THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

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THE INSTITUTE OF CHARTERED ACCOUNTANTSOF NIGERIANOVEMBER 2014 PROFESSIONAL EXAMINATIONQuestion PapersSuggested SolutionsPlusExaminers’ ReportsPROFESSIONAL EXAMINATION – NOVEMBER 2014I

FOREWORDThis 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 of CharteredAccountants of Nigeria (ICAN);(ii)Unsuccessful candidates in the identification of those areas in which they lostmarks and need to improve their knowledge and presentation;(iii)Lecturers and students interested in acquisition of knowledge in the relevantsubjects contained herein; and(iv)The profession; in improving pre-examinations and screening processes, andthus 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 may bemore 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 publishedunder the Institute’s name, they do not represent the views ofthe Council of the Institute. The suggested solutions areentirely the responsibility of their authors and the Institutewill not enter into any correspondence on them.PROFESSIONAL EXAMINATION – NOVEMBER 2014II

TABLE OF CONTENTSSUBJECTPAGESCORPORATE REPORTING1 – 34ADVANCED TAXATION35 - 66STRATEGIC FINANCIAL MANAGEMENT67 – 96ADVANCED AUDIT AND ASSURANCECASE STUDY97 – 126127 – 152PROFESSIONAL EXAMINATION – NOVEMBER 2014III

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIAPROFESSIONAL LEVEL EXAMINATION - NOVEMBER 2014CORPORATE REPORTINGTime Allowed: 3 hoursSECTION A:COMPULSORY QUESTION(30 MARKS)QUESTION 11.Bagat Plc has two subsidiaries (Megat and Mingat) and one associate (Cagat).Since the adoption of IFRS by Government Bagat has been preparing itsconsolidated financial statements in accordance with the principles ofInternational Financial Reporting Standards (IFRS). The draft Statements ofFinancial Position of Bagat and its two subsidiaries as at 31 May 2013 are asfollows:BAGAT MEGAT MINGATN’MN’MN’MAssets:Non-current assets:PlantInvestments – MegatMingatAssociate CagatAvailable for Sale 204,7201003,320Total 8,7201,4606401602,2605,580Equity and liabilities:Share capitalRetained earningsOther components of equityTotal 6001403,740Current assets:InventoryTrade receivablesCash and cash equivalentsPROFESSIONAL EXAMINATION – NOVEMBER 20141

Non-current liabilities:Long-term loansDeferred taxTotal Non-current liabilitiesCurrent liabilities:Trade payablesCurrent tax payableTotal equity and 03,50021,8406001607608,7201,2004801,6805,580The following information is relevant to the preparation of the group financialstatements:i.On 1 June, 2012, Bagat acquired 80% of the equity interest of Megat Plc.On the date of acquisition, the retained earnings of Megat wasN2.72billion and other components of equity were N80million. There hadbeen no new issue of capital by Megat since the date of acquisition. Thepurchase consideration comprised cash of N6billion whereas the fair valueof the identifiable net assets of Megat on this date was N8billion. Theexcess of the fair value of the net assets is due to an increase in the valueof non-depreciable land. An independent valuer has stated that the fairvalue of the non-controlling interests in Megat was N1.72billion on 1 June,2012. It is the policy of Bagat to measure non-controlling interests on thebasis of their proportionate share in the identifiable net assets of theacquired subsidiary and not at fair value (full goodwill method).ii.Also on 1 June, 2012, Bagat acquired 70% of the ordinary shares ofMingat. The consideration for the acquisition of these shares wasN2.56billion. Under the purchase agreement of 1 June, 2012, Bagat isrequired to pay the former shareholders of Mingat 30% of the profits ofMingat on 31 May, 2014 for each of the financial years to 31 May, 2013and 31 May, 2014. The fair value of this arrangement was estimated atN120million at 1 June, 2012 and this value has not changed. This amounthas not been included in the financial statements.The fair value of the identifiable net assets at 1 June, 2012 of Mingat wasN3.52billion and the retained earnings and other components of equitywere N1.1billion and N140million respectively. There had been no newPROFESSIONAL EXAMINATION – NOVEMBER 20142

