ICAN 2022 Corporate Reporting | Mixed

The draft financial statements of Gbola Limited group and its investee companies Tanko Limited and Eze Limited at December 31, 2018 are shown below: Draft statements of profit or loss for the year ended December 31, 2018. Gbola Limited Tanko Limited Eze Limited N’ 000 N’000 N’000 Revenue 17,070 7,320 2,235 Cost of sales (8,640) (3,210) (885) Gross profit 8,430 4,110 1,350 Other operating expenses (2,070) (810) (600) Profit from operations 6,360 3,300 750 Interest expense (570) (660) (210) Profit before tax 5,790 2,640 540 Income tax expense (810) (360) (90) Profit for the year 4,980 2,280 450 Draft statements of financial position as at December 31, 2018 Gbola Limited Tanko Limited Eze Limited N’000 N’000 N’000 N’000 N’000 N’000 Non-current assets: Property, plant and equipment 10,350 12,180 10,680 Investments 29,250 39,600 12,180 10,680 Current assets: Inventories 10,500 8,910 840 Receivables 15,000 4,200 1,950 Cash and cash equivalents 5,625 1,875 225 Total current assets 31,125 14,985 3,015 Total assets 70,725 27,165 13,695 Equity and liabilities: Equity: Share capital (ordinary shares of N1 each) 28,125 12,000 7,500 Reserves 16,875 10,350 2,400 Total equity 45,000 22,350 9,900 Non-current liabilities: 7% Loan notes 4,500 3,000 750 Current liabilities: Trade payables 20,250 1,515 2,820 Current income tax 975 300 225 21,225 1,815 3,045 Total equity and liabilities 70,725 27,165 13,695 Additional information (i) On January 1, 2014, Gbola Limited acquired 9,000,000 ordinary shares in Tanko Limited for N23,250,000 when the reserves of Tanko Limited were N3,000,000. (ii) A new asset with a fair value of N1,500,000 was acquired during the year under a lease agreement by Gbola Limited. A clause in the lease agreement stipulated that N300,000 payments must be paid on December 31, each year for six years, starting from December 31, 2018. The interest rate implicit in the lease is 5.47%. Gbola Limited treated this as an operating expense; because the only accounting entry that the company believes must be made in relation to this asset is the N300,000 payment it has made. (iii) Gbola Limited had an intangible asset of N750,000 for software in its statement of financial position. The directors of Gbola Limited believed that the software will have no recoverable value at the date of acquisition and Tanko Limited wrote it off shortly after its acquisition. (iv) At the date of acquisition of Tanko Limited, the carrying amount of its property, plant and equipment, considered to have a remaining life of 10 years was N5,625,000 lower than its fair value. (v) On January 1, 2017, Gbola Limited acquired 2,250,000 ordinary shares in Eze Limited for N6,000,000 when the reserves of Eze Limited were N1,350,000. The carrying amount of assets of Eze Limited was the same as their fair values at that date. Depreciation should be treated as an operating expense. (vi) A component used by both Tanko Limited and Eze Limited is produced by Gbola Limited and it sells this component at a margin of 25% and goods worth N780,000 were sold to Tanko Limited during the year. None of these goods had been sold by Tanko Limited at December 31, 2018. Gbola Limited also sold goods worth N1,200,000 to Eze Limited and Eze Limited sold all of these goods as at December 31, 2018. (vii) N900,000 in respect of amounts owed by Tanko Limited and N525,000 in respect of amounts owed by Eze Limited were included in the receivables of Gbola Limited. The corresponding balances in Tanko Limited and Eze Limited payables were N600,000 and N525,000 respectively. On December 31, 2018. Tanko Limited sent a cheque of N300,000 to Gbola Limited. (viii) There has been no impairment for Eze Limited. However, the impairment test conducted on Tanko Limited’s goodwill showed that goodwill is being impaired by 10% per annum on a straight-line basis. (ix) Gbola Nigeria Limited cash and cash equivalents included Director’s loan of N1,500,000. The Directors are of the view that the inclusion does not contravene any International Financial Reporting Standard.

Heritage Limited and Legacy Limited are two competitors in merchandising and retailing sector of the economy. At a time when the sector is faced with escalating fuel prices and economic recession, both companies have shown resilience and adaptability. The financial statements of the companies for the year ended December 31, 2020 are as follows: Statements of profit or loss for the year ended December 31, 2020: Heritage Limited Legacy Limited N’000 ₦’000 Revenue 150,000 700,000 Cost of sales (60,000) (210,000) Gross profit 90,000 490,000 Interest 500 12,000 Distribution costs 13,000 72,000 Administrative expenses 15,000 35,000 Total expenses 28,500 119,000 Profit before tax 61,500 371,000 Income tax expense (16,605) (100,170) Profit for the year 44,895 270,830 The statements of financial position as at December 31, 2020: Heritage Limited Legacy Limited N’000 N’000 Assets: Non-current assets: Property 0 500,000 Plant and equipment 190,000 280,000 190,000 780,000 Current assets: Inventories 12,000 26,250 Trade receivables 37,500 105,000 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: Trade payables 22,605 117,670 Total liabilities 32,605 367,670 Total equity and liabilities 240,000 933,250 The Board of Directors of Patrimony Investments PLC is considering a proposal to buy into one of the companies in order to enhance the reported profit and stability of the company after the investment.

