APPLICATION LEVEL EXAMINATION

2024-2029 Syllabus

Mock Exam

FINANCIAL REPORTING
Paper 2.1

Page 1 of 24
 QUESTION ONE

The draft statements of financial position of three companies as on 30 September 2024 are as
follows.
Handel Schubert Albinoni
Plc Ltd Ltd
Assets GH¢ GH¢ GH¢
Non-current assets
Property, plant and equipment 697,210 648,010 349,400
Investments:
160,000 shares in Schubert Ltd 562,000 – –
80,000 shares in Albinoni Ltd 184,000 – –
Current assets
Cash 101,274 95,010 80,331
Trade receivables 385,717 320,540 251,065
Inventory 495,165 388,619 286,925
————— ————— ————–
2,425,366 1,452,179 967,721
————— ————— ————–
Equity and liabilities
Share capital 600,000 200,000 200,000
Retained earnings 1,050,000 850,000 478,000
————— ————— ————–
1,650,000 1,050,000 678,000

Current liabilities 375,366 252,179 189,721

Non-current liabilities 400,000 150,000 100,000

————— ————— ————–
2,425,366 1,452,179 967,721
————— ————— ————–

You are given the following additional information.

i) Handel Plc purchased the 80% shareholding in Schubert Ltd on 13 October 2019 when
Schubert’s retained earnings were GH¢500,000. The non-controlling interest was measured
using the proportionate method (as a percentage of the net assets of Schubert Ltd).
ii) The 40% shareholding in Albinoni Ltd were acquired on 11 May 2019 when Albinoni’s
retained earnings stood at GH¢242,000.
iii) The following dividends have been declared but not paid or accounted for before the year end.
GH¢
Handel Plc 65,000
Schubert Ltd 30,000
Albinoni Ltd 15,000

iv) Included in the inventory figure for Albinoni Ltd is inventory measured at GH¢20,000 which
had been purchased from Handel Plc at cost plus 25%.

Page 2 of 24
v) Included in the current liabilities figure of Handel Plc is GH¢18,000 payable to Albinoni Ltd,
the amount receivable being recorded in the receivables figure of Albinoni Ltd.

Required:
Prepare the consolidated statement of financial position for the Handel Plc group as on 30
September 2024. (20 marks)

Page 3 of 24
 QUESTION TWO

Kumasi Bio Plc is a bio-technology company performing research for pharmaceutical

companies. The finance director has contacted your financial consulting company to arrange a
meeting to discuss five issues relevant to the preparation of the financial statements for the
year to 30 June 2022. Your initial telephone conversation has provided the necessary
background information.

a) On 1 August 2021 Kumasi Bio Plc began investigating a new bio-process. On 1 September
2022, the new process was widely supported by the scientific community and the feasibility
project was approved. A grant was then obtained relating to future work. Several
pharmaceutical companies have expressed an interest in buying the ‘know how’ when the
project completes in June 2023. The nominal ledger account set up for the project shows that
the expenditure incurred between 1 August 2021 and 30 June 2022 was GH¢300,000 per
month.

b) On 30 September 2021 an item of plant was taken out of productive use. The plant manager
instructed an agent to sell the plant for no less than GH¢175,000. The agent is entitled to a
commission of 4% on the selling price. The item is still held in the non-current asset register
and the entry shows it was purchased on 1 July 2012 for GH¢260,000 with an estimated useful
life of five years and a residual value of GH¢60,000. The carrying amount of the plant at 30
June 2022 was GH¢140,000.

c) In August 2022, an employee lodged a legal claim against the company for damage to his
health as a result of working for the company for the two years through to 31 March 2021 when
he had to retire due to ill health. He has argued that his health deteriorated as a result of the
stress from his position in the organisation. Kumasi Bio Plc has denied the claim and has
appointed an employment lawyer to assist with contesting the case. The lawyer has advised
that there is a 25% chance that the claim will be rejected, 50% chance that the damages will be
GH¢600,000 and 25% chance of GH¢1 million. The company has an insurance policy that will
pay 10% of any damages to the company. The lawyer has said that the case could take until 30
June 2018 to resolve. The present value of the estimated damages discounted at 8% is
GH¢476,280 and GH¢793,800 respectively.

d) Kumasi Bio Plc owns several buildings, which include an administrative office in the centre
of Accra. The company revalues these on a regular basis every five years and the next valuation
is due on 30 June 2024. Property prices have increased since the last review and particularly
for the Accra premises. The cost of engaging a professionally qualified valuer is very expensive
and so to reduce costs the finance director is proposing that the property manager, who is a
professionally qualified valuer, should value the Accra property and that the increase in value
should be included in the financial statements. The finance director is of the opinion that
property prices may fall next year.

