SOLUTION: CORPORATE REPORTING STRATEGY NOV 2008 QUESTION 1 (a) WORKING CONSOLIDATION SCHEDULE

Memo GH Cock Ltd: Ordinary shares capital (80:20) Preference shares (0:100) Capital surplus: At acquisition (80:20) Post acquisition (80:20) Minority interest 20% Adjustment for fair value (80:20) Income surplus: At acquisition Contingent liability (80:20) Post acquisition: 80%* (2,536,000 1,700,000) Adjustment for depreciation 25%* 80,000 Pee Ltd: Capital surplus Income surplus Unrealized profit on stocks 20/120*180,000 Cost of investment in cock Ltd Hen Ltd: Ordinary share capital (48:52) Preference shares (16:84) Capital surplus (48:52) Income surplus At acquisition (48:52) Post acquisition (48:52) Cost of investment in Hen Ltd: Ordinary shares Minority share (20%) Preference shares Minority share (20%) Totals Impairment loss Consolidated balances 2,500,000 700,000 900,000 500,000 1,400,000 80,000 1,800,000 (100,000) 1,700,000 836,000 (20,000) 2,000,000 4,746,000 (30,000) (5,700,000) (5,700,000) 1,800,000 200,000 250,000 600,000 409,000 (1,600,000) (40,000) (1,556,000) 20,000 (1,536,000) (8,000) 3,380,800 2,400,000 864,000 32,000 120,000 288,000 (1,600,000) 320,000 (40,000) 8,000 (8,000) 936,000 168,000 130,000 312,000 163,600 245,400 (320,000) (8,000) 1,380,800 2,400,000 5,614,20 0 (20,000) Goodwill Cock Ltd GH 2,000,000 720,000 400,000 64,000 280,000 16,000 Goodwill Hen Ltd GH Minority Interest GH 500,000 700,000 Capital Surplus GH Cons. I/S GH

1,360,000

340,000 167,200 (4,000) 2,000,000 4,746,00 0 (30,000) 668,800 (16,000

5,594,20 0

Consolidated balance sheet of Pee Ltd and its subsidiaries as at 30th September 2008 Assets Non-current Assets Property, plant & equipment Goodwill Current Assets Stocks Accounts receivable Cash & bank balances Total Assets Liabilities and Equity Current Liabilities Trade creditors Sundry creditors Accruals Non-current Liabilities Long-term Loans Equity attributable to equity holders of the parent Stated capital Capital surplus Capital grant Income surplus Minority interest Total equity Total Liabilities and Equity Notes (i) Property, plant & equipment comprised Buildings Plant & equipment Furniture & fittings Motor vehicles Stated capital Ordinary shares Preference shares GH 13,843,000 1,544,000 15,387,000 3,554,000 2,464,000 731,000 6,749,000 __________ 22,136,000 2,615,000 1,847,000 793,000 5,255,000 1,546,000

3,900,000 2,400,000 60,000 5,594,200 11,954,200 3,380,800 15,335,000 22,136,000

6,478,000 5,391,000 1,020,000 954,000 13,843,000 3,000,000 900,000 3,900,000 2

(ii)

(a)

WORKINGS - CONSOLIDATION SCHEME BALANCE SHEET Balance Sheets as at 30th September, 2008 Pee Ltd GH Cock Ltd GH 5,481,000 1,640,000 7,121,000 Hen Ltd GH 3,564,00 0 3,564,00 0 Adjust. GH 120,000 (7,340,000 ) Cons. B.S. GH 13,843,000 13,843,000 1,544,000 3,554,000 2,464,000 731,000 6,749,000 21,998,000

Assets Non-current Assets Property, plant & equipment Long term investments Goodwill Current Assets Stocks Accounts receivable Cash & bank balances Total Assets Liabilities and Owners Equity Current Liabilities Trade creditors Sundry creditors Accruals Long-term Loans Owners Equity Stated capital Capital surplus Capital Grant Income surplus Minority interest Total Liability & Owners Equity

4,678,000 5,700,00 0 10,378,00 0

1,580,000 1,307,000 278,00 0 3,165,00 0 13,543,00 0

1,139,000 640,000 210,000 1,989,000 9,110,000

700,000 581,000 160,000 1,441,000 533,000 3,200,000 1,400,000 2,536,000 ________ 7,136,000 9,110,000

