Institute of Chartered Accountants Ghana (ICAG) Paper 3.1 Corporate Reporting

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1 Institute of Chartered Accountants Ghana (ICAG) Paper 3.1 Corporate Reporting Final Mock Exam 1 Marking scheme and suggested solutions DO NOT TURN THIS PAGE UNTIL YOU HAVE COMPLETED THE MOCK EXAM

2 Corporate Reporting The Institute of Chartered Accountants Ghana First edition 2015 ISBN All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media Ltd. Published by BPP Learning Media Ltd BPP House, Aldine Place London W 8AA The Institute of Chartered Accountants Ghana 2015

3 Final Mock Exam 1: Answers 1 Question 1 Marking scheme Marks Consolidated SPLOCI 4 NBT 3 ONW 3 PLP 2 Inventory 1 Dividend 1.5 Eliminate FV of investment in associate 1.5 NCI 4 20 MLT GROUP CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 20X5 Revenue: 1,941 + (564 9 ) + (340 GHSm 6 ) 72 (W4) 2, (1,931.00) Cost of sales: 1,650 + (328 9 ) + (202 6 ) 72 (W4) + 6 (W4) Gross profit Other income: 75 + (44 9 ) + (29 6 ) (W5) Distribution costs: 72 + (50 9 ) + (62 6 ) (140.50) Administrative expenses: 92 + (70 9 ) + (28 6 ) + 2 (W3) + 9 (W6) (169.50) Finance costs: 21 + (20 9 ) + (19 6 ) (45.50) Share of profit of associate: % 2.00 Profit before tax Income tax expense: 50 + (56 9 ) + (24 6 ) (104.00) Profit for the year Other comprehensive income (not reclassified to profit or loss) Derecognition of available-for-sale financial asset (10 9 (W6)) 1.00 Gains on available-for-sale financial assets: 48 + (22 9 ) ((16 6 (W7)) 6 ) Gains/losses on property revaluation: 28 + (14 9 ) Remeasurement losses on defined benefit plan: (34.00) Share of other comprehensive income of associate: % 4.00 Other comprehensive income for the year net of tax Total comprehensive income for the year

4 2 Final Mock Exam 1: Answers GHSm Profit attributable to: Owners of the parent (bal. fig.) Non-controlling interests (W2) Total comprehensive income attributable to: Owners of the parent (bal. fig.) Non-controlling interests (W2) Workings 1 Group structure 1.10.X4 10% 1.1.X5 50% 60% NBT MLT ONW 1.10.X4 0% 1.4.X5 75% 25% PLP MLT NBT The MLT group controls ONW so the indirect associate, PLP, will be equity accounted using 25% but part of this is owned by the 25% non-controlling interest (NCI) in ONW. Timeline Subsidiary with 40% NCI 9 ONW Subsidiary with 25% NCI 6 PLP 25% associate (with 25% NCI by ONW) 1.10.X4 1.1.X5 1.4.X X5

5 Final Mock Exam 1: Answers 3 2 Non-controlling interests NBT ONW Profit for year TCI Profit for year TCI GHSm GHSm GHSm GHSm Per question Depreciation of fair value adjustment (W3) (1.5) (1.5) Elimination of fair value (6) gain recognised on investment in PLP (W7) Impairment of 'full' goodwill (W6) (9.0) (9.0) Unrealised profit (W4) (6.0) (6.0) Share of profit of associate Per SPLOCI 2.0 Share of TCI of associate ( ( %) % 40% 25% 25% GHS23.35m GHS35.65m 3 Fair value adjustments NBT At acquisition Movement At year end 1 Jan 20X5 20X5 30 September 20X5 GHSm GHSm GHSm Plant (380 ( )) /= (1.5) Intragroup trading (i) Cancel intra group sales/purchases: DEBIT Revenue GHS72m CREDIT Cost of sales (purchases) GHS72m (ii) Eliminate unrealised profit: DEBIT Cost of sales (72 ½ 20 ) GHS6m 0 CREDIT Inventories (SOFP) GHS6m

