Public Sector Accounting and Finance · November 2024

a. i Medical Research Council (MRC) Journal entries Recognising the lease at inception S/N Details Dr Cr Narration Lessee: ₦ ₦ i. Lease PPE (Generator) 19,938,350 To recognise lease Provision for interest 9,161,650 assets and associated Lease liability 29,100,000 liability

ii. Lease liability 4,850,000 Recognition of first Bank 4,850,000 instalment paid at the end of year 2020

iii. Interest expense 1,526,941.67 Interest due in year Provision for interest 1,526,941.67 one iv. Depreciation charges 3,323,058.33 To recognise Accumulated depreciation 3,323,058.33 depreciation charges charges for year 2020 Lessor i. Account receivable 19,938,350 To recognise asset Lease asset (Generator) 19,938,350 leased to the lessee at inception

ii. Bank 4,850,000 To recognise equal Account receivable 3,323,058.33 instalment received in Interest earned 1,526,941.67 year 2020 ii This is a clear case of finance lease because of the following:

• The lease terms equal the useful economic life of the equipment;

• The present value of the minimum lease payment (₦19,938,350) exceeds 90% of the fair value of the asset which is ₦22,000,000

• The present value of annuity of 12% = 4.111 x N4.85m = N19,938,350 98

bi. Non-investment properties

• Property held for sale in the ordinary courses of operations or in the process of construction or development for such sale.

• Property being constructed or developed on behalf of third parties e.g., where a service department of a ministry enters into construction contracts with entities external to its government.

• Owner-occupied property including property held for future use as owner-occupied property held for future development as subsequent use as owner-occupied property. Property occupied by employees such as housing for military or police personnel.

• Property that is being constructed or developed for future use as investment property. Until construction or development is complete, at which time the property become investment property; such property does not meet investment property status.

• Property held to provide a social service and which also generates cash flows; and

• Property held for strategic purpose, which could be accounted for in accordance with IPSAS 17 (Property, Plant and Equipment).

ii. Afonja State Development Property Corporation Journal entries Plaza at Central Business District Details Dr Cr Narration N’000 N’000 Investment property 990,000 To recognise the investment property in the books Bank 990,000 Accumulated depreciation 378,000 To close the investment pr property account Revaluation account 612,000 Investment property 990,000 Investment property 1,050,000 To reinstate the new value of the investment property Revaluation account 612,000 Revaluation surplus 438,000 Building at Kulende Estate Details Dr Cr Narration N’000 N’000 Investment property 508,050 To recognise the investment property in the books Bank 508,050 99 Swapping of 2-storey building Details Dr Cr Narration N’000 N’000 Investment property 23,000 To recognise the investment Bank 23,000 property in the books Swapped investment property New investment property 25,000 To recognise gain on the Existing investment property 23,000 swapping of investment Gain on exchange 2,000 property

b. Journal entries for state-owned university S/N Details Dr Cr Narration N’000 N’000 i. PPE- (Office equipment) 72,873.68 The cost of assets is made up of the purchase cost plus all Bank 54,655.26 attributable cost. Accounts payable 18,218.42 Accounts Payable 18,218.42 On payment of outstanding Bank 18,218.42 debt ii. PPE 413,000 This is treated as part of take- Take over grant 413,000 off grant Impairment charges 169,000 Impairment on carrying PPE 169,000 amount of PPE taken over iii. PPE – Forensic laboratory 1,300,000 Donation received during the year Aid and grant received 1,300,000

iv. Impairment charges 204,450 Being difference between the Accum. Impairment 204,450 carrying amount and the fair value of the building 100

v. PPE 1,500,000 Acquisition of PPE Bank 1,500,000 Revaluation account 1,140,000 To close the account of the Accum. Depreciation 360,000 carrying amount as well as Building 1,500,000 the corresponding accumulated depreciation Building 110,000 To reinstate the current value Revaluation surplus 110,000 of the PPE vi. PPE 24,750 Bank 24,750 Purchase of PPE PPE disposal account 24,750 To close the account of the Motor vehicle Account 24,750 motor vehicle Accum. depreciation 11,325 To close accumulated PPE disposal account 11,325 depreciation account Bank 6,000 To recognise proceeds from the Loss on disposal 7,425 sale of the motor vehicle PPE disposal account 13,425

c. The measures used in identifying impairment of non-cash generating units include:

i. External sources of information

• Cessation, or near cessation, of the demand or need for the services provided by the asset;

• Significant long-term changes with an adverse on the entity have been taken place during the period or will take place in the near future, in the technological, legal or government policy environment in which the entity operates.

ii. Internal sources of information

• Evidence is available of physical damage of an asset;

• Significant long-term changes with an adverse on the entity have taken place during the period or are expected to take place in near future, in the extent to which, or manner in which, an asset is used or expected to be used. These changes include the asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, or plans to dispose of an asset before the previously expected date; 101

• A decision to halt the construction of an asset before it is completed or in a usable condition; and

• Evidence is available from internal reporting that indicates that the service performance of an asset is, or will be, significantly worse than expected.

