Escolar Documentos
Profissional Documentos
Cultura Documentos
STANDARD OF PAPER
The standard of the paper was the same as previously administered ones. The
questions were standard for this level of examination. The questions were spread
enough to cover all areas of the syllabus. The amount of work (the relevant workings
and the final answer) required by question 1 was more than the allotted time and
marks. Apart from that the rest were commensurate with the allotted time and marks.
GENERAL PERFORMANCE
Generally, performance was below average. This could be attributed to lack of
adequate preparation by the candidates. Performance at centres in Accra appeared to
be higher than outside.
There was no similarity of answers to suggest any possible copying.
Page 1 of 31
QUESTION ONE
The following draft consolidated financial statements relates to the Baa Koomi Group plc
Consolidated statement of profit or loss for the year ended 31 July 2016
GH¢000 GH¢000
Revenue 5,845
Cost of sales (2,160)
Gross profit 3,685
Distribution costs 510
Administrative expenses 230 (740)
2945
Income from interests in associated undertakings 990
Operating profit 3,935
Profit on disposal of tangible non-current assets 300
Income from investments 80
Interest payable (300)
Profit before taxation 4,015
Taxation (1,345)
Profit after tax 2,670
Non-controlling interests –equity (200)
Profit attributable to members of parent company 2,470
Dividends paid (800)
1,670
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Equity
Share capital 7,880 4,000
Capital Surplus 5,766 4,190
Retained earnings 6,270 4,600
19,916 12,790
Non-controlling interests -equity 230 -
20,146 12,790
ii) The following, recorded at fair values, refers to Nyamema Ltd at the date of acquisition.
iii) The consideration for the purchase of the shares of Nyamema Ltd comprised 44,000
ordinary shares of GH¢1 of Baa Koomi Group plc at a value of GH¢550,000 and a balance
of GH¢28,000 was paid in cash.
iv) The taxation charge in the consolidated statement of profit or loss is made up of the
following items:
GH¢000
Corporation tax 782
Deferred taxation 208
Tax attributable to associated undertakings 355
1,345
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v) The tangible non-current assets of the Baa Koomi Group plc comprise the following:
Buildings Plant and Total
Machinery
GH¢000 GH¢000 GH¢000
Cost at valuation
At 1 August 2015 5,100 2,800 7,900
Additions - 4,200 4,200
Disposals - 1,000 1,000
At 31 July 2016 5,100 6,000 11,100
Depreciation
At 1 August 2015
Provided during year 700 2,200 2,900
Disposal 250 400 650
At 31 July 2016 - 200 200
950 2,400 3,350
Carrying Amount
At 31 July 2016
At 1 August 2015 4,150 3,600 7,750
4,400 600 5,000
vi) Included in the additions to plant and machinery are items totaling GH¢1,700,000 acquired
under finance leases. The plant and machinery disposal resulted in a profit of GH¢300,000.
All lease rentals were paid on their due dates.
There had been an issue of debentures on 1 August 2015. Their par value was GH¢3,000,000
but they were issued at a discount of GH¢100,000. The effective rate of interest was 7%.
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Required
Prepare a consolidated statement of cash flow for the Baa Koomi Group plc for the year
ended 31 July 2016, in accordance with the requirements of IAS 7 Statements of Cash
flow. (20 marks)
(Note: use the indirect method to present cash flows from operating activities.)
QUESTION TWO
a) Kantanka Ltd adopts the revaluation model of IAS 16 Property, Plant & Equipment and
the fair value model of IAS 40 Investment Property. Kantanka Ltd chooses to recognise
any fair value gains or losses arising on its equity investments in ‘other comprehensive
income’ as permitted by IFRS 9 Financial Instruments. The following transactions relate
to Kantanka Ltd for the year ended 31 March 2017.
i) Kantanka Ltd owns a piece of property it purchased on 1 April 2014 for GH¢3.7 million.
The land component of the property was estimated to be GH¢1.2 million at the date of
purchase. The useful economic life of the building on this land was estimated to be 25 years
on 1 April 2014. The property was used as the corporate head office for two years from that
date. On 1 April 2016, the company moved its head office to another building and leased
the entire property for five years to an unrelated tenant on an arm’s length basis in order to
benefit from the rental income and future capital appreciation. The fair value of the property
on 1 April 2016 was GH¢4.1 million (land component GH¢1.9 million), and on 31 March
2017, GH¢4.8 million (land component GH¢2.1 million). The estimated useful economic
life remained unchanged throughout the period. Land and buildings are considered to be
two separate assets by the directors of Kantanka Ltd. (5 marks)
ii) Kantanka Ltd holds a portfolio of equity investments the value of which was correctly
recorded at GH¢12 million on 1 April 2016. During the year ended 31 March 2017, the
company received dividends of GH¢0.75 million. Further equity investments were
purchased at a cost of GH¢1.6 million. Shares were disposed of during the year for proceeds
of GH¢1.1 million. These shares had cost GH¢0.4 million a number of years earlier but had
been valued at GH¢0.9 million on 1 April 2016. The fair value of the financial assets held
on 31 March 2017 was GH¢14 million. (5 marks)
Required:
Advise Kantanka Ltd on how to account for the above transactions in accordance with
relevant accounting standards.
Required:
i) Discuss the procedure for selecting accounting policies. (3 marks)
ii) Recommend how an entity should account for a change in accounting policy. (2 marks)
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c) Cartier Ltd, a multinational operating in Ghana purchased a plant for GH¢600,000 on 1
January 2015. Cartier Ltd depreciates its plant using the straight line method over 15 years,
assuming a residual value of 10% of original cost. Cartier Ltd claims all available tax
depreciation allowances. On 1 January 2016, Cartier Ltd revalued the plant and increased
its carrying value by GH¢50,000. The asset’s useful life was not affected. Assume there
were no other temporary differences in the period.
Required:
i) Calculate the amount of Cartier Ltd’s deferred tax balance at 31 December 2016 in
accordance with IAS 12 Income Taxes.
ii) Calculate the change in Cartier Ltd’s deferred tax balance for the year ended 31 December
2016 and explain how the change would be treated in Cartier Ltd’s statement of profit or
loss for the year to 31 December 2016.
(Note: Assume an applicable tax rate of 25% and capital allowance of 50% of carrying
amount in the first year and 25% in the second year).
(5 marks)
i) Kojach Ltd has traditionally repainted its premises every five years. The next painting is
due in a year’s time. The entity proposes to accrue as a provision the expected cost of
repainting the premises. (2 marks)
ii) Kojach Ltd has guaranteed the debts of its associate company up to a maximum amount of
GH¢3 million. The associate is in excellent financial health and the directors are of the
opinion that it is unlikely the guarantee will ever be called in. (3 marks)
Required:
Discuss briefly how each of the above transactions and events should be recorded by
Kojach Ltd in compliance with the requirements of IAS 37 Provisions, Contingent
Liabilities and Contingent Assets
(Total: 25 marks)
QUESTION THREE
Abusua Ltd. has been trading profitably for several years but for the past four years its
operations have resulted in losses. The board of directors has decided to restructure the
company.
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Deferred development expenditure 7,050
Patent rights 4,200
27,438
Current assets
Inventories 3,510
Trade receivables 1,600
Cash 428
5,538
Current liabilities
Bank loan 5,360
Trade payables 4,650
Sundry creditors 1,060
11,070 (5,532)
ii) No dividend was declared on the Preference shares for the year ended 30 September, 2016.
iii) The following assets have net realizable values as indicated below:
GH¢000
Freehold land and buildings 4,005
Plant and equipment 3,750
Furniture and fixtures 2,800
iv) The investment in Abusua Ltd. is 55% holding in Obi Ltd. An offer of GH¢ 1,350,000 has
been made for it and it has been accepted by the directors.
v) Following further feasibility study carried out on the project which gave rise to the deferred
development expenditure, the directors have decided to discontinue the project. The project
is not patented.
vi) The directors have decided to sell the patent rights for a net realizable value of GH¢
1,800,000.
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vii) Inventories were written down by GH¢ 2,232,000.
viii) The 22% debentures are secured on the freehold land and buildings.
ix) The bank has a fixed and floating charge over the assets in respect of the loan.
x) It is considered that a proposed reconstruction of the company should result in net profit
after tax of GH¢1,500,000 in the year ending 30 September, 2017 and GH¢1,800,000 or
more in each of the years thereafter.
xi) The company will require a ratio of accounts receivable and cash to current liabilities of
0.80:1 in future to trade satisfactory.
Required:
As a Director of Finance of Abusua Ltd, recommend a scheme of reconstruction for
consideration by the board of directors of the company and prepare a summarized statement
of a financial position (15 marks)
QUESTION FOUR
Sawaleh Ltd
Statement of financial position as at June 30 2016
Non-current assets GH¢000 GH¢000
Land and buildings 3,600
Plant and machinery 9,900
13,500
Current assets:
Inventories 4,400
Trade receivables 4,700
Cash in hand and at bank 1,000 10,100
23,600
Non-Current Liabilities
12% Debenture loan (2018) 2,200
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Current Liabilities
Bank Overdraft 2000
Trade payables 7,000
23,600
The industry performance average ratios in which Sawaleh Ltd operates are stated below.
Required:
As a newly qualified accountant working with Sawaleh Limited, you are to write a memo
to the CEO of the company evaluating the financial position and performance of Sawaleh
Limited by comparing it with that of its industry sector given above. (10 marks)
b) There has been widespread debate for several years concerning the declining value of
traditional methods of measuring corporate performance and the ability to predict corporate
failure. Earnings per share, return on capital employed and other investment ratios are
seemingly out of step with the needs of investors. The analysis of financial ratios is to a
large extent concerned with the efficiency and effectiveness of management’s use of
resources and also with the financial stability of the company. Researchers have developed
models which attempt to predict business failure.
Altman’s ‘Z score’ and Argenti’s failure models are examples of such research. However
many analysts feel that financial statements require several adjustments before any
meaningful evaluation of corporate performance can be made. Analysts often make
amendments to corporate profit and net assets before calculating even the most basic of
ratios because of their disapproval of certain generally accepted accounting principles and
in an attempt to obtain comparability.
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Required:
Discuss any FIVE reasons in general terms why the comparison of the a company’s ratios
with the ratios of previous years and other companies might be misleading. (5 marks)
(Total: 15 marks)
QUESTION FIVE
a) Historically, financial reporting throughout the world has differed widely. The IFRS
Foundation (formerly the International Accounting Standards Committee Foundation
(IASCF)) is committed to developing, in the public interest, a single set of high quality,
understandable and enforceable global accounting standards that require transparent and
comparable information in general purpose financial statements. The various
pronouncements of the IFRS Foundation are sometimes collectively referred to as
International Financial Reporting Standards (IFRS).
Required:
Discuss the IFRS Foundation’s standard setting process including how standards are
promulgated and revised. (6 marks)
Required:
Discuss how integrated reporting has developed from social and environmental reporting.
(7 marks)
c) Measurement is the process of determining the monetary amounts at which the elements of
financial statements are to be recognized and carried in the statement of financial position and
statements of profit or loss and other comprehensive income (Conceptual Framework). This
involve the selection of a particular basis of measurement. A number of these are used to
different degrees and in varying combinations in financial statements.
Required:
Discuss the measurement basis of elements of financial statements in accordance with the
IASB Conceptual Framework. (7 marks)
d) You work for a large company as the assistant financial controller. One of your duties is to
reconcile the sales ledger each month. The ledger has failed to agree month after month. You
strongly believe that it is associated with bad debts being written off on the individual
customer account but not included in the nominal ledger. You consider the differences to be
material and have brought this to the attention of the financial controller but he seems
unwilling to act.
Required:
What action would you take in this situation? (2 marks)
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e) Good ethical behavior may require acting beyond the requirement of the law. In a highly
competitive complex business world, it is essential that professional accountants maintain their
integrity and remember the trust and confidence which is placed in them by whosoever relies
on their objectivity and professionalism.
Required:
Explain why the code of ethics is important to professional accountants in Ghana. (3 marks)
(Total: 25 marks)
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MARKING SCHEME
QUESTION ONE
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Workings
W1
Cash and cash equivalent
2015 3,640
2016 9,030
5,390
W2
Intangible movements
2015 -
2016 200
200 Goodwill? This is not a cash flow
W3
Tangibles: Plant and Machinery
Additions GH¢000
Given per question 4,200
Subsidiary (330)
(3,870)
Finance lease obligation (1,700)
2,170 Cash outflows
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W4
Dividend Received From Associate Company
GH¢000
2015 2,000
CIS 990
2,990
Taxation (Asso) ( 355)
2,635
2016 2,200
435
W7 Taxation
GH¢000
Opening balances: 460 (GH¢434+GH¢26
Subsidiary 34
Profit or loss 990 (GH¢1,345- GH¢355) [or 782 + 208]
1,484
Closing balances 984 (GH¢924+60)
Cash paid 500
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W8 Analysis of proceeds from issue of shares
Share Capital Share premium Total
GH¢000 GH¢000 GH¢000
2015 4,000 4,190
Subsidiary 440 110
4,440 4,300
2016 7,880 5,766
proceeds 3,440 1,466 4,906
The net interest (203-180 = 23) is deducted from GH¢280,000 above given
actual interest of GH¢257,000 (GH¢280,000-GH¢23,000).
EXAMINER’S COMMENTS
Question 1 tested the preparation of Consolidated Statement of Cash Flow.
Although this is a standard question at this level, it was poorly attempted. Many
candidates were not well prepared for this question and either ignored it or attempted
it as the last question. Candidates had difficulty in computing relevant figures for the
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statement. Some of them wasted time calculating goodwill on consolidation and
preparing structure of control with diagrams and explanations which were irrelevant
in the statement of cash flow. Others placed items anywhere in the statement without
regard to the standard format for Statement of Cash Flow. Strangely a candidate gave
an elaborate write up on the advantages of a Cash Flow Statement which was not
required by the examiner. Generally, candidates did not demonstrate sufficient
understanding of principles underlying consolidated cash flows.
QUESTION TWO
a)
(i) This property was an IAS 16 property until 1 April 2016 and an IAS 40 investment
property after this date. The accounting treatment therefore changes on the date it
became an investment property. Any revaluation gains or losses up to that date are
accounted for under IAS 16, and any arising since are accounted for under IAS 40.
The revaluation gain would be taken to OCI and the revaluation loss to profit or loss
as they were recognised in the financial year ended 31 March 2017. The depreciation
relates to previous years, so its recording is not the subject of the requirement.
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Under IAS 40, investment property is not depreciated and is revalued to fair value at
each reporting date. Any gains or losses are taken to profit or loss.
Investment property
GH¢m
Fair value 1 April 2016 4.1
Fair value 31 March 2017 4.8
Fair value gain 0.7
(5 marks)
(ii) Dividends received are recognised as income regardless of the treatment of the
financial assets.
Journal entry to record dividends received: DR GH¢m CR GH¢m
Dr Cash 0.75
Cr Profit or loss 0.75
Remeasurements are treated in accordance with the policy of the entity. We must
assume that the irrevocable election required by IFRS 9 was made as this is the policy
of Kantanka Ltd.
Dr Cash 1.1
Cr Financial assets 1.1
The assets held at the period end must be remeasured to GH¢14 million. These are
already carried at GH¢12.7 million (12.0 – 0.9 + 1.6). The original carrying value
included GH¢0.9 relating to the investments sold, so these are no longer there. In
addition, new assets costing GH¢1.6 million were purchased.
The fair value of these remaining assets on 31 March 2017 was 14 million, hence a
gain of GH¢1.3 million (14 – 12.7) must be recognised.
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Journal entry to record remeasurement at 31 March 2017: DR GH¢m CRGH¢m
Dr Financial assets 1.3
Cr Other comprehensive income 1.3
(5 marks)
the requirements and guidance in IASB standards and interpretations dealing with
similar and related issues; and the definitions, recognition criteria and
measurement concepts for assets, liabilities, income and expenses in the
Framework. [IAS 8.11]
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corresponding adjustment to the opening balance of each affected component of
equity for that period. [IAS 8.24] Also, if it is impracticable to determine the
cumulative effect, at the beginning of the current period, of applying a new
accounting policy to all prior periods, the entity shall adjust the comparative
information to apply the new accounting policy prospectively from the earliest
date practicable. [IAS 8.2
(2 marks)
Accounting depreciation:
2015 – (600 – 60) / 15 = 36
2016 – (614 – 60) / 14 = 39.6
Note: Assume an applicable tax rate of 25% and capital allowance of 50% of
carrying amount in the first year and 25% in the second year.
d) (i) No present obligation exists to paint the premises, hence the accrual of a
provision is not permitted by IAS 37. No contingent liability exists either, unless a
commitment has been made to a supplier to carry out the work. (2 marks)
(ii) There is a present obligation, as the entity has undertaken to guarantee the
debts of another party. However it seems unlikely that this guarantee will be called
in. Hence it is not probable at the reporting date that an outflow of resources will
be required to settle the obligation. Therefore the second condition has not been
met, and no provision should be recognised in the financial statements. If an
outflow of resources is judged possible but not remote, disclosure of a contingent
liability of GH¢3 million should be made in the notes. (3 marks)
(Total: 25 marks)
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EXAMINER’S COMMENTS
Question 2 was in four (4) parts.
Part a) examined how to account for given transactions in accordance with relevant
accounting standards. This part was poorly answered. Candidates were not able to
apply the general principles in the standards to the facts given. Many candidates
simply explained the principles in the standards. Others simply did calculations
without explaining the calculations. The relevant standards were IAS 16 Property,
Plant & Equipment, IAS 40 Investment Property and IFRS 9 Financial Instrument.
Part b) examined procedure for selecting accounting policies and how an entity should
account for a change in accounting policy. The answers were generally satisfactory.
Part c) examined calculation of deferred tax. Two key items were missing in the
question. They were initial allowance and corporate tax rate. Candidates were
assessed according to how they demonstrated their understanding of the principles of
deferred tax in spite of the omission. Not many candidates were able to make
assumptions and produce relevant answer.
Candidates were unable to apply the general principles in the standard to the facts
given. Many candidates simply explained the principles in the standards. Others
simply did calculations without explaining the calculations. This part was poorly
answered.
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QUESTION THREE
ABUSUA LTD
Determination of maximum amount available if the company were to be liquidated.
Assets Realizable Value
GH¢ 000
Freehold Property 4005
Plant & Equipment 3750
Fixtures & Fittings 2800
Investment 1350
Patents 1800
Stock (3510-2232) 1278
Debtors 1600
Cash 428
Cash available if the company is liquidated 17011
Distributed as follows:
Debenture 4005
13006
Bank loan (5360)
Available to unsecured creditors and shareholders 7646
Payment to unsecured creditors
Debenture balance (7875-4005) 3870 3089
Trade creditors 4650 3710
Sundry creditors 1060 846
9580 7,646
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The loss should be shared as follows:
Ordinary shares
They would suffer most because they are the owners and if the company liquidates
they will receive nothing. They should sacrifice GH¢13, 400,000 of their capital and
leave GH¢100, 000 as capital.
Preference shareholders
They will also suffer the same fate as ordinary shareholders under liquidation. They
should therefore suffer a loss of GH¢4,000,000 leaving a capital of GH¢125,000.
Debenture holders
They would suffer 20 per cedi of the remaining balance after they have been paid
GH¢4,005,000. I recommend that they should suffer GH¢1,005,000 leaving debentures
of GH¢6,870,000.
Creditors
The trade creditors and sundry creditors should be made to suffer the maximum loss
they would have lost under liquidation, which is GH¢940,000 and GH¢214,000
respectively.
GH¢000
Bank Loan 5360
Trade creditors 3710
Sundry creditors 846
9916
Debtors and cash should be 0.8 of the new current liabilities. This is GH¢ 7,933,000.
But existing debtors and cash is made up as follows:
GH¢000
Debtors 1600
Cash 428
Sale of investments 1350
Sale of patents 1800
5178
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Additional cash of the difference of GH¢7,933,000 and GH¢5,178,000 is required to
maintain the desired ratio. This amounts to GH¢ 2,755,000 and should be raised by
the old shareholders as ordinary share capital.
PROPOSED SCHEME
Ordinary share:
Reduce the ordinary share capital by GH¢13,400,000 and convert the balance to new
ordinary share capital.
Preference shares
Reduce the preference share capital by GH¢4,000,000 and convert the balance to new
ordinary share capital.
Preference dividend
Write off the preference dividend of GH¢ 825,000 in arrears.
22% Debentures:
I recommend that they should suffer GH¢ 1,005,000 and be compensated by raising
their interest rate to 25%.
Creditors:
Creditors should be made to suffer 20% of the amounts owed to them by the
company.
The investments and patents to be realized to GH¢1, 350,000 and GH¢ 1,800,000
respectively.
In order to have a ratio of debtors and cash to current liabilities of 0.80:1 additional
cash of GH¢ 2,755,000 will have to be sourced (see workings). The existing ordinary
shareholders and existing preference shareholders will be required to introduce cash
of GH¢2, 155,000 and GH¢600, 000 respectively for the purchase of new ordinary
shares.
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ABUSUA LTD.
SUMMARISED BALANCE SHEETAFTER EFFECTING THE RECONSTRUCTION
GH¢000 GH¢000
Long term assets
Freehold land & buildings 4005
Plant & equipment 3750
Fixtures and fittings 2800
10,555
Current assets
Stock 1278
Debtors 1600
Cash (428+1,350+1,800+2,155+600) 6333
9211
Current liabilities
Bank loan 5360
Trade creditors 3710
Sundry creditors 846
9916
Net current liabilities (705)
25% Debentures (6870)
2980
Financed by:
Stated Capital 2980
EXAMINER’S COMMENTS
Question 3 asked candidates to recommend a scheme of reconstruction and prepare a
summarised Statement of Financial Position.
It was generally well answered; many candidates scored pass mark. However, some
candidates only provided workings without providing recommendations. One
candidate wrote extensively on the conditions to be satisfied before proceeding on a
capital reconstruction scheme. Such an effort was not required by the question and
the time spent on it was wasted.
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QUESTION FOUR
(a)
To: CEO, Sawaleh Limited
From: Accountant
Subject: Evaluation of the performance of Sawaleh Limited
Date: November 11, 2016
Introduction
The assessment of the performance of Sawaleh Limited is based on the areas of
profitability, liquidity, and financial security of the company.
Profitability
Sawaleh’s returns on capital employed, return on equity and operating profit margin
are all significantly above the industry averages. Although the first two measures
could be inflated due to assets being shown at the low book values, the profit margin
indicates that Sawaleh Ltd is managing to make good profits, which could be due to
successful marketing, a low cost base or to its occupation of a particularly profitable
niche in the market.
Liquidity
Both the current and the quick (acid test) ratios are well below the industry averages
(see appendix A attached). This suggests that Sawaleh Ltd is either short of liquid
resources or is managing its working capital poorly.
However, the three key working capital ratios modify this impression (appendix A
refers). Although the industry averages are not known, these ratios appear to be very
good by general standards. It therefore appears that Sawaleh Ltd has become under-
capitalized, perhaps through the use of working capital to finance growth.
Financial security
Gearing is high in comparison with the rest of the industry, and 48% of the debt is in
the form of overdraft which is generally repayable on demand. This is therefore a risky
form of debt to use in large amounts. The debenture is repayable in two years and will
need to be refinanced since Sawaleh Ltd cannot redeem it out of existing resources.
Interest cover is also poor, and this together with the poor liquidity probably account
for the low payout ratio (the inverse of the dividend cover). Appendix A attached for
calculations.
Conclusion
In summary, profit performance is strong, but there are significant weaknesses in both
the liquidity and the financial structure. These problems need to be addressed if
Sawaleh Ltd is to be able to maintain its record of strong and consistent growth in
order to compete favourably in the industry. The whole capital needs to be
restructured possibly eliminating the non-voting shares as the Ghana Stock Exchange
will not permit such shares to be listed. Also, surplus assets must be disposed of
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among others this will improve performance and possibly increase the dividend
payout ratio.
Signature
Name of Accountant
b)
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Limitations of inter-period and inter-company comparisons
The data might need to be adjusted to for inflation if valid comparisons are to be
made over time.
The financial statements might have been prepared using different accounting
policies e.g. choice of depreciation and stock valuation policies
Accounts may be made up to a different date which can significantly affect ratios
if the business is seasonal
Traditional analysis tends to focus on profitability. Greater attention is needed to
be paid to assessing liquidity and the capacity to adapt by reference to cash flow
statement
The statement of financial position is prepared at a single point in time. This means
it is possible to practice window dressing and this can affect ratios.
The industry average does not indicate the distribution of results around the
average. It would be helpful to have quartile and decile figures.
(Total: 15 marks)
EXAMINER’S COMMENTS
Question 4 was in two parts, a) and b):
Part a) examined the evaluation of the financial position and performance of a
company by comparing it with that of its industry. It was generally well answered.
Many candidates got the calculation of the relevant ratios right. However, some
candidates wasted time trying to compute price/earnings ratio even though there was
not sufficient information available. A number of candidates simply stated the
variances between the Company’s ratios and those of the Industry without adducing
possible reasons for performing above or below the Industry nor suggesting strategies
to redress or overcome the weakness.