Page 4 of 24
Required:
Prepare notes for your meeting with the finance director which explain and justify the
accounting treatment of these issues, preparing calculations where appropriate and identifying
matters on which you may require further information.
(20 marks)

Page 5 of 24
QUESTION THREE

Badu Trading Ltd has prepared the following draft financial statements for your review
Badu Trading Ltd: Statement of profit or loss for year to 31 August 2023
GH¢000
Revenue 30,000
Raw materials consumed (9,500)
Manufacturing overheads (5,000)
Increase in inventories of work in progress and finished goods 1,400
Staff costs (4,700)
Distribution costs (900)
Depreciation (4,250)
Interest payable (350)
Interim dividend paid (200)
––––––
6,500
––––––
Statement of financial position as at 31 August 2023
GH¢000 GH¢000
Assets
Non current assets
Freehold land and buildings 20,000
Plant and machinery 14,000
Fixtures and fittings 5,600
–––––––
39,600
Current assets
Prepayments 200
Trade receivables 7,400
Inventories 700
Cash at bank 4,600
––––––– 12,900
–––––––
Total assets 52,500
–––––––
Equity and liabilities
Equity shares 21,000
Revaluation surplus 5,000
Retained earnings 14,000
Share deals account 2,000
–––––––
Total equity 42,000
Current liabilities 5,300

Non-current liabilities
8% Debentures 2022 5,200

Page 6 of 24
 –––––––
Total equity and liabilities 52,500
–––––––

Additional information:
i) Income tax of GH¢2.1 million has yet to be provided for on profits for the current year. An
unpaid under-provision for the previous year’s liability of GH¢400,000 has been identified
on 5 September 2023 and has not been reflected in the draft accounts.
ii) There have been no additions to, or disposals of, non-current assets in the year but assets
under construction at the start of the year were completed in the year at an additional cost of
GH¢50,000. These related to plant and machinery.
The cost and accumulated depreciation of non-current assets as at 1 September 2022 were as
follows:
Cost Depreciation

GH¢000 GH¢000
Freehold land and buildings 19,000 3,000
(land element GH¢10 million)
Plant and machinery 20,100 4,000
Fixtures and fittings 10,000 3,700
Assets under construction 400 -

iii) There was a revaluation of land and buildings during the year, creating the revaluation
surplus of GH¢5 million (land element GH¢1 million). The effect on depreciation has been to
increase the buildings charge by GH¢300,000. Badu Trading Ltd adopts a policy of
transferring the revaluation surplus included in equity to retained earnings as it is realised.

iv) Staff costs comprise 70% factory staff, 20% general office staff and 10% goods delivery staff

v) An analysis of depreciation charge shows the following:

GH¢000
Buildings (50% production, 50% administration) 1,000
Plant and machinery 2,550
Fixtures and fittings (30% production, 70% administration) 700

Required:
Prepare the following information in a form suitable for publication for Badu Trading Ltd’s
financial statements for the year ended 31 August 2023.
a) Statement of profit or loss and other comprehensive income, with expenses analysed by
function (7 marks)
b) Statement of financial position (7 marks)
c) Statement of changes in equity (6 marks)

(Total: 20 marks)

Page 7 of 24
QUESTION FOUR

The statements of profit or loss and statements of financial position of two manufacturing
companies in the same sector are set out below for the year ended 31 December 2023.

