• The approach to leases adopted by IFRS 16 requires the commitment to make annual payments to be recognised as a liability, provided the resulting benefit is an asset under the control of the entity for the term of the lease.
• The asset is recognised at present value of the minimum required lease payments, and is depreciated over the shorter of the lease term or the asset’s useful economic life (unless it is highly likely that the asset will transfer to the lessee at the end of the least term, in which case the asset’s useful economic life should be used).
• The liability is initially measured at the present value of minimum required lease payments, and is subsequently measured at amortised cost, with finance costs taken to profit or loss as incurred, using the effective rate implicit in the lease, or the entity’s cost of capital if the implicit rate is not available.

• The investment in Awoshi Electronics is a financial asset as it is an investment in shares. Such investments must initially be recorded at fair value under IFRS 9: Financial Instruments.
• Consequently, the fair value is the fair value of the equipment plus the cash transferred. As a result, a profit or loss on recognition of the equipment may arise.
• At the year end, as this is an investment in equity instruments, it must be held at fair value. Sukura can choose whether to hold the investment at fair value through profit or loss or fair value through other comprehensive income. The decision is irrevocable.
• As the investment is an unquoted one, fair value cannot be determined by reference to market data, so a business valuation needs to be performed.
  

• An amount of GH¢4 million was overprovided for in the previous year.
• Hence the provision for the current year should be reduced by that amount. Hence an expected liability of GH¢24.5 million requires a provision of GH¢20.5 million.
• The liability is still GH¢24.5 million as this is the amount expected to be paid.
• Basically, the provision moves from the existing figure of GH¢4 million credit to the required level of GH¢24.5 million credit.
  

Property 1 is let to another group entity. From a group perspective, this property is not an investment property, as defined by IAS 40, and must therefore be accounted for in accordance with IAS 16. Properties 2 and 3 are investment properties and are accounted for in accordance with the fair value model of measurement set out in IAS 40.                        (1 mark)

Basic earnings per share = (GH¢10,200,000 – (GH¢600,000 x 9/12)) / 3,613,500 = GH¢2.70.

Sunyani owns 150m shares out of 200m in Berekum. This gives 75% ownership in Berekum for 2 full years therefore Berekum is a subsidiary.
Sunyani has 40% ownership in Jinijini for the full year and can appoint directors, hence significant influence is exerted. Therefore, Jinijini is an associate.

W7: Fair value adjustments (note (iv)):
.                                  At Acquisition Date           Movement                         At rep.
Property Jinijini               GH¢10m                        (GH¢1.5m) **                  GH¢8.5m
**Movement = depreciation of the adjustment to the buildings component only for 2 full years since acquisition:
GH¢10m * 75% / 10 yrs * 2 yrs = GH¢1.5m. This is charged to the earnings of the company which holds (and therefore depreciates) the asset, namely Jinijini. Hence:
Dr   PPE                                                      GH¢8.5m
Dr   Retained earnings – Jinijini              GH¢1.5m
Cr   Goodwill (FV net assets)                                                     GH¢10.0m

W8: Intra-group trading of goods
Unrealised profit (URP) on goods held in closing inventory:
(GH¢15m * 20/120) * 1/4 (sold by Berekum therefore NCI is affected) GH¢1.25m

Adjustment to reduce reserves (Berekum) and Inventory:
Dr   Retained Earnings (Berekum)            GH¢1.25m
Cr   Inventory                                                                           GH¢1.25m

W9: Intra-group balance outstanding & interest charged – Sunyani & Berekum
Eliminate interest GH¢1m:
Dr Retained earnings (Berekum)            GH¢1.0m
Cr Trade receivables (Berekum)                                               GH¢1.0m

Following the above adjustment, the intra group receivables and payables now balance at GH¢10.0m. Hence we must cancel those balances.

Dr   Trade payables                               GH¢10.0m
Cr   Trade receivables                                                              GH¢10.0m

W10: Dividends
Jinijini’s proposed dividend                GH¢5m
Amount payable to parent company (40%)                           GH¢2m

Adjustment to show dividend receivable by Sunyani and increase retained earnings (Sunyani).

