Page 1 of 28

THE INSTITUTE OF CHARTERED ACCOUNTANTS, GHANA

NOVEMBER 2015 PROFESSIONAL EXAMINATIONS

EXAMINERS GENERAL COMMENTS

CORPORATE REPORTING (3.1)

GENERAL PERFORMANCE

Generally, there was improvement in performance as compared to previous diets. However,

performance in centres outside Accra continued to be poor; probably effective tuition was

lacking in those areas. There was no similarity of answers to suggest any possible copying.

STANDARD OF THE QUESTION PAPER

Consistency

This paper covered all the topics in the syllabus unlike the previous diet which did not examine

forty five percent of the topics in the syllabus.

Ambiguities/Errors Generally the questions were clear in their requirements. However, b of question 2 b) stated,

“Explain the FOUR (4) criteria that need to be satisfied before expenditure can be recognised as

an intangible asset under IAS 38”. It should be noted that IAS 38 specifically identified only two

(2) criteria. No doubt, this requirement made many candidates produce criteria which were not

part of IAS 38.

COVERAGE OF THE SYLLABUS The questions were spread well enough to cover all areas of the syllabus.

The syllabus weightings were fully respected in this diet. Refer to the Table of Weightings

below:

Table of Weightings

Question Topic Paper Syllabus Diff. No. Weighting Weighting

1. Consolidated financial

statements 20 20 -

2a Financial reporting framework 5 5 -

2b&c Financial reporting standards 20 20 -

3 Current development in financial

reporting 15 15 -

Page 2 of 28

4 Specialised entities and specialised

transactions 15 15 -

5a&b Appraisal of financial performance 15 15 -

5c&d The Professional and ethical duties

of an accountant 10 10 -

-

Totals 100 100 -

STRENGTHS OF CANDIDATES

Candidates showed improved understanding of the techniques of consolidation and scored high

marks in that area.

WEAKNESSES OF CANDIDATES

Weaknesses of candidates can be summarized as follows:

i. Candidates were weak in integrated reporting, social and environmental reporting,

professional ethics and accounting for financial instruments.

ii. Some candidates showed lack of effective time management in answering

questions. They spent too much time on questions they believed they could

handle; this left them little time to tackle other questions satisfactorily.

iii. Some candidates answered the same question on several non-consecutive pages

without cross-referencing the pages. Also, some answered two different questions

on the same page. These show that they jumped into answering the questions

without proper planning.

iv. Some candidates did not prepare adequately for the examination and as a result

scored very low marks.

Page 3 of 28

THE INSTITUTE OF CHARTERED ACCOUNTANTS, GHANA

NOVEMBER 2015 PROFESSIONAL EXAMINATIONS

CORPORATE REPORTING QUESTIONS

QUESTION ONE

The consolidated statement of financial position of SCANAS Ltd Group as at 31 December 2014

and the comparative for 2013 are shown below:

2014 2013

GH¢’000 GH¢’000

Assets

Non-current assets:

Property, plant and equipment 16,800 15,600

Goodwill 2,900 2,400

Investment in associate 8,000 7,800

27,700 25,800

Current assets:

Inventories 11,600 12,000

Account Receivables 9,400 8,200

Held for trading investment 2,200 1,800

Cash and cash equivalent 1,400 4,100

24,600 26,100

Total assets 52,300 51,900

Equity and Liabilities

Equity attributable to owners of the parent:

Ordinary shares (issued at GH¢1.00) 14,800 10,000

Capital surplus 400 400

Retained earnings 7,300 6,300

22,500 16,700

Non-controlling interest 6,500 6,100

Total equity 29,000 22,800

Non-current liabilities:

Long term loans 14,000 18,000

Current liabilities:

Account Payables 8,700 10,200

Income tax 600 900

9,300 11,100

Page 4 of 28

Total liabilities 23,300 29,100

Total equity and liabilities 52,300 51,900

The consolidated income statement for SCANAS Ltd for the year ended 31 December 2014 is

shown below:

GH¢’000

Revenue 12,000

Cost of sales (8,400)

Gross profit 3,600

Distribution costs (400)

Administrative expenses (1,260)

Finance costs (450)

Share of profit of associate 500

Profit before tax 1,990

Income tax (600)

Profit for the year 1,390

Attributable to:

Owners of the parent 1,200

Non-controlling interest 190

1,390

Additional information:

(i) There were no disposals of property, plant and equipment in the year. Depreciation

charged in arriving at profits totaled GH¢1,800,000.

(ii) SCANAS Ltd acquired 90% of the ordinary shares of AT Ltd on 1 September 2014 for a

cash consideration of GH¢460,000 plus the issue of 1 million ordinary share of SCANAS

which had a deemed value of GH¢3.60 per share at the date of acquisition. The fair values

of the net assets acquired were as follows:

GH¢’000

Property, plant and equipment 800

Inventories 2,200

Page 5 of 28

Receivables 700

Cash and cash equivalents 200

Payables (500)

3,400

SCANAS Ltd made no other purchases or sales of investments in the year. The group

policy is to value the net assets.

