Pathfinder NOV 2015 Professional Level

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
NOVEMBER 2015 PROFESSIONAL EXAMINATION
Question Papers
Suggested Solutions
Plus
Marking Guide
Examiners‟ Reports
PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2015 1

TABLE OF CONTENTS
SUBJECT
CORPORATE REPORTING 3
ADVANCED AUDIT AND ASSURANCE 39
STRATEGIC FINANCIAL MANAGEMENT 62
ADVANCED TAXATION 103
CASE STUDY 142

PROFESSIONAL LEVEL - NOVEMBER 2015
CORPORATE REPORTING
Time Allowed: 3 hours
ANSWER FIVE QUESTIONS IN ALL

SECTION A: COMPULSORY QUESTION (30 MARKS)
QUESTION 1
The following financial statements relate to Abia, a public limited company.
Abia Group: Statements of comprehensive income for the year ended April 30,
2015.
Abia Banye Choba
N‟m N‟m N‟m
Revenue 1,620 470 284
Cost of sales (1,372) (274) (168)
Gross profit 248 196 116
Other income 62 34 24
Distribution costs (60) (42) (52)
Administrative expenses (110) (58) (24)
Finance costs (16) (12) (16)
Profit before tax 124 118 48
Income tax expense (42) (46) (20)
Profit for the year 82 72 28
Other comprehensive income for the year, net of tax:
Available-for-sale financial assets (AFS) 40 18 12
Gains (net) on PPE revaluation 24 12 –
Actuarial losses on defined benefit plan (28) – –
Other comprehensive income for the year, net of tax 36 30 12
Total comprehensive income for the year 118 102 40
The following information is relevant to the preparation of the group statement of

comprehensive income:
(i) On May 1, 2013, Abia acquired 70% of the equity interests of Banye, a public
limited company. The purchase consideration comprised cash of N300 million
and the fair value of the identifiable net assets was N320 million at that date.
The fair value of the non-controlling interest in Banye was N108 million on
May 1, 2013. Abia wishes to use the „full goodwill‟ method for all acquisitions.
The share capital and retained earnings of Banye were N110 million and
N170 million respectively and other components of equity were N20 million at
the date of acquisition. The excess of the fair value of the identifiable net
assets at acquisition is due to an increase in the value of plant, which is

depreciated on the straight-line method and has a five year remaining life at
the date of acquisition. Goodwill has been impairment tested annually and as
at April 30, 2014 had reduced in value by 15% and at April 30, 2015 had lost a
further 5% of its original value. The goodwill impairment should be allocated
between group and NCI on the basis of equity shareholding.
(ii) Banye acquired 80% of the equity interests of Choba, a public limited
company, on May 1, 2013. The purchase consideration was cash of N272
million. Choba‟s identifiable net assets were fair valued at N230 million and
the NCI of Choba attributable to Abia had a fair value of N52 million at that
date. Goodwill had been impairment tested and no impairment had occurred.
Choba‟s profits are deemed to accrue evenly over the year.
(iii) Abia has sold inventory to both Banye and Choba in October 2014. The sales
price of the inventory was N20 million and N10 million respectively. Abia sells
goods at a gross profit margin of 20% to group companies and third parties. At
the year-end, half of the inventory sold to Banye remained unsold but the
entire inventory sold to Choba had been sold to third parties.
(iv) Abia sold N10 million worth of goods to a customer who recently made an
announcement that it is restructuring its debts with its suppliers including
Abia. It is probable that Abia will not recover the amounts outstanding. The
goods were sold after the announcement was made although the order was
placed prior to the announcement. Abia wishes to make an additional
allowance of N16 million against the total receivable balance at the year end,
of which N10 million relates to this sale.
(v) Abia owned a piece of property, plant and equipment (PPE) which cost N24
million and was purchased on May 1, 2013. It is being depreciated over 10
years on the straight-line basis with zero residual value. On April 30, 2014, it
was revalued to N26 million and on April 30, 2015, the PPE was revalued to
N16 million. The whole of the revaluation loss had been posted to the
statement of comprehensive income and depreciation has been charged for
the year. It is Abia‟s company policy to make all necessary transfers for excess
depreciation following revaluation.
Required:
a. Compute the goodwill on acquisition of the subsidiaries, showing amount
attributable to the group and the NCI respectively (8 marks)
b. Prepare a consolidated statement of comprehensive income for the year ended
April 30, 2015 for the Abia Group and show all workings. (22 marks)
(Total 30 Marks)

SECTION B: ANSWER TWO OUT OF THREE QUESTIONS IN THIS SECTION (40 MARKS)
QUESTION 2
Megida Plc is in the hospitality industry. The specified ratios and the average
figures for the hospitality industry as at December 31, 2014 are stated below:
Return on capital employed 22.1%
Net assets turnover 1.8 times
Gross profit margin 30%
Net profit before tax 12.5%
Current ratio 1.6:1
Quick ratio 0.9:1
Inventory holding period 46 days
Receivables collection period 45 days
Trade payable period 55 days
Debt to equity 40%
Dividend yield 6%
Dividend cover 3 times
Megida‟s statement of profit or loss for the year ended December 31, 2014 is as
follows:
N‟000
Revenue 2,425
Cost of sales (1,870)
Gross profit 555
Other operating expenses (215)
Operating profit 340
Interest payable (34)
Loss on sale of equipment (120)
Profit Before Tax 186
Taxation (90)
Profit for the year 96
Profit for the year 96
Dividends (90)
Retained profit for the year 6
Retained profit brought forward 179
Retained profit c/f 185

Statement of financial position as at December 31, 2014 N‟000 N‟000
Non-current assets (Note 1) 540

Current Assets:
Inventory 275
Receivables 320
595
Less: Current Liabilities:
Bank overdraft 35
Trade payables 350
Proposed dividend 30
Taxation 85
500
Net Current Assets 95
635
8% Loan Stock (300)
335
Capital and reserves
Ordinary shares (N0.5 each) 150
Profit and loss accounts 185
335
Notes to the accounts
1. Non-current assets
N‟000
Cost 3,600
Accumulated depreciation (3,060)
Carrying amount 540
2. The Stock Exchange quotation of Megida shares throughout the year
averaged N6 per 50k share.
Required
a. State THREE uses and THREE limitations of ratio analysis. (6 marks)
b. Comment briefly on the company‟s performance when compared with
the industry average in the areas of liquidity and gearing. (14 marks)
(Total 20 Marks)

QUESTION 3
Mimiko is a major property developer, which buys land for the construction of
housing.
a. Mimiko took out a foreign currency loan of 5 million Diran at a fixed interest
rate of 8% on May 1, 2014. The interest is paid at the end of each year. The
loan will be repaid after two years on April 30, 2016. The interest rate is the
current market rate for similar two-year fixed interest loans.
Mimiko has a financial statement for year ended April 30, 2015 and the
average currency exchange rate for the year is not materially different from
the actual rate.
Exchange rates N1 = Diran
May 1, 2014 5
April 30, 2015 6
Average exchange rate for year ended April 30, 2015 5.6
Required:
Advice Mimiko on how to account for the loan and interest in the financial
statements for the year ended April 30, 2015. (6 Marks)
b. One aspect of Mimiko‟s business is to provide low-cost homes in Abuja

through the establishment of a separate entity, known as a housing
association due to the high cost of rents in that city. Mimiko purchases land
and transfers ownership to the housing association before construction starts.
Mimiko sells rights to occupy the housing units to members of the public but
the housing association is the legal owner of the building. The housing
association enters into loan agreements with the bank to cover the costs of
building the homes. However, Mimiko negotiates and acts as guarantor for the
loan, and bears the risk of increases in the loan‟s interest rate above a
specified rate.
Currently, the housing rights are normally all sold out on the completion of a
project. Mimiko enters into discussions with a housing contractor regarding
the construction of the housing units but the agreement is between the
housing association and the contractor. Mimiko is responsible for any
construction costs in excess of the amount stated in the contract and is
responsible for paying the maintenance costs for any units not sold. Mimiko
sets up the board of the housing association, which comprises one person
representing Mimiko and two independent board members.
Mimiko recognises income for the entire project when the land is transferred
to the housing association. The income recognised is the difference between
the total sales price for the finished housing units and the total estimated

costs for construction of the units. Mimiko argues that the transfer of land
represents a sale of goods which fulfils the revenue recognition criteria in IAS
18 Revenue. (8 marks)
c. Mimiko leased its head office during the current accounting period and the
agreement terminates in six years‟ time. There is a clause in the operating
lease relating to the internal condition of the property at the termination of
the lease. The clause states that the internal condition of the property should
be identical to that at the outset of the lease. Mimiko has improved the
building by adding another floor to part of the building during the current
accounting period. There is also a clause which enables the landlord to
recharge Mimiko for costs relating to the general disrepair of the building at
the end of the lease. In addition, the landlord can recharge any costs of
repairing the roof immediately. The landlord intends to replace part of the
roof of the building during the current period. (6 marks)
Required:
Discuss how items b & c above should be dealt with in the financial
statements of Mimiko. (Total 20 Marks)
QUESTION 4
a. The Abuja Municipal Development Authority has mapped out a development

strategy for the development of the Municipal. A certain area was marked
“Model Area A” which allows companies to use the area for two years and
dismantle all constructions made on the allocated space.
Because of the strategic location of this Model Area, Mafowosere Plc, a

company operating in the office furniture and interior decoration industry,
feels that this can help to promote its merchandise. It therefore pays for all
the costs of the “model area” including design, and construction costs. The
company plans to use the area for the allowed period and dismantle all
constructions and installations thereafter.
The costs of dismantling the „model area‟ are normally 15% of the original
construction cost and the elements of the area are worthless when dismantled.
The current accounting practice adopted by Mofowosere Plc is to charge the
full cost of the “model area” against the statement of profit or loss and other
comprehensive income in the year when the area is dismantled. The
accumulated cost of the “model area” shown in the statement of financial
position at December 31, 2014 is N38 million. The company has estimated
that the average age of the “model area” is 10 months at December 31, 2014.
Assume a discount rate of 12%, if necessary. (7 Marks)

b. Mafowosere Plc recently undertook a sales campaign whereby customers can
obtain free 3 after sales maintenance service, by presenting a coupon, which
has been included in an advertisement in a national newspaper, on the
purchase of the company‟s furniture. The offer is valid for a limited time
period from September 1, 2014 to December 31, 2014.
The management are unsure as to how to treat this offer in the financial
statements for the year ended December 31, 2014. (5 Marks)
c. The Abuja Municipal Development Authority, in order to encourage the flow of

direct foreign investment into the “model area”, decided to subsidise the cost
of production of any foreign company that invests in the “model area”.
Mafowosere Plc, through its foreign wholly owned subsidiary claimed the sum
of N100 million subsidy.
During an audit exercise, this anomaly was discovered and a fine of N10
million was imposed on Mafowosere Plc. The company is to repay the N100
million subsidy plus N12 million interest. The total repayment has been
regarded as an intangible asset which has to be amortised. (3 Marks)
d. Mafowosere Plc gives a standard six months warranty to all its customers. The
company has extended the warranty to one year for certain major customers
and has insured against the cost of the six months extended period of the
warranty. The warranty has been extended at nil cost to the customer.
The claims made under the extended warranty are made in the first instance
against Mafowosere Plc and then Mafowosere Plc in turn makes a counter
claim against the insurance company. Past experience has shown that 85% of
their furniture will not be subject to warranty claims in the first six months,
10% will have minor defects and 5% will require major repair. Mafowosere
estimates that in the second six months of the warranty, 15% of the furniture
sold will have minor defects and 10% will require major repair.
In the year to December 31, 2014 the following information is relevant:
Standard Extended Selling Price

Warranty Warranty Per Unit of
(Units) (Units) Warranty
(N)
Sales 3000 7000 2000
Major Minor Defect

Repair
N N
Cost of repair (average) 600 150

Assume that sales of furniture are on December 31, 2014 and any warranty
claims are made on December 31 in the year of the claim. Assume a risk
adjusted discount rate of 5%. (5 Marks)
Required:
Discuss how items (a & d) above should be dealt with in the financial
statements of Mafowosere Plc for the year ended December 31, 2014 under
International Financial Reporting Standards.
(Total 20 Marks)
SECTION C: ANSWER ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION

(30 MARKS)
QUESTION 5
Global Electricity Plc specialises in the generation and supply of electricity and gas.
The directors have reviewed the Financial Statements and feel that there is very
little information about their corporate environmental governance and human
capital management.
The company discloses the following social and environmental information in the
financial statements.
(i) Corporate Environmental Governance

- the highest valuation dosage to a member of the public
- total acid gas emissions and global warming potential
- contribution to clean air through emission savings
(ii) Human Capital Management
- investments in the training and development of staff;
- full commitment to equal opportunities
- the number of employees injured at work in the year
The company wishes to enhance its disclosures based on the current best practices
in these areas.
Required:
a. Advise the Directors of Global Electricity on FIVE areas each of corporate

environmental governance and human capital management to measure and
report the company‟s performance apart from their disclosures.
(10 Marks)
b. Identify and explain five benefits that companies derive from disclosure of
social and environmental information in their annual reports.
(5 Marks)
(Total 15 Marks)

QUESTION 6
a. At December 31, Year 1, Haruna owned 90% of the shares in Satima. At this
date the carrying amount of the net assets of Satima in the consolidated
financial statements of Haruna Group was ₦800 million. None of the assets of
Satima are re-valued.
On January 1, Year 2, Haruna sold 80% of the equity of Satima for ₦960
million in cash.
The remaining shares in Satima held by Haruna are estimated to have a fair
value of ₦100 million.
Required:
Explain how the disposal of the shares in Satima should be accounted for in
the consolidated financial statements of Haruna Group. (7 marks)
b. H Plc acquired 90% of the equity shares of S Limited for N120 million.
Goodwill on consolidation was N18 million. There had been no impairment of
goodwill since the date of acquisition. H Plc sold a 50% holding (leaving it
with a 40% holding) for N100 million. This transaction resulted in H plc losing
control of S Limited. The fair value of the residual investment (i.e. the
remaining 40%) was estimated to be N70 million. The carrying value of the
net assets of S Limited at December 31, was N124 million.
Required:
Calculate the gain or loss on disposal. (8 Marks)
(Total 15 Marks)
QUESTION 7
a. The principal aim when developing accounting standards for small and
medium-sized enterprises (SMEs) is to provide a framework that generates
relevant, reliable and useful information which should provide a high quality
and understandable set of accounting standards suitable for SMEs. There is
no universally agreed definition of SMEs and it is difficult for a single
definition to capture all the dimensions of a small or medium-sized business.
The main argument for separate SME accounting standards is the undue cost
burden of reporting, which is proportionately heavier for smaller firms.
Required:
Discuss the main differences and modifications to IFRS which the IASB made
to reduce the burden of reporting for SMEs, giving specific examples where
possible. (8 Marks)

b. Wamako Sokoto has met the definition of an SME in its jurisdiction and wishes
to comply with the IFRS for „Small and Medium-Sized Entities‟. The entity
wishes to seek advice on how it will deal with the following accounting issues
in its financial statements for the year ended November 30, 2014. The entity
currently prepares its financial statements in accordance with full IFRS.
(i) Wamako Sokoto purchased 90% of Muktar Gongora, a SME, on December
1, 2013. The purchase consideration was N11.4 million and the value of
Muktar Gongora‟s identifiable assets was N12 million. The value of the
non-controlling interest at December 1, 2013 was estimated at N1.4
million. Wamako Sokoto wishes to use the full goodwill method, if
allowed. The estimated life of goodwill cannot be estimated with any
accuracy. Wamako Sokoto wishes to know how to account for goodwill
under the IFRS for SMEs.
(ii) Wamako Sokoto has incurred N2 million of research expenditure to
develop a new product in the year to November 30, 2014. Additionally, it
incurred N1 million of development expenditure to bring another
product to a stage where it is ready to be marketed and sold.
Required:
Discuss how the above transaction should be dealt with in the financial
statements of Wamako Sokoto with reference to the IFRS for Small and
Medium-Sized Entities (7 Marks)
(Total 15 Marks)

SOLUTIONS

SOLUTION 1
(a) Abia Plc
i. Purchase of Banye
Group NCI Total

N‟M N‟M N‟M N‟M
Fair Value of consideration paid by Abia/NCI 300.0 108.0
Fair value of Net asset acquired
Share capital 110.0
Retained earnings 170.0
Other components of equity 20.0
Fair value adjustment plant (balancing figure) 20.0
Fair value of net asset acquired 320.0
Share thereon: Abia 70% and NCI 30% 224.0 96.0
Goodwill 76.0 12.0 88.0
ii Purchase of Choba
Group NCI Total
70% 30%
Value of cash consideration 190.4 81.6
Fair value NCI to Abia -____- 52.0 52.0
190.4 133.6
Fair value of asset: Choba 230
Share thereon: Abia 56% and NCI 44% (128.8) (101.2)
Goodwill 61.6 32.4 94.0
b. Aba Group
Statement of Comprehensive Income for the year ended 30 April, 2015
N‟M
Revenue 2,334.0
Cost of sales (1,786.0)
Gross profit 548.0
Other income 120.0
668.0
Distribution cost (154.0)
Admin expenses ( 203.6)
Impairment of receivable (6.0)
Operating profit 304.4
Finance cost (44.0)
Profit before tax 260.4

Tax (108.0)
Profit for the year 152.4
Other comprehensive income

Available for sale financial asset 78.0
Revaluation PPE 39.2
Actuarial loss defined benefit (28.0)
Other comprehensive income for the year 89.2
Total comprehensive income for the year 241.6
Profit for the year attributable to:
Owners of the parent 121.0
Non-controlling interest (Wk 8a) 31.4
152.4
Total comprehensive income attributable to:
Owners of the parent 192.4
Non-controlling interest (Wk 8b) 49.2
241.6
Workings
1. Consolidation Schedule for statement of comprehensive income
Abia Banye Choba CPL
N'm N'm N'm N'm
Revenue 1,620.0 470.0 284.0
Intragroup sales (wk 3) (30.0)
Revenue bankrupt customer (wk 5) (10.0) ______ ______ _______
Net Revenue 1,580.0 470.0 284.0 2,334.0
Cost of sales (1,372.0) (274.0) (168.0)
Intragroup cost of sales 30.0
Unrealised prof (wk 4) (2.0) ______ ______ ________
Net cost of sales (1,344.0) (274.0) (168.0) (1,786.0)
Gross profit 236.0 196.0 116.0 548.0
Other income 62.0 34.0 24.0 120.0
Distribution cost (60.0) (42.0) (52.0) (154.0)
Admin expenses (110.0) (58.0) (24.0)
Depreciation (wk 2) (4.0)
Loss on revaluation of PPE (wk 6) (3.2)
Impairment of goodwill (see A part) (4.4)
Total admin expenses (203.6)
Impairment of trade receivable (6.0) _____ ____ (6.0)
Operating profit 118.8 121.6 64.0 304.4
Finance cost (16.0) (12.0) (16.0) (44.0)
Profit before tax 102.8 109.6 48.0 260.4
Tax (42.0) (46.0) (20.0) (108.0)
Profit for the year 60.8 63.6 28.0 152.4

Other comprehensive income
Available for sale financial asset 40.0 18.0 20.0 78.0
Gain PPE revaluation 24.0 12.0
Revaluation adjustment (wk 6) 3.2 39.2
Losses defined benefit (28.0) ___ ___ (28.0)
Other comprehensive income for the
year 39.2 30.0 20.0 89.2
Total comprehensive income for the
year 100.0 93.6 48.0 241.6
2. Group Structure
Abia
70%
B C
Banye 80% Choba
N‟M N‟M
Abia in Banye is 70% and so NCI is 30%
Abia in Choba is 70% of 80% ie
56%
NCI in Choba direct is 20%
Indirect is 30% of 80% i.e. 24% 44%
Total 100%
3 Depreciation on fair value adjustment of plant N20 m

(see (a) part of the solution) divided by 5 years (This
will affect both 2014 and 2015 statement of profit or
loss) 4
4 Intra-group sales/cost of sales 30
5 Unrealised profit on intra-group sales (20% x 20 x 50%) = 2
6 Revenue (bankrupt customer) 10

Allowance for doubtful receivables 6 16

The N10million revenue should not be recognized in the first instance as it
is not probable that the economic benefit attaching to the sales will flow
to the entity
7 Revaluation of PPE N‟M
Cost 01.05.2013 24.00

Depreciation t0 30.04.2014 (2.40)
Carrying amount 30.04.2014 21.60
Revalued to 26.00
Revaluation Reserve OCI 4.40
01.05.2014 Bal b/f 26.00

30.04.2015 Dep 26/9 (No of years remaining
life of PPE) (2.89)
Carrying amount 30.04.2015 3.11
Revalued to (16.00)
Revaluation loss (7.11)
OCI (4.4 -0.49)** 3.91

Balance to profit or loss (3.20)
**Note: Adjustment for excess depreciation

following revaluation(i.e. depreciation
charged before and after revaluation) (2.89-
2.4)) i.e. 0.49
8(a) Profit or loss attributable to NCI:

NCI in profit for the year (30% x 63.6 + 44%
x 28) = 31.40
8(b) NCI in total comprehensive income

30% x 93.6 + 44% x 48) = 49.20

Marking Guide Marks Marks
(a) i. Calculation of goodwill on acquisition of Banye
Fair Value of considerations (Abia & NCI @1/2 Mark each) 1
Fair value of net assets (1/2 mark for each component) 2
Share of fair value of net assets (Abia & NCI @ 1/2 Mark each) 1 4
ii. Calculation of goodwill on acquisition of Choba

Value of cash consideration - (Group & NCI @ ½ mark each) 1
Fair value of NCI to Abia ½
Fair value of net asset – Choba ½
Share of fair value of net asset - (Abia & NCI @1/2 mark each) 1
Group/NCI of respective percentages (1/2 Mark each) 1 4
(b) Statement of comprehensive income

(18 entries @ 1/3 mark each) 6
Workings (48 entries @ 1/3 mark each) 16

Grand total 30
EXAMINER‟S REPORT
The question tests candidates understanding of the computation of goodwill on

acquisition of a direct and indirect subsidiary and the preparation of consolidated
statement of comprehensive income.
Being a compulsory question, all the candidates attempted the question and most
of them exhibited an average understanding of the question some performed
relatively well with about 30% of those who attempted the question scoring 50%
and above.
Some of the candidates were unable to compute non-controlling interest and/or
identify relevant components of statement of comprehensive income meant for
consolidation. Dealing with non-controlling interest in the indirect subsidiary as
well as the group‟s policy on valuing non-controlling interest at fair value was
difficult to majority of the students. Adjustment for the revaluation of Property,
Plant and Equipment is another area that requires care especially for the
depreciation adjustment following revaluation. Only few students were able to deal
with this adjustment. This has been well explained in the solution.
Candidates are advised to deepen their understanding of group relationship, the
relevant IFRSs dealing with this as well as the adjustments and treatment of non-
controlling interest. In consolidated statement of comprehensive income, students
are advised to pay attention to calculation of profit for the year attributable to NCI
and the parent.

SOLUTION 2
Megida Plc
(a) i. Usefulness of Ratio Analysis
1. Performance Measurement: It provides indication of a firm‟s

performance and current financial position. It also measures
performance of managers.
2. Liquidation/Reorganisation Decision: It helps in identifying
whether or not to liquidate or reorganise a business in form of a
business combination, merger, acquisition or internal
reconstruction.
3. Investment/Divestment Decisions: It guides investment decisions
as to whether to further invest or divest where such investments is
not performing satisfactorily.
4. Trend Analysis: It aids in the construction of a pattern of a firm‟s
performance behavior and financial position.
5. Forecasting: It helps in predicting the firm‟s future performance.
6. Assets Utilization: It facilitates the assessment of the efficiency
with which the firm is utilizing assets for income generation.
7. Liquidity: It helps to determine the ability of the firm to meet its
current obligations as they fall due.
8. Comparative Analysis: It facilitates inter-firm and intra-firm
comparison.
9. Market valuation: Some ratios are useful in determining the value
of a company (e.g. the use of EPS x PE to derive Market Value).
ii. Limitations of Ratio Analysis:
1. Comparison of ratios can be misleading unless they are calculated

from financial statements prepared under uniform accounting
policies.
2. Due to impact of inflation, ratios calculated from financial
statements prepared on historic cost basis cannot give a true
picture of yearly trends.
3. There are no generally accepted formulas for calculating certain
ratios thereby making it difficult for inter-firm comparison.

4. Only items that can be measured in monetary/quantitative terms
are included in financial statements. For instance, non-financial
corporate strengths or weaknesses are not incorporated.
5. For purposes of overall assessment of the financial strength or
weakness of a firm, the fact that there is no ideal ratio makes the
task difficult. For example, a current ratio of less than 2 could be
dangerous for many firms, but quite acceptable for others.
6. The factors influencing the performance of a firm in one year may
change in another, thus rendering horizontal analysis misleading.
7. The statements of financial position prepared at different points in
time are static in nature and therefore cannot give much
information about the pre and post statement of financial position
events.
8. Ratios on their own are meaningless without a basis of making
comparison.
9. Incidence of creative accounting can give misleading ratios.
10. Some items used in the financial statements are subjective since
some are provisions made based on management judgment. Thus,
ratio computation based on them would also be subjective.
(b) Megida Plc‟s performance compared with industry average:
i. Liquidity
The company shows real cause of concern because:
 Its current and quick ratios are worse than the industry
average and are far below expected level.
 Current liquidity problems appear to be due to high level of
trade creditors and huge bank overdrafts.
 High level of inventory contributes to the poor quick ratio.
 Receivables collection period is unreasonably long.
 It takes longer days for Megida Plc to settle its payables
than industry average, which might damage relationship
with suppliers leading to curtailment of further credit.
ii. Gearing:
Gearing (as measured by debt/equity ratio) is higher than twice
the level of the sectoral/industry average.