Examiner’s report The question is in four parts. Part (a) of the question tests candidates’ knowledge on the preparation of journal entries in the book of the lessor and lessee at the inception of the lease in accordance to IPSAS 13 - Leases. Part (b) requires the candidates to identify the features of non-investment properties and prepare journal entries in accordance to IPSAS 16 -Investment Properties. Part (c) requires the candidates to prepare journal entries on some transactions as related to property, plants and equipment in accordance to IPSAS 17 - Property, Plants and Equipment, while part (d) requires to enumerate measures by which asset impairment can be determined in accordance with IPSAS 21 - Impairment of Non - Cash Generating Units. All the candidates attempted the question and their performance was below average The common pitfalls were the inability of the candidates to understand the provisions of IPSAS 13 - Leases; IPSAS 16 - Investment Properties; IPSAS 17 - Property, Plants and Equipment; and IPSAS 21 - Impairment of Non - Cash Generating Units. Candidates are advised to have adequate knowledge of the relevant provisions of the syllabus and to make use of the Institute’s Pathfinder and the Study Text for better performance in the Institute’s future examinations.

Marking guide Marks Marks ai. Journal entries Correct journal entries - Lessee 3¼ Correct journal entries – Lessor 1¾ ii. Type of lease and justification Type of lease at 1 mark 1 Any two (2) justifications at ½ mark each 1 7 b.i. Description of non-investment properties Any five (5) descriptions at 1 mark each 5

ii. Journal entries Correct journal entries for Plaza 2 Correct journal for building at Kulende ½ Correct journal entries for swapping of investment properties 2 4½ 102

c. Journal entries for state-owned university Correct journal entries 8½

d. Sources of information for impairment Any five sources at 1 mark each 5 Total 30

SECTION B

a. The responsibilities of Micro Pension Contributor shall include:

i. Opening of a Retirement Savings Account (RSA) with any Pension Fund Administrator (PFA) of choice; iii. Making contributions into RSA in accordance with the relevant guidelines; iv. Requesting for RSA statement from PFA; v. Updating RSA information on request; vi. Appointing a next of kin; vii. Choosing the platform for making contributions; viii. Deciding to make contingent withdrawals; ix. Choosing the mode of accessing pension (programmed withdrawal or annuity) from micro pension plan; and x. Demanding for adequate customer service as provided in the consumer protection framework issued by the Commission.

b. The following persons not below 18 years of age with source of income shall be eligible for participation in micro pension plan under Section 2(3) of the Pension Reform Act 2014:

i. Criterial for eligibility for participating in micro pension plan

• Self-employed persons that belong to a trade, profession, cooperative or business association;

• Self-employed persons with a business registration as a company, partnership or enterprise.

• Employees operating in the informal sector who work with or without formal written employment contract.

• Other self-employed individuals.

• Micro Pension Contributors shall be resident in Nigeria. 103

ii. The following documents shall be provided at the point of registration:

• Evidence of membership of a registered association, union or cooperative society

• Certificate of business registration

• Certificate of incorporation

• Letter of employment

• Bank Verification Number (BVN)

• Other documentation as may be specified by the PFA

iii. Provisions of Pension Reform Act (PRA) 2014 on contingent withdrawal

• The micro pension contributor shall be eligible to access the portion of his/her contribution available for withdrawal 3 months after making the initial contribution.

• Subsequently, the micro pension contributor can only make withdrawals once in a week from the balance of the contingent portion of the RSA.

• The micro pension contributor may withdraw the total balance of the contingent portion of RSA including all accrued investment income thereto.

• The micro pension contributor may choose to convert the contingent portion of the contributions to the retirement benefits portion at the end of every year.

• The time frame for processing and payment of contingent withdrawals shall not exceed two working days.

• Payment shall be made only to the Micro Pension Contributor’s designated bank account.

• The PFA shall approve and pay all requests for contingent withdrawals.

• The PFA shall notify the Commission of all payments made monthly.

• Contingent withdrawals shall be subject to applicable tax laws in accordance with the provisions of Section 10(4) of the PRA 2014.

• At retirement, the Micro Pension Contributor has the option of transferring part or all of his outstanding balance on the contingent portion to his retirement benefits portion. 104

iv. Conversion from micro pension plan to mandatory contribution plan

• The micro pension contributor shall be eligible to participate under Section 2(1) of the Pension Reform Act, 2014 where the secures employment in the formal sector with an organisation that has three (3) or more employees.