(iii)Finance costs include interest on loans and any gains on held for trading investments. All

interest due was paid in the year.

Required:

Prepare the consolidated statement of cash flows for SCANAS Ltd for the year ended 31

December 2014.

(20 marks)

QUESTION TWO

a) The International Accounting Standards Board (IASB) Conceptual Framework for

Financial Reporting sets out the concepts that underlie the preparation and presentation of

financial statements for external users.

Required:

Discuss the relevance and possible limitations of the Conceptual Framework for

Financial Reporting. (5 marks)

b) IAS 38 Intangible assets deals with the recognition and subsequent measurement of

intangible assets.

Required:

a. Explain the term ‘intangible asset’, and state the intangible assets that fall within

the scope of IAS38. (2 marks)

Page 6 of 28

b. Explain the FOUR (4) criteria that need to be satisfied before expenditure can be

recognised as an intangible asset under IAS 38. (8 marks)

c) Alafia Limited issued a GH¢5,000,000 18% convertible loan note at par on 1 January 2012

with interest payable annually in arrears. Three years later, on 31 December 2014, the loan

note becomes convertible into equity shares on the basis of GH¢100 of loan note for 50

equity shares or it may be redeemed at par in cash at the option of the loan note holder. The

financial accountant of Alafia Limited has observed that the use of a convertible loan note

was preferable to a non-convertible loan note as the latter would have required an interest

rate of 24% in order to make it attractive to investors.

The present value of GH¢1 receivable at the end of the year, based on discount rates of

18% and 24% can be taken as:

Year 18% 24%

1 0.847 0.806

2 0.718 0.650

2 0.609 0.524

Required:

(i) Show the accounting treatments for the convertible loan note in Alafia Limited’s

income statement for the years ended 31 December 2012, 2013 and 2014; and the

statement of financial position as at 31 December 2012, 2013 and 2014.

(8 marks)

(ii) Pass journals to record entries at the end of 2014 assuming

(i) The share option is taken (1 mark)

(ii) The loan is repaid (1 mark)

[Total = 25 marks]

Page 7 of 28

QUESTION THREE

a) International Integrated Reporting Council’s long term vision is a world in which integrated

thinking is embedded within mainstream business practice in the public and private sectors.

The cycle of integrated thinking and reporting, resulting in efficient and productive capital

allocation, will act as a force for financial stability and sustainability. Many are those who

think that the concept of integrated reporting should be given prominence and if possible,

legislated and made compulsory for all listed entities.

Required:

i) Describe the scope of integrated reporting; and (2 marks)

ii) Discuss the benefits of integrated reporting to preparers and users of financial statements.

(4 marks)

b) High quality corporate reporting has become an important issue for many corporate entities.

However, the recommendations to improve it are sometimes questioned on the basis that the

marketplace for capital can determine the nature and quality of corporate reporting. It could be

argued that additional accounting and disclosure requirements would only distort a market

mechanism that already works well and would add costs to the reporting mechanism, with no

apparent benefit. On the contrary, it could also be argued that increased disclosure reduces

risks and offers a degree of protection to users. However, increased disclosure has several costs

to the preparer of financial statements.

Required:

Discuss the relative costs to the preparer and benefits to the users of financial statements of

increased disclosure of information in financial statements. (4 marks)

c) One of the current issues in accounting is the concept of social and environmental reporting.

Many are those who think that the concepts of social and environmental reporting should be

given prominence and if possible, legislated and made compulsory for all listed entities.

Page 8 of 28

Required:

i) Describe the nature of social and environmental reporting? (2 marks)

ii) Discuss the relevance of social and environmental reports to users of financial statements.

(3 marks)

[Total = 15 marks]

QUESTION FOUR

a) Describe the primary objective of current cost accounting. (2 marks)

b) Using relevant examples, clearly distinguish between monetary items and non-monetary

items as they relate to accounting for price-level changes. (2 marks)

c) An entity is considering adjusting its historical cost based financial statements to reflect

economic reality. Make an argument for and against the use of current purchasing power

accounting as a method of adjusting financial statements for price-level changes.

(4 marks)

d) The following information relate to the business of Joe and Joy who operate a firm that

buys and sells batik shirts. The financial position of the firm, as revealed by the statement

of financial position as at 31 December 2013 using historical cost measurements, was as

follows:

GH¢ GH¢

Share capital: Joe 1,000 Non-current Assets 1,200

Joy 800 Inventory 600

1,800 1,800

Page 9 of 28

The non-current asset shown on the statement of financial position was acquired on 31

December 2013 and has an estimated life of 5 years, with no scrap value.

Data recorded in respect of the year ended 31 December 2014 is as follows:

GH¢

Sales 2,200

Purchases at historical cost 700

Closing inventory: at historical cost 220

at replacement cost 270

Cost of goods sold at replacement cost 1,200

It was also estimated that the replacement cost of non-current assets had risen to

GH¢1,400 by 31 December 2014.

