QUESTION 10 – A.I
IFRS 10 Consolidated Financial Statements outlines the requirements for the preparation and
presentation of consolidated financial statements, requiring entities to consolidate entities it
controls.
Control requires exposure or rights to variable returns and the ability to affect those
returns through power over an investee.
Control is the power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities. Control is presumed where the acquirer acquires more than onehalf of that other entity’s voting rights (unless it can be demonstrated that such ownership
does not constitute control).
QUESTION 10 – A.II
ii) Control may also have been obtained, even when one of the combining entities does
not acquire more than one-half of the voting rights of another, if, as a result of the
business combination, it obtains:




Power over more than one-half of the voting rights of the other entity by virtue of an
agreement with other investors; or
Power to govern the financial and operating policies of the other entity under a statue
or an agreement; or
Power to appoint or remove the majority of the members of the board of directors or
equivalent governing body of the other entity; or
Power to cast the majority of votes at meetings of the board of directors or equivalent
governing body of the other entity.
QUESTION 10 – B.I
What are Consolidated Financial Statements?
The financial statements of a group in which the assets, liabilities, equity, income, expenses
and cash flows of the parent and its subsidiaries are presented as those of a single economic
entity.
QUESTION 10 – B.II
Preparation of consolidated financial statements
A parent prepares consolidated financial statements using uniform accounting policies for
like transactions and other events in similar circumstances. [IFRS 10:19]
However, a parent need not present consolidated financial statements if it meets all of
the following conditions: [IFRS 10:4(a)]. What are the four conditions that a parent
needs to meet for exemption from preparing consolidated financial statements?
1
1. It is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity
and its other owners, including those not otherwise entitled to vote, have been
informed about, and do not object to, the parent not presenting consolidated financial
statements.
2. Its debt or equity instruments are not traded in a public market (a domestic or foreign
stock exchange or an over-the-counter market, including local and regional markets).
3. It did not file, nor is it in the process of filing, its financial statements with a securities
commission or other regulatory organisation for the purpose of issuing any class of
instruments in a public market.
4. Its ultimate or any intermediate parent of the parent produces financial statements
available for public use that comply with IFRSs, in which subsidiaries are
consolidated or are measured at fair value through profit or loss in accordance with
IFRS 10.
QUESTION 10 – C
Control
An investor determines whether it is a parent by assessing whether it controls one or
more investees. An investor considers all relevant facts and circumstances when
assessing whether it controls an investee. An investor controls an investee when it is
exposed, or has rights, to variable returns from its involvement with the investee and
has the ability to affect those returns through its power over the investee. [IFRS 10:5-6;
IFRS 10:8]
An investor controls an investee if and only if the investor has all of the following
elements: [IFRS 10:7]
1. Power over the investee, i.e. the investor has existing rights that give it the ability to
direct the relevant activities (the activities that significantly affect the investee's
returns).
2. Exposure, or rights, to variable returns from its involvement with the investee.
3. The ability to use its power over the investee to affect the amount of the investor's
returns.
Control is identified by IFRS10 Consolidated Financial Statements as the sole
basis for consolidation and comprises the following three elements:
1. Power over the investee, where the investor has current ability to direct activities that
significantly affect the investee’s returns;
2. Exposure, or right to, variable returns from involvement in the investee; and
3. The ability to use the power over the investee to affect the amount of the investor’s
returns.
QUESTION 11
The recognition, measurement and disclosure of an Investment Property in accordance with
IAS 40: Investment Property appears straight forward. However, this could get complicated
when measured either under the fair value model or under the revaluation model.
Required:
2
i) Define Investment Property under IAS 40 and explain the rationale behind its accounting
treatment.
ii) Explain how the treatment of an investment property carried under the fair value model
differs from an owner-occupied property carried under the revaluation model.
SOLUTION 11-A
i)
Definition of investment property – IAS 40
Investment property is property (land or a building or part of a building or both) held (by
the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or
both.
Examples of investment property:

land held for long-term capital appreciation

land held for a currently undetermined future use

building leased out under an operating lease

vacant building held to be leased out under an operating lease

property that is being constructed or developed for future use as investment property
The following are not investment property and, therefore, are outside the scope of IAS
40:

property held for use in the production or supply of goods or services or for
administrative purposes

property held for sale in the ordinary course of business or in the process of
construction of development for such sale (IAS 2 Inventories)

property being constructed or developed on behalf of third parties (IAS
11 Construction Contracts)

owner-occupied property (IAS 16 Property, Plant and Equipment), including property
held for future use as owner-occupied property, property held for future development
and subsequent use as owner-occupied property, property occupied by employees and
owner-occupied property awaiting disposal.