Chris Caroline
Ltd Ltd
GH¢ GH¢
Revenue 150,000 700,000
Cost of sales (60,000) (210,000)
–––––––– ––––––––
Gross profit 90,000 490,000
Distribution costs (13,000) (72,000)
Administrative expenses (15,000) (35,000)
Interest payable (500) (12,000)
–––––––– ––––––––
Profit before tax 61,500 371,000
Income tax expense (16,605) (100,170)
–––––––– ––––––––
Profit for the period 44,895 270,830
–––––––– ––––––––

Chris Ltd Caroline Ltd

GH¢ GH¢ GH¢ GH¢
Assets
Non-current assets
Property - 500,000
Plant and equipment 190,000 280,000
–––-–––– 190,000 ––––––– 780,000
Current assets
Inventories 12,000 26,250
Trade receivables 37,500 105,000
Cash at bank 500 22,000
––––––– 50,000 ––––––– 153,250
––––––– –––––––
Total assets 240,000 933,250
––––––– –––––––
Equity and liabilities
Equity
Share capital 156,000 174,750
Retained earnings 51,395 390,830
––––––– 207,395 ––––––– 565,580
Non-current liabilities
Long-term debt 10,000 250,000

Current liabilities

Page 8 of 24
 Trade payables 22,605 117,670
––––––– –––––––
Total equity and 240,000 933,250
liabilities
––––––– –––––––

Required:
Use ratio analysis to compare the profitability, efficiency/liquidity and solvency of the two
entities. State, giving reasons, which is the stronger company in each case.
(20 marks)

Page 9 of 24
QUESTION FIVE

a) The IASB’s Conceptual Framework defines assets and explains the criteria that should be met
before an asset should be recognised in the financial statements.

Required:
Explain the recognition criteria for assets set out in the IASB’s Conceptual Framework and
explain why some items meet the definition of an asset might not be recognised. (6 marks)

b) Companies are increasingly expected to prepare reports explaining how sustainability issues
affect them and how their business and operations affect the environment and society around
them.

Required:
Explain how the IFRS Foundation has addressed the global move towards reporting on
sustainability issues. (4 marks)

c) On 30 September 2024 Skyward Ltd entered into a lease agreement to obtain the use of a
machine. The agreement stipulated a lease term of eight years with payment of GH¢150,000
due at the end of each year of the term, however it also included a clause allowing Skyward to
terminate the lease after five years in exchange for a one-off payment of GH¢200,000. At the
commencement of the lease Skyward Ltd expected to exercise the early termination option.
Skyward Ltd paid GH¢7,500 legal fees to negotiate the lease. The interest rate implicit in the
lease cannot be readily determined.

Required:
Explain how Skyward Ltd should recognise the lease in its statement of financial position
prepared as at 30 September 2024 in accordance with IFRS: 16 Leases. (5 marks)

d) List the FIVE fundamental principles set out in the IESBA Code of Ethics and the FIVE
categories of threats to these fundamental principles. (5 marks)

(Total: 20 marks)

Page 10 of 24
SOLUTION TO QUESTIONS

QUESTION ONE
Handel Plc
(a) Consolidated statement of financial position as at 30 September 2024
GH¢ GH¢
Assets
Non-current assets
Property, plant and equipment
(697,210 + 648,010) 1,345,220
Interest in associate (W6) 270,800
Goodwill 2,000
————–
1,618,020
Current assets
Inventory (495,165 + 388,619) 883,784
Receivables (385,717 + 320,540 + 6,000) 712,257
Cash at bank and in hand (101,274 + 95,010) 196,284
————–
1,792,325
————–
Total assets 3,410,345
————–

GH¢
Equity and liabilities
Capital and reserves
Share capital 600,000
Retained earnings (W5) 1,357,800
————–
1,957,800
Non-controlling interest 204,000

Non-current liabilities (400,000 + 150,000) 550,000

Current liabilities
Trade payables (375,366 + 252,179) (note 2) 627,545
Declared dividends – parent company 65,000
– non-controlling interest 6,000
————–
698,545
————–
Total equity and liabilities 3,410,345
————–

Page 11 of 24
Workings
(1) Group structure

Handel

80% 40%

Schubert Albinoni

(2) Net assets

Schubert
Reporting Acquisition Post
date date acquisition
GH¢ GH¢ GH¢ GH¢ GH¢
Share capital 200,000 200,000

Retained 500,0
earnings 850,000 00
Declared
dividend (30,000)
——
———– —–
820,000 500,000 320,000
———––– ——–—–

1,020,000 700,000
———––– ———––

(3) Goodwill
Schubert
GH¢
Consideration 562,000
Non-controlling interest (20% x 700,000 (W2)) 140,000
Net assets of Schubert Ltd at acquisition (700,000)
————
2,000
———–
(4) Non-controlling interest
Non-controlling interest at acquisition (W3) 140,000

