Pathfinder Peii May2010

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
MAY 2010 PROFESSIONAL EXAMINATION II & MDCS
Question Papers Suggested Solutions Plus Examiners Reports

PROFESSIONAL EXAMINATION II MAY 2010
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FOREWORD
This issue of the PATHFINDER is published principally, in response to a growing demand for an aid to:. (i) (ii) (iii) (iv) Candidates preparing to write future examinations of the Institute of Chartered Accountants of Nigeria (ICAN). Unsuccessful candidates in the identification of those areas in which they lost marks and need to improve their knowledge and presentation. Lecturers and students interested in acquisition of knowledge in the relevant subjects contained herein, and The profession; in improving pre-examinations and screening processes, and so the professional performance of candidates.
The answers provided in this publication do not exhaust all possible alternative approaches to solving these questions. Efforts had been made to use the methods, which will save much of the scarce examination time. Also, in order to facilitate teaching, questions may be altered slightly so that some principles or application of them may be more clearly demonstrated. It is hoped that the suggested answers will prove to be of tremendous assistance to students and those who assist them in their preparations for the Institutes Examinations.
NOTES
Although these suggested solutions have been published under the Institutes name, they do not represent the views of the Council of the Institute. The suggested solutions are entirely the responsibility of their authors and the Institute will not enter into any correspondence on them.
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TABLE OF CONTENTS
SUBJECT FINANCIAL REPORTING AND ETHICS
PAGES 4-32
STRATEGIC FINANCIAL MANAGEMENT ADVANCED TAXATION MULTI-DISCIPLINARY CASE STUDY
33-63 64-96 97-148
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ICAN/
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL EXAMINATION II MAY 2010 FINANCIAL REPORTING AND ETHICS Time allowed 3 hours SECTION A: Attempt All Questions PART I
1.
EXAMINATION...................................
MULTIPLE-CHOICE QUESTIONS
(20 Marks)
Which ONE of the following demonstrates the application of the acquisition method in a business combination? A. B. C. D. E. Determining the acquirer Amortizing the Value of assets acquired Recognising and measuring goodwill or a gain from a bargain purchase Separation of the two companies accounting policies Ignoring goodwill or a gain from a bargain purchase.
2.
According to SAS 26 (Business Combination), which ONE of the following information should be disclosed by a reporting entity in a business combination? A. B. C. D. E. Non-acquisition related costs The post-acquisition date The percentage of voting equity instruments not acquired The bulk cost of the combination only Acquisition related costs.
3.
Which ONE of the following is not required to be disclosed separately by a reporting entity in respect of the carrying amount of goodwill at the beginning and end of the period? (i) (ii) Impairment losses recognised during the period Net exchange differences arising during the period
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(iii) (iv) (v) A. B. C. D. E. 4. The net amount and accumulated impairment losses at the beginning and end of the period Additional goodwill recognised during the period Any other changes in the carrying amount during the period i & ii iv & v iv only iii only I, ii, iv & v.
Which ONE of these is NOT an example of cash flow from financing activities? A. B. C. D. E. Proceeds from sale of shares Dividend paid Interest paid Interest received Proceeds from sale of investment.
5.
Which ONE of these would a parent company that losses control of a subsidiary not do? A. Recognising the assets and liabilities of the subsidiary at their carrying amounts at the date when control is lost B. Recognising the carrying amount of any non-controlling interests in the former subsidiary at the date when control is lost C. Derecognising any resulting difference as a gain or loss in profit or loss attributable to the parent D. Derecognising the carrying amount of any non-controlling interests in the former subsidiary at the date when control is lost E. Derecognising the fair value of the considerations received, if any, from the transaction, event or circumstances that resulted in the loss of control.
6.
Ethics is also referred to as A. Psychological Ethics B. Moral Ethics
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C. Behavioural Morality D. Moral Physiology E. Moral Philosophy 7. Which ONE of the following is NOT identified as fundamental principle of ethics? A. B. C. D. E. 8. Confidentiality of ethics Objectivity Professional misconduct Integrity Professional competence and due care.
The following are Normative theories of ethics EXCEPT A. B. C. D. E. Psychological Egoism Ethical Egoism Virtue Ethics Kohlbergs theory of moral development Divine command theory
9.
Business ethics is NOT an attack on business but rather its first line of defence. Which of the following do you consider as the major 3-C characteristics of business ethics? i. ii. iii. iv. v. A. B. C. D. E. Compliance Care Commitment Contribution Consequences i, ii and iii ii, iii and iv iii, iv and v i, iii and iv i, iv and v.
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10. All the ancient Ethicists hold that the part to happiness is ONE of the following: A. B. C. D. E. The part of Diligence The part of Competence The part of Virtue The part of Altruism The part of Trust.
11. Filade Investments Ltd. has 10% return on Total Assets of N300,000 and a Net Profit Margin of 5%. What is its sales? A. N750,000 B. N960,000 C. N450,000 D. N480,000 E. N600,000 12. The restructuring of a company should not be undertaken if A. B. C. D. E. 13. the restructuring can prevent an unwanted takeover the restructuring is expected to create value for shareholders the restructuring is expected to increase companys revenue the restructuring will attract more customers into the business the interests of bondholders are negatively affected.
In the long run, an unsuccessful acquisition is ONE that A. B. C. D. E. enables the acquirer to make all equity purchases and increasing additional financial leverage enables the acquirer to diversify its assets base decreases the market price of the acquirers stock over what it would have been without the acquisition enables the preference shareholders to have adequate claim on their investment increases financial leverage.
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14. The market price of company X is N60 per share and that of company Y is N30. If X offers three-quarters share for each share of Y, the ratio of exchange of market price would be A. B. C. D. E. 15. 1:2 1 : 1.5 1 : 1.125 1 : 1.05 1:5
A Cash Flow Statement may provide considerable information about what is really happening in a business beyond what is contained in either Income Statement or the Balance Sheet. Therefore all of the following statements are untrue of a Cash Flow Statement EXCEPT A. B. C. D. E. Debtors want to determine regularity of their purchases Stockholders want to determine the level of business risk of the company Suppliers want to know if their customers will be able to pay if offered credit Investors want to evaluate market price of the company share Employers are interested in the overall productivity of their employees as indicated by its ability to fund its operations.
16.
The characteristics of ethical leadership include all of the following EXCEPT A. B. C. D. E. People oriented Loyalty to Stockholders and other interested group Modelled through visible unethical actions and traits Focused on setting ethical standards and accountability Based on broad ethical awareness.
17.
The features of a compliance driven framework does not include the following: A. B. C. D. E. Judgement Law based Fear driven Obedience/disobedience Mandatory
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18. In this era of globalization, International Federation of Accountants (IFAC) has focused on four key areas. Which of these is NOT ONE of them? A. B. C. D. E. 19. Strengthening standards; setting and promoting ethical conduct Achieving convergence with International Standards Serving the needs of small and medium practices and those of Professional Accountants in business The global reawakening of ethical problems Supporting the growth and development of the accountancy profession worldwide.
Which ONE of the following is NOT true of Corporate Governance? A. B. C. D. E. It is designed to make managers internalise the welfare of all stakeholders in the firm It aligns shareholders' and managers' interests lead us to better corporate performance There is an important relationship between corporate governance structures and the quality of decision-making particularly in relation to takeovers and mergers Good corporate governance system can guarantee public interest protection Good Corporate governance encourages corporate debacles.
20.
In order to promote ethics in your organisation, it is imperative that you do the following, EXCEPT A. B. C. D. E. Study Business Ethics Clearly articulate the organisational philosophy and values Become a member of ICAN Provide visible top management support for high ethical standards Encourage formal and informal conversations about ethical issues.
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PART II: SHORT ANSWER QUESTIONS (20 Marks)
1. Transactions involving entities or businesses under common control in which all are ultimately controlled by the same party or parties but for which the control is not transitory is known as ........................ The amount for which an asset could be exchanged or a liability settled, between knowledgeable willing parties in an arms length transaction is referred to as ...................... An entity for which there are users who rely on its financial statements for information that will be useful to them for making decisions is ...................... When a business combination is achieved in a single exchange transaction, the date of exchange is the ........................ In a business combination involving more than one exchange transaction, the aggregate cost of the individual transactions is ......................... Whatever an individual believes is right or wrong is right or wrong for that individual. This is the official position of ....................... The claim that human beings are by nature motivated purely by self-interest (in all their actions they aim to benefit themselves) to secure something that they consider good for themselves is ascribed to .. The tool that a company uses to communicate its financial performance to its stakeholders is .. State any TWO of the public service values that accountants should uphold and never compromise.
2.
3. 4. 5. 6. 7.
8. 9.
10. Morality requires people sometimes to follow the common good rather than their own ....................
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11. Basis of accounting where revenue is recognised when earned, and expenses are recognised when obligations are incurred or to match the timing of revenue earned is called .................. 12. The general set of customs, regulations, habits and laws that determine to what extent an organization should be run is ................................ 13. The assistance of government in the form of transfer of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity is known as ................................................ 14. When preparing Financial Statements, items that are normal to the activities of an enterprise but are abnormal as a result of their occurrence and size are called ................................................................. 15. The Financial Statements of a group presented as those of a single economic entity is ...................................................................... 16. State any prominent ethical principle that is applied in professional ethics. 17. Ethical dilemma is a product of ............................ 18. The rules that absolutely allow no exception are known as ..................... 19. The rules that support the belief that other things being equal, one should keep promises, tell the truth, obey the law and so on are referred to as ............................... 20. When an accountant does what is required by valid ethical principles, he/she is applying ....................................
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SECTION B ATTEMPT ANY FOUR QUESTIONS (60 MARKS) QUESTION 1- CASE STUDY
Mr. Dele is a non-executive director of SUPER NIGERIA LIMITED. The companys success and reputation rely on one core product. In order to manufacture the product, it needs to source two main components A and B. Component A may be purchased from either of two suppliers, OKOKO NIGERIA LIMITED or GOLD NIGERIA LIMITED. The Board has agreed a strategy that both suppliers will be used, thereby enabling the purchasing department to exercise bargaining power over its suppliers. On the days that Mr. Dele attends monthly board meetings, he takes lunch in the staff restaurant. One day he finds himself in conversation with Mrs. Oriyomi the purchasing manager, who is unfamiliar with the concept of a non-executive director. As he explains his role, Mrs. Oriyomi, seizes the opportunity to seek his opinion on a matter that has been causing her some concern. She is responsible for placing orders for stock, and orders of component A are usually placed on a weekly basis. Prices are obtained from OKOKO NIGERIA LIMITED and GOLD NIGERIA LIMITED on a regular basis, and confirmed prior to each order being placed. However, in recent months the purchasing director, Mr. Oluwole, has been taking a more active role in the ordering process. He has been directing the manager to place almost every order with GOLD NIGERIA LIMITED, although the manager believes that a better price could often have been obtained from OKOKO NIGERIA LIMITED. The director told the manager that he has been building an effective relationship with the sales director of GOLD NIGERIA LIMITED, which would lead to a reduction in prices in the long term. This has involved regular business lunches and an invitation for the purchasing director and his family to spend a weekend on the sales directors private yacht. The purchasing manager expresses her opinion to Mr. Dele that the purchasing director is accepting bribes, as well as ignoring the companys agreed purchasing strategy, which aims to limit the risk associated with exposure to just one supplier. Required: (a) What are the relevant facts in this case? (2 Marks)
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(b) (i) What is the moral foundation of Mr. Oluwoles action if the claim of Mrs. Oriyomi is true? (5 Marks) (ii) Does Mrs. Oriyomi have any moral justification for reporting the case of Mr. Oluwoles violation of the companys directive? (4 Marks) (iii) What advice should Mr. Dele give to the purchasing manager? (2 Marks) (iv) What action should be taken in his role as a non-executive director? (2 Marks) (Total 15 Marks)
QUESTION 2
The net profit margin is an important ratio to all stakeholders of a reporting entity. (a) (b) (c) (d) List FOUR accounting policies that will have effect on the net profit margin as a measure of operational performance. (2 Marks) State any ONE effect of these policies on the net profit margin. (4 Marks)
How is the effect of accounting policy changes treated in financial statements? (1 Mark) The Chairmans statement is a key report that accompanies the Financial Statement presented to the members of a company at its Annual General Meeting (AGM). Identify and explain any FIVE important areas that the Chairmans statement is expected to address. (8 Marks) (Total 15 Marks)
QUESTION 3
The Income Statement For The Year Ended 31 December 2008 relates to Goodway Limited. N N Profit Before Tax 121,900 Less: Taxation 52,900 69,000
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Less: Transfer to General Reserve Dividends: Preference Shares Ordinary Shares Retained Profit 5,750 1,380 2,070
(92,00) 59,800
1 January 2008, the issued Share Capital of Goodway Ltd was 23,000 6% Preference Shares of N1 each and 20,700 Ordinary shares of N1 each. Required: Calculate the Basic and Diluted Earnings Per Share for the year ended 31 December, 2008 under the following circumstances: (i) (ii) (iii) No change in the issued share capital. (4 Marks)
The company made a Bonus Issue of one Ordinary Share for every four shares in issue at 30 September, 2008. (2 Marks) The company made a Rights Issue of Shares on 1 October 2008 in the proportion of 1 for every 5 shares held at a price of N1.20. The middle market price for the shares on the last day of quotation cum rights was N1.80 per share. (9 Marks) (Total 15 Marks)
QUESTION 4
There are four theoretical problems associated with the Principle-Based Ethical approach to Business Ethics. Discuss any THREE of them. . (15 Marks)
QUESTION 5
(a) (b) Explain the term creative accounting? Discuss any FOUR likely reasons for creative accounting. (3 Marks) (12 Marks) (Total 15 Marks)
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QUESTION 6
Megida Plc is in the hospitality industry. The specified ratios and the average figures for the industry as at 31 December 2009 are stated below: Return on capital employed Net assets turnover Gross Profit Margin Net profit before tax Current ratio Quick ratio Stockholding period Debtors collection period Creditors payment period Debt to Equity Dividend yield Dividend cover 1.8 times 30% 1.6:1 0.9:1 46 days 45 days 55 days 40% 6% 3 times 22.1% 12.5%
Megidas Income statements for the year ended 31 December 2009 are as follows: Turnover Cost of sales Gross profit Other operating expenses Operating profit Interest payable Exceptional items (Note 2) Profit Before Tax Taxation Profit after tax Dividends Retained profit for the year Retained profit brought forward Retained profit c/f N000 2,425 (1,870) 555 (215) 340 (34) (120) 186 (90) 96 (90) 6 179 185
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Balance Sheet Fixed Assets (Note 1) Current Assets Stock Debtors Current Liabilities Bank overdraft Trade creditors Proposed dividend Taxation Net Current Assets 8% Loan Stock Capital and Reserves Ordinary Shares (N0.5 each) Profit and Loss Accounts N000 N000 540 275 320 595 35 350 30 85 (500) 95 635 (300) 335 150 185 335
Notes to the Accounts 1. Fixed Assets Cost Accum. Depreciation Net Book Value N000 3,600 (3,060) 540
2. 3.
Exceptional items relate to losses on the sale of some equipment that had become worthless. The Stock Exchange quotation of Megida shares throughout the year averaged N6 per 50k share.
Required: (a) (b) State THREE uses and THREE limitations of ratio analysis. (6 Marks) Comment briefly on the companys performance when compared with the industry average in the areas of liquidity and gearing. (9 Marks) (Total 15 Marks)
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SOLUTIONS TO SECTION A PART I
1. 2. 3. 4. 5. 6. 7. 8. 9. C E C C D E C D E
MULTIPLE CHOICE QUESTIONS
10. C 11. E 12. E 13. C 14. B 15. C 16. C 17. C 18. D 19. E 20. C TUTORIALS 11. Return on Total Assets is 10% of N300,000
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(10% x 300,000) = N30,000 Net Profit Margin = Return on Investment To arrive at Sales figure, therefore, the Net Profit is grossed up by 5%: (30,000 0.05) = N600,000 14. (3/4 x 60) = N45 (45 30) = 1.5 Therefore Ratio of Exchange of Market Price = 1 : 1.5
EXAMINERS REPORT
The questions test all aspects of the syllabus. Majority of the candidates performed well. However, a few candidates displayed poor understanding of ethics related questions. Candidates should ensure proper coverage of all areas of the syllabus so as to avoid loss of marks in future examinations.
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PART II SHORT ANSWER QUESTIONS
1. Business Combination 2. Fair Value 3. Reporting Entity 4. Acquisition Date or Date of Acquisition 5. Purchase Consideration or Consideration Transferred 6. Ethical or Moral Subjectivism 7. Psychological Egoism 8. Financial Statements or Annual Report 9. Objectivity; Integrity; Professionalism; Due Care; Confidentiality; Independence; Accountability; Probity; Competence; Honesty; Openness; etc. 10. Self or Personal Interest; Private Good or Interest 11. Accrual Concept or Basis 12. Code of Conduct or Corporate Governance 13. Government Grant 14. Exceptional Items 15. Consolidated Financial Statements or Group Financial Statements 16. Principles of Utility; Utilitarianism; Deontologist; Care Ethics; Egoism; Justice and Duty; Teleology 17. Conflict of Interests 18. Absolutism or Categorical Rules 19. Prima Facie Duty 20. Rule of Ethics or Code of Conduct
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EXAMINERS REPORT
The questions cover all aspects of the syllabus. Candidates performance was generally average. The major pitfalls were candidates inability to adequately understand basic theory and principles on ethics. Candidates are advised to ensure full coverage of all areas of the syllabus for good performance in future.
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SOLUTIONS TO SECTION B QUESTION 1
a. (i) Contrary to the Companys strategic position to buy from either of two suppliers, only one of the recommended companies supplies the needed product. The Purchasing Director has directed the Purchasing Manager against the strategic position. Mr. Oluwoles attachment to Gold Nigeria Limited is traceable to the personal benefits and bribes he enjoys from the Company. Regular business lunches and an invitation to the Purchasing Director of Super Nigeria Limited and his family to spend weekend in the private yacht of the Sales Director of Gold Nigeria Limited Mr. Oluwoles action can be analyzed within the framework of Ethical egoism. Ethical egoism emphasizes satisfaction of ones self-interest in the face of others interests. There is a conflict between his personal interest and the general interest of the organization. The company intends to have viable relationship with the two firms, thus intends to keep transacting business with them. Mr. Oluwoles action could be said to be a form of disloyalty based on egoism basic tenet. OR The moral foundation of Mr. Oluwoles action is that he is operating at level one stage two of Kohlberg theory of moral development where in human action which is self interest driven espouses the what is in it for me, which makes the Purchasing Director to go against the companys policy. Mr. Oluwoles action is a violation of the companys strategic position which could at the long run affect the corporate image of the organization as a company that encourages bribes and kick back as the basis of economic transaction. Mrs Oriyomi has the moral justification for reporting him to his superiors in order to preserve the corporate image of the organization.
(ii) (iii) (iv)
b.(i)
(ii)
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(iii) Mr. Dele should advise the Purchasing Manager to report the matter to the Managing Director/management/relevant authority, who are better positioned to handle the matter. What is expected of Mr. Dele is to discuss the issue of Mr. Oluwoles violation of the companys directive with the Managing Director who will decide on the appropriate ways of handling the matter. However, if the Managing Director/management/relevant authority fails to act, he may bring the matter up at the Board of Directors meeting.