property leased to another entity under a finance lease
ii)
Under the fair value model for investment property, changes in fair value are recognized in
net income, whereas changes in fair value under the revaluation model are taken to other
comprehensive income.
QUESTION 11-B -IAS 40 INVESTMENT PROPERTY
3
Kumeri Ltd (Kumeri) is a real estate company which reports under International Financial
Reporting Standards (IFRSs). The Office Building of Kumeri had a net carrying amount
of GH¢18 million at the beginning of the financial year 1 January 2019. The property was
held under the cost model. As its residual value was estimated at more than its cost due to a
buoyant property market, no depreciation had been charged.
As part of a relocation of the company's business, the property became vacant and was leased
out to a third party on 1 April 2019 (under a six-month short lease). At the time the property
was leased out, its fair value was GH¢22 million.
At the end of the lease, the company decided to transfer the property to its inventories of
properties for sale in the ordinary course of its business. At that date the value of the
property was GH¢21 million. The property was sold in December 2019 for GH¢21.3
million.
The company uses the fair value model for its investment property.
Required:
Determine the amounts to be recognised in profit or loss and in other comprehensive income
in respect of the property for the year ended 31 December 2019.
SOLUTION 11-B
QUESTION 12-A
(a) The following events occurred after the year end, but before the financial statements were
authorised for issue: 14
4
i) Enactment by the government of a revised tax rate affecting the amount of the settlement of
the deferred tax liability included in the financial statements.
ii) A share split in respect of the earnings per share calculation.
iii) Criteria being met in order to classify non-current assets as held for sale.
iv) A material, but not fundamental, error arising in the comparative figures.
Required: In accordance with IAS 10: Events after the reporting period, explain with
justification whether each of the above is an adjusting or a non-adjusting event after the
reporting period.
SOLUTION 12-A
i) Non-adjusting event.
Change in the tax rate after the balance sheet period but additional liability occurs on the
amounts in the balance sheet and therefore, it must be disclosed but not adjusted.
ii) Non- adjusting event
A share split is not known at or before the balance sheet date and so it is a non-adjusting
event.
iii) Non- adjusting event.
The asset once meets the criteria for non-current assets held for sale must be disclosed in the
financial statements as the same. This is because such assets would be sold within a year and
the users of the financial statements must have knowledge about the same.
iv) Non-adjusting event.
A material error could only be disclosed as long as it is not a fundamental error and there are
no changes in the figures in the balance sheet
QUESTION 12-B
Suame Ltd is a listed telecommunication company which prepares its financial statements for the
year ended 31 October, 2015 in accordance with IFRS. The financial statements are due to be
authorised for issue on 15 January 2016.
(i) Suame Ltd holds an investment in the shares of a listed company, Asafo Ltd. During
November 2015 there was a material fall in the value of Asafo Ltd’s shares. Analysts attribute
the fall in value principally to a fraud dating back to December 2014 that was discovered by
Asafo Ltd's management and announced publicly in November 2015.
(ii) In December 2015, the directors of Suame Ltd publicly announced a plan to reduce the
workforce by 10% as a result of worsening economic conditions.
Required:
5
Discuss the effects of each of the above items on the financial statements of Suame Ltd for
the year ended 31 October 2015 in accordance with IAS 10 Events after the Reporting Period.
SOLUTION 12-B
d) i) The fall in value relates to conditions that arose after the end of the reporting
period.
Therefore, the fall in value is a non-adjusting event after the reporting period.
Whilst the effect of the fraud may be an adjusting event in Asafo Ltd’s own financial
statements, it is not an adjusting event for the value of the company's shares on the stock
market as that market value was based on all information available at that time (for example
investors who purchased shares on 31 December at the market price on that date would not be
able to make a claim against the previous owner when the fraud was discovered).
In accordance with IAS 10, which requires disclosure of material non-adjusting events after
the reporting period, disclosure will be made of:

The nature of the event

The amount of the financial effect, ie fall in value.
ii) The announcement of plans to restructure creates a constructive obligation to do a
restructuring. As a result, a restructuring provision will be recognised from that date,
providing the IAS 37 criteria are met. However, no legal or constructive obligation
existed
to restructure at the 31 October 2015 year end and this is therefore a non-adjusting
event
after the reporting period.
In accordance with IAS 10, which requires disclosure of material non-adjusting events after
the reporting period, disclosure will be made of:

The nature of the event

The amount of the financial effect, ie the expected restructuring costs. (2 marks)
QUESTION 13-A
RoyCo acquired a brand new property (land and buildings) on 1 January 2016 for GH¢40
million (including GH¢15 million in respect of the land). The asset was revalued on 31
December 2017 to GH¢43 million (including GH¢16.6 million in respect of the land). The
buildings element was depreciated over a 50-year useful life to a zero residual value. The
useful life and residual value did not subsequently need revision. On 31 December 2018 the
property was revalued downwards to GH¢35 million as a result of the recession (including
GH¢14 million in respect of the land). The company makes a transfer from revaluation
surplus to retained earnings in respect of realised profit.
Required: Calculate the amounts recognised in profit or loss and in other comprehensive
income for the years ended 31 December 2017 and 31 December 2018.
6
ii. Explain the reasons for your treatment of the two revaluations that occurred in 2017 and
2018 in the financial statements.
iii. Assuming the IASB board is considering an amendment to the IAS 16: Property, Plant
and Equipment, what changes will you suggest to the IASB board based on what you have
learnt so far about the standard?
SOLUTION 13-A
7
QUESTION 13-B
(b) Once an entity has recognized an item of Property, Plant and Equipment as an asset in its
books, the entity can choose between two models (or methods) to account for the asset in
subsequent measurement periods, that is, the period(s) after the asset has been acquired and
before its disposition. The two models are the cost model and the revaluation model. The
entity shall apply the same model to the entire class of property, plant and equipment to
which that asset is of similar nature and use in the entity’s operations.
Required: Identify TWO differences between the cost and revaluation model for the
measurement of Property, Plant and Equipment.
SOLUTION 13-B
The cost model (carry an asset at cost less accumulated depreciation and any accumulated
impairment losses). The revaluation model (carry an asset at its fair value at the revaluation
date less subsequent accumulated depreciation and subsequent impairment losses).
What is the difference between Cost Model and
Revaluation Model?
Cost Model vs Revaluation Model
In Cost model, assets are valued at the
cost incurred to acquire them.
In Revaluation model, assets are shown at fair
value (an estimate of market value).
Class of Assets
Class is not effected under this model.
The entire class has to be revalued.
Valuation Frequency
8
Valuation is carried out only once
Valuations are carried out at regular intervals.
Cost
This is a less costly method.
This is costly compared to Cost Model.
Difference between cost and revaluation model
1.
Cost model measures at the cost incurred to acquire them whereas revaluation model
measures at fair value
2.
Cost model has no biases in valuation whereas under revaluation model management
may assign a higher revalued amount
3.
Cost model is less complicated compared to revaluation model
4.
Revaluation model provides more accurate picture/worth of the business/asset compared
to the cost model
5.
Cost model valuation is carried out only once whereas revaluation model valuations are
carried out at regular intervals
6.
Under cost model class of asset is not affected whereas under revaluation model the
entire class has to be revalued
7.
Cost model is less costly method compared to revaluation model which is costly
exercise at regular interval
QUESTION 13-C
The following costs were incurred in 2016 in the design and construction of a new office
building over a nine-month period during 2016:
GH¢000
Feasibility study
8
Architects’ fees
100
Site clearance (by external demolition professionals)
80
Construction materials
600
Cost of own inventories used in the construction
(net realisable value if sold outside the company GH¢24,000)
Internal construction staff salaries during period of construction
External contractor costs
30
360
2,400
Income from renting out part of site as storage depot
9
during early phase of construction
(12)
3,566
Required:
In accordance with IAS 16 Property, plant and equipment, calculate the amount that should
be capitalised as property in the financial statements for the year ending 31 December 2016.
SOLUTION 13-C
Feasibility study – expensed by analogy with