• The micro pension contributor shall formally request for conversion, attaching all necessary documents specified in the guidelines for the registration of contributors/members issued by the commission.

• The micro pension contributor shall retain the existing RSA.

• Micro pension contributor may withdraw the total balance of the contingent portion of the RSA prior to conversion.

• Where the micro pension contributor chooses not to withdraw the contingent portion, the balance of the contingent portion shall be merged with the retirement benefits portion of the RSA prior to conversion.

• At conversion, the PFA shall move the micro pension contributor’s RSA balance to the appropriate fund under the multi-fund structure.

• Where an eligible contributor fails or refuses to request for conversion to the mandatory contribution after one (1) month of receiving remittance from the new employer, the PFA shall automatically change the status of the contributor upon receiving the second remittance.

• The PFA shall notify the employer of the status of the RSA of the contributor.

• The PFA shall forward monthly returns on conversion to the Commission.

Examiner’s report The question is in four parts. Part (a) of the question requires the candidates to explain the responsibilities of a micro pension contributor, while part (b) requires the candidates to enumerate criterial for eligibility to participate and document necessary requirements and registration for micro pension plan. Also, part (c) of the question requires the candidates to highlight the provisions of Pension Reform Act 2014 (as amended) on the administration of contingent withdrawals in a micro pension plan and part (d) requires the candidates to explain the conditions to be met for an individual to convert from micro pension plan to a mandatory contribution plan. 105 Few candidates attempted the question and their performance was below average. The commonest pitfall was the inability of the candidates to properly identify and explain the provisions of Pension Reform Act 2014 (as amended) as it affects micro pension plan. Candidates are advised to make use of ICAN Pathfinders and the Study Text for better performance in the Institute’s future examinations.

Marking guide Marks Marks a Responsibilities of a micro pension contributor Identification of any five responsibilities 5

b. i Eligibility criteria for micro pension plan Any four eligibility criteria at ½ mark each 2 ii Documentation for micro pension plan Any four documents at ½ mark each 2 4

c. Provisions of PRA on contingent withdrawal Any six provisions 6

d. Conditions for conversion from micro pension plan to a mandatory contribution plan Explanation of any five conditions 5 Total 20

a. Processes of remitting contributions into Retirement Savings Account by contributors as in the PRA (2014): i. Every employee to whom this Act applies shall maintain an account, (in this Act referred to as “Retirement Savings Account”) in his name with any Pension Fund Administrator of his choice. ii. The employee shall notify his employer of the Pension Fund Administrator chosen and the identity of the retirement savings account opened under (i) above. iii. The employer shall:

• Deduct at source the monthly contribution of the employee; and

• Not later than 7 working days from the day the employee is paid his salary, remit an amount comprising the employee’s contribution under paragraph of this subsection and the 106 employer’s contribution to the Pension Fund Custodian specified by the Pension Fund Administrator of the employee. iv. Upon receipt of the contributions remitted under (iii) above, the Pension Fund Custodian shall notify the Pension Fund Administrator who shall cause to be credited the retirement savings account of the employee for whom the employer had made the payment; v. Where an employee fails to open such Retirement Savings Account within a period of six months after assumption of duty, his employer shall, subject to guidelines issued by the Commission, request a Pension Fund Administrator to open a nominal retirement savings account for such employee for the remittance of his pension contributions; vi. An employer who fails to deduct or remit the contributions within the time stipulated in (iii) above shall, in addition to making the remittance already due, be liable to a penalty to be stipulated by the Commission; vii. The penalty referred to in (vi) above shall not be less than 2 percent of the total contribution that remains unpaid for each month or part of each month the default continues and the amount of the penalty shall be recoverable as a debt owed to the employee’s retirement savings account, as the case may be; viii. An employee shall not have access to his retirement savings account or have any dealing with the Pension Fund Custodian with respect to the retirement savings account except through the Pension Fund Administrator; and ix. The Commission shall determine the cost of recovery of un-remitted contributions and the sources to defray the cost, which may include the amount recovered as penalty pursuant to (vi) above.