Summary
The company‟s liquidity and gearing position is quite poor and give
cause for concern. If it is to replace its old assets in the near future, it
will need to raise finance. With the current high level of borrowing,
this may be a serious problem for the company. Whilst the gearing
level may be at an uncomfortable level, it is currently beneficial to
shareholders. The company is making an overall return of 34.6%
based on its return on capital employed, but only paying 8% interest
before tax, on its loan stock. The gearing level may become a serious
issue if Megida Plc becomes unable to meet the finance costs. The
company already has an overdraft and the ability to make further
interest payments could be in doubt.
Workings:
Calculation of relevant Unit Industry Megida

ratios Average Plc‟s
Return on capital employed 34.6
(186 + 34)/635 x 100 % 22.1
(ROCE)
Current ratio (595/500) Ratio 1.6:1 1.19:1
Quick ratio (320/500) Ratio 0.9:1 0.64:1
Inventory holding period (275/1870 x 365) Days 46 54
Debt collection period (320/2425 x 365) Days 45 48
Credit payment period (350/1870 x 365) Days 55 68
Debt/equity ratio (300/335 x 100) % 40 90

(a) (i) Uses of ratios (Any 3 @ 1 mark each) 3
(ii) Limitations of ratios (any 3 @ 1 mark each) 3
(b) Formula for six ratios at 1 mark each 6
- Computation of ratios (6 at ½ mark each) 3
- Comparison with industry average (6 at ½ mark each) 3
- Implication/benefit of liquidity and gearing in relation
to ROCE 2
Grand total 20

EXAMINER‟S REPORT
The question tests candidates‟ understanding of the use of ratios to assess the financial
state of a company. As such it requires candidates to be able to identify the relevant ratios
to use, knowing the correct formula, picking the correct figures from the financial
statements and computing correctly. Finally they are expected to make relevant comments
using the computed ratios comparing with the industry average.
It was the most popular question of choice after the compulsory question and most of those
who attempted the question did very well with about 40% scoring 50% and above. Poor
performance by some candidates can be attributed to their inability to limit themselves to
the relevant ratios needed to make informed comments as required by the questions as
some went ahead to compute all ratios given thereby wasting valuable time that would
have been used to address other parts of the question. There were instances where
candidates did not get the formulas for the ratios correct, and some got the formulas right
but picked wrong figures from the financial statement and even where they got both
formulas and figures correct computed wrongly. This may be attributable to examination
pressure. Finally some students who got all the above correct were unable to make
informed comments on liquidity and gearing of the company.
Candidates should familiarise themselves with what is involved in answering questions on
ratios as outlined in this guide for future diets knowing that they should be able to:
 identify the relevant ratios to use,
 know the correct formulae,
 pick the correct figures from the financial statements,
 compute correctly, and
 make informed comments using the computed ratios compared with industry
average.

SOLUTION 3
Mimiko
(a) The foreign currency loan will be accounted for as follows:
i) On the date the 5 million Diran loan was obtained, that is May 1,
2014, Mimiko will have to convert it to naira at the exchange rate
ruling on this date which is 5 Diran to N1. This means 5000000/5 =
N1, 000,000. It will be recognized as a liability and the receipt into
bank account.
Dr Bank 1,000,000
Cr Loan - Financial Liability 1,000,000
Being foreign currency loan obtained
ii) Interest is calculated on due date as 8% x 5,000,000 i.e. 400,000

Diran which in turn will be converted at the average exchange rate
for the year, 5.6 Diran. (400,000/5.6) which is N71, 429.00. It will be
recognized as an expense in the statement of profit or loss.
Dr Income statement Finance Cost 71,429

Cr Loan -Finance Cost payable 71,429
Being interest on loan recognized
iii) On payment of interest at year end the 400,000 Diran paid will be
converted at the rate ruling on that day which is 6 Diran to the N
(that is 400,000/6 = N66,667). As interest had earlier been
recognized at N71,429, there will be an exchange gain of N4,762.
Accounting entry in the financial statements will be:
Dr Finance Cost payable 71,429

Cr Bank 66,667
Cr Profit or loss - Exchange gain 4,762
Being payment of interest on foreign loan & exchange gain thereon
iv) At year end, the liability is translated at closing rate which is 6 Diran
to N1 i.e. 5,000000/6 = N833,333. This had already been recognized
at N1,000,000. Therefore there is an exchange gain of N166,667.
Accounting entry will be:
Dr Loan -Financial Liability 166,667

Cr Profit or loss - Exchange gain 166,667
Being gain on restatement of foreign currency loan

(b) The consideration should be whether or not the recognition of income for the
entire project by Mimiko on transfer of land to the Housing Association is in
line with the provisions of IAS 18 Revenue. According to IAS 18, revenue
arising from the sale of goods should be recognised when all of the following
conditions have been satisfied (IAS 18.14):
(i) The seller has transferred to the buyer the significant risks and
rewards of ownership;
(ii) The seller retains neither continuing managerial involvement to the
degree usually associated with ownership nor effective control over
the goods sold;
(iii) The amount of revenue can be measured reliably;
(iv) It is probable that the economic benefits associated with the
transaction will flow to the seller; and
(v) The costs incurred or to be incurred in respect of the transaction can
be measured reliably.
The key issue is whether Mimiko has transferred the risks and reward of the
project to the housing association and does not retain control usually associated
with ownership. The following help to determine the true position, Mimiko:
 provides a guarantee as regards the maintenance costs,

 is liable for certain increases in the interest rate over expectations,
 is responsible for financing variations in the procurement and construction
contract which the contractor would not cover.
 negotiates and guarantees loan and its repayment for the housing
association.
 is exposed to risk as if he had built the housing units himself because he
gives guarantees in respect of the construction process.
 determines the membership of the board of the housing association and
thus it is questionable whether the board is independent of Mimiko or not.
 guarantees that the housing association would not be liable if budgeted
construction costs are exceeded, so Mimiko is exposed to financial risk in
the construction process.
On the whole therefore Mimiko can be said to have retained the significant risks
and had effective control of the land transferred and also the entire construction
process. Consequently, the revenue recognition criteria under IAS 18 Revenue
are not met on the transfer of the land. Mimiko should account for the whole
project as if he had built the housing units himself. Accordingly, revenue should
be recognised when the housing units are finished and delivered to the buyers
in accordance with IAS 18. This will be only when the project is completed.
(c) The issues to be addressed are the treatment of:

 Cost to be incurred at the end of the lease to restore the internal condition
of the property to its identical state at the outset of the lease

 Cost incurred to add another floor to the building
 Cost chargeable by the landlord for general disrepair of the building at the
end of the lease
 Cost of immediate repair of the roof rechargeable by the landlord
The cost incurred by Mimiko to add additional floor to the building should be
capitalised in accordance with IAS 16 Property, Plant and Equipment and
amortised over the six years of the lease. As Mimiko has an obligation to restore
the internal condition of the property to its identical state at the outset of the
lease, the additional floor creates an obligating event requiring a provision in
line with IAS 37. A provision should be made for the present value of the cost of
removal of the floor in six years‟ time. At the same time, Mimiko should
recognise an asset for the cost of removal. The cost should be recovered from the
benefits generated by the new floor over the remainder of the lease. The asset
should be amortised over the six-year period. In effect, this is in substance a
decommissioning activity.
As regards the disrepair of the building, the estimated costs should be spread
over the six years of the agreement. IAS 37 Provisions, Contingent Liabilities and
Contingent Assets would indicate that Mimiko has a present obligation arising
from the lease agreement because the landlord can recharge the costs of any
repair to Mimiko. The obligating event is the wear and tear to the building
which will arise gradually over the tenancy period and its repair can be
enforced through the legal agreement. The wear and tear will result in an
outflow of economic benefits and a reliable estimate of the yearly obligation
arising from this will be made.
As regards the roof repair, it is clear from the lease terms that an obligation
exists and therefore a provision should be made for the whole of the
rectification work when the need for the repair is identified.

(a) Foreign loan/interest conversion/translation and recognition 6
(b) Revenue recognition criteria (Any 4) 4
Key issues on transfer of risks and rewards attaching

to ownership (Any 4) 4 8
(c) Identification of lease terms that results in assets,

provisions, expenses 4
Comment on IAS 16 and IAS 37 2 6

Grand total 20

EXAMINER‟S REPORT
The (a) part of the question tests candidates understanding of the treatment of the
principal and interest component of foreign currency loan in line with IAS 21 –
Effect of Changes in Foreign Exchange Rates, while the (b) part examines the
practical application of principles around IAS 18 - Revenue, IAS 16 - Property, Plant
and Equipment and IAS 37 - Provisions, Contingent Liabilities and Contingent
Assets and finally the (c ) part tests candidates‟ understanding of treatment of
Operating Leases where the terms contain provisions that alter the nature of the
lease.
Many candidates attempted the question and their performance was just average.
The major weakness observed on the part of candidates is lack of in-depth
knowledge of the principles of IFRSs and their practical application to scenario
based transactions. For example many candidates could not apply the principles of
what constitutes sale under IAS 18 and conditions under which income can be
deemed to have been earned on transfer of land to the housing estate. Also many
struggled with understanding the difference between conversion and translation.
The most difficult bit appeared to be the treatment of modification and restoration
of an item of operating lease where again the candidates can apply knowledge of
IAS 16 - Property, Plant and Equipment and IAS 37 - Provisions, Contingent
Liabilities and Contingent Assets to resolve the issues raised by the question.
The need for candidates to have a deeper working knowledge of the principles of
IFRSs for Corporate Reporting examinations cannot be overemphasized. Candidates
are advised to familiarize themselves with this aspect of the syllabus as it will
continue to be a constant feature in future diets given the adoption of IFRS in
Nigeria.

SOLUTION 4
MAFOWOSERE
(i) The cost of the model area should be accounted for as Property, Plant and
Equipment in accordance with IAS 16 - Property, Plant and Equipment.
Property, Plant and Equipment are tangible assets that are held for use in
the production or supply of goods and services, for rental to others or for
administrative purposes, and are expected to be utilized in more than
one accounting period.
The model area meets this definition since it will be in use for more than
one accounting year, and customers will be able to view the furniture
items in the area. The costs of the model area should be depreciated over
their expected useful life to their expected residual value.
MAFOWOSERE Plc, after initial recognition could use the cost model or
revaluation model for the measurement of the model area. It would,
however, be difficult to use the revaluation model as it would not be
possible to measure fair value reliably. Market based information
normally will have to be used.
MAFOWOSERE Plc has an obligation to dismantle the model area after

two years. The company should assess whether it has a present
obligation as a result of past event. The assessment should be carried out
in accordance with IAS 37 - Provisions, Contingent Liabilities and
Contingent Assets. In this instance, it would seem that a provision should
be set up and the amount added to the cost of the asset. The costs of
dismantling to be recognized are an initial estimate of the obligations
which arises when Property, Plant and Equipment is acquired and as a
consequence of using the asset.
With the approximate age of the Property, Plant and Equipment of 10

months and the 15% of cost of dismantling, the cost shown in the
statement of financial position of December 31, 2014 should be N42.51m
(N38m + 15% of N38m discounted for two years at 12%). The
accumulated depreciation should be N17.71 (N42.51m x 10/24). The
discount N0.45m (N4.51m x 12% x 10/24) should be unwound over the two
year period as a finance cost in the statement of profit or loss and other
comprehensive income.
A provision for the dismantling costs will be set up for N4.51 m plus the
unwound discount of N450, 000 totaling N4.561m.
(ii) An obligation should not be recognized for the coupons and no provision
created under IAS 37 (Provision, contingent liabilities and contingent
assets). A provision should only be recognized where there is an
obligating event. There has to be a present obligation (legal or
constructive), the probability of an outflow of resources and the ability to

make a reliable estimate of the amount of the obligation. These
conditions do not seem to have been met. Until the company‟s furniture
is purchased, the free 3 after sales maintenance service cannot be
obtained, as this is the point at which the present obligation arises, the
probable outflow of resources occurs and an estimate of the amount of
the obligation can be made.
When the company‟s furniture is purchased, the service maintenance

becomes part of the cost of the sale. The revenue recognized will be the
amount received from the customer (the sales price). The revenue will
not be grossed up to include the value of the maintenance service.
(iii) The payment of the fine constitutes a cost to the company and is not an
intangible asset. An intangible asset is a resource controlled by the
company as a result of past events and from which future economic
benefits are expected to flow (IAS 38 – Intangible Assets). This payment
does not meet this definition. The fine should be charged against current
year‟s profits and disclosed as a separate line item under IAS 1
(Presentation of Financial Statements, para 97/98).
(iv) The cause of the obligation is the initial sale of this furniture product with
the warranty given at that time. It would be appropriate for the company
to make a provision for the year made up of the 6 monthly warranty of
N225,000 and N577,500 (appendix I) respectively which represents the
best estimate of the obligation.
Only if the insurance company has validated the counter claim will
MAFOWOSERE Plc be able to recognize the asset and the income. The
company has to be virtually certain. If it is, then MAFOWOSERE Plc may
be able to recognize the asset. Generally, contingent assets are never
recognized, but disclosed where an inflow of economic benefit is
probable.
The company could discount the provision if it was considered that the
time value of money was material. The majority of provisions will reverse
in the short-term (within 2 years) and therefore, the effects of discounting
are likely to be immaterial. In this scenario, using risk adjustment rate
(IAS 37), the provision would reduce to N219, 510 in the first six months
and N563, 410 (Appendix I) in the second six months. The company will
have to determine whether this is material or not.

APPENDIX I
EXPECTED DF DISCOUNTED
1 Six month warranty
st
VALUE EXPECTED VALUE
(5%)
N‟000 N‟000
85% x Nil
10% x 10,000 x N150 x 6/12 75
5% x 10,000 x N600 x 6/12 150
225 (1.025) 219.51
2nd Six month extended

warranty
15% of N7,000 x 150 157.5

10% of N7,000 x 600 420.0
577.5 (1.025) 563.41

(i) Cost of model accounted under IAS 16 1
Specification of measurement model after
initial recognition 1
Assessment of obligation arising under IAS 37 1
Cost in SOFP calculation 1
Depreciation 1
Discount as a finance cost in SCI 1
Provision for dismantling 1 7
(ii) Conditions under which obligation is recognised 1
Relevance of the IAS 37 to the case 2
Treatment of cost of sale/revenue 2 5
(iii) Definition of Intangible asset and relevant IAS 1
Accounting treatment of fine and repayment 2 3
(iv) Calculation of 1st six months warranty 2

Calculation of 2nd six months warranty 2
Explanation 1 5
Grand total 20

EXAMINER‟S REPORT
The question specifically requires the candidates to apply the principles of IAS 16-
Property, Plant and Equipment, IAS 37- Provisions, Contingent Liabilities and
Contingent Assets including warranty and IAS 38 -Intangible Assets. Candidates are
expected to demonstrate knowledge of the standards covering issues of
measurement, recognition, capitalisation of dismantling cost, depreciation and
unwinding of interest.
Most of the candidates did not attempt the question and those who did performed
below average. The candidates were unable to relate and apply the relevant IAS to
the question.
Candidates are advised not only to study the IFRS, but to deepen their knowledge
in the practical application of its principles in different scenario based situations
and cases.

SOLUTION 5
GLOBAL ELECTRICITY PLC
a. From: The Consultant,

Corporate Environmental Governance and Human Capital
Management
To: The Managing Director/Chief Executive Officer,

Global Electricity Plc
Dear Sir,
Advice on Corporate Environmental Governance and Human Capital

Management
Further to the meeting of last week between your company‟s representatives

and our firm, we hereby highlight additional areas you can consider on the
above-stated subject matter.
Corporate Environmental Governance
The areas that further disclosures can be made, among others, are:
(i) Use of energy, emissions and waste disposal
(ii) Environmental remediation expenditure
(iii) Environmental disclosure assurance
(iv) Progress in addressing changes in legal requirements that are not yet
effective.
(v) Investment in local community initiatives
(vi) Accidents affecting the environment, such as, oil spillage, water
pollution and toxic waste
(vii) Transportation of products
(viii) Gas pipeline vandalisation
Human Capital Management
For human capital management, some areas where further disclosures can
be made are:
(i) The size and composition of the workforce

(ii) Retention and motivation of employees
(iii) Remuneration and fair employment practices
(iv) Leadership and succession plan
(v) Accidents affecting the community
(vi) Policy for employing physically-challenged persons
(vii) Congruence of employee and organizational goals
(viii) Job rotation for experience acquisition
(ix) Mutual trust and confidence

If you need further clarification on any of these areas, please contact the
undersigned.
Yours faithfully,
Signed
Managing Consultant
(b) Benefits that companies derive from disclosure of social and environmental
information in annual reports:
(i) Top Management/Board of Directors: top Management needs the

disclosure to respond to press criticisms, answer shareholders‟
questions and ensure that company policies are followed.
Board of Directors, because of their growing legal liability, needs to
know in some details what social programmes the company
undertakes.
(ii) Environmentalist and other stakeholders:
Management can disclose social and environmental information to
satisfy the above groups.
(iii) Social and environmental disclosures influence some investor‟s
decisions
(iv) Disclosures also differentiate a company from its competitors.
(v) It can confer on the firm, some level of acceptability within the local
environment.
(vi) It may indicate the ability to manage key resources, risks and
relationship

(a) Presentation 2 /2
1
Relevant points on corporate environmental governance

(Any five points at 11/2 marks each) 71/2 10
(b) Relevant points on human capital management (any 5 @ 1 mark) 5
Grand total 15

EXAMINER‟S REPORT
The question examines issues described as “Beyond Financial Reporting” in the

syllabus covering corporate environmental governance and human capital
management and disclosure of social and environmental information.
Most of the candidates attempted the question because they felt they could deal
with the issues raised by the questions. Unfortunately their performance was not
too good.
The commonest pitfall was their inability to highlight the relevant issues on
corporate environmental governance and human capital management as well as
disclosure of social and environmental information. Another contributory factor was
the failure to present their recommendations in a report format.
Candidates are advised to properly cover all aspects of the syllabus in their
preparation to enhance better performance in future diets.

SOLUTION 6
HARUNA GROUP
(a) In accounting for this in the Consolidated Financial Statements of Haruna

Group, the gain or loss on disposal will be recognised in group income
statement. This is calculated as follows
N‟M
Fair value of consideration received (Sales proceeds) 960
Fair value of retained interest 100
1,060
Less: Carrying amount of Satima at the date of disposal (800 x (720)
90%)
Gain on disposal to be credited to profit and loss 340
Explanation:
If a part disposal results in loss of control the parent must recognise a profit
or loss on disposal in the consolidated statement of comprehensive income.
A part disposal which does not result in loss of control is a transaction

between the owners of the subsidiary.
In this case, the parent company should recognise the profit on disposal in
the consolidated statement of comprehensive income.
(b) The gain on disposal recognised in the statement of comprehensive income

should be calculated as follows:
N‟M
Consideration received for shares in Satima Limited 100.0
Fair value of residual investment 70.0
170.0
Net assets de-recognised 124.0
NCI (10% x N124 million) (12.4)
111.6
Goodwill derecognized 18.0
Net assets sold (129.6)
Gain on disposal, reported in profit or loss 40.4

(a) i) Calculation of Gain or Loss on disposal
(5 entries @ 1 Mark each) 5
ii) Explanation on treatment of profit or loss on disposal

(2 points @ 1 mark each) 2 7
(b) Calculation of Gain or Loss on disposal

(8 ticks @ 1 mark each) 8
Grand total 15
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of the computation and treatment of

profit or loss on disposal of interests in subsidiaries that results in loss of control.
This question was in fact the example on page 777 of the Study Text.
Almost all the candidates attempted the question and most of them displayed clear
understanding of the requirement with above average performance.

SOLUTION 7
IFRS FOR SMEs
(a) Differences
In deciding on the changes made to IFRS for SMEs, the needs of the users
have been taken into account, as well as the costs and other burdens
imposed upon SMEs by IFRS. Relaxation of some of the measurement
and recognition criteria in full IFRS has been made in order to achieve
the reduction in these cost and burdens. Some disclosure requirements
in full IFRS are intended to meet the needs of listed entities, or to assist
users in making forecasts of the future. Users of financial statements of
SMEs often do not need such detailed information.
Small companies have different strategies with survival and stability

rather than profit maximization being their goals. The stewardship
function is often absent in small companies, thus there are a number of
accounting practices and disclosures which may not provide relevant
information for the users of SME financial statements. As a result the
standard does not address the following topics:
(i) Earnings per share
(ii) Interim financial reporting
(iii) Segment reporting
(iv) Insurance (because entities that issue insurance contracts are not
eligible to use the standard); and
(v) Assets held for sale
Modifications
In addition there are certain accounting treatments, which are not
allowable under the standard. Examples of these disallowable
treatments are the revaluation model for property, plant and equipment
and intangible assets.
Generally there are simpler and more cost effective methods of
accounting available to SMEs than those in full IFRS accounting
practices, which have been disallowed.
Additionally, the IFRS for SMEs makes numerous simplifications to the
recognition, measurements and disclosure requirements in full IFRSs.
Examples of these simplifications are:
(i) Goodwill and other indefinite-life intangibles are amortized over
their useful lives, but if useful life cannot be reliably estimated,
then the useful life is presumed to be 10years.

(ii) A simplified calculation is allowed if measurement of defined
benefit pension plan obligation (under the projected unit credit
method) involves undue cost or effort.
(iii) The cost model is permitted for investments in associates and joint
ventures.
As a result of the above-stated differences and modifications, SMEs do

not have to comply with over 90% of the volume of accounting
requirements applicable to listed companies. If an entity opts to use the
IFRS for SMEs, it must follow the standard in its entirety and it cannot
cherry pick between the requirements of the IFRS for SMEs and those of
full IFRSs.
(b) i) Business Combination

IFRS 3 - Business Combinations allows an entity to adopt either the
full or partial goodwill in its consolidated financial statements.
However, the IFRS for SMEs only allows the partial goodwill method.
As a result, IFRS for SMEs does not require SME to determine the fair
value of the non-controlling interests not purchased when
undertaking a business combination.
Beside, IFRS 3 - Business Combinations requires goodwill to be tested

annually for impairment, but IFRS for SMEs requires goodwill to be
amortised annually within the period of its useful life. This is a much
simpler approach. The standard also specifies that, when the useful
life of the goodwill cannot be reliably estimated, it should be
presumed to be ten years.
Arising from the foregoing, the goodwill of Wamako Sokoto on

acquisition of 90% interest in Muktar Gongora will be as follows:
N‟000
Consideration furnished 11,400
Fair value of identifiable net assets acquired
(90% of N12,000) 10,800
Goodwill on acquisition 600
The above-calculated goodwill of N600,000 will be amortised for a

period of ten years at N60,000 per annum.
(ii) Research and Development Expenditure

IFRS for SMEs requires that all internally generated research and
development expenditure shall be expensed through profit or loss
in the year in which it arises. Unlike full IFRS under IAS 38 –

Intangible Assets which requires that expenses in relation to
internally generated research and development should be
expensed at research stage and capitalized at development stage.
The development stage requires a specified requirement to be met
before such capitalization can take place. Sometimes, these
requirements are difficult to determine. With the simplified
approach adopted under IFRS for SMEs, it has taken away the
burden of determining the development stage criteria.
As a result of the above, Wamako Sokoto total expenditure on
research and development of N2million and N1million respectively
must be written off to profit or loss for the year, resulting in write-
off of total sum of N3million.
Marking Guide Marks

(a) Differences between Full IFRS and IFRS for SMEs covering
Earnings per share, Interim financial reporting, Segment reporting,
Insurance, Assets held for sales 5
Modifications of Full IFRS to suit SMEs on Goodwill and other intangibles,

Defined Benefit plan and Cost model for investments 3
(b) i) No fair value for goodwill and Computation of goodwill 4
ii) Full IFRS – Research and Development and SMEs R & D 3

Grand total 15
EXAMINER‟S REPORT
The question requests candidates to discuss and demonstrate the main differences
and modifications made to full IFRS to reduce the burden of reporting for SMEs.
Only some of the candidates attempted the question and their performance was
poor. Majority of the candidates could neither state the differences nor the
modifications.
With the relevance and quantum of the SMEs in Nigeria‟s business environment,
candidates need to ensure proper understanding of the provisions of IFRS for SMEs.

PROFESSIONAL LEVEL EXAMINATION - NOVEMBER 2015
ADVANCED AUDIT AND ASSURANCE
SECTION A: COMPULSORY QUESTION (30 Marks)
QUESTION 1
a. Gnasher Investigations is an entity specialising in conducting investigations

for corporate clients. It employs ex-police officers, security consultants, IT
and fraud specialists. Gnasher Investigations recently dropped its firm of
auditors and has approached your firm to undertake the audit. You have
been provided with the following information:
 Gnasher Investigations is a major service provider to your firm,
particularly in the provision of IT and fraud consultancy.
 Gnasher Investigations has acrimoniously dropped their previous
auditors and are withholding fees, pending the resolution of a number of
issues in particular relating to their accusations on the competence of the
auditors.
 Gnasher Investigations is facing a hostile take-over at present from
Technical Investigations Group, a company you also audit.
Required
i. Explain the impact of each of the three pieces of information provided
above and how these would influence your decision to accept the
nomination as auditors for Gnasher Investigations. (5 Marks)
ii. Describe other factors that you would consider in taking a decision as to
the acceptance of Gnasher Investigations as a client. (5 Marks)
iii. Describe the steps you would take if you decided to accept the
nomination as auditors for Gnasher Investigations. (5 Marks)
b. You are required to discuss the following FIVE elements of good quality
control in a firm of Chartered Accountants:
(i) Independence
(ii) Personnel management
(iii) Acceptance and continuance of client
(iv) Engagement performance
(v) Monitoring (10 Marks)

c. Why does the Institute of Chartered Accountants of Nigeria place much
emphasis on the requirement that all member firms put in place a system of
quality control? (5 Marks)
(Total 30 Marks)
SECTION B: ANSWER ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION (40 Marks)
QUESTION 2
a. Analyse and evaluate any FOUR fundamental principles of ethical standards

as provided in the Institute of Chartered Accountants of Nigeria‟s Code of
Professional Conduct for Accountants. (8 Marks)
b. Outline the penalties for a member‟s unethical behaviour. (4 Marks)
c. Outline the powers available to the Institute to enforce the ethical standards.
(8 Marks)
(Total 20 Marks)
QUESTION 3
EBOLA SANITIZER LIMITED
You have been appointed as the auditor of Ebola Sanitizer Limited for the year
ended 31 December 2014. The principal activity of the company is the
development, manufacture and sale of Ebola-testing equipment for health care
sector.
During the planning meeting with the Company‟s Chief Finance Officer, the
following matters were brought to your attention:
(i) Inventories include N1.5million in respect of the cost of instruments made to

a customer‟s specification. The customer is based in a country which
recently imposed trading sanctions against your country.
(ii) Work-in-progress includes N2.5million in respect of an equipment being

manufactured for Hazard Care Plc. Labour has been charged at daily rates,
which include direct costs and appropriate overheads.
(iii) In October 2014, the company commenced construction of an assembly line

for its new range of testing machines. The line is due to be completed in
February 2015. The costs recorded in the non-current assets register include
materials, labour, overheads and loan interest.