SIC-32 para 2(a)/9(a) in accordance with IAS 8 para 11(a) Architects’ fees (IAS 16 para 17(b))
100
Site clearance (IAS 16 para 17(b))
80
Construction materials
600
Cost of own inventories used in the construction
(IAS 2 is applied first before use on the project)
24
Internal construction staff salaries (IAS 16 para 17(a))
360
External contractor costs
2,400
Income from renting out part of the site as storage depot
during early phase of construction (IAS 16 para 21)
3,564
QUESTION 13-D
10
An entity purchased an office building with a useful life of 50 years for GHC5.5 million on 1
January 2006. (The amount attributable to land was negligible). The entity used the building
as its head office for five years until 31 December 2010, when the entity moved its business
into larger premises. The building was reclassified on that date as an investment property and
leased under a 40-year lease. The fair value of the head office at 31 December 2010 was
GHC6 million. Explain the treatment of the office building on the assumption that the entity
uses the fair value model for investment properties.
SOLUTION 13-D
Investment property
i) Land or building, or part of a building, or both, held by the owner or the lessee under a
finance lease to earn rentals and/or for capital appreciation, rather than for use in production
or supply of goods and services or for administrative purposes or for sale in the ordinary
course of business.
ii) At 31 December 2010, the building has a carrying value of GHC4.95 million in
accordance with IAS 16. On 31 December 2010, the property should be recognized as an
investment property. The property should be fair valued at 31 December 2010 and any
change in value should be recognized in accordance with IAS 16.
The property should therefore be recognized at a carrying amount of GHS6 million and the
difference of GHC1.05 million [GHC6 million – GHC4.95 million] should be recognized in
other comprehensive income as a revaluation surplus.
In subsequent period (unless there is further change in use) the building should be measured
at fair value with any gain or loss recognized directly in profit or loss.
QUESTION 14-A
IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors is applied in
selecting and applying accounting policies, accounting for changes in estimates and reflecting
corrections of prior period errors. Required: Describe the procedures an entity shall apply in
selecting an accounting policy.
SOLUTION 14-A
Selection and application:
When an IFRS specifically applies to a transaction, event or condition, the policy shall be
determined by
applying the IFRS.
In the absence of an IFRS that specifically applies to a transaction, other event or condition,
management shall
use its judgement in developing and applying an accounting policy that results in information
that is:
(a) relevant to the economic decision-making needs of users; and
(b) reliable, in that the financial statements:
11
(i) represent faithfully the financial position, financial performance and cash flows of the
entity;
(ii) reflect the economic substance of transactions, other events and conditions, and not
merely
the legal form; (SUBSTANCE OVER FORM)
(iii) are neutral, i.e. free from bias; (MATERIALITY)
(iv) are prudent; (In view of the uncertainty attached to future events, profits are not anticipated but
recognised only when realised though not necessarily in cash. Provision is made for all known
liabilities and losses even though the amount cannot be determined with certainty and represents only
a best estimate in the light of available information.)
QUESTION 14-B
According to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, an
entity must select and apply its accounting policies consistently from one period to the next
and among various items in the financial statements. However, an entity may change its
accounting policies under certain conditions.
Required: Identify the circumstances under which it may be appropriate to change
accounting policy in accordance with the guidance given in IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors.
SOLUTION 14-B
Changes in accounting policies only if:
(a) Required by IFRS; or
(b) Results in the financial statements providing reliable and more relevant information.
QUESTION 15-A
Sawla Ltd (Sawla) prepares financial statements under International Financial Reporting
Standards (IFRSs). On 1 June 2020, Sawla acquired a manufacturing software at the cost