(iv)
EXAMINERS REPORT
The question is a case study testing candidates understanding of various ethical issues adopting diverse approaches. Candidates were expected to identify relevant facts of the case and the moral principles breached by both executive and nonexecutive directors of the company. Candidates displayed good understanding of the case and performance was generally above average. Candidates commonest pitfall was the provision of the same points for different subquestions. Candidates need to properly identify relevant points for each question on the case studies, in order to improve performance.
QUESTION 2
(a) The following accounting policies will have effect on the net profit margin as a measure of operational performance: i. Depreciation policy ii. Stock Valuation method iii. Income/Revenue recognition policy iv. Basis of Accounting v. Research & Development policy vi. Fixed assets Capitalization policy
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(b) One effect of these policies on the net profit margin: i. Depreciation policy Straight-line depreciation compared to reducing balance will reduce profit. The straight-line method will charge the same amount over the life of the asset while reducing balance will charge higher amount in the early years of the assets thereby reporting a lower profit. Stock Valuation method The method adopted in valuing stock (raw materials, work in progress, finished goods and spares parts) will impact on net profit. For instance, valuation under the First In First Out (FIFO) method will result in a different profit compared to Weighted Average method. Income/Revenue recognition policy The way in which income/revenue is recognized for sale of goods, rendering of services and in respect of interest, royalty, dividend and long-term contract is capable of affecting net profit for the period. Basis of Accounting - The basis of accounting, whether cash or accrual basis will affect the net profit figure. Research & Development policy The policy to write off research and development as incurred will reduce profit compared to where only research cost is written off as incurred and development is capitalized. Fixed Assets Capitalisation policy Fixed Assets Capitalisation policy varies from one organisation to the other. While some may capitalize all fixed assets, others may have a minimum benchmark under the materiality concept.
ii.
iii.
iv. v.
vi.
(c)
Accounting policy changes in financial statements should be reflected by retrospective application to prior period, presented as if that policy had always been applied; unless it is impracticable to do so. In case of a change due to new enactment in the accounting standard e.g. IFRS, the change should be accounted for based on the specific transitional provisions set forth in the standard.
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(d) Important areas the Chairmans statement is expected to address: i. Global environment Addresses issues affecting global economy such as the current global financial crisis and how it affected the companys operations during the period. ii. Domestic economy This will highlight issues or development within the local economic environment. iii. Companys performance It will cover major achievements of the company during the period under review, including profitability, dividend and bonus. iv. Companys strategy This will cover how the company intends to compete favourably, in view of the issues identified in the domestic economy and global environment. v. Future outlook It will deal with future prospects of the company including opportunities and challenges. vi. Changes in the Board It will highlight appointment and retirement of directors during the year under review. vii. Corporate Governance - This will indicate the measures adopted by the company to protect the interest of all the companys stakeholders. viii. Major Project(s) - This will enumerate the major project(s) embarked upon or concluded by the company within the year under review.
EXAMINERS REPORT
The question examines candidates knowledge of accounting policies that impact on net profit margin, highlighting the effect and treatment of changes in those policies on operating results. They are also expected to identify and explain areas usually covered in Chairmans Statement. Candidates performance was just fair, as some candidates could not differentiate between accounting policies and accounting basis and concepts; and some mixed-up the contents of Directors Report with that of Chairmans Statement. Candidates are advised not to neglect any aspect of the syllabus in order to boost their performance.
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QUESTION 3
BASIC EPS i. No change in share capital = PAT Pref Div x 100 No. of shares DILUTED EPS
69,000 1,380 20,700 = 327k
N/A
ii.
Bonus issue on 30 Sept. 2008: No. of shares before bonus issue Bonus (1 for 4) No. of shares after bonus issue = PAT Pref Div x 100 No. of shares
20,700 5,175 25,875 69,000 1,380 25,875 = 261k
N/A
iii .
Rights issue on 1 Oct. 2008 Before rights issue 5 shares Rights issue (1 for 5) 1 share After rights issue 6 shares Theoretical ex-right price (N10.20/6) Bonus element of issue increases shares to Full price element of issue increases shares to Weighted Average No. of shares in issue 1.80 1.20 3.00 20,700 4,140 24,840 1.70 9.00 1.20 10.20 37,260 4,968 42,228 1.70
20,000 x 1.8/1.7 = 21,918 20,700 x 6/5 = 24,840 /12 x 21,918 + 3/12 x 24,840 =16,438+ 6,210 = 22,648
9
EPS = PAT Pref Div x 100 No. of shares
69,000 1,380 22,648 = 299k
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EXAMINERS REPORT
The question requests candidates to compute Basic and Diluted Earnings Per Share (EPS) under circumstances of Bonus and Rights Issues. Most candidates displayed fair understanding of the question. Candidates commonest pitfall was the use of wrong formulae for the calculation of Basic and Diluted EPS. Candidates will perform better if they acquaint themselves with the contents of the Annual Reports of publicly quoted companies and practice with past questions and other standard texts.
QUESTION 4
Preambles: According to Virtue ethics, courses and writings in business ethics appear ineffective due to the theoretical problems created by the dormant Principle-Based Ethics (BPE) of Immanuel Kants formalism and J.S Mills Utilitarianism. These systems provide guideline to help people evaluate whether acts are morally right or wrong. Although these two systems differ in a number of areas, they both start with a group-centered perspective as opposed to a self-centered one. Good people consider everyone, not just themselves. Both Kant and Mill claim that the reasonableness inherent in their respective systems should be self-evident to rational people. Further, both believe rational people will choose to follow these ethical guidelines in all aspects of their lives. In effect, both theorists link rationality with goodness. (a) An exclusive reliance on PBE has created four recurring problem for business ethicists: (i) Lack of Ethical Motivation - PBE does not adequately address the issue of ethical motivation. It is argued that PBE does not provide the motivation for ethical behaviour but rather provides what constitutes a moral action. It lacks motivation which involves answering the question why should I be good or do right things?
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(ii) The Problem of Generality The failure of PBE involves its generality. Neither formalism nor utilitarianism provides the basis for predictable decisions to specific situations. PBE lacks specificity when applied to business ethics cases. In other words, PBE does not support business persons with concrete solutions to ethical quandaries. Limited Applicability The problem with PBE is that both formalism and utilitarianism have peculiar problems that limit their applicability to practical situations when we need to make moral decision. Emphasizes Ends rather than Means PBE involves not so much a theoretical weakness as a practical deficiency. Business ethics tends to be predominantly utilitarian, but the modern form of utilitarianism is less than what Beetham or Mill would accept. Rather than an enlightened self-interest which disinterestedly accounts for the concerns of all, utilitarianism has become a Machiavellian calculation of ends apart from means. The problem of adequate understanding - The effectiveness of a principle is determined by the level of understanding of the principle.
(iii)
(iv)
(v) (b)
The study of Business Ethics is necessary because of the following reasons: i. To ensure that business are carried out in accordance with ethical standards. ii. To increase the normal intensity in business and corporate decisions. iii. To reduce the incidence of business misconducts and corporate debacles. iv. To enhance the level of public trust in business organizations. v. To reduce the negative impact of some sharp business practices in societies. vi. To enhance the welfare of stakeholders. vii. To enhance business profitability in the long-term. (Ethical management for profitability). viii. To have an understanding of fundamental principles of business conduct. ix. To facilitate the production/delivery of goods or services that will be in the interest of the consumers. x. So that the organisation will be able to act in public interest and enhance the level of public trust in business. xi. Government will benefit from good business ethics because firms will pay their taxes in full as and when due.
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xii. Employee(s) will benefit because adherence to ethical behaviours ensures that workers salaries/entitlements will be paid fully and as and when due. xiii. Creditors and other stakeholders will also benefit from proper business conduct because they will be paid according to terms of payment agreed upon. The business will be properly managed and not run aground. xiv. It will improve the level of fair competition in business and reduce the incidence of unethical business conduct or sharp practices.
EXAMINERS REPORT
The question expects candidates to discuss theoretical problems associated with Principle-based Ethical approach to business and enumerate reasons for studying Business Ethics. Most of the candidates displayed poor understanding of the question. They were off the mark on issues that were expected to be highlighted. Candidates need to pay more attention to the Sections on Ethics in the syllabus to improve their performance.
QUESTION 5
(a) Creative Accounting Creative accounting is a term in general use to describe the practice of applying inappropriate accounting policies or entering into complex or special purpose transactions with the objective of making a companys financial statements appear to disclose a more favourable position, particularly in relation to the calculation of certain key ratios, than would otherwise be the case. Most commentators believe creative accounting stops short of deliberate fraud, but is nonetheless undesirable as it is intended to mislead users of financial statements. (b) Likely reasons for creative accounting: i. Performance pressure Companies are often under pressure to perform in order to meet expectations of their stakeholders and the public at large. Where such a companys performance is not up to their expectation,
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management may be under immense pressure to embark on creative accounting in order to present a better result. ii. Competition The activities of competitors often put enormous pressure on their peers to perform or out-perform. This was very common in the Nigerian banking sector before the recent banking crisis. This led to some banks manipulating their accounts in order to achieve the desired results. Performance based executive rewards Where the incentives and bonuses of executives are based on performance such as meeting profit targets, it could result in management manipulating financial results. Business combination To resist a take over bid or in an attempt to sell the entity at a higher value than it would have been without creative accounting. To meet or exceed forecast - This is very common in many countries and it is now required by the Securities and Exchange Commission in Nigeria that companies should publish their forecast financial statements. Where the actual performance is significantly below the forecast earlier published, management may result into creative accounting to meet expectation. To satisfy shareholders who may be unhappy with the companys performance.
iii.
iv.
v.
vi.
vii. To manage and sustain share price and minimize volatility. viii. To meet minimum standards especially regulatory requirements such as minimum liquidity ratio for banks. ix. x. To avoid or reduce tax liability or other levies and regulatory fees. To attract or woo investors (local or foreign).
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EXAMINERS REPORT
The question requires candidates to explain the term Creative Accounting and discuss the likely reasons for it. Majority of the candidates displayed good understanding of the question and performed very well. However, few candidates were unable to differentiate between the reasons for and the process of creative accounting. Candidates are advised to cover all aspects of the syllabus in their preparation for future examinations.
QUESTION 6
(a)(i) Usefulness of Ratio Analysis Performance Measurement: It provides indication of a firms performance and near present financial position. Liquidation/Reorganisation Decisions: It helps in determining whether or not to liquidate or reorganise a business in form of a business combination, merger, acquisition or internal reconstruction. Investment/Divestment Decisions: It guides in investment decisions as to whether to further invest or divest where such investment is not performing satisfactorily. It aids in the construction of a pattern of a firms behaviour and financial position. It helps in predicting the firms future performance. It facilitates the assessment of the efficiency with which the firm is utilising assets for income generation. It helps to determine the ability of the firm to meet its current obligations as they fall due. It facilitates inter firm comparison. (a)(ii) Limitations of Ratio Analysis: Comparison of ratios can be misleading unless they are calculated from financial statements prepared under uniform accounting policies. Due to impact of inflation, ratios calculated from financial statements prepared on historic cost basis cannot give a true picture of yearly trends.
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Only items that can be measured in monetary terms are included in financial statements. For instance, non-financial corporate strengths or weaknesses are not incorporated. 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. The factors influencing the performance of a firm in one year may change in another, thus rendering horizontal analysis misleading. The balance sheets prepared at different points in time at static in nature and therefore cannot give much information about the pre and post balance sheet events. Incidence of creative accounting can give misleading results.
(b) Megida Plcs performance compared with industry average: (i) Liquidity: The company shows real cause for 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 stock contributes to the poor quick ratio. Debtors collection period is unreasonably long. It takes longer days for Megida Plc to pay its creditors than industry average, which might damage relationship with suppliers leading to curtailment of further credit. (ii) Gearing: Gearing (as measured by debt/equity) is higher than twice the level of the sectoral/industry average. Whilst this may be an uncomfortable level, it is currently beneficial to shareholders. The company is making an overall return of 34.6% but only paying 8% (before tax) interest on its loan stock. The gearing level may become a serious issue if Megida Plc becomes unable to maintain the finance costs. The company already has an overdraft and the ability to make further interest payments could be in doubt.
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Summary The companys 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. Workings: Ratio Return on Capital Employed (ROCE) Net Assets Turnover Net Profit Margin Gross Profit Margin Current Ratio Quick Ratio Stock Holding Period Debt Collection Period Creditors Payment Period Debt to Equity Ratio Dividend Yield Dividend Cover Unit % Times % % Ratio Ratio Days Days Days % % Times Industry Average 22.1 1.8 12.5 30 1.6:1 0.9:1 46 45 55 40 6 3 Megida Plcs 16.0 3.8 8.0 23 1.19:1 0.64:1 54 48 68 90 27 1
EXAMINERS REPORT
The question tests candidates understanding of the uses, limitations, computation and interpretation of ratio analysis. Candidates displayed good understanding of the computations but could not correctly interprete the ratios in comparison to industry average. Candidates will perform well if they familiarize themselves with the theory and practice of interpretation of financial statement. They are also advised to study the basic principles involving computation and interpretation of accounting ratios.
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ICAN/101/V/3
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL EXAMINATION II MAY 2010 STRATEGIC FINANCIAL MANAGEMENT Time allowed 3 hours
EXAMINATION NO...................................
SECTION A: Attempt All Questions PART I

1.
(20 Marks)
The following are in line with good Corporate Governance EXCEPT A. B. C D. E. Tax management Development of long and short term strategic plans Adequate investment in human resources Right by the majority shareholders to remove directors that fails to pay dividend Pursuit of wealth maximization objective.
2.
Which of the following is NOT a feature of a well functioning Capital Market? A. B. C. D. E. Provision of timely and accurate information Provision of liquidity Selective provision of information about securities Possession of good internal and external efficiency Rapid adjustment of estimates of security prices by investors to reflect their interpretation of the new information received.
3.
Which of the following is NOT an area of application of spreadsheet packages relevant to the financial manager? A. B. C. D. E. Sensitivity Analysis How-can Analysis What-If Analysis Optimum level Analysis Quantitative Analysis.
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4. Which of the following is NOT a factor to be considered in formulating strategies? A. B. C. D. E. 5. Organizational culture and value system Protection of top management interests Organizational competence and resources capabilities Market share and penetration Social obligations.
If capital is to be rationed for a period of more than one year, the appropriate technique for investment decision is A. B. C. D. E. profitability index net present value linear programming internal rate of return cost benefit analysis.
6.
Probability-tree analysis is best used when cashflows are expected to be A. B. C. D. E. known with certainty independent of previous periods cashflows risk free related to the cashflows in previous periods unknown.
7.
A restriction imposed on a borrower by a lender is referred to as A. B. C. D. E. covenant fixed charge accord pledge floating charge.
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The following information relates to questions 8 and 9. The income statement of Cotton Plc for the end of year 2009 is N000 N000 Sales 1,800 Less: Variable costs 720 Fixed cost 480 1,200 Profit before interest and tax 600 Less: Interest on Debenture 200 Profit before tax 400 Less company tax @ 30% 120 Profit after tax 280 8. Compute the Companys financial leverage A. B. C. D. E. 9. 1.8 1.5 3.8 0.9 2.7
What is the Companys operating leverage? A. B. C. D. E. 3.8 1.5 1.8 2.7 0.9
10.
Which of the following is NOT an assumption that underlies an efficient capital market? A. B. C. Investors adjust their estimates of security prices slowly to reflect their interpretation of the new information received Expected return implicitly includes risk in the price of the security New information comes to the market in a random fashion
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D. E. 11. A large number of profit-maximizing participants analyze and value securities independent of each other The timing of news announcement is independent.
The Efficient Market Hypothesis (EMH) assumes that A. B. C. D. E. there are no transaction costs there is perfect foresight there are no levies there are no taxes the successive price changes are independent.
12.
In relation to working capital, risk means that there is jeopardy to the firm for not maintaining sufficient current assets to A. B. C. D. E. meet its cash obligations before they occur and take advantage of prompt payment discounts meet its cash obligations as they occur and support the proper level of sales keep current and acid-test ratios at or above industry norms support the proper level of sales and take prompt payment discounts keep current and acid-test ratios below industry norms.
13.
Receiving a required inventory item at the exact time needed describes the term A. B. C. D. E. Total Quality Management Program Evaluation and Review Technique Economic Order Quantity Just-In-Time Automated Teller Machine.
14.
If the market price per share of company X is N90 while that of company Y is N60, given that company X offers three quarters of its shares for Y, what is the ratio of exchange in value terms? A. B. C. D. E. 1.000 1.500 1.125 0.667 1.250
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15. Economies of scale, market share dominance and technological advances are reasons most likely to justify a A. B. C. D. E. 16. strategic acquisition divestiture two-tier tender offer shark repellant financial acquisition.
Which of the following factors does not create problem of financing Small and Medium Scale Enterprises? A. B. C. D. E. Poor management Inefficiency Low business credibility High risk of failure Little access to new technology.
17.
Which of the following is NOT an objective of the Small and Medium Enterprises Investment Scheme? A. B. C. D. E. Provision of financial advisory, technical and managerial support to the entrepreneurs. Stimulation of economic growth, development of local technology and generation of job opportunities Facilitation of the flow of funds for the establishment of new Small and Medium Scale Enterprises projects, reactivation, expansion and modernization or restructuring of on-going projects Administration of micro-credit programmes of government and high net-worth individuals Elimination of the burden of interest and other financial charges for the entrepreneurs.
18.
The International financial institution that assists developing countries by providing funds for long-term developmental programmes for the benefits of the citizens of those countries is the A. B. C. African Export-Import Bank World Bank Group Bank for International Settlement
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D. E. 19. Paris Club London Club.
The following are categories of risk coverage of the Multilateral Investment Guarantee Agency EXCEPT A. B. C. D. E. Risk resulting from armed conflict or civil unrest Repudiation of contracts with investors by government Risk resulting from domestic business transaction Transfer risk emanating from host countrys policies on currency conversion and transfer Risk of loss resulting from legislative or administrative actions and omissions of host government
20.
Which of the following is NOT a special borrowing facility at the International Monetary Fund? A. B. C. D. E. Ecology Fund Infrastructural Development loan/grant Deficit balance of payment/Trade Financing Domestic loan Financing Special Capital Project Financing.
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1.
(20 MARKS)
The fiduciary responsibility of corporate directors and officers towards a company which states that a fiduciary must act in accordance with the interests of the beneficiary, is known as The market price of a firms share represents the .. that the market participants place on the company. The process of developing detailed, short-term decisions about what is to be done, who is to do it, and how it is to be done is the responsibility of the .. management. The electronic worksheet that can be used for a variety of tasks and applications is the . The selection of the combination of investment proposals that provides the highest net present value, subject to the budget constraint for the period is the objective of The technique of analyzing alternative sequential decisions and possible outcome from them is known as . The optimal capital structure for a firm is that for which the overall cost of capital is .. While preference share has prior claim on income and assets, ordinary share has .. claim. The following information relates to Game Plc: EPS = 40 kobo Market Price per Share = 110 kobo Dividend Yield (DY)= 5 % What is Game Plcs dividend cover?
2. 3.
4. 5.
6. 7. 8. 9.
10.