Required:
a. Prepare an audit planning memorandum (extract) setting out specific audit

work to be carried out in respect of the matters stated in (i – iii) above.
(10 Marks)
b. Advise on audit adjusting entries to be raised to correct any material

misstatements in the financial statements.
(10 Marks) (Total 20 Marks)
QUESTION 4
There are occasions when company directors might want to conceal documents or
records. For example, if the company is facing litigation for a considerable sum of
money, they may not wish to disclose this fact in their financial statements since
the appropriate treatment could well be the recording of a liability. Documents
showing that a company‟s assets are not worth as much as they are stated in the
statement of financial position may also be suppressed by the directors.
It is likely that company directors will attempt to conceal a matter where it will
have an adverse effect on the company‟s financial statements. There may also be
occasions when directors do not disclose matters that might improve a company‟s
profit figure. For example, directors might be intent on “income smoothing” or
shareholding directors in small companies may wish to minimise their profits for
tax purposes.
Required:
a. Analyse THREE circumstances under which company directors may portray the
company‟s performance as better than it actually is. (6 Marks)
b. Assess and advise on any TWO audit procedures required to deal with
identified misstatements in various account balances and other financial
statements disclosures. (4 Marks)
c. Develop audit procedures the auditor should adopt where he has identified the
risk of material misstatements in the financial statements arising from fraud.
(10 Marks)
(Total 20 Marks)

(30 Marks)
QUESTION 5
An installed software programme that can process accounts receivables was

presented to the auditor of Yes Limited. The aging, which indicates how long the
customers‟ balances were outstanding, is useful when evaluating the collectability
of those accounts.
In order to test whether the age analysis was done correctly, the auditor decided to
test the clients‟ schedules. He used the audit firm‟s software to recalculate the
aging. He reasoned that if the aging of accounts receivables produced by his audit
software was in reasonable agreement with the clients figures, he would have
evidence that the client‟s aging was reliable.
However, the auditor was shocked when he found material differences between the
balances he arrived at using his Audit software and the client‟s balances. The
client‟s information technology manager investigated the discrepancies and
discovered that programme errors occurred while designing the software. This
outcome caused the auditor to substantially increase the level of his review of the
year-end balances which eventually resulted in significant audit adjustments to the
financial statements.
Required:
a. Assess and advise on any THREE ways information technology improves
internal control. (6 Marks)
b. Evaluate SIX risks specific to accounting systems in IT environment.
(9 Marks)
(Total 15 Marks)
QUESTION 6
B Plc, a leader in the manufacture of beverages has been in crisis since its
shareholders‟ loss of confidence in its management. The predecessor of B Plc which
was a partnership between two friends metamorphosed into a private company
after 15 years of operation. Two years later, it became a public company. The
erstwhile partners had substantial interest and control in the company. The way
the affairs of the company were being conducted was not much different from the
partnership business which was the progenitor of the public company. This
overbearing influence of the former partners caused disaffection among the other
shareholders.

Your audit firm has just been appointed as the auditors of the company and you
found out that many internal and accounting control systems are being short
circuited by management.
Required:
a. As the leader of the team in charge of the audit of the company, assess the
attitude of management vis-a-vis spirit of good governance. (9 Marks)
b. Evaluate SIX matters of importance requiring the auditors of a public

company to communicate with those charged with governance of the
company. (6 Marks)
(Total 15 Marks)
QUESTION 7
Mystical Perfumes has been in existence importing perfume for a number of years.
The managing director had built up the business using contacts he already had in
the industry. The company imports only one brand of perfume which is
manufactured exclusively by one company. The perfume is distributed via „shops
within shops‟ at 20 branches of a well-known store. Under this agreement, Mystical
Perfumes pays a percentage of its takings to the store, with a minimum annual
payment of ₦100,000 per store.
The audit is nearing completion but you have just heard that the Tanzanian
manufacturer is facing serious financial difficulties and that supplies have ceased.
Required
a. Set out additional information that the auditor would require before
reaching his audit opinion. (7 Marks)
b. Set out the possible forms of report that the auditor may issue. (8 Marks)
(Total 15 Marks)

SOLUTIONS

SOLUTION 1
Based on first Scenario
(a) i. Since Gnasher Investigation is a major service provider to our firm,

the issue of independence is of great concern which may not allow us
take up the audit.
Based on second Scenario

If the reason of parting ways with the old audit firm is incompetence
and there is no independence issue, we can take up the audit and
press for the payment of the withheld fees on behalf of the previous
auditors.
Based on third Scenario

As auditors to Technical Investigation Group which is considering
taking over Gnasher Investigations, it will not be advisable for our
firm to take over the audit of Gnasher, since the company is facing a
hostile take-over by the Technical Investigation Group and this could
cause conflict of interest.
ii. Other factors to be considered before accepting the nomination as

auditors for Gnasher Investigations include:
- Assessment of whether there are any professional problems
attached to accepting the engagement, e.g. problems of
lack of independence, lack of technical expertise or conflict
of interest.
- Ensuring that resources are available to complete the audit
assignment, especially the right number and quality of
staff.
- The need to carry out risk assessment of the assignment.
- Taking up references on the proposed client company and
its directors, if they are not already known to the firm. This
is known as client screening.
- Communicating with the existing auditors to discuss the
appointment, the client and the audit work, to establish if
there are any matters that we should be aware of when
deciding whether or not to accept the appointment.
- Whether a partner or anyone closely connected with a
partner has a beneficial interest in Gnasher. This may be
particularly relevant in view of the existing relationship
with Gnasher.
- Fees in relation to overall income of the firm.

iii. Once we have decided to accept the nomination as auditors for
Gnasher Investigations, we will ascertain that suitable procedures are
carried out to ensure that:
- The firm will be independent and there will be no conflict of
interest.
- The firm has the technical competence to do the work.
- Professional clearance has been sought for and obtained
from the previous auditors.
- Appropriate anti-money laundering procedures are
performed i.e. client identification.
- Letter of engagement is sent to the client and duly signed
by the appropriate authority.
- The audit will not impact on the consultancy service
relationship already being provided.
(b)
i. Independence
For an audit opinion to be of value, the auditor must be independent
and seen to be independent. This means that the auditor must have
independence of mind and in appearance. He is not affected by
influences or prejudices that compromise his professional judgment.
This allows the auditor to act with integrity and exercise objectivity
and professional skepticism.
ii. Personnel Management

This centres on the direction and supervision of staff, and review of
their work.
Direction:
- The audit team should be informed of the work they are
expected to carry out and the objectives that the work is
intended to achieve.
There should be a well prepared audit work programme

- Staff should be familiar with the overall audit plan.
- Staff should understand:
Their responsibilities:
Nature of the business of the client
Risk related issues
Detailed approach to the performance of the audit

Review of work
This may take the following forms:
Peer review
Engagement quality control review
Hot review
Monitoring review or cold review
The purpose of audit review is to check whether:

- The audit work was carried out to proper professional
standard
- The objectives of the audit have been achieved
- The work carried out during the audit and the audit
evidence are suitably documented and that the audit
evidence supports the conclusions that have been reached.
iii. Acceptance and continuance of client

ISQC 1 requires that the firm should establish policies and procedures
to provide it with reasonable assurance that the firm will only take on
or continue work where the firm
- Is competent to perform the engagement
- Has the capabilities, including the necessary resources to do
so
- Can comply with the relevant ethical requirements,
- Has considered the integrity of the client and does not have
information which would lead it to conclude that the client
lacks integrity
- Is sure that there will be independence and there are no
conflicts of interest
- Professional clearance is received from previous auditors in
the case of new client
iv. Engagement performance

Policies and procedures are required to include:
- Those that will ensure consistent quality engagement
performance
- Supervision responsibilities
- Review responsibilities
- Appropriate consultation takes place on difficult or contentious
matters
- Sufficient resources are available for such consultation
- The nature, scope and conclusions of the consultation are
documented
- Conclusion arising from the consultation are implemented

- Guidance on engagement quality control reviews should be put
in place
v. Monitoring
The firm is required to establish a monitoring process designed to
provide it with reasonable assurance that its quality control system is
relevant, adequate and operating effectively. This process should
include inspecting, on a cyclical basis, at least one completed
engagement for each engagement partner.
Responsibility for the monitoring process should be given to a partner
or other appropriate persons with sufficient experience and authority.
When monitoring review which is also known as cold review is carried
out, it should not be performed by those involved with the
engagement or the engagement quality control review.
The practice should ensure that its quality control and procedures are
regularly reviewed and updated to ensure compliance with set
standards both within the firm and generally by the profession as a
whole.
(c) The Institute of Chartered Accountants of Nigeria places much emphasis on

the requirement that all member firms put in place a system of quality
control because IFAC to which ICAN belongs, requires that members should
perform their professional work with due skill and care and with proper
degree of technical competence.
To satisfy the professional requirements for due skill, care and technical
competence, audit firms need to have a strong system of quality control.
Good procedures for quality control reduces the risk for the audit firm to:
- issue an incorrect audit opinion

- be sued for negligence, and payment of damages
- avoid adverse publicity and damage to the reputation of the
firm
- avoid loss of client

a)(i) Stating of impact 1
Decision arrived at based on impact ½
2nd Scenario – as above 1
½
3rd Scenario
Stating of impact 1
Stating of hostility of takeover 1 5
(ii) Stating any five factors mentioned 1 mark each 5

(iii) Stating any steps 1 mark each 5
(b)(i) Independence:
Stating of independence of mind and appearance
Not affected by influences or prejudices
Acting with integrity
(ii) Personnel Management:
Direction and supervision of staff
Audit programme and working papers
Review of work
(iii) Acceptance and continuance of client:
Establishment of policies and procedures to
ensure that the firm is competent and capable
Assurance of independence
(iv) Engagement performance:
- Policy in place for supervision, review of quality control
- Availability of resources
- Internal and external consultations
- Conclusions arising from the consultation & implementation
(v) Monitoring:
Establishment of monitoring policies 2 marks each for any
Responsibility for monitoring – engagement partner (i) – (v)
Regular update of quality control procedures 10
(c) Stating of due care and skill 1
Stating of any two risks that will be reduced
by good quality control 2 Marks each 4
Total 30
EXAMINER‟S REPORT
The question is in three parts. Part (a) tests audit engagement issues, part (b) tests
element of good quality control in an audit firm, while part (c) tests the importance of
quality control as enunciated by ICAN.
Being a compulsory question, it was attempted by all the candidates, but performance was
poor.
The commonest pitfall of the candidates was their inability to relate part (b) of the
question to quality control.
Candidates are advised to read the Study Pack thoroughly before embarking on the
examination.

SOLUTION 2
(a) Fundamental Principles of ethical standards as provided in the Institute of

Chartered Accountants of Nigeria‟s Code of Professional Conduct for
Accountants are:
i) Integrity
A Chartered Accountant should be straightforward and honest in all
professional and business relationships. Integrity implies not merely
honest, but fair dealing and truthfulness.
ii) Objectivity
Objectivity is the state of mind, which has regard to all considerations
relevant to the task at hand, but no other consideration. A Chartered
Accountant should not allow bias, conflict of interest or undue
influence to override his professional or business judgment.
iii) Professional Competence and Due Care

A Chartered Accountant has a continuing duty to maintain
professional knowledge and skills at the level required to ensure that
a client or employer receives competent professional service based on
current developments in practice, legislation and techniques. A
member should not accept or perform work, which he is not
competent to undertake unless he obtains such advice and assistance
as will enable him to do so. A Chartered Accountant should act
diligently and in accordance with applicable technical and
professional standards when providing professional services. A
member should carry out his professional work with due skill, care,
diligence and expedition and with proper regard for the technical and
professional standards expected of him as a member.
iv) Confidentiality
A Chartered Accountant should respect the confidentiality of
information acquired as a result of professional and business
relationships and should not disclose any of such information to third
parties without proper and specific authority unless there is a legal or
professional right or duty to disclose. Confidential information
acquired as a result of professional and business relationships should
not be used for the personal advantage of the Chartered Accountant or
third party.
v) Professional Behaviour
A Chartered Accountant should comply with relevant laws and
regulations and should avoid any action that discredits the profession.

A member should conduct himself with courtesy and consideration
towards all with whom he comes in contact with in the course of
performing his work.
(b) Penalties for a member‟s unethical behavior include:
o Fines
o Suspension from membership of the Institute for a period of
time
o Expulsion from membership of the Institute
o Withdrawal of Certificate and Licence to Practice
o Reprimand
o Payment of costs associated with the investigations and
meetings
(c) Enforcement of ethical standards

(i) The power of the Institute to enforce ethical standards is
derived from the Institute of Chartered Accountants of Nigeria
Act No 15 of 1965. This power is conferred on the Accountants
Disciplinary Tribunal. The Tribunal in this respect is
independent of Council.
(ii) The Investigating Panel considers complaints against the
conduct of members, and is empowered to initiate disciplinary
action by referring appropriate cases to the Disciplinary
Tribunal for adjudication.
(iii) Where a complaint is against the conduct of a firm having more

than a partner, the complaint shall be deemed to have been
made against each and every member who was partner in the
said firm at the material time for the purposes of this scenario.
(iv) Any failure to follow the guidance in fundamental principles or

in the statements shall also be taken into account by the
Committee of the Institute responsible for regulating the work
of members and member firms.

(a) Stating any of the fundamentals of ethical standard 1 Mark each 4

Integrity, objectivity, professional competence
and due care, confidentiality, professional
behaviour 4
Development of each fundamental 1 point each 4
(b) Any four penalties 1 Mark each 4 8
(c) Analysing the powers of the Institute in

enforcing the ethical standards 2 Marks for 4 8
Total 20
EXAMINER‟S REPORT
The question tests ethical standard fundamentals, penalties for unethical behavior
by members and the powers available to the Institute on the enforcement of ethical
standards.
About 90% of the candidates attempted the question and performance was good.

SOLUTION 3
(a) Extracts of Audit Planning Memorandum:
(i) - Confirm trading sanctions against your country/client noting

when this could be lifted.
- Verify/compute inventory valuation report in respect of the
specific inventory of N1.5m made to customer‟s specification.
- Obtain/verify customer‟s request for the production.
- Trace funds already received on the contract to the financial
records and determine amount outstanding.
(ii) - Verify and recompute work-in-progress sheets/reports in

respect of manufacture of equipment for Hazard Care Plc.
- Agree labour charge out rate
- Compute and compare apportionment of overheads
(iii) Verify cost records for non-current assets, noting

- Valuation of materials
- Valuation for labour/charge-out-rate
- Apportionment of overheads
- Whether loan interest is directly related to the loan obtained for
the manufacture/construction of the assembly line only
- Verify/review loan document
- Check interest computation and compare with what is charged
to non-current assets register.
(b) Areas of Audit Adjustments

- Audit journal will be raised in respect of the inventory of N1.5m
which belonged to a customer whose country has imposed
trading sanctions against our client‟s country.
- Where no amount has been received on the contract, write off
the full amount already incurred against income.
- Where part payment has been made, write off the inventory
value of N1.5m, but make provision for the amount paid.
- If interest calculations by the firm are materially different from
client‟s calculation, appropriate correcting journal should be
raised.

(a) 1 mark for any 10 points raised 10 10
(b) 21/2 marks for any four areas of audit adjustments listed 10 10
20
EXAMINER‟S REPORT
The question tests candidates understanding in respect to preparation of audit

planning memorandum and adjustments needed to be made by auditors to correct
material misstatement in financial statements.
About 40% of the candidates attempted the question and performance was poor.
The commonest pitfall of candidates was their lack of understanding of the

question.
Candidates are advised to read the Study Pack very well before writing the
examinations.

SOLUTION 4
(a) Company directors may wish to portray the company‟s performance as better
than it actually is under the following circumstances:
i. Where directors are entitled to bonus based on higher profit before tax
or higher turnover.
ii. When there is a plan to sell the company or a merger is envisaged.
iii. Where they intend to influence creditors or lenders particularly where
the company is seeking for facilities.
iv. Where retaining one or more directors is based on performance.
v. Where there has been some sort of embezzlement on the part of the
directors and there is need to cover up.
vi. Where the company wants to offer its shares to the public.
(b) Steps to be taken when misstatements are identified in various account

balances and other financial statements are:
- discuss the matter with management regarding its effect on the

accounts
- if the auditor considers that there is an apparent material
misstatement of fact, he should request management to take legal
advice and thereafter consider the legal advice received by the entity
- notify those charged with governance and explain what the auditor‟s
action will be concerning the misstatement
- take any further appropriate action (such as taking legal advice about
the matter)
- where management refuses to adjust the financial statements, the
auditor should modify its report based on appropriate circumstances.
(c) The audit procedures to be adopted include the following:
- Deploy experienced personnel in key areas of the clients audit e.g.

Revenue, bank balances, receivables, payables and assets.
- Obtain external confirmation in respect of certain balances – banks,
receivables and payables.
- Obtain expert advice/confirmation with experts in respect of plant and
equipment.
- Carry out an analytical review
- Discuss with those charged with governance.
- Evaluate the internal control system of the company
- Carry out detailed substantive tests

Marking Guide Marks
(a) Any three circumstances where the
Directors may wish to portray better performance than
actual 6
(b) Assess and advice on any two procedures 4
(c) Any four audit procedures to be adopted when fraud

is identified 10
20
EXAMINER‟S REPORT
The question tests candidates knowledge on the manipulation or window dressing

of financial statements to show better performance than actual and procedures to
be adopted by auditors when faced with such circumstances.
About 90% of the candidates attempted the question and performance was below
average.
The commonest pitfall of the candidates was their confusing issues to be discussed
in Part B for Part C and vice-versa.
Candidates are enjoined to cover the Study Pack adequately before examinations.

SOLUTION 5
(a) Information technology improves internal control in the following ways:

i. If correct data is presented to the machine and faultless computer
programs are used, the output will be error free.
ii. Passwords ensure that only those authorized can handle particular
transactions.
iii. Access is usually restricted to computer environment.
iv. Completeness of recording is assured by the design of programs and
procedures that allow only complete documentation to be entered into
the system.
(b) Risks specific to accounting system in an IT environment include:
i. Human error.
ii. Over-riding of controls by management for fraudulent acts.
iii. Possibility of collusion and fraud by members of staff particularly
computer staff.
iv. Failure to apply control properly
v. Poor program set-up
vi. Unauthorised access to master-file
vii. Unexpected systems break down through virus or other means
viii. Loss of audit trail

(a) Any three points how IT improves internal 6
control e.g. password, access restriction, etc
(b) Any six points on specific risks to

Accounting system in an IT environment 9
15
EXAMINER‟S REPORT
The question tests candidates understating of how IT improves internal control of an

accounting system. It also tests the risks associated with accounting system in IT
environment.
The pitfall of the candidates was stating the benefits of IT instead of stating how
Information Technology improves internal control.
Candidates are enjoined to familarise themselves with their Study Pack more
comprehensively.

SOLUTION 6
(a) The attitude of management of B Plc is at variance with the spirit of good
governance for the following reasons:
Corporate governance is the way in which companies are managed and
controlled. In particular, it focuses on the role of directors and their
responsibilities to shareholders and other stakeholders.
As a form of business entity, an important feature of companies is the
divorce of ownership from management. Good governance requires that
every company should:
- Be headed by an effective board which is collectively responsible for
the success of the company.
- Have a clear division of responsibilities at the head of the company
between the running of the board and the executive responsibility for
the running of the company‟s business. No one should have
unfettered powers of decision.
- Have a board that includes a balance of executive and non-executive
directors and in particular, independent non-executive directors such
that no individual or small group of individuals can dominate the
board‟s decision makings.
- Put in place a formal and transparent procedure for the appointment
of new directors to the board.
- Ensure that the board is supplied in a timely manner with information
in a form and of a quality appropriate to enable it to discharge its
duties. All directors should receive induction on joining the board
and should regularly update and refresh their skills and knowledge.
- Ensure that the board undertake a formal and vigorous annual
evaluation of its own performance and that of its committees and
individual directors.
(b) Matters of importance that are required to be communicated to those

charged with governance of a public company by its auditors include:
i. The responsibility of the auditors in relation to the financial
statements.
ii. Planning, scope and timing of the audit
iii. Significant findings from the auditors
iv. Material weaknesses, if any in the design, implementation or
operating effectiveness of internal control
v. Written representations required by auditors
vi. Auditors‟ independence
o A statement that relevant ethical requirements regarding
independence have been complied with.

o All relationships (including total fees for audit and non-audit
services) which may reasonably be brought to bear on
independence.
o The related safeguards that have been applied to
eliminate/reduce identified threats to independence.
Marking Scheme Marks Marks

(a) Any six points on good governance 9
11/2 mark for each point.
(b) Any six points on matters of importance
1 mark per point 6
15
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of Corporate Governance.

The commonest pitfall of the candidates was their lack of understanding of the
requirements of the question which bothers on Corporate Governance.
Candidates are advised to familarise themselves with the Study Pack.

SOLUTION 7
(a) Further information that the auditor would require before reaching his audit
opinion include:
- Obtaining sufficient evidence about the appropriateness of
management‟s use of the going concern assumption in the
preparation and presentation of the financial statements.
- Checking whether a material uncertainty exists that may cast
significant doubts on the entity‟s ability to continue as a going
concern.
- Performing risk assessment procedure to determine whether there are
events or conditions that may cast significant doubt on the entity‟s
ability to continue as a going concern.
- Enquire for written representation from management and where
appropriate, those charged with governance, regarding their plan for
future action and the feasibility of these plans.
- Enquire from the entity‟s legal counsel regarding litigation and
claims.
- Enquire from management the possibility of getting suppliers from
other sources.
- Whether management has been able to determine how long the
financial difficulties of their supplier will last
- Enquire about the current level of inventory and determine whether it
will be sufficient for the company until supplies resume, or alternative
found.
- Confirm whether there is in place Loss of Income Insurance Policy.
(b) Possible forms of opinion
Where the going concern assumption is appropriate but a material

uncertainty exists the auditor must consider whether the financial
statements:
o Adequately disclose the principal events or conditions that may cast
significant doubt on the entity‟s ability to continue as a going concern
and management‟s plans to deal with those events or conditions and
o Disclose clearly that there is a material uncertainty related to events
or conditions that may cast significant doubt on the entity‟s ability to
continue as a going concern.
If there is adequate disclosure then the auditor should express an unquilified

opinion but should use an “emphasis of matter” paragraph to highlight the

uncertainty and to draw attention to the relevant note in the financial
statements.
If there is no adequate disclosure then the auditor should express a
“qualified or adverse” opinion.
Where the going concern assumption is inappropriate the auditors should
express:
o an adverse opinion if the financial statements have been prepared on
a going concern basis.
o an unqualified opinion if the financial statements have been prepared
on an alternative acceptable basis (e.g. break-up basis) and there is
adequate disclosure of this basis. An “emphasis of matter” paragraph
may be required.

(a) Any seven additional information
one mark for each point 7
(b) Reference to Going Concern 1

Reference to “Uncertainty –subject to” 2
Stating adequate disclosure, unmodified opinion

and emphasis of matter paragraph 2
Stating that there is no adequate disclosure, then there is

adverse opinion if financial statements are prepared in line
with going concern. 2
Unmodified opinion where the financial statements are

prepared on break-up basis. 1
15
EXAMINER‟S REPORT
The question tests candidates‟ knowledge on the various forms of audit report.
About 80% of the candidates attempted the question and performance was fair.
The commonest pitfall of the candidates was their inability to identify the problem
in the question to be able to come up with relevant audit report.
Candidates are advised to cover the syllabus and study the Pack properly.

STRATEGIC FINANCIAL MANAGEMENT
QUESTION 1 COMPULSORY QUESTION (30 Marks)
SECTION A
Kay Plc. has been expanding rapidly through mergers and acquisitions. Currently,
it is considering a bid for Y Plc. a company whose shares are not traded. The latest
Statement of Financial Position of Y Plc. is summarised below:
N‟m N‟m
Non-current assets 378
Current assets:
Inventory 242
Receivables 163
Cash 21 426
Total assets 804
Current liabilities 242

Non-current liabilities 106 348
Share capital 120
Reserves 336 456
Capital and liabilities 804
Y Plc. has 120million N1 shares issued and fully paid. The non-current assets
shown in the Statement of Financial Position above include a property with a book
value of N80million. The agreed market value of this property is N136million. The
current market values of the remaining assets and liabilities are estimated not to
be substantially different from the figures included in the Statement of Financial
Position above.
Y Plc‟s latest Income Statement is summarised below:
N‟m
Revenue 756
Cost of sales (544)
Gross profit 212
Administrative cost (77)
Operating profit 135
Financing costs (12)
Profit before tax 123
Tax (39)
Profit after tax 84
Dividend (18)
Retained profit 66

No interim dividend has been paid. Kay Plc. believes that if the bid succeeds, it
can reduce financing and operating costs by N14,550,000 per annum (after tax).
Kay Plc. further believes that the annual cash flow it will derive from ownership of
Y Plc. over the next ten years will be approximately equal to that company‟s current
after tax profit plus the forecast cost savings. Kay Plc considers that cash flows
after year ten should be ignored in any valuation of potential acquisitions.
Kay Plc. has an issued share capital of 80,000,000 N1 shares with a current market
value of N32 per share (ex div). Current earnings per share amount to N4 and
current dividend per share is N1.20. The company‟s asset beta is 0.8. Kay Plc. has
no prior charge on capital and no other non-current liability. The risk free rate of
interest is 8% and the return on the market portfolio is 13%. Kay Plc. uses the
Capital Asset Pricing Model (CAPM) to estimate its cost of capital. The bid will be in
the form of a share exchange.
Required:
a. Explain, in general terms, the criteria a company should use in assessing a

potential company for takeover.
(6 Marks)
b. i. Calculate the maximum price Kay Plc. should offer per share in Y Plc.
to
avoid diluting current earnings per share after the takeover.
(3 Marks)
ii. Estimate the price Kay Plc. must offer per share in Y Plc. in order to
maintain dividend levels to shareholders in that company. You must
assume that Kay Plc. does not intend to change its own dividend per
share. (3 Marks)
iii. Suggest two other bases of valuing the shares in Y Plc. and calculate
the price per share on those bases.
(5 Marks)
c. Estimate Kay Plc.‟s share prices after the takeover for each of the offer prices
calculated in (b) above, assuming that Kay Plc. retains its current P/E ratio
after the takeover. (8 Marks)
d. Advise the directors of Kay Plc. on steps that could be taken to minimise the
risk of failing to realise the potential synergistic benefits arising from the
takeover. (5 Marks)
(Total 30 Marks)

SECTION B: ANSWER ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION
(40 MARKS)
QUESTION 2
Corporate failure is never the result of a random set of events. It is normally a

reflection of deep-seated corporate shortcomings.
a. Identify and discuss the financial symptoms of corporate failure in Nigeria.