of GH¢1.5 million. The software is estimated to have a useful economic life of 5 years with
no residual value. To develop staff capacity to a higher level, a training program was
organised for production staff on the use of the software at a cost of GH¢250,000 during the
year. Management is convinced the staff training will generate more revenue for the entity
through future economic benefits. Sawla intends to adopt the revaluation model under IAS 38
Intangible Assets and to revalue the software at the end of each year. Accordingly, the
software was valued by a software engineer at GH¢1.7 million on 31 December 2020. Sawla
accepted this value and decided to incorporate the valuation in the financial statements.
Required: In accordance with IAS 38: Intangible Assets, explain how to account for the
above transactions for the year to 31 December 2020.
SOLUTION 15-A
12
Sawla to recognise an intangible asset at the cost of GH¢1.5million. Training cost cannot be
capitalised under IAS 38 Intangible assets. Hence the cost of training GH¢250,000 should be
expensed to the statement of profit or loss for the year.
The fair value must be determined by reference to an active market. If no such need exists for
the intangible asset, then the cost model must be adopted. The valuation of GH¢1.7 million
cannot be incorporated because it is not obtained from an active market.
On 31 December 2020, the Intangible asset will be measured at GH¢1.325 million [(1.5
million - (GH¢1.5 million ÷ 5years x 7/12)]. The Amortisation charge of GH¢175,000 should
be recognised in the statement of profit or loss.
Initial recognition 1 mark
Training cost write off 1 mark
Application of fair valuation model 2 mark
Treatment of amortisation 1 mark
QUESTION 15-B
Delali Ltd adopts revaluation model for subsequent measurement of its intangible assets in
accordance with IAS 38: Intangible assets. The policy of Delali is to revalue its intangible
asset at the end of each year. An intangible asset with an estimated useful life of 9 years was
acquired on 1 January 2016 for GH¢45,000. It was revalued to GH¢54,400 on 31 December
2016 and the revaluation surplus was correctly recognized on that date. As at 31 December
2017, the asset was revalued at GH¢32,000.
Required: Discuss the accounting treatment required in 2016 and 2017 financial
statements.
SOLUTION 15-B
d) In 2016
 The income statement for 2016 shows an amortization of GH₵5,000 [GH₵45,000/9years]
 The statement of financial position as at 31 December 2016 shows the following
 The asset at a carrying amount of GH₵54,400 [under non-current assets]
 A revaluation surplus of GH₵14,400 [GH₵54,400 - GH₵40,000] is shown under equity. (2 marks)
In 2017
 Amortisation of GH₵6,800 [GH₵54,400/8 years (remaining useful life)] is charged to income
statement  A transfer should be made from revaluation surplus to retained earnings through the
statement of changes in equity of the excess depreciation of GH₵1,800 [6,800 charged less 5,000
(45,000/9) based on the original cost], and thereby reducing the revaluation surplus to GH₵12,600.
 The carrying amount of the intangible asset as at 31 December 2017 is now GH₵47,600
[GH₵54,400 - GH₵6,800] but this should be reduced to GH₵32,000.
13
 The revaluation deficit is GH₵15,600 of which GH₵12,600 should be recognized in other
comprehensive [reducing the revaluation surplus to nil and the GH₵3,000 remainder is recognized as
an expense in the income statement).
QUESTION 15-C
You are the finance director of ABC Company. ABC is preparing its financial statements for
the year ended 31st December 2015. The following item has been brought to your attention:
ABC acquired the entire share capital of XYZ Ltd during the year. The acquisition was
achieved through a share exchange. The terms of the exchange were based on the relative
values of the two companies obtained by capitalizing the companies’ estimated cash flows.
When the fair value of XYZ’s Ltd identifiable net assets was deducted from the value of the
company as a whole, its goodwill was calculated at GH¢2.5 million. A similar exercise
valued the goodwill of ABC at GH¢4 million. The directors wish to incorporate both
goodwill values in the companies’ consolidated financial statements
Required: Describe how ABC should treat the item in its financial statements for the year
ended 31st December 2015 commenting on the directors’ views, where appropriate.
SOLUTION 15-C