865,000 607,000 193,00 0 1,665,00 0 5,229,00 0

(30,000) (90,000) 50,000

(40,000)

2,615,000 1,847,000 793,000 5,255,000 1,546,000 3,900,000 2,400,000 60,000 5,594,200 3,380,800 15,197,000 21,998,000

1,176,000 720,000 416,00 0 2,312,00 0 585,00 0 3,900,000 2,000,000 4,746,00 0 ________ _ 10,646,00 0

779,000 546,000 217,00 0 1,542,00 0 60,000 428,00 0 2,000,00 0 250,000 1,009,00 0 _______ _ 3,259,00

0 13,543,00 0 5,229,00 0

(i)

Property, plant & equipment comprised: Pee Ltd GH 1,898,000 2,200,000 280,000 300,000 4,678,000 Cock Ltd GH 3,400,000 1,561,000 290,000 230,000 5,481,000 Hen Ltd GH 1,180,000 1,510,000 450,000 424,000 3,564,000

Buildings Plant & equipment Furniture & fittings Motor vehicles (ii)

The stated capital of the companies is made up of: Pee Ltd GH 3,000,000 900,000 Cock Ltd GH 2,500,000 700,000 Hen Ltd GH 1,800,000 200,000

Ordinary shares Preference shares (b)

The existence of significant influence by an investor is usually evidenced in one or more of the following ways: (i) (ii) (iii) (iv) (v) (vi) representation on the board of directors or equivalent governing body of the investee; participation in policy-making processes, including participation in decisions about dividends or other distributions; material transactions between the investor and the investee; interchange of managerial personnel; provision of essential technical information; or direct or indirect holding of 20% or more of the voting power of the investee.

QUESTION 2 (a) Proceeds Freehold building 19% Debentures 280,000 (400,000) nil 4 OAK LTD POSITION IN CASE OF LIQUIDATION GH

GH

Investments Bank overdraft Development expenditure Stocks Debtors Motor vehicles Equipment, furniture & fittings Bank & cash balances Liquidation expenses Tax Amount available to unsecured Unsecured creditors Total GH 120,000 260,000 425,760 805,760

100,000 (360,000)

nil 6,000 200,000 250,000 80,000 85,000 15,000 636,000 (10,000) 626,000 (32,600) 593,400

19% Debentures Bank overdraft Trade Creditors

Paid GH 88,374 191,476 313,550 593,400

Loss GH 31,626 68,524 112,210 212,360

Dividend 0.736448 0.736448 0.736448 0.736448

CAPITAL REDUCTION COMPUTATION LOSSES TO BE WRITTEN OFF Income surplus account Reconstruction expenses Preference dividend Stocks Debtors Less: Capital surplus Development expenditure GH 518,880 8,000 81,000 100,000 195,400 903,280 (148,000) (1,000) 754,280

SHARING THE LOSSES Existing capital structure GH Ordinary shares 400,000

Apportionment Reconstruction of loss capital GH 394,000 GH 6,000 5

18% preference share Preference dividend 19% Debentures Bank overdraft Trade creditors Other creditors

150,000 81,000 400,000 360,000 425,760 32,600 ________ 1,849,360

130,000 71,000 22,000 50,000 90,000 ______ 757,000

20,000 10,000 378,000 310,000 335,760 32,600 ________ 1,092,360

Loss in case of liquidation GH Ordinary shares 18% Preference share Preference dividend 19% Debentures Bank overdraft Trade creditors 400,000 150,000 81,000 31,626 68,524 112,210 843,360 Proposed scheme

Proportionate share of loss GH 358,224 134,334 72,540 28,323 61,367 100,491 755,280

GH394,000 should be written off the ordinary share capital. The remaining balance of GH6,000 should be converted to new ordinary shares. The ordinary shareholders should introduce GH250,000 cash to purchase new ordinary shares and further cash totaling GH466,700 for additional new ordinary shares in order to bring the working capital ratio of the reconstructed company to 2:1. The 18% preference share capital should be reduced by GH130,000 and the balance converted to 19% cumulative preference share capital. The preference shareholders should introduce GH40,000 cash for new 19% cumulative preference shares and GH20,000 cash for new ordinary shares. The 18% preference shareholders should waive GH71,000 of the preference dividend arrears and be issued with GH10,000 new ordinary shares in full settlement of the balance. The 19% debentures should be reduced by GH22,000 and the interest rate raised to 21%. 6

GH50,000 should be written off the bank overdraft and GH40,000 paid off. GH60,000 pf the balance should be converted to 21% debentures. Trade creditors should waive GH90,000 and GH100,000 converted to new ordinary shares. The other creditors should be paid off.