(6 Marks)
b. Discuss SEVEN general causes of corporate failure in Nigeria. (14
Marks) (Total 20
Marks)
QUESTION 3
Gazoline Plc., a public limited company with a market value of N7billion, is a major
supplier of gas to both business and domestic customers. The company also
provides maintenance contracts for both gas and central heating customers using
the well-known brand name “Gas For All”.
Customers can call emergency lines for assistance for any gas-related incident, such
as a suspected leakage. Gazoline Plc. employs its own highly trained work force to
deal with all such situations quickly and effectively. The company also operates a
major new credit card scheme, which has been extensively marketed and is
designed to give users concessions such as reductions in their gas bills.
The company has recently bid N1.1billion for Smooth Car, a long established
mutual organisation (i.e. it is owned by its members) that is the country‟s leading
motoring organisation. Smooth Car is financed primarily by an annual subscription
of its 4.4million members. In addition, the organisation obtains income from a
range of other activities such as a high profile car insurance brokerage, a travel
agency and assistance with all types of travel arrangements. Its main service to
members is the provision of a roadside break-down service which is now an
extremely competitive market with many other companies involved. Although
many of its competitors use local garages to deal with break-downs, Smooth Car
uses its own road patrols.
Smooth Car members have to approve the takeover which, once completed, would
provide them each with a windfall of around N300 each.
Gazoline Plc. intends to preserve the Smooth Car name which is well-known by
customers.

Required:
a. Examine the possible reasons why Gazoline Plc. is seeking to buy Smooth
Car. (8 Marks)
b. Discuss how the various stakeholders of Smooth Car might react to the
takeover. (6 Marks)
c. Explain the potential problems that Gazoline Plc. may face in running
Smooth
Car now that the takeover has been achieved. (6 Marks)
(Total 20 Marks)
QUESTION 4
The latest Statement of Financial Position of Kilanko Nigeria Limited is summarised

below:
N‟000 N‟000 N‟000
Non-current assets at net book value 28,500
Current assets:
Inventory and work-in-progress 17,500
Receivables 9,000
26,500
Less: Current liabilities:
Unsecured payables 20,000
Bank overdraft (unsecured) 8,000
28,000
Working capital (1,500)
Total assets less current liabilities 27,000
Liabilities falling due after more than one year
10% Secured Debentures 15,000
Net assets 12,000
Capital and reserves:

Called up share capital 20,000
Statement of profit or loss (8,000)
12,000
Kilanko Nigeria Limited‟s called up capital consists of 20million N1 Ordinary Shares
issued and fully paid. The non-current assets comprise Freehold Property with a
book value of N15,000,000 and Plant and Machinery with a book value of
N13,500,000. The debentures are secured on the Freehold Property.

In recent years, the company suffered series of trading losses which have brought it
to the brink of liquidation. The directors estimate that in a forced sale of the assets,
they will realise the following amounts:
N
Freehold premises 10,000,000
Plant and machinery 5,000,000
Inventory 8,500,000
Receivables 8,500,000
The costs of liquidation are estimated at N3,850,000. However, trading conditions

are now improving and the directors estimate that if new investments in Plant and
Machinery, costing N12,500,000, were undertaken, the company should be able to
generate annual profits before interest of N8,750,000. In order to take advantage
of this, they have put forward the following proposed reconstruction scheme:
(i) Freehold premises should be written down by N5,000,000, plant and
machinery by N5,500,000, inventory and work-in-progress by N4,000,000
and receivables by N500,000.
(ii) The Ordinary Shares should be written down by N15,000,000 and the debit
balance on the Statement of Profit or Loss written off;
(iii) The secured debenture holders would exchange their debentures for
N7,500,000 ordinary shares and N6,500,000 14% unsecured loan stock
repayable five years‟ time.
(iv) The bank overdraft should be written off and the bank should receive
N6,000,000 of the 14% unsecured loan stock repayable in five years time as
compensation.
(v) The unsecured payables should be written down by 25%.
(vi) A rights issue of 1 for 1 at par is to be made on the share capital after the
above adjustments have been made; and
(vii) N12,500,000 will be invested in new plant and machinery.
Required:
a. Prepare the Statement of Financial Position of the company after the
completion of the reconstruction.
(6 Marks)
b. Prepare a report, including appropriate calculations, discussing the

advantages and disadvantages of the proposed reconstruction from the point
of view of:
i. The Ordinary Shareholders.
ii. The Secured Debenture holders
iii. The Bank. (14 Marks)
(Total 20 Marks)

(30 MARKS)
QUESTION 5
The working capital cycle of a business is the length of time between payment for
inventory entering into inventory and receipt of the proceeds of sales.
The table below gives information extracted from the Statement of Comprehensive
Income and the Statement of Financial Position of Bright Sum Plc. for the years
2012 to 2014.
2012 2013 2014
Inventory: N‟000 N‟000 N‟000
Raw materials 1,080 1,458 1,800
Work-in-progress 756 972 933
Finished goods 864 1,296 1,428
Purchases 5,184 7,020 7,200
Cost of goods sold 7,560 9,720 10,983
Revenue 8,640 10,800 11,880
Trade receivables 1,728 2,592 2,970
Trade payables 864 1,053 1,260
You are required to:
a. Calculate the working capital cycle for each of the 3 years. (9 Marks)
b. Explain THREE possible actions that might be taken to reduce the length of
the cycle and TWO possible disadvantages of each. (6 Marks)
(Total 15 Marks)
QUESTION 6
a. In recent years, one of the major problems faced by treasurers of

multinational companies has been the fluctuating value of the Naira against
other currencies and the difficulty of predicting future movements in the rate
of exchange. A treasurer has especially two important functions to perform
in a situation of rapid currency movements. firstly, to be clear as to the
nature of his company‟s exposure in terms of exchange transactions and
secondly, to minimise the risk from such exposure.
Required:
Describe TWO types of foreign exchange exposures which can arise in respect
of transactions involving a foreign currency. (6 Marks)

b. Owiya Osese Plc. a Nigerian Company is due to receive 500,000 Waka, the
currency of an African country, in 6 months time for goods supplied. The
company decided to hedge its currency exposure by using the forward
market.
The short-term interest rate in Nigeria is 15% per annum and the equivalent
rate in the African country is 18%. The spot rate of exchange is 2.50 Waka to
the Naira.
You are required to calculate how much Owiya Osese Plc. actually gained or
lost as a result of the hedging transaction, if at the end of 6 months, the
Naira in relation to Waka has:
i. Gained 4%
ii. Lost 2%
iii. Remained stable
NOTE: You may assume that the forward rate of exchange simply reflects the
interest rate differential in the two countries (i.e. it reflects the interest rate
parity analysis of forward rates). (9 Marks)
(Total 15 Marks)
QUESTION 7
Assume you are the Finance Director of a large multinational company listed on a
number of international stock markets. The company is reviewing its corporate
plan and also focuses on maximising shareholder wealth as its major goal. The
Managing Director thinks this single goal is inappropriate and therefore asks his
co-directors for their views on giving greater emphasis to the following:
(i) Cash flow generation.

(ii) Profitability as measured by profits after tax and return on investment.
(iii) Risk-adjusted returns to shareholders; and
(iv) Performance improvement in a number of areas such as concern for
environment, employees‟ remuneration, quality of working conditions and
customers satisfaction.
Required:
a. Provide the Managing Director a report for presentation at the next board
meeting which evaluates the argument that maximisation of shareholders‟
wealth should be the only true objective of a company.
(8 Marks)
b. Discuss the advantages and disadvantages of the Managing Director‟s
suggestions about alternative goals. (7 Marks)
(Total 15 Marks)

Formulae
Modigliani and Miller Proposition 2 (with tax)

𝑉𝐷
𝐾𝐸𝐺 = 𝐾𝐸𝑈 + 𝐾𝐸𝑈 − 𝐾𝐷 (1 − 𝑡)
𝑉𝐸𝐺
Asset Beta
𝑉𝐸 𝑉𝐷 (1 − 𝑇)
𝛽𝐴 = 𝛽𝐸 + 𝛽
(𝑉𝐸 + 𝑉𝐷 (1 − 𝑇)) (𝑉𝐸 + 𝑉𝐷 (1 − 𝑇)) 𝐷
Equity Beta
𝑉𝐷
𝛽𝐸 = 𝛽𝐴 + (𝛽𝐴 − 𝛽𝐷 ) (1 − 𝑡)
𝑉𝐸
Growing Annuity
𝑛
𝐴1 1+𝑔
𝑃𝑉 = 1−
𝑟−𝑔 1+𝑟
Modified Internal Rate of Return

1
𝑃𝑉𝑅 𝑛
𝑀𝐼𝑅𝑅 = 1 + 𝑟𝑒 − 1
𝑃𝑉𝐼
The Black-Scholes Option Pricing Model

C0 = S0N(d1) – Ee-rt N(d2)
𝑆0
𝐼𝑛 + (𝑟 + 0.5𝜎 2 )𝑇
𝑑1 = 𝐸
𝜎 𝑇
d2 = d1 - 𝜎 𝑇
The Put Call Parity

C + Ee-rt = S + P
Binomial Option Pricing

𝑢 = 𝑒 𝜎× 𝑇/𝑛
d = 1/u
𝑎 = 𝑒 𝑟𝑇/𝑛
𝑎−𝑑
𝜋=
𝑢−𝑑
The discount factor per step is given by = 𝑒 −𝑟𝑇/𝑛

Annuity Table
Present value of an annuity of 1 i.e. 1 - (1 + r)-n
r
Where r = discount rate
n = number of periods
Discount rate (r)
Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15

This table can be used to calculate N(d) the cumulative normal distribution

SOLUTIONS

SOLUTION 1
(a) The criteria that should be used to assess if a target is appropriate will
depend on the motive for the acquisition. The main criteria that are
consistent with the underlying motive include:
Benefit for acquiring undervalued company

The target firm should trade at a price below the estimated value of the
company when acquired. This is true of companies which have assets that
are not exploited.
Diversification
The target firm should be in a business which is different from the acquiring
firm‟s business and the correlation in earnings should be low.
Operating synergy
The target firm should have the characteristics that create operating
synergy. Thus, the target firm should be in the same business in order to
create cost savings through economies of scale or it should be able to create
a higher growth rate through increased monopoly power.
Tax savings
The target company should have large claims to be set off against taxes and
not sufficient profits. The acquisition of the target firm should provide a tax
benefit to the acquirer.
Increase the debt capacity
This happens when the target firm is unable to borrow money or is forced to
pay high rates. The target firm should have capital structure such that its
acquisition will reduce bankruptcy risk and will result in increasing its debt
capacity.
Disposal of cash slack

This is where a cash rich company seeks a development target. The target
company should have highly profitable projects with positive net present
value but no funds. This happens when for example the target company has
some exclusive right to product or use of asset but no funds to start
activities.
Access to cash resources

A company with a number of cash intensive projects or products in their
pipeline, or heavy investment in R&D might seek a company that has
significant cash resources or highly cash generating product line to support
their own needs.

Control of the Company
In this case the objective is to find a target firm which is badly managed and
whose stock has underperformed the market. The management of an existing
company is not able to fully utilize the potential of the assets of the company
and the bidding company feels that it has greater expertise or better
management methods. The bidding company therefore believes that the
assets of the target company will generate for them a greater return than for
their current owners. The criterion in this case is a market valuation of the
company that is lower than, for example the value of its assets.
Access to key technology

Some companies do not invest significantly in R&D but secure their enabling
technologies by acquisition. Pharmaceutical companies who take over
smaller biotechs in order to get hold of the technology are good examples of
this type of strategy.
b. i) Purchase consideration per share.

If Kay Plc.‟s share capital is 80 million N1 shares and its current
earnings per share is N4 then its total earnings will be:
(80 million x N4) = N320 million
If Y Plc‟s total earnings is N84 million as per income statement and
the additional earnings after takeover is N14.55 million then total
expected earnings after merger will be:
N
Kay Plc. existing earnings 320,000,000
Y Plc.‟s existing earnings 84,000,000
Expected additional earnings 14,550,000
Total expected earnings 418,550,000
Required Earnings Per share = N4
Therefore, total number of post acquisition shares
 418,550,000  = 104,637,500 shares
N 
 4 
Less: Existing share of Kay Plc. = 80,000,000 shares
 No of shares to be issued to
Y Plc.‟s shareholders = 24,637,500 shares
If the market value of Kay Plc. is N32 per share ex-div, purchase
consideration for Y Plc. will therefore be:
24,637,500 shares x N32.00

= N788,400,000

Since the existing number of shares of Y Plc. is 120 million, then the
purchase consideration per existing share in Y Plc. will be:
𝑁788,4000 ,000
= 120,000,000,000 = N6.57
ALTERNATIVE METHOD
Let x represent the post-acquisition number of shares in Kay Plc.
Post –acquisition total earnings:

N
Kay Plc‟s existing earnings 320,000,000
Y Plc‟s existing earnings 84,000,000
Synergy 14,550,000
418,550,000
N418,550,000
EPS = x
That is N4 
N418,550,000
x
Therefore 4x = N 418,550,000
x = 104,637,500 shares
Shares issued to Y Plc. will be (104,637,500 - 80,000,000)
= 24,637,500 Shares
Total value placed on Y Plc. will be 24,637,500 x N32 = N788,400,000
Value per existing share of Y Plc. will therefore be:
= N788,400,000 ÷120,000,000
= N6.57
Thus maximum price payable per share is N6.57
ii) Purchase consideration per share.
Total dividend paid to the Shareholders of Kay Plc. is 80 million x

N1.20=N96million
Existing dividend paid by Y Plc. = N18million

Total dividend paid by Kay Plc. & Y Plc.
to their shareholders before merger = N114million
Required dividend per share after merger = N1.20
Therefore, total number of shares after merger is

𝑁114 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
𝑁1.20
= 95,000,000 𝑠ℎ𝑎𝑟𝑒𝑠

Total number of post - acquisition shares = 95,000,000
Current number of shares – Kay Plc. = (80,000,000)
Number of shares to be issued to shareholders of Y Plc. = 15,000,000
If the market value of Kay Plc‟s share is N32.00

Therefore total purchase consideration for Y Plc.‟s
will be 15 million x N32 = N480,000,000
Since number of shares in Y Plc. is 120 million, then

the purchase consideration for Y Plc. will be
N480 million
= 120 𝑚𝑖𝑖𝑙𝑖𝑜𝑛 𝑠ℎ𝑎𝑟𝑒𝑠
= N4 per share
ALTERNATIVE METHOD
Let x represent total shares issued by Y Plc.
 Total dividend receivable in Kay Plc by Y Plc. shareholders will be N1.20 x
This should equal total current dividend in Y Plc, N18,000,000.
Thus: 𝑁1.20𝑥 = 𝑁18,000,000

𝑁18,000,000
𝑥=
𝑁1.20
= 15,000,000 shares
Total purchase consideration will therefore be:

15,000,000 X N32 = N480,000,000
Thus, amount payable per existing share in Y Plc. will be:
N480,000,000/120,000,000= N4
(iii) Two other possible valuation methods in this question are:
Asset Basis and Discounted Cashflow method.
Asset Basis
Value of Y Plc‟s equity as per its statement of financial position is N456 million
Add: Increase in value of property (N136- N80) million = N56 million
Asset value of Y Plc. will therefore be (N456 + N56) million = N512 million
Since the number of shares held by the shareholders of Y Plc is 120 million, then
the purchase consideration for Y Plc. using the assets basis will be:
𝑁512,000,000
= 𝑁4.26667 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
120,000,000
= N4.27 per share

Discounted Cash Flow (DCF) Method:
N
Annual cash flows from Y Plc. 84,000,000
Expected savings-Financing/Operation Cost 14,550,000
Total Expected annual Cash flows 98,550,000
Therefore expected annual cash flows for the next ten years is N98.550,000.
Kay Plc‟s cost of capital using CAPM is
Ke = Rf +β(Rm –Rf)
= 8% + 0.8(13%-8%)
= 12%
Therefore, purchase consideration for Y Plc. will be:

N98,550,000,000 discounted @ 12 percent for 10 year period
i.e N98,550,000,000 x 5.65 = N556,807,500
Since the number of existing shares held by the shareholders of Y Plc. is 120
million, then the value per share to Y Plc. will be:
𝑁556,807,500
= N4.64006 = N4.64
120,000,000
c) Kay Plc.‟s current P/E ratio is
𝑉𝑃𝑆 𝑁32
𝐸𝑃𝑆
= 𝑁4
=8
If the P/E ratio is maintained, the value will be:

Post- acquisition earnings of Kay Plc x P/E ratio
i.e N418,550,000 x 8 = N3,348,400,000
Therefore calculations of new value per share of Kay Plc‟s will be as follows:
b (i) b(ii) Assets DCF Method

Basis
N‟000 N‟000 N‟000 N‟000
Post acquisition Value of Kay Plc. 3,348,400 3,348,400 3,348,400 3,348,400.0
Purchase consideration for Y Plc. (788,400) (480,000) (512,000) (556,807.5)
New value of Kay Plc 2,560,000 2,868,400 2,836,400 2,791,592.5
Existing number of shares 80,000 80,000 80,000 80,000
Share Price: N32 N35.855 N35.455 N34.895

d) The steps that could be taken to minimize the risk of failing to realize the
potential synergistic benefits from the takeover include:
i. Integration Plan: The acquiring company should prepare a detailed

strategic plan for integration based on its own and the acquired
company‟s strengths and weaknesses. The plan should highlight the
objectives and the process of integration.
ii. Communication: Management should inform employees about their

involvement in making the integration smooth and easy and remove any
ambiguity and fears in the mind of the staff
iii. Authority and responsibility: Management should take the employees

into confidence and decide the authority and responsibility relationships.
The detailed organizational structure can be decided later to avoid
confusion and indecisiveness.
iv. Cultural integration:- Management should focus on cultural integration of

the employees of the merged companies. There is a need for
understanding of the cultures of the two organizations. Clear
communication and training can help to bridge the cultural gaps.
v. Skills and competences upgrading: Management should prepare and

immediately implement a plan for skill and competencies upgrading
through training.
vi. Structural adjustment: Management should be prepared to make

adjustments to accommodate the aspiration of the employees of the
acquired company.
vii. Control systems: Management should ensure that it is in control of all

resources and activities of the merged firm. It must put proper financial
control in place so that resources are optimally utilized and wastage
avoided.
viii. Kay Plc. should respect the products, markets and customers of Y. Plc.
ix. Retention of key personnel (especially of Y.Plc) possibly by offering them

enhanced packages.

Marking Guide Marks
(a) 1 mark for each valid point 6

(b) (i)Post-acquisition total earnings 1
No of shares issued to Y. Plc. 1
Total value placed on Y. Plc. 1
/2_
Maximum price payable per share to Y. Plc. 1
/2_
3
(ii) Post-acquisition dividend 1
No of shares issued to Y. Plc. 1
Total Price payable 1
/2_
Maximum price payable per share to Y. Plc. 1
/2_
3
(iii) Asset Method
Total value of Equity 1
Value per share payable to Y. Plc. 1
DCF Method
Calculation of cost of equity using CAPM method 1
/2
Annual total cashflow expected from takeover 1
Identifying correct discount factor. 1
/2
Total value 1
/2
Value per share 1
/2
5
(c) Calculation of P/E ratio 1
/2
Stating the post-acquisition earnings of Kay Plc. 1
/2
Calculation of the expected total value of Kay Plc. 1
- Post-acquisition
Using the total post acquisition value of Kay Plc. as the
opening figure of the 4 scenarios 1
Amount paid for Y Plc for the 4 scenarios (1/2 mark each) 2
Total value of existing shares in Kay Plc for the 4 scenarios (1/2 1
mark each)
Value per existing share in Kay Plc, for the 4 scenarios
(1/2 mark ech) 2 8
(d) 1 mark for each valid point (max of 5 points) 5
Total marks 30
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of the issues involved in strategic acquisition
and the different methods of valuing companies for takeover.
Being a compulsory question, almost all the candidates attempted it but most of them did
not understand its requirements. They therefore performed poorly.
Candidates‟ commonest pitfall was their failure to answer the question correctly which may
be due to their inadequate knowledge of the different methods of valuing companies for a
takeover.
Candidates are advised to always cover the syllabus adequately by giving consideration to
all sections of the syllabus in their preparation for the Institute‟s examinations. They should
also improve their knowledge on mergers and acquisitions.

SOLUTION 2
(a) Financial symptoms of corporate failure
i) Declining profitability: Low, negative and/or an adverse trend in operating

profitability figures normally represent a distress situation;
ii) Declining liquidity: Unless timely stemmed, declining profitability
inevitably turns into decreased ability to generate cash and cash crisis.
iii) Declining solvency: Declining profitability sooner or later leads to declining
solvency when liabilities exceed assets. A solvency crisis triggers action by
banks and other lenders concerned about lack of cover for their exposure;
and
iv) Inadequate capital: When a company‟s capital is not adequate for the
business it is engaged in, the company is likely to fail. In a similar vein, if a
company‟s gearing/leverage ratio is high and level of income is not enough
to meet the interest payments on the debts, that is, when the interest cover
and the liquidity is low, it may lead to problem in meeting the payment of
interest on loans.
(b) General Causes of corporate failure in Nigeria
i) Bad management: Management is the process of combining, allocating and

utilizing an organizations input(men, materials and funds) by planning,
organizing, directing and controlling for the purpose of producing output-
goods and services- desired by customers in order to accomplish
organizational objectives. Towards achieving this objective, it will be
necessary to watch the cost, sales, profit margin etc of the organization;.
The end-result of all these management tasks and processes will show in
the financial ratios like cash flow to total debt ratio, return on assets ratio,
stability of the earnings and the interest coverage ratio, the retained
earnings to total assets ratio, the current ratio, and the size of total assets
which are some of the ratios that indicate corporate success or failure. From
this, it can be safely concluded that how well managers do their work
determines whether a company will fail or not.
ii) Technology: Although investment in technology is a management decision

some companies lack the resources to acquire the right technology for their
industry. This sometimes increases their overhead and their unit cost when
compared with their competitors who are able to acquire such modern
technology. Since technology assists in the price of goods and service
delivery time, companies that are not able to move with the new
technological developments are bound to lose out even though acquiring
new technology goes a little beyond management decision. Investment in
new technology depends on the resource available to the company.

iii) Frauds: Although many companies invest in internal control to avoid or
prevent fraud, it still occurs. Corporate fraud has assumed an alarming
proportion in Nigeria today despite the legal provisions made against it. It
has led to the failure of companies by depleting their resources.
iv) Political & Environmental factors: These are factors that impact negatively
or otherwise on the company beyond the control and even sometimes the
cognitive forecast of its management. It has to do with political factors such
as political turmoil and environmental factors such as the Boko Haram
Insurgency.
v) Cost of funds: Companies raise short term funds for working capital from
the banks (money market) while they raise long term funds from the capital
market. Since cost of funds in Nigeria is very high firms find it very difficult
to source funds for their operations from banks and this has been having
negative effect on their operations.
vi) Inflation: This has made the cost of goods to be high and since the incomes
of the consumers are not moving at the same rate the suppliers increase the
price of their products, it has become difficult for consumers to buy the
products. Many companies‟ warehouses are therefore overstocked with
unsold goods thereby affecting their operational performance.
vii) Poor infrastructural facilities: The poor level of infrastructural facilities in

the country creates additional costs for organizations in the form of
provision of electricity, water, transportation , security, communication, etc.
viii) Multiple Taxation: Businesses in Nigeria are exposed to multiple taxation

from Local Government level to Federal Government level thereby creating
additional cashflow burden. Furthermore, a large number of illegal charges
are imposed on organizations by corrupt government officials at the various
ports, all of which add to the cost of doing business in the country.
ix) Government Foreign Exchange Policy: This is also an area that contributes
to corporate failure in the country. For example, the recent Central Bank
guidelines on foreign exchange is adversely affecting many industries as
they are now having a shortage of foreign currency to import necessary
inputs.

Marking Guide Marks
(a) 1 mark for each valid point identified(Max 3 points) 3
1 mark for the discussion (3 marks max) of the valid
points identified 3
6
(b) 1 mark for each valid point (max 7 points) 7
1 mark for the discussion of the valid points 7
14
Total 20
EXAMINER‟S REPORT
The question tests candidates‟ understanding of the analysis and evaluation of the
symptoms and causes of corporate failure.
About 90 Percent of the candidates attempted the question and performance was average.
Most of the candidates that attempted the question showed some understanding except for
a few that could not differentiate between the symptoms and causes of corporate failure.
Candidates‟ commonest pitfall was their inability to express themselves well. They are
therefore advised to improve their communication skills.