b. Categories of persons exempted from the Contributory Pension Scheme (CPS) as contained in the PRA 2014:

i. The categories of persons mentioned in Section 291 of the Constitution of the Federal Republic of Nigeria 1999 (as amended) including the members of Armed Forces, the Intelligence and Secret Services of the Federation; ii. An employee who is entitled to retirement benefits under any pension scheme existing before the 25th day of June 2004 and has 3 or less years to retire (i.e. fully funded pension scheme); iii. Any person who falls within the provisions of (i) and (ii) above shall continue to derive retirement benefit under such existing pension scheme as provided for in the Second Schedule to this Act; and 107

iv. Where an officer exempted under (ii) above dies in service or in the course of duty, the Federal Government Pension Transitional Arrangements Directorate (PTAD) and the Federal Capital Territory Pension Transitional Arrangements Directorate shall cause to be paid, en- bloc to his next- of- kin or designated survivors, a gratuity and pension to which the officer would have been entitled at the date of his death calculated on the basis of applicable computations under the existing Pay-As-You-Go Pension scheme of the public service of the Federation and Federal Capital Territory.

c. Procedures for payment of retirement benefits to holders of Retirement Savings Accounts (RSA) as provided by the Act: i. A holder of retirement savings account shall upon retirement or attaining the age of 50 years, whichever is later, utilise the balance standing to the credit of his retirement savings account for the following benefits:

• Programmed monthly or quarterly withdrawals calculated on the basis of an expected life span;

• Withdrawal of a lump sum from the total amount credited to his retirement savings account provided that the amount left after the lump sum withdrawal shall be sufficient to procure a programmed fund withdrawals or annuity for life in accordance with extant guidelines issued by the Commission, from time to time;

• Annuity for life purchased from a life insurance company licensed by the National Insurance Commission with monthly or quarterly payments;

• Professors covered by the Universities (Miscellaneous Provisions (Amendment) Act, 2012 shall be according to the University Act; or

• Other categories of employees entitled, by virtue of their terms and conditions of employment, to retire with full retirement benefits shall still apply.

ii. Where an employee retires before the age of 50 years, the employee may request for withdrawal of lump sum of money of not more than 25% per cent of the amount standing to the credit of the retirement savings account, provided that such withdrawals shall only be made after six months of such retirement and the retired employee does not secure another employment. 108

iii. Where an employee has accessed the amount standing in his retirement savings account pursuant to (ii) above, such employee shall subsequently access the balance in the retirement savings account in accordance with (i) above.

iv. If an officer retires and is less than 50 years, on the advice of suitably qualified physician or properly constituted medical board, certifying that the employee is no longer mentally and physically capable of carrying out the function of his office, the officer may withdraw;

v. The medical board or suitably qualified physician, at the request of the employee, be made once in every two years to review the fitness of the employee and where the medical board certifies that he is now mentally and physically capable of carrying out the functions of his office, he may re-enter the scheme upon securing another employment.

vi. Any employee who disengages or is disengaged from employment before the age of 50 years and is unable to secure another employment within four months of such disengagement may make withdrawal from his retirement savings account in accordance with the provisions of section 7(2) and (3) of the PRA (2014).

vii. If the officer is retired due to total or permanent disability either of mind or body, may withdraw retirement savings account.

viii. Where the employee retires before the age of 50 years in accordance with the terms and conditions of employment, the officer shall be entitled to make withdrawals

Examiner’s report The question is in three parts and it relates to the provisions of Pension Reform Act, 2014 (as amended). Part (a) of the question requires candidates to explain processes of remitting contributions into Retirement Savings Account (RSA). Part (b) of the question requires the candidates to highlight the categories of persons exempted from the Contributory Pension Scheme (CPS), while part (c) requires candidates to explain the procedures for payment of retirement benefits to holders of Retirement Savings Account (RSA). Majority of the candidates attempted the question and their performance was average. The commonest pitfall was the inability of the candidates to properly identify and explain the provisions of Pension Reform Act 2014 (as amended). 109 Candidates are advised to read widely and ensure they have adequate knowledge of the relevant sections of the syllabus. They should also make use of Pathfinders and the Study Text of the Institute and other relevant learning materials on this aspect of the syllabus for better performance in future examinations.

Marking guide Marks a Processes of remitting contributions into Retirement Savings Account by contributors Explanation of any six processes of remitting contributions 6

b. Categories of persons exempted from the CPS as contained in the PRA 2014: Any four categories of persons exempted at 2 marks each 8

c. Procedures for payment of retirement benefits to holders of Retirement Savings Accounts Explanation of any six procedures 6 Total 20

a. Benefits of e-payments and e-collection e-Payment i. Provides complete and timely information on government cash resources; ii. Improve operational control on budget execution; iii. Enables efficient cash management; iv. Reduces bank fees and transaction costs; v. Facilitates efficient payment mechanisms; vi. Improves bank reconciliation and quality of fiscal data; vii. Improves liquidity of government; viii. Allows issuance of warrants and AIEs based on cash plan; e-Collection i. It controls and monitors receipts and payments of FGN funds; ii. It prevents and detects potential and actual fraud; iii. Its improves planning through MTEF; iv. Avoids double payments and likely build- up of payment arrears; v. Creates an accurate cash flow statements that help government to obtain an appropriate line of credit; vi. Implements cash collection acceleration techniques; vii. Integrates policy priorities into annual budgets and thereby ensures that available resources are channelled to priority sectors; 110

ix. No more commercial bank accounts maintain by MDAs; x. Brings about drastic fall on the ways and means (overdraft) requirement from CBN; and xi. Supports government budget execution.