Required:

Prepare an income statement for the year ended 31 December 2014 and a statement of

financial position as at 31 December 2014 using:

(i) Historical cost accounting; and (3 marks)

(ii) Current cost accounting. (4 marks)

[Total = 15 marks]

Page 10 of 28

QUESTION FIVE

a) It has been suggested that ratio analysis is not necessarily the best way of assessing a

company’s performance.

Required:

i) Describe TWO (2) items of information which should be looked at to make

ratio analysis more meaningful. (3 marks)

ii) Explain FOUR (4) limitations of the use of accounting ratios in appraisal of

financial performance. (4 marks)

b) Below are the financial ratios for the year 2014 for Nyentieobia Limited, a company

engaged in the buying and shipment of shea butter products. The ratios for the industry

have also been provided.

Nyentieobia Industry Limited Average

Quick ratio 0.52:1 0.84:1

Current ratio 1.20:1 1.80:1

Debtors collection period 46 days 41 days

Creditors payment period 70 days 50 days

Inventory holding period 58 days 48 days

Dividend yield 3.6% 9 %

Debt to equity 85% 45%

Dividend cover 1.4 times 3.4 times

Gross profit margin 18% 28%

Net profit margin 8% 12.8&

Return on capital employed 28% 14%

Net assets turnover 4.2 times 1.9 times

Required:

Provide an assessment of Nyentieobia Limited in comparsion with the industry in respect

of profitability, liquidity, efficiency and shareholders’ investment.

(8 marks)

Page 11 of 28

c) The directors of Muni Limited are involved in takeover talks with another entity. In the

discussions, one of the directors stated that there was no point in an accountant studying

ethics because the profession already has a set of moral beliefs that are followed and these

are created by simply following generally accepted accounting practice. He further stated

that in adopting a defensive approach to the takeover, there was no ethical issue in falsely

declaring Muni Limited’s profits in the financial statements used for the discussions

because, in his opinion, the takeover did not benefit the company, its executives or society

as a whole.

Required:

Discuss the above views of the director regarding the fact that there is no point in an

accountant studying ethics and that there was no ethical issue in the false disclosure of

accounting profits.

(5 marks)

d) Accounting professionals are responsible for acting in the public interest, and for

promoting professional ethics. The directors of Jungle Limited feel that when managing

the affairs of a company the profit motive could conflict with the public interest and

accounting ethics. In their view, the profit motive is more important than ethical behaviour

and codes of ethics are irrelevant and unimportant.

Required:

Discuss the views of the directors regarding the fact that codes of ethics are irrelevant and

unimportant. (5 marks)

[Total = 25 marks]

Page 12 of 28

SUGGESTED SOLUTIONS

QUESTION ONE

SCANAS Ltd Group

Consolidated Statement of cash flows for the year ended 31 December 2014

GH¢’000 GH¢’000

Cash flow from operating activities

Profit before tax 1,990

Adjustment for non-cash and non-operating items:

Depreciation 1,800

Goodwill impairment 500

Share of profit of associate (500)

Gain on held for trading investment [2,200-1,800] (400)

Changes in working capital:

Decrease in inventory [11,600-2,200] -12,000 2,600

Increase in receivables [9,400-700] -8,200 (500)

Decrease in payables [8,700-500] -10,200 (2,000)

Cash inflow from operating activities 3,400

Taxation paid [900+600-600] (900)

Net cash inflow from operating activities 2,590

Cash flow from investing activities

Acquisition of PPE [16,800 – 15,600 – 800 + 1,800] (2,200)

Acquisition of subsidiary, net of cash acquired [460 -200] (260)

Dividend received from associate [7,800+500-8,000] 300

Cash outflow from investing activities (2,160)

Cash flow from financing activities

Proceeds from issue of shares [10,000+8,600-14,800] 1,200

Dividend paid to shareholders of parent (200)

Dividend paid to non – controlling shareholders (130)

Loan repayment [18000-14000] (4,000)

Cash outflow from financing activities (3,130)

Net decrease in cash and cash equivalents (2,700)

Cash and cash equivalents at 1 January 2014 4,100

Cash and equivalents at 31 December 2014 1,400

Page 13 of 28

Workings [All in GH¢’000]

1) Goodwill

Opening balance 2,400

Arising on acquisition 1,000

3,400

Closing balance (2,900)

Impairment 500

2) Goodwill on acquisition

Consideration transferred [1 m shares x GH¢3.60+GH¢460,000 4,060

Non-controlling interest [10% of GH¢3,400.000] 340

4,400

Value of net assets acquired (3,400)

Goodwill 1,000

3) Changes in working capital

Inventories Receivables Payables

Balance b/f 12,000 8,200 10,200

On acquisition 2,200 700 500

14,200 8,900 10,700

Balance c/d 11,600 9,400 8,700

Increase/(decrease) (2,600) 500 (2,000)

EXAMINER’S COMMENTS

The question tested the preparation of a consolidated statement of cash flows. It was very well

answered; candidates scored very high marks. However, a number of candidates did not pay

attention to classification of the cash flows.