SOLUTION 3
(a) The objective of a takeover should be consistent with the overall objective of
the firm making the takeover, which in most cases should be to increase the
wealth of the shareholders.
However, there are good and bad reasons behind a takeover. Among the
good reasons is the possibility of creating synergy, that is increasing the
wealth of the shareholders. Although Gazoline Plc. and Smooth Car are in
different market sectors, there is a link between the two. It is possible for
Gazoline Plc. to make use of the services of Smooth Car in their travelling
arrangement for the supply of gas to their customers. They may also use the
services of Smooth Car to transport their staff for their maintenance contracts.
This is also applicable for the insurance of their staff, their assets and the
business. It could therefore be said that the services provided by Smooth Car
are complementary to the business of Gazoline Plc.
In this respect, some possible reasons why Gazoline Plc. may seek to buy
Smooth Car include:
i To create synergy, that is to increase the wealth of its shareholders;

ii. To achieve diversification – spreading its risk. The most obvious being
the marketing systems, the call centre system and local offices and
training facilities for mobile repair/emergency staff;
iii. Elimination of duplicate and competing facilities;
iv. To ensure availability of efficient and reliable transport systems for its
staff on maintenance contracts and the supply of gas;
v. To take advantage of the stable earnings of Smooth Car;
vi. To take advantage of the cash flow profile of Smooth Car, that is, to
reduce the risk of the company‟s (Gazoline Plc.) cashflow profile;
vii. To take the opportunity of the takeover to create a new outlet for its
product by marketing it to the customers on the data base of Smooth
Car (the target company); and
viii. The take over of Smooth Car will abolish its mutual status and will
allow equity funds for expansion to be raised more easily, by share
issues made by the parent company, thus, reducing the cost of capital.

b) The various stakeholders of Smooth Car are its members, who are the
owners, directors and senior managers, other employees, customers and
creditors.
i) Members: They are likely to be happy with the takeover in view of the
promised wind fall. However, they will be interested also in the future
direction of the new company, its earning capacity and the financial
benefits that may accrue to them. They will also be interested in the
consideration for the takeover apart from the wind fall. Since Smooth
Car brand name will be retained, members will like to ensure that the
company is well managed and its culture of quality services
maintained so as to preserve the good name for which it is known. It is
also likely that some members may not feel comfortable with the
takeover as the organisation has always been part of them. These are
the people that may not like change. They may therefore likely look
elsewhere for the maintenance of their vehicles.
ii) Directors and Senior Managers:-These are the members that have been
operating the business of the organisation. While they may not be
comfortable with the takeover because of the likelihood of losing their
jobs, they are expected to act in the best interest of the organisation
and ensure that the takeover is in the interest of their members.
However, some of them may be interested in what they will benefit
from the takeover and therefore, will like to know what the
acquirer(Gazoline Plc) has in stock for them with respect to retention
or redundancy. They will also want to know the ex-gratia payment that
will be due to them in case of redundancy.
iii) Creditors : The creditors will be interested in their payments and when
this are likely to be made, by ensuring that adequate arrangement is
made for their settlement. This will be done by making sure the
acquirer, that is Gasoline Plc., is financially sound.
iv) Government/Regulatory Authorities: Government through the Security

and Exchange Commission, may be interested in the proposed
takeover if it creates monopolistic situation.
c). Gazoline Plc.may face a number of problems after the takeover has been
achieved. These include:
i) Former members of Smooth Car who did not agree with the takeover,
and who may have been actively resisting it, may decide to change
their service provider to another organisation. The parent company
(Gazoline Plc.) will have to be pro-active in giving confidence to all its
Smooth Car Customers;

ii). The two organisations probably had different management styles;
Gazoline Plc. being a stock exchange quoted company with a clear
need for financial results and Smooth Car being more oriented to
serving its customers and acting as a pressure group to represent their
needs, conflicts may arise between directors, managers and
employees of Smooth Car after the takeover as a result of an enforced
change in management style from Gazoline Plc,
iii). Actual and feared redundancy, relocations, changes in work practice,

training methods and other problems may demotivate Smooth Car
employees, causing resistance and a drop in productivity. In this
respect, delays in information provision and decision making can
make the situation worse, and.
iv). Competitors may take advantage of re-organisation at Smooth Car in

order to gain market share.
Marking Guide Marks
a) 2 marks for each valid reason identified

(maximum of 4 reasons) 8
b) 1
/2 mark for various stakeholders identified
(Maximum 4) 2
1 mark each for stating the likely reactions of the
identified 4 stakeholders 4
6
c) 2 marks for each identified potential
problem/discussion(maximum of 3 identified
problems) 6
Total marks 20
EXAMINER‟S REPORT
The question tests candidates understanding of the issues in strategic merger.

These include the benefits of mergers and acquisitions to the acquiring company.
Candidates are expected to give reasons for acquisitions and discuss the integration
challenges that may be faced after acquisition. About 90% of the candidates
attempted the question and performance was good. However, few candidates could
not differentiate between „Shareholders‟ and „Stakeholders‟.
Candidates are advised to read, understand and interprete questions appropriately
and note their specific requirements before attempting them.

SOLUTION 4
(a) KILANKO NIGERIA LIMITED

STATEMENT OF FINANCIAL POSITION
N‟000 N‟000
Non-current assets:
Freehold Property (WI) 10,000
Plant & Machinery (WI) 20,500
30,500
Current assets:
Inventory & work in progress (W2) 13,500
Receivables (W2) 8,500
22,000
Less: Current liabilities
Unsecured payables (W4) 15,000
Working Capital 7,000
Total assets less current liabilities 37,500
Liabilities falling due after 1 year
14% unsecured Loan Stock (Secured Debenture (6,500)
Holders)
14% unsecured Loan Stock (Bank) (6,000)
25,000
Called up share capital (original Shareholder W3) 5,000

Called up share capital (secured debenture holders) 7,500
Rights issues (original Shareholders & Debenture 12,500 25,000

holders)
Workings
1. Non-current assets:
Freehold property (N15 million – N 5 million) = N10 million
Plant and machinery (N13.5-N5) million + N12.5 million) = N20.5 million
2. Current assets
Inventory & Work in progress (N17.5 –N4) million = N13.5 million
Receivables (N9 - N0.5 million) = N 8.5 million
3. Ordinary Share Capital

Called up share capital
(N20 - N 15) million = N5 million (Original Shareholders
N7.5million (Secured Debenture holders)
Total capital before the rights issue = (N5 + N7.5) Million = N12.5 million
Rights issue 1 for 1 = N12.5 million

Therefore Total Capital will be
(N12.5 + N12.5) million =N25 million
4. Unsecured payables
N20 million x 0.75 = N15 million
b) OMO FINANCIAL SERVICES LTD

10 Adedeji Street, Lagos
3/12/2015
The Managing Director

Kilanko Nigeria Limited,
20, Mawamiwa Street,
Odi-Olowo,
Mushin,Lagos.
Sir,
PROPOSED LIQUIDATION/RESTRUCTURING OF KILANKO NIGERIA LTD
In order to be able to make a critical review of the proposed reconstruction of your

company from the point of view of the following stakeholders,
i. Ordinary Shareholders
ii. Secured Debenture Holders and
iii. The Bank
it will be necessary to prepare detailed analysis of the reconstruction under

liquidation and under the suggested restructuring.
In case of liquidation- The position of the company will be as follows:
Realisable Value
N
Plant and machinery 5,000,000
Inventories 8,500,000
Receivables 8,500,000
22,000,000
Less: Liquidation Expenses 3,850,000
Amount available to Creditors 18,150,000
10% Secured Debenture N15,000,000
This is secured with the freehold property whose book value of N15 million could
only realise N10 million.

Therefore the 10% secured debenture holders will realize the security for N10
million and thereafter claim the balance of N5 million along with other creditors.
In this case the total outstanding liability payable will be as follows:
(N)
Unsecured payables 20,000,000
Bank overdraft (Unsecured) 8,000,000
Balance payable to secured debenture holders 5,000,000
33,000,000
These Creditors will have to share the sum of N18,150,000 which is the amount
available to creditors as earlier calculated
Therefore, the proportional amount available to the creditors per naira will be
N18,150,000 = 0.55 or 55k
N33,000,000
The sharing of the available fund will be as follows:
i) Ordinary shareholders-They will receive nothing
ii) The 10% secured debenture holders will receive N10,000,000 that is from
the realised asset and 0.55 x N5,000,000 = N2,750,000 from the
proceeds of the other assets. They will therefore receive a total amount of
N10 million + N2.75 million =N12.75 million i.e N12,750,000
They will therefore lose (N15- N12.75) million i.e N2.25 million.
iii) The bank will receive:

0.55 x N8,000,000 = N4,400,000
Losing (N8 - N4.4) million ie N3.6 million
If the reconstruction succeeds as recommended, the Statement of Financial Position
of the reconstructed company as attached (solution to the part.
However, should the proposed annual profit before interest of N8,750,000 be

achieved, the company‟s Statement of Profit or Loss will be as follows:
N
Profit before tax and interest
8,750,000
Less: Interest on 14% N6.5 million unsecured loan stock
(910,000)
Bank – 14% N6 million unsecured loan stock
(840,000)
7,000,000
The Earnings Per Share (EPS) will therefore be N7,000,000 = 0.28 or 28k
25,000,000

In this case, the position of the stakeholders will be as follows should the
reconstruction succeed.
i. The original shareholders will earn 28k per share after investing an
additional capital of N5 million. In effect they will only own 10 million out of
the 25 million shares of the company making them non-controlling
shareholders. However their share of 28k earning on the old shares will be
N0.28 x 5 million and their share on the rights issue will also be N0.28 x 5
million. These will be N1.4 million + N1.4 million i.e N2.8 million.
ii. The secured debenture holders will receive N10 million being the proceeds
of the security. They will also receive N910,000 interest per annum on the
unsecured loan stock for 5 years and at the end of the fifth year, they will
receive N6.5 million being the proceeds of the insured loan. They will in
addition receive N0.28 on the 7.5 million ordinary shares allotted to them
and N0.28 on the rights issue. In effect they will earn N2.1 million + N2.1
million =N4.2 million on the shares held.
Their annual earnings will therefore be:
Interest on the 14% unsecured Loan Stock N 910,000
Earnings per share on their shareholdings N 4,200,000
Total yearly earnings N 5,110,000
iii. The bank – The bank will receive a yearly interest of N840,000 for 5 years
after which they will receive the sum of N6 million being the principal value
of the 14% unsecured loan stock. However, the bank will lose N2 million
immediately.
In conclusion, it is clear from the two cases that the secured debenture
holders benefit most whether on liquidation or on reconstruction.
However, the restructuring is the best option for the company and should
therefore be pursued.
Thanks
Yours faithfully
Signed
For:Omo Financial Services Ltd

Marking Guide Marks
a) Calculation of Non-current assets–Freehold Property/Machinery 1
b) Current assets – Inventory & work in progress and
Receivables 1/2 mark each 1
Unsecured payables ½
Total assets less current liabilities ½
Unsecured loan – Debenture holders/Bank (½ each) 1

Called-up share capital (original Shareholders /secured
Debenture holders 1/2 each 1
Rights issue (original Shareholders/Secured debenture holders)
1
/2 each 1
6
b. Date, address, subject matter etc 2
Working – liquidation Account 1
Secured Debenture (Stating the fact that the secured
Debentures holders would realize the secured assets and then
claim for the balance along with other creditors)
2
Workings of the dividend available to creditors 1
6
Stating the entitlements of each of the shareholders i.e ordinary
shareholders, the secured debentures and the bank in case of
liquidation. 3
Calculation of the Earnings per share in case of reconstruction

1
Stating the entitlements of each of the Stakeholders i.e

Ordinary Shareholders, the secured debenture holders and the
bank in case of restructuring 3
Conclusion 1
8
Total Marks 20
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of the principles of reconstruction.
About 50% of the candidates attempted the question but performance was poor. Candidates
are expected to prepare the Statement of Financial Position after the reconstruction and
also evaluate the scheme of reconstruction but they showed lack of understanding of the
requirements of the question hence the poor performance.
Candidates‟ commonest pitfall was their lack of understanding of the requirements of the
question.
Candidates are advised to read wide and cover the syllabus adequately for better result.
They should endeavour to remember the laws guiding liquidation and also improve their
knowledge of corporate restructuring.

SOLUTION 5
(a) Working Capital Cycle
2012 2013 2014

i) Raw material R.M .Inventory 365
x
Inventory (R.M Purchases 1 1,458 365 1,800 365
Inventory) = =N 1,080 x 365 =76 N x = 76 N x =91
5,184 1
7,020 1 7,200 1
ii) Trade Payable TP
x
365
(TP) Purchases 1 1,053 365 1,260 365
=N 1,864 x 365 =(61) N x =(55) N x =(64)
5,184 1
7,020 1 7,200 1
iii) Work in WIP
x
365
Progress (WIP) Cost.ofSales 1 972 365 933 365
=N 757 x 365 =37 N x = 37 N x =31
7,560 1
9,720 1 10,983 1
iv) Finished Goods F .G.Inventory 365
x
Inventory (F.G. Cost.ofSales 1 1,296 365 1,428 365
Inventory)
N x =49 N x =47
=N 864 x 365 =42 9,720 1 10,983 1
7,560 1
v) Trade TR
x
365
Receivable Re venue 1
(TR) =N 1,728 x 365 = 73 2,592 365 2,970 365
8,640 1 N x =88 N x =91
10,800 1 11,880 1
Working
Capital
Cycle in days 167 195 196
(b) Possible actions that might be taken to reduce the length of the working
capital cycle and their disadvantages include:
i) Raw Material Inventory

Reducing Raw Materials Inventory: This could be achieved by reducing
safety stock, making orders for small quantity of raw materials, GIT
purchases, etc.
Disadvantages include:
- Probability of stock outs;
- Increased order cost; and
- Probable delay in manufacturing

ii) Trade Payable: This could be done by delaying payment to the
creditors.
- Loss of goodwill,
- Loss of suppliers; and
- Loss of cash discounts.
iii) Work-in-progress: This could be achieved by improved technical know

how and the introduction of new technology that is, introducing
newly developed efficient machines.
- Cost of capital investment as a result of the need for injection of
new capital;
- Need to hire experienced and innovative staff hence an increase in
salary cost may occur;
- Increased capital may be required; and
- Possible increase in cost of research and development
iv) Finished goods: This could be done by reducing the inventory of

finished goods.
- Possibility of stock out;
- Loss of sales; and
- Customers‟ loss of interest in the goods and possible search for
alternatives.
v) Trade Receivable – This could be achieved by offering cash discounts

and improvement in the collection of overdue balance by factoring or
engaging debt collectors.
- Cost of discounts;
- Possibility of customers taking the discount and not making early
payment;
- Cost of collection in case of debt collectors or Factors;
- Reduction of customers goodwill; and
- Loss of sales

Marking Guide Marks
a. ½ mark for each element of the working capital cycle correctly

computed- 15 in all 71/2
½ mark for each working capital cycle for 3 yrs 11/2
9
b. 1 mark for each possible action suggested(Max 3) 3
½ mark for each disadvantage given(2 disadvantages are to be
stated for each possible action suggested 3
6
Total 15
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of management of working capital.
Candidates are expected to calculate the working capital cycle and to explain the possible
policies required to reduce it. About 90% of the candidates attempted the question and
performance was good. However, a few of the candidates confused working capital with
working capital cycle and therefore performed poorly.
Candidates are advised to always cover the syllabus adequately for better results. They are
also advised to take time to read, understand and interpret questions appropriately and
note their specific requirements before attempting them.

SOLUTION 6
(a) Types of foreign exchange exposures which could arise in respect of

transactions involving foreign currency include: Translation Exposure,
Transaction Exposure and Economic Exposure.
(i) Translation exposure

This is the risk of losses or gains arising on the translation of the
Financial Statements of foreign subsidiaries into the currency of the
parent company for the purpose of preparing consolidated accounts.
It arises in international companies with foreign subsidiaries.
Statement of Profit or Loss and Statement of Financial Position will be
denominated in the local currency of the subsidiary and on
consolidation will be translated into the currency of the holding
company. On translation of the Financial Statements from one
currency to another, losses or gains arise due to exchange rate
movements.
(ii) Transaction exposure

This is the foreign exchange risk that arises in transactions between
two parties where the normal transaction currency of each party is
different and when the transaction involves a future receipt/payment
between the two parties. The amount received in domestic currency
might be different from the amount originally expected because of
movements in the exchange rate between the date of the initial
transaction and the date of settlement (payment/receipt).
(iii) Economic exposure

This refers to the long term movement in exchange rates caused by
changes in the competitiveness of a country. It is therefore the risk
that a company might choose to locate its operations in a country
whose currency gains in value over time against the currencies of its
competitors in world markets. The consequence of an increase in the
value of the domestic currency is a loss of competitiveness.
(b) Owiya Osese Plc.

Using Direct Quote
Interest rates in Nigeria over 6 months will be ½ x 15% = 7.5%
Interest rates in the African country over 6 months will be ½ x 18% = 9%
Implied forward rate using Interest Rate parity theory:
i.e I +RF = F
I + RD S
Where: RD = Domestic rate of interest
RF = Foreign rate of interest

S = Spot exchange rate stated in terms of domestic currency
(DC) per unit of foreign currency (FC).
F = Forward exchange rate
Substituting figures for the formula, the position will be:
1.09 F
 1.075  1.09  2.5
1.075 2.5
2.725
F   2.5349
1.075
Gain/Loss from hedging
i) if the Naira has gained 4%:

Waka actual rate will be 2.5 x 1.04 = 2.6
500,000
 the unhedged receipt =  N192,308
2.6
500,000
Whilst the hedged receipt will be =  N197,246
2.5349
 Gain from hedging = N197,246 – N192,308

= N4,938
ii) If the Naira has lost 2%
Waka actual rate will be = 2.5 x 0.98 = 2.45
500,000
Unhedged receipt will be = N204,082
2.45
500,000
Whilst the hedged receipt will be  N197,246
2.5349
 Loss from hedging = N204,082 – N197,246
= N6,836
iii) If the Naira has remained stable

Waka actual rate is still 2.5
500,000
Unhedged receipt = = N200,000
2.5
Whilst the hedged receipt is 500,000 = N197,246
2.5349
 Loss from hedging = N200,000 – N197,246
= N2,754

ALTERNATIVE METHOD
Direct Quote
The interest rates for 6months investment are:

* Naira 15  2 = 7.5%
* Waka 18  2 = 9%
Implied forward rate:
1  RF S

1  RD F
S= 1
2.5 = 0.4000 (N/Waka)
RF= 0.09
RD= 0.075
1.09 0.40

1.075 F
F = 0.3945 (N/Waka)
Evaluation
i) Naira gained 4% N/Waka
1 0.3846
Actual rate = =
2.50  1.04
N
Hedged receipt (500,000 x 0.3945) 197,250
Unhedged receipt (500,00 x 0.3846) (191,300)
Gain from hedging 4,950
ii) Naira lost 2% N/Waka

1 0.4082
Actual rate = =
2.50  0.98
N
Hedged receipt 197,250
Unhedged receipt (500,000 x 0.4082) (204,100)
Loss from hedging 6,850
iii) Naira remains stable N/Waka

Actual rate = (N/Waka) 0.4000
N
Hedged receipt (500,000 x 0.3945) 197,250
Unhedged receipt (500,000 x 0.4) 200,000
Loss from hedging 2,750

Marking Guide Marks
a. 1 mark for each identified exposure(max 2) 2

2 marks for the description/explanation of each identified
exposure 4
b. Calculation of the interest rate for 6 months both ½
domestic and foreign.

Stating the formula applied in the calculations of the ½
implied forward rate.

Calculation of the implied forward rate 2
Calculation of the gain/loss from hedging when the Naira
gained 4% 2
Calculation of the gain/loss from hedging if naira lost 2%
2
Calculation of the gain/loss from hedging if naira remains
stable 2
9
Total 15
EXAMINER‟S REPORT
The question tests candidates understanding of management of financial risk with
emphasis on the different foreign exchange risks and the use of currency forward contract,
to hedge foreign exchange risk.
Candidates are expected to give two types of foreign exchange risk and calculate the
opportunity cost / gain of hedging. About 15% of the candidates attempted the question
and performance was poor
Candidates‟ commonest pitfalls were their inability to understand foreign exchange risk
and the various hedging instruments. They also failed to remember the interest rate parity
formula needed to calculate the implied forward rate.
Candidates are advised to always cover the syllabus adequately in their preparations for
the Institutes‟ examinations. They should also endeavour to remember key formulae and
improve their knowledge on the management of financial risk section of the syllabus for
better result in future.

SOLUTION 7
(a)
To: The Managing Director
From: The Finance Director
ARGUMENT ON SHAREHOLDERS‟ WEALTH MAXIMISATION OBJECTIVE OF A

COMPANY
The memorandum is meant to educate you on the debate on shareholders‟

wealth maximization objective as the only true objective of a company.
What is shareholders‟ wealth maximization? Shareholders‟ wealth

maximization objective concept means maximizing the return to ordinary
shareholders as measured by the sum of dividends and capital appreciation.
It means maximizing the net present value of a course of action to
shareholders, that is, the difference between the present value of its benefits
and the present value of its costs. A financial action that has a positive Net
Present Value (NPV) creates wealth for shareholders. It also seeks to
maximize the value of a firm or its share price. Though, the share price is
determined by a general consensus among market operators, regarding the
value of companies and mirrors its expectation concerning the current and
anticipated future profits of the firms, it reflects the time value of money to
them and the risk attached to those profits.
Shareholders‟ wealth maximization may have some practical difficulties in

selecting a suitable measurement for growth in shareholders‟ wealth,
financial targets such as profit maximization and growth in earnings per
share might be used but no financial target on its own is ideal.
Financial performance may be assessed in a variety of ways by the actual or

expected increase in the share price, growth in profits, growth in earnings
per share and so on. Companies may also adopt profit maximization
(accounting profit), profitability maximization (Return on Capital Employed
(ROCE), Return on Equity(ROE), Return On Investment (ROI), growth, long-
term stability and so on as their objective, but all these objectives ignore risk
and time value of money which are taking care of in the shareholders‟
wealth maximization objective. In practice, however, companies might have
other stated objectives, but these can usually be justified in terms of the
pursuit of wealth maximization. Therefore, the shareholders wealth
maximization objective is an appropriate and operationally feasible criterion
to choose among the alternative objectives.
However, shareholders‟ wealth maximization objective should not be

adopted in isolation without considering other objectives such as, profit

maximization and earnings growth, in the expectation that if these
objectives are achieved shareholders‟ wealth maximization will be increased
by an optimal amount.
It is therefore recommended that companies should assume and follow this

objective in their financial decision making, but they should balance it with
those of other stakeholders in the firm. It is theoretically logical and
operationally feasible normative goal for guiding financial decision-making.
It is also all embracing, that is, it takes care, in the long run, all other
company objectives including maximization of profits, sales revenue, market
share, level of employee turnover, satisfaction of management staff and so
on.
Signed
Finance Director
(b) i) Cash flow generation

Cash flow generation is one of the main sources of liquidity; it is a
short-term objective which should be pursued only in a period of
economic meltdown. During this period, it is the „survival instinct‟
that is critical. Shareholders are not likely to put their funds in a
company whose management lacks the required aggressiveness for
long-term profitability and growth. However, if the aim of the firm‟s
management is to maximize the net present value of the cash flows
generated in the medium to long term, then this objective will
effectively be the same as maximizing shareholders‟ wealth.
ii) Profitability as measured by profit after tax and return on investment

This is a better objective than profit maximization (accounting profit)
as it takes into account both profits and the assets utilized in
generating such profits.
Measures of profitability include return on capital employed (ROCE) or
return on investment (ROI) or return on equity (ROE) and earnings per
share (EPS) and so on. This objective has something short coming
namely:
i) Problem of definition, that is, which profits and capital are to

be used.
ii) The uncertainty that goes with the earning of the profits (risk)
is ignored;
iii) Time value of money is also ignored and
iv) It fails to provide an operational feasible measure for ranking
alternative courses of action in terms of their economic
efficiency.

However, companies use it to assess performance and control in their
organisations. It is useful for the comparison of widely differing
divisions within a diverse multinational company and can provide
something approaching a „level playing field‟ when setting targets for
the different branches of the organisation. It is important, however,
that the measurement techniques to be used in respect of both profits
and the asset base are very clearly defined and that there is a clear
and consistent approach to accounting for inflation to be able to solve
the problem of definition. The selection of the time frame is also
important in ensuring that the selected objectives work for the long-
term health of the business.
iii) Risk adjusted returns to shareholders

It is assumed that the use of risk adjusted returns in this question
relates to the criteria used for investment appraisal rather than to the
performance of the firm. As such, it cannot be pursued solely as an
organizational objective, but used as a tool in achieving it.
It provides a useful input to the goal setting process as it focuses

attention on the company‟s policy on making risky investments. Since
investment decisions usually affect the value of the firm if the
investments are profitable and add to shareholders‟ wealth, it is
important that they are evaluated on a criteria which is compatible
with the objective of the shareholders‟ wealth maximization.
However, it is fundamental that a company uses the right technique

to avoid wrong decisions, bearing in mind the financial implication
such decisions can bring to the company. It should also be noted that
an investment must firstly be properly evaluated before selection. It
is the acceptable investments that should be included in the capital
expenditure programme of the company. Thus, investments should
be evaluated on the basis of a criterion, which is compatible with the
objective of the shareholders‟ wealth maximization bearing in mind
that an investment will add to the shareholders‟ wealth if it yields
benefits in excess of the minimum benefits as per the opportunity cost
of capital.
iv) Performance improvement in non-financial areas

Aside from the financial objectives which firms pursue, there are other
objectives which are critical to the achievement of the shareholders‟
wealth maximization and which should also be of concern to
corporate organizations. These are the non-financial objectives. A
company as an integral part of the society cannot be separated from
the environment (internal and external) in which it operates. It
therefore owes stakeholders, both within and outside the company,
certain social and ethical obligations among which are:

- employees: to provide a conducive work environment, job
satisfaction and job security;
- customers: to produce good quality product(s) at affordable prices
and devoid of any health hazards; good service and
communication and open and fair commercial practice.
- suppliers: to pay as at and when due and avoid exploitation; and
- local community: protect the environment from pollution of the air
or water through industrial wastage and oil spillages. Give
financial aids to charities and support sports development
programmes. Set up schools and colleges to enhance educational
opportunities of the children in the community etc.
However, the non-financial objectives stated above may often work

indirectly to the financial benefit of the firm in the long term, but in
the short term they do often appear to compromise the primary
financial objectives. It should be noted that a company does not
stand alone; it forms part of the society and the environment in which
it operates, hence it owes certain social and ethical obligations to the
people in its environment to be able to survive.
Marking Guide Marks
a) Title –Date, to whom addressed, from whom etc

1
Subject matter /2
1
Definition of wealth maximisation 1

How is Wealth maximization determined. 1
Comparative analysis vis-a vis profit growth, growth in
earnings per share etc 1
Arguments for wealth maximization objective over other
objectives apart from profitability objective 1
Recognising the fact that wealth maximization objective
should not be pursued in isolation of other objectives 1
Conclusion/Recommendation 1
Signing of the report 1
/2
8
b.(i) Definition /2
1
Arguments for and against 1

(ii) Definition 1
/2
Arguments for and against 11/2
(iii) Definition 1
/2
Arguments for and against 1 /2
1
(iv) Definition 1
/2
Arguments for and against 1
/2
7
15

EXAMINER‟S REPORT
The question tests candidates‟ knowledge of corporate objectives and their impact on
various stakeholders.
Candidates are expected to assess the shareholders wealth maximization objective but
evaluate the alternative corporate objectives but most of them did not have a clear and
accurate understanding of the question hence the poor performance.
Candidates‟ commonest pitfalls were their misinterpretation of the question and their
failure to present the solution in a report format.
Candidates are advised to read, understand and interprets questions appropriately and
note their specific requirements before attempting them. They should also learn report
writing. The usage of the Institutes‟ Pathfinder and study packs in their preparations for
the examinations of the Institute will assist in this area.