Page 12 of 24
 Share of post-acquisition profits (20%  320,000) 64,000
(W2) _______
204,000
————
(5) Retained earnings
GH¢
Handel 1,050,000
Dividends receivable – Schubert (80%  24,000
30,000)
– Albinoni (40%  15,000) 6,000
Declared dividend (65,000)
————–
1,015,000
Schubert (80%  320,000 (W2)) 256,000
Albinoni (W6) 88,400
Unrealised profit (W7) (1,600)
————–
1,357,800
————–

Page 13 of 24
 (6) Investment in associate
GH¢000
Cost 184,000
Share of post-acquisition profit
(40%  [ (478 − 15) − 242) 88,400
Unrealised profit (W7) (1,600)
————–
270,800
————–
(7) Unrealised profit
GH¢
Step 1 – Unrealised profit
GH¢20,000 × 25/125 4,000

Step 2 – H’s share

GH¢4,000  40% 1,600

Step 3 – Double entry

Dr Retained earnings 1,600
Cr Investment in associate 1,600

(20 marks evenly spread using ticks)

Page 14 of 24
QUESTION TWO

Kumasi Bio Plc

a) Development expenditure
IAS 38 on intangibles requires that research and development be considered separately:
research – must be expensed as incurred
development – must be capitalised where certain criteria are met.
It must first be clarified how much of the GH¢3 million incurred to date (10 months at
GH¢300,000) is simply research and how much is development. The development
element will only be capitalised where the IAS 38 criteria are met. The criteria are listed
below together with the extent to which they appear to be met.
The project must be believed to be technically feasible. This appears to be so as the
feasibility has been acknowledged.
There must be an intention to complete and use/sell the intangible. Completion is
scheduled for June 2023
The entity must be able to use or sell the intangible. Interest has been expressed in
purchasing the know-how on completion
It must be considered that the asset will generate probable future benefits. Confirmation
is required from Kumasi Bio Plc as to the extent of interest shown by the pharmaceutical
companies and whether this is of a sufficient level to generate orders and to cover the
deferred costs.
Availability of adequate financial and technical resources must exist to complete the
project. The financial position of Kumasi Bio Plc must be investigated. A grant is being
obtained to fund further work and the terms of the grant, together with any conditions,
must be discussed further.
Able to identify and measure the expenditure incurred. A separate nominal ledger
account has been set up to track the expenditure.
If all of the above criteria are met, then the development element of the GH¢3m incurred
to date must be capitalised as an intangible asset. Amortisation will not begin until
commercial production commences.
(5 marks)

Page 15 of 24
b) Non-current asset held for sale
IFRS 5 on non-current assets held for sale and discontinued operations requires that
where a non-current asset is being held for sale, rather than for continued use in the
business, it must be re-classified in the statement of financial position, re-measured and
depreciation must cease to be charged.
For the asset to be classified as “held for sale” it must be available for immediate sale in
its present condition and the sale must be highly probable. This requires that:
The appropriate level of management are committed to the plan
An active programme is underway to locate a buyer
The asset is being marketed at a price that is reasonable in relation to its fair value
Completion of the sale is anticipated within one year of classification.
From the information provided, an agent has been instructed by the plant manager, which
suggests that the organisation is committed to the plan to sell the asset. Confirmation is
required that the price of GH¢175,000 is reasonable in relation to fair value. The asset
has been out of use now for 9 months and this may suggest that the target price is too
high and that a sale may not be achieved within the year.
If reassurance as to the above conditions can be obtained, the asset must be reclassified
in the statement of financial position as “Non-current assets held for sale”, positioned
under current assets. It should be re-measured to GH¢168,000 being the lower of carrying
amount (GH¢170,000 see below) and fair value less costs to sell (GH¢175,000 x 96%).
The write down of GH¢2,000 should be charged to the profit or loss for the year.
Depreciation should cease from the date of classification.
Workings
The fair value less cost to sell is GH¢175,000 – 4% agents fees = GH¢168,000
Annual depreciation is:
Cost GH¢260,000
Residual value GH¢ 60,000
Depreciable amount GH¢200,000
Useful life 5 years
Annual depreciation GH¢40,000
The current carrying amount of GH¢140,000 shows that the asset has received three
years of depreciation by the 30 June 2022 (GH¢260,000 less (3  GH¢40,000)). If
classified as held for sale, depreciation should have ceased on 30 September 2022 and
9 months of depreciation should be added back (9/12  GH¢40,000 = GH¢30,000), giving
a revised carrying value of GH¢170,000.
(5 marks)

Page 16 of 24
c) Provision
Although the claim was made after the reporting period, IAS 10 considers this to be an
adjusting event after the reporting period. The employment of the individual dates back
to 2012 and so the lawsuit constitutes a current obligation for the payment of damages
as a result of this past event (the employment).
The amount and the timing are not precisely known but the likelihood of payment of
damages by Kumasi Bio Plc is probable and so a provision should be made for the
estimated amount of the liability, as advised by the lawyer. Disclosure, rather than
provision, would only be appropriate if the expected settlement was possible or remote,
and the lawyer’s view is that a payment is more likely than not.
It is not appropriate to calculate an expected value where there is only one event, instead
a provision should be made for the most likely outcome. The lawyer has various views on
the possible pay-out, but the most likely pay-out is GH¢600,000 as this has a 50%
probability. As settlement of the provision is not anticipated until 2018, the provision
should be discounted at 8% to give a liability of GH¢476,280.
Provided that the payment from the insurance company is virtually certain, this should be
shown as an asset, also at its discounted value of GH¢47,628, being 10% of the provision.
In both cases the discounting should be unwound over the coming three years through
profit or loss.
(5 marks)

d) Revaluation
IAS 16 on Property, Plant and Equipment does not impose a frequency for updating
revaluations. It simply requires a revaluation where it is believed that the fair value of the
asset has materially changed. Hence, if in the past there have been material differences
between the carrying amount and fair value at the 5 yearly review then Kumasi Bio Plc
should consider having more frequent valuations following on from this year’s valuation.
Revaluations should be regular and not timed simply when property prices are at a peak.
It is not acceptable for Kumasi Bio Plc to defer its next revaluation while values are low.
If property prices do fall in 2023, then it may be necessary to perform an impairment test
in accordance with IAS 36: Impairment of Assets.
If it is believed that an asset’s fair value has moved materially, then all assets in that class
must be revalued. Hence it is not sufficient for Kumasi Bio Plc to just revalue the Accra
property.
IAS 16 does not require the valuation to be performed by an external party, and so the
use of the property manager to conduct the valuations is acceptable. Notes to the financial
statements will disclose that he is not independent of the company.
(5 marks)
(Total: 20 marks)

Page 17 of 24
QUESTION THREE

Badu Trading Ltd

(a) Statement of profit or loss and other comprehensive income for the year
ended 31 August 2023
GH¢000
Revenue 30,000
Cost of sales (w1) (19,650)
––––––
Gross profit 10,350
Distribution costs (w1) (1,370)
Administrative expenses (w1) (1,930)
––––––
Profit from operations 7,050
Finance costs (350)
––––––
Profit before tax 6,700
Tax (w2) (2,500)
––––––
Profit after tax 4,200
Other comprehensive income
Gain on property revaluation 5,000
Total comprehensive income 9,200
––––––
(b) Statement of financial position as at 31 August 2023
GH¢000 GH¢000
Assets
Non-current assets
Property, plant and equipment 39,600
Current assets
Inventory 4,600
Trade and other receivables (7,400 + 200) 7,600
Cash and cash equivalents 700
12,900
–––––––
Total assets 52,500
–––––––
Equity and liabilities
Capital and reserves
Equity shares 21,000
Share premium 2,000
Revaluation surplus 4,700
Retained earnings 11,800
–––––––
Total equity 39,500
Non-current liabilities
Borrowings 5,200
Current liabilities
Trade and other payables 5,300
Taxation (2,100 + 400) 2,500

Page 18 of 24
 7,800
–––––––
Total equity and liabilities 52,500
–––––––

C) Statement of changes in equity for the year ended 31 August 2023

Share Revaluation Retained
capital Share Deals surplus earnings Total
GH¢000 GH¢000 GH¢000 GH¢000 GH¢000

Balance at beginning of year 21,000 2,000 0 7,500 30,500

Dividends paid (200) (200)
Profit for the period 4,200 4,200
Other comprehensive income 5,000 5,000
Transfer of excess depreciation on
revaluation (300) 300 0
––––––– ––––––– ––––––– ––––––– ––––––
Balance at end of year 21,000 2,000 4,700 11,800 39,500
––––––– ––––––– ––––––– ––––––– ––––––

Workings
1 Allocation of expenses
Cost of Admin Distrib
sales
GH¢000 GH¢000 GH¢000
Raw materials consumed 9,500
Manufacturing overheads 5,000
Increase in inventories (1,400)
Staff costs (70%/20%/10%) 3,290 940 470
Distribution costs 900
Depreciation
Building (50%/50%) 500 500
Plant and machinery 2,550
Fixtures and fittings (30%/70%) 210 490
–––––– –––––– ––––––
19,650 1,930 1,370
–––––– –––––– ––––––
2 Retained earnings brought forward
GH¢000 GH¢000
Retained earnings carried forward per question 14,000
Less tax charge
- Current year estimate 2,100
- Underprovision in previous year 400
––––– (2,500)
Add transfer of excess depreciation on revalued building 300
––––––
11,800
––––––

(20 marks evenly spread using ticks)

Page 19 of 24
QUESTION FOUR

Analysis
Profitability
The return on capital employed achieved by Chris Ltd (28.5%) is substantially lower than
that achieved by Caroline Ltd (47%). This variation in performance is also seen at the
gross profit (60% compared to 70%) and net profit levels (30% compared to 39%).
The variation in gross profit percentage could be caused by differences in sales mix,
inventory valuation methods or mark-up.
Since these entities operate in the same sector it is unlikely that their selling prices differ
significantly. However, Caroline Ltd, as a much larger entity, may be able to negotiate
better prices from its suppliers.
Caroline Ltd is also more efficient at using its assets. It is generating 85c per GH¢1 of
assets whereby Chris Ltd is only generating 70c per GH¢1.

Efficiency/liquidity
The liquidity of both entities appears satisfactory, although Caroline Ltd has less funds
tied up in its current assets. Caroline Ltd is also more efficient at collecting its debts (55
days compared to Chris Ltd’s 91 days), and takes a longer credit period from its suppliers.
Solvency
Caroline Ltd is much more highly geared than Chris Ltd (44% compared to 4.8%). Caroline
Ltd has the ability to raise debt more easily because of its greater profitability and its
property, on which debt can be secured. Both companies can easily cover their interest
payments suggesting that neither entity’s debt is at risk.
Conclusion: Caroline Ltd is the stronger entity.

Ratios
Chris Caroline
Gross profit % W1 60% 70%
Net profit % W2 30% 39%
Return on capital employed W3 28.5% 47%
Asset turnover W4 0.7 times 0,85 times
Current ratio W5 2.2 times 1.3 times
Quick ratio W6 1.7 times 1.1 times
Receivables days W7 91 days 55 days
Payables days W8 137 days 204 days
Inventory days W9 73 days 46 days
Gearing ratio W10 4.8% 44%
Interest cover W11 124 times 32 times
(20 marks evenly spread using ticks)

Page 20 of 24
Workings
W1 Gross profit%
Gross profit
Gross profit margin =  100
Sales

Chris Caroline
Chris: (90,000/150.000) × 100 60%
Caroline: (490,000/700,000) × 100 70%

W2 Net profit%
Net profit
Net profit margin =  100
Sales
Chris Caroline
Chris: (44,895/150.000) × 100 30%
Caroline: (270,830/700,000) × 100 39%

W3 Return on capital employed

Profit before interest and tax
ROCE = Share capital and reserves + Long term  100
debt
Chris Caroline
Chris: (62,000 (W13)/217,395 (W12)) × 100 28.5%
Caroline: (383,000 (W13)/815,580 (W12)) × 100 47%

W4 Asset turnover
Sales
Asset turnover = Share capital and reserves + Long term
debt
Chris Caroline
Chris: (150,000/217,395 (W12)) × 100 0.7 times
Caroline: (700,000/815,580 (W12)) × 100 0.85 times

W5 Current ratio
Current assets
Current ratio =
Current liabilities
Chris Caroline
Chris: 50,000/22,605 2.2 times
Caroline: 153,250/117,670 1.3 times

W6 Quick ratio
Current assets less inventory
Quick ratio =
Current liabilities
Chris Caroline
Chris: (50,000 – 12,000)/22.605 1.7 times
Caroline: (153,250 – 26,250)/117,670 1.1 times

Page 21 of 24
W7 Receivables days
Trade receivables
Receivable days = × 365
Sales
Chris Caroline
Chris: (37,500/150,000) × 365 91 days
Caroline: (105,000/700,000) × 365 55 days

W8 Payables days
Trade payables
Payables days = × 365
Cost of sales
Chris Caroline
Chris: (22,605/60,000) × 365 137 days
Caroline: (117,670/210,000) × 365 204 days

W9 Inventory days
Inventory
Inventory days = × 365
Cost of sales
Chris Caroline
Chris: (12,000/60,000) × 365 73 days
Caroline: (26,250/210,000) × 365 46 days

W10 Gearing ratio

Long term debt
Gearing ratio =  100
Share capital and reserves

Chris Caroline
Chris: (10,000/207,395 (W12)) × 100 4.8%
Caroline: (250,000/565,580 (W12)) × 100 44%

W11 Interest cover

Profit before interest and tax
Interest cover =
Interest
Chris Caroline
Chris: 62,000 (W13)/ 500 124 times
Caroline: 383,000 (W13)/12,000 32 times

W12 Share capital and reserves + long term debt

Chris Caroline
Share capital 156,000 174,750
Reserves 51,395 390,830
207,395 565,580
Long term debt 10,000 250,000
217,395 815,580

W13 Profit before interest and tax

Chris Caroline
Profit before tax 61,500 371,000
Add back interest 500 12,000
62,000 383,000

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QUESTION FIVE

(a) Recognition criteria for assets in the IASB’s Conceptual Framework

Only items that meet the definition of an asset, a liability or equity are recognised in
the statement of financial position.
However, not all items that meet the definition of one of those elements are
recognised. An asset is recognised only if recognition of that asset provides users
of financial statements with information that is useful, i.e. with: relevant information
about the asset and about any resulting income, expenses or changes in equity;
and a faithful representation of the asset and of any resulting income, expenses or
changes in equity.
Information about an asset may not be relevant when there is uncertainty about its
existence or when there is only a low probability of an inflow of economic benefits
in respect of that asset.
Whether a faithful representation can be provided may be affected by the level of
measurement uncertainty associated with the asset.
Specific rules in the standards provide additional guidance which results in the
recognition of assets that meet these requirements. For example, IAS 38 Intangible
Assets contains more detailed recognition guidance for the recognition of intangible
assets, including those that are internally generated assets. This latter guidance
attempts to ensure that internally generated assets are recognised when there is a
degree of certainty about its existence and that it can be measured reliably.
(6 marks)
(b) IFRS Foundation and sustainability reporting
Over several years, different bodies and organisations have issued guidance on
corporate sustainability reporting. As a result there was no single globally accepted
set of standards or sources of guidance.
The IFRS Foundation is seeking to address this and set up the International
Sustainability Standards Board (ISSB) in 2021. Its aim is to develop a global
baseline of sustainability disclosure standards. These will complement IFRS
Accounting Standards issued by the IASB.
To date the ISSB has issued two IFRS Disclosure Standards, with the first providing
a general framework for sustainability disclosure and the second applying this to
climate-related issues.
Both Standards require the disclosure of sustainability-related risks and
opportunities, which allows users to understand both negative and positive effects
of sustainability issues on a company.
(4 marks)

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c) Lease agreement
Skyward Ltd is the lessee and should recognise a lease liability and right-of-use asset
in respect of the leased machine on 30 September 2024.
The lease liability is measured at the present value of future lease payments over the
lease term. The lease term in the agreement is eight years, however Skyward Ltd
expects to exercise an early termination option after five years. Therefore, the future
lease payments to be discounted are the GH¢150,000 payments due at the end of
each of the five years of the expected term plus the GH¢200,000 termination penalty.
The payments should be discounted at the interest rate implicit in the lease, however
as this cannot be determined, Skyward Ltd’s incremental borrowing rate should be
used. In the statement of financial position, the total lease liability should be presented
split between current and non-current elements.
Skyward should measure the right-of-use asset on 30 September 2024 at an amount
equal to the initial measurement of the lease liability plus the initial direct costs of
GH¢7,500. This should be presented as a non-current asset in the statement of
financial position.
(5 marks)
d) Fundamental principles
 Integrity
 Objectivity
 Professional competence and due care
 Confidentiality
 Professional behaviour

Threats to the fundamental principles

Self-interest threat
Self-review threat
Advocacy threat
Familiarity threat
Intimidation threat
(5 marks)

(Total: 20 marks)

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