The theory which states that future patterns of share prices are a repetition of the same pattern of price movements which have occurred in the past is known as
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11. 12. 13. The implication of Efficient Market Hypothesis (EMH) is that the time at which new shares are issued is .. Holding cash for the purpose of taking advantage of discounts or investments opportunity is called . motive. The expression: Re-order level - (Average Usage x Average Lead Time) is used to calculate . Merging with an unrelated company is referred to as . merger. Conversion of a subsidiary to a company in which the shares of the company are issued to the parent company is known as .. Retained earnings are the easiest source of funds to a small firm because the firm has no access to .. A major setback in the use of Accounting Rate of Return investment appraisal technique by small and medium scale enterprises is An International Institution which addresses the balance of payment problem of member countries is The institution established to act as arbiter in the settlement of transactions emanating from the services of Central Banks and International oriented Commercial banks is the Which International Institution is established to provide financial support to the less developed countries that cannot borrow on conventional terms due to debt servicing costs?
14. 15. 16. 17. 18. 19.
20.
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SECTION B ANSWER QUESTION ONE AND ANY OTHER THREE (60 Marks) QUESTION 1 - CASE STUDY GOODY-GOODY PLC
Goody-Goody Plc is a fast growing profitable company situated in a commercial city in the southern part of the country. It specializes in the manufacture and distribution of water reservoirs. The management of Goody-Goody Plc has just identified a niche market in certain northern cities requiring a particular size of reservoir not currently manufactured by the company. The companys current facilities cannot be used to manufacture the new size reservoir, and it is imperative to buy a new machinery. Acquisition and installation will cost N18million over the next 2 years, N9million in each year. Expected cash inflows associated with the project from year 3 to 8 are N2.8million, N3.8million, N6.5million, N6.2million, N5million and N1.5million respectively. If the project is successful the company has an option to invest additional N15 million to secure a wider market at the end of year 5. The probability of success is 60 percent with an expected incremental cash flow from year 6 to 10 as follows: Incremental Cash flow (Nm) 8.0 5.4 Probability 0.5 0.5
However, if not successful the company will not invest the N15million and there will be no expected incremental cashflows. The required rate of return of Goody-Goody plc is 10 per cent. You are required to determine: (a) the net present value of the initial project and comment on its acceptability. (5 Marks) (b) the worth of the project if the option to expand is considered. Comment on its acceptability. (10 Marks) (Total 15 Marks)
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QUESTION 2
Good Corporate Governance can help manage the problems of conflicting interest of the stakeholders of an organization. In the context of the statement above, you are required to: (a) (b) define Corporate Governance (2 Marks)
state FOUR key elements in Corporate Governance aimed at controlling the ability of the directors to promote their own interest and ensure adequate disclosure of their activities. (4 Marks) list SIX areas covered by the code of good Corporate Governance practice. (6 Marks) list THREE main characteristics of Decision Support System (DSS). (3 Marks) (Total 15 Marks)
(c) (d)
QUESTION 3
(a) (b) List the THREE forms of capital market efficiency (3 Marks)
A valued client of your stock broking firm has asked for your advice on his investment portfolio. Details of his securities in the stock market (which is regarded as efficient) with the associated risk characteristics are given below: SECURITIES
Standard deviation (%) Correlation coefficient (%) Proportion of amount invested (%)
X 5 80 30
Y 15 40 30
Z 14 60 40
The expected return on shares in general and on the basis of past return and inflationary expectation was estimated to be 20%. It is expected that the risk premium will be about 5%. The risk of the market as measured by its standard deviation is 8%. All the three securities lie on the Securities Market Line (SML).
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You are required to prepare the following computations for a discussion with your client, as a prelude to your advice: (i) (ii) The expected portfolio return The risk of the portfolio (8 Marks) (4 Marks) (Total 15 Marks)
QUESTION 4
(a) (b) (c) In relation to cash management, state THREE functions of the Treasury Manager in an organization. (3 Marks) List FOUR symptoms of overtrading. (4 Marks) Extracts from the financial statements of TERMAC are given below: N 5,000,000 4,200,000 2,800,000 700,000 350,000 800,000 602,500 420,000
Sales Cost of sales Purchases Raw materials Work in progress Finished Goods stock Debtors Creditors
Assuming that all sales and purchases are on credit and a year of 365days, you are required to calculate the length of the cash operating cycle of the company. (8 Marks) (Total 15 Marks)
QUESTION 5
Beta Plc made an offer of 1 of its ordinary shares for every 2 shares in Ocean Plc on 5 June 2009. If the offer was successful Beta will use Oceans distribution facilities to expand its sales of fertilizers to farmers and this would result in an increased cash flow of N4.5million per year after tax. Betas financial analyst estimate that the capitalized value of the cash flow is N45 million.
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Extract from the accounts of the two companies are given below. BALANCE SHEET AS AT 31 DECEMBER 2008 Beta Plc Nm 750 900 (600) 1,050 (300) 750 300 450 750 300 Ocean Plc Nm 360 210 (210) 360 (180) 180 150 30 180 150 Nm 30 21 9
Fixed Assets Current Assets Less current liabilities Total assets less curr. Liabilities Less long term loans Issued share capital and reserves: Share capital N1 each 50k each Reserves Note: Current Assets include stock of
Income statement for the year ended 31/12/2008 Nm Profit after taxation 150 Dividends 60 Retained Profit 90 Price per share of Beta Plc is N5 while that of Ocean Plc is N2. You are required to: (a) (b) (c)
calculate the price earnings ratios of Beta Plc and Ocean Plc before the Merger. (3 Marks) determine what the price earnings ratio of the group will be if the value of Beta Plcs shares increases by 50k after the merger. (4 Marks) calculate the market capitalization of Beta Plc after the merger assuming that the stock market is rational and that there are no events other than those which would influence the share price. Ignore the 50k increase in Beta Plcs share price mentioned in (b) above. (3 Marks)
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(d) calculate the net dividend income the holder of 1 share in Ocean Plc would receive before and after the merger assuming that Beta maintains the same dividend per share as before the merger. (5 Marks) (Total 15 Marks)
QUESTION 6
(a) (b)
In relation to overseas investment decision, distinguish between Foreign Direct Investment and Foreign Portfolio Investment. (4 Marks) i. ii. List the THREE institutions that make up the World Bank Group. State the THREE objectives of setting up the World Bank. (3 Marks) (3 Marks)
(c)
List FIVE special borrowing facilities at the International Monetary Fund (IMF). (5 Marks) (Total 15 Marks)
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SOLUTIONS TO SECTION A PART 1 - MULTIPLE CHOICE QUESTIONS
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. D C E B C D A B C A E B D C A E D B C D
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TUTORIALS 8.
PBIT 600 = = 1.5 PBT 400 CONTRIBUTION 1,800,000 720,000 1,080,000 = = = EBIT 600,000 600,000
OR 1.80
9.
VARIABLECO ST = PBT
720,000 400,000
1.80
14.
3 90 270 x = = 1.125 4 60 240
EXAMINERS REPORT The questions test candidates knowledge of various aspects of the syllabus. Virtually all the candidates attempted the questions and performance was average. Some of the candidates showed good understanding of the questions while some had problems in proffering appropriate solutions. Candidates are advised to ensure adequate coverage of the syllabus for better performance.
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PART II - SHORT ANSWER QUESTIONS
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Agency relationship or Loyalty Value Middle level Spread sheet package Capital rationing Decision tree or Probability tree Minimum or Lowest Residual 7.27 times Chartist or Technical Immaterial or Irrelevant or Not important Speculative Minimum stock level or Safety stock or Buffer stock Conglomerate Spin-off Capital market or Bank loan Ignoring the time value of money The International Monetary Fund (IMF) Bank for International Settlement International Development Association (IDA).
TUTORIAL 9. Dividend cover =
EPS 40 40 = = DYxMV 0.05 x110 5.50

= 7.27 times
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EXAMINERS REPORT
The questions test candidates knowledge of the various aspects of the syllabus. Almost all the candidates attempted the questions but performance was below average. Many of the candidates did not have a good understanding of some of the questions hence gave wrong answers or failed to answer them. Candidates are advised to read wide and in-depth when preparing for the examinations of the Institute for better result.
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SOLUTIONS TO SECTION B QUESTION 1 CASE STUDY
(a) GOODY-GOODY PLC Computation of NPV of the initial project Year 1 2 3 4 5 6 7 8 Cash flow N000 (9,000) (9,000) 2,800 3,800 6,500 6,200 5,000 1,500 DF PV 10% N000 0.9091 (8,181.90) 0.8264 (7,437.60) 0.7513 2,103.64 0.6830 2,595.40 0.6209 4,035.85 0.5645 3,499.90 0.5132 2,566.00 0.4665 699.75 (118.96)
Comment: The project should not be undertaken because it has a negative NPV of N118,960 (b) Incremental Cash Flow Incremental cash flow Nm 8.0 5.4 Probability 0.5 0.5 Expected value Nm 4.0 2.7 6.7 DF PV 10% N000 0.5645 (4,685.35) 0.5132 3,438.44 0.4665 3,125.55 0.4241 2,841.47 0.3856 2,583.52 7,303.63
Year 6 7 8 9 10
Outflow N000 (15,000)
Inflow N000 6,700 6,700 6,700 6,700 6,700
Net flow N000 (8,300) 6,700 6,700 6,700 6,700
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If the probability of success is 60 per cent, then the NPV = 0.60 x N7,303,630 = N4,382,180 Since the initial projects net present value is negative i.e. (N118,960), then the overall projects net present value will be: N4,382,180 N118,960 = N4,263,220
From the calculations, investing an additional N15 million brings about a positive NPV which wipes out the negative NPV of the initial project. Therefore, the additional N15 million and the incremental expected cash flows are worthwhile hence the option to expand is recommended if the project is to be embarked upon.
EXAMINERS REPORT
The question tests candidates knowledge of investment appraisal technique under capital investment decisions aspect of the syllabus. Almost all the candidates attempted the question but most of them understood only the part (a) of the question and demonstrated lack of understanding of the (b) part, hence performance was poor. Candidates commonest pitfalls were their inability to determine the timing of the cash flows (inflows and outflows). Some candidates also failed to apply or use the given probability in the question which will enable them to arrive at the expected value of the cash inflow. Candidates are advised to take time to read, understand and interprete questions appropriately and note the specific requirements before attempting them.
QUESTION 2
(a) Corporate Governance as defined by Dayton (1984) is the process, structures and relationship through which the Board of Directors oversees what the executives do to achieve the objective of the company. It is the system by which companies are directed and managed in the best interest of the owners and other stakeholders. It refers to the role of the Board
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of Directors, executives and non-executives, shareholders right and to other action taken by shareholders to influence corporate decisions. (b) Key elements in Corporate Governance aimed at controlling the ability of the directors to promote their own interest and ensure adequate disclosure of their activities include: (i) Allowance for a review of audit regulations, corporate disclosure framework and shareholders participation. This is to improve the accountability and transparency of companies compliance to statutory regulation, best ethical practices, consumer protection and so on. Appointment of Audit Committee. This is to assist the Board of Directors in managing the accuracy and integrity of the financial statements of the company by making sure that the statements comply with the legal and regulatory requirements and the efficiency of the companys internal audit functions. Existence of a entrepreneurship. managerial system which promotes creative
(ii)
(iii)
(iv)
Enhanced overall performance through good management within set best practice guidelines.
supervision
and
(v)
Maximisation of corporate value through enhancement of transparency and efficiency. Prevention of fraudulent practices through the mechanisms designed by the Board and management. Prevention of exploitation of investors by the managers.
(vi)
(vii)
(viii) Ensuring that the suppliers of finance to companies have their rewards. (ix) Provision of a framework for the pursuit of the organisations strategy in an ethical and effective way to safeguard against misuse of all resources.
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(c) Areas covered by the code of good Corporate Governance practice include: (i) (ii) (iii) (iv) (v) (vi) (vii) (ix) (x) (xi) The independent directors. Structuring the Board to add value. Promoting ethical and responsible decision making. Laying solid foundation for management. Recognising and managing risk. Encouraging enhanced performance evaluation. Recognising the legitimate interest of stakeholders. Respecting the rights of shareholders. Safeguarding the integrity of financial reporting, and Adherence to the corporate governance code of conduct for company directors published under the aegis of Securities and Exchange Commission (SEC).
(viii) Remunerating fairly and responsibly.
(d)
Characteristics of Decision Support System (DSS) include: (i) It is an information system used by senior managers to carry out analysis of specific problems, opportunity and threats. It provides support but neither replaces the managers judgement nor provide predetermined solutions. It is an information system that combines data, analytical tools and models to support semi-structured and unstructured decision making. It allows for interactive enquiries and responses between financial managers and the system, thereby enhancing problem solving process. It is intended to provide a wide range of alternative information gathering and analytical tools with a major emphasis on flexibility and user friendliness. There are no predetermined solutions or reporting formats. Information is produced by analytical modelling of financial data.
(ii) (iii) (iv)
(v)
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EXAMINERS REPORT
The question tests candidates knowledge of the meaning, elements and code of good corporate governance. It also tests candidates understanding of Decision Support Systems (DSS). Many candidates attempted the question but performance was poor. Most of them performed well in part (a) of the question but did not quite understand the requirements of parts (b) and (c) hence the interchange of some requirements of part (b) with those of part (c). Also, candidates understanding of part (d) was poor, as a result, most of them avoided the question and those who attempted it, gave wrong answers. Candidates commonest pitfall in parts (b) and (c) was their inability to differentiate between the code and the key elements of corporate governance. However, their commonest pitfall in part (d) of the question was their inadequate knowledge of Information Technology (IT). Candidates are advised to study extensively and understand the questions before attempting them. They should also endeavour to improve their knowledge of Information Technology (IT) as it is an important aspect of the syllabus.
QUESTION 3
(a) The three forms of capital market efficiency are: (i) (ii) (iii) (b) i Weak form Semi-strong form and Strong form.
Calculation of beta factors for each of the security:
x x Co x
m
Security: X =
Standard deviation x Correlation coefficient Market standard deviation
0.05 x 0.8 0.08
0.5
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Y Z = = 0.15 x 0.4 0.08 0.14 x 0.6 0.08 = = 0.75 1.05
Expected Return for each security = E(Ri) = Rf + (Rm Rf) where: E(Ri) is expected return on the security Rf is the risk-free return Rm is the expected market return is the beta (risk) of the security X Y Z = = = 15% + 0.5 (2015)% 15% + 0.75 (2015)% 15% + 1.05 (2015)% = = = 17.5% 18.75% 20.25%
Expected return on the portfolio is derived from the following formula. E(Rp) = Wx E(Rx) + Wy E(Ry) + Wz E(Rz) where: X, Y, and Z are the securities E(Rp) is the expected return on portfolio E(Rx) is the expected return of security X and Wx is the proportion of the available investment funds invested in security X.
Therefore the expected return on the portfolio using the above formula is: (0.3 x 17.50)% + (0.3 x 18.75)% + (0.4 x 20.25)% = 5.250% + 5.625% + 8.100% = 18.975% = 19% (ii) The risk of the portfolio is the addition of the Beta factor for each security X proportion of the available investment funds invested in each security
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i.e
p = x x Wx + y x Wy + z x Wz
(0.5 x 0.3) + (0.75 x 0.3) + (1.05 x 0.4) 0.150 + 0.225 + 0.420 0.795 79.5% = 80%.
which is: = = =
Determination of Rf i.e. Rm Rf 0.20 Rf Rf Rf = = = = = Premium 0.05 0.05 0.20 0.15 15%
EXAMINERS REPORT
The question tests candidates knowledge of portfolio management with particular reference to Capital Asset Pricing Model (CAPM) and Efficient Market Hypothesis (EMH). Few candidates attempted the question and performance was poor. Some candidates that attempted the question got the formula right and therefore did well. The remaining candidates performed poorly. Candidates commonest pitfalls were their inability to get the formula right and where they are able to state the formula correctly, they were unable to interprete and identify the figures to use in solving the problems. Candidates are advised to read wide and in-depth for the Institutes examinations. They should also endeavour to understand the principles involved in the interpretation of formulae.
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QUESTION 4
(a) Functions of the Treasury Manager in relation to cash management include: (i) (ii) Cash planning. budgets. This is achieved through the preparation of cash
Management of cash flows through the management of cash collections and disbursements. This is achieved by acceleration of cash collection and control of disbursements. Maintaining a sound cash position through determination of the optimum cash balance by matching the cost of excess cash and danger of cash deficiency. Investing surplus cash in marketable securities or short term investment opportunities to earn profits. This is done through the selection of investment opportunities taking into consideration the safety, maturity and marketability of the investment. Banking and custody of cash.
(iii)
(iv)
(v) (b)
Symptoms of overtrading include: (i) (ii) Rapid growth in turnover (sales). Rapid increase in the volume of current assets and possibly fixed assets. High stock turnover and low average collection period which means that the rate of increase in stocks and debtors would be greater than the rate of increase in sales. Increase in assets financed by a small increase in proprietors capital (e.g. retained profits) while most increases are financed by trade creditors (repayment period to creditors become much slower). Substantial increase in overhead costs resulting in a fall in net profit margins.
(iii)
(iv)
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(v) Decline in gross profit ratio as a result of higher purchase costs.
(vi)
Major decline in the debt and liquidity ratios, e.g. Decline in the ratio of working capital to sales Decline in the ratio of debtors to trade creditors Decline in the current and acid test ratios
(vii) (c) (i)
Bank overdrafts reach or exceed the limit of the facilities agreed with the banker.
Calculation of the length of the cash operating cycle Raw material stock turnover period = Average stock of raw materials Purchases x 365 days = 700,000 x 365 days 1 2,800,000 1 = 91.25 days = 91 days 350,000 x 365 days 4,200,000 1 = 30.42 days = 30 days 800,000 x 365 days 4,200,000 1 = 69.52 days = 70 days
(ii)
Work-in-progress stock turnover period = Work-in-progress x 365 days = Cost of goods sold 1 Finished goods stock turnover period = Finished goods stock x 365 days = Cost of goods sold 1 Debtors collection period = Debtors x 365 days = Sales 1
(iii)
(iv)
602,500 x 365 days 5,000,000 1 =
43.98 days = 44 days
(v)
Creditors payment period = Creditors x 365 days = Purchases 1
420,000 x 365 days 2,800,000 1 = 54.75 days = 55 days
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Therefore, the length of the cash Operating cycle = 180.42 days = 180 days
EXAMINERS REPORT
The question tests candidates knowledge of the functions of the Treasury Manager with respect to cash management. It also tests candidates knowledge of overtrading and calculation of cash operating cycle. Most of the candidates attempted the question and performance was fair. The (c) part of the question was well understood by many candidates. However, in part (a), candidates failed to limit themselves to the question asked and therefore performed poorly while the (b) part was not well attempted. The commonest pitfall of the few candidates that performed poorly in part (c) of the question was their inability to get the correct formula to use in calculating the operating cycle for each of the working capital item. However, their commonest pitfall in part (a) of the question was their inability to differentiate between the cash management functions of the treasury manager and his general functions while the (b) part was not well understood by most of the candidates. Candidates are advised to take time to read, understand and interprete questions appropriately and note the specific requirements to ensure that they answer questions correctly.