Page 14 of 28

QUESTION TWO

a)

i) Relevance of the Conceptual Framework for Financial Reporting ( 3 marks)

1) The Conceptual Framework is intended to assist the IASB in the development of future

International Financial Reporting Standards (IFRS) and in its review of existing IFRS. The

situation is avoided whereby standards are developed on patchwork basis, where a particular

accounting problem is recognised as having emerged and resources are then channelled into

standardising accounting practice in that area, without regard to whether that particular issue was

necessarily the most important issue pertaining at that time without standardisation. Moreover,

through the Conceptual Framework, those who are interested in the work of the IASB get more

information about the IASB’s approach to the formulation of IFRSs.

2) Although, the Conceptual Framework assists national standard-setting bodies in developing

national standards, it is primarily intended to assist the Board in promoting harmonisation of

regulations, accounting standards and procedures relating to the presentation of financial

statements by providing a basis for reducing the number of alternative accounting treatments

permitted by IFRSs.

3) In the preparation and presentation of financial statements, the Conceptual Framework provides

guidance to preparers of financial statements in applying IFRS. Some standards may concentrate

on the income statement whereas some may concentrate on the valuation of net assets (statement

of financial position) but a conceptual framework caters for every aspect of the financial

statements. And for auditors who have to assert the true and fair view of those financial statements

prepared and presented, the Conceptual Framework assists auditors in forming an opinion on

whether the financial statements comply with IFRS.

4) It enables users of financial statements to interpret the information contained in financial

statements prepared in compliance with IFRS. Where there is a conflict of interest between user

groups on which policies to choose, policies deriving from a conceptual framework will be less

open to criticism that the standard-setter gave in to external pressure.

ii) Limitations of the Conceptual Framework for Financial Reporting (2 marks)

1) Financial statements are intended for a variety of users and it is not certain that a single conceptual

framework can be devised which will suit all users.

2) Given the diversity of user requirements, there may be a need for a variety of accounting standards,

each produced for a different purpose (and with different concepts as a basis).

Page 15 of 28

3) It is not clear that a conceptual framework makes the task of preparing and then implementing

standards any easier than without a framework.

b) Intangible Assets

i) An intangible asset is an identifiable non-monetary asset without physical substance. Intangible

assets comprise expenditure on computer software, research and development, advertising, brands,

etc. It also includes rights under licensing agreements for items such as motion picture films, video

recordings, plays, manuscripts, patents and copyrights.

(2 marks)

ii) Recognition criteria for intangible asset (8 marks)

1) The asset needs to be ‘identifiable’

An asset is identifiable either if it is separable (can be sold without disposing of the business as a

whole) or if it arises from contractual or other legal rights, irrespective of separability.

2) Control over the economic benefits derivable from the asset

Control involves the power to obtain the future economic benefits flowing from the asset and to

restrict the access of others to those benefits. The capacity of an entity to control the future

economic benefits would normally, but not necessarily, stem from legal rights that are enforceable

in a court of law.

3) Future economic benefits flowing to the entity

These benefits may include revenue from the sale of products or services, but could also include

cost savings or other benefits arising from the use of the asset by the entity.

4) Cost can be measured reliably

‘Cost’ will often be the cost of purchasing or developing the asset. In the case of an asset acquired

in a business combination, ‘cost’ will be the fair value of the asset at the date of acquisition,

assuming this fair value can be reliably measured.

c) This question relates to a compound financial instrument (convertible debt). The treatment is in

accordance with IAS 39 Financial instruments.

Page 16 of 28

i) Financial statement extract (6 marks)

Income Statement for the year ended 31 December 2012

Finance costs (see working) 1,056,480

Income Statement for the year ended 31 December 2013

Finance costs (see working) 1,094,035.2

Income Statement for the year ended 31 December 2014

Finance costs (see working) 1,140,603.65

Statement of Financial Position as at 31 December 2012

Non-current liabilities

18% convertible loan note (4,402,000 + 1,056,480 – 900,000) 4,558,480

Equity (Option to convert) [5,000,000 – 4,402,000] 598,000

Statement of Financial Position as at 31 December 2013

Non-current liabilities

18% convertible loan note (4,558,480 + 1,094,035.2 – 900,000) 4,752,515.2

Equity (Option to convert) [5,000,000 – 4,558,480] 441,520

Statement of Financial Position as at 31 December 2014

Non-current liabilities

18% convertible loan note (4,752,515.2+ 1,140,603.65 – 900,000) 4,993,118.85

Equity (Option to convert) [5,000,000 – 4,752,515.2] 247,484.8

Workings

Determination of debt and equity components of compound financial instrument (2 marks)

Item Cash flows Discount

factor @

24%

Present

value

GH¢’000 GH¢’000

Year 1 interest 18% x 5,000 = 900 0.806 725.4

Year 2 interest 18% x 5,000 = 900 0.650 585

Page 17 of 28

Year 3 interest 18% x 5,000 = 900 0.524 471.6

Year 3 Principal 5,000 0.524 2,620

Total value of debt component (carrying value) 4,402

Proceeds of the issue 5,000

Equity component (Residual) 598

Note: The finance cost in the income statement for 2012, for instance, is computed as GHC4,

402,000 x 24% = GHC1, 056,480. Meanwhile, the interest to be paid is GHC5, 000,000 x 18% =

GHC900, 000. This requires an accrual of GHC156, 480 (that is, GHC1, 056,480 – 900,000). This

accrual should be added to the carrying value of the debt to arrive at the amortised cost at the end

of year 2012.