ABC Ltd Whilst it is acceptable to value the goodwill of GHC2.5 million of XYZ (the
subsidiary) on the basis described in the question and include it in the consolidated balance
sheet, the same treatment cannot be afforded to ABC’s own goodwill. The calculation may
indeed give a realistic value of GHC4 million for ABC goodwill, and there may be no
difference in nature between the goodwill of the two companies, but it must be realized that
the goodwill of ABC is internal goodwill and IFRSs prohibit such goodwill appearing in the
financial statements. The main basis of this conclusion is one of reliable measurement. The
value of acquired (purchased) goodwill can be evidenced by the method described in the
question (there are also other acceptable methods), but this method of valuation is not
acceptable as a basis for recognizing internal goodwill.
Correct interpretation within IAS 38 and IFRS 3 should be awarded 5 marks
QUESTION 15-D
SOLUTION 15-D
QUESTION 15-E
Kwik Ltd (Kwik) runs a unit in Ablekuma Metropolis that has suffered a massive drop in income due
to failure in its technology on 1 January 2018. As a result, the following carrying amounts were
recorded in the books immediately before the impairment test. GH¢million Goodwill 20 Technology
5 Equipment 10 Land 50 Buildings 30 Other net assets 40 Page 6 of 30 The value in use of the unit is
estimated at GH¢85 million, and Kwik has received an offer of GH¢75 million for the unit. The
technology is worthless, following its complete failure. Other net assets include inventory,
receivables and payables. It is considered that the carrying amount of other net assets is a
reasonable representation of its net realisable value. Required: In accordance with IAS 36:
impairment of assets, show the accounting treatment for the above transactions.
14
SOLUTION 15-E
c) The carrying amount is GH¢155 million, and the recoverable amount is
GH¢85 million, the value in use. Therefore, an impairment loss is GH¢(155-85) =
GH¢70
million. (1 mark) Kwik should recognise an impairment loss of GH¢70 million in
the statement of profit or loss and allocate the GH¢ 70 million to its assets in the
following order (W1 & W2):
Asset
Carrying
amount
Goodwill
Technology
Equipment
Land
Buildings
Other net assets
GH¢
20
5
10
50
30
40
155
Amount to be Amount to
written off
Statement
of
Position
GH¢
(20)
(5)
(5)
(25)
(15)
(0)
(70)
Working 1
Allocation of impairment loss
Total impairment
Technology
Goodwill
Net to be allocated
report in
Financial
GH¢
0
0
5
25
15
40
85
(2 marks)
GH¢ million
70
(5)
(20)
45
Working 2
Pro-rate based on carrying amount
Equipment
45 x 10/(10+50+30)
Land
45 x 50/(10+50+30)
Buildings
45 x 10/(10+50+30)
Other net assets
(5)
(25)
(15)
0
45
QUESTION 15-F
Devine Education Ltd acquired an item of plant at a cost of GH¢800,000 on 1 April 2016. The
plant had an estimated residual value of GH¢50,000 and an estimated useful life of five years,
neither of which has changed. Devine Education Ltd uses straight-line depreciation.
15
On 31 March 2018, Devine Education Ltd was informed by a major customer (who buys products
produced by the plant) that it would no longer be placing orders with Devine Education Ltd. Even
before this information was known, Devine Education Ltd had been having difficulty finding work for
this plant. It now estimates that net cash inflows earned from the plant for the next three years will be:
GH¢'000
Year ended:
31 March 2019
220.00
31 March 2020
180.00
31 March 2021
170.00
Devine Education Ltd has confirmed that there is no market in which to sell the plant as at 31 March
2018, but is confident that it can still be sold for its original estimated realisable value on 31 March
2021. Devine Education Ltd's cost of capital is 10% and the following values should be used: GH¢
Value of GH¢1 at:
End of year 1
0.91
End of year 2
0.83
End of year 3
0.75
Required:
In line with IAS 36: Impairment of Assets, calculate the carrying amounts of the asset
above as at 31 March 2018 after applying any impairment losses. (Note: Calculations
should be to the nearest GH¢1,000).
SOLUTION 15-F
b) Carrying amount of the plant at 31.3.18
1.4.16
31.3.17
31.3.18
Cost
Depreciation
Balance
Depreciation
Balance
((800,000 – 50,000) / 5)
GH₵
800,000
(150,000)
650,000
(150,000)
500,000
As there is currently no market in which to sell the plant, its recoverable amount will
be its value in use, calculated as:
GH₵'000GH₵'000
Discount Factor 10%
PV
0.91
200
0.83
149
0.75
165