Reconstructed Preference dividend arrears Cash Ordinary shareholders Cash Preference shareholders Preference dividend Bank Overdraft Trade creditors Cash

New Ordinary Shares GH 6,000 250,000 20,000 10,000 100,000

19% Preference Shares GH 20,000 10,000 40,000 (10,000)

21% Debentures GH 378,000

Bank Overdraft GH 310,000

Trade Creditors GH 335,760

60,000

(60,000) (100,000) (40,000)

386,000 Further cash Total Cash Balance per question New ordinary shares New ordinary shares New ordinary shares Reconstruction expenses Tax on employees salaries 19% cumulative preference shares Bank overdraft (b) 466,700 852,700

60,000

438,000

210,000

235,760

60,000 GH 15,000 250,000 20,000 466,700 (8,000) (32,600) 40,000 (40,000) 711,100

438,000

210,000

235,760

Balance sheet of Oak Ltd. after reconstruction. 7

GH Non Current assets Freehold building Equipment, furniture & fittings Motor vehicles Development expenditure Current Assets Stocks Debtors Investments Cash Net Current Assets 21% Debentures (secured on freehold building) Representing Stated capital Capital surplus (c)

GH 250,000 103,500 95,400 13,000 461,900

201,343 258,316 166,521 711,100 1,337,280 891,520 1,353,420 (438,000) 915,420

912,700 2,720 915,420

Reasons why reorganizing a company might be preferred to liquidating the company includes: (i) (ii) (iii) (iv) (v) The company might continue to contribute to employment; The company might continue to contribute to tax revenue; The company might continue to contribute to overall growth of the national economy; Customers may be assured of source of supplies; Suppliers may be assured of outlet for their goods;

Working capital ratio immediately after reconstruction GH Current liabilities: Bank overdraft 210,000 Trade creditors 235,760 445,760 Required total current assets 1,337,280 Deduct:

Ratio

1 3

Stocks Debtors Investments Total cash required Cash before additional cash introduced Additional cash introduced

201,343 258,316 166,521 711,100 244,400 466,700

Reconstruction account Reconstruction expenses Income surplus Development expenditure Preference dividend Stocks Debtors Ordinary shares Preference shares 19% Debenture Bank overdraft Trade creditors Capital surplus Capital surplus after reconstruction

DR GH 8,000 518,000 81,000 100,000 195,400

CR GH

1,000 71,000

903,280 2,720 906,000

394,000 130,000 22,000 50,000 90,000 148,000 906,000

QUESTION 3 (a) i. Unrealised gain in Stock for 2007. Unrealised Gain at Year End 22,560 x (122 + 134) 2 - 22,560 126 22,560 x 128 - 22,560 126 9 GH

22,918 22,560

258.00

Less Unrealised Gain at Start 12,400 x (112 + 110) 2 - 12,400 108 = = 12,400 x 111 - 12400 108 12,744 - 12,400 344.00 14

Unrealized Gain for 2007

ii.

Unrealised Holding Gain on Equipment for 2007 GH

Gain at Year End 14,240 x 50200 - 14,240 = 35600 20,080 - 14,240

5,840.00

Less Gain at Start 21,360 x 38,100 - 21,360 = 35,600 Less: Element of Current Cost Revaluation written off as depreciation during Year (21,360 - 14,240) x 50,200 - 7,120 35,600 = = iii. 7,120 x 50,200 - 7,120 35,600 10,040 - 7,120

1,500.00 4,340.00

(2,920) 1,420

Unrealized Holding Gain Calculation of cost of Sales Adjustment

Opening stock Purchases Closing stock

HCA GH 1,450 12,700 (1,540)

