Question 2
ICAN
•
2023
•
CORPORATE REPORTING
•
mixed
Case Stimulus
Octopus Petroleum PLC is a multi-national oil and gas group operating in the Niger Delta areas of Nigeria. The company has been highly profitable over the years. The group explores and extracts natural resources, hold reserves and has recently become involved in the downstream sector by opening various commercial retail outlet for sale of petrol to motorists. In June 2020, the company was involved in an ecological disaster in Ogoni area of Niger Delta as a result of massive oil spillage due to some technical faults, thereby resulting to spilling oil into the surrounding ocean and damaging wildlife and local communities. Investors are concerned about the future prospect of Octopus Petroleum PLC and whether it represents a safe investment since the company normally operates in the lucrative oil and gas sector.
Additional Information
(i) The N3,700 million provision for Ogoni Oil spill is an estimated cost net relevant tax.
(ii) Calculating the financial cost of the oil spill in Ogoni land had been slightly problematic for Octopus Petroleum Group in many ways. However, N530million had been expended by year end, while the future cost of clean-up and compensation have not yet been identified or determined.
(iii) However, one of such uncertain cost is fines payable to Federal Government of Nigeria in respect of the incident. The appropriate arms of the NNPCL and the Federal Government are still investigating the incident and how Octopus Petroleum responded to the problem. Fines have been levied in respect of past incidents, and some are in excess of N2,500 million.
(iv) Octopus Petroleum Group has vertically integrated in the second half of year 2020 by acquiring and re-branding a large number of petrol stations across the country.
(v) Octopus Petroleum oil reserves are at record high levels at the end of the 2020 financial year.
(vi) Also the price of oil has increased by approximately 5% during year 2020 financial year.
(vii) In common with many oil companies, Octopus Petroleum Group valued inventory on a last-in-first-out basis (LIFO). The auditors of Octopus Petroleum Group exceptionally allow this treatment, although it contravenes the accounting standard IAS 2.
(viii) Octopus Petroleum Group maintained its dividend payment at N625million for years 2020 and 2019.
(ix) It is the global practice for inventors in the oil and gas sector to evaluate investments using the following category of ratios. Profitability: - Return on capital employed (C. E = Equity + Borrowings) - Return on equity - Gross profit percentage - Operating profit percentage Liquidity: Current ratio Acid test ratio Use of resource or financial position; - Inventory turnover - Assets turnover - Interest cover - Gearing ratio
Requirements
(
a
)
Analyse the performance of Octopus Petroleum Group over the two year period. Your analysis should also consider the group’s ability to finance the cost of the oil spill in Ogoni land in the coming years.
(
b
)
i. Explain why it is better to use the consolidated financial statements for financial analysis rather than those of the parent separate financial statements.
(
b
)
ii. Enumerate the possible contents of an environmental report included in an annual report of companies.
Detailed Solution & Marking Scheme
Get the step-by-step solution,
key points required by examiners
and detailed marking guidance
through the Edcrib AI Tutor.
Reveal Answer
About This Question
This is
Ican
2023
Corporate Reporting
Question 2.
It is one of the
mixed
questions from the
2023
Ican
Corporate Reporting
examination.