Loan amortised cost schedule (2 marks)

Year Liability @

start

Finance

charge @ 24%

Interest paid @

18% / Principal

paid or share

option taken

Liability @

end

1 4,402,000 1,056,480 (900,000) 4,558,480

2 4,558,480 1,094,035.2 (900,000) 4,752,515.2

3 4,752,515.2 1,140,603.65 (900,000) 4,993,118.85

4 4,993,118.85* - (5,000,000) -

* Difference due to rounding off

ii) If the share option is taken,

Dr Financial liability 5,000,000

Cr Equity 5,000,000

If the loan is repaid,

Dr Financial liability 5,000,000

Cr Cash 5,000,000

(4 correct entries x 1/2 mark = 2 marks)

EXAMINER’S COMMENTS

The question was in three parts.

Part a) examined the relevance and limitations of the Conceptual Framework for Financial

Reporting. The question was generally well answered.

Part b) examined the meaning and recognition of intangible assets as per IAS 38. Even though the

question was generally well answered, some candidates provided answers as follows: :”There

should be technical feasibility to complete the assets, there should be intention to complete and

Page 18 of 28

use or sell the asset, there should be adequate financial and technical resources to complete the

asset and there should be available market for the asset”. These are additional recognition criteria

for internally generated intangible assets [IAS 38.57]. The criteria needed for recognition of

intangible assets, being economic benefits flowing to the entity and the ability to measure the cost

reliably IAS 38.21 were absent from the list of criteria provided by the candidates. Obviously,

those candidates did not have a firm grip of IAS 38.

Part c) tested accounting for financial instruments. Although the question was a repeat from a

previous diet, it was very poorly answered. Only a few candidates got the calculations and related

journal entries correct. The choice of discount rate was problematic.

QUESTION THREE

a) Scope of Integrated Reporting

According to the International Integrated Reporting Committee (IIRC) integrated reporting is a

process that results in communicating the value creation of an entity over time through an

Integrated Report.

The IIRC defines an Integrated Report as ‘a concise communication about how an organization’s

strategy, governance, performance and prospects lead to the creation of value over the short,

medium and long term’

Integrated reporting provides information not only on the financials of an entity, but also

information on strategy, governance, performance and prospects.

The following issues are often the subject matter for integrated reports:

Overview of the organisation

The strategic direction of the entity

Analysis of stakeholder relationships

Overview of the external environment

Overview of governance structures

An explanation of the entity’s business model

Strengths, Weaknesses , Opportunities and Threats (SWOT) analysis

Basis of resource allocation

Analysis of financial performance and financial position

Sustainability projection.

Page 19 of 28

Benefits of integrated reporting

The primary benefit of integrated reporting is that it allows a company to better understand,

manage and report on multiple dimensions of value.

A properly designed set of performance measures often included in integrated reports will give

management the incentive and urge to improve performance.

For other stakeholders, the report is intended to provide more and better information to increase

stakeholder understanding of the company- its management, strategy and operations, and its perils

and prospects.

It has been suggested that the integrated report will become an organisation’s primary report,

which links in with various supporting, more detailed, reports.

b) Costs to the preparer and benefits to the users of financial statements of increased disclosure of

information in financial statements. (4 marks)

Costs to Preparers (Any 2 points x 1 mark = 2 marks)

The main costs to the preparer of financial statements are as follows:

i) the cost of developing and disseminating information,

ii) the cost of possible litigation attributable to information disclosure,

iii) the cost of competitive disadvantage attributable to disclosure.

i) The costs of developing and disseminating the information include those of gathering, creating

and auditing the information. Additional costs to the preparers include training costs, changes to

systems (for example on moving to IFRS), and the more complex and the greater the information

provided, the more it will cost the company.

ii) Although litigation costs are known to arise from information disclosure, it does not follow that

all information disclosure leads to litigation costs. Cases can arise from insufficient disclosure and

misleading disclosure. Only the latter is normally prompted by the presentation of information

disclosure. Fuller disclosure could lead to lower costs of litigation as the stock market would have

more realistic expectations of the company’s prospects and the discrepancy between the valuation

implicit in the market price and the valuation based on a company’s financial statements would be

lower. However, litigation costs do not necessarily increase with the extent of the disclosure.

Increased disclosure could reduce litigation costs.

Page 20 of 28

iii) Disclosure could weaken a company’s ability to generate future cash flows by aiding its

competitors. The effect of disclosure on competitiveness involves benefits as well as costs.

Competitive disadvantage could be created if disclosure is made relating to strategies, plans, (for

example, planned product development, new market targeting) or information about operations

(for example, production-cost figures). There is a significant difference between the purpose of

disclosure to users and competitors. The purpose of disclosure to users is to help them to estimate

the amount, timing, and certainty of future cash flows. Competitors are not trying to predict a

company’s future cash flows, and information of use in that context is not necessarily of use in

obtaining competitive advantage. Overlap between information designed to meet users’ needs and

information designed to further the purposes of a competitor is often coincidental. Every company

that could suffer competitive disadvantage from disclosure could gain competitive advantage from

comparable disclosure by competitors. Published figures are often aggregated with little use to

competitors.