Exposure to variety of risks may affect ability to achieve corporate objectives; thereby making risk management a corporate governance issue. Risk reports enable stakeholders to evaluate the importance attached to risk management and the company’s effectiveness in managing identified risks. Therefore, risk reports boost shareholders’ confidence that the company has adopted a responsible attitude towards risk. As part of regulatory framework to manage risk, the Security and Exchange Commission (SEC) provided a number of guidelines for rules and content of effective risk reports.

Emili PLC and Wagbo PLC are both public limited companies wholly owned by Tanimo PLC, also a public limited company. Tanimo group PLC operates in the agro-allied industry; but the directors felt that the current structure does not serve their intended purpose and are therefore considering two different restructuring plans for the group. The statements of financial position of Tanimo PLC and its subsidiaries Emili PLC and Wagbo PLC as at May 31, 2021 are as follows: Tanimo PLC Emili PLC Wagbo PLC Nm Nm Nm Property, plant and equipment 600 200 45 Cost of investment in Emili PLC 60 - - Cost of investment in Wagbo PLC 70 - - Net current assets 160 100 20 Total assets 890 300 65 Share capital-ordinary shares of N1 each 120 60 40 Retained earnings 770 240 25 Total equity and liabilities 890 300 65 Tanimo PLC acquired the investment in Wagbo PLC on June 1, 2015 when the company’s retained earnings balance was N20 million. The fair value of the net assets of Wagbo PLC on June 1, 2015 was N60 million. Emili PLC was incorporated by Tanimo PLC on June 1, 2015 and has always been a wholly owned subsidiary. The fair value of the net assets of Emili PLC as at May 31, 2021 was N310 million and of Wagbo PLC was N80 million. The fair values of the net current assets of both Emili PLC and Wagbo PLC are approximately the same as their carrying amount. The directors are not certain on what effects the following plans would have on the individual accounts of the companies and the group accounts. Local companies legislation requires that the amount at which share capital is recorded is dictated by the nominal value of the shares issued and if the value of the consideration received exceeds that amount, the excess is recorded in the share premium account. Shares cannot be issued at a discount. In the case of a share for share exchange, the value of the consideration can be deemed to be the carrying amount of the investment exchanged. It is the group's policy to value non-controlling interests at its proportionate share of the fair value of the subsidiary's identifiable net assets. The two different plans to restructure the group are as follows: Plan 1 Emili PLC is to purchase the whole of Tanimo's PLC investment in Wagbo PLC. The directors are undecided as to whether the purchase consideration should be 50 million N1 ordinary shares of Emili PLC or a cash amount of N75 million. Plan 2 The assets and trade of Wagbo PLC are to be transferred to Emili PLC at their carrying amount. Wagbo PLC would initially become a non trading company. The consideration for the transfer will be N60 million which will be left outstanding on the intercompany account between Emili PLC and Wagbo PLC.

The debate over principle-based and rule-based accounting standards has increased as the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) seek to converge accounting standards for global uniformity. There have been divergent opinions as to whether rule-based standards are superior to principle-based standards and that principle-based standards pose greater ethical challenge to accountant than rule-based standards.

International Financial Reporting Standards - IFRS(s) are sets of accounting standards and it is unrealistic to assume that these standards could not replace those based around rules. However, where rule based system has been in operation, there is likely to be an expansion of ethical challenges for both accountants and auditors that are involved with the financial statements if principles based approach was adopted. Therefore, regulatory authorities need to ensure ethical practices in order to achieve high quality financial statements. This is drawing attention to the need for closer or greater monitoring. Apart from this fact, corporate financial reporting regulations have been in operation before the advent of IFRS(s).

Femmy PLC operates in a city where a major insurance company has just announced a restructuring that will lay off 4,000 employees. For Femmy PLC, accounts receivable represents one of the major assets of the company. Although the company’s annual uncollectible accounts are not out of line, they are material in size. The company is about to submit its application for a bank loan. Sales and net income have declined in the past year and some customers are falling behind in settling their accounts. A steady financial performance is necessary to be able to secure the anticipated bank loan. Therefore, management felt there is the need to underestimate the uncollectible accounts this year to show a small growth in earnings. They believe that future successful years will average out the losses. More so, since the company has a history of success, the adjustments are seen as mere accounting measures and estimates. The Chief Accountant viewed management’s action as unethical.