ADVANCED TAXATION
SECTION A: COMPULSORY QUESTION (30 Marks)
QUESTION 1
Taxes matter for any economy. They provide funding needed for the sustainable
growth of social programmes, public investments, economic growth and
development to build a prosperous and orderly society.
However, a recent survey on “Paying Taxes 2015: The global picture. The changing
face of tax compliance in 189 economies worldwide” which was commissioned by
the World Bank and conducted by the renowned global accounting firm
PricewaterhouseCoopers, ranked Nigeria as 187 out of 189 countries covered by the
survey. Among the things assessed in this survey are the period it takes a tax payer
to prepare, file and pay due taxes; the number of taxes that a tax payer has to pay;
the method of payment and the total tax liability as a percentage of the taxable
profits.
The report indicated that while worldwide compliance benchmark is 268 hours, it
takes 908 hours, which is more than three times of the world benchmark, for
companies and other taxable persons in Nigeria to comply with tax laws and tax
payment requirements.
Some commentators have argued that the outcome of the survey is a good
indication of why the country is not earning as much as it should from taxation and
that this unhealthy situation is due to the lax tax administration in the country,
which makes it possible for companies and individual taxpayers to either underpay
or evade paying their taxes.
Whatever the case may be, Nigeria‟s poor tax compliance rate has one major
implication, and that is, no country that tolerates a high level of tax evasion can
generate the revenue needed for its economic growth and development especially
at this time of dwindling revenue from crude oil, which is the nation‟s main
revenue earner.
From the foregoing, it is obvious that if Nigeria is to achieve the desired economic
growth and development, its tax policy makers need to urgently put in place
measures aimed at expanding non-oil tax base, improving collection, encouraging
tax compliance and strengthening tax enforcement by sanctioning defaulters.

Required:
a. As a Tax Consultant, you have been invited to make a presentation at a joint
meeting of the National Economic Council and the Joint Tax Board. Your
presentation should highlight SIX of the extant measures the government has
put in place to reduce tax evasion and enforce tax compliance.
(12 Marks)
b. Recommend TWO tax policy measures the government can take to expand
non-oil tax revenue base.
(8 Marks)
c. Briefly discuss FOUR incentives that are available to local and foreign
investors in gas utilisation (downstream operations) under the Companies
Income Tax Act CAP C21 LFN 2004 (as amended).
(10 Marks)
(Total 30 Marks)
SECTION B: ANSWER ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION

(40 MARKS)
QUESTION 2
Ramsgate Company Limited has been in the business of manufacturing Plastic Baby
Toys for a number of years. In recent years, however, the fortunes of the Company
began to dwindle as a result of the activities of merchants who import container
loads of Toys from China and dump them in the market at prices below Ramsgate
Company Limited‟s cost of production. The Company‟s financial year-end is
December 31, annually.
The Tax Consultant to the Company made spirited efforts to convince the Managing
Director of the benefits that await the Company if it could apply for Pioneer Status.
The benefits include tax holidays granted to Companies in the industries that meet
the conditions of being designated as Pioneer Industries. For such Companies to
qualify for Pioneer Status, the President must be satisfied that:
(i) Such industry is not already being carried on in Nigeria at all, or it is being
carried out but not on a scale suitable for the economic development of
Nigeria, or
(ii) There are favourable prospects for further developments of such industries in
Nigeria, or
(iii) It is expedient in the public interest to encourage the development or
establishment of such industry and declare the Industry a Pioneer Industry
and Products of the Industry Pioneer Products.
Based on the above clarifications by the Tax Consultant, the management decided
to take advantage of the benefits of Pioneer Status, hence the decision to carry out

some modifications to its plant and machinery to enable it manufacture special
type of high pressure pipes. The Company applied for and was subsequently
granted Pioneer Status, effective 1 January 2011.
The following information was extracted from the Company‟s records:
Assessable Capital
Profits Allowances
N N
For the year ended 31 December, 2007 712,500 157,500
For the year ended 31 December, 2008 309,000 135,375
For the year ended 31 December, 2009 (367,500) 120,308
For the year ended 31 December, 2012 1,425,000 181,125
For the year ended 31 December, 2013 2,800,575 162,015
Note: An extension of the Initial Pioneer period was neither sought nor granted.
Assume a tax rate of 30% for all tax years.
Compute the Tax liabilities of Ramsgate Company Limited for the relevant
Assessment Years and advise the management of Ramsgate Company Limited on
the tax savings from the Pioneer Status.
(Total 20 Marks)
QUESTION 3
a. Define the following in relation to Petroleum Profits Tax Act CAP P13 LFN
2004.
i. The Board
ii. Chargeable Natural Gas
iii. Casing Head Petroleum Spirit
iv. G-Factor (4 Marks)
b. SSV Nigeria Ltd engaged a firm of Tax Consultants – KMK and Associates – to
compute its Petroleum Profits Tax payable for the year ended 31 December
2014. The Petroleum Profits Tax was computed at N680,000,000 after the
following deductions have been made:
N
Royalties on domestic sales 100,000,000
Customs Duties on Plant and Machinery 160,000,000
Capital Allowances b/f 40,000,000
Capital Allowances for current year 90,000,000
Agreed loss b/f 100,000,000

The following additional information is also relevant:
N N
(i) Memorandum of Understanding (M.O.U.) credit 46,000,000
(ii) Royalties on Export Sales 200,000,000
(iii) Other incomes
 Transportation of crude oil 4,000,000
 Disposal of fixed assets 2,000,000
 Others 20,000,000 26,000,000
(iv) Tangible drilling expenses (capitalised) 120,000,000
(v) Intangible expenses 100,000,000
(vi) Non-productive rent 10,000,000
(vii) Additional assets for off-shore operations 30,000,000

Compute the Petroleum Profits of SSV Nigeria Limited for the year ended
31 December, 2014. (16 Marks)
(Total 20 Marks)
QUESTION 4
Toloju Petroleum Limited was incorporated in 1992 and has been involved in
winning and obtaining Chargeable Oil for its own account by drilling, mining and
extracting Chargeable Oil in Nigeria.
The Managing Director was confused on how the Chargeable Tax was computed on
the operations of the Company during the Accounting Year ended 31 December
2012. Considering the Profit as per the Financial Statements, he could not
ascertain the bases of computations of Assessable Profit and Chargeable Profit.
The Company sold 30,000 barrels of Crude Oil in the international market while
15,000 barrels were sold in the domestic market during 2012 financial year. The
Posted Price for Crude Oil exported was USD$25 per barrel and Exchange Rate was
N156 per USD$1, while Posted Price for domestic Crude Oil sold was N1,500 per
barrel.
The Company incurred N5million on administrative and operational expenses. The
sum of N4.5million was paid as royalty on Exported Crude Oil, while Customs and
other Duties amounted to N1.5million. Royalty on local Crude Oil sold was
N1million and total sum of N0.5million was incurred on Intangible Drilling.
The capitalised expenditure for 2012 were N7million and N5million on On-shore
and Off-shore activities respectively. The Company purchased Qualifying Capital
Expenditure in the sum of N15million to improve its Property, Plant and
Equipment, while the Capital Expenditure written down value (net of 1% retention)
were N4million and N3million for 2008 and 2009 respectively.

Other incomes received were N2.5million from interest on bank placements and
N3million net dividend on quoted investments.
Required:
As a Tax Consultant to the company, compute the Assessable Tax of the Company
for the relevant tax year, showing clearly the fiscal value of Chargeable Oil, Total
Profit, Assessable Profit and the Chargeable Profit.
(20 Marks)

(30 MARKS)
QUESTION 5
In its efforts to improve the Corporate image of Soloke Limited, the Board of
Directors approved the relocation of its Corporate Head Office from Lagos Mainland
to Ikoyi with effect from 1 December, 2013. The ultra modern Corporate Head
Office was acquired for N320million on 15 July, 2013 and the sum of N140million
incurred on improvement and renovation.
The old Corporate Office in Lagos Mainland built at a total cost of N200million in
2006 had carrying value of N300million as at 31 December, 2012 and was disposed
of on 27 June, 2013 for N280million.
a. Outline the tax implications of the disposal of Lagos Mainland office and
compute the relevant tax payable on disposal. (9 Marks)
b. Ascertain the cost of the new ultra modern head office for the purposes of
Capital Gains Tax and Capital Allowance. (3 Marks)
c. Explain briefly the concept of Capital Gains arising on assets on which Roll-
Over Relief had been granted. (3 Marks)
(Total 15 Marks)
QUESTION 6
Medicap Healthcare Limited was incorporated in 2002 as an HMO under the
Nigerian Health Insurance Scheme. The Company operates from its Corporate Head
Office located in Central Business District, Abuja, built in 2003 at a cost of
N600million.
The Company invested in other buildings in Lagos and Port Harcourt, where it earns
rental income. The building in Lagos was acquired in September 2008 for N350
million with annual rental income of N42million.

The Company acquired its Port Harcourt building in 2012 for N218million, where it
earned rental income of N10million in that Financial year. These buildings were
recorded at cost in the books as at 31 December, 2012.
In line with the directives of the Federal Government, the company adopted IFRS
with effect from 1 January, 2013 and opted for the revaluation model for its land
and buildings. The Firm of Austine & Partners did the valuation of the buildings as
at 31 December, 2013 as follows:
N‟ Million
Abuja office building 720
Lagos building 470
Port Harcourt building 300
The revaluation surplus on Lagos and Port Harcourt buildings were included in the
Statement of Profit or Loss based on re-classification of the buildings as investment
properties in the Financial Statements. The Board proposed a dividend of
N100million to members at the Annual General Meeting which was approved for
distribution.
The Finance Director expressed concern over dividend distribution from unrealised
profit arising from revaluation of buildings and fair value gains on quoted equities
classified as Financial Assets – Fair value through Profit or Loss.
Prepare a report to the Board highlighting the tax implications of the actions taken
by the Board.
(15 Marks)
QUESTION 7
You are the consultant to Group Nigeria Limited and two of its subsidiaries known
as Marine Nigeria Limited and Tobia Clearing Limited.
Group Nigeria Limited is engaged in shipping business, while Marine Nigeria
Limited renders crew training and handling services. Tobia Clearing Limited only
provides clearing and forwarding services to the Group and other third parties on
regular basis.
Apart from the structure stated above, Group Nigeria Limited is affiliated to GAC
Multinationals, a renowned shipping outfit which operates as a holding company in
Dubai. GAC Multinationals has been operating from Dubai since 1982 to take
advantage of the tax free policy.

The structure of the company is shown thus:
GAC
MULTINATIONALS
60%
GROUP NIGERIA
52% LIMITED 40%
MARINE TOBIA
NIGERIA CLEARING
LIMTED 10% LIMITED
From enquiry, you discovered that:

(i) GAC Multinationals provides technical and management services to all its
affiliates in many countries, where it has interest.
(ii) Apart from the provision of general services mentioned above, it also grants
long and short term loans to the Nigerian group of companies when the need
arises.
(iii) In January 2008, Group Nigeria Limited obtained a long-term loan of
N125,000,000 from the holding company in Dubai at an annual interest rate
of 21%. The balance outstanding as at 31 December, 2013, was N50,000,000.
(iv) Interests on the loan were either credited to the current account of the lender
or remitted on quarterly basis in line with the standing agreement.
(v) Transfer pricing regulations in Nigeria came into effect in 2012, this could not
be applied in the determination of interest charged within the Group.
(vi) Certain services are commonly utilised amongst the Nigerian Companies who
share the same office accommodation in Lagos, Nigeria. These transactions
include:
 Lease of office space and
 Provision of drivers
The cost of the services stated above are paid by Group Nigeria Limited and
allocated to users using some parameters.
Your clients are faced with problems of identifying, correct Transfer Pricing
Methods (TPM) and policies to be adopted in Nigeria.
In relation to the Income Tax (Transfer Pricing) Regulation No 1 of 2012,

a. Explain Connected Taxable Persons to the Chief Executive Officer of Group
Nigeria Limited and its Subsidiaries.
(7 Marks)
b. Classify Transfer Pricing Methods into Traditional Transaction Methods and
Transactional Profit Methods.
(3 Marks)
c. Which of the methods mentioned above will you recommend for adoption for
the treatment of loan interest payable to the Holding Company and common
transactional costs in respect of lease of office space and provision of drivers
within Nigerian Companies?
Give reasons for your recommendations. (5 Marks)
(Total 15 Marks)

NIGERIAN TAX RATES
1. CAPITAL ALLOWANCES
Initial % Annual %
Office Equipment 50 25
Motor Vehicles 50 25
Office Buildings 15 10
Furniture and Fittings 25 20
Industrial Buildings 15 10
Non-Industrial Buildings 15 10
- Agricultural
Plant and Machinery Production 95 Nil
- Others 50 25
2. INVESTMENT ALLOWANCE 10%
3. RATES OF PERSONAL INCOME TAX

Graduated tax rates with Consolidated Relief Allowance of N200,000 or 1% of
Gross Income whichever is higher + 20% of Gross income.
Taxable Rate of
Income Tax
N %
First 300,000 7
Next 300,000 11
Next 500,000 15
Next 500,000 19
Next 1,600,000 21
Over 3,200,000 24
After the relief allowance and exemption had been granted, the balance of
income shall be taxed as specified in the tax table above.
4. COMPANIES INCOME TAX RATE 30%
5. TERTIARY EDUCATION TAX 2% of Assessable Profit
6. CAPITAL GAINS TAX 10%
7. VALUE ADDED TAX 5%

SOLUTIONS

SOLUTION 1
Tax Evasion is the act whereby Individuals or Ogranisations (Corporate and Non-
Corporate) engaged in Business Activities deliberately refuse or fail to maintain any
financial records regarding their Business Activities. Tax Evasion is outright fraud
and illegal.
Failure to register with the Relevant Tax authorities and failure to render Tax
Returns regularly, translates to Tax Evasion, which is outrightly illegal.
Considering the large civil population and the inadequacy of Tax Revenue
personnel, a huge amount of Revenue from Taxes is lost through Evasion.
It becomes imperative that Governments at various levels put in place extant
measures to eradicate/curtail the phenomenon.
The measures the government has put in place to reduce Tax Evasion with a view to
ensuring high revenue from taxes are as follows:
(i) TAX CLEARANCE CERTIFICATE

A Tax Clearance Certificate is to be submitted to any Ministry, Department,
Commercial Bank or any Agency of Government with whom a Tax Payer has
any dealings. The Certificate must be produced for key issues like
appointments by Government as Chairman of Membership by Public Boards,
Institutions, and Commission or to any other similar positions created by
Government.
Tax Clearance Certificates are also required to be tendered by an applicant to
the Departments of Foreign Exchange Control for permission to remove funds
to a non-resident recipient in respect of income accruing from Rent,
Dividends, Interest on which tax has been paid and in respect of which the
application is sought or that no tax is payable whichever is the case.
(ii) STIPULATED PENALTIES

There are stipulated penalties in place, to serve as punishment for tax payers
who evade tax, to serve as deterrent to others.
(iii) WITHHOLDING TAX

Withholding tax is an advance payment of tax which is deducted at source
on certain transactions. Where it is not a final tax, it is treated as a Tax
credit in the settlement of the Income Tax Liability for the year to which the
payment that suffered the deduction relates.
Withholding tax deductions help to capture obscure transactions, thus
bringing unknown tax payers into the Tax Net and it also enhances
involuntary compliance.

(iv) TAX EDUCATION
The Government has set in motion continuous education of the citizenry on
the evils of Tax Evasion through continuous workshops and seminars for tax
payers.
(v) TAX AUDITS AND INVESTIGATIONS

In order to ascertain the correctness of audited financial statements
forwarded to the tax office, the Revenue Authority in its wisdom, created
a Resident Tax audit unit in each of its integrated Tax office (ITO‟s).
The audits are similar to special audits. They are additional to statutory
audits and are carried out by the tax officials from the relevant tax office.
Investigations as distinct from Tax Audits are called for, when there are
problems for example, when a large fraud is suspected or when evidence of
mismanagement abounds.
(vi) INTELLIGENCE UNIT

The main function of this unit is to gather and analyse information and thus
maintain a good database of information for civil/criminal investigation in
respect of Tax-payers, through interviews and publications.
(vii) THE INTRODUCTION OF TIN

The Tax Identification Number (TIN) is a unique sequential fourteen digit
number generated electronically as part of the registration process and
assigned to a Taxpayer (Company, Enterprise or Individual) for
Identification. This number eases tracking of taxpayers and access to their
tax history and records. This is done in collaboration with the States‟ Board
of Internal Revenue to enhance exchange of information. This has led to the
discovery of fake Tax Clearance Certificates and other ploys to evade tax by
Taxpayers.
(viii) THE INTEGRATED TAX ADMINISTRATION SYSTEM

This is geared towards simplification of processes and systems for ease of
use by Taxpayers. It will engender the adoption of best practices by the
FIRS, in the areas of business processes, taxpayer identification and the
automation of core tax processes with a comprehensive taxpayer database
as an enabler. It will enhance and simplify Tax administration, provide
requisite support to critical tax administration functions-such as Returns
and payment processing procedures, revenue and taxpayer accounting, Tax
audit and investigation, Tax policies and research forecasting etc in a
manner that would otherwise be difficult or tedious using a manual system.
(ix) PRESUMPTIVE TAX

Presumptive Tax is a form of tax regime designed to bring taxpayers
operating in the informal sector e.g. Artisans, Traders etc into the tax net. It
is predicated on a taxpayer‟s presumed (not actual) income, which may not

be easy to determine because records are not adequate. The method of
taxation is thought to be effective in reducing tax evasion as well as
equalizing the distribution of the tax burden. The FIRS believe that the
implementation of a workable presumptive tax regime will engender easy
access to the large pool of taxpayers in the informal sector and bring them
into the Tax Net. This will enable the government not only to grow the tax
base across the three tiers of government, but more importantly, improve
tax collection from non-oil tax revenue. If this is done successfully, it will
contribute to the overall development of the tax system and the economy.
The government has also tightened the laws of Tax Evasion and severe
punishment for tax officials that collude with individuals and organizations
to fleece the treasury. Greater efforts should be made by the various
governments to expand the Tax Net beyond the few Tax Payers captured by
the Pay-As-You-Earn system and ensure that all taxable adults are captured
under the Personal Income Tax regime. The waivers on Companies Income
Tax should be streamlined to plug the leakages and their rampant abuse.
(x) TAX EDUCATION

The Government through various means such as seminars, educational
programs and social media enlighten Taxpayers on the importance of
paying taxes and its relevance to the development and growth of the
Country.
(xi) ESTABLISHMENT OF TAX CONSULTANTS WITHIN THE TAX SYSTEM

The Government through the tax authorities has put in place enough Tax
Agents to administer taxes and ensure appropriate collection of taxes.
Government has ensured that loopholes are blocked to reduce Tax Evasion.
(xii) INTRODUCTION OF FINANCIAL TRANSPARENCY

Government has introduced financial transparency requiring public
disclosure of the ultimate human beneficiaries of Companies, Trusts and
Foundations. This is to prevent the further subversion of Countries‟ tax bases
whether by high net-worth individuals, businesses, criminals or terrorists. It
is also required to restore faith in the rule of law and the democratic process
as the current non-disclosure of beneficial ownership is corruption‟s best
friend.
(xiii) INTRODUCTION OF TAX INCENTIVES

The Federal Government has developed various incentives for various sectors
of the economy as part of the efforts to provide an enabling environment
that is conducive to the growth and development of Industries, inflow of
foreign Direct Investments, shield existing Investments from unfair
competition, and stimulate the expansion of domestic production capacity.
This is to ensure that Taxpayers take advantage of the Incentives and
invariably reduce Evasion of Tax.

(b) TAX POLICY MEASURES THE GOVERNMENT CAN TAKE TO EXPAND NON-OIL
TAX REVENUE BASE
(i) AGRICULTURE
(a) The Federal Government should put in place policies that will
encourage high participation of the citizens in the agricultural
sector, as that will reduce unemployment and increase the tax
revenue.
(b) Government should establish an Agricultural Financing Bank,
to provide Loans for short-term and long-term financing that
will be accessible to the youths/unemployed graduates and
professionals.
(c) Invest in modern mechanized equipment that can be
affordable to encourage farming through hiring processes.
(ii) MANUFACTURING
(a) Implement the National Industrial Revolution Plan (NIRP)
aimed at industrializing and diversifying the economy.
(b) Continuous support for the private sector, particularly the SMEs
(c) Review and restructuring the Export Expansion Grant Scheme
(EEG) for sustainability through creation of Export Free Zones.
(d) Review and restructuring of the Export Expansion grant scheme
(EEG) for sustainability.
(iii) TRANSPORTATION
(a) Repair major roads to allow easy flow of traffic. This will help
businesses to thrive and so indirectly increase the tax revenue.
(b) Improve aviation transportation facilities to increase
patronage.
(c) Improve road and rail transportation.
(iv) REGISTRATION OF BUSINESS NAMES

Most tax payers have now realized that it is better to run their
businesses as Partnerships, Sole traders etc., to reduce their tax
liabilities because, most State Governments raise assessment for tax
payers without requesting for audited accounts. CAC now demands for
TIN number from new individuals for registration purposes.
(v) CONFIRMATION OF TAX CLEARANCE CERTIFICATES

It is mandatory for officials of Ministries, Departments, Agencies of
Government as well as Commercial Banks to demand for Tax
Clearance Certificates for registration of licences or contracts, but in

practice fake Tax Clearance Certificates are sometimes submitted as
genuine ones E.g. Genuineness of drivers licences by law enforcement
agencies.
(c) INCENTIVES AVAILABLE TO INVESTORS IN GAS UTILIZATION (DOWNSTREAM

OPERATIONS) UNDER CITA CAP C21 LFN 2004 (AS AMENDED)
The following are some of the available Tax Incentives:
i. An initial tax-free period of three years, which may, subject to
satisfactory performance of the business, be renewed for an
Additional two years.
ii. As an alternative to the tax-holiday, an additional Investment
allowance of 35%, which shall not reduce the value of the asset.
iii. Tax-free dividend during the initial Tax-Free period where:
- The investment in the business was in foreign currency
- The introduction of imported Plant and Machinery during the
period was not less than 30% of the Equity Share Capital of the
Company
iv. Accelerated Capital Allowance after the Tax-free period, are as
follows:
- An Annual Allowance of 90%, with 10% retention for investment in
Plant and Machinery
- An additional Investment Allowance of 15%, which shall not reduce
the value of the asset.
v. Interest payable on any loan obtained with the prior approval of the
Minister for a Gas project, shall be deductible.

MARKING GUIDE
MARKS
(a)(i) Definition and Explanation of Tax Evasion 3
(ii) Measures put in place by Government to reduce Tax Evasion and

enforce Tax Compliance
- Submission of Tax Clearance Certificate
- Withholding Tax
- Stipulated Penalties put in place by legislation
- Tax Education
- Tax Audit and Investigation
- Intelligence Unit
- Introduction of Tax Identification Number (TIN)
- Introduction of Integrated Tax Administration System ITAS
- Presumption Tax
- Financial Transparency
- Introduction of Tax Incentives
(3 marks each for any THREE Points) 9
12
(b) Tax Policy Measures for Expansion of Non-Oil Tax Revenue base
(i) Agriculture
- Participation of Citizens in Agriculture to enhance
employment especially for youths
- Agricultural Financing loans on short or long term basis
- Introduction of Mechanised farming
(ii) Manufacturing
- Industrialization and diversification of the economy through
Productive Sector of the economy
- Active Support for Private Sector through SMEs
- Export Expansion Grant Scheme through Creation of Export
Free Zones (EPZ)
- Government efforts in providing conducive environment in
terms of Infrastructure
(iii) Transportation
- Road maintenance
- Implementation in aviation transportation
- Improvement in Rail transportation
(iv) - Tax payers registration as Partnership and Sole traders

- Corporate Affairs Commission insistence on TIN from
individuals for registration
(v) - Demand for Tax Clearance Certificate (TCC) by Government

agencies, Banks and other corporate bodies
- Genuineness of TCC by law enforcement agencies
(2 marks each for any FOUR Points with Explanation) 8

(c) Incentives Available to Investor in Gas Utilization (Downstream
Operations)
- Tax free Period of 3 years with renewal of additional two
years
- Investment Allowances of 35%
- Tax free Dividend
- Accelerated Capital Allowances
- Interest on loan allowed as tax deductible
(2½ marks for Each coorrect Points) 10
Total 20
EXAMINER‟S REPORT
This compulsory question was designed to examine candidates‟ knowledge and
understanding of issues on the high rate of poor Tax Compliance in Nigeria, it‟s
consequences and measures being put in place by Government to check the trend.
It also examined Candidates‟ knowledge of Tax Incentives available to both Local and
Foreign Investors in the Gas Utilization (Downstream Operations Sector) under the
Companies Income Tax Act (CAP C21 LFN 2011).
Majority of the Candidates displayed below-average knowledge and understanding of the
requirements of the question.
Performance was consequently below average.
Candidates are advised to be more thorough in their preparations for future Examinations
and to be more discerning when addressing the requirements of a question. Candidates
are advised to make good use of the Institute‟s Study Pack on Advanced Taxation, in their
preparations for future examinations.

