Limitations of inter-period and inter-company comparisons

• The data might need to be adjusted to for inflation if valid comparisons are to be made over time.
• The financial statements might have been prepared using different accounting policies e.g. choice of depreciation and stock valuation policies
• Accounts may be made up to a different date which can significantly affect ratios if the business is seasonal.
• Traditional analysis tends to focus on profitability. Greater attention is needed to be paid to assessing liquidity and the capacity to adapt by reference to cash flow statement.
• The statement of financial position is prepared at a single point in time. This means it is possible to practice window dressing and this can affect ratios.
• The industry average does not indicate the distribution of results around the average. It would be helpful to have quartile and decile figures.
  

Since the amount available is GH¢7,646,000 as against creditors of GH¢9,580,000. Each ordinary creditor would receive for every GH¢1 as capital.
GH¢ 0.798=GH¢0.80 PER
The shareholders would receive nothing if their company liquidates.

The loss should be shared as follows:
Ordinary shares:
They would suffer most because they are the owners and if the company liquidates they will receive nothing. They should sacrifice GH¢13, 400,000 of their capital and leave GH¢100, 000 as capital.
Preference shareholders:
They will also suffer the same fate as ordinary shareholders under liquidation. They should therefore suffer a loss of GH¢4,000,000 leaving a capital of GH¢125,000.
Debenture holders:
They would suffer 20 per cedi of the remaining balance after they have been paid GH¢4,005,000. I recommend that they should suffer GH¢1,005,000 leaving debentures of GH¢6,870,000.
Creditors:
The trade creditors and sundry creditors should be made to suffer the maximum loss they would have lost under liquidation, which is GH¢940,000 and GH¢214,000 respectively.
Preference dividends in arrears:
The preference dividend in arrears of GH¢825,000 is to be waived.
Note: alternative recommendations are acceptable provided they are logical reasonable and in accordance with best practice.
Working capital requirements:
Ratio of debtors to current liabilities is 0.80:1

After the capital reduction, current liabilities are:

Debtors and cash should be 0.8 of the new current liabilities. This is GH¢ 7,933,000. But existing debtors and cash is made up as follows:

Additional cash of the difference of GH¢7,933,000 and GH¢5,178,000 is required to maintain the desired ratio. This amounts to GH¢ 2,755,000 and should be raised by the old shareholders as ordinary share capital.

PROPOSED SCHEME
Ordinary share:
Reduce the ordinary share capital by GH¢13,400,000 and convert the balance to new ordinary share capital.
Eliminate the negative income surplus and capital surplus balances
Preference shares:
Reduce the preference share capital by GH¢4,000,000 and convert the balance to new ordinary share capital.
Preference dividend:
Write off the preference dividend of GH¢ 825,000 in arrears.
22% Debentures:
I recommend that they should suffer GH¢ 1,005,000 and be compensated by raising their interest rate to 25%.
Creditors:
Creditors should be made to suffer 20% of the amounts owed to them by the company.

The investments and patents to be realized to GH¢1, 350,000 and GH¢ 1,800,000 respectively.

In order to have a ratio of debtors and cash to current liabilities of 0.80:1 additional cash of GH¢ 2,755,000 will have to be sourced (see workings). The existing ordinary shareholders and existing preference shareholders will be required to introduce cash of GH¢2, 155,000 and GH¢600, 000 respectively for the purchase of new ordinary shares.

No present obligation exists to paint the premises, hence the accrual of a provision is not permitted by IAS 37. No contingent liability exists either, unless a commitment has been made to a supplier to carry out the work.

There is a present obligation, as the entity has undertaken to guarantee the debts of another party. However it seems unlikely that this guarantee will be called in. Hence it is not probable at the reporting date that an outflow of resources will be required to settle the obligation. Therefore the second condition has not been met, and no provision should be recognised in the financial statements. If an outflow of resources is judged possible but not remote, disclosure of a contingent liability of GH¢3 million should be made in the notes.

Accounting depreciation:
2015 – (600 – 60) / 15 = 36
2016 – (614 – 60) / 14 = 39.6
Note: Assume an applicable tax rate of 25% and capital allowance of 50% of carrying amount in the first year and 25% in the second year.
Deferred tax balance at 31 December 2016 = GH¢87,400

Deferred tax increase during year ended 31 December 2016 = GH¢21,400
GH¢21,400 will be added to the tax charge in Cartier Ltd’s statement of profit or loss for the year ended 31 December 2016.

• When a Standard or an Interpretation specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item must be determined by applying the Standard or Interpretation and considering any relevant Implementation Guidance issued by the IASB for the Standard or Interpretation. [IAS 8.7]
• In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or condition, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. [IAS 8.10]. In making that judgement, management must refer to, and consider the applicability of, the following sources in descending order:
• the requirements and guidance in IASB standards and interpretations dealing with similar and related issues; and the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework. [IAS 8.11]
• Management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources in paragraph 11. [IAS 8.12]
  

• If a change in accounting policy is required by a new IASB standard or interpretation, the change is accounted for as required by that new pronouncement or, if the new pronouncement does not include specific transition provisions, then the change in accounting policy is applied retrospectively. [IAS 8.19]
• Retrospective application means adjusting the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied. [IAS 8.22]
• However, if it is impracticable to determine either the period-specific effects or the cumulative effect of the change for one or more prior periods presented, the entity shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, which may be the current period, and shall make a corresponding adjustment to the opening balance of each affected component of equity for that period. [IAS 8.24] Also, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new accounting policy to all prior periods, the entity shall adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable.
  