Companies bargain with suppliers and with customers, and information disclosure could give those

parties an advantage in negotiations. In such cases, the advantage would be a cost for the disclosing

entity. However, the cost would be offset whenever information disclosure was presented by both

parties, each would receive an advantage and a disadvantage.

Benefits to users (Any two points x 1 mark = 2 marks)

Increased information disclosure benefits users by reducing the likelihood that they will

misallocate their capital. This is obviously a direct benefit to individual users of corporate reports.

The disclosure reduces the risk of misallocation of capital by enabling users to improve their

assessments of a company’s prospects. This creates three important results.

(i) Users use information disclosed to increase their investment returns and by definition support the

most profitable companies which are likely to be those that contribute most to economic growth.

Thus, an important benefit of information disclosure is that it improves the effectiveness of the

investment process.

(ii) The second result lies in the effect on the liquidity of the capital markets. A more liquid market

assists the effective allocation of capital by allowing users to reallocate their capital quickly. The

degree of information asymmetry between the buyer and seller and the degree of uncertainty of

the buyer and the seller will affect the liquidity of the market as lower asymmetry and less

uncertainty will increase the number of transactions and make the market more liquid.

Page 21 of 28

(iii) Information disclosure helps users understand the risk of a prospective investment. Without any

information, the user has no way of assessing a company’s prospects. Information disclosure helps

investors predict a company’s prospects. Getting a better understanding of the true risk could lower

the price of capital for the company. It is difficult to prove however that the average cost of capital

is lowered by information disclosure, even though it is logically and practically impossible to

assess a company’s risk without relevant information. Lower capital costs promote investment,

which can stimulate productivity and economic growth.

c)

a. Social and environmental reporting? (2 marks)

Social and environmental reporting is the measurement and reporting of information concerning

the impact of a business and its activities on society. It is the disclosure of information in the

published annual report or in separate report, of the effect that the operations of the business have

on the natural environment. In other words, it is the collation and communication of data -

financial, quantitative and/or qualitative - about an organisation's interactions with society.

b. Relevance of social and environmental reports to users of financial statements. (3 marks)

The backbone of social reporting is the explicit recognition that every organisation has a wide

range of stakeholders - those who are influenced by and/or, in turn, influence the organisation. In

addition to shareholders and other financial participants, the most important of the other

stakeholders are usually taken to be the employees, the local community (ies), customers,

suppliers, the environment and government(s). From society's point of view, each of these

stakeholders have rights to, amongst other things, information about the activities of the

organisation - whether or not the organisation chooses to recognise those rights. From the

organisation's point of view, it has a range of stakeholders that it must manage and whose interests

it must balance if it is to remain a successful enterprise.

EXAMINER’S COMMENTS

Question 3 was in three parts:

Part a) tested integrated reporting. It was poorly answered. Many candidates understood this to

mean social and environmental accounting and answered it as such. Some candidates were totally

ignorant of the subject and submitted answers like, “It is the process of world-wide integration of

accounting standards whereby the whole world would adopt one reporting standard; the scope of

integrated reporting is to streamline business practices in the public and private sectors;

integrated reporting require that financial report of the group is presented in an integrated manner

Page 22 of 28

to neutralize inter-company capital allocation deficiencies”. For the few who were somewhat

familiar with integrated reporting, key concepts like, providing information on strategy,

governance, performance and prospects as well as communicating the value creation of an entity

did not come out strongly enough in their answers.

Par b) examined the costs and benefits to users of financial statements of increased disclosure of

information in financial statements. Most candidates provided common sense answers; technical

reasons such as the cost of possible litigation and the cost of competitive advantage listed by the

examiner were absent.

Par c) tested social and environmental reporting. This was poorly answered. Many candidates kept

repeating the same incoherent discussions on corporate social responsibility and how companies

should conduct themselves, environmental pollution, land degradation and general environmental

issues that did not relate to the accounting function.

QUESTION FOUR

e) Current Cost Accounting (CCA) also called replacement cost accounting method is a method

of accounting in which assets and liabilities are valued on the basis of their current replacement

cost, and increases in their value as a result of inflation are excluded from calculation of profits.

CCA approach recognizes the changes in the prices of individual specific assets and liabilities due

to the changes in technology, taste or other factors. CCA method revalues the assets and liabilities

on current cost or replacement cost basis. It does not consider the RPI. (2 marks)

f) Distinction between monetary items and non-monetary items, as they relate to accounting for

price-level changes. (2 marks)

Monetary items are those items whose amounts are fixed by contract or otherwise in terms of

numbers of currency units (e.g. cedis), regardless of changes in general price levels whiles non-

monetary items are those items whose amounts changes with respect to changes in general price

level. Examples of monetary items are cash, receivables, payables and loan capital. Examples of

non-monetary items are PPE and inventories.

g) Arguments for and against the use of current purchasing power accounting as a method of

adjusting financial statements for price-level changes. (4 marks)

Arguments for:

• Profit is measured in real terms excluding inflationary value increments. This enables better

forecasts of future prospects to be made.