QUESTION 5
(a)
BETA AND OCEAN PLC
Price Earnings, P/E ratio computation before merger: Beta Plc Nm EPS = PAT No of shares = 150 600 = 0.25 Ocean Plc Nm 30 150 = 0.2
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P/E ratio = Share price = EPS N5 N0.25 = 20 times (b) P/E ratio computation for the group after merger P/E ratio EPS = = Share Price Earnings Per Share Total Earnings No of shares Total market value Total Earnings N2 N0.20 = 10 times
No of shares = (600 + 75)m = 675 million shares. Total earnings Beta Ocean Increased cash flow Therefore EPS = Nm 150.0 30.0 4.5 184.5 184,500,000 675,000,000 = N0.27
If EPS = N0.27 and Share price = N5.50 (given) Then, the Price Earning (P/E) Ratio of the group would be: N5.50 0.27 = 20.37 times
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(c) Calculation of market capitalisation of Beta Plc (after merger) Nmillion = = = = 3,000 300 45 3,345
Capitalisation of Beta Plc (pre-merger) = 600m x N5.0 Capitalisation of Ocean Plc (pre-merger) = 150m x N2.0 Value of merger benefit (given) Therefore, capitalisation of group after merger (d)
Calculation of dividend income of the holder of 1 share in Ocean Plc before and after merger assuming Beta maintains the same dividend per share as before the merger.
Dividend per share (DPS) of holder of 1 share in Ocean Plc: Before merger: DPS = = N21,000,000 150,000,000 N0.14
After merger: assuming Beta Plc maintains the same dividend per share as before the merger: DPS 60,000,000 600,000,000 = N0.10 Therefore, a holder of 1 share in Ocean Plc will now get 10k 2 = 5k since the ratio of offer is 2:1. Comment: The shareholders of Ocean Plc would be losing 9k, that is, (14k 5k) on each of their shareholding since they were earning 14k on each holding, before the merger. =
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EXAMINERS REPORT
The question tests candidates knowledge of mergers and acquisition with special emphasis on evaluation of financial performance of merged companies. Most candidates attempted the question and performance was above average. Candidates had fair knowledge of the question. They performed well in part (a) of the question while parts (b) and (d) were fairly attempted but they displayed a very poor understanding of part (c). Candidates commonest pitfalls in answering the question were their lack of an indepth knowledge of the principles involved in mergers and acquisitions; and their inability to sift and properly obtain the correct figures to use for the calculations demanded in the questions. Candidates are advised to ensure adequate coverage of all sections of the syllabus and note the specific requirements of a question before attempting it.
QUESTION 6
(a) Foreign Direct Investment (FDI) refers to a lasting interest in an enterprise in another economy where the investors purpose is to have an effective voice in the management of the enterprise. Such direct investment usually involves acquisition of a controlling interest in an overseas branch or subsidiary. Firms which invest overseas are examples of multinational corporations. On the other hand, Foreign Portfolio Investment (FPI) refers to participation in overseas investment without any control over the running of the business. It involves the purchase of shares or loan stock in an overseas business organisation. (b)(i) The three financial institutions that make up the World Bank Group are: * * * The International Bank for Reconstruction and Development (IBRD); The International Development Association (IDA) and The International Finance Corporation (IFC).
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(ii) The objectives of setting up the World Bank include: Assisting in the reconstruction and development of the territories of members by facilitating investment of capital for productive purposes. Promoting long-range balanced growth of International trade and the maintenance of equilibrium in the balance of payments by encouraging international investment for the development of the productive resources of member countries. Ensuring, in so far as it makes or guarantees loans, that the most urgent needs are satisfied first.
(c)
The special borrowing facilities at the International Monetary Fund (IMF) include: (i) (ii) (iii) (iv) (v) Ecology Fund Infrastructural Development loan/grant Deficit balance of payment/Trade Financing Budget Deficit Financing Special Capital Project Financing.
EXAMINERS REPORT
The question tests candidates knowledge of international financial management with emphasis on the major international financial institutions such as the World Bank Group, IMF, ADB and so on. It also tests candidates understanding of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). Many candidates attempted the question but performance was below average. Candidates understanding of the question, particularly the parts (a) and (b) was poor while the part (c) of the question was fairly attempted. Candidates commonest pitfall in part (a) of the question was their non-understanding of the meaning of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). They were therefore unable to define the two types of Foreign investments. In part (b) of the question, candidates were unable to list the three institutions that made up the World Bank Group. Candidates are advised to always cover the syllabus adequately for better result. They should also give consideration to International Finance in their preparations.
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ICAN/
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL EXAMINATION II MAY 2010 ADVANCED TAXATION Time allowed 3 hours
EXAMINATION NO...................................
SECTION A: Attempt All Questions PART I

1.
MULTIPLE-CHOICE QUESTIONS (20 Marks)
Which ONE of the following details is disclosed in the Tax Clearance Certificate of a limited liability company? A. B. C. D. E. Total profit Tax withheld Tax paid Total expenses Adjusted profit.
2.
What is the expiry date of an unrestricted Tax Clearance Certificate? A. B. C. D. E. 31st August of the year of issue 30th September of the year of issue 31st December of the year of issue 30th November of the year of issue 31st October of the year of issue.
3.
Why are penalties imposed by tax authorities? A. B. C. D. E. To punish tax payers To encourage prompt collection of taxes To discourage collection of taxes To punish tax defaulters To punish tax payers.
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4. Which ONE of the following does a Tax Clearance Certificate show? A. B. C.
D. E.
The date of issue The names of the directors The names of the shareholders
The date of appointment of the directors The date of change in accounting date.
5.
In which ONE of the following services does an oil service company engage? A. B. C. D. E. Seismic survey Systemic survey Systematic survey Systems survey Systems review and survey.
6.
Which one of the following is not included in the chargeable profit of a petroleum company? A. B. C. D. E. Proceeds of sale of chargeable oil sold by the company in that period Value of all chargeable oil disposed of by the company in that period Value of chargeable natural gas All income incidental to and arising from anyone or more of its petroleum operations Cost of extraction of oil.
7.
Which one of the following represents the assessable profit of a company for any accounting period under Petroleum Profits Tax Act CAP P13 LFN 2004? A. B. C. D. E. Adjusted profit after adjusting for capital allowances of the current period Adjusted profit after adjusting for balancing allowances and previous years losses Adjusted profit after adjusting for losses and balancing charges Adjusted profit after adjusting for losses and capital allowances Adjusted profit after adjusting for losses from previous accounting periods.
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8. What is chargeable profit under Petroleum Profits Tax Act CAP P13 LFN 2004? A. B. C. D. E. 9. Assessable profit less the capital allowances and balancing allowance Assessable profit less the balancing allowance Assessable profit less the capital allowances allowed by the Act Assessable profit less the losses for the previous period Assessable Profit after deduction of allowance expenses.
What is the accounting period for all companies engaged in petroleum operations? A. B. C. D. E. A period from 1 August to 31 July of the same year A period from 1 September to 31 August of the same year A period of one year preceding the year of operation A period of one year from 1 January to 31 December of the same year A period of one year from the date a company first makes a sale of bulk disposal of chargeable oil.
10.
Which ONE of the following determines a dispute as to the date of the first sale of chargeable oil? A. B. C. D. E. Federal Inland Revenue Service Board Joint Tax Board Department of Petroleum Resources Director of Petroleum Resources Director of Petroleum services.
11.
Which ONE of the following is to kept by a vatable person? A. B. C. D. E. Creditors ledger Sales Day Book Debtors ledger Nominal ledger Payroll.
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12. Which of the following is VAT exempt? A. B. C. D. E. 13. Computers Motor vehicles Books and educational materials Shredding machines Cement.
Which ONE of the following, under Capital Gains Tax, are connected persons? A. B. C. D. E. Spouse of the person making the disposal Trustee of a unit trust A Partnership A company A legal practitioner.
14.
Which ONE of the following is not a case of computing chargeable gains using open market values? A. B. C. D. E. Assets transferred to trustees by the settler Termination of a life interest in a settlement Where transaction is between connected person Transactions were not done at arms length Transactions done at arms length.
15.
Which ONE of the following is not ground for which a pioneer certificate can be revoked? A. B. C. D. E. Where there is no contravention of the provisions of the Act governing pioneer industries Where production day is less than one year When qualifying expenditure is more than N50,000 for an indigenous controlled company Where qualifying expenditure is less than N150,000 for company not indigenously controlled Where there is an application from the pioneer company.
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16. Which ONE of the following does not qualify as a pioneer industry? A. B. C. D. E. 17. The Manufacture of motor vehicles The Manufacture of salt The Manufacture of iron and steel The Manufacture of glass and glassware The Manufacture of pharmaceuticals.
How is the fine paid by a company on behalf of a drunken driver treated for drunk driving in computing adjusted profit? A. B. C. D. E. Allowable expense Non allowable expense Partly allowable expense Relief allowable expense Non reliable expense.
18.
When are monies received after cessation of business deemed to have been paid? A. B. C. D. E. On the last day before the cessation occurred On the day of the cessation On the day such monies were collected On the day such monies were banked On the day such monies were received for.
19.
XYZ Ltd paid N300,000 as its tax liability for 2008 year of assessment. What is the adjusted profits assuming a tax rate of 30%? A. B. C. D. E. N1,200,000 N1,100,000 N1,000,000 N 900,000 N 800,000
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20. The adjusted profit of a company is N6,000,000, if the Depreciation not included in the adjusted profit is N300,000, what is the new adjusted profit? A. B. C. D. E. N6,300,000 N5,700,000 N5,700,300 N6,600,000 N6,300,500
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PART II: SHORT ANSWER QUESTIONS (20 Marks)
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. What is an Original Assessment?............................ The information circulars or departmental instructions, issued by the Federal Inland Revenue Service Board are for . What is the maximum period covered by a Tax Audit? Minimum Tax applies to companies that have been in business for .years and beyond. How will the profits of a non-resident company carrying on the business of shipping in and outside Nigeria be taxed? Tax can be by converting sole proprietorship to a limited liability company. What do you mean in taxation when you say an expense is an allowable deduction? How will you determine the assessable profit for the third year of assessment under commencement provisions? Eru Nigeria Limited paid N6,000,000 in a given year as company tax. What was the total profit using a tax rate of 30%? Why is Value Added Tax (VAT) described as an indirect tax? What is the penalty for failure to collect VAT under the VAT law? Dividend distributed by unit trust are profits.from tax. In which way is Investment Allowance in Petroleum Profit Tax Act Cap P13 LFN 2004 similar to Initial Allowance under Companies Income Tax Act Cap C21 LFN 2004? What is the tax holiday granted as an incentive to companies engaged in downstream sector in the gas industry?
14.
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15. Dividends distributed during the tax holiday period by companies engaged in the downstream sector of the gas industry and where the investment is in foreign currency attract an incentive. What is this incentive? Petroleum profits are assessed to tax on.. All non-productive rents incurred by a company are known as.. Sec.11 of Petroleum Profits Tax Act Cap P13 LFN 2004 as amended provides that gifts and donations are notin ascertaining the adjusted profit of a petroleum company. What is paid to confer legal approval on an instrument of apprenticeship? Who is empowered by law to appoint the State Commissioner for Stamp Duties?
16. 17. 18.
19. 20.
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SECTION B ANSWER QUESTION ONE AND ANY OTHER THREE (60 Marks) QUESTION 1 - CASE STUDY
You have been invited by a Club of young Nigerian Business Executives to give a talk on the topic commencing a thriving business in Nigeria and the tax implications. Your talk is expected to address the following issues with emphasis on the tax implications of each: (a) Legal form of the proposed business:
(i) (ii) (iii) Registering as a Business Name Registering the business as a Partnership Incorporating a Limited Liability Company.
(b) (c) (d)
How the profits of the business will be taxed on commencement. How the profits of the business will be taxed on cessation. Options of election by a Taxpayer and Revenue. (15 Marks)
Note: Your talk should be presented in a Report format to the Club.
QUESTION 2
Empire Nigeria Limited is owned by Nigerians and has been in business since year 2003. The results of the company as at 31 December 2008 are as follows: Assets employed N N Fixed Assets Current Assets Less: Current Liabilities Net Current Assets Net Assets 550,000,000 360,000,000 180,000,000
190,000,000 370,000,000
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FINANCED BY: Share Capital Statutory Reserves General Reserves Long Term Loans 140,000,000 60,000,000 100,000,000 70,000,000 370,000,000
You are provided with the following additional information: (a) (b) (c) (d) (e) The turnover of the company during the year ended 31 December, 2008 was N240,000,000. Gross Profit was N35,000,000. Assessable Profit was N2,100,000. Unrelieved capital allowances brought forward from 2007 year of assessment was N600,000. Capital allowances for 2008 year of assessment amounted to N950,000.
You are required to: (a) (b) Compute the companys minimum tax liability for 2009 year of assessment. (5 Marks) Compute the companys income tax liability for 2009 year of assessment. (5 Marks) Note: Ignore restriction on capital allowance that can be relieved. Differentiate between Direct and Indirect Taxes. Give THREE examples of each. (5 Marks) (Total 15 Marks)
(c)
QUESTION 3
Pee Dee Concept Limited is into advertising business. The company agrees to advertise a product on a one metre by one metre sheet poster board at six different sites. The cost of advertising per site is 1,500 at a commission of 5%. You are required to: (a) Calculate the VAT due to the relevant tax authority on this transaction. (4 Marks)
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(b) (c) Who is a VATable person under the VAT enabling law? Give FIVE examples. (6 Marks) List any FIVE details to be furnished in a VAT Invoice. (5 Marks) (Total 15 Marks)
QUESTION 4
The estimated tax liability of Integrity Petroleum Limited was N84,000,000 for 2008 tax year. The actual tax liability as per the audited accounts of the company filed at the tax office by its auditors was finally agreed at N89,500,000. Required: (a) Prepare the schedule of stream of payments to the tax authority for 2008 tax year, assuming the company was served notice of assessment in November 2008. (5 Marks) What are tax offsets under the Petroleum Profits Tax Act Cap P13 LFN 2004 as amended? (4 Marks) Explain briefly the Joint Venture Contracts (JVCs) Tax Regime. (3 Marks)
(b) (c) (d)
QUESTION 5
(a) Date 1/4/01
Under the Production Sharing Contracts (PSC), what are the Royalties Rates? (3 Marks) (Total 15 Marks)
Lazarus Company Limited purchased the following assets: Type Plant and Machinery Amount N1,200,000
Part of the plant and machinery was sold on 31 December, 2005 for N1,850,000. The company spent N250,000 as expenses incidental to the sale. The market value of the remaining plant and machinery was N750,000 on 31 December, 2005.
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You are required to compute: (i) (ii) (iii) (b) The chargeable gain on the asset sold. The capital gains tax. The new cost of the remaining asset. With respect to Capital Gains Tax Act Cap C1 LFN 2004. (i) (ii) Explain briefly what is meant by Roll Over Relief. What are allowable expenditure? (3 Marks) (4 Marks) (4 Marks) (2 Marks) (2 Marks)
QUESTION 6
Barabas Airline Limited is a foreign company incorporated in Ghana. Its core business is carriage of passengers, mails and livestock into and out of Nigeria. You are given its financial results for the year ended 31 December, 2006 as follows: Income from passengers flight on other routes Income from cargo loaded into aircraft on other routes Income from passengers flight from Nigeria Income from cargo loaded into aircraft from Nigeria Deduct: Depreciation Staff salaries General provision Other expenses Net profit You are given the following additional information: (a) Capital allowances were agreed with the relevant authority at 110% of depreciation charged. Other expenses include disallowable expenses of N100,000. N N 50,275,000 51,360,000 12,800,300 11,750,160 126,185,460
464,500 3,382,110 50,600 136,450
4,033,660 122,151,800
(b)
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You are required to: (a) (i) (ii) (iii) (b) Compute the total profits of company for Nigerian Tax purposes. (4 Marks) Calculate the income tax liability for the relevant year of assessment. (1 Mark) Calculate the education tax liability. (1 Mark)
Explain briefly tax incentives to the following lines of businesses: (i) (ii) (iii) Small Companies Wholly Export Business Unit Trust (1 Mark) (1 Mark) (1 Mark)
(c)
State any FOUR powers and functions of the Federal Inland Revenue Service Board. (6 Marks)
(Total 15 Marks)
1.
CAPITAL ALLOWANCES Office Equipment Motor Vehicles Office Building Furniture & Fittings Industrial Building Non-Industrial Building Plant and Machinery - Agricultural Production - Others INVESTMENT ALLOWANCE TAX-FREE ALLOWANCE: Rent Transport Utility Meal Subsidy
TAX RATES
Initial % 50 50 15 25 15 15 95 50 10% Maximum Per Year N 150,000 20,000 10,000 5,000
Annual % 25 25 10 10 10 10 NIL 25
2. 3.
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Entertainment Leave 4. 6,000 10% of Annual Basic Salary
PERSONAL INCOME TAX RELIEF/ALLOWANCES (a) Personal Allowance - N5,000 plus 20% of Earned Income (b) Children Allowance - N2,500 per annum per unmarried child subject to a maximum of four children (c) Dependent Relative - N2,000 each (d) Disabled Persons - N5,000 or 10% of Earned Income (whichever is higher) (e) Life Assurance - Actual premium paid RATES OF PERSONAL INCOME TAX: Taxable Income Rate of Tax N % First 30,000 5 Next 30,000 10 Next 50,000 15 Next 50,000 20 Over 160,000 25 Note: Annual income of N30,000 and below is exempted from tax but a minimum tax of 0.5% will be charged on the total income. COMPANIES INCOME TAX RATE EDUCATION TAX CAPITAL GAINS TAX VALUE ADDED TAX 30% 2% 10% 5%
5.
6. 7. 8. 9.
10. WITHHOLDING TAXES Type of Payment Dividend, Interest, Rent Royalties Contract supplies Building construction activities Consultancy/Professional services Management services Commissions Technical services Directors fees Rates (Companies) 10% 15% 5% 5% 10% 10% 10% 10% 10% Rates (Non-corporate) 10% 15% 5% 5% 5% 5% 5% 5% 10%
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SOLUTION TO SECTION A PART 1
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. C C D A A E E C D D B C A E A A B A C A
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EXAMINERS REPORT
The questions test candidates knowledge of virtually all parts of the syllabus; tax administration, assessable and chargeable profits on Oil and Gas, VAT, Capital Gains Tax, connected persons, pioneer industry, commencement and cessation of businesses. The questions were well attempted by the candidates. Candidates performance was good.
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1. 2. 3. This is an assessment raised by the tax authority to which no objection has been raised by the taxpayer. Guidance of stakeholders. Six years. However, where tax evasion is involved, there is no time limit for reopening tax assessment/tax audit. Four. Profit is calculated thus: Profit = (a/c) - (b/c) c c a= b= c= Profit and Loss of the company before depreciation Allowance claimable by way of depreciation Total sums receivable in respect of the carriage of passengers, mails, livestock and goods
4. 5.
Tax is now charged on the Profit Tax Payable must not be less than 2% of c above for any accounting period. 6. 7. 8. Managed/mitigated. The expense is wholly, reasonably, exclusively and necessarily incurred and can be deducted from income in arriving at the assessable profit. (i) Preceding year basis (PYB), that is, the profit of 12 months period ending in the second tax year. Where there is no 12 months account, the basis shall be the 1st 12 months as in the second tax year. (ii) Option based on actual (iii) Where the basis period is less than 12months, the preceeding year basis (PYB)
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9. 10. N6,000,000 x 100 = N20,000,000. 30 1 Because it is a consumption tax that devolves in successive stages such that at the end, it is the final consumer of the goods and services that bears the burden. 150% of the amount not collected plus 5% interest above CBN rediscount rate. Exempted. Investment allowance under PPTA Cap P13 LFN 2004 as amended is similar to initial allowance under CITA Cap C21 LFN 2004 as amended, in that, it is claimable in the year the asset is first put into use and only once in the life of the asset to the business. Initial tax-free period of three (3) years which may be renewed for an additional period of two(2) years subject to satisfactory performance of the business. The dividend is tax-exempt. Actual year. Dead rents. Allowable. Stamp Duty. State Civil Service Commission.