Factor 121/110 121/115.5 121/121

CCA GH 1,595 13,305 (1,540) 10

12,610 Current cost accounting cost of sales Less Historical cost accounting cost of sales Cost of sales Adjustment iv. Monetary Working Capital Adjustment for 2007 2006 GH 18,600 11,700 6,900 GH

13,360 13,360 12,610 750 2007 GH 26,400 14,800 11,600 GH 11,600 6,900 4,700

Debtors Less Creditors Monetary working Capital MWC at End MWC at start Increase in MWC Increase Due to Volume Increases MWC at end: 11,600 x 108 112 Less MWC at start 6,900 x 108 100 MWCA Meaning of MWCA =

11,186 7,452 3,734 966

By company opening and closing Monetary Working Capital (MWC)at average prices, we establish how much of the total increase in MWC for the year (GH4,700) is attributable to an increase in volume (GH3,734) and it follows that the remainder of the increase must be due to price (ie the effect of price changes) and this represents the Monetary working Capital Adjustment (MWCA) (b) Talco Ltd. The loss on internally generated goodwill does not affect the F/S. Indeed, IAS 38: Intangible assets prohibits the recognition of internally generated goodwill, therefore, remove from income account. GH Vehicle cost 14,500 Depreciation for 2 years 5,800 Carrying amount 8,700 Recoverable amount 5,600 Impairment loss to income account 3,100 GH 11

Buildings cost Accumulated depreciation (4 years) Carrying amount as at 31/12/2004 Unrealized gain to capital surplus Revaluation in February 2005 Depreciation for three (3) years (2005 2007) 57,500 x 3 21 Carrying amount as at December 2007 Unrealized gain to capital surplus Revaluation at December 2007 Cost of asset Depreciation for 2007 Carrying amount December 2007 Value in use Receivable amount: Sale value Cost to sell

65,000 (10,400) 54,600 2,900 57,500 (8,214) 49,286 47,614 96,000 GH 8,500 1,700 6,800 14,400 13,400 2,680 10,720

If the assets fair value less cost to sell and its value in use both exceed its carrying amount, the asset is not impaired, as in this case. Therefore do nothing.

QUESTION 4

(a)

Using Dividend Yield Using the GSE earnings yield of 22%. The company yield should be higher than 22%. Risk Premium of 5% is added to cover being a private company. The valuation is arrived at by using: do (1 + g) rg Growth in earnings is estimated at 10% Last paid dividend was GH9,452 (1.12) 27% - 12% = 10,586.24 0.15 Total value = GH70,574.93 Total No. Of shares issued 50,000 per share = MV =

GH1.41

12

Using Earnings Basis This method of P/E ratio of similar quoted company and reduce to cover the high risk of private company. Earning per share using 2008 earnings P/E ratio = P/E EPS = 1 22% = = = 9,250 50,000 GH0.185 4.5

The P/E ratio of unquoted Assuming the same P/E ratio of 3.6 = Price per share= 3.6 x GH0.185

GH0.67

Using Net Assets Patent Land & Building (8,050 x 110%) Motor vehicle Plant & equipment Stock (10,400 1,200 + 300) Debtors Cash Less Liabilities Trade Creditors Overdraft Taxation Net assets Assets per share Price per share (b) Challenges of being a quoted company. 1) Cost: initial cost is high and yearly stock exchange fees. Cash flow Valuation Year 2009 2010 PAT 17,416.00 19,505.92 Dep. 4,620.00 4,851.00 Net Cash flow 22,036.00 24,356.92 DCF 0.781 0.610 PV of cash flow 17,210.12 14,857.72 13 10,705 5,800 2,075 GH 3,500 8,855 22,500 13,500 9,500 10,903 3,070 81,828

(18,580) 53,248 53,248 GH1.06496

2011 2012 2013

21,846.63 24,468.23 27,404.41

5,093.55 5,348.23 5,615.64

26,940.18 29.816.46 33.020.05

0.477 0.373 0.291

12.850.47 11.121.54 9,608.83 65,648.68 50,000.00 GH1.31 PV of cash flow 11,699.38 10,037.06 8,628.52 7,423.92 6,377.93 44,166.81 50,000.00 GH0.880

Year 2009 2010 2011 2012 2013

Present value of cash flows Number of shares Value per share Cash flow valuation (Alternative solution) PAT Dep. Net Cash flow DCF 10,360.00 4,620.00 14,980.00 0.781 11,603.20 4,851.00 16,454.20 0.610 12,995.58 5,093.55 18,089.13 0.477 14,555.05 5,348.23 19,903.28 0.373 16,301.66 5,615.64 21,917.30 0.291 Present value of cash flows Number of shares Value per share

2) 3) 4) 5) 6) 7)

Disclosure requirements for published accounts are increased by stock exchange regulations. Higher publicity leads to the companys per finance becoming public information. Bad year is difficult to hide. Difficult dividend policy because of wide spread shareholders much different objectives. Dictation of control of existing owner by outsiders. They lose control and unexpected. There is significant preference to achieve short term results. Limited companies are susceptible to be being taken over if the shareholdings are spread.

(c)

The main points which an accountant would wish to consider in carrying out an examination of the accounting policies and calculations for a profit forecast in connection with a clients application for the admission of its securities for a listing on the Stock Exchange include the following: 1) Whether the profit forecast under review is based on forecasts regularly prepared for the purpose of management, or whether it has been separately and specifically prepared for the immediate purpose; Where profit forecasts are regularly prepared for management purposes, the degree of accuracy and reliability previously achieved, and the frequency and thoroughness with which estimates are revised;

2)

14

3)

Whether the profit forecast under review represents the managements best estimate of results which they reasonably believe can and will be achieved as distinct from targets which the management have set as desirable; The extent to which profit forecast results for expired periods are supported by reliable interim accounts; The details of the procedures followed to generate the profit forecast and the extent of the procedures followed to generate the profit forecast and the extent to which it is built up from detailed forecasts of activity and cash flow; The extent to which profits are derived from activities having a proved and consistent trend and those of a more irregular, volatile or unproved nature; How many profit forecasts take account of any material extraordinary items and prior year adjustments, their nature and how they are presented; Whether adequate provision for foreseeable losses and contingencies and how the profit forecast takes account of factors which may cause it to be subject to a high degree of risk, or which may invalidate the assumptions; Whether working capital appears adequate for requirements; normally this would require the availability of properly prepared cash flow statements; and where short-term or longterm finance is to be relied on, whether the necessary arrangements have been made and confirmed.; and The arithmetical accuracy of the profit forecast and the supporting information and whether forecast balance sheets and sources and applications of funds statements have been prepared these help to highlight arithmetical inaccuracies and inconsistent assumptions.

4) 5)

6) 7) 8)

9)

10)

QUESTION 5 (i) Aims and objectives of value added statement To identify the stakeholders for whom published financial reports should be prepared. To consider the most suitable means of measuring and reporting the economic position, performance and prospects of an undertaking. To put into proper perspective the collective efforts of capital, management, employees as well as the government. As a basis for negotiating wage increases and planning tax liability. As a means of performance evaluation and control.

15

(ii)

Depreciation for the year: Freehold premises Plant and machinery Fixtures and fittings GH 7,600 84,000 16,000 107,600

Other income: Government grant

(90,000) 6 Development cost amortized: (36,000) 6 Total dividend Interim Final (48,000 x 0.36) 2

15,000 6,000

15,000 86,400 101,400

Exchange loss on 20% loan 31/8/08 (360,000 x 1.12) 0.96 31/8/07 Exchange loss Bought-in-materials Opening stock Purchases Closing stock Discount allowed Rent Advertising Audit fees Development cost Exchange loss

420,000 (360,000) 60,000

488,000 5,880,000 (780,000) 15,000 100,000 160,000 80,000 6,000 60,000 6,009,000

Nuza Ltd Value added statement for the year ended 31st August 2008 GH Sales Bought-in-materials Value added Other income

GH 7,690,000 (6,009,000) 1,681,000 15,000 16

1,696,000 Distributed to stakeholders as follows: To employees: Salaries and wages Social Security Directors remuneration To the government: Corporate tax To the providers of capital: Dividend Interest Invested in the business: Depreciation Retained profit

770,000 99,000 50,000

919,000 120,000

101,400 84,000 107,600 364,000

185,400

471,600 1,696,000

17