Dr   Dividends receivable                 GH¢2.0m
Cr   Retained earnings (Sunyani)                                        GH¢2.0m
  (80 ticks @ 0.25 = 20 marks)

• Economic Reality is more important: In substance over form principle the economic reality of transaction is more important than legal form of the transaction. Thus the transaction are not recorded merely on the bases of legal reality and economic reality is more relevant for accounting for the transaction. This is an important characteristic of this principle.
• Portray Real Nature of Transaction: Another important characteristic of Substance over form principle is portraying the real picture of the transactions. This approach discourages the hiding the actual nature of transaction. This concept has been explained with few examples.
• Achieve Faithful Representation: Application of prudence concept helps in achieving the faithful representation of
  financial statements. Faithful representation of financial statements is an important accounting principle.
• It has become clear that any hard rule can be creatively circumvented by contriving transactions appropriately. This is because transactions are necessarily structured between parties as they wish, and to suit their business needs. Regulators cannot anticipate the needs of transacting parties, and rules by their nature always lag behind the transactions themselves. In other words, as regulators see a transaction that is not covered by the existing rules, they seek to “plug the gap”. This is not a satisfactory way to ensure that financial statements reflect truth and fairness.           (2 valid points for 4 marks)
  

There are some key tell-tale indicators that should alert the accountant to the possibility that substance and form issues may exist. Some of these are:

• If two or more transactions are executed together, and the combined effect of both taken together is different from the effect of each individually, this is worth investigating. For example a sale transaction selling an asset (possibly at a price in excess of market) and an agreement to lease back that same asset (possibly at an inflated rental).
• Business arrangements entered into which seem to disproportionately advantage one party over another. There is nothing legally wrong with entering into an arrangement that is not in your best interests, but rational business people tend not to do so unless there is a benefit elsewhere.
• Contrived option arrangements that serve to divert risk from where it might otherwise lie.
• Unusual terms in business agreements that might affect our assessment of the timing of revenues and costs.
• Transactions that may be structured to manipulate the reported results, for example by misreporting expenses as assets, or liabilities as revenue.                                                                                                                                                       (Any 4)

(i) The firm name of the partnership.
(ii) The general nature of the business.
(iii) The address and Post Office Box number of

• the principal place of business of the partnership,
• all other places in Ghana at which the business is carried on.

(iv) The names and any former names, residential addresses and business occupation of the partners.
(v) The date of commencement of the partnership- unless the partnership has commenced more than 12 months prior to the date of the statement.
(vi) Particulars of any charges requiring registration under section 25 of Act 152 or statement that there are no such charges and where particulars of any charge require registration under section 25 of the Act, the statement shall be accompanied by the documents required by that Section.                                                                                        (Any 4 items x ½ mark= 2 marks)

• The partnership is not one which is registerable under Act 152, for example, if it has more than 20 persons;
• Any of the business which the partnership has been carrying on or is to carry on is unlawful;
• The name of the firm is misleading or undesirable;
• Any of the partners is an infant or of unsound mind or a person who within the preceding 5 years has been guilty of fraud or dishonesty whether convicted or not in connection with any trade or business or is an undischarged bankrupt or
• The statement is incomplete, illegible, inaccurate, irregular or on paper insufficiently durable to be suitable for registration, the Registrar shall, upon the payment of the prescribed fee register the said statement.                                                (Any 3)

Assessment of the relative performance and financial position of Light Ltd and Favour Ltd Favour Ltd for the year ended 31 December 2017.

Introduction
This report is based on the draft financial statements supplied and the ratios shown in the appendix above. Although covering many aspects of performance and financial position, the report has been approached from the point of view of a prospective acquisition of the entire equity of one of the two companies.                             (1 mark)
Profitability
The ROCE of 20·9% of Favour Ltd is far superior to the 14·8% return achieved by Light Ltd. ROCE is traditionally seen as a measure of management’s overall efficiency in the use of the finance/assets at its disposal. More detailed analysis reveals that Favour Ltd’s superior performance is due to its efficiency in the use of its net assets; it achieved a net asset turnover of 2·3 times compared to only 1·2 times for Light Ltd. Put another way, Favour Ltd makes sales of GH¢2·30 per GH¢1 invested in net assets compared to sales of only GH¢1·20 per GH¢1 invested for Light Ltd.

The other element contributing to the ROCE is profit margins. In this area Favour Ltd’s overall performance is slightly inferior to that of Light Ltd, gross profit margins are almost identical, but Light Ltd’s operating profit margin is 10·5% compared to Favour Ltd’s 9·8%. In this situation, where one company’s ROCE is superior to another’s it is useful to look behind the figures and consider possible reasons for the superiority other than the obvious one of greater efficiency on Favour Ltd’s part. A major component of the ROCE is normally the carrying amount of the non-current assets. Consideration of these in this case reveals some interesting issues. Favour Ltd does not own its premises whereas Light Ltd does. Such a situation would not necessarily give a ROCE advantage to either company as the increase in capital employed of a company owning its factory would be compensated by a higher return due to not having a rental expense (and vice versa). If Favour Ltd’s rental cost, as a percentage of the value of the related factory, was less than its overall ROCE, then it would be contributing to its higher ROCE.