11. 12. 13.
14. 15. 16. 17. 18. 19. 20.
Tutorials 5. (i) The tax authority of the country in which the company that chartered or owns the ship is domiciled, computes and assesses on a basis not materially different from the provisions of Companies Income Tax Act Cap C21 LFN 2004 as amended. (ii) Where at the time of assessment, the ratios cannot for any reason be satisfactorily applied, the deemed profits to be derived from Nigeria may be
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computed on a fair percentage on the full sum receivable in respect of the carriage of passengers, mails, livestock and goods shipped or loaded in Nigeria.
EXAMINERS REPORT
The questions test candidates knowledge of various aspects of the syllabus. The questions were well attempted by the candidates. Many of the candidates did not really understand the concepts of indirect tax, similarities between Investment allowance in Petroleum Profits Tax Act Cap P13 LFN 2004 and Initial allowance under Companies Income Tax Act C21 LFN 2004,and period covered by a Tax audit. Candidates should endeavour to go through the syllabus thoroughly.
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Ladies and Gentlemen, Commencing A Thriving Business in Nigeria And The Tax Implications. It is my honour to be invited by your club to give a talk on the above subject matter, which will be addressed as follows: (a) Legal Form of The Proposed Business. (i) Registering a business name confers on your business the sole proprietorship status. It means that there is no distinct difference between the owner and the management. The tax law recognises this as such as the Total Taxable Income of the sole proprietor represents that of the business name. However, the business name must be registered with the Federal Inland Revenue Service for VAT purposes. For the employees of the business, the business name must be registered with the relevant State Internal Revenue Service for the purpose of Pay As You Earn scheme. Withholding Tax is also expected to be deducted and remitted by the business to the relevant tax authority. (ii) Registering the business as a partnership recognizes that the coming together of the partners is for profit purposes. The position of the tax law is that of recognition of the partners as separate individuals for tax purposes. The issues of VAT, PAYE and Withholding Tax are also applicable here. Incorporating a Limited Liability Company confers the status of a separate entity on the business. In other words, it recognizes a separation between the company, its owners and the management. The tax laws recognize a separate life for the company compared with the promoters of the company. The company is thus assessed to tax in its name and not on the income of the promoters. The issues of VAT, PAYE and Withholding Tax are also applicable here.
(iii)
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(b)
How the profits of the business will be taxed on commencement. (i) The profits of a business name operator or a sole trader are taxed under the Personal Income Tax Act Cap P8 LFN2004 as amended. The basis of taxing the assessable profits of a business name operator or a sole trader are as follows: In the first year of assessment, in which a trade or business is carried on in Nigeria, the assessable profit is the amount of the profits from the date of commencement to 31 December of that year, For the second year of assessment the assessable income (if the tax payer does not give notice of election in writing), is the amount of the income of one year from the date of the commencement in Nigeria of the trade or business, profession or vacation; For the third and subsequent years, the assessable income is the income of the preceding year provided the person does not give notice of election in writing. Where the accounting period ending in the second tax year is less than 12 months, the basis period shall be the first twelve months of trade. With commencement rule, it is possible for profit of the first accounting period to be assessed to tax more than once, which is referred to as overlap profit. No relief is available for overlap profit in Nigeria. (ii) Profits made by a partnership are taxed as income in the hands of the individual partners under the Personal Income Tax Act Cap P8 LFN 2004 as amended. Commencement provisions are also applicable. The Profits made by a limited liability company are taxed under the Companies Income Tax Act Cap C21 Laws of the Federation of Nigeria (LFN) 2004 as amended to date. The commencement provisions are also applicable here.
(iii)
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(c) How the profits of the business will be taxed on cessation (i) Where an individual permanently ceases to carry on a trade or business, profession or vocation in Nigeria, the assessable income therefrom shall be as regards the amount of the income of that year. As for the penultimate year of assessment, the income will be either the actual income of that year or the assessable income computed under the general rules of the preceding year basis (PYB), whichever is higher. The individual shall not however be deemed to derive assessable income from such trade, business, profession or vocation for the year of assessment following that in which the cassation occurs. The revenue office has the option of choosing whichever is higher of the two. (ii) (iii) The same rules as above are applicable in taxation of profits of partnership on cessation. The provision of option is also the same here. The same rules as in (1) are applicable to limited liability companies. The provision of option is also the same here. Where after the date on which a company has permanently ceased to carry on a trade or business, any sum which would have been included in or deducted from the profits of that trade or business if it had been received or paid prior to that date, such sum shall be deemed to have been received or paid by the company on the last day before cessation occurred. (d) Option of Election by a Taxpayer and Revenue This topic is being discussed separately to emphasise the major differences between commencement rules and cessation provisions. Under commencement rules, the taxpayer can elect to be assessed on actual basis in the second and third years of assessment provided the notice is given in writing. The election should be made within two years after the end of second assessment year or within one year of the end of the third assessment year. The tax payer can revoke the earlier election within one year of the end of the third assessment year, where necessary.
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Under cessation, the Revenue has the option of choosing the assessable profits of the penultimate year between the higher, of the assessable profits based on the actual and preceding year basis. Ladies and Gentlemen, I am most grateful to be privileged to be with you on this occasion. While thanking you for your patience and understanding, I do hope that you have gained tremendously from todays talk. Questions are however welcome on issues not too clear to you. Thank you.
EXAMINERSREPORT
The question tests the ability of candidates to talk on professional issues in a social gathering. It also tests candidates ability on legal form of business concerns, the tax implications of the different businesses and taxation of profits with special emphasis on commencement and cessation rules. Options between taxpayers and Revenue Offices are also tested. Most of the candidates attempted the question. Candidates performance was below average. Some of the candidates were unable to distinguish between registration of different forms of businesses and their tax implications. Candidates are advised to have a better understanding of the different forms of businesses and their tax implications.
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QUESTION 2
Empire Nigeria Ltd. (a) Computation of Minimum Tax Liability 2009 Assessment Year (a) (i) 0.5% of Gross Profit i.e .5% of N35,000,000 (ii) 0.5% of Net Assets i.e .5% of N300,000,000 (iii) 0.25% of Paid up capital i.e 25% of N140,000,000 (b) 0.25% of Turnover i.e N500,000 0.125% of N240,000,000 N500,000 N N 175,000 1,500,000 1,500,000 350,000 1,250
Note: The highest above is N1,500,000,which will be added to the figure using turnover.
299,375 1,799,375
(b)
Computation of Companys Income Tax Liability 2009 Assessment Year Assessable Profit Deduct Unrelieved capital allowances bfd Current year capital allowance Total Profits Tax on N550,000 at 30% Education Tax 2% of N2,100,000 Total Tax Liability N 600,000 950,000 N 2,100,000
(1,550,000) 550,000 165,000 42,000 207,000
(c)
Direct Tax This form of tax is assessable profit directly on the tax payer who is required to pay tax on his property, income or. They are paid mainly on income, capital and property.
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Indirect Taxes. These taxes are imposed on commodities before they reach the consumer, and are paid by those upon whom they ultimately fall, not as taxes, but as part of the selling prices of the commodities. Direct Taxes Personal Income Tax Capital Gains Tax Petroleum Profit Tax Companies Income Tax Education Tax Withholding Tax Indirect Taxes Value Added Tax Sales Tax, Customs Excise Duties Goods and Services Tax Customs Import Duties Stamp Duties.
Tutorials There was no need for limiting capital allowances to 2/3 because the question was specific on this.
EXAMINERSREPORT
This question tests candidates knowledge of minimum tax liability, computation of assessable profits and understanding of Direct and Indirect taxes. The question was attempted by many candidates. Candidates performance was below average. Most of the candidates display lack of understanding of minimum tax and indirect taxes. Some disregarded the instruction on restriction of capital allowance. Candidates should endeavour to understand issues involved in the computation of assessable profits and other related issues thoroughly.
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QUESTION 3
(a) PEE DEE CONCEPT LIMITED COMPUTATION OF VAT PAYABLE Cost of the site (1500 x 6 ) Add: Commission 5% of N9,000 VAT @ 5% to FIRS (b) VATABLE PERSON A person that deals in Vatable Goods and Services Examples of Vatable persons are: (i) (ii) (iii) (iv) (v) (c) A limited liability company A partnership A sole trader An individual A club dealing in vatable goods. N 9,000 495 9,495 475
DETAILS TO BE FURNISHED IN A VAT INVOICE (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) Suppliers Tax identification Number (TIN) Name and address of purchaser Vat registration number Amount payable before Vat The date of invoice Tax charged Rate applied Goods supplied Net amount payable after Vat Gross amount of the Transaction.
EXAMINERS REPORT
The question tests the candidates understanding of VAT, Vatable person, Vat invoice, relevant authority in VAT.
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It was attempted by many candidates. Candidates performance was average. Some candidates that attempted the question could not get the computation right. Many did not understand the issue of Vatable person whom they described as agents of VAT. Candidates are advised to get acquainted with the provisions of the ACTS.
QUESTION 4
(a) INTEGRITY PETROLEUM LIMITED Schedule of Stream of Payments of the Tax Liability of N89,500,000 for 2008 Tax Year. Date March 2008 April 2008 May 2008 June 2008 July 2008 August 2008 September 2008 October 2008 November 2008 December 2008 Basis of Computation /12 of N84,000,000 /12 of N84,000,000 1 /12 of N84,000,000 1 /12 of N84,000,000 1 /12 of N84,000,000 1 /12 of N84,000,000 1 /12 of N84,000,000 1 /12 of N84,000,000 1 /12 of N84,000,000 Final tax i.e actual Tax already paid i.e N89,500,000 N63,000,000
1 1
Amount Paid N 7,000,000 7,000,000 7,000,000 7,000,000 7,000,000 7,000,000 7,000,000 7,000,000 7,000,000 26,500,000 N89,500,000
(b)
The expenses generally referred to as tax offsets are: (i) (ii) (iii) Investment tax credit Royalties on chargeable oil won and locally disposed off Non-Productive Rents, that is, any rent which is deductible but it is not deducted from any royalties under an oil prospecting license or oil mining lease
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(iv) All sums whose liability was incurred by the Company during the period to the Federal Government of Nigeria by way of Customs and Excise Duties levied in respect of plant storage tanks, pipelines, tools, machinery and equipment, essential for use in the companys operations. They have become part of S. 10 and S.17 of Petroleum Profits Tax Act deductions. (c) Joint Venture Contracts Under the Petroleum Profit Tax Act Cap P13 LFN 2004 as modified by MOU 2000 and the letters from the minister of Petroleum Resources, this is a joint venture between the NNPC and the operators for which NNPC meets its equity contribution through the Cash Calls and the companies provide the counterpart funding. The Companies lift the crude in the ratio of their equity participation. A tax inversion penalty clause was introduced because of criticism on the fact that this regime is disincentive to cost minimization. Savings by the Government are countered by the Transfer Pricing and Avoidance Scheme introduced. (d) Royalties Rates Under The Production Sharing Contract Up to 200 metres water depth 162/3% 201 500 metres water depth 12% 501 800 metres water depth 8% 801 1,000 metres water depth 4% Above 1,000 metres water depth 0%
EXAMINERSREPORT
The question tests candidates understanding of Petroleum Profits Tax Payments schedule, Joint Venture Contracts (JVC) and Royalties under Production Sharing Contract. Many candidates attempted the question. Candidates performance was average. Candidates are advised to have a better understanding of the areas tested.
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QUESTION 5
(a) i LAZARUS COMPANY LIMITED COMPUTATION OF CHARGEABLE GAIN Sales proceed Less: Selling expenses Net sales proceed Less: Cost A x C A+B 1,850,000 x 1,200,000 1,850,000+750,000 Chargeable gain N 1,850,000 (250,000) 1,600,000
(853,846) 746,154
(ii)
LAZARUS COMPANY LIMITED COMPUTATION OF CAPITAL GAINS TAX Chargeable gains Capital Gain Tax @ 10%
N 746,154 74,615 1,200,000 - 853,846 N346,154
(iii) Cost of remaining asset
Note: Where A = Value of part disposed of B = Value of part not disposed of C = Total cost of the asset.
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(b)i Rollover Relief Where a company carrying on a trade or business disposes an asset used in the business and applies the proceeds in acquiring new assets of the same class as the old ones which are to be used in the business, a relief is granted. The company will be entitled to deduct the gains arising on disposal from the cost of the new asset. Full relief is obtained only when the total consideration for the sale of the old asset is applied in the acquisition of the new asset or assets of the same class, in full. Partial relief is obtained where part of the sales consideration of the old asset is applied in the acquisition of the new asset. The amount is restricted to the applied amount. Allowable expenditure: Any expenditure wholly and exclusively incurred on an asset for the purpose of enhancing its value and reflected in its state or nature at the time of disposal Any expenditure that has not wasted away before disposal, hence extensions and improvements to property are allowable but repairs, maintenance and redecoration are not. Cleaning a picture is allowable but insurance cost is not. Any expenditure wholly and exclusively incurred in establishing, preserving or defending the title or right over an asset.
(ii)
EXAMINERSREPORT
The question tests candidates understanding of Capital Gains Tax, market value in calculating gains, allowable expenses and Rollover relief. The question was well attempted by the candidates and the performance was average. The candidates did not exhibit good awareness of the specific provisions of the Acts. Candidates are advised to endeavour to understand the specific issues in the ACTS.
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QUESTION 6
BARABAS AIRLINE LIMITED (a) (i) Computation of Total Profits of the Non-Resident Company Income Derived in Nigeria Passengers flight from Nigeria Cargo loaded into aircraft from Nigeria Total Computation of Global Adjusted Profit of the Company Net Profit Add Back: Depreciation General Provision Disallowable expenses Adjusted Profit Note: Adjusted Profit Ratio 122,766,900 x 100 = 97.3% 126,185,460 Calculation of Tax Liability Assessable profit = 97.3% x 24,550,460 = Less capital allowance 110% x 464,500 Total Income Income Tax Liability at 30% iii Calculation of Education Tax Education Tax NIL 23,887,598 (510,950) 23,376,648 7,012,994 N 12,800,300 11,750,160 24,550,460
N 464,500 50,600 100,000
N 122,151,800
615,100 122,766,900
ii
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Education Tax Being a non-resident company, it is not liable to education tax. Education tax is payable only by companies registered in Nigeria according to Section 1(2) of the Education Tax Act 2004 CAP E4 LFN as amended. b. i Small Companies Small companies with turnover of not more than N1 million in the first three years shall be taxed at reduced corporate tax rate of 20%. Also, dividends received from small companies in the first five years shall be exempted from tax. Wholly Export Business Dividends from investments in wholly export oriented businesses are exempted from tax. Also, the profit of a company whose products are exclusive input for the manufacturing of goods for export are exempted from tax. Unit Trust Dividends received from a Unit trust are exempted from tax. Also, gains on disposal of investments in a unit trust are exempted from Capital Gains Tax, provided the proceeds are reinvested. Powers and functions of the Federal Inland Revenue Service Board are to : Provide the general policy guidelines relating to the functions of the Service; Manage and superintend the policies of the Service on matters relating to the administration of the revenue assessment, collection and accounting system under the Act or any enactment of the law; Review and approve the strategic plans of the Service; Employ and determine the terms and conditions of service including disciplinary measures of the employees of the Service; Stipulate remuneration, allowances, benefits and pensions of staff and employees in consultation with the National Salaries, Income and Wages Commission; and Do such other things, which in its opinion, are necessary to ensure the efficient performance of the functions of the service under the Act.
ii
iii.
(c) (i) (ii)
(iii) (iv) (v)
(vi)
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EXAMINERSREPORT The question tests candidates understanding of the computation of Total Profits of a Non-Resident Company in the Airline business with emphasis on income tax and education Tax. The questions was well attempted by the candidates. Candidates performance was below average. The candidates displayed lack of understanding of computation of the income tax of non-resident companies in the Airline industry. Candidates are advised to read and understand the contents of the syllabus very well.
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ICAN/101/Z/4
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL EXAMINATION III MAY 2010 MULTI-DISCIPLINARY CASE STUDY Time allowed 2 hours
EXAMINATION NO...................................
SECTION B READ & DIGEST CASE STUDY ACENCO TEA PLC BACKGROUND
Acenco Tea Limited was incorporated in 2000 with a share capital of 750,000 ordinary shares N1.00 each. The company imported and marketed tea brands: Life safe, Life sure, and Life secure. The directors of the company were Messrs Bamidele and Korede. They considered themselves as good Jolly friends and not as employees of the company. For this reason, there were no job descriptions, administrative procedure or segregation of duties. The company grew considerably and by 2006, brand loyalty to its products had been achieved, and it had established a strong market share in the country. The sales revenue had reached N20 million within five years when three different brands of tea from different countries had been imported and blended to make its products. Due to the tremendous growth, the corporate structure had become more elaborate as more professional managers were employed to meet the management requirements and other needs of the company. Bamidele and Korede were the only shareholders and Executive Directors of the company and they related as friends and decisions were taken at informal meetings. This process had always taken most of their time, while other issues were denied serious consideration before decisions were taken. Mr. Simon, a friend of Bamidele, who came to visit him in his office, met the duo in a meeting and he had to wait for some hours before getting their attention. When Simon
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met him, he could not hide his opinion about the time spent at meetings and he said sometime, along the line, both of you have to make a decision as to whether you would continue to run this company like a real live and profitable business or you are going to continue to hold eight-hour staff or friendly meetings every Wednesday and dwell on philosophical attributes of tea bags. This opinion expressed, described the problem of informal organizational structure of the company. In 2006, Korede left the company for other business ventures but remained a shareholder and director. The structural development in the company had grown beyond the directors and each had to make a decision about his interest in the company. Korede had become disenchanted with the changing corporate structure. Bamidele, however, adjusted better to Acencos elaborate structure and blended his role of corporate executive with his free spirited outlook to life. Acenco Tea Ltd became the largest Nigerian importer of branded tea in the country by 2005. The number of employees had risen to 200 and the company has relocated its office to Ogba Industrial Area, Lagos. It offered its employees a profit-sharing plan and health insurance package. It sought to relieve boredom in the production department through participation in quality circles and job rotation. This was just a way of appreciating the loyalty and spirit of devotion of the workers. Bamidele was concerned with designing an organization that has good intention for almost everybody without discrimination between management and workforce. Bamidele also left the company two years later to devote his personal time to a number of non-profit, and socially conscious organizations. Fehinbu, a financial specialist, was employed to replace Bamidele and he promised to effect few changes in the company. He said, Brisko Plc bought the best small companies in Nigeria. The only thing I intend to change is the small. However, Brisko Plc pushed Acenco Tea Ltd into new product lines and sought to expand the companys activities into international markets and the other changes were not successful. Acencos diversification into coffee drinks was also not successful. Brisko Plcs approach to employees also angered long-serving employees, who objected to Brisko Plc hiring an undercover agent to investigate suspected drug use in Acenco Tea Ltd. Following an aborted buyout by Tinton Tea Ltd in 2008, the management of Acenco Tea Ltd acquired the former. In 2010, Bamidele returned to the company confessing that he missed the corporate world that he had worked so hard to build. He promised to concentrate on marketing and product development and to use environmentally appropriate product designs that would eliminate the use of strings and tags on most tea bags. He truly did his best to restore the previous hang loose atmosphere of the workers by installing showers
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for employees who biked to work and a track for noon time runners and roller bladers. He encouraged a return to the corporate uniform of old-jeans and T-shirts. It has become necessary from early family and friends days to the present day to effect drastic changes in the companys structure. The founders realized the links of hands-on management quite early in the companys history, and after Brisko Plcs acquisition of Acenco Tea Ltd, more changes occurred. The company was divided into more units when it became larger. Managers and other specialists were employed and responsibilities were divided among them and new levels and sub-units were created to handle specialized functions in the organization. The company established methods, procedures and structures that differed from those of other subunits because each subunit had a different task to perform. The structures of the company as reviewed, have been completed and the management was determined to continue to control the larger part of the market. It also planned to expand its operations to the neighbouring countries in which its brands of tea could be marketed. This corporate policy was based on the belief that an organizations size determines the number of persons employed. Sales volume, financials or physical assets and geographical spread are also indications of an organizations size. MANAGEMENT STRUCTURE AND THE EXECUTIVES Since Bamidele resumed at Acenco Tea Ltd after its acquisition by Brisko Plc, and Fehinbu had earlier been hired as the Chief Executive, there was a problem as to who should be in charge of the implementation of the planned structural development. It was believed in some quarters that since Acenco Tea Ltd had been acquired by Brisko Plc, Bamidele had no business being its Chief Executive again. Fehinbu, therefore, sent a memo to Kekereowo, Chief Executive of Brisko Plc, to clear the issue. In reply, Kekereowo explained that Brisko Plc acquired only 49 percent of the share capital of Acenco Tea Ltd, which belonged to Korede. Bamidele refused to sell his own shares representing 51 percent of Acenco Tea Ltd capital. Kekereowo and Bamidele were friends and Bamidele did not object to the acquisition of 49 per cent when Korede decided to sell his shares. Fehinbu was however advised to relinquish the position of Chief Executive to Bamidele, which he did, and became the Deputy. Both worked together amicably and the cooperation between them enabled the expansion policy of the company to be implemented successfully. Bamidele said to Fehinbu You are the Chief Executive in practical reality because you will see to the effective implementation of the expansion policy of the company and I trust, you will
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not disappoint us. Fehinbu said in reply I sincerely appreciate the confidence you repose in my ability, and I promise not to disappoint you and Kekereowo. Now that the management problem had been resolved, the following proposals for developmental and expansion programmes were submitted by the management to the Board of Directors of Acenco Tea Limited. FINANCIAL POLICY Acenco Tea Ltd planned to raise funds from the Capital Market to finance its expansion and structural development. As a prelude to the implementation of the proposal, the company applied to the Corporate Affairs Commission for approval to change its name to Acenco Tea Plc as a public limited liability company. This process was completed without much delay and the application was approved. The present share capital of 750,000 ordinary shares of N1.00 each was altered to 1,500,000 ordinary shares of 50kobo each. The appropriate resolution was passed at the Board of Directors meeting. The number of shares later was increased to 10 million ordinary shares of 50kobo each. It also applied to the Securities and Exchange Commission and Nigerian Stock Exchange for approval to issue 10 million ordinary shares at N8.00 each. Appropriate approvals were granted to the company to issue a prospectus for the public offer of the shares. The shares were oversubscribed by 20% and the issue cost was agreed to be 5% of the total amount realized. PRODUCTION OF LIFE RICH BEVERAGE Acenco Tea Plc proposed to develop, produce and market beverage drink by producing Life Rich, a kind of beverage that enriches the life of the consumers. Life Rich has been developed from the Acenco Tea Plc Research and Development department under the companys Chief Nutritionist, Mrs. Jemgbo. The pilot market test was successful, based on the acceptance rate of 85 percent. Earlier, the market survey had been carried out and the response was equally encouraging. The cost of implementation of the production of Life Rich Beverage was given as follows. Plant and Machinery Advertising/Marketing Research and Development Registration of Life Rich Drink Market Survey N100 million N 25 million N 15 million N 5 million N 5 million N150 million
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EXPANSION OF OPERATIONS Acenco Tea Plc planned to expand its marketing operations to neighbouring countries and to market its brands of Life Tea in those countries. The countries of Benin, Togo and Ghana were selected. To implement this proposal, it incorporated three companies with share capital subscribed by the citizens of those countries with Acenco Tea Plc as the parent company. In furtherance of the proposal to expand its market to the neighbouring countries, the management appointed Babakekere & Co (Solicitors) who have branch offices in each of the selected countries to incorporate subsidiaries in the respective countries. The following companies were accordingly incorporated, Acenco Tea (Benin) S.A., Acenco Tea (Togo) S.A and Acenco Tea (Ghana) Plc. The subsidiary companies imported tea brands and Life Rich Beverages (see Appendix II). Acenco Tea Plc could not receive the full export value due to unexpected bill of exchange problems which occurred from the initial order documents. It was difficult to transfer all the proceeds into Nigeria. The groups management, therefore, instructed the Chief Executives of the subsidiary companies to consider the amount that could not be transferred as a loss. Total amount to be considered as a loss was shown in Appendix III based on the standard cost of production (Appendix V). MARKETING EXPANSION IN NIGERIA Acenco Tea Plc opened more branches in major cities and towns in the six geographical zones of the country. Each branch is managed by a branch manager and a regional manager controls three branch managers. Implementing this proposal required an effective organization structure and adequate capacity building. In view of this, management recruited twelve branch managers and four regional managers. They were sent for training in information technology, because they would do more of electronic transactions, tele-conferencing and less travelling between branches, regional offices and group office, as soon as the branches and regional offices had been established. Each branch activity or performance would be by electronic transactions and would be linked to the regional offices by computer systems. All transactions, including sales, orders, stock level, personnel and other transactions would automatically and simultaneously be in the branch and the regional offices, while all regional offices transactions would be captured by computer central information systems. Expansion proposals of the company included the acquisition of some important marketing companies in the beverage industry, which would enable the marketing team to push into market, the quantities of Life Rich Tea Beverage that would be
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required and which would also enable consumers to have access to the product without difficulties. Management, therefore, needs to identify companies that would be acquired without much difficulties. Fehinbu and Marketing Director, Ojulowo, had a meeting to compile a list of possible companies for acquisition that could be presented to the Board of Directors. They concluded on two major distribution and marketing companies that were distributing the products of the competitors. The companies have distribution networks that Acenco Tea Plc would need for marketing its products. The companies were: (a) Distribution Network PLC and (b) Central Distribution Limited. Insider information concerning performances and operations were collected and analysed. They recommended Distribution Network Plc as the appropriate candidate for acquisition. Management, therefore, recommended Distribution Network Plc to be taken over. The Board of Directors met and decided to go ahead with the acquisition of the company. The Boards decisions were communicated in a letter of offer to the Board of Distribution Network Plc. The offer was five shares of Distribution Network Plc for three shares of Acenco Tea Plc. The Board of Distribution Network Plc accepted the offer and recommended that the shareholders should accept the offer. The Balance Sheet of Distribution Network Plc is on Appendix IV. For the implementation of the Information technology project, Tunder, Kehinde & Associates (Information Technology Consultants) were contracted to link all computer systems to a reputable internet service provider, which would enable the managers to become more efficient and save the travelling time from branch offices, regional offices and group head office for information that could be supplied or obtained through computer systems. An innovation was introduced into the systems by which managers would participate in tele-conferencing without leaving their locations or offices. Tele-conferencing can be closed or open. Closed tele-conferencing is for selected persons that are connected to the system to participate while open teleconferencing entails participating with a password to the computer. OPERATIONAL CONTROL The management had reviewed the developmental and expansion policies as illustrated in the previous paragraphs and was satisfied with the results and would want effective control systems to be established to ensure efficiency in the performance of all units in the group.
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It was decided that Director, Group Operations, should be responsible for operational controls that involved production, sales volume, distribution, shareholding, information technology systems, efficient utilization of workers time or hours at work and other cost related operational problems. The usual motivation for designing operational systems is to increase the efficiency, accuracy and quality of job performance. Achieving these objectives depends on effective communication. Communication systems include the use of telephone, fax machine, electronic mail and tele-conferencing. The installation of these communication systems was to increase the transmission, speed, accuracy and reduce human traffic. Advanced Manufacturing Technology (AMT), a part of the communication system as envisaged, is a family of technologies that include computer-assisted design and engineering systems, material resource planning systems, automated material planning systems, automated materials handling system, flexible manufacturing systems and computer integrated manufacturing systems. Just-In-Time (JIT) system and Total Quality Management are two such systems. JIT is a fundamental principle that can be applied anywhere in the cycle of material flow within any manufacturing environment. Inventory also requires space and insurance. A classic problem in manufacturing is to balance the cost of carrying inventory against the cost of being cut off stock. JIT approach to the inventory problem is to ensure that the needed materials arrive at the place they are needed just-in-time to be used in the production of finished products. In view of its importance, the Production Director of Acenco Tea Plc group instructed all Production Managers in the group to adopt Just-In-Time system. Inventory must neither be too high nor too low, but must ensure that orders are of optimum sizes and must arrive just-in-time for production. Based on the above instruction, Jeff Mosetan, the Production Manager, requested for the purchase of 7,200,000 units of product A. The ordering cost was N1,250 per order and the carrying cost of inventory was 20% of the ordering cost. He, however, was mindful of the optimum quantities that could be ordered. The cost price of product A was N150 per unit. REPLACEMENT OF EXISTING MACHINE The successful acquisition of Distribution Network Plc and the establishment of subsidiary companies in the neighbouring countries opened a wider market opportunity for the distribution and sales of the branded tea and beverages of Acenco Tea Plc nationally and internationally. It was realized that the major machine currently in use for production would be due for replacement if the expansion was to
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be undertaken by the company. The equipment/machine was ZK105 which was purchased ten years ago and its performance may not meet the projected demand. ZK105 machine had become expensive to maintain and Fukoye the Chief Engineer was determined to replace it. The components of the equipment were a collection of electronic components which were attached to a printed circuit board and when tested, the process produced, not only a component, but a report on its characteristics. It required little labour for its operation but its input and output materials handling systems had often caused problems. The Chief Engineer, had proposed to replace it with the latest equipment, the ZK107. This equipment would save on materials handling and labour and would produce a more consistent output for a wider product range. Engineer Fukoye did his homework and also the analysis on the proposed new equipment and though he knew the likely reaction of Mosetan, he dared not present the proposal to him without proper analysis and appraisal. Engineer Fukoye decided to pre-empt Mosetans reaction by asking for his opinion on the proposal to replace ZK105 machine. He, therefore, went to his office and after the usual social chat, he raised the issue of the replacement of the equipment again. Mosetan was not surprised because Fukoyes predecessor had unsuccessfully tried to convince him on two occasions to replace ZK105 equipment with ZK107. He reached out for a piece of paper and in a studious mood, wrote on it, the cost of equipment, installation, etc which were estimated to be N3,850,000. Fukoye was surprised and felt that he had been outsmarted by the Production Manager and decided to explain the benefits that would be derived, if the equipment should be replaced. Fukoye did not argue, but wrote and listed the benefits and these included: N (i) Annual savings in maintenance and downtime 400,000 (ii) Annual savings in labour costs 350,000 (iii) Annual scrap and quality non-conformance savings 300,000 On further interrogation, Fukoye opined that the payback period would be less than five years which Mr. Mosetan wanted to be convinced of its practicability. Mosetan then replied I am not bothered about all you have submitted because it would be your responsibility to justify the forecasts and projections and you will be held accountable for your failure. In view of your insistence to replace the equipment, I will advise that you prepare the capital expenditure budget, if you are confident about the proposal and submit to the
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Divisional Finance Director for approval and then, we will see what would be the outcome. Fukoye has discovered from the conversation he had with the Production Manager that he had to do his homework well if he wanted to succeed. He completed the capital expenditure budget as advised and submitted to the Divisional Finance office for consideration and approval. He was welcomed by the Divisional Finance Director like a stranger from a distant land, creating a certain curiosity. He eventually found Mr. Poko, a young-looking Chartered Accountant who specialized in project analysis and appraisal and they settled down to a real discussion about the capital expenditure budget. Poko, after due observation, said I am sure, this is a good job with good idea but you have missed a few tricks in setting out the argument. He went further and said the payback period is only a rough guide and for this reason, we usually use the net present value to appraise capital projects. Poko explained and continued, as you have not built inflation into your forecasts, we can use an inflation free rate of 20% for this class of capital expenditure and a ten year planning horizon. You will however defend the costs and the benefits of the estimates he warned Fukoye. Poko further observed and said I noticed that you have not found savings in inventory or disadvantage in energy consumption which in my opinion were also important. If the observations of Poko were carefully taken into consideration, it would be necessary to justify whether the rate of 20% compares favourably with the likely internal rate of return on the project. In conclusion, no decision could be taken on the replacement of ZK105 machine with ZK107 until all the above facts have been taken into consideration. CASH MANAGEMENT AND CONTROL Mr. Fehinbu, Deputy Chief Executive and a financial specialist was disturbed by the incidence of financial mis-statements that were discovered in the accounts of Distribution Network Plc. He decided to reorganize the cash management control system in the groups operations and accordingly instructed Mr. Kingsley, the Group Finance Manager, to design a cash management control system in the groups operations that would ensure efficient cash management in the organization. Kingsley, in his memo to all financial managers in the group, explained to them what cash management control system would involve and how it would operate. Cash management is an important function of the Financial Manager. He has responsibility
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to establish efficient cash management team that would work with business to obtain good results, and avoid dealing with any bank with poor customer services. Inefficient cash management would result into loss of revenue through excessive bank charges, inefficient services by the banks, idle cash which would reduce the profits of the company. It is therefore necessary to monitor cash management portfolio and always review the services provided by the banks at intervals or at least once in a year, in order to find and evaluate answers to some key questions that could lead to improvement in services and reduction in bank charges. It is equally important to give adequate information about the problems and complexity of the business or activities as well as the operations management of the company. You must ensure that banks could offer the company the full range of banking services at competitive charges. The Financial Manager has the responsibility to ensure that fund transfers are handled carefully and that the outgoing funds transfers would appropriately be timed to allow for maximum use. He should consistently ensure that all cheques deposited in the banks are cleared within the shortest business working days to improve the liquidity of the company. It should be realized that, if any of the company bankers makes frequent or repetitive errors in processing electronic transfers, cheques, drafts, or handling of documentation, it would be necessary to inform the appropriate bank management to avoid undue charges to the companys account. In order to ensure efficient management of funds, an efficient cash management system should be established for the company by its management through the following actions: Make accurate forecasts of cash inflows and outflows and where appropriate, apply the excess funds to the needs of the company. Set and monitor the borrowing limits for the branches, subsidiaries and associate companies and determine the financial parameters of high and low financial funding.
Due to large amount of sales that would result from the expansion programmes, a new cash management control system would be established to ensure that all sales receipts are paid into one main receiving bank account, which would be opened in all nominated banks. The accounts would be designated A, B and C. Accounts B and C would only be used for expenses to be incurred by the Group office, subsidiaries and branches.
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The new cash management control system requires that approval of transfer of funds from Account A to any account would be effected by a letter signed by the Chief Executive with Group Finance Officer or Group Finance Director and Group Treasurer. The letter would be delivered to the Manager of the bank concerned instructing him to transfer the amount in question from Account A to B in case of Acenco Tea Plc or from Account B to C in case of Distribution Network Plc and branches of Acenco Tea Plc. As a rule, no cheque should be drawn on Account A, but all withdrawals from Accounts B and C should be by cheques. Each company or branch in the group must therefore prepare its monthly cash forecast not later than two weeks before the 1 st day of the month following and it must be received by the Group Treasurer not later than 25th of each month to ensure smooth operations in the following month. For efficient operations, it had been recommended that the Cash Management Control System be computerised. STRUCTURAL AND DEVELOPMENTAL PROGRAMMES Acenco Tea PLC had completed the structural and developmental programmes and was ready to initiate a strategic development plan that would make the company one of the largest tea and beverage producers in Africa. For this purpose, it would require a restructuring of its share capital through the appropriate financing programme. The Managing Director therefore set up a committee which had the Group Finance Director as Chairman, Director of Operations and Production Manager as members. The committee, after several meetings, recommended the following financing options for the groups expansion: (a) (b) (c) (d) Rights Issue; Issue of 5% Preference Shares; Issue of 5% Debenture Stock; and Increase in the production of Life Rich Beverage to 300,000 tons per annum. (Appendix II).
Option (d) above, would require the purchase of two new ZK 108 machines that would make production more efficient with the following benefits per month in standard cost of production of Life Rich Beverage. (i) (ii) (iii) (iv) Reduction in divisional expenses Savings in direct material usage Savings in group office overhead Savings in direct labour 25.5% 10% 20% 25%
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(v) (vi) Savings in scrap value Savings in indirect labour Life expectancy of the machines: Expected rate of return 5% 25% 10 years 20%
Cost of ZK108 machine was estimated to be N4,500,000 each. The committee recommended that the proposed new factory should be built along the Lagos-Sagamu Express way. The cost of the factory was estimated at N150 million. The land was leased for 99 years from Ogun State Government and the following payments would be made to the government and its agencies: * Factory building plans approval fee * Surveyor General Office (Delineation of plot fee) * Governors Consent fee * Lease Rent for 25 years * Miscellaneous expenses N5.0 million N1.5 million N0.5 million N2.75 million N1.2 million
The management accepted the recommendation by the committee and in order to finance the projects, it recommended to the Board of Directors, the following financing options for approval: (a) Increase share capital to 100,000,000 ordinary shares of 50 kobo each; (b) Offer a Rights Issue of 75 million ordinary shares at N5.00 each; (c) Issue N10 million 15% Preference shares of N1.00 each; and (d) Issue N5 million 7% Debenture stocks. The cost of issue of 15% Preference shares and 7% Debenture Stock would be 5% on the amount realized and 5% on the Rights Issue. The recommendations were accepted and approved by the Board of Directors and the appropriate resolutions were passed at its meeting. It also approved the estimated cost of the factory buildings as N150 million. The relevant approved fees were to be paid to government and other agencies. Acenco Tea PLC decided to build its new factory on the plots allocated by the Ogun State Government along LagosSagamu Express way. It applied for the approval of the factory building plans from the Building Approval Department of the Ministry of Lands and Housing. Sebikan was the Third party officer of Acenco Tea Plc and he was appointed to follow and see through the eventual approval of the building plans. He submitted the building plans and other relevant documents for approval to Owonimo, the officer in charge. On the receipt of the building plans; he said good soup requires
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money and your company must be prepared to spend money before approval can be granted. Sebikan replied, It would not be a problem as long as all the money spent will be covered by official receipts. Owonimo collected the factory building plans and other documents, and advised Sebikan to call him later to know the progress. Sebikan had a serious responsibility to discharge which was the approval of the factory building plans. He called Owonimo a week later to know the progress on the application he submitted the previous week. He replied and said I told you earlier, you have to grease palms before processing the building plans and I have been waiting for you to respond Sebikan then asked him to name his price and Owonimo said N1.5 million will not be too much for your company. Sebikan then replied and said I will report to the management for appropriate action. Acenco Tea PLC was a pioneer member of the Dont Give and Dont Take Bribe Initiative, a NonGovernmental Organization (NGO) that was established to fight corruption in the business sector. Sebikan was not sure whether the management would accede to paying bribe to Owonimo. However, he reported the demand to the Fehinbu, Deputy Chief Executive Officer, who said I doubt whether the Board of Directors would approve payment of bribe, because the company is a pioneer member of Dont Give and Dont Take Bribe Initiative. He said, The Board of Directors would have to choose between paying bribe and allowing the job to take off in good time or be delayed, while the cost would be mounting daily. He brought it up at the Board meeting and it was discussed and agreed not to be recorded as discussed. It was agreed that the interest of the company was paramount and it has to be protected, and in view of this situation, the bribe should be paid but it should be entered in the books as miscellaneous expenses. The construction of the factory building was temporarily stopped because the community protested against the companys lack of social responsibility. The community claimed that the earthen road was destroyed by the contractors heavy equipment and consequently, farmers could not bring their products to the market. Furthermore, the community wanted assurance that their environment would be protected against effluent waste. Sebikan was asked to meet with the representatives of the community. The meeting was held and the community agreed to allow the construction to continue on the conditions that:
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(a) third party insurance would be taken out to compensate any one that might suffer from the effluent wastes; (b) the company would reconstruct the roads damaged by the heavy equipment; (c) a scholarship scheme would be introduced for the villages brilliant indigent students in secondary and tertiary institutions; and (d) the company would sponsor Ilosiwaju Day festival each year. Sebikan reported the decision of the meeting to the Chief Executive who in turn reported to the Board of Directors. The Board of Directors, at one of its meetings, approved the demands by the community because they felt socially responsible to them. This would cost the company about N10 million each year. Acenco Tea Plc completed the factory buildings and all machines and equipment were installed. Production commenced as planned and capacity increased by 80 percent. The increased capacity created marketing problems which had to be resolved as quickly as possible to avoid a glut of finished products which would occupy the warehouse and might necessitate hiring additional warehouses outside the factory premises with the consequence of increasing the carrying cost of finished products. MARKET LEADERSHIP Acenco Tea Plc being the largest tea and beverage manufacturing company in Nigeria and West Africa, aimed at market leadership of the tea and beverage market. It therefore needs to provide a marketing strategy by which it could dictate the trends in the market in terms of price and supply. Market leadership is a position where it would directly or indirectly dictate or effect a change in demand or supply in a market on its own through the manipulation of price, quantity and marketing strategies. It could dictate the price of its products or condition the behavior of the consumers in the product market. Absolute market leadership could be possible if absolute monopoly could be achieved in the case of a large-scale company like Acenco Tea Plc. In view of its bid to assume market leadership, it planned to consolidate its control in the market by acquiring Tesco Tea Plc. When the acquisition had been effected, Acenco Tea Plc group would be able to control between 85% and 90% of the tea and beverage market in Nigeria and West Africa. It therefore appointed Success Bank Plc as its financial adviser for the takeover bid that would be considered.
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Tesco Tea Plc controlled 90% of the Ghana region market of tea and beverage. The takeover bid, if successful, would enable the group to predetermine production and sales of a given quantity and marketing same to yield an aggregate net profit for the group. Effective market leadership through the control of the market, could be achieved and effect change in demand and price at will. The Board of Directors decided on the takeover bid of Tesco Tea Plc after careful analysis and consideration of the financial and management data that were considered relevant to the takeover bid. However, the takeover bid plan leaked and the management of Tesco Tea Plc prepared in advance to resist it. The takeover bid was launched on 20 June, 2009 with an all cash bid, which valued Tesco Tea Plc at N70.5 million. The main producers in the industry can be divided into categories as shown in Appendix VI. The businesses remain largely independent and there was limited sharing of skills and expertise. Tesco Tea Plc was the second largest producer of tea and beverage in West Africa with a total of 46,100 tons in 2009. Tesco Tea Plc was the parent company of an international group of companies, whose core business was the production and marketing of tea and beverage. Tea contributed more to the group sales and operating profit. The company was quoted on both the Nigerian and Ghanaian Stock Exchanges and its market capitalization as at 21 May, 2009 was N63 million. Tesco Tea Plc. had attained market leadership position in Ghana as shown in Appendix VI. In addition, the beverage division was disposed of in 2008. Mr. Brown, a Chartered Accountant, became Chief Executive Officer of Tesco Tea Plc. He was recently employed at the time of the take-over bid. He had previously held a number of positions in Pacific Oil and had been a director of Premier Tea Plc in South Africa in 2007. He had initial responsibility for tea production, marketing and distribution in Ghana where he was the initiator of the establishment of Sisco Tea Ltd, an associate company of Tesco Tea Plc in Lagos, Nigeria. He became the Chief Executive Officer designate in December 2008 and finally, became the substantive Chief Executive Officer in January 2009. The first rumour that Tesco Tea Plc might be a potential bid target occurred in April 2009 after Tesco Tea Plc group issued a profit warning. This came only six weeks after the announcement of half year results and this seriously undermined Mr. Browns credibility as the new Chief Executive. Temidire, Chairman of Acenco Tea Plc telephoned Brown and asked him for time to discuss a possible takeover. The price of N4.20 per share was mentioned but this did not go down well with him and it was dismissed by Brown.
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ACENCO TEA PLC In 2009, Acenco Tea Plc was the largest producer of tea and beverage in West Africa with a total of 51,700 tons (Appendix VI). Acenco Tea PLC market share and major competitors by country was as shown in Appendix VI. Tea contributed approximately 68.6% of sales and more than 50% of operating profit as shown in Appendix IX. TAKEOVER BID On 29 April, 2009, Acenco Tea Plc announced a pre conditional offer for Tesco Tea Plc of N4.70 per share. The offer represented a premium of 14% over Tesco Tea Plc as at Thursday closing price on Ghana Stock Exchange before any significant speculation in the market concerning a possible bid for Tesco Tea Plc. It was acknowledged by analysts that the two groups were strategically a good fit. They can be described as two elephants but the consensus was that the price would have to be close to N5.0 per share for the bid to succeed. ACENCO TEA PLC ATTACKED TESCO TEA PLC Acenco Tea Plc attacked Tesco Tea Plc primarily for mistakes made in the past on investments and diversification strategy which had effect on its international operations and results and had made Tesco Tea Plc to fall behind its international competitors. TESCO TEA PLCS RESPONSE The initial response of Tesco Tea Plc was to dismiss the bid as significantly undermining the company. The first significant document that was issued by Tesco Tea Plc was the early release of the groups 2008 results on 25 April, 2009. The document stated that: Acenco Tea Plcs chairman has congratulated our management for doing all the right things He was right to say so: We have a business that is fundamentally changed, refocused on our strength in tea packaging and tea branding; We have invested carefully, building leading positions in our chosen markets; We have exciting growth prospects; and
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We will deliver substantial performance improvement and cost savings in the near future.
The document also showed that the net dividend for 2008 would be N1.50 per share which was an increase compared with internal plan (Appendix IX). Tesco Tea Plc announced its operational improvements programme. The document announced details of the projected benefits arising from such cost savings and included forecast of the benefits to be achieved and would be of the order of N5.20 per share by year 2012. The document also reiterated that Acenco Tea Plcs bid undervalued the company. The final blow in Tesco Tea Plcs defence was launched on 27 April, 2009 when it promised to deliver the benefits as indicated in the document. TAKE-OVER BID DEFENCE PLAN Tesco Tea Plcs financial advisers at the time of the bid were Solid Planners Bank Plc. They had been heavily involved in producing the defence plan in 2009. They steered the conduct of the defence itself. Solid Planners Bank PLC had access to Tesco Tea Plcs. financial information including accounts, forecasts and budgets. Their valuation presented to the Board in April 2009 was prepared based on the Business Plan for 2009-2012. The valuation which seemed to be a reasonable estimate, provided the profit forecasts in the Business Plan and were considered achievable. Tesco Tea Plc however intended to achieve actual results lower than planned and profit projections were sometimes too optimistic (Appendix VI). Solid Planners Bank was instructed to reduce the profit forecast in the 2009-2012 plan to bring them down to more achievable levels. The discounted cash flow analysis that was prepared for the Board of Tesco Tea Plc valued the business at N4.80 per share which was seen as relatively conservative. The valuation supported the claim that the Acenco Tea Plcs bid of N4.70 per share undervalued the Tesco Tea Plc group. DESPERATE MOVE Acenco Tea PLC in its desperate move bought shares from the stock exchange floor through its broker. The total shares bought represented 44.5% of total shareholdings. Early in the defence process, shareholders were indifferent and did not want to talk to the management of Tesco Tea Plc until the final offer from Acenco Tea PLC had been made and no further information could be realized. During the last ten days of the offer period, Brown and the Finance Director, Mr. Olade, held a number of meetings
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with the institutional investor in an attempt to persuade them to back the management and reject the bid offer. As the final days of the bid approached, the lobbying by Tesco Tea Plc management paid off, when Sentel Assurance publicly backed the decisions of the management of Tesco Tea Plc. This was followed by other shareholders and the bid was finally rejected. Acenco Tea Plc then announced that it had received acceptances that represented 44.5% of the shareholders of Tesco Tea Plc. The takeover bid of Tesco Tea Plc finally failed, because the total shareholdings in Tesco Tea Plc that was acquired by Acenco Tea Plc were less than 51% of the whole shareholdings in Tesco Tea Plc. SUCCESS BANK PLC IN CRISIS Banks in Nigeria went through share capital consolidation exercise in 2005 and Success Bank PLC was one of the 25 banks that were successfully re-energized and recapitalized during this period. The share capital was initially increased to N25 billion and few other banks subsequently increased share capital and also raised further funds from the capital market. These banks had solid capital base and in general terms, they were solid and financially strong banks. Success Bank Plc was considered as one of the strong banks in Nigeria. Acenco Tea Plc was one of the most valuable customers of Success Bank Plc. It had different accounts with the bank. Each account could be used to obtain facilities including overdrafts and loans, and is considered independent for the purpose of obtaining facilities. Acenco Tea Plc negotiated and obtained facilities from Success Bank Plc on different accounts which in total amounted to N12.5 billion as at 25, March 2010. As an important and most valued customer, the management of the bank had no doubt about the repayment of the facilities and furthermore all facilities were secured on the assets of the company. The company also serviced the loans according to the terms of the contracts as and when due and for this reason, there was no unnecessary pressure on the customer by the bank. The worlds financial and economic crisis had begun to take its toll on the banks in Nigeria but this had not yet manifested to the general public, however the financial and economic indicators had exposed the financial sectors to liquidity problems. The Central Bank of Nigeria, the financial watchdog, initially expressed confidence in the banking sector and assured that the banks in the country were financially solid to withstand the effects of the economic downturn. However, the tone changed when a
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new governor of the Central Bank of Nigeria assumed office and he accused few banks Chief Executive Officers of financial misdeeds. He ordered that the banks accounts be audited. The audit reports revealed that all was not well with some of the banks and confirmed that their liquidity was in great danger. Further investigations and analysis were carried out and serious financial crisis was discovered which confirmed the recklessness of some of the Executive Directors of the banks concerned. They were accused of financial mismanagement and abuse of their official positions. In order to accelerate the recovery of loans and facilities outstanding and funds mismanaged by the bank officials, the Central Bank Governor invited the Economic and Financial Crimes Commission to assist the Central Bank and the banks. In addition, the Central Bank had to go to court to obtain the order and permission for such recovery actions. In order to establish the exact amount misappropriated by the Executive Directors of the banks, an investigation was ordered to be carried out on the finances of the banks concerned. The investigation was to establish the amounts that customers owed the banks and establish which persons or organizations had not been servicing their loans or facilities. It was clear that the report might be used as evidence against each customer and executive directors of the banks. Gbenro & Co (Chartered Accountants) was one of the firms that were appointed to carry out the investigation and establishment of the list of debtors. Acenco Tea PLC was reported to owe Success Bank Plc N16 billion while Acenco Tea Plc confirmed owing N12.6 billion. The EFCC officials called on Fehinbu, the Chief Executive of Acenco Tea Plc, to demand for terms of repayment of N16 billion facilities owed to Success Bank Plc. Fehinbu informed them that Acenco Tea Plc owed N12.6 billion and in view of this disagreement, it had appointed Dede & Co (Chartered Accountants) to investigate its bank accounts with Success Bank PLC to confirm its claim of N12.6 billion or N16billion claimed by the Success Bank PLC during the investigation. It was discovered that N1.5 million was paid to Mr. Owonimo and this was included in miscellaneous cost of the factory building which was financed partly through bank loans. The Chief Investigator asked for the purpose for which the amount was disbursed. Sebikan was called to explain and after a long pause, he said the amount was paid to grease the palms of an official in the Ministry of Land and Housing for the approval of the factory building plans. The Chief Investigator then said this was a bribe you paid to the official. Sebikan replied and said yes. The investigator completed their assignments and submitted their reports to the management which confirmed the amount owed to Success bank Plc to be N12.65 billion.
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On the receipt of the investigators report, the Chief Executive Officer of Acenco Tea Plc, Fehinbu, thanked Dede & Co and said Acenco Tea Plc is a responsible company that appreciates accountability and financial prudence in its dealings with third parties. He further said you might be called upon to justify the correctness of the amount before a court of law. The Chief Investigator replied we stand by our report and we will be ready to defend it even before any court of the land. PROFESSIONAL AND BUSINESS ETHICS The management of Acenco Tea Plc was informed that one of the consumers of Life Rich Beverage had complained about stomach pains after consuming the beverage. The remaining portion of the beverage and the tin were recalled and tested and it was confirmed that the content was contaminated through the water used in the factory. The customer was treated and adequate compensation was paid without going to court. The management thereafter set up a committee to examine the manufacturing process in order to avoid reoccurrence in future. It was discovered that the Chemist, Mrs. Jare, who was in charge of water quality was careless in the discharge of her professional responsibility and thereby made the company liable to public ridicule which was against business ethics and values. Mrs Jare, the Chemist, in charge was also charged for lack of professional ethics and she was relieved of her position in the company.
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APPENDIX 1: ACENCO TEA PLC: BALANCE SHEET AS AT 31 DECEMBER 2009 N 71,350,000 3,050,000 2,740,000 11,255,000 17,045,000 2008 N 1,774,000 1,010,700 902,700 992,600 2,906,000 2007 N 1,650,000 962,600 1,062,000 789,400 2,814,000 2006 N 1,350,000 820,000 1,035,000 1,250,000 3,105,000
Fixed Assets Current Assets: Stock Debtor Bank
Current Liabilities: Creditors Taxation Loan Net Current Assets Net Assets Share Capital 10,000,000 ordinary shares of 50 kobo each Share Premium General Reserves Revenue Reserves Notes 1,800,000 1,250,000 2,700 ,000 5,750,000 11,295,000 82,645,000 5,000,000 948,200 297,900 539,700 1,785,800 1,120,200 2,894,200 750,000 862,000 331,000 635,000 1,828,000 986,000 2,636,000 750,000 800,000 250,000 720,000 1,770,000 1,335,000 2,685,000 750,000
75,000,000 1,420,000 1,225,000 82,645,000
1,120,800 1,023,400 2,894,200
934,000 952,000 2,636,000
1,000,000 935,000 2,685,000
EPS Dividend per share Net Assets per share
10,000,000 1,500,000 1,500,000 ord. 1,500,000 ord. shares of ord. shares of shares of 50 ord. shares of 50 kobo each 50 kobo each kobo each 50 kobo each 12.2 kobo 8.5 kobo N8.26 68 kobo 41 kobo N1.929 63 kobo 38 kobo N1.757 62 kobo 37 kobo N1.79
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APPENDIX II EXPORT RECORD
ACENCO TEA (BENIN) ACENCO TEA (TOGO) S.A ACENCO TEA (GHANA) PLC
Products
Qty of export (tons) 500 tons 300 tons 600 tons 80 tons
Export price N 100 120 140 400
Qty of export (tons) 600 tons 400 tons 800 tons 100 tons
Qty of export (tons) 800 tons 600 tons 1200 tons 200 tons 2,800 tons
Total (tons)
Life Sure Tea Life Secure Tea Life Safe Tea Life Rich Beverage
1900 tons 1300 tons 2600 tons 380 tons 6,180 tons
1,480 tons
1,900 tons
NOTE: 1 (one) packet of tea bags contains 100 grams 1 (one) tin of Life Rich Beverage contains 500 grams EXCHANGE RATE: N1.00 = 260 CFA, N1.00 = 5 Cedis
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APPENDIX III EXPORT SALES LIFE RICH SUBSIDIARIES OF ACENCO TEA PLC; (showing transfers)
ACENCO TEA (BENIN) S.A

Product Quantities Tons Life Sure tea Life secure tea Life safe tea Life rich (beverage) 1,764,000 500 300 600 80 Grams (000) 500,000 300,000 600,000 80,000 Grain per packet Price per packet N 100 120 140 400 Amount (N000)
ACENCO TEA (TOGO) S.A

Quantities Tons Grams (000) 600,000 400,000 800,000 100,000 Grain per packet Price per packet N 120 140 160 500 Amount N000
ACENCO TEA (GHANA) PLC

Quantities Tons Grams (000) Grain per packet Price per packet N 140 160 180 600 Amount N000
100 100 100 500
500,000 360,000 840,000 64,000
600 400 800 100
100 100 100 500
720,000 560,000 1280,000 100,000
800 600
800,000 600,000
100 100 100 500
1,120,000 960,000 2,160,000 240,000
1200 1,200,000 200 200,000
2,660,000
4,480,000
CALCULATION OF AMOUNT TRANSFERRED 1764000,000 260 AMOUNT TRANSFERED = 6784615 AMOUNT NOT TRANSFERED = 5766923 1017692
CFA CFA CFA
2,660,000 260 = 10,230769 CFA 8696154 CFA 1534615 CFA
4480,000,000 5 = 896,000,000 C 761,600,000 C 13,440,000 C
APPENDIX IV DISTRIBUTION NETWORK PLC: BALANCE SHEET AS AT 31 DECEMBER 2009

FIXED ASSETS Current Assets: Stock Debtors Bank Current Liabilities: Creditors Taxation Dividend Net Assets Share capital: 8,000,000 ordinary shares of 50kobo each General Reserve Revenue Reserves Shareholders Funds Loan Account 8,663,000 33,760,000 3,592,000 855,000 1,500,000 5,947,000 N 4,225,000 2,500,000 1,500,000 8,225,000 N 45,645,000
2,278,000 47,923,000
4,000,000
42,423,000 46,423,000 1,500,000 47,923,000
APPENDIX V
ACENCO TEA PLC: STANDARD COST OF PRODUCTION OF LIFE RICH BEVERAGE
N Direct labour Direct materials Indirect labour Electricity Maintenance/repairs Supplies Supervision Division admin. Expenses Group office Overhead Depreciation TOTAL Production batch volume Number of tins 98,000 700,000 48,000 25,000 16,200 4,000 40,000 25,000 35,000 130,000 1,121,200 400 batch 800,000 tins
DIAGRAM OF CASH MANAGEMENT CONTROL The schematic diagram will be as shown below: ORIGINATOR ACENCO TEA PLC MOVEMENTS BANK A All sales receipts and other income BANK B BANK C All sales receipts and other income are paid to Bank FROM A TO B
BN TRANSFER FOR EXPENSES AND PAYMENTS DISTRIBUTION All sales NETWORK PLC receipts and other income TRANSFER FOR PAYMENT ALL BRANCHES All sales receipts and other income TRANSFER FOR PAYMENTS
FROM B TO C
FROM B TO C
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APPENDIX VI
PRODUCERS BY COUNTRY
Nigeria
Togo
Benin
Ghana
Total
Tea
Bev.