viii. Minimises deficits and borrowings within limits set by government; and ix. Improves transparency and accountability of all FGN receipts.

b. Conditions for approving supplementary funds The conditions under which such requests may be granted are as follows: i. Public interest The supplementary request must manifestly be in the public interest. This must genuinely be at addressing issues, which have generated interest or debate nationally. For example, the need to fund vaccination in a pandemic situation, which was not earlier, envisaged. ii. Urgency The need is so urgent that the additional provisions request cannot be deferred till the following year when it will be incorporated in the new estimates. For example, a war situation. iii. Unforeseen circumstances The need could not be foreseen when the current estimates were being approved. iv. Virement impracticable The money required cannot be sourced through virement

c. Examination of payment vouchers The checklist shall include: i. Are all paid vouchers and supporting documents stamped “PAID” and also stamped “CHEQUE SIGNED” to differentiate them from new vouchers? ii. Are cheque numbers entered on paid vouchers? iii. Are payment vouchers received in the Central Pay Office (CPO) through schedules controlled serially or through voucher movement register? iv. Are the payment vouchers properly checked? v. Is there adequate safeguard to ensure that payments are made only to the right people and for good consideration? 111

Examiner’s report The question is in three parts. Part (a) of the question requires candidates to enumerate the benefits of e-payment and e-collection of the components of Treasury Single Account (TSA). Part (b) of the question requires the candidates to explain the conditions that need to be met for supplementary funds to be approved and part (c) of the question requires the candidates to create a checklist on how to examine payment vouchers. Majority of the candidates attempted the question and performance was below average. The common pitfalls were the inability of the candidates to explain the conditions that need to be met for supplementary funds to be approved, while in part (c), the candidates were unable to create a checklist on how to examine payment vouchers. Candidates are advised to read widely and ensure they have adequate knowledge of relevant regulations relating to public sector accounting for better performance in the Institute’s future examinations.

Marking guide Marks Marks a Benefits of TSA components Any five benefits of e-payment 5 Any five benefits of e-collection 5 10

b. Conditions for supplementary fund approval Identification of any three conditions 3 Explanation of conditions identified 3 6

c. Examination of payment voucher Stating any four checklists 4 Total 20 112

SECTION C

a. Definition of public debt The total amount of loan raised by government directly or through any of the authorised agencies is known as public debt. The loan could be raised within the domestic economy, in which case the creditors are mostly citizens or from outside the economy, in which the creditors are foreigners. The former is commonly known as domestic or internal debt, while the latter is known as external or foreign debt. In other words, public debt can be defined as total outstanding financial obligations of a government during a given period. It is an important source of capital formation, most especially in developing economies like Nigeria where the low level of income is insufficient for consumption and hence does not permit sustainable savings. Public debt may be bilateral or multilateral. It is bilateral where the creditors are governments of a given country. For example: i As at March 2024, Nigeria owed China $5.05 billion; ii France $652 million; and iii Germany $125.62 million in bilateral debts. It is multilateral when multilateral institutions are the creditors for example: i World Bank; ii International Monetary Fund (IMF); iii Islamic Development Bank (IsDB); iv European Development Bank; v International Fund for Agricultural Development; vi International Development Association (IDA); and vii The African Development Bank (AfDB).

b. Under certain circumstances, debt financing becomes either necessary or preferable. i During war and other emergencies, when there is need for large pool of funds and additional tax revenue cannot be raised, debt financing becomes inevitable. ii Where actual tax receipts are falling much below the anticipated volume, while expenditure is not showing a corresponding reduction. iii Debt financing can be tied to a project where such projects are expected to benefit certain areas or certain sections of the people who can be expected to bear the cost of the project out of the benefit they would 113 receive. For instance, a particular irrigation project might benefit the farmers of a particular area. In this case, the cost of the project can be met through borrowing and then recovered from the beneficiaries through a levy or some other means. iv Governments can use debt financing in situations of economic depression to help the country. v Government can avoid negative effect of taxes on incentives through borrowing especially when tax burden is significantly high.