6 4 Final Mock Exam 1: Answers Note. As the intra-group sale was made by the subsidiary, the unrealised profit adjustment must also be reflected in the non-controlling interest. 5 Intra-group dividend The dividend received from NBT by MLT must be cancelled out on consolidation of the statement of profit or loss and other comprehensive income. DEBIT Other income (P/L)(GHS20m 60%) GHSm CREDIT Dividends paid (NBT (in SOCIE)) GHSm 6 Goodwill NBT GHSm Consideration transferred: Cash Contingent consideration (Note 2) Fair value of previously held investment (10%/40% 40) (Note 3) 10.0 Non-controlling interest (at FV) 40.0 Fair value of net assets (380.0) 90.0 Impairment loss 10% (9.0) 81.0 Notes. 1 No information was provided in respect of the goodwill on the acquisition of ONW, but as no impairment has arisen, it would have no effect in the statement of profit or loss and other comprehensive income. 2 Although the original estimate of the FV of the contingent consideration would have been used at the acquisition date, IFRS 3 Business combinations allows the figure to be adjusted through goodwill if changes arise from additional information about facts and circumstances that existed at the acquisition date (IFRS 3 para. 58). 3 The fair value of MLT s original 10% holding in NBT would be measured using the same share price as for the non-controlling interest at that date. The gain on the derecognition of the available-for-sale financial asset at the date control is obtained is therefore: GHSm Fair value at date control obtained 10 Carrying value brought down from previous year end (30.9.X4) (9) 1 to OCI 7 Fair value of ONW s investment in PLP The fair value uplift on the investment in PLP (GHS6m) that has been recognised in ONW s other comprehensive income must be eliminated on consolidation. The carrying value of the investment in associate in the consolidated statement of financial position would be based on the fair value paid at the acquisition date, plus the group share of the associate s income surplus.

7 Final Mock Exam 1: Answers 5 Question 2 Marking scheme Marks (a) Entity has choice/cash-settled due to past practice 1 Measure at FV at y/e, spread over vesting period, remove leavers 2 Change in share price after y/e = non adjusting event after reporting 2 period Calculation of expense/liability 1 Explain deferred tax 2 Calculate deferred tax 2 Available/Maximum 10 (b) CSC 1 Benefits 1 Interest on liability (9/) 2 Expected return on assets (9/) 2 Financial statement extracts 4 Available/Maximum (a) Accounting treatment for share-based payment This is a share-based payment transaction where the entity (MCN) has a choice of settlement. IFRS 2 Share-based payment requires the transaction to be treated as cash-settled if there is a present obligation to settle in cash. If there is no obligation, the transaction should be treated as equity-settled. Here, MCN's past practice of always settling in cash has created a valid expectation in employees that they will receive cash. Therefore, there is a constructive present obligation for MCN to settle in cash and MCN should account for the scheme as a cash-settled transaction. Cash-settled share-based payments are accounted for as follows: (i) An expense should be recognised over the vesting period (two years) (ii) A corresponding liability should be recorded in the statement of financial position (iii) The liability should be measured at fair value and this fair value updated each year end to give the best estimate of amount to be paid (iv) Any expected leavers over the vesting period should be removed from the number of employees as they will not receive the share-based payment (the best estimate at each year end should be used) Calculation The fair value of the liability at the year end is valued using the year end share price as this represents the cash value at that date. The liability as at 30 September 20X5 and the corresponding expense to be recognised in profit or loss for the year ended 30 September 20X5 is calculated as follows: [(30 managers 2 leavers) 6,000 shares GHS9 year end fair value ½ vested] = GHS756,000

8 6 Final Mock Exam 1: Answers (b) Event after the reporting period The post year end increase in the share price to GHS9.25 on 20 October 20X5 is a non-adjusting event after the reporting period. This is because it relates to conditions that arose after the 30 September 20X5 year end. The liability at 30 September 20X5 is not adjusted for this but the difference of GHS21,000 [28 managers 6,000 shares (GHS9.25 GHS9) ½] would be disclosed as a non-adjusting event after the reporting period if considered material. Deferred tax IAS Income taxes requires deferred tax to be recognised on temporary differences. With this cashsettled scheme, a temporary difference arises because an expense is recognised in profit or loss over the vesting period whereas a tax deduction is given at one point in time ie on exercise. The carrying amount of the share-based payment expense is zero as it has already been deducted in determining accounting profit. The tax base is calculated as the expected tax deduction on exercise (estimated by using the year end share price in this case) based on employees' services to date. GHS Carrying amount of share-based payment expense 0 Tax base (same as expense as calculated above as based on y/e price) (756,000) Temporary difference (756,000) Deferred tax asset (GHS756,000 30%) 226,800 This deferred tax asset (representing future tax relief on exercise of the instruments) should only be recognised if MCN has sufficient future taxable profits against which it can be offset. A corresponding credit is recognised in profit or loss. Pension costs STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 20X5 (EXTRACTS) Profit or loss GHS Service cost 15,500 Net interest on net defined benefit obligation: (5,243 3,267) 1,976 Charge to profit or loss 17,476 Other comprehensive income GHS Actuarial gain on defined benefit obligation 7,143 Return on plan assets (excluding amounts in net interest) (11,367) Remeasurement gains/(losses) on defined benefit pension plans (4,224) STATEMENT OF FINANCIAL POSITION FOR THE YEAR ENDED 30 SEPTEMBER 20X5 (EXTRACTS) Retirement benefit obligations GHS Present value of defined benefit pension plan obligations (119,500) Fair value of defined benefit pension plan assets 102,100 Net retirement benefit obligations (17,400)