514
As this is greater than the carrying amount, the plant is NOT impaired and will be
left at its carrying amount of GH₵500,000.
Year Ended
31 March 2019
31 March 2020
31 March 2021
GH₵'000
Cash Flow
220
180
(170+50)
16
QUESTION 15-G
Ayariga Ltd acquired its head office on 1 January 2007 at a cost of GH¢10 million (excluding
land). The company’s depreciation policy is to depreciate property over 50 years on a straight
line basis. Estimated residual value is zero.
On 31 December 2011, Ayariga Ltd revalued the non-land element of its head office to
GH¢16 million. In accordance with IAS 16 Property, Plant and Equipment the company
17
has decided not to transfer annual amounts out of revaluation reserves as assets are used. In
January 2017 storm damage occurred and the recoverable amount of the head office property
(excluding land) was estimated at GH¢5.8 million.
Required: In accordance with IAS 36 Impairment of Assets, recommend (with workings)
how the above transaction should be accounted for as at 1 January, 2017.
SOLUTION 15-G
c)
IAS 36 and IAS 16 require that an impairment that reverses a previous revaluation
should be recognised through other comprehensive income to the extent of the
amount in the revaluation surplus for the same asset. Any remaining amount should
be recognised in the statement of comprehensive income. Thus:
Carrying value at 31 December 2011 is 45/50 X GH¢10m = GH¢9m
The revaluation reserve (GH¢16 - GH¢9) = GH¢7m
The carrying amount at the 31 December 2016 is 40/45 x GH¢16 = GH¢14.2m
The recoverable amount at 31 December 2016 = GH¢5.8m
The total impairment charge is (GH¢14.2 -GH¢5.8) = GH¢8.4m
Of this, GH¢7m is a reversal of the revaluation reserve, so only GH¢1.4m is
recognised through the statement of comprehensive income.
QUESTION 16-A
Ejura Ltd (Ejura) is a Manufacturing and retail company which prepares financial statements
in accordance with International Financial Reporting Standards (IFRS) up to 31 December
each year. In order to generate or improve sales on one of its older products, Ejura offered a
promotion named ‘something for free’. The promotion included free maintenance services for
the first two years. On 1 October 2019, under the promotional offer, Ejura sold goods to a
supermarket chain for GH¢4.4 million. A two-year maintenance contract would normally be
sold for GH¢0.5 million, and the list price of the product would normally be GH¢5 million.
The transaction has been included in revenue at GH¢4.4 million.
Required: In accordance with IFRS 15: Revenue from Contracts with Customers,
justify the appropriate accounting treatment for the above transaction in the financial
statements of Ejura for the year ended 31 December 2019.
SOLUTION 16-A
a) Under (IFRS 15), each component should be measured separately. As only three
months of the maintenance service has been provided, we should only recognize
3/24 of the maintenance fee as revenue in the year ended 31 December 2019. The
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remainder should be treated as deferred income and recognized as the service is
being provided.
The sale of goods, however, should be recognized immediately. As the total of the
fair values exceeds the overall price of the contract, a discount has been provided.
As we do not know what has been discounted, it would seem reasonable to apply
the same discount percentage to each separate component.
The discount is 20% based on listed prices (i.e. [4.4m/(5m + 0.5)] – 1).
GH¢m
Sale of goods (GH¢5m x 80%)
4
Sale of services (3/24 x GH¢0.5m x 80%)
0.05
Revenue to be recognized in year ended 31 December 2019
4.05
Deferred income should be measured at GH¢0.35m (21/24 x GH¢0.5m x 80%).
Revenue (retained earnings should therefore be reduced by GH¢0.35m.
GH¢m
0.35
Dr Retained earnings
Cr Deferred Income (CL)
GH¢m
0.35
Explanation of the separate measurement of the components - 2 mark
Revenue Recognition - 2 marks
Deferred Income
- 1 mark
Correct Journal entries for the treatment – 2 marks
Alternative presentation for IFRS 15: Revenue recognition
GH¢
million
Total transaction price
Revenue to be recognized:
Product sale (GH¢5 million / GH¢5 million + GH¢0.5 million
x GH¢4.4 million
Maintenance (3/24 months x 0.4 million
Deferred revenue
GH¢
million
4.4
4
0.05
4.05
0.35
Five (5) point criteria for recognition of revenue
Step 1: Identify contract with the customer
Step 2: Identify the performance obligations within the contract