c. Reasons advanced to justify the need for public debts The following are some of the reasons that have been advanced to justify the need for a country to borrow: i Huge and persistent budget deficit: The government borrows when its expenditure is greater than its revenue (budget deficit), especially after its taxing capacity has been stretched to the limit. ii Balance of payments disequilibrium: Excessive reliance on foreign resources to sustain domestic production processes and on foreign goods and services beyond the nation’s foreign exchange earning capacity may lead government into contracting debt obligations. iii Rapid population growth: In most developing countries, population is growing faster than the level of national output. The need arises for government borrowing to expand public enterprises and public utilities to cater for the welfare of the people. iv Implementation of development programmes: To promote economic development usually requires provision of new and upgrading of existing social and economic infrastructural facilities like roads, railways, electricity, schools and hospitals. The tax revenue of government may be insufficient to execute such projects, hence the resort to borrowing. v Economic instability: A stable economy naturally provides an enabling environment for economic growth and development. Public debt of the internal type may be contracted to control inflation, while both internal and external borrowings may be used to stimulate economic activities during economic depression. vi Natural disasters: Government has the responsibility to provide relief to victims of natural disasters, such as earthquakes, floods and fire disasters, famines, sectarian violence and other natural calamities. Government borrowing may be justified because such occurrences are never expected nor budgeted for. vii Fluctuations in government revenue: Most countries operate mono cultural economies depending on only one (or very few) export product 114 for foreign exchange earnings. A sudden poor performance of such product in the international market would reduce income considerably and adversely affect budget implementation. Any country that finds herself in such a situation may have no option than to borrow to bridge the financial resource gap. viii War-time borrowing: Financial resources needed to prosecute wars are usually beyond the capacity of government. Hence, the need to borrow arises to avoid devastating consequences of defeat. ix Debt servicing: New debt with favourable terms and conditions may be undertaken to service old debts thereby reducing the burden of debt on the economy.

Examiner’s report The question is in three parts. Part (a) of the question requires the candidates to explain the concept of public debt “distinguishing between bilateral and multilateral debt”. Part (b) of the question require the candidates to explain the conditions under which debt finance would be preferable, while part (c) requires the candidates to identify and explain reasons to justify the need for public debts. Majority of the candidates attempted the question and their performance was very good. The common pitfalls were the inability of the candidates to distinguish between bilateral and multilateral debt, while in parts (b) and (c) few of the candidates could not satisfactorily explain the conditions under which debt finance would be preferable and explain reasons to justify the need for public debts respectively. Candidates are advised to make use of Pathfinders and the Study Text of the Institute for better performance in the Institute’s future examinations.

Marking guide Marks Marks a. Concept of public debt Explanation of the concept of public debts 2 Distinguishing between bilateral and unilateral debts 2 One example each. 2 6

b. Conditions under which debt finance would be preferable Explanation of two conditions at 1½ marks each 3

c. Reasons advanced to justify the need for public debts Identification of any four reasons at ½ mark each 2 Explanation of any four reasons identify at 1 mark each 4 6 Total 15 115

Factors to justify the need for public enterprises: i Market failure: The operation of market mechanism presupposes that the economic activities are guided by rational expectation, that is, profitability. However, there are differences in endowment which in most cases determines productivity and returns. Therefore, public undertakings are required in areas of the economy which the government deems necessary or very crucial, but which investors may not be willing to touch because of the huge capital and risks involved in such ventures. Furthermore, investment in such areas of the economy may take a longer time to materialise. It is for these reasons that public enterprises are established to operate in such essential industries of the economy . ii Merit goods: The goods or services considered to be of utmost necessity such as education, health care services, water supply and the likes cannot be left in the hands of private investors. They would be under-supplied because consumers would not be able to pay the market prices of these goods. Generally, the supply of such services should be adequate and should be available at low or near zero prices in order to encourage more consumption or participation. In the case of education, for example, the government may insist that every child up to a certain age must benefit from free education. In some cases, free medical services are provided for certain categories of people such as pregnant women as well as people over 75 years. But when private investors dominate the provision and supply, the prices may be beyond the reach of the people. For example, private tertiary institutions in Nigeria embark on aggressive advertisement for students, whereas, public tertiary institutions are burdened with over-population. Hence, the need for these services to be provided by government through the establishment of public enterprises thereby making prices become bearable for the populace. iii Strategic or security consideration: Sometimes, governments set up public enterprises because of the very nature of the projects. Currency and mint, for example cannot be expected to be left in the hands of private investors. Similarly, some defence industries, certain research and development organisations would be better handled by public enterprises. iv Promote growth of the economy: Usually, the objective or goal of the government is that the country should grow and develop at an optimum rate. This happens if the various components of the country have steady access to 116 capital stock which may not be readily available through market mechanism. Therefore, public undertakings directly add to the capital assets of the economy in the form of roads, bridges, factories and the likes. Without public undertakings, certain areas of the country’s economy may be starved of the capital they require to function even though such areas of the economy are very important. Hence, another reason why public enterprises are established is to inject capital into areas of the economy which ordinarily private investors may shy away from. The establishment of an Agriculture Development Bank, Bank of Industry are examples to ensure that capital is provided for investors in those sectors that lack funding. v Monopoly: Another reason for the establishment of public undertakings is where the effective control of the economy is sought to be in the hands of the state rather than individuals. This is the argument of not permitting the emergence of monopoly in the hands of private investors. The authorities might plan to have a strategic control over the workings of the whole economy through controlling of key sectors. This is generally referred to as controlling the commanding heights of the economy from which, indirectly, the movement of the economy can be guided. vi Natural resources: One of the potent reasons for public undertakings is the case of some natural resources like forests, mines, and so on. The commercial interest of private investors may be in conflict with those of the state. A private investor, for example, authorised to mine a particular resource may likely want to make more money by extracting more than expected. This may result in a large scale and quick denuding of the land thereby causing soil erosion and upsetting the ecological balance. A public enterprise or undertaking given the same task would operate based on a defined systematic policy of extraction thereby avoiding damage to the soil structure and environment.