SOLUTION 2
RAMSGATE COMPANY LIMITED

COMPUTATION OF THE TAX LIABILITIES
FOR THE RELEVANT YEARS OF ASSESSMENT
a) Pre-Pioneer Period
N N
2008 Tax year
Assessable profit 712,500.00
Capital Allowance 157,500.00
Absorbed (157,500.00)
(157,500.00)
Total profit 555,000.00
Income tax @ 30% 166,500.00
Tertiary Education Tax 14,250.00
2009 Tax year N N

(i) Penultimate year (1/1/08 -31/12/08)
Assessable profit 309,000.00
Capital Allowance Absorbed (135,375.00) (135,375.00)
Total Profit 173,625.00
Income tax @ 30% 52,087.50
Tertiary Education Tax @ 2% 6,180.00
(ii) Actual Basis (1/1/09 -31/12/09) N

Loss (367,500.00)
Capital allowances 120,308.00
Total Profit Nil
Income Tax Payable Nil
2010 Assessment Year N

Loss (902,250.00)
Total Profit Nil
Tax Payable Nil
From the above, the following should be noted:

i) The old business was deemed to have ceased by 2010 year end, prior to the
year the Pioneer status was granted. Cessassion provision was thus applied.

ii) The total loss of N1,269,750 (N367,500 + N902,250) cannot be relieved in
the Pioneer period.
iii) A total of N188,123 (N120,308 + N67,815) Capital Allowances can no longer
be utilised in the Pioneer Period.
The amount is expected to be carried backward for a maximum of five years
prior to year of cessassion to reduce total profit of the years i.e. to eliminate
the total profit of both 2009 assessment year (Preceding Year Basis and that
of 2008 assessment year)
Ramsgate Company Limited will not pay any tax during the period of 2011
….. 2013
(b)
2009 Assessment Year N N
Tax Refundable @30% 52,087.50
53,088.00
2008 Assessment Year N

Amount Recouped
N(188,123 – 173,625) 14,498.00
Tax Refundable @ 30% 4,349.40
Pioneer Period
Period Assessable (Loss)/Profit Capital allowances

2011 (424,200) 262,875
2012 1,425,000 181,125
2013 2,800,575 162,015
3,801,375 606,015
The Net Assessable Profit of N3,801,375 and accumulated Capital Allowances

of N606,015 would have resulted in a Net Total Profit of N3,195,360. This
would have resulted in an Income Tax of N958,608 and Tertiary Education
Tax charged on Assessable Profit. The Total liability comprising the Income
Tax and Tertiary Education Tax are saved by Ramsgate Company Limited.

MARKING GUIDE
MARKS
Appropriate Heading 1
Pre-Pioneer Period Assessment
- 2008 Assessment Year 1
Total Profit 1
Income Tax 1
Tertiary Education Tax 1
4
- 2009 Assessment Year 1
Total Profit 1
Income Tax 1
Tertiary Education Tax 1
Working of 2009 on Actual Basis with Correct Total Profit and
Tax Payable 1
5
- 2010 Assessment Year
Total profit 1
Tax payable 1
Comment on Cessation Rule 1
Comment on the Total loss 1
Comment on Capital Allowance 2
Calculation of Tax Refundable 2
Comment on Post Pioneer Period, Capital Allowance and Non-payment
of Tax from 2011 – 2013 2
10
Total 20
Appropriate Heading is very essential to identify candidates‟ understanding of

what is required
- 2008 – Calculation of Total Profit from which Income Tax and Tertiary
Education Tax are calculated.
- 2009 – Determination of the Total Profit based on Predeeding Year and
Actual bases are very essential
- 2010 Assessment Year – Understanding the determination of Total
Profit and Tax Payable.
Comment
- Understanding the fact of deemed cessation of the business prior to
commencement of Pioneer Period
- The fact of the loss prior to Pioneer Period
- Not being relieved in Pioneer Period is essential
- The Pre-Pioneer Period Utilised Capital Allowance being carried
backward to eliminate or reduce Total Profits for a maximum period of
5 years
- The need to mention the fact that Unutilized Capital Allowances are to
be carried to Post Pioneer Period.

EXAMINER‟S REPORT
This question dwells on the conditions for obtaining the designation of a Pioneer Status by
Companies Operating in Nigeria, as well as the benefits accruing therefrom.
The question also examines Candidates‟ knowledge and understanding of the Computation
of Tax Liabilities from relevant Financial results of a Pioneer Company and the resulting
Tax Savings
Only about 60% of the Candidates attempted the question. Less than 30% of the candidates
that attempted the question scored more than 50% of the 20 marks obtainable.
Candidates are advised to be more painstaking in their preparations for future
Examinations by practising with several worked examples, to ensure they have better
understanding of a question‟s requirement.

SOLUTION 3
a)
(i) Board
The Federal Inland Revenue Service Board which shall have overall
supervision of the Federal Inland Revenue Service. It consists of the
Executive Chairman of the Service and other members from Federal
Government agencies as contained in Federal Inland Revenue Service
(Establishment Act 2007)
(ii) Chargeable Natural Gas

This in relation to a Company engaged in Petroleum Operations
means Natural Gas actually delivered by such a Company to the
Nigerian National Petroleum Corporation under a Gas Sales Contract,
but does not include Natural Gas taken by or on behalf of the
Government of the Federation of Nigeria.
(iii) Casinghead Petroleum Spirit

Any liquid hydrocarbons extracted in Nigeria from Natural Gas by a
process of separation or by any other chemical or physical process but
before the same has been refined or otherwise treated in any other
way.
(iv) G-Factor
Gas Production Cost adjustment factor
b)
SSV Nigeria Limited
Petroleum Profits Tax Computation
Accounting Year Ended 31 December 2014
N'000 N'000
Petroleum Profits Tax as computed 680,000
(This represents 85% of Chargeable Profit
i.e. N  680,000 100 = sssN800,000,000
 85  800,000
Add back straight deductions:
Royalties on domestic sales 100,000
Custom Duties on P & M 160,000
Capital Allowance brought fwd 40,000
Capital Allowance for current yr 90,000
Agreed loss brought fwd 100,000 490,000
1,290,000
Add Other income 20,000
1,310,000

N'000 N'000
Less: Section 10 Allowable expenditure:
Royalty on domestic sales 100,000
Custom duties on P & M 160,000
Royalties on export sales 200,000
Intangible drilling expenses 100,000
Non-productive rent 10,000 (570,000)
740,000
Less: Education Tax N( 2
102 740,000 ) (14,509)
Adjusted profit 725,491
Less: Loss brought fwd (100,000)
Assessable Profit 625,491
Less: Capital Allowance:
brought forward 40,000
for the current year 90,000
Lower of:
Petroleum Investment Allowance:
N‟000
Additional Assets for Off-Shore
operation 30,000
Tangible drilling expenses 120,000
150,000
Allowance @ 15% assuming the depth is
between 100 – 200 metres 22,500
152,500
OR
85% of Assessable profit (85% of N625,491) 531,667

Less: 170% of PIA (170% x N22,500) (38,250)
493,417
Capital Allowance claimable (PIA)
(152,500)
Chargeable Profit
472,991
Assessable Tax @ 85% 402,042
Less: MOU Credit
(46,000)
Chargeable Tax
356,042

Note:
15% was used in calculating the Royalty for Deep Off-shore operation since
the depth was not given. The Royalty rates are as follows:
(i) On-shore operations 5%
(ii) Operations in territorial waters and continental shelf

areas up to and including 100 metres depth 10%
(iii) Operations in territorial waters and continental shelf

areas in water depth between 100 metres and 200 metres 15%
(iv) Beyond 200 metres water depth 20%

MARKING GUIDE
MARKS
(a) Definitions (One mark for each, i.e. 1 x 4) 4
(b) - Correct Heading 1

- Determination of Chargeable Profit 2
- Add back deductions: (Any 4 deductions added back) 2
- Any 4 (Section 10 Allowable Expenditure) 2
- Correct determination of Tertiary Education Tax 2
- Determination of Adjusted Profit 1
- Determination of Assessable Profit 1
- Capital Allowance
- Determination of Petroleum Investment Allowance 1
- Determination of Capital Allowance 1
- Claimable Capital Allowance 1
3
- Assessable Tax 1
- Chargeable Tax 1
Total 20
NOTES
(a)(i) Emphasis of supervisory role of the FIRS

(ii) Natural Gas delivered by a Petroleum Company to NNPC under Gas Sales Contract
(iii) Liquid Hydro Carbon from Natural Gas by Chemical or physical process of
separation before it is refined or
(iv) Gas Production Cost Adjustment Factor
(b) - Determination of Chargeable Profits by grossing up the Petroleum Profits Tax

- The need to recognize the fact that the deduction should be added back
before Other Income to arrive at Total Income
- The need to recognize the Section 10 Allowable Expenditure
- Tertiary Education Tax calculation in order to arrive at Adjusted Profit
- Determination of Assessable Profit by deducting loss brought forward
- Determination of Chargeable Profit
- Calculating the 85% of the Chargeable Profit to give an Assessable Tax @ 85%
- Calculating the Chargeable Tax by deducting MOU

EXAMINER‟S REPORT
The question tests Candidates‟ knowledge of some technical terms under the Upstream
Operations of the Petroleum Profits Tax Act and ability to distinguish between Allowable
and Disallowable expenses.
A good number of the candidates attempted the question, but performance was generally
below average in both sections of the question.
The major pitfall in part (b) of the question was candidates‟ inability to distinguish
between allowable expenses and non-allowable expenses in the computation of Petroleum
Profits Tax.
Petroleum Profits Tax Act constitutes a major part of the Subject and it is therefore
expected that candidates should prepare very well on questions therefrom.
Candidates are advised to prepare better for future examinations, by practising several
worked examples both in past editions of the Institute‟s Pathfinder publications and other
relevant Textbooks.

SOLUTION 4
TOLOJU PETROLEUM LIMITED

PETROLEUM PROFITS TAX COMPUTATION
YEAR ENDED 31 DECEMBER 2012
N N
Fiscal value of oil sold:
Value of Crude oil Exported (W1) 117,000,000
Value of Domestic sales (W2) 22,500,000
139,500,000
Other income: 2,500,000
142,000,000
Less: Expenditure:
Admin and Operational expenses 5,000,000
Royalty on Exported crude oil 4,500,000
Royalty on local oil sold 1,000,000
Customs and other duties 1,500,000
Intangible drilling Expenditure 500,000
(12,500,000)
Adjusted profit 129,500,000
Less: Tertiary Education Tax (2,539,216)
Assessable profit 126,960,784
Less: Capital Allowance:
Lower of (A) or (B)
(A) Petroleum Investment Allowance (W4) 1,350,000
Capital Allowance for the year (W5) 10,900,000
12,250,000
OR
(B) Restriction (W6) 105,621,666
Capital Allowance claimable (A) (12,250,000)

Chargeable profit 114,710,784
Assessable Tax @ 85% 97,504,166
Tertiary Education Tax @ 2% of Assessable
Profit (W3) 2,539,216
Total Tax liability 100,043.382
W1: N30,000 x 25 x 156 Exported Crude

= N30,000 x 3,900
= N117,000,000
W2 N15,000 x 1,500 Local Sales

= N22,500,000

Other Income:
Only interest on Bank Placement is used since the dividend on
quoted Investment is regarded as Franked Investment Income
W3 - Tertiary Education Tax

=
102 x N129,500,000
2
= N2,539,216
W4
Petroleum Investment Allowance (PIA): N
- on-shore operations – N7,000,000 @ 5% 350,000
- off-shore operations – (Beyond 200 metres)
@ 20% of N 5,000,000 1,000,000
Total PIA 1,350,000
The improvement in Property and Plant of N15,000,000 was not used for the
Petroleum Investment Allowance because the year of acquisition was not
mentioned.
W5 Qualifying Capital Expenditures: N N

on-shore 7,000,000
off-shore 5,000,000
Improvement on Property,
Plant & Equipment 15,000,000
27,000,000
Capital Allowance @ 20% 5,400,000
Tax written down value:
2008 = N 4,000,000
5 – 4years = N4,000,000
2009 = N 3,000,000
5 – 3years = N1,500,000
5,500,000
Total N10,900,000
W6 Restricted: N
85% of Assessable Profit of N126,960,784 107,916,666
Less: 170% of Petroleum Investment Allowance
N(1,350,000 x 170%) 2,295,000
105,621,666

MARKING GUIDE
MARKS
Correct Heading stating the Year end 1
Fiscal Value of Crude Oil Exported 2
Fiscal Value of Domestic Sale 1
3
Other Income (Interest on Bank Placement) 2
Deductable Expenses {Any four (4)} 4
Determination of Tertiary Education Tax 1
Determination of Claimable Capital Allowance
- Petroleum Investment Allowance 2
- Restriction (85%) 1
- Capital Allowance Claimable 1
4
Chargeable Profit 2
Assessable Tax 2
Total Tax Liability 1
Total 20
- Heading of the solution with correct year-end is desirable
- Determination of Exported Crude using the posted price and
rate
- Determination of Domestic Sale
- Other income:
Only interest on Bank Placement is used because Dividend Income
is regarded as Franked Investment Income which had been taxed
at source. Hence, it does not come into the calculation of Other
Income.
- There is need for Candidates to understand the allowable
expenses
- Determination of Tertiary Education Tax which is
( 2 x Assessable Profit)
102
- Determination of Claimable Capital Allowance

Understanding the computation of Capital Allowance from the On-
Shore, Off-Shore and improvement in Property & Plant
- Using the Tax Written Down Value of 2008 and 2009, for
calculation of Petroleum Investment Allowances
- Using all the above calculations to determine the Chargeable Profit
- Determination of Assessable Tax
- Determination of Total Liability to include the Assessable Tax and
Tertiary Education Tax

EXAMINER‟S REPORT
This question on the Petroleum Profits Tax Act test candidates‟ knowledge of the correct
bases for computing the Fiscal Value of Chargeable Oil, Assessable Profit and Chargeable
Profits as well as the correct identification of Deductable Expenditure, the incidence/
treatment of Capital Allowance and Petroleum Investment Allowance.
A fair number of candidates attempted the question and performance was generally below
average.
The commonest pitfalls noticed included the wrong computation of Fiscal Value of
Chargeable Oil, Assessable Profit and Chargeable Profit and correctly identifying
Deductable Expenditure as well as the incidence/treatment of both Capital Allowance and
Petroleum Investment Allowance.
Working through several worked examples in both the Institute‟s Study Packs and past
editions of the Pathfinder, will improve performance by Candidates.

SOLUTION 5
Soloke Limited
a) Tax implications of the Disposal of Lagos Mainland office
i) If there is a Chargeable Gain resulting from the Disposal of the Lagos
Mainland Head Office building, the Gain will be subject to Capital
Gains Tax.
ii) Capital Gains Tax is chargeable on the Gain at 10%.
iii) Where the sales proceeds of the building is re-invested in the
purchase of a new building of the same class as the one sold, a Roll-
over relief is granted.
TAX PAYABLE ON DISPOSAL OF

LAGOS MAINLAND HEAD OFFICE BUILDING
COMPUTATION OF CAPITAL GAINS TAX FOR 2013 TAX YEAR
i) Assuming no Roll-over relief claim is made: N‟000
Sales proceeds 280,000,
Less: Cost of acquisition (200,000)
Capital Gains Chargeable 80,000
Capital Gains Tax @ 10% 8,000
ii) Assuming Roll-over relief claim is made N‟000

Sales proceeds 280,000
Less: Cost of Acquisition (200,000)
Capital Gains - Chargeable 80,000
Less: Roll-over Relief: N‟000
Amount Re-invested 280,000
Less: Cost of Sold Building (200,000)
Gain Rolled-over (80,000)
Capital Gains - Chargeable Nil
Capital Gains Tax @ 10% Nil
If a full Roll-over relief as claimed, is granted, there will be no
Chargeable Capital Gain, and therefore, no Capital Gains Tax is
payable for the 2013 Tax year.

b) For the purposes of Capital Gains Tax Computation, the cost of the New Head
Office shall be as follows:
(i) If no claim was made for Roll-over Relief:
N‟000
Cost of Building 320,000
Renovation Cost 140,000
Carrying Cost for Capital Gains Tax 460,000
(ii) If claim was made for Roll-over Relief N‟000

Renovation Cost 140,000
460,000
N‟000
Less: Amount Rolled-over
Proceeds of Old Asset Sold 280
Less: Acquisition Cost (200) (80,000)
Carrying Costs for Capital Gains Tax 380,000
(iii) Cost for Capital Allowance Purposes: N‟000

Add Renovation Cost 140,000
Cost for Capital Allowance Purposes 460,000
c) The concept of Capital Gains arising on Assets on which Roll-over Relief has
been granted include:
i. Capital Gains on disposal is the difference between the Sales Proceeds
and the Carrying Cost.
ii. The Carrying Cost of an Asset is the Actual Cost of acquisition of the
Asset Less any Chargeable Gain Rolled-over.
iii. The cost of the New Asset for Capital Gains Tax and Capital Allowances
purposes, is the difference between the amount re-invested and the
amount Rolled-over. Therefore, for Roll-over Relief to be applicable,
the cost of the New Asset must be higher than the cost of the old
asset.

MARKING GUIDE
MARKS
(a) Basic theory of Tax consequence of Disposal
Of Fixed/Capital Assets 1
Nature of Tax and Rate 1
Incidence of Roll-over Relief 1
3
Computation of CGT assuming no Roll-over Relief Claim ½
Correct computation of Chargeable Capital Gain ½
Correct Computation of Capital Gains Tax ½
Computation of CGT assuming Roll-over Relief Claim is made ½
Correct computation of Chargeable Capital Gain
- before claim is made 1
Correct computation of Roll-over Relief 1
Correct computation of Chargeable Capital Gain ½
Correct computation of Capital Gains Tax ½
5
Summary of consequences of claiming full Roll-over Relief 1
9
(b) Correct computation of Carrying Cost for CGT
purposes, if no Roll-over Relief is claimed ½
Correct computation of Carrying Cost for CGT
purposes, if Roll-over Relief is claimed ½
- Cost of Building before claim ½
- Amount Rolled –Over.
Carrying Cost for Capital Gains Tax ½
Correct computation of Cost for Capital Allowance Purposes 1
3
(c) The incidence of Capital Gains arising on Assets
on which Roll-over Relief has been granted
- What constitutes the Capital Gain? 1
- What is Carrying Cost of such an Asset? 1
- Cost for Capital Gains Tax and Capital Allowances
Purposes 1
3
Total 15
EXAMINER‟S REPORT
This is a question on Capital Gains Tax, testing Candidates‟ knowledge and understanding
of the incidence and treatment of Roll-over Relief as well as the concept of Carrying Cost of
an Asset in the computation of Capital Gains Tax.
Over 90% of the Candidates attempted the question and performance was below average.
Candidates are advised to be more painstaking in acquiring better understanding of
concepts they come across in the course of their preparations for future Examinations.

SOLUTION 6
The Board Members

Medicap Healthcare Limited
Central Business District
Lagos
Dear Sirs/Madams
TAX IMPLICATIONS OF DECLARING DIVIDEND OUT OF UNREALIZED PROFITS/FAIR
VALUE GAINS ON QUOTED SECURITIES
We write to update you on the above subject matter, following the recent action by
your honourable Board that proposed a Dividend of N100 million to members at the
Annual General Meeting.
The main objective of your Company is to engage in Health Management under the
Nigerian Health Insurance Scheme. That notwithstanding, the Company also
invested in Properties in order to generate additional Income.
Since the Company has adopted the International Financial Reporting Standards
(IFRS), in line with the Federal Government directive, the Company‟s buildings in
Lagos and Port-Harcourt were re-classified from Property, Plant and Equipment, to
Investment Properties in line with the provisions of International Accounting
Standards (IAS) 40 – (Investment Property), based on the use of those buildings to
generate Rental Income.
The revaluation surpluses on the Investment Properties have been included in the
Statement of Profit or Loss in the Financial Statement. Such revaluation surpluses
are non-taxable incomes that should be deducted from the Accounting Profit for Tax
Computation purposes.
Similarly, the Fair Value Gains from Quoted Securities classified as Financial Assets,
and also included in the Profit or Loss Statement for the financial year, are also
non-taxable items, which should be deducted from Accounting Profit for Tax
Computation purposes.
The Dividend declared for distribution by the Company is liable to Withholding Tax
at 10%, payable to the relevant Tax Authority whilst the Net Dividend is paid to
Shareholders.
The Withholding Tax is payable to the relevant Tax Authority within 30 (thirty) days
from the date of deduction or from the time the duty to deduct arose, whichever is
earlier.
The penalty for failure to remit such withheld taxes is a fine of 200% of the Tax
withheld and not remitted, plus interest at prevailing commercial rate, in addition
to the Tax withheld and not remitted to the State‟s Internal Revenue Service.

In the same vein, failure to deduct or remit Withheld Taxes from Corporate Bodies is
an offence punishable on conviction to a fine of N5,000 (Five thousand naira) in
addition to the Tax withheld and not remitted with interest at the prevailing
commercial rate.
It is important to note that Investment Properties could be treated as stocks held for
sales, therefore, for such unrealized profits from such Properties to be declared as
Dividends, provision should be made for Deferred Tax for such unrealized
Profits/Gains.
In conclusion, we need to emphasize that Cash Dividend should only be declared
from realized Profits from actual transactions during the Accounting year and NOT
from revaluation of assets, etc.
Yours faithfully,
Signed
XYZ & Co.
MARKING GUIDE
MARKS
Correct Addressee ½
Correct Subject-Matter of Letter ½
Main Objective of Company 1
Consequence of adopting IFRS 1
Consequence of complying with Provisions of IAS 40
regarding Investment Properties 1
Revaluation surpluses on Investment
- Properties – included in P & L 1
- To be deducted for Tax Purposes 1
Incidence of Fair Value Gains/Treatment 2
Incidence of Withholding Tax Payment 1
Time-frame for Payment of Withholding Tax 1
Penalties for failure to remit Withholding Tax from Dividends 2
Penalties for failure to deduct or remit Withholding Taxes for Corporate 1
Bodies
Incidence of Unrealised Profits from Investment Properties 1
Conclusion
- Condition for Payment of Cash Dividend 1
Total 15

EXAMINER‟S REPORT
The question tests candidates‟ knowledge of the Tax Implications of the declaration of
Dividend out of Unrealized Profits, arising from the revaluation of Fixed Assets of a
Company, as well as from Fair Value Gains on quoted Equities classified as Financial
Assets. It also tests candidates‟ knowledge and understanding of the provisions of the
International Financial Reporting Standards (IFRS) regarding the Board‟s proposal.
Less than 40% of the Candidature attempted the question and performance was below
average. Majority of the Candidates did not present their solutions in a Report Format and
the few that did, displayed lack of knowledge of the IFRS provisions regarding such
proposal by the Board of the Company.
Candidates are advised to update themselves better with knowledge of this and other
provisions of the IFRS, impacting on Tax Administration and Practice.

SOLUTION 7
a. CONNECTED TAXABLE PERSONS

- Connected Taxable Persons within the context of the TP Regulation
2012 include, individuals, Entities, Companies, Partnerships, Joint
Ventures, Trusts or Associations involved in the control and
management of such Groups/Bodies/Organisations. In summary, such
„persons‟ include:
(i) Any entity dealing with related Parties (Associates,
Subsidiaries, Joint Ventures);
(ii) A member of a Local Group of Companies;
(iii) Members of a Conglomerate;
(iv) Multinationals;
(v) An Entity in a group located in the Free Trade Zone;
(vi) An Entity with a Pioneer status;
(vii) Any Loss making entity within a Profitable Group;
(viii) Related Parties subject to Tax at different rates;
(ix) Permanent Establishments.
b. TRANSFER PRICING METHODS ARE CLASSIFIED INTO TRADITIONAL

TRANSACTION AND TRANSACTIONAL PROFIT METHODS AS FOLLOWS:
i. Traditional Transaction Methods
a. The Comparable Uncontrolled Price (CUP) Method
b. The Resale Price Method
c. The Cost-Plus Method
ii. Transactional profit methods

a. The Transactional Net Margin Method
b. The Transactional Profit-Split Method
c. The most appropriate method recommended for adoption for the treatment
of Loan Interest Payable to a Holding Company and Common Transactional
Costs in respect of lease of office space, etc. within Nigerian Companies, is
the Comparable Uncontrolled Price (CUP) Method.
The CUP method is recommended because:

- It compares the price charged for transactions between Associated
Organisations (i.e. Related Parties) with prices charged for similar
transactions between Unrelated Parties under similar circumstances.
- It can also be used for Interest on Loans granted by GAC
Multinationals, as the Loans were granted in the past (January 2008),
and were backed-up with valid agreement binding on both Parties.

- The Loan came into effect before the commencement of the Income
Tax (Transfer Pricing) Regulations Act 2012.
For lease of office space, the most appropriate method is the Comparable
Uncontrolled Price (CUP) method, because the external CUP method will be
available for bench-marking. At the same time, the rateable value as
provided by Government for the purpose of Property Tax (e.g. Land Use
Charge or Tenement Rates), could be used as comparisons
(b) The provision of Drivers

This relates to Intra-Group Services. The Most Appropriate Method (MAP) is
the Transactional Net Margin (TNM) Method.
The method examines a Net Profit indicator which is a ratio of Net Profit
relative to a base such as Cost, Sales, Assets, Capital Invested, etc. that the
taxpayer realizes from a controlled transaction with the Net Profit earned
from comparable uncontrolled transactions. The method is considered the
Most Appropriate Method (MAP) as Net Margins are less affected by
transactional differences as against Price.
It is also less affected by functional differences than Gross Margins.
In the same vein, Service /Product and functional comparability are less
crucial in applying Transactional Net Margin (TNM) Method.

MARKING GUIDE
MARKS
(a) Connected Persons ½
- Individuals
- Entities in a group, the free Trade Zone/Pioneer Status
- Companies – Members of Conglomerates
- Partnerships
- Joint Ventures
- Trusts or Association
- Members of a Local Group of Companies
- Associates, Subsidiaries
- Multinationals
- Permanent Establishments
(A mark each for any seven (7) correct points) 7
(b) Traditional Transaction Methods
- Comparable Uncontrolled Price
- Resale Price
- Cost Plus
Transactional Profit Methods
- Transactional Net Margin
- Transactional Profit Split
(Three (3) marks for all the above) 3
(c) Recommended Methods for Adoption
- Comparable Uncontrolled Price (CUP) Method for loan
Interest Payable to a Holding Company and common
Transactional Costs in respect of lease of office space
- For the Provision of drivers, since this relates to Intra-Group
Services, the Method to use is the Transactional Net Margin
Method
(Full mark for correct recommendation and explanation) 5
Total 15
EXAMINER‟S REPORT
The question was designed to test Candidates‟ knowledge of the provisions of Transfer
Pricing Regulations in Nigeria, as contained in the Income Tax (Transfer Pricing)
Regulation No. 1 of 2012, and their applications.
Performance by the Candidates that attempted the question was very poor, as majority of
them could not correctly identify Connected Persons.
Candidates displayed scanty knowledge of the concept of Connected Taxable Persons and
Traditional Transaction as against Transactional Profit Methods of Transfer Pricing
classifications. At this level, candidates should spend some quality time comprehending
key concepts in various sections of the Syllabus.
Candidates are advised to devote more quality time in analysing concepts as specified in
the Institute‟s Study Packs and other relevant Textbooks, whilst preparing for future
Examinations.