9 Final Mock Exam 1: Answers 7 Working Assets Liabilities GHS GHS Opening balances 72, ,500 Service cost 15,500 Contributions by MCN 48,200 Benefits paid (10,600) (10,600) Interest on plan assets (72,600 6% 9/) 3,267 Interest cost (116,500 6% 9/ ) 5, ,467 6,643 Actuarial gain/(loss) on assets (bal. fig.) (11,367) Actuarial (gain)/loss on obligations (bal. fig.) Closing balances 102,100 (7,143) 119,500

10 8 Final Mock Exam 1: Answers Question 3 Marking scheme Store valuation Calculations 2 Explanation of treatment 3 Identification of other issues 2 7 Forward contract Cash flow hedge 1 At inception 1 Year end fair value 1 Gain to OCI 2 Calculations 1 6 Borrowing costs Qualifying asset 1 Explanation of interest rate 1 Amount to capitalise 1 Cessation of capitalisation 1 Sub-lease Recognise onerous contract 1 Provision 2 20 Marks To: From: Date: Subject: REPORT The Directors of SVT Accountant Today Preparation of financial statements for year ending 30 September 20X5 Terms of reference: This report considers the accounting treatment of a number issues and in particular: Revaluation losses Cash flow hedging Borrowing costs Sub-lease costs Property revaluation As SVT has a policy of carrying its supermarket properties at fair value, the values must be restated regularly (and in the case of an apparently volatile asset such as this overseas store, annually). In the year ended 30 September 20X4 a valuation gain of GHS3.6m would have been recognised in other comprehensive income. (See calculations in point 1 of Appendix 1.) In the current year the depreciation charge of GHS0.7m will have been charged to profit or loss, with the excess over the depreciation that would have been charged on the building at its historical cost transferred to income surplus. The valuation at 30 September 20X5 reveals a loss of GHS7.3m. IAS 16 restricts the amount of revaluation loss that can be charged against the capital surplus (through other comprehensive income) to the amount held in the capital surplus relating to that asset. The calculations in point 1 of Appendix 1 show that only GHS3.5m may be charged to other comprehensive income and the excess GHS3.8m must be charged to profit or loss. The other issue relating to the circumstances of this store is the possibility that it may be closed. As no decision has yet been made, there is no need to consider any implications of IFRS 5: Non-current assets held for sale and discontinued operations as no reclassification of assets is done until a sale or closure is