Examiner’s report The question requires candidates to discuss factors to justify the need for public enterprises. Majority of the candidates attempted the question and their performance was above average. The common pitfalls were the inability of few candidates to identify and explain factors to justify the need for public enterprises. Candidates are advised to make use of Pathfinders and the Study Text of the Institute for better performance in the future examinations. 117

Marking guide Marks Marks Factors to justify the need for public enterprises: Identification of any five factors 5 Explanation of the five factors identified at 2 marks each 10 15 Total 15

a. The following are the measures open to a Federal Government in intervening in the activities of an economy:

i. Fiscal policy It relates to government expenditure and tax measures aimed at controlling aggregate demand and hence the economy. It may be expansionary or contractionary depending on the objective(s) being pursued. Its components include taxation, expenditure, national budget, borrowing or public debt and subsidies

ii. Monetary policy This refers to the conscious and deliberate action on the part of the monetary authorities to control money supply, the general credit availability, the direction and cost of credit within the economy. It is aimed at influencing intermediate variables for the purpose of manipulating target variables. It comprises the use of measures such as open market operations, cash reserve ratio, liquidity ratio, bank rate or discount rate, credit ceiling, sectoral allocation, moral suasion and mandatory deposit.

iii. Commercial policy It relates to a set of rules and regulations that influence the country’s imports and exports. It consists of tariffs, quotas and other form of trade restrictions design to promote exports, generate income and employment and restrict imports in order to reduce commercial deficits.

b. The following steps are required to be taken by the Federal Government or its agencies before seeking the approval of the National Assembly on their request for external borrowing:

i. The FG must seek approval of the annual borrowing programme;

ii. Approval of the terms and conditions of external loans as contained in the annual borrowing programme must be sought by the FG;

iii. The FG must seek approval of overall limits, for the amounts of consolidated debt of the federal, state and local governments, to be set 118 by the President on the advice of the Honourable Minister of Finance (HMF); and

iv. There must be prior authorisation in the Appropriation or other Act or Law for the purpose for which the borrowing is to be utilised.

c. Requirements for raising fund from the domestic market by state governments. In order to raise fund from the domestic capital market, a state government must conform to the requirements of the Investment and Security Act, 2007 as stated below:

i. Compliance with constitutional provisions: In accordance with Section 120 of the 1999 Constitution (as amended), state governments must ensure any borrowing is approved by the State House of Assembly. Borrowing must align with the legal framework governing public finance and borrowing in Nigeria.

ii. Approval from the Federal Government: As per the Debt Management Office (DMO) Act, 2003, state governments must obtain approval from the Federal Ministry of Finance through the Debt Management Office (DMO) before accessing the domestic capital market.

iii. Adherence to the Fiscal Responsibility Act (FRA) 2007: The FRA imposes specific requirements on borrowing by state governments:

• Borrowing must be strictly for capital expenditure or human development projects.

• The loan must demonstrate clear economic benefits.