There is insufficient information to determine this. Another relevant point may be that Favour Ltd’s owned plant is nearing the end of its useful life (carrying amount is only 22% of its cost) and the company seems to be replacing owned plant with leased plant. Again this does not necessarily give Favour Ltd an advantage, but the finance cost of the leased assets at only 7·5% is much lower than the overall ROCE (of either company) and therefore this does help to improve Favour Ltd’s ROCE. The other important issue within the composition of the ROCE is the valuation basis of the companies’ non-current assets.
From the question, it appears that Light Ltd’s factory is at current value (there is a property revaluation reserve) and note (ii) of the question indicates the use of historical cost for plant. The use of current value for the factory (as opposed to historical cost) will be adversely impacting on Light Ltd’s ROCE. Favour Ltd does not suffer this deterioration as it does not own its factory.

The ROCE measures the overall efficiency of management; however, as Salt is considering buying the equity of one of the two companies, it would be useful to consider the return on equity (ROE) – as this is what Salt is buying. The ratios calculated are based on pre-tax profits; this takes into account finance costs, but does not cause taxation issues to distort the comparison. Clearly Favour Ltd’s ROE at 50% is far superior to Light Ltd’s 19·1%. Again the issue of the revaluation of Light Ltd’s factory is making this ratio appear comparatively worse (than it would be if there had not been a revaluation). In these circumstances it would be more meaningful if the ROE was calculated based on the asking price of each company (which has not been disclosed) as this would effectively be the carrying amount of the relevant equity for Salt Ltd.                                             (4 marks)
Gearing
From the gearing ratio it can be seen that 71% of Favour Ltd’s assets are financed by borrowings (39% is attributable to Favour Ltd’s policy of leasing its plant). This is very high in absolute terms and double Light Ltd’s level of gearing. The effect of gearing means that all of the profit after finance costs is attributable to the equity even though (in Favour Ltd’s case) the equity represents only 29% of the financing of the net assets. Whilst this may seem advantageous to the equity shareholders of Favour Ltd, it does not come without risk. The interest cover of Favour Ltd is only 3·3 times whereas that of Light Ltd is 6 times. Favour Ltd’s low interest cover is a direct consequence of its high gearing and it makes profits vulnerable to relatively small changes in operating activity. For example, small reductions in sales, profit margins or small increases in operating expenses could result in losses and mean that interest charges would not be covered.

Another observation is that Light Ltd has been able to take advantage of the receipt of government grants; Favour Ltd has not. This may be due to Light Ltd purchasing its plant (which may then be eligible for grants) whereas Favour Ltd leases its plant. It may be that the lessor has received any grants available on the purchase of the plant and passed some of this benefit on to Favour Ltd via lower lease finance costs (at 7·5% per annum, this is considerably lower than Favour Ltd has to pay on its 10% loan notes).
Liquidity
Both companies have relatively low liquid ratios of 1·2 and 1·3 for Light Ltd and Favour Ltd respectively, although at least Light Ltd has GH¢600,000 in the bank whereas Favour Ltd has a GH¢1·2 million overdraft. In this respect Favour Ltd’s policy of high dividend payouts (leading to a low dividend cover and low retained earnings) is very questionable. Looking in more depth, both companies have similar inventory days; Favour Ltd collects its receivables one week earlier than Light Ltd (perhaps its credit control procedures are more active due to its large overdraft), and of notable difference is that Light Ltd receives
(or takes) a lot longer credit period from its suppliers (108 days compared to 77 days). This may be a reflection of Light Ltd being able to negotiate better credit terms because it has a higher credit rating.                                            (4 marks)

Summary
Although both companies may operate in a similar industry and have similar profits after tax, they would represent very different purchases. Favour Ltd’s sales revenues are over 70% more than those of Light Ltd, it is financed by high levels of debt, it rents rather than owns property and it chooses to lease rather than buy its replacement plant. Also its remaining owned plant is nearing the end of its life. Its replacement will either require a cash injection if it is to be purchased (Favour Ltd’s overdraft of GH¢1·2 million already requires serious attention) or create even higher levels of gearing if it continues its policy of leasing. In short although Favour Ltd’s overall return seems more attractive than that of Light Ltd, it would represent a much more risky investment. Ultimately the investment decision may be determined by Salt’s attitude to risk, possible synergies with its existing business activities, and not least, by the asking price for each investment (which has not been disclosed to us).            (2 marks)

• Cash flow information is useful in assessing the ability of the entity to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different entities.
• It provides information that enables users to evaluate the changes in net assets of an entity, its financial structure (including its liquidity and solvency) and its ability to affect the amounts of timing of cash flows in order to adapt to changing circumstances and opportunities.
• It also enhances the comparability of the reporting of operating performance by different entities because it eliminates the effects of using different accounting treatments for the same transactions and events.
• Cash flow information is often used as an indicator of the amount, timing and certainty of cash flows.
• It is also useful in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and the impact of changing prices.