issue of share capital by Mingat since the date of acquisition and theexcess of the fair value of the net assets is due to an increase in the valueof property, plant and equipment (PPE). The fair value of the noncontrolling interests in Mingat was N1.06billion on this date. PPE isdepreciated on a straight-line basis over seven years.iii.Finally, Bagat acquired a 25% interest in Cagat Plc on 1 June, 2012 forN400million achieving significant influence over that company in itsfinancial and operating policy decisions. Cagat Plc retained earnings forthe year to 31 May, 2013 was N200 million.iv.Included in trade receivables of Bagat at 31 May, 2013 is a receivablefrom Megat of N30million. Unknown to Bagat, Megat has paid thisamount through a bank transfer by the close of work on 31 May, 2013 butit had not yet been reflected in the bank statement of Bagat.Megat has already passed accounting entries to reflect this transaction.v.Goodwill arising on the purchase of Mingat was tested for impairment on31 May, 2013 and this provided evidence of impairment to the tune ofN36million. No accounting entries have been passed to reflect theimpairment.Required:Prepare a consolidated statement of financial position as at 31 May, 2013 for theBagat Group.(30 Marks)SECTION B:ATTEMPT TWO OUT OF THREE QUESTIONS(40 MARKS)QUESTION 2(a) Labalaba Plc operations involve selling cars to the public through a chain of retailcar showrooms. It buys most of its new vehicles directly from the manufactureron the following terms:(i)Pay the manufacturer for the cars on the date they are sold to customers orsix months after they are delivered to its showroom whichever is earlier.(ii)The price paid will be 80% of the retail price as set by the manufacturer atthe date that the goods are delivered.PROFESSIONAL EXAMINATION – NOVEMBER 20143

(iii)Pay the manufacturer 1.5% per month (of the cost to Labalaba) as a‘display charge’ until the goods are paid for.(iv)May return the cars to the manufacturer at any time up to the date the carsare due to be paid for and incur the freight cost of any such returns.Labalaba Plc has never taken advantage of this right of return.(v)The manufacturer can recall the cars or request them to be transferred toanother dealer at any time up to the time they are paid for by Labalaba.Required;Advise the management of Labalaba Plc as to which party bears the risksand rewards in the above arrangement and show whether there is a saleand how the transactions should be treated by each party.(7 Marks)(b)Mr. Ojoowuro, the director of a grocery store, has noticed that the taxcharge for his company is N15million on profits before tax of N105million.This is an effective rate of 14.3%. Another company, Irin Plc has an incometax charge of N30million on profit before tax of N90million. This is aneffective rate of tax of 33.3%, yet both companies state that the rate ofincome tax applicable to them is 25%. Mr. Ojoowuro has also noticed thatin the statements of cash flows each company has paid the same amountof tax of N24million.Required:Advise Mr. Ojoowuro on the possible reasons why the income tax charge inthe financial statements as a percentage of the profit before tax may notbe the same as the applicable income tax rate and why the tax paid in thestatement of cash flows may not be the same as the tax charge in thestatement of profit or loss and other comprehensive income.(7 Marks)(c)Maidogo Limited sells NIXAQ, a product manufactured by it, from severalretail outlets.In previous years, the company has undertakenresponsibility for fitting the product in customers’ premises. Customerspay for the product at the time they are ordered. The average length oftime it takes from ordering to its fitting is 14 days. In previous years,Maidogo Limited had not recognised a sale in its books until the producthad been successfully fitted because the rectification costs of any fittingerror would be expensive.With effect from 1 April, 2013, Maidogo Limited changed its method oftrading by sub-contracting the fitting to approved contractors. Under thispolicy, the sub-contractors are paid by Maidogo Limited and they (the subcontractors) are liable for any errors made in the fitting. Consequently,Maidogo Limited is proposing to recognise sales when customers order andPROFESSIONAL EXAMINATION – NOVEMBER 20144

pay for the goods rather than when they have been fitted. Details of therelevant sales figures are;N’000Sales made in retail outlets for the year to 31 March, 2014Sales value of NIXAQ fitted in the 14 days to 14 April, 2013Sales value of NIXAQ fitted in the 14 days to 14 April, 201469,0003,6004,800Note: The sales value of NIXAQ in the 14 days to 14 April, 2013 are notincluded in the annual sales figure of N69million, but those for the 14April, 2014 are included.Required:Discuss whether or not the above represents a change of accounting policy,and calculate the amount that you would include in the revenue for NIXAQin the year to 31 March, 2014.(6 Marks)(Total 20 Marks)QUESTION 3Prochain PlcThe Directors of Prochain Plc have pursued an aggressive policy of expansion in thelast two years. They have developed several new products and market share hasincreased.The financial statements for the year ended 31 December, 2013 which will bepresented to the Board of Directors at its next meeting is being finalised.The financial statements at the year-end are presented below:Statement of profit or loss and other comprehensive income for the year ended 31DecemberRevenueCost of salesGross profitDistribution costs & administration expensesFinance costsProfit before taxIncome taxProfit for the year20132012(N’m)(N’m)34,20028,900(24,000) (20,250)10,2008,650(5,120) (3,300)(520)(450)4,5604,900(1,300) (1,400)3,2603,500PROFESSIONAL EXAMINATION – NOVEMBER 20145

Other comprehensive incomeTotal comprehensive income for the year3,2603,500The results of the company as well as certain key ratios that will form part of thecovenants in respect of the loan facilities will be discussed at the Board of Directorsmeeting.Statement of Financial Position as at 31 DecemberNoteNon-current assetsProperty, plant & equipmentAvailable for sale investmentCurrent assetsInventoriesTrade receivablesCash and cash equivalentsTotal assetsEquity and liabilitiesEquityShare capital (N0.50k)Revaluation reserveOther reservesRetained earningsNon-current liabilities:Term loan6% bonus bonds (2015)Current liabilities:Trade and other payablesShort-term borrowingsTotal equity & liabilities2013N’000 006,07040,9304,700-4,70032,200Notes:1The movement on the revaluation reserve relates to property, plant andequipment revalued in the year.2The movement on other reserves relates to the gains on the investmentsavailable for sale.3The bonds are repayable on 1 July, 2015.PROFESSIONAL EXAMINATION – NOVEMBER 20146

The key ratios for the loan covenants include:i.ii.iii.iv.GearingInterest coverCurrent ratioQuick ratioTarget50%9.5 times1.5:11.1:1Required:(a)Based on the results of Prochain Plc for the year ended 31 December, 2013,calculate the key ratios for the loan.(8 Marks)(b)Prepare a report commenting on the financial performance for the year inrelation to the key ratios for the loan.(12 Marks)(Total 20 Marks)QUESTION 4(a)The following is the statement of financial position of Lagos Plc as at31 December, 2013 with its immediate two comparative years.Non-current assetsProperty, plant & equipmentGoodwill on business acquisitionInvestment propertyCurrent assetsInventoryTrade ReceivablesOther ReceivablesCash & cash equivalentsTotal AssetsEquity and LiabilitiesOrdinary share capitalShare premiumRetained earningsCurrent liabilitiesTrade payablesOther payablesBank overdraftCurrent tax SSIONAL EXAMINATION – NOVEMBER 20147

The management of Lagos Plc is not sure of the impact of IAS12 (Income Taxes)on its retained earnings as at 31 December, 2013 as well as what the newdeferred tax balance will be on migrating to IFRS.The following information was also available as at the year end.Tax written down value of PPETax written down value of goodwill on businessacquisitionTax base of trade receivablesTax base of trade payablesN’00040,3004,30029,80013,000Assume that current tax has been correctly computed in line with the applicabletax laws at 30%.Required:Using relevant computations, advise the management of Lagos Plc on theimpact of deferred tax calculated on retained earnings in accordance withIAS 12.(12 Marks)(b)On 1 June, 2013, Bam Plc acquired Mango Limited for N3,150m