• The state must show a viable repayment plan, ensuring debt sustainability.

iv. Debt Sustainability Analysis (DSA): The DMO conducts a debt sustainability analysis to assess whether the state’s existing debt profile and proposed borrowing are sustainable.

v. The consent of the Federal Ministry of Finance to state’s request to borrow from the capital market

vi. Credit worthiness and credit rating: States are typically required to obtain a credit rating from a recognised agency to demonstrate their financial capacity and repayment ability. A 119 profile of the assets and liabilities of the state in the last five years in addition to a 5- year projection

vii. Preparation of an offer document (Prospectus): A profile of the state showing its population, major industries, their locations and other major projects embarked upon. The information has to be submitted with an application to the Securities and Exchange Commission (SEC) as well as the Nigerian Exchange Limited (NGX)

viii. Registration with the Securities and Exchange Commission (SEC) The borrowing programme must be registered with the Securities and Exchange Commission (SEC), which is responsible for regulating the Nigerian capital market.

ix. Applications to Securities and Exchange Commission (SEC): The application shall, amongst other documents, be accompanied by an original copy of an irrevocable letter of authority giving the Accountant General of the Federation the authority to deduct at source from the statutory allocation due to the body, in the event of default by the body in meeting its payment obligations under the terms of the loan and the relevant trust deed.

x. Legislative approval The borrowing must be approved by the state’s legislature, ensuring that it aligns with the state's budgetary and developmental priorities. Legislative approval provides legal backing for the issuance of bonds or other securities.

xi. Open and transparent bidding process States may be required to conduct an open and transparent bidding process for the selection of financial advisors, underwriters and other intermediaries in the borrowing process.

xii. Collateral or revenue backing The state may need to provide guarantees, such as internally generated revenue (IGR) or statutory allocations from the federation account, as security for the borrowing.

xiii. Adherence to capital market rules The borrowing must comply with capital market rules, including listing requirements for bonds on the Nigerian Exchange (NGX) or Financial Market Dealers Quotation (FMDQ) Exchange. 120

xiv. Engagement with professional advisors States must engage professionals such as financial advisors, issuing houses and legal counsel to structure and manage the borrowing process effectively. These professionals ensure compliance with legal, financial and market standards.

xv. Independent revenue verification States must demonstrate adequate revenue-generation capacity to repay the debt. Verification by independent auditors may be required to confirm revenue streams.

xvi. Alignment with development goals Borrowing plans must be tied to specific developmental projects, ensuring alignment with the state's medium to long-term goals.

Examiner’s report The question is in three parts. Part (a) of the question requires candidates to explain the measures open to Federal Government in intervening in the activities of an economy. Part (b) of the question requires the candidates to enumerate the steps that the Federal Government or its agencies must take before seeking the approval of the National Assembly on their request for external borrowing, while part (c) of the question asks the candidates to identify the requirements for raising funds from the domestic capital market by state governments. Few of the candidates attempted the question and their performance was poor. The commonest pitfall was the inability of few candidates to enumerate the steps that the Federal Government or its agencies must take before seeking the approval of the National Assembly on their request for external borrowing. Also, few candidates were unable to identify the requirements for raising funds from the domestic capital market by State Government. Candidates are advised to make use of Pathfinders and the Study Text of the Institute for better performance in the Institute’s future examination. 121

Marking guide Marks Marks a. Measure used for intervening in the economy by FG Identification of any two measures 1 Explanation of any of the two measures identified at 1½ marks each 3 Any example of each of the two measures at ½ mark each 1 5

b. Measures to be taken before seeking approval of NASS for external borrowing Identification and explanation of any four measures 4

c. Requirements for raising funds from domestic market by state government Any four requirements identified at 1½ marks each 6 Total 15 122 ICAN/242/Q/B6 Examination No......................... THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA SKILLS LEVEL EXAMINATION – NOVEMBER 2024 CORPORATE STRATEGIC MANAGEMENT & ETHICS EXAMINATION INSTRUCTIONS PLEASE READ THESE INSTRUCTIONS BEFORE THE COMMENCEMENT OF THE PAPER

1. Check your pockets, purse, mathematical set, etc. to ensure that you do not have prohibited items such as telephone handset, electronic storage device, programmable devices, wristwatches or any form of written material on you in the examination hall. You will be stopped from continuing with the examination and liable to further disciplinary actions including cancellation of examination result if caught.

2. Write your EXAMINATION NUMBER in the space provided above.

3. Do NOT write anything on your question paper EXCEPT your examination number.

4. Do NOT write anything on your docket.

5. Read all instructions in each section of the question paper carefully before answering the questions.

6. Do NOT answer more than the number of questions required in each section, otherwise, you will be penalised.

7. All solutions should be written in BLUE or BLACK INK. Any solution written in PENCIL or any other COLOUR OF INK will not be marked.

8. You are required to attempt Question ONE (compulsory), any TWO Questions in Section B and any Two questions in Section C.

9. Check that you have collected the correct question paper for the examination you are writing. THURSDAY, NOVEMBER 21, 2024 123 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA