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Institute of Chartered

Accountants Ghana (ICAG)


Paper 3.1
Corporate Reporting

Final Mock Exam 1

Question paper
Time allowed

3 hours

Instructions:
All five questions in this exam are compulsory and must be attempted.

DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER
EXAMINATION CONDITIONS

Corporate Reporting
The Institute of Chartered Accountants Ghana
First edition 2015
ISBN 9781 4727 2842 5
All rights reserved. No part of this publication
may be reproduced, stored in a retrieval system
or transmitted, in any form or by any means,
electronic, mechanical, photocopying, recording
or otherwise, without the prior written
permission of BPP Learning Media Ltd.
Published by
BPP Learning Media Ltd
BPP House, Aldine Place
London W12 8AA
www.bpp.com/learningmedia

The Institute of Chartered Accountants


Ghana 2015

Final Mock Exam 1: Questions

ALL FIVE questions are compulsory and MUST be


attempted
Question 1
The following financial statements relate to MLT, a public limited company.
MLT GROUP
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30
SEPTEMBER 20X5
MLT
NBT
ONW
PLP
GHSm
GHSm
GHSm
GHSm
Revenue
1,941
564
340
194
Cost of sales
(1,650)
(328)
(202)
(121)
Gross profit
291
236
138
73
Other income
75
44
29
8
Distribution costs
(72)
(50)
(62)
(28)
Administrative costs
(92)
(70)
(28)
(16)
Finance costs
(21)
(20)
(19)
(10)
Profit before tax
181
140
58
27
Income tax expense
(50)
(56)
(24)
(11)
Profit for the year
131
84
34
16
Other comprehensive income for the year
(not reclassified to profit or loss), net of tax:
Gains on available-for-sale financial assets
Gains (net) on property revaluation
Remeasurement losses on defined benefit
plan
Other comprehensive income for the year,
net of tax
Total comprehensive income and expense
for year

48
28
(34)

22
14

16

24
8

42

36

16

32

173

120

50

48

The following information is relevant to the preparation of the group statement of profit or loss and other
comprehensive income:
(a)

During 20X0, MLT acquired a 10% interest in NBT, a public limited company. This investment was
measured at fair value with changes in value presented in other comprehensive income. At the
reporting date of 30 September 20X4 its fair value was GHS9m and no further adjustment has yet
been made in the financial statements of MLT in respect of this value.
On 1 January 20X5, MLT acquired a further 50% of the equity interests of NBT. The purchase
consideration comprised cash of GHS200m paid on the acquisition date with a further amount to be
paid on 1 January 20X6. The amount payable is based on a multiple of NBTs profit before tax over
the three years after the acquisition. The fair value of this amount was estimated to be GHS250m as
at the acquisition date. This estimate was revised to GHS220m as at 30 September 20X5 because
subsequent work carried out by MLTs group accountant identified errors in the profit projections used
in the original estimate. The fair value of NBTs identifiable net assets at the acquisition date was
GHS380m.
The fair value of the non-controlling interest in NBT was GHS40m on 1 January 20X5. MLT wishes to
use the full goodwill method for all acquisitions. The stated capital and income surplus of NBT were
GHS100m and GHS160m respectively and other components of equity were GHS100m at the date
of acquisition. The excess of the fair value of the identifiable net assets at acquisition is due to an
increase in the value of plant, which is depreciated on the straight-line method and has a ten year
remaining life at the date of acquisition. NBTs profits are deemed to accrue evenly over the year. The
goodwill on the acquisition of NBT was reviewed for impairment at the reporting date and this
indicated that it had suffered an impairment of 10% of its value.

Final Mock Exam 1: Questions

(b)

MLT acquired 75% of the equity interests of ONW, a public limited company, on 1 April 20X5.
There was no significant difference between the fair values of ONWs net assets and their carrying
values at the acquisition date. Since 20X2 ONW has owned a 25% interest in PLP, a public limited
company and exercises significant influence over that company. ONW carries the investment in PLP
at fair value with changes in value recognised in other comprehensive income. In the current year a
gain of GHS6m has been recognised. Goodwill had been impairment tested and no impairment had
occurred. Profits of both ONW and PLP are deemed to accrue evenly over the year.

(c)

In August 20X5 NBT sold inventory to MLT. The sale price of the inventory was GHS72m. NBT sells
goods at a mark-up of 20% to group companies and third parties. At the year end, half of the
inventory sold to MLT remained unsold.

(d)

NBT paid a dividend of GHS20m on 30 June 20X5. MLT recognised the amount it received on that
date in other income.

(e)

Ignore any taxation effects of the above adjustments.

Required
Prepare a consolidated statement of profit or loss and other comprehensive income for the year ended 30
September 20X5 for the MLT Group.
(Total = 20 marks)

Final Mock Exam 1: Questions

Question 2
(a)

On 1 October 20X4 MCN, a public limited company with a 30 September year end, granted to each
of its senior management team either 6,500 shares in MCN or a cash equivalent equal to the market
price of 6,000 shares. The right is conditional on the managers remaining in employment at MCN
until 30 September 20X6.
MCN reserves the right to choose whether to settle the scheme in cash or shares. However, in the
past, MCN has always opted to settle similar schemes in cash. If the shares are issued, they must be
held for two years from 30 September 20X6 before being sold.
MCN's share price was GHS8.50 on the 1 October 20X4 and GHS9.00 on 30 September 20X5. It
rose to GHS9.25 on 20 October 20X5, the date the financial statements were authorised for issue.
The fair value of the shares alternative was calculated at GHS8.10, GHS8.60 and GHS8.85 at the
same dates respectively.
At 1 October 20X4, there were 30 members of the senior management team. As at 1 October 20X4
no members of the team were expected to leave during the vesting period. However, due to a buoyant
job market, two managers left in September 20X5 and as at 30 September 20X5, a third manager
was expected to leave within a few months of the year end.
The new finance director is unsure how to account for the above scheme. He is also aware that
because tax relief will be granted on exercise (based on the entity's share price at the date of
exercise), there might be some deferred tax implications.
Required
Discuss, with suitable computations, the accounting treatment for the above scheme in the financial
statements of MCN for the year ended 30 September 20X5, taking into account any deferred tax
implications and the impact of events occurring after the end of the reporting period.
(10 marks)

Assume a tax rate of 30%.


(b)

Pension costs
MCN acquired a new subsidiary on 1 January 20X5. The subsidiary operated a defined benefit
pension plan for its senior management. As part of the fair value exercise, an actuarial valuation was
carried out on the defined benefit pension plan at that date. The plan assets had a fair value of
GHS72,600 and the present value of the pension obligation was GHS116,500.
The following information has been provided for nine months to 30 September 20X5:
Plan assets at 30 September 20X5 at fair value
Present value of obligation at 30 September 20X5
Current service cost
Contributions paid into the fund by MCN
Benefits paid to pensioners
Yield on high quality corporate bonds (per annum)

GHS
102,100
119,500
15,500
48,200
10,600
6%

The group accountant of MCN is unfamiliar with accounting for defined benefit plans, as the other
plans within MCN are defined contribution plans. She has been advised that the directors must
account for the plan in accordance with IAS 19 Employee benefits as revised in 2011.
Required
Prepare the extracts from the consolidated statement of profit or loss and other comprehensive
income and statement of financial position for the year ended 30 September 20X5.
(10 marks)
(Total = 20 marks)

Final Mock Exam 1: Questions

Question 3
SVT is a company that operates a chain of large out-of-town supermarkets. It has expanded rapidly over the
last ten years, opening new stores in its home country and overseas. It has also moved into a wide-range of
non-food sales and the provision of services, such as opticians. The company is currently preparing its
consolidated financial statements for the year ending 30 September 20X5.
On 1 October 20X3 SVT purchased land and buildings in an overseas capital city in order to open a new
store. The land and buildings cost GHS20m, of which GHS8m related to the cost of the land. The property
is being depreciated over 20 years on the straight-line basis with zero residual value. On
30 September 20X4, it was revalued to GHS23m (including land valued at GHS10m) and on
30 September 20X5, the land and buildings were revalued to GHS15m. The whole of the revaluation loss
had been posted to other comprehensive income and depreciation has been charged for the year. It is SVTs
company policy to make all necessary transfers for excess depreciation following revaluation. The directors of
SVT are concerned about the most recent valuation, as well as the disappointing results from the new store
and the possibility of closing down this operation was discussed at the most recent board meeting.
(7 marks)
During the last year, SVT opened petrol stations at a number of its supermarkets as a pilot scheme. This has
proved to be very popular with customers and the company wants to expand this operation. The finance
director identified a key risk of volatility of petrol prices and has taken out a forward contract to hedge
against this.
On 1 August 20X5, SVT entered into a forward contract to hedge its expected fuel requirements for the
second quarter of the next financial year for delivery of 10 million gallons of petrol on 31 December 20X5 at
a price of GHS2.04 per gallon.
The company intends to settle the contract net in cash and purchase the actual required quantity of petrol in
the open market on 31 December 20X5.
At the company's year end the forward price for delivery on 31 December 20X5 had risen to GHS2.16 per
gallon of fuel.
(6 marks)
During the year, SVT has commenced a programme of building 20 new stores in its home country. Costs of
GHS68m have been incurred in the current year in respect of site preparation and payments to contractors.
No specific loans were taken out to fund the building as SVT was able to use funds available to it through its
existing set of borrowings. One director has suggested that an amount of interest calculated at the highest
interest rate currently being suffered by the company should be capitalised in order to improve reported
profits.
(4 marks)
In overseas countries, SVT normally leases its supermarket buildings. A number of properties leased over two
years ago are now surplus to requirements. Although every effort has been made to sub-let these premises in
the current economic climate it is recognised that it may not be possible to do so immediately. Therefore
there will be a shortfall arising from sublease rental income being lower than the lease costs being borne by
SVT.
(3 marks)
Required
Write a report to the directors of SVT explaining how each of these matters should be dealt with in the group
financial statements for the year ending 30 September 20X5.
(Total = 20 marks)

Final Mock Exam 1: Questions

Question 4
FMC is a group of companies listed in the EU reporting under IFRSs. The group develops and makes a large
portfolio of pharmaceutical products, both for the health care and beauty markets. FMC's customers include
hospitals, governments, pharmacies and retail parapharmacy and supermarket chains. The group has two
divisions: Research & Development and Fabrication. In addition to working for the FMC group, the Research
& Development division also conducts research and development on behalf of smaller pharmaceutical
companies and for governments.
(a)

Due to the nature of its business, FMC undertakes a significant amount of new research and
development expenditure each year. During the current financial reporting period, FMC started two
new significant development projects and abandoned development on another project which was not
generating the results expected in human trials, as well as causing some significant adverse side
effects. One of the testers is suing FMC for hair loss suffered in one trial, although FMC's lawyers have
advised that the chances of success are slim given that a legal contract outlining the risk was signed
with the human testers. One of the drugs that had been being developed in recent years went into
commercial production for the first time during the year and has been an instant success. (6 marks)

(b)

On 1 October 20X0 the government awarded FMC a 10-year licence to make a cancer treatment
drug. The licence was recognised on that date at its fair value of GHS9.8m. As a result of the award
of the licence, FMC purchased a division of a competitor making similar products in 20X1 and
merged it with its own activities, within its Specialist Drug sub-division, which is a separate cashgenerating unit. Goodwill of GHS12m was recognised on the purchase. By 20X6/20X7 the part of the
Specialist Drug division producing the cancer drug amounted to about 5% of the revenues of the
Group.
On 1 May 20X7, the government revoked the licence on the grounds that FMC had failed to meet
some of the criteria of the licence. At the date of the decision, the net book value of the combined
assets of the Specialist Drug division was GHS942m (including the goodwill on the purchase of the
competitor's business). No impairment losses had previously been recognised. As a result of this FMC
decided to sell the associated assets or redeploy them elsewhere within the Specialist Drug division.
As part of an impairment test conducted after the decision to sell, fair value less costs to sell of the
Specialist Drug division was estimated at GHS804m. Revised estimated net cash inflows for the
Specialist Drug division at the end of each of the next five years (taking into account sale or
redeployment of the assets making the cancer drug) were estimated at GHS112m for years 13,
GHS130m for year 4 and GHS1,014m for year 5 assuming the disposal of the division after five
years. An appropriate discount factor is 12%.
Employees of the division were notified of the decision on 1 June and redundancy notices for those
who could not be redeployed elsewhere were issued on that date. The estimated amount of
redundancy payment was GHS400,000 which had not been paid by the year end as the division had
not been shut down by that date.
(11 marks)

(c)

During the period FMC set up a joint (50:50) arrangement with a competitor to market and distribute
certain over the counter products in the EU market. The joint arrangement is set up as a separate
company which will pay dividends to the investors. FMC transferred a portfolio of distribution assets
and a significant amount of cash to the entity as part of the set-up arrangement. The investors do not
have direct rights to or ownership of the assets of the joint arrangement once contributed unless the
entity is wound up, when the proceeds from the sale of the assets less liabilities would be distributed
50:50. No guarantees were entered into for the liabilities of the joint arrangement. The joint
arrangement has been loss making so far, mainly due to set-up costs and has paid no dividends, but
is expected to be profitable in the future.
(3 marks)

Required
Write a report to the directors advising them about the implications of the above information for the financial
statements for the year ending 30 September 20X7.
(Total = 20 marks)

Final Mock Exam 1: Questions

Question 5
The draft consolidated financial statements of LGR Group for the year ended 31 May 20X7 are being
finalised. The non-executive directors have asked for expert advice in relation to the accounting
treatment of certain transactions, and in particular, whether a summary of financial indicators
presented to them is reliable.
SUMMARISED CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 20X7
GHS000
Non-current assets
Property, plant and equipment
Intangible assets
Investment in joint venture

27,480
9,400
320
37,200
41,900
79,100

Current assets

Equity
Stated capital
Income surplus

39,900
8,700
48,600

Non-current liabilities
Long-term loans

21,100
9,400
79,100

Current liabilities
Key ratios
Return on capital employed

Gearing
(a)

Profit before interest and tax GHS8,360,0 00


12%
Equity long term loans
GHS69,700, 000

Interest bearing debt GHS21,100, 000


43%
Equity
GHS48,600, 000

One of LGRs subsidiaries LCO, has opened up a new retail superstore selling climbing
equipment. The building has been leased on the following terms:
Start date: 1 June 20X6
Lease term: Five years
Rentals:
Eight six-monthly payments of GHS200,000 commencing on 1 June 20X7
No expense has been recognised in respect of this lease. A six-monthly market rate of interest
for borrowing with a similar risk would be 4%. LCO also plans to sell goods over the internet.
GHS350,000 of start-up costs been capitalised as an intangible non-current asset. (3 marks)

(b)

Another subsidiary, PSN, completed the construction of a new manufacturing facility on 28


February 20X7. The project was financed through the issue of a GHS4,000,000 6% four-year
bond. This was issued on 1 June 20X6 at a discount of 3%. The internal rate of return of the
debt is 7%. Market interest rates on debt with the same risk profile were 7% during the
accounting period, but increased to 8% at the year end. The bond has been accounted for at
fair value though profit or loss (fair value measured as the present value of the future cash
flows with fair value changes recognised as financing items) and the finance costs for the year
have been capitalised as part of the building cost. The building is being depreciated over 30
(6 marks)
years.

(c)

LGR owns 50% of the equity stated capital of ISL. The other 50% is owned by an unrelated
company, ZCF. All of the equity shares carry the same votes and rights to dividends. ISL was
incorporated on 1 June 20X6 and acquired 10 shops from LGR. A contractual agreement
between LGR and ISL grants LGR the right to make key management decisions regarding the
operation of the ten shops. During the year ISL raised loans from ZCF carrying interest at
market rates to fund expansion of the business.

Final Mock Exam 1: Questions

The loans have been guaranteed by LGR. The investment in ISL has been equity accounted as
a joint venture under IAS 28 Investments in associates and joint ventures.
The following information relates to ISL for the year ended 31 May 20X7.
STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 20X7
GHS000
Non-current assets
Property, plant and equipment

2,600
1,200
3,800

Current assets
Equity
Stated capital
Retained losses
Non-current liabilities
Long-term loans
Current liabilities

800
(160)
640
2,200
960
3,800
(4 marks)

(d)

JEB, another subsidiary of LGR, runs a national chain of garden centres. In June 20X6 the
company paid GHS2,000,000 to acquire two leasehold properties, on leases of 40 years. The
accounting policy which has been adopted as it is believed to be followed by other
companies in this sector is not to provide any depreciation until the last ten years of the lease
from which point the depreciable amount will be written off over the remainder of the useful
(2 marks)
life of the lease.

Required

Prepare a report for the non-executive directors explaining the appropriate accounting treatment
and/or disclosure under current requirements for each of the issues identified above.
Your report should also contain a revised schedule of ratios in line with best current practice.
(5 marks)
(Total = 20 marks)
Notes.

Cumulative discount factors:


8 periods at 4%
3 periods at 8%

6.733
2.577

Final Mock Exam 1: Questions

Notes

Notes