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THE INSTITUTE OF CHARTEREDACCOUNTANTS OF NIGERIAPATHFINDERMAY 2017 DIETSKILLS LEVEL EXAMINATIONSQuestion PapersSuggested SolutionsMarking GuidesPlusExaminer‟s Reportsi

FOREWARDThis issue of the PATHFINDER is published principally, in response to a growingdemand for an aid to:(i)Candidates preparing to write future examinations of the Institute ofChartered Accountants of Nigeria (ICAN);(ii)Unsuccessful candidates in the identification of those areas in which theylost marks and need to improve their knowledge and presentation;(iii)Lecturers and students interested in acquisition of knowledge in the relevantsubject contained herein; and(iv)The professional; in improving pre-examinations and screening processes,and thus the professional performance of candidates.The answers provided in this publication do not exhaust all possible alternativeapproaches to solving these questions. Efforts had been made to use the methods,which will save much of the scarce examination time. Also, in order to facilitateteaching, questions may be edited so that some principles or their application maybe more clearly demonstrated.It is hoped that the suggested answers will prove to be of tremendous assistance tostudents and those who assist them in their preparations for the Institute‟sExaminations.NOTESAlthough these suggested solutions have been published under theInstitute‟s name, they do not represent the views of the Council of theInstitute. The suggested solutions are entirely the responsibility of theirauthors and the Institute will not enter into any correspondence on them.i

TABLE OF CONTENTSSUBJECTPAGEFINANCIAL REPORTING .1TAXATION .39PERFORMANCE MANAGEMENT .69AUDIT AND ASSURANCE.107PUBLIC SECTOR ACCOUNTING & FINANCE .134MANAGEMENT GOVERANCE AND ETHICS .159ii

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIASKILLS LEVEL EXAMINATION – MAY 2017FINANCIAL REPORTINGTime Allowed: 3 hoursINSTRUCTION:SECTION A:YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVENQUESTIONS IN THIS PAPERCOMPULSORY QUESTION(30 MARKS)QUESTION 11.The following information relates to financial statements included in theannual report of Bello Professional Nigeria Limited.Summarised Statement of Profit or Loss for the year ended March (13,500)5,250(8,250)RevenueCost of salesGross profitOperating expensesFinance expensesProfit/(loss)before taxIncome tax credit/(expense)Profit/(loss) for the 00)63,000(21,000)42,000Summarised Statement of Financial Position as at March 31ASSETS:Non-current assetsProperty, plant & equipmentCurrent assets:InventoriesTrade receivablesSundry receivablesBank balanceTotal 3,7503,750- 273,75034,50015,00011,250252,000

EQUITY & LIABILITIESEquityOrdinary shares of N1 eachShare premiumRetained earningsNon-current liabilities:10% loan notesFinance lease obligationsDeferred tax liabilitiesCurrent liabilities:10% loan notesCurrent income taxBank overdraftFinance lease obligationTrade payablesTotal equity and 000273,75018,7506,00031,50056,250252,000The following additional information is also available:(i)The finance expenses are made up of the following items:20152014N‟000N‟000Loan notes interest3,7503,750Finance lease charges2,250750Interest on overdraft1,500- 7,5004,500(ii)The property, plant and equipment schedule included in the notes to thefinancial statements contained in the report are as follows:2015N‟00048,75093,750142,500Leased plantLeasehold plantOwned plant22014N‟00018,75066,000106,500191,250

During the year Bello Professional Nigeria Limited sold its leasehold plantfor N63.75million and entered into an agreement to rent it back from thepurchaser. There were no additions to or disposals of owned Plant duringthe year. The depreciation charges which are included in the cost ofsales for the year ended 31 March 2015 were as follows:Leased plantLeasehold plantOwned plantN‟00013,5001,50012,75027,750(iii)On August 1 2014 there was a bonus issue of shares from share premium ofone new share for every 10 held on May 1 2014. There was a fullysubscribed cash issue of shares at par as at March 31, 2015(iv)The 10% loan notes is due for repayment on June 30, 2016. BelloProfessional Nigeria Limited is in negotiation with the loan providers,Accrual Bank Plc.Required:a.Prepare a statement of cashflow for Bello Professional Nigeria Limitedfor the year ended March 31, 2015 in accordance with IAS 7 usingindirect method.(18 Marks)b.One of the directors present at the annual general meeting of BelloProfessional Nigeria limited where the financial statements were laidbefore members was of the view that direct method of preparingcashflow is more useful and provides better information to users thanthe indirect method.Comment on the director‟s view stating whether you agree or not,giving reasons for your opinion.(7 Marks)c.IAS 7 – Statement of cashflow allows some variation in the ways thatthe cashflow for interests and dividends are presented in the statement.Explain the various ways of classifying the following items in aStatement of cashflow as permitted by IAS 7.i.ii.Interests paidDividends received(5 Marks)(Total 30 Marks)3

SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONSIN THIS SECTION(40 MARKS)QUESTION 2Abuja Limited acquired 80% of Abaji Limited‟s ordinary shares on January 1 2015.The company paid an immediate N5.00 per share and a further payment ofN19,440,000 in cash. The company only recorded the cash consideration of N5 pershare. The two statements of financial position as at December 31 2015 are 780Equity and liabilities:Ordinary shares of N1 eachShare premiumRevaluation reserve48,60014,4008,10014,4007,200-Retained earnings:January 1 2015Year to December 31 58084,780Non- current assets:Property, plant and equipmentDevelopment costsInvestmentCurrent assetsTotal assetsNon-current liability8% intercompany loanCurrent liabilityTotal equity & liabilitiesAdditional information provided are:(i)The parent company, Abuja Limited, value non-controlling interests (NCI)using the fair value at the acquisition date. The fair value of NCI at theacquisition date was N14,940,000. There is an impairment as at December31 2015 resulting in the reduction of NCI to N14,220,000.4

(ii)Abaji Limited revalued land and building using fair value which resulted inan increase of N3,600,000 at the acquisition date and a further N720,000 atDecember 31, 2015.(iii)Abaji Limited have line of products with a brand name valued at N7,200,000with an estimated life of 10 years as at 1 January 2015. The brand is notincluded in Abaji statement of financial position on this date.(iv)A loan of N10,800,000 from Abuja Limited granted to Abaji Limited atacquisition date was included in Abuja Limited investment. Loan interest ispayable annually in arrears. Abuja Limited did not receive the interest dueand paid by Abaji for the year ended December 31, 2015 until after the yearend. Therefore Abuja Limited has not accounted for the Abaji accruedinterest.(v)The development project of Abaji Limited was completed on June 30, 2015 ata cost of N9,000,000. As at December 31, 2015, N1,800,000 had beenamortised. Abaji Limited had capitalised N3,240,000 at the acquisition date.However, the directors of Abuja Limited are of the opinion that Abaji Limiteddevelopment costs cannot be recognised as an asset because it does notmeet the requirement in IAS 38.(vi)Abuja Limited bought goods from Abaji Limited. One third of the goods werestill in the inventory of Abuja Limited at December 31, 2015. The goods wassold to Abuja Limited at a profit of N1,080,000.Required:Provide figures to be included in the consolidated statement of financial position asat December 31 2015 in respect of the following:a.Non- controlling interestb.Goodwill(7 Marks)(show your calculations of net assets as at date of acquisition and dateof consolidation)c.Consolidated reserves:i.Share premiumii.Retained earningsiii.Revaluation reserve(Show your workings)NB.(7 Marks)(6 Marks)(Total 20 Marks)You are not required to prepare a consolidated statement of financialposition as at December 31 20155

QUESTION 3You are a financial reporting consultant. The management of Bode Limited a welldiversified company with branches in all states of the federation has sometransactions for which it requires advice from you. Bode Limited has a financialaccountant who is not yet a qualified accountant.These transactions are as listed below:(a)The company recognised a cash generating unit during the year endedDecember 31, 2015 which is made up of the following assets.CostsN‟m4,0504502,7007,200Property, plant and equipmentGoodwillOther assetsThe management of Bode Limited estimated that the recoverable amount ofthe cash generating unit as at the end of the year will be N6.30billion.The financial accountant of Bode Limited is aware of some of the provisions ofIAS 36 on impairment of assets but he is confused as to how impairment (ifany) on these assets should be allocated among the assets that make up thecash generating unit of the company.(b)Also, on January 1, 2015 Bode Limited borrowed N300million to finance theproduction of two assets both of which were expected to take one year tobuild.The work started on January 1, 2015. The loan facility was drawn down on thesame day and was utilised as follows with the remaining funds investedtemporarily.Asset XAsset YN‟000N‟000January 1, 201550,000100,000July 1, 201550,000100,000The loan interest rate is 9% per annum and Bode Limited can invest surplusfunds at 7% per annum.The financial accountant is not certain as to how these assets (X and Y) shouldbe accounted for in the financial statement of Bode Limited as at December31, 2015.6

(c)The company owns a building which it has been using as head office in Abuja.In order to reduce cost, the company‟s management on June 30, 2015 decidedto move the head office to the branch office at Abuja and has now let out itshead office building.The company‟s accounting policy is to use fair value model for InvestmentProperty.The head office building had an original cost on January 1, 2006 ofN37.5million and was being depreciated over 50 years. As at December 31,2015 the fair value of the head office building was assessed by anindependent valuer to be N52.5million.The financial accountant is confused as to how these transactions should betreated in the financial statements of the company.Required:Write a memo to the management of Bode Limited explaining how thesetransactions should be accounted for in their financial statements. Provide relevantcalculations where necessary.(Total 20 Marks)QUESTION 4a.Explain the following, stating their importance to investors in the evaluationof financial performance:i. Earnings per share (EPS)ii. Price earnings ratio (PE-ratio)b.(6 Marks)The issued and fully paid share capital of Almond Nigeria Limited which hasremained unchanged since the date of incorporation until the financial yearended March 31, 2015 include the following:(i) 2,400,000,000 ordinary shares(ii) 600,000,000 6% participating preference share of N1 each.The company has been operating at a profit for a number of years. As a resultof a very conservative dividend policy in the previous years, there is a largeaccumulated profit balance on the statement of financial position.On July 1, 2015, the directors decided to issue to all ordinary shareholders twobonus shares for every one previously held.The following is the extract of group statement of profit or loss and othercomprehensive income for the year ended March 31, 2016.7