The draft accounts of your client Good Days Ltd., a shopping mall for the year ended 31 December 2016 showed the following:
In December 2016, management announced plans to stop the sales of ladies ware from the end of the month. These sales amounted to GH¢ 1.4 million for the year ended 31 December 2016 (2015 GH¢1.6 million). A provision of GH¢0.6 million has been made at 31 December 2016 for the compensation of redundant employees who are mainly sales girls.
Required:
Comment on the materiality of these two plans.
Note: The following materiality levels are to be used as benchmarks:
Value %
Profit Before Tax 5
Gross Profit ½ – 1
Revenue ½ – 1
Total Assets 1 – 2
Net Assets 2 – 5
Profit After Tax 5 – 12 (10 marks)
View Solution
The two materiality plans are:
- Ladies Ware
Revenue from the ladies ware forms part of the total revenue of the company. The relevant indicators of materiality is therefore revenue.
The ladies ware revenue as a percentage of total revenue is as follows:
(GH¢ 1.4/ 84.40)*100 =1.66
1.66% is higher than the materiality threshold of ½ -1% of revenue. Therefore the ladies ware sales revenue is material to the statements of Profit or Loss and other comprehensive income. (4 marks)
- Provision
The provisions should be considered in terms of its effect on the financial statements. It affects both the statements of financial position as it’s a liability in the financial statements and the statements of profit or loss and other comprehensive income as it is a charge in arriving at the profit or loss in a year
Statement of Financial Position
(GH¢0.6m/75m)*100% = 0.8% of total assets
The materiality threshold for total assets is 1-2% therefore the 0.8% is not material to the statement of financial position. (3 marks)
Statement of Profit or loss and other comprehensive income
(GH¢0.6 m/ 5m)*100 = 12%
The materiality threshold for profit before tax is 5% therefore the 12% is material to the statements of profit or loss and other comprehensive income. (3 marks)