Dividends received are recognised as income regardless of the treatment of the financial assets.

Remeasurements are treated in accordance with the policy of the entity. We must assume that the irrevocable election required by IFRS 9 was made as this is the policy of Kantanka Ltd.

The assets held at the period end must be remeasured to GH¢14 million. These are already carried at GH¢12.7 million (12.0 – 0.9 + 1.6). The original carrying value included GH¢0.9 relating to the investments sold, so these are no longer there. In addition, new assets costing GH¢1.6 million were purchased.

The fair value of these remaining assets on 31 March 2017 was 14 million, hence a gain of GH¢1.3 million (14 – 12.7) must be recognised.

This property was an IAS 16 property until 1 April 2016 and an IAS 40 investment property after this date. The accounting treatment therefore changes on the date it became an investment property. Any revaluation gains or losses up to that date are accounted for under IAS 16, and any arising since are accounted for under IAS 40.
The carrying value of the property at 1 April 2016 was as follows:

The revaluation gain would be taken to OCI and the revaluation loss to profit or loss as they were recognised in the financial year ended 31 March 2017. The depreciation relates to previous years, so its recording is not the subject of the requirement.

Under IAS 40, investment property is not depreciated and is revalued to fair value at each reporting date. Any gains or losses are taken to profit or loss.
Investment property
.                                                            GH¢m
Fair value 1 April 2016                        4.1
Fair value 31 March 2017                   4.8
Fair value gain                                     0.7
Journal entry 31 March 2017:                        DR GH¢m             CR GH¢m
Dr Investment property                                      0.7
Cr Profit or loss                                                                                    0.7

The reporting of corporate responsibility activities has developed substantially over the past 10–20 years. It first emerged as social and environmental reporting whereby companies disclose the impact of their operations, both positive and negative, on the community and environment in which they operate. Typical social disclosures might include details of community support programmes, charitable fundraising activities and educational and social programmes for employees. Typical environmental disclosures might include activities to reduce levels of emissions, recycling programmes and pollution controls.

More recently, these types of basic social and environmental disclosures have developed into sustainability reporting. This form of reporting particularly focuses on the issue of sustainable development and whether the operations of an organisation are sustainable into the future. The ability of an organization’s performance to be sustainable into the future is said to be based on its economic, environmental, social and governance performance. For example in order to be sustainable, accompany must limit its use of non-renewable energy sources (an environmental issue); it must also treat its staff well and reward them adequately to ensure their continued support (economic and social issues). Therefore sustainability reporting discloses environmental and social issues but also expands disclosure to integrate the economic impact of a company, for example through wages, taxes and purchasing policy, and governance i.e. how the company is run.

Integrated reporting develops the concept of sustainability reporting further by linking sustainability issues to financial strategy and results, sometimes referred to as ‘triple bottom line’ or PPP reporting (‘Profit, Planet and People’). This form of reporting is based on the idea that companies that achieve success in the future will be those that have an integrated strategy that achieves financial results whilst also creating lasting value for the company itself, its stakeholders and the wider society.

(i) A Ghanaian company can present its financial statements on the same basis as its foreign competitors, making comparison easier.
(ii) Cross-border listing is facilitated, making it easier to raise capital abroad
(iii) Companies with foreign subsidiaries have a common, company-wide accounting language.
(iv) Foreign companies which are targets for takeovers or mergers are more easily appraised.
(v) Staff working with multinational firms can easily be redeployed to other jurisdictions.
(vi) Access to and mobility of quality accounting staff.
(vii) Efficient and cost-effective audit engagements for multinational firms.
(viii) Firm-level IFRS adoption can lead to earnings quality.

Timeliness:
If there is undue delay in the reporting of information it may lose its relevance. However, to provide information on timely basis it may often be necessary to report before all aspects of a transaction or other event is known, thus impairing reliability. In achieving a balance between relevance and reliability, the overriding consideration is how best to satisfy the economic decision-making needs of users.

Balance between benefit and cost:
The benefits derived from information should exceed the cost of providing it. Thus, relevant information may be excluded where the cost of providing it far outweiGHȻ the benefits to be derived from the information. The evaluation of benefits and costs is, however, substantially a judgmental and complex process.

Balance between qualitative characteristics:
In practice, a balancing, or trade-off, between qualitative characteristics is often necessary. Generally the aim is to achieve an appropriate balance among the characteristics in order to meet the objective of financial statements. The relative importance of the characteristics in different cases is a matter of professional judgment.