Page 23 of 28

• It provides a stable monetary unit with which profit and capital can be valued. It therefore measures

the impact on the company in terms of shareholders purchasing power.

• By applying a single price index to all non-monetary assets, subjective valuation of current value

accounting is avoided.

• The restatement of asset values in terms of a stable money value provides a more meaningful basis

of comparison with other companies.

• CPP accounting is based on historical cost data which is readily verifiable and hence free from

subjectivity.

Arguments against:

• The use of indices inevitably involves approximations in the measurement of value.

• CPP does not show the current values of assets and liabilities. Retail price index is not necessarily

appropriate for all assets in the business. In addition, the physical capital of the business is not

maintained.

• An objection of CPP accounting is raised by some authorities who believe that there is no such

thing as generalised purchasing power.

• CPP deals with changes in the general price level and not with changes in prices of individual

items. (7 marks)

h) Profit measurement by historical cost:

Joe & Joy

Income Statement for the year ended 31 December 2014

GH¢ GH¢

Sales 2,200

Less Cost of goods sold:

Opening inventory 600

Add Purchases 700

1,300

Less Closing inventory 220

1,080

1,120

Less Depreciation (GH¢1,200/5) 240

Accounting profit 880

Profit measured by replacement cost:

Joe & Joy

Income Statement for the year ended 31 December 2014

GH¢ GH¢

Sales 2,200

Page 24 of 28

Less Cost of goods sold (at replacement cost) 1,200

1,000

Depreciation (GH¢1,400/5) 280

Current operating profit 720

Holding gains:

Realised through use during the year:

Non-current assets; depreciation (GH¢280 - ¢240) 40

Inventory; cost of goods sold (GH¢1,200 - ¢1,080) 120

160

Unrealised at the end of the year:

Non-current assets; net book values (GH¢1,120 -GH¢960) 160

Inventory (270-220) 50

210

Total holding gains 370

Current operating profit plus holding gains 1,090

Historical cost and replacement statement of financial position:

Joe & Joy

Statement of Financial Position as at 31 December 2014

Historical Replacement

Cost Cost

GH¢ GH¢

Non-current assets: 1,200 1,400

Less: Accumulated depreciation 240 280

960 1,120

Current assets:

Inventory 220 270

Cash (Sales – Purchases) 1,500 1,500

2,680 2,890

Share capital 1,800 1,800

Retained profit

Accounting profit 880

Current operating profit 720

Revaluation reserve 370

2,680 2,890

Page 25 of 28

Note: The application of replacement cost values attempts to reflect economic reality by

maintaining the value of asset balances in line with changes in the value of money and changes in

the specific value of the assets concerned.

EXAMINER’S COMMENTS

This question was in four parts:

Part a) examined the primary objective of current cost accounting. It was poorly answered as

candidates tried to provide common sense answers in place of technical accounting terminology.

Many candidates needlessly confused current cost accounting with current purchasing power

accounting and freely inter-changed the two as if they meant the same thing.

Part b) tested the difference between monetary and non-monetary items. Several candidates did

not know the distinction between these items. The following are some of the answers provided:

“Monetary items have direct effect on purchasing power, eg increase in interest rate, deflation,

increase in cost of capital; non-monetary items include change in taste, change in demand; non-

monetary items are those items whose value cannot be measured, eg compliance level of laws and

regulations.”

The candidates who brought out the technical difference of monetary items having their values

fixed by contract and non-monetary items having their values changing with respect to general

price level were very few.

Part c) tested arguments for and against the use of current purchasing power accounting as a

method of adjusting financial statements for price-level changes. Common sense answers were

provided but overall, they were satisfactory.

Part d) tested the preparation of a very simple income statement and a statement of financial

position using historical cost accounting and current cost accounting methods. Many candidates

were able to handle the historical cost accounting but only a few candidates were able to handle

the current cost accounting calculations correctly.

Page 26 of 28

QUESTION FIVE

a)

Other information to be looked at during ratio analysis (Any 2 points x 1.5 marks = 3 marks):

i. The content of any accompanying commentary on the accounts and other statements.

ii. The age and nature of the company’s assets.

iii. Current and future developments of the company’s business interests.

iv. Any other noticeable features of the report and accounts, such as post balance sheet events,

contingent liabilities, a qualified auditor’s report, the company’s taxation position, etc.

Limitations of the use of accounting ratios in appraising financial performance. (4 points x 1

mark = 4 marks)

1. Inconsistent definitions of ratios

2. Financial statements may have been deliberately manipulated (creative accounting)

3. Different companies may adopt different accounting policies (e.g. use of historical costs compared

to current values)

4. Different managerial policies (e.g. different companies offer customers different payment terms)

5. Statement of financial position figures may not be representative of average values throughout the

year (this can be caused by seasonal trading or a large acquisition of non-current assets near the

year-end)

6. The impact of price changes over time/distortion caused by inflation.

b) Nyentieobia Limited

i) Profitability (2 marks)

Both gross profit margin and net profit margin have fallen below the industry average. This may

be the result of uncontrolled overhead cost on the presence of large obsolete equipment. Unless

steps are taken quickly to improve the income account investors may shift their interest into more

profitable companies in the industry.

ii) Liquidity (2 marks)

Both quick and current ratios fall far below those of the industry as confirmed by the fact that it

takes longer to collect its debt than the industry. The problem may have been worsened by the

fact that inventory stay longer at Agrimore Ltd than in the industry which is not the best use to

which resources should be put.

Page 27 of 28

iii) Efficiency (2 marks)

Even though Agrimore Ltd takes longer to collect its debts (5 days), this is compensated by an

even longer time to settle the debts (20 days). This means that creditors provide free finance for

its operations. However, the holding on to inventory for a long time (10 days) cannot be justified.

This should be turned over in like manner as that assets turnover far exceeds that of the market.

iv) Shareholders’ Investment (2 marks)

Both dividend cover and dividend yield fall below that of the industry. Such a situation is not

likely to excite investors especially income – oriented investors who are seeking to recoup their

investment in the shortest time possible. This poor performance may be due to the fact that high

gearing ratio of Agrimore Ltd has effectively put its future in the hands of debenture holders who

are reaping the bulk profits in the form of interest charges.

c) Discuss the above views of the director regarding the fact that there is no point in an accountant

studying ethics and that there was no ethical issue in the false disclosure of accounting profits.

(5 marks)

There are several reasons why an accountant should study ethics. The moral beliefs that an

individual holds may not be sufficient because often these are simple beliefs about complex issues.

The study of ethics can sort out these complex issues by teaching the principles that are operating

in these cases. Often there may be ethical principles which conflict and it may be difficult to decide

on a course of action. The study of ethics can help by developing ethical reasoning in accountants

by providing insight into how to deal with conflicting principles and why a certain course of action

is desirable.

Another important reason to study ethics is to understand the nature of one’s own opinion and

ethical values. Ethical principles should be compatible with other values in life. For example, one’s

reaction to the following circumstances: the choice between keeping your job and violating

professional and ethical responsibilities, the resolution of conflicts of interest if they involve

family.

A good reason for studying ethics is also to identify the basic ethical principles that should be

applied. Professional accountants are required to adhere to a set of fundamental principles in the

course of their professional duty, such as confidentiality, objectivity, professional behaviour,

integrity and professional competence and due care. The main aim of professional ethics is to serve

as a moral guideline for professional accountants. By referring back to the set of ethical guidelines,

the accountant is able to decide on the most appropriate course of action, which will be in line with

the professional body’s stance on ethics.

Page 28 of 28

Although the takeover does not benefit the company, its executives or society as a whole, the action

is deceptive, unethical and hence unfair. It violates the relationship of trust, which the company

has with society and the professional code of ethics. There are nothing but good reasons against

the false disclosure of profits.

d) Discuss the above views of the directors regarding the fact that codes of ethics are irrelevant and

unimportant. (5 marks)

The directors should be persuaded that professional ethics are an inherent part of the accounting

profession. Professional ethics are a set of moral standards applicable to all professionals. Each

professional body has its own ethical code which requires its members to adhere to a set of

fundamental principles in the course of their professional duty, such as confidentiality, objectivity,

professional behaviour, integrity and professional competence and due care.

Often there may be ethical principles which conflict with the profit motive and it may be difficult

to decide on a course of action. An accountant has an ethical obligation to encourage the directors

to operate within certain boundaries when determining the profit figure. Users are becoming

reactive to unethical behaviour by directors. This is leading to greater investment in ethical

companies with the result that unethical practices can have a greater impact on the value of an

entity than the reporting of a smaller profit figure. Ethical issues are becoming more and more

complex and it critical to have an underlying structure of ethical reasoning, and not purely be

driven by the profit motive.

EXAMINER’S COMMENTS

Question 5 was in four parts:

Part a) tested limitations of the use of ratios in appraisal of financial performance. It was well

answered.

Part b) tested the financial analysis of a company with respect to profitability, liquidity, efficiency

and shareholders’ investment using ratios. Most candidates simply repeated the ratio differentials

provided in the question without being able to explain and respond to WHY the particular situation

might have occurred and HOW it could be addressed to bring about improved performance. Some

candidates stated and calculated ratios which were not needed despite the fact that all ratios needed

for answering the question were specifically provided by the Examiner.

Part c) tested why the professional accountant should study ethics. It was very poorly answered.

Candidates were unable to respond to the WHY. They rather listed various ethical conduct such as

objectivity, integrity, confidentiality, independence, due care and competence and proceeded to

discuss them extensively.

Part d) tested the relevance of codes of ethics. Again, candidates failed to respond to the request

for RELEVANCE. They listed the same ethical conduct as in Part c) and repeated the same

discussion. Clearly, they have no understanding of the subject matter under discussion.