11 Final Mock Exam 1: Answers 9 highly probable. If a decision is made before the financial statements are approved, it may be appropriate to disclose this as a non-adjusting event after the reporting period under IAS 10 Events after the reporting period if this store is material to the group. Forward contract Given that SVT is hedging the volatility of the future cash outflow to purchase fuel, the forward contract is accounted for as a cash flow hedge, assuming all the criteria for hedge accounting are met (ie documentation at inception as a cash flow hedge, being a 'highly effective' hedge and ability to measure the effectiveness of the hedge). At inception, no entries are required as the fair value of a forward contract at inception is zero. However, the existence of the hedge is disclosed under IFRS 7 Financial instruments: disclosures. At the year end the forward contract must be valued at its fair value of GHS0. million. (See calculations in point 2 of Appendix 1.) The gain is recognised in other comprehensive income (items that may subsequently be reclassified to profit or loss) in the current year as the hedged cash flow has not yet occurred. This will be reclassified to profit or loss in the next accounting period when the cost of the petrol purchase is recognised. Borrowing costs It is correct to assume that borrowing costs can be capitalised here as the new supermarkets under construction meet the definition of qualifying assets under IAS 23 Borrowing costs. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale. In this case, there is no specific loan funding the construction of the asset, so it is not permitted to choose one individual interest rate. Instead, a rate should be calculated as the weighted average of borrowing costs outstanding during the period (excluding borrowings specifically for a qualifying asset). The amount capitalised should not exceed total borrowing costs incurred in the period. Once this weighted average has been calculated, it should be applied to the costs to date for the period from the start of the building project to the year end. Capitalisation of interest must cease when substantially all the activities necessary to prepare the asset for its intended use or sale are complete. Sub-lease costs The problem with the lease costs and the sub-letting of the buildings is an example from IAS 37 Provisions, contingent liabilities and contingent assets, of an onerous contract. The IAS states that a provision should be made for the amounts of the shortfall which in this case will be for the difference between the sub-lease rental income and the lease costs borne by SVT in the future and must be recorded in the financial statements at 30 September 20X5. Appendix 1 1 Property revaluation Carrying value Capital surplus GHSm GHSm X3 Cost (0.600) Depreciation 20 Revaluation (bal. fig) X4 Revalued c/d (0.700) Depreciation for year 19 Transfer to income surplus: ( ) (0.100) Revaluation loss (bal. fig.) X5 Revalued c/d (7.300) (3.500) To OCI (not re-classified on disposal) and 3.8 to P/L

12 10 Final Mock Exam 1: Answers Original entries: DEBIT Other comprehensive income GHS7.3m CREDIT Property, plant and equipment GHS7.3m Correct entries: DEBIT Other comprehensive income GHS3.5m DEBIT Profit or loss (bal. fig.) GHS3.8m CREDIT Property, plant and equipment GHS7.3m To correct: DEBIT Profit or loss GHS3.8m CREDIT Other comprehensive income GHS3.8m 2 Forward contract GHS'm Market price of forward contract for delivery on 31 December (10m GHS2.16) 2.16 SVT's forward price (10m GHS2.04) (2.04) Cumulative gain 0. The gain is recognised in other comprehensive income as the cash flow has not yet occurred: DEBIT Forward contract (Financial asset in SOFP) GHS0.m CREDIT Other comprehensive income GHS0.m

13 Final Mock Exam 1: Answers 11 Question 4 Marking scheme (a) Development expenditure Capitalise if IAS 38 criteria met 1 Expense otherwise 2 Amortisation 1 Court case Accounting treatment 1 Disclosure 1 (b) Granted licence Explanation 1 Calculation 1 Impairment loss Explanation 2 Calculation 2 Recognition of loss 1 Non-current assets held for sale Explanation 2 Not discontinued 1 Termination benefits 1 (c) Joint arrangement Joint venture rather than joint operation 1 Accounting treatment 1 Impairment indicator 1 Marks REPORT To: Board of Directors, FMC From: Financial Controller Date: Today Subject: Financial statements year ended 30 September 20X7 As requested this report considers the implications of various matters both internal and external to the Group for the financial statements for the year ending 30 September 20X7. (a) Development expenditure Development expenditure is only capitalised under IAS 38 Intangible assets when certain criteria demonstrating the existence of future economic benefits are met. If these are not met at the year end in relation to the two new projects or the existing development projects, all expenditure must be written off as an expense on a project by project basis. Any capitalised expenditure relating to the abandoned development project must be expensed and may require separate disclosure under IAS 1 Presentation of financial statements if material. The development expenditure relating to the drug now in commercial production should begin to be amortised on a systematic basis over its expected useful life to a nil residual value as of the date when it became 'available for use', ie when commercial production started. Court case If the chance of success of the human tester is considered possible and the amount is material, this item will be considered to be a contingent liability and a disclosure of the court case and the possible payment should be made in a note to the financial statements. If the chance of success and therefore outflow of resources embodying economic benefits is considered remote, no disclosure is necessary. (b) Granted licence Since the grant has been recognised at fair value rather than cost (nil), the grant should have been amortised to profit or loss and the asset recognised amortised over the life of the grant. This would

14 Final Mock Exam 1: Answers (c) have a nil effect on profit or loss as the amount of the grant credit would equal the amortisation of the asset. During the current year the amortisation income and expense should be recognised for seven months until the 1 May decision, ie GHS0.57m (GHS9.8m/10 7/). Now that the licence has been revoked, it and the grant should be derecognised in the financial statements. This will simply require the remaining grant to be credited against the remaining asset value. Impairment loss More serious is the necessary impairment review conducted as a result of the loss of the licence. The impairment test (see Working 1) reveals an impairment loss of GHS15m. This should be recognised first against the goodwill of GHSm with the remaining GHS3m being recognised against the other non-current assets of the unit pro-rata, but not so as to reduce any asset below its fair value less costs of disposal (or value in use if determinable). Non-current assets held for sale Any assets planned to be sold not sold by the year end will require separate classification in the statement of financial position as 'non-current assets held for sale', and written down to their fair value less costs to sell if lower than carrying amount (after performing a final revaluation if held under the revaluation model of IAS 16 Property, plant and equipment) in accordance with IFRS 5 Noncurrent assets held for sale and discontinued operations. Given that the revenues of the drug only represented 5% of the Group figure, it would not be appropriate to classify the activity as a discontinued operation. Termination benefits A provision should be made for the GHS400,000 of redundancy payments as the issue of redundancy notices in June demonstrates commitment to discontinue the cancer drug production. This is a termination benefit under IAS 19 Employee benefits and should be treated as such. Joint arrangement The joint arrangement is a joint venture under IFRS 11 Joint arrangements rather than a joint operation. This is because the parties (FMC and the competitor) have rights to the net assets (rather than rights to the assets and obligations for the liabilities) of the entity. Under IAS 28 Investments in associates and joint ventures, the joint venture must be equity accounted in the consolidated financial statements. The investment in the joint venture (cost plus share of post-acquisition reserves less impairment) is shown as a single line in the consolidated statement of financial position and a single line for each of profit or loss (group share) and component of other comprehensive income (group share) in the statement of profit or loss and other comprehensive income. Given the losses, which are an impairment indicator, an impairment test should be conducted on the investment in the joint venture at the year end and any impairment losses recognised in the financial statements. Working: Impairment loss Value in use: GHSm Year 1 1 1/ Year 2 1 1/ Year 3 1 1/ Year / Year 5 1,014 1/ Carrying value 942 Recoverable amount (927) Higher of GHS804m and GHS927m Impairment loss 15

15 Final Mock Exam 1: Answers 13 Question 5 Marking scheme Marks Format and presentation of the report 1 Recalculated ratios 4 (a) LCO Correct recognition of lease expense 1.5 Treatment of start-up costs 1.5 (b) PSN Calculation of correct carrying value and interest (per IAS 39 2 amortised cost) Calculation of discounted PV, CV and interest on fair value basis 2 Correction of treatment of post-completion interest 1 Effect on depreciation 1 (c) ISL Definition of subsidiary 1 Consideration of factors which might lead to it being treated as a 2 subsidiary Consolidate as subsidiary with 50% NCI 1 (d) JEB Inappropriate depreciation policy 1 Calculation of revised figures 1 20 To: From: Date: Subject: REPORT The non-executive directors of LGR A Accountant 10 June 20X7 Financial Statements and Performance measures for the year ended 31 May 20X7 We have reviewed the specified accounting treatments as requested and present our views as to their acceptability. We have also identified changes which may be required in future if current proposals from the standard setters become mandatory. Appendix 1 contains a revised schedule of ratios. Appendix 2 contains supporting calculations. (a) LCO Operating lease This operating lease has the incentive of a rent-free period in the first year. Such incentives should be recognised as a reduction in the overall payments under the lease in order to apply the accruals concept in the IASB's Conceptual Framework for Financial Reporting. The benefit should be spread over the life of the lease (normally straight-line). An expense of GHS320,000 (Appendix 2 (2)) should be accrued for the year ended 31 May 20X7. Start-up costs IAS 38 Intangible assets deals with accounting for start-up costs. Assuming LCO s costs are not related to the purchase of tangible equipment then they may not be recognised as an asset, as no intangible or other asset is acquired or created that can be recognised. The amount should be written off to profit or loss.

16 14 Final Mock Exam 1: Answers (b) (c) (d) PSN Conclusion Bond and capitalised interest The bond should be held at amortised cost not fair value under IAS 39 Financial instruments: recognition and measurement as it is not a liability held for trading. This would result in a bond valuation of GHS3,898,000 rather than GHS3,793,000 reported as a non-current liability (Appendix 2(3)). This will require a reversal of a GHS105,000 gain on revaluation of the bond reported in profit or loss. Under IAS 23 Borrowing costs interest on borrowings to finance the construction of a qualifying asset (ie those that necessarily take a period of time to get ready for their intended use) must be capitalised for assets during the period in which activities that are necessary to prepare the asset for its intended use are in progress. The company raised finance specifically to finance this project and is right therefore to capitalise the borrowings costs as part of the cost of the building. Strictly, however, the three months' interest arising since completion of the project on 28 February 20X7 should be written off to profit or loss, which reduces profit by a further GHS67,750 (Appendix 2(3)). The offsetting amount of excess depreciation which has been charged is immaterial (Appendix 2(3)). As both of these are finance items, profit before interest and tax is unaffected. However, both items affect equity and the bond valuation affects long-term loans. ISL On the basis of the equity shareholdings ISL would appear to be a joint arrangement, but the substance of the arrangement also needs to be considered. IFRS 10 Consolidated financial statements defines a subsidiary as 'an entity that is controlled by another entity'. Control arises where the investor has power over the investee giving it the current ability to direct the relevant activities; is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Here, the contractual agreement giving LGR the right to make management decisions regarding the ten shops is evidence that LGR has the power to direct the relevant activities of ISL. LGR is also exposed to variable returns in the form of dividends from its 50% equity shareholding in ISL and the contractual agreement gives LGR the ability to affect those returns. Furthermore, evidence of whether control exists is often demonstrated by which party is exposed to the benefits and risks. Here, the fact that LGR has guaranteed the borrowings of ISL is an indication that LGR is exposed to the risks of ISL. It would appear that the commercial intentions of the two parties here are: (i) LGR to raise 'off-balance sheet' finance (ii) ZCF to make a lenders return Therefore ISL should be fully consolidated as a subsidiary. As a 50% non-controlling interest will be included there is no change to income surplus or profit for the year, but its borrowings will be included in the group total. JEB IAS 16 Property, plant and equipment requires that depreciation be allocated on a systematic basis over the asset s useful life reflecting the pattern in which the asset s economic benefits are consumed. This would require depreciation (to apply the accruals concept) over the whole 40-year lease term over which economic benefits are generated rather than over in the last 10 years of the lease. Consequently, this policy should be changed giving a depreciation expense, and corresponding reduction in property, plant and equipment of GHS50,000 (Appendix 2 (4)). The effect of the above amendments is to worsen ROCE to 10.7% and increase gearing to 49%. Appendix 1 Revised indicators (figures from Appendix 2 (1)) GHS7,640 Return on capital employed = 10.7% GHS47,707 GHS23,405 GHS23,405 Gearing 49% GHS47,707

17 Final Mock Exam 1: Answers 15 Calculations 1 Adjusted figures for ratios Appendix 2 Profit before interest and tax Equity Long-term loans GHS 000 GHS 000 GHS 000 Per draft financial statements 8,360 48,600 21,100 Operating lease (App 2 (2)) (320) (320) Start-up costs (Note (a) of report) (350) (350) Interest incorrectly capitalised (App 2 (3)) (68) Gain on bond incorrectly credited (App 2 (3)) (105) 105 Consolidation of subsidiary 2,200 Leasehold depreciation (App 2 (4)) (50) (50) 2 Operating lease Total payable GHS200,000 8 = GHS1,600,000 Annual expense GHS1,600,000/5 = GHS320,000 3 Bond and capitalised interest 7,640 47,707 23,405 Correct amortised cost treatment GHS X6 Loan raised: net proceeds [GHS4,000, %] 3,867 Interest to X7 (7%) 271 Coupon interest paid [GHS4m 6%] (240) Amortised cost valuation 3,898 Incorrect fair value through profit or loss treatment GHS X6 (as above) 3,867 Interest to X7 (7%) 271 Interest paid (240) gain reported in profit or loss (105) Fair value of bond at X7* 3,793 * Time Cash flows Discount factor Present value GHS 000 GHS (240) (4,000) 1 3, ,793 3 months' interest (GHS271,000 3 ) = GHS67,750 (same under both valuation methods) Related correction to depreciation = GHS567 (immaterial) 4 Depreciation of leasehold properties GHS2m 40 = GHS50,000

18 16 Final Mock Exam 1: Answers

19 Notes

20 Notes