Sale of product

Maintenance contract
Step 3: Determine the transaction price – the transaction price is GH¢4.4 million
Step 4: Allocate the transaction price among the performance obligations within the
contract

Based on the standalone selling price of the individual obligations

Where the standalone selling price are not available, use expected cost plus %
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
Where the above is not available, use the residual approach.
In this case, the scenario provides the standalone selling prices and hence, these shall
be used to allocate the price. Allocation of transaction price to:
Sale of products (GH¢5 million / GH¢5 million + GH¢0.5 million x GH¢4.4 million =
GH¢4
Maintenance: GH¢0.5 million/ GH¢5 million + GH¢0.5 million x GH¢4.4 million =
Step 5: Recognise the revenue over time or at point in time

Revenue from the product would be recognize during the contract period as
control
over the product is transferred to the customer.


Revenue from the maintenance contract would be earned over a period of 24
months. Therefore, for the current period, 3/24 months would be recognised as
revenue, and the remainder would be deferred.
QUESTION 16-B
Marshall Ltd (Marshall) is a manufacturing company that prepares Financial Statements in
compliance with IFRSs and has a reporting date to 31 December. During the year to 31
December 2020, Marshall entered into a contract with a customer to manufacture and sell
some goods such that the goods will be delivered (control of the goods vests with the
customer) in two years. The contract has two payment options:
i) The customer can pay GH¢500,000 when the contract is signed or
ii) GH¢650,000 in two years when the customer gains control of the goods. Marshall's
incremental borrowing rate is 10%. The customer paid GH¢500,000 on 1 January 2020, when
the contract was signed. Marshall intends to recognise revenue on this contract in the
financial statements.
Required: In accordance with IFRS 15: Revenue from Contract with Customers,
explain (with supporting calculations) how Marshall should account for the above
transactions for years 2020 and 2021.
SOLUTION 16-B
b) IFRS 15 requires revenue to be recognised as each performance obligation is
satisfied. An entity satisfies a performance obligation by transferring control of a
promised good or service to the customer, which could occur over time or at a point in
time.
In this contract, Marshall undertakes to transfer control of the goods in two years.
Hence, performance obligation has not been satisfied, and revenue cannot be
recognised.
The customer has made an advance payment of GH¢500,000 for goods to be delivered in
2 years. This represents a liability (revenue received in advance) and has a significant
financing component.
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For the year to 31 December 2020, Marshall would recognise a finance cost of
GH¢50,000 (500,000 x 10%) and a liability in the statement of financial position of
GH¢550,000 (GH¢500,000 + GH¢50,000).
For the year to 31 December 2021, Marshall would recognise a finance cost of
GH¢55,000 (550,000 x 10%) and a liability in the statement of financial position of
GH¢605,000 (GH¢550,000 + GH¢55,000).
Revenue recognition principle = 1 mark Subsequent measurement in P/L for 2 years =1 mark
Subsequent measurement in SFP for 2 years = 1 mark Workings = 1 mark
QUESTION 17
SOLUTION 17
QUESTION 18
a) Nkoso Ltd (Nkoso) is an agro-processing company which reports under International
Financial Reporting Standards up to 31 December each year.
On 10 October 2019, Nkoso organised a Christmas party at the company’s head office in
Accra. Unfortunately, there was an incident of food poisoning and the company has
received 500 legal claims from victims of the food poisoning, seeking compensation of an
average of GH¢5,000 each. A letter from Nkoso’s legal advisors, dated 10 December
2019, suggests 40% of these claims are likely to be successful.
The Accountant of Nkoso does not want to make any provision for these claims on the
grounds that less than 50% of the cl aims are likely to be successful. The legal advisors
have suggested that an average of two years from the end of the current reporting period
will elapse before the claims are settled. The risk related discount rate is estimated to be
10%.
Required:
In accordance with IAS 37: Provisions, Contingent Liabilities and Contingent Assets,
advise the directors of Nkoso on the appropriate accounting treatment of the above in the
financial statements for the year ended 31 December 2019.
(6 marks)
SOLUTION 18
b) The food poisoning claims are covered by IAS 37 Provisions, Contingent
Liabilities and Contingent Assets. If there was a single claim, then it would be
classified as a contingent liability, and no provision should be recognised in the SFP.
This is because the outcome is possible not probable.
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




However, because there are 500 claims and each one has a 40% chance of
succeeding, then overall Nkoso would expect to lose 200 claims. Therefore, a
provision should be recognised in the SFP because:
There is an obligation at the end of the reporting period due to a past event
There is a probable outflow of economic resources
A reliable estimate can be made (200 claims at GH¢5,000 each)
Because the claims are not expected to be settled for another two years, the
provision should be discounted using the risk related time value of money. The
provision should therefore be carried in the SFP at 31 December at:
500 X 5,000 X 0.40 X 1/(1.10)2 = GH¢826,446
QUESTION 19
In accordance with Ghana’s banking Act, explain the following and their respective
benchmarks:
i) Secondary Reserves
ii) Capital Adequacy Ratio (CAR)
iii) Primary Liquidity
iv) Secondary liquidity
v) Non-Performing loans
vi) Income earning assets and non-income earning assets
vii) Interest bearing liabilities and non-interest bearing liabilities
viii) Asset quality
ix) Interest Income
x) Interest expense
xi) Policy rate
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GH¢m
0.8
Dr SPLOCI (retained earnings)
Cr Provisions (NCL)
GH¢m
0.8
23
Explanation of the treatment in IAS 37 or provisions and contingent liabilities,
stating the conditions: 2 marks Amount of provision to be recognized taking into
consideration the discount
rate 2 marks Journal entries for the provision 2 marks
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