CASE STUDY
Time Allowed: 4 hours (including reading time)
Requirement
NOTE: Ensure you use the Case Study answer booklet for this paper.
You are Chika Ahmad a partly qualified Chartered Accountant with one paper left to
complete the Professional (Final) Level Examinations. You are currently employed
as an Associate Analyst with Phoenix-Adele Global Partners (PAGP) an Accounting
and Advisory firm based in Lagos Nigeria.
Magic Network Communications Limited (MNC) provides telephone and internet

services to the Nigerian telecommunications market. The company is fast growing
and has significantly increased its subscriber base since it began operations six (6)
years ago after being granted operational licence. The Nigerian Communications
Commission (NCC), is the independent regulatory body for the Nigerian
telecommunications industry and responsible for granting operational licence.
You are required vide an e-mail from your Partner, Muri Adele (Exhibit 1), to draft
a report to Adesua Thomas, Finance Director at MNC, a client company. Your report
is to be submitted to the Partner for his review and is to be discussed at a
presentation meeting with the client next week.
The following overall time allocation is suggested:
Reading 1 hour
Planning and calculations 1 hour
Drafting report 2 hours

LIST OF EXHIBITS
Exhibit Description
1 E-mail from Muri Adele, Partner, Phoenix-Adele Global Partners

(PAGP) to you, Chika Ahmad.
2 Letter from Adesua Thomas, Finance Director at Magic Network

Communications Limited (MNC), to Muri Adele.
3 Extract of the Chairman‟s Statement from the 2015 Annual

Report of Magic Network Communications Limited.
4 Financial Information Extract of Magic Network Communications

Limited for the years 2014 and 2015.
5 Magic Network Communications Limited‟s Call Centre operations

information.

EXHIBIT 1
Phoenix-Adele Global Partners

E-mail
From: Muri Adele – Partner
To: Chika Ahmad – Associate Analyst
Date: November 17, 2015
Re: Magic Network Communications Limited
As a follow up to the meeting, I and your good self held yesterday with Adesua
Thomas (Finance Director) of Magic Network Communications Limited (MNC), one of
our biggest clients. I will require you to draft a report for my urgent review. The
draft report should address all of Adesua‟s concerns as discussed during our
meeting which are explained in greater detail in the letter sent to me by Adesua
(Exhibit 2). The matters raised in the attachments to this e-mail, (Exhibits 3 – 5)
should also be taken into consideration in your draft report. I am available to
provide any additional information or clarification you may require.
The attachments include an extract of the Chairman‟s Statement from the 2015
Annual Report (Exhibit 3), relevant financial information extract (Exhibit 4) and
MNC‟s call centre operations information (Exhibit 5).
Adesua is particularly interested in some analysis that relates to both financial and
non-financial performance measures. A detailed analysis of the call centre‟s
operations and relevant professional advice are also required. This is as a result of
the Chief Executive Officer‟s (CEO‟s) concern about the call centre and how to
operate it more efficiently and profitably, otherwise the company may consider the
possibility of shutting it down.
I will ask you to treat this report with all the urgency and confidentiality that it
requires because as you know, MNC is one of our biggest clients and we will like to
keep them happy. I will be expecting your draft report by the close of business
today.
Finally, I have just learnt that MNC is in breach of some regulatory requirements in
its operations and as a result have been fined a substantial sum of money for this
non-compliance. I understand that MNC intends to contest this in court but it is
rather worrisome that Adesua Thomas failed to mention this during our meeting. It
is surely an information we should be put in the know especially because there are
rumours that the CEO is seriously considering tendering his resignation as a result
of the matter. I got to know about it just this afternoon from Kunle Esan, the
former Chief Auditor at MNC and he also mentioned another problem about the

state of low staff morale at MNC especially due to the long hours being worked
without additional incentives for such efforts.
Thanks
Muri Adele
Partner, PAGP
Required:
Using the information in the attachments, draft a report addressed to Adesua
Thomas, Finance Director at MNC. Your report is to be submitted to Muri Adele
(Partner, PAGP) today and it is to be discussed at a presentation meeting with the
client next week.
Your report should comprise:

1. An analysis of the strategic performance of Magic Network Communications
Limited (MNC). As part of your analysis of the financial performance of MNC, you
are expected to take into consideration the comments by the Chairman in his
statement (Exhibit 3) and the relevant financial information provided in
(Exhibit 4) by coming up with suitable ratios that you deem meaningful in
MNC‟s industry for your analysis.
You are expected to use the Balanced Scorecard Model for your analysis; and
2. i. An analysis and determination of the product mix that will maximise the
margin of MNC call centre, if no staff was to switch position. Also calculate
the total margin from your suggested product mix (Exhibit 5).
ii. Advise on how to allocate the existing staff between the two roles (operators
and consultants) in order to satisfy the market demand working with the
assumption that MNC cannot hire new call centre staff. Your advice should
also include other business/managerial factors that should be taken into
account when considering your recommendations.
Note: Your report should only concentrate on the key figures and issues, and
should provide a clear explanatory commentary together with your judgement
and conclusions on the key items which you identify.

EXHIBIT 2
Magic Network Communications Limited
November 16, 2015

Partner
Phoenix-Adele Global Partners
Accounting House
1, Communication Road
Lagos
NIGERIA
ATTENTION: MURI ADELE
Dear Sir,
RE: CONSULTANCY SERVICES
As you are aware we are currently undergoing some restructuring and as always,
would need your professional input in the ongoing process.
The Board of Directors has been concerned about our insistent focus on financial
performance measures and is of the view that consideration should be given to
non-financial measures as well as the potential of helping and understanding our
customers‟ requirements to serve them better.
After our discussions, we have agreed that the Balanced Score Card is an
appropriate model for use in this analysis and I have provided some information
that may be useful to your firm in conducting this analysis.
In addition, the Chairman in his statement (Exhibit 3) in the most recent Annual
Report (2015) highlighted the need for looking at different measures of profitability
on a per customer basis and I hope you can include this in your analysis.
Finally, the call centre which we operate is an important part of the business, as it
is a window for fast growing customer base to reach out to us and for us to
understand their needs and of course serve them better. I have provided relevant
information about the call centre and its operations (Exhibit 5) and I do hope you
find it useful.
MNC Limited – Capital Projects

MNC has recently been involved in several expansion projects and quite a few seem
to be profitable. Two major projects (Project Venice and Project Oluno) making up
89.4% of our total projects in the last few years have returned a combined Net
Present Value of N308.52 billion i.e. N201billion and N107.52 billion respectively.
The initial investments were N190billion and N85billion while the Return on
Capital Employed (ROCE) on these projects were 29.4% and 31.35% respectively.

MNC Limited – Customer Focus
Recently we have seen our customer base grow quite rapidly every year since we
began operations six years ago, however, our last financial year 2015 has been the
year that has seen the highest growth rate in customers. We currently serve
approximately 5 million customers that cut across the entire country and this is
something we are very proud of as we can confidently say that we are the fastest
growing telecommunications company in the country. Whereas last year, we had
only 3.56 million customers in our subscriber base.
However, due to the increase in customers we have been encountering certain
difficulties as you might expect. Our systems and staff have been struggling to
cope even after being stretched to the limit. We have recently undertaken a
massive recruitment drive to ensure that we have adequate staff to support our
operations. I must tell you that some of the staff hired lack the necessary skills
needed to serve our customers but at this time we have very little choice.
A recent customer satisfaction survey conducted by our sales and marketing team
has provided the following results:
2015 2014
Number of customer complaints 753,661 131,456
Percentage of customer complaints resolved 63.0% 90.0%
Average service delivery rating * 5.7 7.9
Recommend MNC ** 5 9
* Scale of 1-10 with 10 being the highest rating and 1 being the lowest rating.
** Scale of 1-10 with 10 being “Very likely to recommend” and 1 being “Will not
recommend”.
MNC Limited – Strategic Planning

The Board of Directors has recently approved the funding required for our research
centre which would focus on seeking new ways to provide our service in a cost
effective and efficient manner. We need to get some of our technical staff who
understand the business and can provide further insight on our need and quite
importantly, our customers‟ needs and how to organise customer services for the
next decade and beyond involved in this project. We understand how quickly
technology is evolving and we do not intend to play catch up as our competitors are
also investing quite heavily in Research and Development (R & D).
The research team has discovered some interesting, innovative and possibly market
changing ideas. No patents have been filed as it is still very early and a lot needs
to be tested realistically before any of these innovative products become
commercially available.

Our training and development costs have also increased significantly as expected,
since we are providing training for our newly hired staff to enable them meet the
challenges of providing extraordinary service to our customers.
I hope you find the information provided useful and I will be happy to provide
further information or respond to any question you might have.
I will look forward to receiving your draft report as agreed.
Yours sincerely
Adesua Thomas
Finance Director
Magic Network Communications Limited

EXHIBIT 3
EXTRACT OF CHAIRMAN‟S STATEMENT FOR YEAR ENDED 30 SEPTEMBER, 2015
Overview
I am pleased to report that the trading momentum across the company remained
positive in 2015 with the company enhancing its competitive position. As a result, the
company reported strong growth in profit. National and International recognition for
our brand was reflected in the many prestigious awards the company received during
the year as recognition for our increasingly excellent services as the company
celebrated its 6th anniversary in Nigeria.
Performance
At MNC, our customers always come first and we increased both the value delivered to
each of our customers and the overall reach and power of our platform. We added 1.42
million new customers, growing our customer base by 40% to 4.98million. This increase
in customer base has resulted in increase in operating profit to N28.45billion, from
N19.67billion in the previous year, 2014.
Over the course of the year, we launched and improved several key products. Our call
centre now provides services in five (5) different Nigerian languages used by 92% of
the country‟s population in addition to English and French.
Business Developments
The company has invested in research and development of new internet based
products and is looking forward to launch some of these products in the next few years.
This will add to the company‟s other investment projects that have yielded positive
results and contributed to the profitability of the company in the past year.
Corporate Developments
The company has announced its intention to be listed on the Nigerian Stock Exchange,
subject to shareholders‟ approval. We see this as the next step in our strategic plan as
it will present further opportunities for MNC to raise fund from the general investing
public.
People
On behalf of the directors, I would like to thank all our employees throughout the
company and acknowledge their contributions and continued commitment to serving
our teeming customers. As we always say at MNC, we are partners in progress.
Future Outlook
While the economic outlook can be quite unpredictable, the company remains strong in
competitive and financial positions. Over the long term, MNC will continue to benefit
from the strength of its growing brand and as the customer base continues to grow, we
intend to provide the highest quality of service now and into the future.
Chairman, MNC Limited

October 31, 2015

EXHIBIT 4
Financial Information Extracts
Statement of Financial Position as at 30 September
2015 2014
Non-current assets N'billion N'billion
Property, plant and equipment 257.00 119.92
Intangible assets 40.00 45.00
297.00 164.92
Current assets
Trade and other receivables 35.50 43.50
Cash and cash equivalents 21.59 14.06
57.09 57.56
Total assets 354.09 222.48
Current liabilities
Trade and other payables 67.77 52.41
Current tax payable 37.90 21.00
105.67 73.41
Non-current liabilities
Finance debt 80.00 -
80.00 -
Total liabilities 185.67 73.41
Equity
Ordinary share capital 100.00 100.00
Retained Earnings 68.42 49.07
Total equity 168.42 149.07
Total Liabilities and Equity 354.09 222.48
Statement of Comprehensive Income

2015 2014
N'billion N'billion
Revenue 522.28 243.39
Cost of Sales 431.18 197.54
Gross Profit 91.10 45.85
Selling, Distribution and Administrative Costs 62.65 26.18
Profit before Interest & Tax 28.45 19.67
Taxation 9.10 6.24
Profit for the year 19.35 13.43

Statement of Changes in Equity
Other
Share Share Retained
Comprehensive Total
Capital Premium Earnings
Income
September 30, 2015 N'billion N'billion N'billion N'billion N'billion
At Opening 100.00 - 49.07 - 149.07
Issue of Shares - - - - -
Profit for the year - - 19.35 - 19.35
Dividend - - - - -
Prior period adjustments - - - - -
-
At Closing 100.00 - 68.42 - 168.42
September 30, 2014

At Opening 100.00 - 36.84 - 136.84
Issue of Shares - - - - -
Profit for the year - - 13.43 - 13.43
Dividend - - - - -
Prior period adjustment - - (1.20) - (1.20)
At Closing 100.00 - 49.07 - 149.07
Other relevant information:
2015 2014
Cash Flow from Operations 134.34 55.35
Number of Subscribers 4.98 million 3.56 million
Project Venice Project Oluno

Net Present Value (NPV) N201billion 107.52billion
Initial Investment N190billion N85billion
ROCE (%) 29.4 31.35
Number of Years 5 5
Discount Rate (%) 10 10
Profitability Index (PI) 1.06 1.26

EXHIBIT 5
The following internal information relates to the Call Centre operations by MNC.
Demand Operator Consultant

Type of service for which queries
(Number of minutes minutes
are received
enquiries) (Per enquiry) (Per enquiry)
Mobile Telephony (MT) 2,500 16 0
Mobile Internet Service (MIS) 1,000 12 8
Home Internet Service (HIS) 2,000 12 28
Business Internet Service (BIS) 250 6 54
MNC‟s call centre currently operates with a total of 185 staff of whom:
- 100 are operators who work fifteen hours per day and are paid N60 per
worked hour; and
- 85 are consultants who work fifteen hours per day and are paid N90 per
worked hour.
Both operators and consultants are required to take a mandatory one hour break
each working day.
However, with a relatively insignificant cost of training, an operator can be

transformed into a consultant, with a resulting pay rise. Consequently, a consultant
can also be transformed into an operator, but there is no decrease in pay.
Pricing of Call Centre Service information is provided below:
Type of Service Price of service per

enquiry (N)
Mobile Telephony (MT) 40
Mobile Internet Service (MIS) 220
Home Internet Service (HIS) 180
Business Internet Service (BIS) 300
All enquiries for the service provided are charged automatically to each customer‟s
account.

SOLUTIONS

CASE STUDY NOVEMBER 2015
Marking Key
Req 1 Req 2 Overall TOTAL
SA
CA
BC
NC
Total 8 8 4 20
NOTE
SA Superior Achievement
CA Competent Achievement
BC Below Competent Achievement
NC Non-Competent Achievement
V Void

REQUIREMENT 1 – Balanced Scorecard/Ratios
USES DATA AND INFORMATION USES ANALYTICAL SKILLS (material

APPROPRIATELY points in the written report)
 Identifies the financial perspectives

 Uses MNC‟s Financial Statements:
- Income statement issues
- Statement of financial position  Identifies the customer perspectives
 Uses other relevant information
issues
(Exhibit 4)
 Uses information in Chairman‟s  Identifies the learning and growth
statement perspectives issues
 Uses information in letter from MNC
 Identifies the internal processes
(Exhibit 2)
 Identifies wider context for MNC‟s perspectives issues
business - A non-listed company  Identifies the ratios relevant to
(market expectations)
MNC‟s industry that need to be
computed
USES PROFESSIONAL TOOLS AND IDENTIFIES ISSUES AND OPTIONS

KNOWLEDGE
 Identifies that the model may have
 Recognises the Balanced Scorecard its limitations
Model  Identifies the possibility of using
 Considers the four perspectives of other models to meet the needs of
the model MNC
 Considers the usefulness of the  Identifies the possibility of
model outsourcing some staff rather than
 Applies the model using information hiring full time, less qualified staff
from the case  Identifies the opportunities that the
increased subscriber base brings
and how to leverage on this
 Identifies the need for a detailed
and formal customer and competitor
analysis

APPLYING PROFESSIONAL SCEPTICISM CONCLUSIONS (Draws distinct
AND ETHICS conclusions under appropriate
heading)
 Identifies the accuracy of the  Concludes on the overall business
information provided by MNC model
 Identifies the ethical issues in the  Concludes on ratios and the
case, e.g. non disclosure of fine additional information it might
from the regulatory authority. provide to MNC
 Identifies other issues that need to  Concludes on possible effect of
be considered e.g. government external factors (positive and/or
policy, industry regulators. negative) e.g. government policy,
 Identifies the possibility of industry regulators, unexpected
unsatisfied subscribers moving to situations
other Networks.  Concludes on the possible use of
other business analysis models to
properly analysis the company‟s
operations.
EVALUATIVE SKILLS AND JUDGEMENT RECOMMENDATIONS
 Recognises the possible need for  Better Customer Relation

Management
hiring and retaining higher skilled
 Adequate economic and business
staff to relate with planning
customers/subscribers  Consider other possible targets
 Recognises the need to update (untapped) markets to increase
customer database and the use of revenue
artificial intelligence tool to better  Use information from the Balanced
understand its customers Scorecard model to better advise
MNC on improvement in financial
 Recognises the need to arrange
and non-financial areas
training for call centre operators
and consultants for effective service
delivery.
 Recognises the need to carry out a

competitive analysis to understand
the company‟s competitors.

REQUIREMENT 2–Product Mix
USES DATA AND INFORMATION USES ANALYTICAL SKILLS (material

APPROPRIATELY points in the written report)
 Uses MNC‟s Financial Information:  Determines the contribution for

- Call centre information (Exhibit 5) each service
 Determines the excess resource
 Uses other relevant information (operators‟ hours)
 Determines the scarce resource
 Uses information in the letter from
(consultants‟ hours)
MNC (Exhibit 2)
 Determines the contribution per
 Identifies wider context for MNC‟s limiting factor
business/economic environment  Determines the appropriate ranking
 Determines the product mix
USES PROFESSIONAL TOOLS AND IDENTIFIES ISSUES AND OPTIONS

KNOWLEDGE
 Analyses the revenue for each  All figures should be discussed in

service the context of the case
 Analyses the costs for each service  Negotiate and manage relationship
with consultants possibly
 Analyses contribution for each considering being available for
service more hours at a slightly
reduced/increased wage per hour
 Analyses the contribution per
limiting factor for each service  Need to discuss the effect of the
increased wage bill of hiring/
additional consultants‟ on MNC‟s
 Analyses the number of operators to
profitability
be upgraded or consultants to be
downgraded
 Need to discuss the effect of the
upgrade on the morale of
consultants/operators who may be
more qualified/experienced
 Need to discuss the possibility of

operators not being ready for an
upgrade

APPLYING PROFESSIONAL SCEPTICISM CONCLUSIONS (Draws distinct
AND ETHICS conclusions under appropriate
heading)
 Identifies that internal financial  Concludes on scarce resource

information may not always be
reliable
 Identifies effect of decisions on staff
 Concludes on product mix and total
morale/customers etc.
contribution therefrom
 Identifies the need for adequate
training of staff to ensure that the  Concludes on number of staff
subscriber base is maintained or required to be upgraded to
increased consultants
 Identifies that the survey carried out
by the company‟s marketing  Concludes on other issues to be
department might have been considered
padded.
EVALUATIVE SKILLS AND JUDGEMENT RECOMMENDATIONS
 Recognises the possibility of call  MNC should consider the

service system to enable customers information and how accurate it is
resolve routine enquiries using an  MNC should use the financial
automated assistant based on information and conclusions drawn
similar cases alongside non-financial
 MNC must keep up to date data and
 Recognises the need for hiring the use this for resource allocation and
right staff with appropriate training other decision making
and qualifications
 MNC should prepare budgets and
 Recognises and discusses the use of adhere to it for self-monitoring.
other ways of analysing financials
for decision making e.g. common
size analysis, trend analysis etc.
 Recognises the use of external
consultant to carry out subscribers
data.

Appendices Main Report
Appendices R1: Content and style Report: Structure
 Tabulated and mix of numbers and

percentages (%)  Sufficient and appropriate headings
 Performance (P or L) analysis and trends  Appropriate use of paragraphs/sentences

for MNC  Legible
 No unnecessary immaterial detail  Correctly numbered pages
 Shows balance scored card model.
V NC BC CA SA V NC BC CA SA
Appendices R2: Content and style Report: Style and language
 Logical approach and numbers clearly  Relevant disclaimer (external report)

derived.
 Suitable language for the board
 Analysis of changes in MNC‟s
financials for 2013 and 2014.  Tactful/ethical comments
 Well presented ratios analysis  Acceptable spelling and punctuation
 Shows detailed contribution analysis

of MNC‟s call centre operations
 Shows the determination of limiting

factor
V NC BC CA SA V NC BC CA SA
NOTE
R1: Requirement 1
R2: Requirement 2

Requirement I: Balanced Scorecard Model

Appendix II
Statement of Comprehensive Income
2015 2014 CHANGE PERCENTAGE
N‟billion N‟billion N‟billion CHANGE
Revenue 522.28 243.39 278.89 114.59
Cost of Sales 431.18 197.54 233.64 118.28
Gross Profit 91.10 45.85 45.25 98.70
Selling distribution and Administration 62.65 26.18 36.47 139.31
Profit before Interest & Tax 28.45 19.67 8.78 44.64
Taxation 9.10 6.24 2.86 45.84

Profit for the year 19.35 13.43 5.92 44.08
Cash Flow from Operations (CFO) 134.34 55.35 78.99 142.71
Number of Subscribers (billion) 4.98 3.56 1.42 39.89
Ratios to consider:
1. Revenue per subscriber 104.88 68.37
2. Operating profit per subscriber 5.72 5.53
3. Net Profit per subscriber 3.89 3.78
4. CFO per subscriber 26.98 15.55

Other Ratios
Note: All figures in the calculation are in N‟billion
Ratio Formula 2015 2014
Gross Margin (Gross (91.10/522.28) x (45.85/243.39) x

profit/sales) x 100% 100%
100%
= 17.5% = 18.8%
Net Margin (PBIT/sales) x (28.45/522.28) x (19.67/243.39) x

100% 100% 100%
= 5.5% = 8.1%
Return on Capital Employed (PBIT/capital (28.45/248.42) x (19.67/149.07) x

employed) x 100% 100%
100%
= 11.5% = 13.2 %
Current Ratio Current (57.09/102.67): 1 (57.56/73.41): 1

assets/Current
Liabilities: 1
= 0.5:1 = 0.8:1
Gearing (Prior charge (80/248.42) x Not Applicable

capital/Capital 100%
employed) x
100% = 32.2%
Proprietary‟s Ratio (Equity/Total (168.42/354.09) x (149.07/222.48) x

capital) x 100% 100% 100%
= 47.57% = 67.0%
Debt Ratio (Non-current (80/354.09) x Not Applicable

liabilities/Total 100%
Assets) x 100%
= 22.60%

Appendices: Requirement II
Type of service for which queries are received
Demand Operator Consultant Revenue Total Total Contribution Limiting Cont/Limiting Ranking
(Number of minutes minutes Operator Consultants factor factor
queries) (Per query) (Per query) (N) Cost (N) cost (N) N N
Mobile TelePhony (MT) 2,500 16 - 100,000 40,000 - 60,000
Mobile Internet Service (MIS) 1,000 12 8 220,000 12,000 12,000 196,000 8,000 24.50 1st
Home Internet Service (HIS) 2,000 12 28 360,000 24,000 84,000 252,000 56,000 4.50 2nd
Business Internet Service (BIS) 250 6 54 75,000 1,500 20,250 53,250 13,500 3.94 3rd
755,000 77,500 116,250 561,250

Operator Mins Consultants Mins
Mobile Telephony (MT) 40,000 -
Mobil Internet Service (MIS) 12,000 8,000
Home Internet Service (HIS) 24,000 56,000
Business Internet Service (BIS) 1,500 13,500
Available Minutes 77,500 77,500
No of Workers 100 85
Rate per hour 60 90
Number of hours worked 14 14
Required Minutes 84,000 71,400
Scarce resource Not applicable Scarce

EXAMINER‟S REPORT
This case study has two requirements. Candidates are expected to first use the Balanced
Scorecard Model to analyse and report on the performance of the Company discussed in the
case. They are then required to use the marginal costing decision making approach,
contribution analysis, to advise the company on profitable product mix based on the limiting
factor.
As expected, all the candidates attempted the question. However, performance was very poor.
The commonest pitfalls of candidates are:
 Lack of understanding of the Balanced Scorecard Model as a performance measurement
tool;
 Candidates seem to have forgotten that it is the contribution analysis that is suitable for
making product mix decision when there is a limiting factor. Most of the candidates used
the profit or loss approach; and
 Inability of the candidates to write a good and well arranged report with appropriate
headings, appendices and disclaimer.
Candidates are advised that in preparing for future examination they should;
- Familiarise themselves with important strategic and performance measurement models
they have earlier learnt; and
- Learn the act of report writing, with appropriate appendices and disclaimer.

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

NOVEMBER 2015 PROFESSIONAL EXAMINATION

PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2015 1

ADVANCED AUDIT AND ASSURANCE 39

STRATEGIC FINANCIAL MANAGEMENT 62

ADVANCED TAXATION 103

CASE STUDY 142

PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2015 2

ANSWER FIVE QUESTIONS IN ALL

The following financial statements relate to Abia, a public limited company.

The following information is relevant to the preparation of the group statement of

PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2015 3

PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2015 4

PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2015 5

Non-current assets (Note 1) 540

PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2015 6

b. One aspect of Mimiko‟s business is to provide low-cost homes in Abuja

PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2015 7

a. The Abuja Municipal Development Authority has mapped out a development

Because of the strategic location of this Model Area, Mafowosere Plc, a

Assume a discount rate of 12%, if necessary. (7 Marks)

PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2015 8

c. The Abuja Municipal Development Authority, in order to encourage the flow of

In the year to December 31, 2014 the following information is relevant:

Standard Extended Selling Price

Major Minor Defect

PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2015 9

SECTION C: ANSWER ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION

(i) Corporate Environmental Governance

a. Advise the Directors of Global Electricity on FIVE areas each of corporate

PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2015 10

PROFESSIONAL LEVEL EXAMINATION – NOVEMBER 2015 11

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(a) Abia Plc

Group NCI Total

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Other comprehensive income

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3 Depreciation on fair value adjustment of plant N20 m

4 Intra-group sales/cost of sales 30

5 Unrealised profit on intra-group sales (20% x 20 x 50%) = 2

6 Revenue (bankrupt customer) 10

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Cost 01.05.2013 24.00

01.05.2014 Bal b/f 26.00

OCI (4.4 -0.49)** 3.91

**Note: Adjustment for excess depreciation

8(a) Profit or loss attributable to NCI:

8(b) NCI in total comprehensive income

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ii. Calculation of goodwill on acquisition of Choba

(b) Statement of comprehensive income

Workings (48 entries @ 1/3 mark each) 16

The question tests candidates understanding of the computation of goodwill on

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(a) i. Usefulness of Ratio Analysis

1. Performance Measurement: It provides indication of a firm‟s

ii. Limitations of Ratio Analysis: