• Representation on the board of directors or equivalent governing body;
• Participation in the policy-making process, including decisions about dividends and other distributions;
• Material transactions between parties;
• Interchange of managerial personnel; and
• Provision of essential technical information.

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

• The Conceptual Framework for Financial Reporting implies that the two fundamental qualitative characteristics (relevance and faithful representation) are vital as, without them, financial statements would not be useful, in fact, they may be misleading. As the name suggests, the four enhancing qualitative characteristics (comparability, verifiability, timeliness and understandability) improve the usefulness of the financial information. Thus financial information which is not relevant or does not give a faithful representation is not useful (and worse, it may be misleading);
• Financial information which does not possess the enhancing characteristics can still be useful, but not as useful as if it did possess them. For financial statements to be useful to users (such as investors or loan providers), they must present financial information faithfully, i.e. financial information must faithfully represent the economic phenomena which it purports to represent (e.g. in some cases it may be necessary to treat a sale and repurchase agreement as an in-substance (secured) loan rather than as a sale and subsequent repurchase).
• Faithfully represented information should be complete, neutral and free from error. The substance is not identified as a separate characteristic because the IASB says it is implied in a faithful representation such that faithful representation is only possible if transactions and economic phenomena are accounted for according to their substance and economic reality.

i) Self-interest and self-review threat
KK faces a self-interest threat because he is a beneficiary of the reduced interest charged. Also, being a member of the loan committee, he finds himself in a situation where he would be reviewing his own committee’s decisions and hence, is faced with a self-review threat.
To address this threat, KK should advise the accounts officer to charge the correct interest rate and arrange for a different person to review the loan aspects of the draft accounts.

ii) Advocacy threat
As KK is part of those advocating for a separate set of accounts to be opened for the loans, he may become too defensive of the union’s position.
To address such risk, he should be seen as providing only impartial and neutral advice in this respect.

iii) Familiarity threat
KK faces a familiarity threat to integrity – not ensuring that the accounts receivables balance reflects the true amount – due to his close association with the owner of Sede Ltd.
KK should advise that the correct figure of receivables be included in the accounts.

iv) Intimidation threat
KK is faced with intimidation threat as he works under a bossy CEO.
As a safeguard, KK should advise the CEO himself or discuss the anomaly with a relevant board committee, internal audit, non-executive directors or the board chairperson to ensure that the imprest is properly accounted for.

To             : Chief Executive Officer
From        : Management accountant
Subject     : Performance Analysis of Konka Ltd from 2018 to 2020

Introduction
This performance report relates to the financial statements of Konka Ltd for the period 2018 to 2020. The report covers the profitability, operating efficiency, liquidity and solvency positions of Konka Ltd over the period under review. An appendix is attached to this report which shows the ratios calculated as part of the performance review.

Profitability
The gross profit margin has remained relatively static over the three years, although it rose by approximately 1% in 2018. ROCE, while improving very slightly in 2019 to 21.5%, has dropped dramatically in 2020 to 17.8%. The net profit margin has also fallen in 2020, despite the improvement in the gross profit margin. This marks a rise in expenses which suggests that they are not well controlled. The utilisation of assets compared to the turnover generated has also declined, reflecting the drop in trading activity between 2019 and 2020.

Operating Efficiency
It is apparent that there was a dramatic increase in trading activity between 2019 and 2020, but then a significant fall in 2020. As a result, revenue rose by 17% in 2019 but fell by 7% in 2020. The reasons for this fluctuation are unclear. It may be the effect of some kind of one-off event, or it may be the effect of a change in product mix. Whatever the reason, it appears that improved credit terms granted to customers (receivables payment period up from 46 to 64 days) have not stopped the drop in sales.

Liquidity
Both the current ratio and quick ratio demonstrate an adequate working capital situation, although the quick ratio showed a slight decline. This is because there has been an increased investment over the period in inventories and receivables, which has been only partly financed by longer payment periods to trade payables and a rise in other payables (mainly between 2019 and 2020).

Solvency
The level of gearing of the company increased when a further GH¢64 million was raised in long-term loans in 2020 to add to the GH¢74 million already in the statement of financial position. Although this does not seem to be a particularly high level of gearing, the debt/equity ratio rose from 18.5% to 32.0% in 2020. The interest charge has increased to GH¢19 million from GH¢6 million in 2019. The 2020 charge was GH¢15 million, suggesting that either the interest rate on loan is flexible or that the full interest charge was not incurred in 2020. The new long-term loan appears to have funded the expansion in both fixed and current assets in 2020.

Capital employed = shareholders’ funds plus payables falling due after one year and any long-term provision for liabilities and charges. It is possible to calculate ROCE using net profit after taxation and interest, but this admits variations and distortions into the ratios which are not affected by operational activity.

2 marks for the structure of the report = 2 marks
2 marks for analysis of performance x 4 areas covered = 8 marks
4 marks for Appendix (12 ratios computed: 4 ratios x 3 years) = 4 marks
1 mark for the orderly presentation of computation of ratios = 1 mark

i) Long-term loan: There is no indication of why this loan was raised and how it was used to finance the business. Further details are needed of interest rate(s), security is given and repayment dates.

ii) Trading activity: The level of sales has fluctuated in quite a strange way, requiring further investigation and explanation. Factors to consider would include pricing policies, product mix, market share and any unique occurrence which would affect sales.

iii) Further analysis: It would be useful to break down some of the information in the financial statements, perhaps into a management accounting format. Examples would include the following.

• Sales by segment, market or geographical area
• Cost of sales split into raw materials, labour and overheads
• Inventory broken down into raw materials, work in progress and finished goods
• Expenses analysed between administrative costs, sales and distribution costs.

iv) Accounting policies: Accounting policies may have a significant effect on certain items. In particular, it would be useful to know what the accounting policies are in relation to intangible assets (and what these assets consist of) and whether there has been any change in accounting policies.

v) Dividend policy: Konka Ltd has maintained the dividend payments to shareholders during the three years. Presumably, Konka Ltd would have been able to reduce the amount of long-term debt taken on if it had retained part or all of the dividend during this period. It would be interesting to examine the share price movement during the period and calculate the dividend cover.

1. In accordance with IAS 38: Intangible assets, the GH¢5 million paid for the export license should be capitalised at cost as an intangible non-current asset and amortised over its useful economic life of 10 years. Therefore, there should be a charge to income of GH¢500,000 in the current year.

2. The provision for the legal costs of GH¢9.6 million sought by the customer is only a present obligation arising out of a past event if the case goes against Koli Ltd. Based on the scenario in the question, it is improbable that the case will be lost so the recognition criteria laid down in IAS 37: Provisions, Contingent Liabilities and Contingent Assets – are not met. Therefore, the GH¢400,000 is possibly recoverable from the customer, but IAS 37 only allows recognition of potential reimbursements if the reimbursement is virtually certain. Thus, GH¢400,000 should remain in administrative expenses, and GH¢9.6 million should be reversed.

3. Allocation of operating expenses

4. Depreciation of non-current assets
NB: The building was purchased on 1 January 2011 and revalued on 31 December 2019, so it was nine years old when it was revalued. The remaining useful economic life at the revaluation date is estimated at 50–9 = 41 years. Depreciation after the revaluation is charged on the revalued amount.

The lessee is required under IFRS 16 to recognise a right-of-use asset and a corresponding liability. Accordingly, GH¢30.320 million is to be included both as asset and lease liability on initial recognition. The lease liability is treated as shown below:

The statement of profit or loss in the first year will include a finance cost of GH¢3.032million with a depreciation charge of GH¢6.064 million.

The statement of financial position will include closing lease liability in the current year, GH¢25.352 million, of which GH¢19.887 million is a non-current liability and GH¢5.465 million is a current liability. The right of use asset of GH¢30.320 million will be depreciated over five years (GH¢30.320 ÷ 5 years) = GH¢6.064 million. Therefore, the asset will be recognised in the statement of financial position at GH¢24.256 million (.i.e. GH¢30.320 – 6.064) million.

Alternatively, the current lease liability GH¢5.465 million (GH¢8 million-GH¢2.535) million) and the non-current lease obligation is GH¢19. 887 million (GH¢25.352 million- GH¢19.887 million).
Workings:
Lease liability = 3.971 x GH¢8 million) = 30.320 million

i) This is a grant related to income. As the purchase expense has already been incurred, the grant should be released to profit or loss in full in the period the grant is received.   (1mark)

ii) The tax relief is government assistance received. This should be disclosed as a note to the financial statements.   (1 mark)

iii) This is a grant related to an asset. The grant should be matched against the associated cost. There are two acceptable accounting approaches in this situation.    (1 mark)

iv)
Option 1.  Deduct the grant from the asset cost so that the asset is recorded at GH¢ 200,000, the net cost.  (1 mark)

Option 2.  Record the asset at its total cost of GH¢500,000 and take the grant to the statement of financial position as deferred income. The deferred income is then released to profit and loss over the useful life of the asset. The effect is to reduce the depreciation charge.  (2 marks)

A group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. The group includes goodwill acquired in a business combination if the group is a cash-generating unit to which goodwill has been allocated in accordance with IAS 36 Impairment of Assets or if it is an operation within such a cash-generating unit.

Since the Fair value is lower, the asset should be measured at GH¢245,000 (W3) in the statement of financial position. (1 mark)

Since the Fair value is lower, the asset should be measured at GH¢245,000. Need for impairment loss of (GH¢307,500-245,000) = GH¢62,500
Dr Cost of sales                              62,500
Cr NCA held for sale                                            62,500

(1 mark)