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INSTITUTE OF CHARTERED ACCOUNTANTS GHANA ADVANCED FINANCIAL REPORTING

SOLUTIONS- MAY 2012

Question 1

1 (A) Procedure for recognition and measurement of Impairment loss in a cash generating

unit

i. First t, to reduce the carrying amount of any goodwill

ii. Then to the other assets of the units pro-rata on the basis of the carrying amount of

each asset.

In allocating an impairment loss as stated above, an entity shall not reduce the carrying

amount of an asset below the highest of:

a. its fair value less cost to sell

b. Its value in use and

c. zero

(ii) Calculation of impairment loss

GHS ‘000

Purchase consideration 450

Less Net Asset Acquired (420)

Goodwill 30

Impairment Loss (450 – 405) = 45

Goodwill (30)

Intangible assets (70 – 60) (10)

Impairment loss to Income statement 40

Note: since the assets were valued at fair value less cost to sell (net selling price), they cannot

be reduced below the net selling price. Impairment loss to be recognized is GHS 40,000 of

the total of GHS 45,000

(iii). Net Assets as at August 1, 2011

Property, Plant & Equipment 340

Intangible asset 60

Trade receivables 50

Trade Payables (40)

410

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1B).

i. Extracts of financial statements of Asonaba Ltd for the Year ended 31 December

2010

GHS

Income Statement for the year ended 31 December 2010 6,900

Finance Cost (6.9% of GHS100, 000)

Statement of Financial Position as at 31 December 2010 Non-current liabilities

Loan notes [at amortized cost] (100,000 + 6,900 – 6,000) 100,900

Statement of cash flow for the year ended 31 December 2010 Cash flows from operating activities

Interest paid [6% of GHS 100,000] (6,000)

Cash flows from financing activities

Proceeds from loan notes issued 100,000

ii. Extracts of financial statements of Oyoko Ltd for the year ended 31 December

2010

FVTPL HTM AFSFA

GHS GHS’ GHS

Income Statement Finance Income 250 1,725 1,725

Statement of Financial Position Non-current Assets

Financial Assets 23,750 25,225 23,750

Equity

Available for sale reserve (1,475)

Statement of cash flows Cash flows from operating activities

Interest received (6% of GHS 25,000) 1,500 1,500 1,500

Cash flows from investing activities

Financial asset investment (25,000) (25,000) (25,000)

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Workings

Fair value through profit or loss [FVTPL]

GHS GHS

Interest received (6% of GHS 25,000) 1,500

Initial Amount recognized [250 x GHS100] 25,000

Fair value at year end [250 x GHS 95 (23,750)

Reduction in fair value (1,250)

Amount recognized in profit and loss 250

Held to Maturity [HTM] Initial Amount recognized 25,000

Interest income in profit or loss (6.9% of GHS 250,000) 1,725

Interest income received (6% of GHS 25,000) (1,500) 225

Carrying amount amortized cost at 31 December, 2010 25,225

Available for sale financial asset [AFSFA] Initial Amount recognized 25,000

Interest income in profit or loss (6.9% of GHS 250,000) 1,725

Interest income received (6% of GHS 25,000) (1,500) 225

25,225

Fair value at year end [250 x GHS 95] 23,750

Fair value change in equity (1,475)

Note:

The AFS reserve has a debit balance in equity. If the holder believes that the financial asset is

impaired, then it should be reclassified out of Other Comprehensive Income into profit or

loss.

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Question 2

PEACE LIMITED GROUP

CONSOLIDATED INCOME STATEMENT FOR THE

YEAR ENDED 31 DECEMBER, 2010

GHS ‘000 GHS ‘000

Turnover (27,675 + 35,438) 63,113

Cost of Sales (18,081 + 28,176) (46,257)

Gross Profit 16,856

Distribution Cost (3,870 + 2,832) (6,702)

Administrative Expenses (4,407 + 945) (5,352)

Depreciation (573 + 630) 1,203

Exchange Difference Gain (workings 8) 1,037

Profit before Tax 4,636

Taxation (585+ 2,839) (3,424)

Profit after Tax 1,212

Non-controlling Interest (40% x 1,053) (421)

Transfer to Income Surplus 791

GROUP INCOME SURPLUS ACCOUNT

GHS ‘000

Balance as at 01/01/2010 (3,033 -555) 2,478

Income Surplus –Love Ltd – post (11,175+ 522 – 450) x 60% 6,748

Transfer from Income Statement 791

Less Dividend paid (549)

Balance as at 31/12/2010 9,468

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PEACE LIMITED GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER, 2010

NON-CURRENT ASSETS GHS ‘000 GHS ‘000

Property, Plant & Equipment (5,295 + 11,550) 16,845

Goodwill Workings 6 15

16,860

CURRENT ASSETS

Inventory (6,735 + 1,470) 8,205

Trade Receivables (1,845 + 750) 2,595

Cash & Bank (468 + 4,050) 4,518 15,318

Total Assets 32,178

EQUITY AND LIABILITIES

Shareholders’ Fund

Ordinary Share Capital 1,800

Income Surplus 9,468

Non-Controlling Interest (40% X 12,225) 4,890 16,158

NON CURRENT LIABILITIES

Long Term Loan (3,690 + 3,720) 7,410

CURRENT LIABILITIES

Trade Payables (3,690 + 3,720) 8,610

Total Equity and Liabilities 32,178

WORKINGS

1. Translation of Peace Income Statement

KA’000 RATE GHS’000

Turnover 283,500 8 35,438

Cost of Sales 189,000 (28,176)

Gross Profit 31,500 7,262

Distribution Cost 22,659 8 (2,832)

Administrative Expenses 7,560 8 (945)

Depreciation 6,300 10 (630)

Exchange Difference -Gain 1,037

Profit before Tax 3,892

Taxation 22,710 8 (2,839)

Profit after Tax 1,053

Dividends (12,600) 8 (1,575)

Transfer to Income Surplus (522)

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2. Translation of Statement of Financial Position

KA’000 RATE GHS’000

Property, Plant & Equipment 115,500 10 11,550

Inventory 11,025 7.5 1,470

Trade Receivables 5,250 7 750

Cash & Bank 28,350 7 4,050

Trade Payables (13,125) 7 (1,875)

Long Term Loan (26,040) 7 (3,720)

120,960 12,225

Ordinary Share Capital 10,500 10 1,050

Income Surplus 110,460 11,175

120,960 12,225

3. Translation of Opening Balance

KA’000 RATE GHS’000

Ordinary Share Capital 10,500 10 1,050

Income Surplus – pre-acquisition 4,500 10 450

Income Surplus 83,289 10 8,130

98,289 9,630

Property, Plant & Equipment [115,500 +6,300] 121,800 10 12,180

Inventory 14,280 10 1,428

Long Term Loan (26,040) 9.5 (2,741)

Net Monetary Liability (Bal) (11,751) 9.5 (1,237)

98,289 9,630

4. Group Structure

Group share 2, 1000,000 x 100 / 3,500,000 = 60%

Non –controlling Interest = 40%

5. Cost of Sales

KA’000 RATE GHS’000

Opening Inventory 14,280 10 1,428

Purchases (balancing figure) 185,745 8 28,218

Closing Inventory 11,025 7.5 1,470

189,000 28,176

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6. Goodwill Accounts

Cost of Investment [GH¢915 x KA 10] 9,150

Less Net Assets Acquired

Ordinary Share Capital 10,500

Income Surplus (Pre-Acquisition) 4,500

15,000

Group Share (60% X 15,000) (9,000)

Goodwill 150

Translated to GH¢ at close (150 x 7) = GH¢21.42

Alternative Solution

Cost of Investment [GH¢915 x KA 10] 915

Less Net Assets Acquired

Ordinary Share Capital (10,500/10) 1,050

Income Surplus (Pre-Acquisition) (4,500 /10) 450

1,500

Group Share (60% X 1,500) (900)

Goodwill 15

Re-translated at Balance Sheet date (10/7 x 15) = GH¢21.42

7. Group Income Surplus Accounts

Balance B/d 3,035

Income Surplus [60% x (11,175- 450)] 6,435

Balance c/d 9,468

8. Calculation of Exchange Difference

Shareholders’ Fund at 01/01/2011 workings 3 9,630

Profit before 2010 –Exchange Diff. workings 3 1,559

Balance c/d 11,188

Less Shareholders’ Fund at 31/12/2011 workings 2 12,225

Exchange Gain 1,037

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9. Calculation of Non-controlling Interest

KA ‘000

Stated Capital 10,500

Income Surplus 110,460

120,960

Non-controlling Interest 40% X 120,960 = 48,348

Translated at 31/12/10 = 48,348/7 = GH¢6,912

Question 3

a. Importance of Corporate Failure Prediction

i. Banks use corporate failure prediction to monitors loans to customers.

ii. Auditors use it to assess the going concern status of a client.

iii. Industrial Companies use it to monitor the creditworthiness of customers

iv. It helps companies to assess whether they are in danger of possible collapse.

v. Local Governments can use it to assess the risks of their suppliers.

Calculation of Z-Score

X1 0.012 x Working Capital x 100

Total Assets

0.012 x 3,445 x 100

27,787

0.15

X2 0.014 x Retained Earnings x 100

Total Assets

0.014 x 5,245 x 100

27,787

0.26

X3 0.033 x Earnings Before Interest & Tax

Total Assets

0.033 x 4,880 x100

27,787

0.59

X4 0.006 x Market Value of Equity x100

Carrying amount of Debts

0.006 x 14,000 x100

3,700

2.28

X5 0.999 x Sales

Total Assets

0.999 x 29,000

27,787

1.04

4.32

Advice: the company is not likely to collapse since the Z-score is above 3

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Workings

Income Statement GHC’000

Profit before Interest and Tax 4,880

Debenture Interest (185)

Profit before Tax 4,695

Tax (1800)

Profit after Tax 2,895

Income Surplus Accounts

Balance b/f 2,350

Profit after Tax 2,895

Retained Earnings 5,245

Market Value of Equity

Price per Share GHC2.00

Value of Equity 7,700 x 2 / 1.1 = 14,000

Working Capital GHC’000 GHC’000

Current Assets

Inventory / Stocks 5,600

Receivables / Debtors 2,580

Bank 4,200

Investment Income 107 12,487

Current Liabilities

Creditors /Payables 6,300

Debenture Interest 92

Tax (1,800 + 850) 2,650 (9,042)

3,445

Total Assets GHC’000

Current Assets 12,487

Plant & Machinery 5,800

Freehold Premises 8,100

Investments 1,400

27,787

b.

i. Cost of Sales Adjustments

Cost of Sales Adjustments is the difference between the replacement cost and the

historical cost accounting cost of sales. It is necessary to eliminate realized holding gains

from the gross profit.

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ii. Depreciation Adjustments

This is the difference between the depreciation charge on the gross replacement cost of

the asset and the historical cost of depreciation. Thus if depreciation is provided on the

current cost of an asset each year and the arrears of depreciation caused by continuing

inflation are made good, the entity would have retained the opportunity to replace the

asset at the end of its useful life. Alternatively, the entity can buy other assets of

equivalent value.

iii. Monetary Working Capital adjustments

This is the aggregate of

a. Trade Receivables, Prepayments and Bills Receivable

b. Trade Payables, Accruals and Bills payable

When a company gives or takes credit for the sale or purchase of goods, they are paid for

at the end of the credit period; at the replacement cost, it is at the beginning of the credit

period. If the entity measures profit on the excess of revenue

Trade payables protect the entity because the entity lags behind current prices in the

payment while Receivables would be a burden on profits in a period of rising prices

because Sales receipts always relate to previous months at lower cost profits levels.

iv. Gearing Adjustments

This is computed when operating capacity of a business is financed in part by borrowing.

During a period of rising prices, the non-current assets financed by these borrowings

increase in monetary amount while the amount of the Loan remains unchanged.

Historical Cost accounting Income Statement does not reflect this gain though interest is

charged on the borrowings.

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Question 4

KUMASI SHOE FACTORY LIMITED

RECONSTRUCTED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER, 2010

Non-Current Assets GHS GHS’

Property, Plant & Equipment 2,250,000

Current Assets

Inventories 600,000

Accounts Receivables 450,000

Cash & Bank 1,250,000 2,300,000

Total Assets 4,550,000

LIABILITIES & SHAREHOLDERS’ FUND

SHAREHOLDERS’ FUND

Ordinary Share Capital 3,000,000

Capital Surplus 200,000 3,200,000

Non-Current Liabilities

10% Debenture 350,000

Current Liabilities

Accounts Payables 1,000,000

Total Liabilities & Shareholders’ Fund 4,550,000

B). Expected Profit after Tax and EPS

GHC

Expected Profit before Interest 400,000

Interest [10% X 350,000] (35,000)

Profit before Tax 365,000

Tax @ 25% (91,250)

Profit attributable to ordinary shareholder 273,750

Number of share issued after reconstruction = 3,000,000 shares

Earnings Per Share = 273,750 = GHC 0•091

3,000,000

Earnings per Share would be [0•091 X 600,000 shares] amounting to GH¢54,600 per annum.

This might seem a worthwhile return, therefore they should accept the reconstruction.

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C). Statement of Distribution on Liquidation

Total Proceeds on liquidation 2,250,000

Distribution

Liquidation Expenses 10,000

Secured Creditors – Bank Overdraft 750,000

Unsecured Creditors

15% Debenture holders – 745,000

Accounts Payable – 745,000 1,490,000 (2,250,000)

Nil

Since the unsecured creditors, who are the 15% Debenture holders and the accounts payables

amount to GH¢2,000,000, they would receive GH¢0•745 per GH¢1. [1,490,000/2,000,000]

Workings

Capital Reduction Accounts

Ordinary shares 200,000 Ordinary shares

2,000,000

Ordinary shares 150,000 Pref. Shares

750,000

Prop. Plant & Equip 1,000,000

Inventories 400,000

Prov. - Bad Debts 50,000

Income Surplus 750,000

Capital Surplus 200,000

2,750,000

2,750,000

OR Capital Reduction Accounts

Ordinary shares 150,000 Ordinary shares

1,800,000

Prop. Plant & Equip 1,000,000 Pref. Shares

750,000

Inventories 400,000

Prov. - Bad Debts 50,000

Income Surplus 750,000

Capital Surplus 200,000

2,550,000

2,550,000

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Stated Capital

Balance c/d 3,000,000 Ordinary shares

200,000

Pref. Shares

150,000

Debenture holders

650,000

Bank

2,000,000

3,000,000

3,000,000

Bank Accounts

Stated

Capital 2,000,000 Bal b/f

750,000

Bal c/d

1,250,000

2,000,000

2,000,000

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Question 5

A. The Managing Director’s statement is incorrect for a number of reasons:

i. The figures are based on book values. It is more appropriate to use market values in

arriving at a valuation for listing purposes.

ii. The addition of total assets and surpluses is to double count since the surplus

represents one of the sources of finance use to acquire the existing assets.

iii. The liabilities should have been deducted from the total assets figure in order to arrive

at the net asset position of the company.

iv. The issue of 500,000 new shares would bring the total number of shares of the

company to 10,500,000 . If only the new shares are offered on the exchange, this

represents 4.7% of the total number of shares. The minimum percentage that can be

offered in the market is about 25%.

v. In view of the problems with the net assets valuation, and taken into account the

valuation estimates given below, Obuoba is unlikely to achieve the price of GH¢7

per share which would be necessary to raise GH¢3.5 million from 500,000 shares

B

i. Revised Profit (for PE Ratio method) GHS’000

Profit before Tax per draft accounts 12,000

URP on sale or return [30/130 x GHS2.6 m] (600

Depreciation: Land and building (800)

Plant (1,400)

Fair valuation gain of FAFVTPL 160

Embezzlement: current year (500)

Additional interest [amortization] 720-600 (120)

-------

Profit before tax 8,740

Taxation: Current Tax @ 20% 1748

Deferred Tax [20% 500) 100

------- (1,848)

---------

Profit after tax 6,892

=====

ii. Dividend Paid [For Dividend Yield method]

GHS’000

Retained earnings as at 31 December 2010 19,000

Reported profit 9,600

----------

28,600

Balance as at 31 December 2011 (23,000)

-----------

Dividend paid 5,600

=====

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An alternative is to prepare a revised Income Statement as follows:

GHS’000

Sales (52000-2,600] 49,400

Cost of sales [29,000 – 2,000 + 800+1400] (29,200)

-----------

Gross Profit 20,200

Selling expense (4,500)

Admin (4,500)

Interest [2000+120] (2,120)

Fair valuation gain 160

--------

Profit before tax 8,740

Taxation (1,848)

--------

Net Profit 6,892

====

iii. Revised Net Asset [ For Net Assets Method]

GHS’000

Per the trial balance 24,000

Prior year adjustment [embezzlement] (1,500)

Adjustment to reported profit [9,600 – 6,892] (2,708)

Revaluation surplus – Land and buildings 2,800

--------

22,592

=====

An alternative is to prepare the revised SOFP as follows

GHS’000

Land and buildings 18,000

Plant 5,600

FAFVTPL 2,160

-------

25760

-------

Current assets

Inventory 11,000+ 2000 13,000

Trade receivables [9,000-2,000 -2,600] 4,400

Cash 1,000

--------

18,400

--------

Total assets 44,160

=====

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Equity

Stated capital 1,000

Revaluation surplus 2,800

Retained earnings [23,000- 1500 - 2708] 18,792

------

22,592

Non-current- liabilities

Long term loans [7,000 + 4120] 11,120

Deferred tax provision 100

Current liabilities

Trade payables 8,600

Current tax 1,748

-------

44,160

i. Price Earnings Ratio

Value per share = EPS X PE ratio

EPS GHS6,892,000/10 million shares = GHS 0. 6892

PE ratio = That of Dadeba as adjusted

= (GHS4.20/GHS0.60) = 7 adjusted to 5.25

Value per share = GHS0.6892 x 5.25 = GHS3.6183

ii. Dividend Yield Method

Value per share = Do/Dividend yield

Do = GHS5,600,000 / 10m shares = GHS0.5600

Dividend yield = That of Dadeba as adjusted

= (GHS0.36/GHS4.20) = 8.57% adjusted to 10.71% or 11.42%

Value per share = GHS0.5600/0.1142 = GHS4.9037 or GHS0.5600/0.1071 = GHS5.228

iii. Net Assets Method

Value /share = Net Assets/No of ordinary shares

=GHS22,592,000/10 million shares

=GHS2.2592