Part b) examined reasons why the comparison of a company’s ratios with the ratios of
previous years and other companies might be misleading. This part was well
answered. However, some candidates dwelt extensively on comparing Altman’s Z-
Score and Argenti’s failure models. They lost marks because that comparison was not
a requirement.
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QUESTION FIVE
a)
International Financial Reporting Standards (IFRS Standards) are developed through
an international consultation process, the "due process", which involves interested
individuals and organisations from around the world.
The due process comprises six stages, with the Trustees of the IFRS Foundation having
the opportunity to ensure compliance at various points throughout:
Setting the agenda
The IASB evaluates the merits of adding a potential item to its agenda, also know
as the work plan, mainly by reference to the needs of investors.
The IASB considers: the relevance to users of the information and the reliability of
information that could be provided; whether existing guidance is available; the
possibility of increasing convergence; the quality of the standard to be developed;
and resource constraints.
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Developing and publishing the Standard
The development of an IFRS Standard is carried out during IASB meetings, when
the IASB considers the comments received on the Exposure Draft. After resolving
issues arising from the Exposure Draft, the IASB considers whether it should
expose its revised proposals for public comment, for example by publishing a
second Exposure Draft.
More recently, these types of basic social and environmental disclosures have
developed into sustainability reporting. This form of reporting particularly focuses on
the issue of sustainable development and whether the operations of an organisation
are sustainable into the future. The ability of an organization’s performance to be
sustainable into the future is said to be based on its economic, environmental, social
and governance performance. For example in order to be sustainable, a company must
limit its use of non-renewable energy sources (an environmental issue); it must also
treat its staff well and reward them adequately to ensure their continued support
(economic and social issues). Therefore sustainability reporting discloses
environmental and social issues but also expands disclosure to integrate the economic
impact of a company, for example through wages, taxes and purchasing policy, and
governance i.e. how the company is run.
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c) Measurement basis of elements of Financial Statement
(i) Historical cost. Assets are recorded at the amount of cash or cash equivalents
paid or the fair value of the consideration given to acquire them at the time of their
acquisition. Liabilities are recorded at the amount of proceeds received in exchange
for the obligation, or in some circumstances (for example, income taxes), at the
amounts of cash or cash equivalents expected to be paid to satisfy the liability in the
normal course of business.
(ii) Current cost. Assets are carried at the amount of cash or cash equivalents that
would have to be paid if the same or an equivalent asset was acquired currently.
Liabilities are carried at the undiscounted amount of cash or cash equivalents that
would be required to settle the obligation currently.
(iii) Realisable (settlement) value. Assets are carried at the amount of cash or cash
equivalents that could currently be obtained by selling the asset in an orderly
disposal. Liabilities are carried at their settlement values; that is, the undiscounted
amounts of cash or cash equivalents expected to be paid to satisfy the liabilities in
the normal course of business.
(iv) Present value. Assets are carried at the present discounted value of the future
net cash inflows that the item is expected to generate in the normal course of
business. Liabilities are carried at the present discounted value of the future net cash
outflows that are expected to be required to settle the liabilities in the normal course
of business.
(1.75 marks each for every point =7 marks)
d)
The possible actions could be
Informing the financial controller audit committee or board of directors and
formerly asking the financial controller to address it.
Informing the financial controller that you are going to bring the matter to the
attention of the financial director or the audit committee.
It would not be advisable to report externally until legal advise has been taken,
hopefully this situation can be resolved with one of the above actions.
(2 marks)
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The main ethical issue is integrity. It would not be appropriate for an accountant
to assist someone with the potentially fraudulent act or to allow misleading
information to be presented to others.
There is also the potential issue of objectivity. if you are placed under pressure by
the financial controller as this will mean you have a conflict of interest between a
conflict of interest on the requirement to behave with integrity.
(Total: 25 marks)
EXAMINER’S COMMENTS
Question 5 was in five parts.
Part a) tested the IFRS Foundation’s standard setting process. It was generally well
answered.
Part b) tested how integrated reporting has developed from social and environmental
reporting.
Although the answers were generally satisfactory, some candidates could not explain
appropriately the link between integrated reporting and social and environmental
reporting.
Part d) tested ethical conduct between a subordinate and his supervisor. It was
generally well answered.
Part e) tested why the code of ethics is important for professional accountants in
Ghana. It was generally well answered.
CONCLUSION
Candidates should be educated to prepare adequately before presenting themselves
for the examination. The Institute should consider organising classes for prospective
candidates outside Accra.
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