Tea Bev.
Tea
Bev.
Tea Bev.
Tea Bev.
Acenco
16.2
5.5
5.5
2.5
4.4
1.6
10.5
5.5
36.6
15.1
Tesco
10.4
6.0
4.4
2.2
3.7
2.0
13.4
4.0
31.9
14.2
APPENDIX VII TEA AND BEVERAGE MARKET IN WEST AFRICA

2006 Tea (000) 131.10 4.5 28.4 12.7 100.9 5.8 Bev. (000) 56.6 4.4 11.0 8.9 43.6 7.4 2007 Tea Bev. (000) (000) 140.9 60.8 7.5 7.4 32.8 13.5 15.5 22.7 108.5 47.4 7.5 8.7 2008 Tea Bev. (000) (000) 115.0 66.9 (18.4) 51.2 35.5 14.6 8.2 8.1 120.9 52.2 11.4 10.1 2009 Tea Bev. (000) (000) 174.4 74.9 12.5 12.0 40.2 15.8 13.2 8.2 132.0 57.7 9.2 10.5
Production % Change Export % Change Consumption % Change
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APPENDIX VIII TESCO TEA PLC FINANCIAL DATA
2006 N(000) Group Turnover Operating Profit Operating margin (%) Profit before tax Earnings per share (k) Net dividend (kobo) Net Assets 190,000 30,000 16.3 29,800 1.90 1.12 2.90 2007 N(000) 194,000 36,000 18.6 34,200 2.20 1.30 3.40 2008 N(000) 202,000 35,000 17.3 31,200 2.30 1.40 4.00 2009 N(000) 230,000 33,000 14.3 26,700 2.60 (1.50) 4.70
APPENDIX IX ACENCO TEA PLC FINANCIAL DATA

2006 N(000) Group Turnover Operating profit Operating margin % Profit before tax Earnings per share (k) Net dividend Net Assets per share 352,600 77,550 22.0 53,300 62 kobo 37 kobo N1.79 2007 N(000) 420,700 91,780 21.82 56,470 63 kobo 38 kobo N1.757 2008 N(000) 642,940 102,380 28.4 67,200 68 kobo 41 kobo N1.929 2009 N(000) 685,000 107,250 15.6 80,750 12 kobo 8.5 kobo N8.26
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APPENDIX X TESCO TEA PLC BALANCE SHEET AS AT DECEMBER FIVE YEAR FINANCIAL DATA
2009 2008 2007 2006 N N N N 65,175,000 55,398,750 46,257,960 40,475,710
Fixed Assets Current Assets: Stock Debtors Bank Current Liabilities: Creditors Taxation Dividend Net Current Assets Net Assets Share Capital 15,000,000 share of 50k each General Reserves Revenue Reserves Loan Account Dividend per share Earnings per share Net Assets per share
6,041,750 5,588,610 5,113,580 3,575,000 3,342,620 3,058,500 2,145,000 2,134,270 2,006,210 11,761,750 11,065,500 10,178,290 5,136,560 1,222,650 202,500 6,561,710 5,008,150 1,204,310 192,370 6,404,830 4,783,080 1,162,160 176,980 6,122,220
4,678,920 2,829,110 1,885,840 9,393,870 4,567,840 1,121,480 162,820 5,852,140
5,200,040 4,660,670 4,056,070 3,541,730 70,375,040 60,059,420 50,314,030 44,017,440 7,500,000 7,500,000 7,500,000 7,500,000 13,051,040 11,194,300 9,308,090 8,010,940 38,824,000 34,165,120 33,005,940 28,006,500 59,375,040 52,859,420 49,814,030 43,517,440 11,000,000 7,200,000 500,000 500,000 70,375,040 N1.50 N2.60 N4.70 60,059,420 N1.40 N2.30 N4.00 50,314,030 44,017,440 N1.30 N1.12 N2.20 N1.90 N3.40 N2.90
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SCHEDULE OF APPENDICES APPENDIX I APPENDIX II APPENDIX III APPENDIX IV APPENDIX V APPENDIX VI APPENDIX VII APPENDIX VIII APPENDIX IX APPENDIX X Acenco Tea Plc: Four-Year Balance sheet Export record Export sales of Life Rich to subsidiaries of Acenco Tea Plc (Showing Transfers) Distribution Network Plc Balance Sheet as at 31 December, 2009 Acenco Tea Plc: Standard cost of production of Life Rich Beverage Producers of Tea and Beverage by country Tea and Beverage Market in West Africa Tesco Tea Plc Four-Year Financial Data Acenco Tea Plc Four-Year Financial Data Tesco Tea Plc Four-Year Balance Sheet
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ICAN/101/Z/4
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL EXAMINATION III MAY 2010 MULTI-DISCIPLINARY CASE STUDY Time allowed 3 hours (10 MARKS)
EXAMINATION NO...................................
SECTION A PART I
MULTIPLE CHOICE QUESTIONS
1. Option pricing methods in evaluating Information Technology investments include all EXCEPT A. B. C. D. E. Making ICT Investments without expectation of immediate payback Taking action that creates opportunity for later operational ICT projects Considering the opportunities in the option underlying asset Choosing among various ICT investments and rejecting non-relevant ICT programs Designing ICT prototyping that maximizes the value of an application development project.
2. Software assets include all EXCEPT A. B. C. D. E. Enterprise systems software Middle ware Internally written enterprise applications Laptop computers Software licensing agreements.
3. A rational decision making process will operate where the following assumptions subsist EXCEPT A. B. C. D. E. The existence of perfect information Clearly defined problems dampened by an ambiguous system Clearly identified criteria that could be objectively weighted Existence of clear goals and preferences which are stable over time Existence of a unique chance, the alternative that will yield the maximum pay-off.
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4. Companies embark on training and development programmes for the following reasons, EXCEPT A. B. C. D. E. Increased productivity Reduced employee turnover Decreasing need for supervision Reducing employee turnover Creation of a pool of readily available replacement for personnel who may leave.
5. The immediate priorities of a checklist of investigation in a case of fraud case include all EXCEPT ONE of the following: A. B. C. D. E. Securing the assets Prevention of further fraud Curtailing authorization Initiating possible civil/criminal proceedings Beginning interviews of employees suspected of involvement immediately.
6. The marketing mix describes the specific combination of marketing elements used to achieve the marketing objectives and satisfy the target market. It consists of the following major factors EXCEPT A. B. C. D. E. Product Distribution Customers taste Promotion Price .
7. ONE of the following is NOT the objective of management accounting information A. B. C. D. E. To analyse the profitability of the business To prepare accurate financial statements useful for management decision making To put a value on stocks To plan for the future To control the business.
8. The major bases of cost classification are all but ONE of the following: A. Reaction to changes in activity
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B. C. D. E. Responsibility by Plant, Department, Process or Cost Centre The magnitude of the expenditure in Naira value Natural characteristics Economic characteristics.
9. When some people pretend to be someone who they are not or to be doing something they cannot do or selling something they dont possess, they are committing: A. Fraud by failing to disclose information B. Fraud by impersonation C. Fraud by false representation D. Fraud by abuse of position E. Fraud by duress .
10. Jide, an attendant at Mr. Small Restaurant, can serve 30 customers in one hour while customers arrive at the eating joint at the rate of 40 people per hour. What is the traffic intensity of the eatery? A. B. C. D. E. 0.75 1.42 0.25 1.75 1.25
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PART II
1. 2.
SHORT-ANSWER QUESTIONS
(30 MARKS)
A system designed to compare projected (forecast) results with future objectives so that corrective action may be taken in advance is described as The Fraud Risk Triangle proposes that risk is predicated on the existence of three factors, these are , and VAT incurred by a business on purchased goods and services is known as The strategies of cost leadership and differentiation are ways in which a firm can find, get and keep its clients. What are these strategies called? A flexible budget is one which by recognizing different cost behavior patterns, is designed to change as changes. What is the systematic and detailed comparison of the performance of different companies generally operating in a common industry called? The benefits produced by an investment which are immediately obvious and measurable are known as . The joining together of a number of personal computers or other devices in a network that operates within a limited geographical area is referred to as .. Research engineering is the decomposition and analysis of competitors products in order to determine how they are made .. and the way in which future development may proceed. An increase in value which would be created by having available one additional unit of a limiting resource at its original cost is known as . The measure of the firms ability to meet its current obligation is measured by The profits of oil marketing companies are assessed under Act.
3.
4. 5. 6. 7. 8.
9.
10. 11. 12.
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13. 14. 15. 16. Undercover deals in the capital market are known as .. A mode of offer of existing shares by a divestor to the public is known as . A marketing strategy by which a firm observes what others are doing to improve its own product is known as . A method of budgeting which requires each cost element to be specifically justified, as though the activities to which the budget relates were being undertaken for the first time is . Complete the following Claxton (1998) decision process model
17.
Real world
Opinions
Facts
External filter
Interior filter 18. 19. Total ICT costs involve the following: .. costs, software cost and . costs. Plant, equipment, fixtures and fittings which are subjects of financial leases are dealt with in the financial statements by debiting Equipment on Lease and crediting . A concept in law in which someone can be deemed to have, or to be able to infer, knowledge from the facts available is referred to as .
20.
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21. In government accounting system, the memorandum accounts book used for monitoring government expenditure to ensure that there is no extra-budgetary spending is known as Gains from disposal of stocks and shares, gains by ecclesiastical, charitable or educational institutions are . from Capital Gains Tax. Ethics is the behaviour or conduct in business transactions that are considered to be right or , good or . A situation where a master is made responsible for the torts or wrongs committed by his servant while engaged in the course of his employment is called What is the most unique and common characteristic of nearly all the techniques of operations research? The term that best describes moving away company business from identifiable risk is . The aim of .. is to find out about customers wants and where they want them. A chart on which activities and their durations are represented by lines drawn to a time scale is known as Job Analysis is a systematic . to collect all information pertinent to each task performed by an employee. Geographical spread is one of the methods of market ..
22. 23. 24.
25. 26. 27. 28. 29. 30.
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SECTION B - ATTEMPT ALL QUESTIONS QUESTION 1
From the extract of relevant data from the books of Acenco Tea Plc with respect to Life Rich Beverage, calculate: (a) (b) (c) (d) Standard cost per batch. (4 Marks) Standard cost per tin. (2 Marks) Describe how Just-In-time system operates to achieve optimum inventory. (4 Marks) Calculate the Economic Order Quantity of product A required. (4 Marks) (Total 14 Marks)
(60 MARKS)
QUESTION 2
(a) (b) (c) Describe tele-conferencing System and how it operates. (5 Marks)
Which of the costs of investment on Life Rich Beverages qualifies for capital allowances? (4 Marks) Calculate the capital allowances due on the investment for Life Rich Beverage. (3 Marks) (Total 12 Marks) Bamidele returned to claim the position of Chief Executive of Acenco Tea Plc after the acquisition by Brisko Plc and created management problems. Comment on the development with reference to Companies and Allied Matters Act 2004. (6Marks) How will Brisko Plc treat Acenco Tea Plc in its books? (2 Marks) (Total 8 Marks) (5 Marks)
QUESTION 3
(a)
(b)
QUESTION 4
(a) (b) Calculate acquisition value of Distribution Network Plc.
Calculate the Net Value of the public share offer by Acenco Tea Plc. (4 Marks) (Total 9 Marks)
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QUESTION 5
Determine whether the export sales of Life Rich Beverage to subsidiary companies was profitable. (6 Marks)
QUESTION 6
(a) (b) Describe the type of organization structure of Acenco Tea Plc. (5 Marks)
Advise the Director (Operations), whether ZK107 machine should be purchased to replace ZK105 machine. (6 Marks) (Total 11 Marks)
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SOLUTIONS TO SECTION A MULTIPLE CHOICE QUESTIONS
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. C D B B C C C C B A
TUTORIAL 10. Service rate Arrival rate = 30/40 = 0.75 = Traffic Intensity
EXAMINERS REPORT
The ten questions test IT, SFM, Auditing, Business Environment, Management Accounting, law and operations research. The performance of candidates was average.
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SHORT-ANSWER QUESTIONS
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. Business Plan. Will, Opportunity, Escape. Input VAT Marketing Strategies Variable Cost Inter firm comparison Returns Local Area Network (LAN) Operational or functional Marginal Revenue (MR) Short term solvency/Liquidity/ Acid test Companies Income Tax Insider trading Offer for sale Benchmarking Zero-Based Decision process Hardware, Maintenance
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19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. Lessors account Ratio decidendi Vote book Exempted Wrong, Bad Vicarious liability Mathematical model/modeling Hedging Marketing research Critical path analysis/Critical path Study Segmentation or identification.
EXAMINERS REPORT
The thirty questions test all the courses in the professional examinations syllabus of the Institute. The performance of the candidates was average.
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(a) STANDARD COST OF PRODUCTION Direct Materials Direct Labour Overheads: Indirect Labour Electricity Maintenance/Repairs Supplies Supervision Depreciation Total Standard Cost of Production Standard Cost Per batch 1,061,200 400 (b) N 700,000 98,000 48,000 25,000 16,200 4,000 40,000 130,000 =
263,200 1,061,200 N2,653
Standard cost of production per tin = 1,061,200 800,000 = N1.327 N1.33 JIT System The goals of a Just-In-Time system are to eliminate non-value added practices, continuously improve efficiency, and reduce costs while increasing quality. A characteristic of the Just-In-Time system is its continuous focus on eliminating all waste from a system e.g waste of assets, excessive inventory, waste of time and waste of materials. A complete JIT system begins with production, includes deliveries to a companys production facilities, continues through the manufacturing plant and even includes the types of transactions processed by the accounting system.
(c)
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A company must ensure that it receives products/spare parts/materials from its suppliers on the exact date and at the exact time when they are needed. For this reason, the purchasing staff must investigate and evaluate every supplier, eliminate those which could not keep up with the delivery dates. In addition, deliveries should be sent straight to the production floor for immediate use in manufacturing products, so that there is no time to inspect incoming parts for defects. As soon as suppliers certify their delivery and quality, the company must install system, which may be as simple as a fax machine or as advanced as an electronic data interchange system or linked computer system through what tests are to be sent to the company. Drivers then bring small deliveries of product to the company possibly going to the extreme of dropping them off at the specific machines that will use them first. Next, the set up times for concerns machinery is shortened. (d) Economic Order Quantity (EOQ) 2QO = where C Q O C = = = estimated annual quantity used in units (can be found in the annual purchases budget) ordering cost estimated cost to carry one unit in stock for one year. Economic Order Quantity (EOQ) is an estimate of the number of units per order that will be the least costly and provide the optimal balance between the costs of ordering and the costs of carrying inventory Working I EOQ =
2(7,200,000)1250 250
= 8,485 Units
20% of N1.250 N250
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EXAMINERS REPORT
The question tests candidates Knowledge of Standard Cost, Just-In-Time system and Economic Order Quantity in Cost and Management Accounting. The candidates understanding of l (a) and I (b) of the question was very poor but they demonstrated good knowledge and understanding of part I (c) and I (d). The major pitfall was the use of administrative overhead cost in calculating standard cost per batch and standard cost per tin. Candidates are advised to improve their knowledge of costing system and the difference between direct, indirect, marginal and absorption costing.
QUESTION 2
Teleconferencing is a system of video conferencing that uses a restricted band of frequencies and allows participants to be connected by telephone lines. Teleconferencing system also makes use of television that uses point-to-multipoint technology that is broadcast to any use within the range of the transmitter. It is also a system in which television picture links two physically separated parties, is a convenient way for business people to meet and communicate without the expense or inconvenience of travel. Video cameras (web cam) on computers now allow personal computer users to teleconference over the internet. Video phones, which use tiny video cameras and rely on satellite technology, can also send private or public television images and have been used in news reporting in remote locations. (b) The of investment on life Rich Beverages which qualifies for Capital Allowances is Plant and machinery (c) Computation of Capital Allowance Initial allowance Annual allowance Investment allowance Cost of Plant and Machinery -
N 100,000,000 50% 25% 10%
- N100,000,000
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Cost Initial allowance @ 50% (W.I) Annual allowance (W.II) Tax Written Down Value Investment allowance 10% of Cost = 10/100 x 100,000,000 1 Note: Investment allowance is not taken into consideration in determining the Tax Written Down Value of Qualifying Capital Expenditure Summary of Capital allowance Initial allowance Annual allowance Investment allowance I Workings Initial allowance: 50 x 100,000,000 100 1 Annual allowance: Cost Initial allowance Annual allowance = N 50,000,000 12,500,000 N 100,000,000 (62,500,000) 37,500,000 10,000,000
N 50,000,000 12,500,000 10,000,000 72,500,000 N50,000,000
II
N 100,000,000 (50,000,000) 50,000,000
= 25% p.a = 100 = 4 25 50,000,000 = 12,5000,000 p.a 4
EXAMINERS REPORT
The question tests candidates knowledge of Information Technology, especially conferencing system and computation of capital allowances in taxation.
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Candidates performance was above average. There was a mix-up. The pitfall was the inability of candidates to identify investment cost qualifying for capital allowances and ascertaining the basis of computation of capital allowances and applicable rates of each category of qualifying capital expenditure. Candidates are advised to study and understand the basis of capital allowances.
QUESTION 3
(a) The seeming management problem that could have been created was resolved amicably between Bamidele and Fehinbu. However, having consideration for Bamideles majority holding in the shares of Acenco Tea Limited, he is right to reclaim the Chief Executive position in line with Section 263(s) of CAMA 2004. (b) Associated Company Brisko Plc will trust Acenco Plc as an associated company since its owns only 49% of Acenco Tea Plcs share capital. The profits attributable to Brisko Plc will be consolidated in the Companys Group accounts.
EXAMINERS REPORT
The question tests the candidates understanding of CAMA LFN 2004 on appointment of directors. Many candidates approached the question from the point of ethical issues involved and/or corporate politics which was not required by the examiner. Additionally, candidates could not interprete the issues involved. Candidates performance was below average. Candidates are advised to study widely for future examinations.
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QUESTION 4
(a) Acquisition Value of Distribution Network Plc i Fixed Assets Current Assets: Stocks Debtors Bank
N 4,225,000 2,500,000 1,500,000 8,225,000
N 45,645,000
Less: Current Liabilities: Creditors Taxation Dividend
3,592,000 855,000 1,500,000 5,947,000
Price per share i.e 8,000,000 ordinary shares
2,278,000 47,923,000 N47,923,000 8,000,000 N5.99
= =
(b) Net value of the public shares offered by Acenco Tea Plc. The total issue cost is N8 per share x 10m = 80,000,000 Issue cost was agreed at 5% of the total cost = 0.05 x 80,000,000 = N4,000,000
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The Net value of the offer is: Total Issue Value Less Issuing Cost N 80,000,000 4,000,000 76,000,000
The Net Value of the Public Shares offered by Acenco Tea Plc is N76,000,000
EXAMINERS REPORT
This question tests candidates knowledge of mergers and acquisition as well as the valuation of acquisition cost of new companies and the valuation of shares issued. The candidates performance was very poor as there was lack of understanding of the question by the majority of the candidates. Candidates were able to identify the data but failed to use the data appropriately. Candidates are advised to read widely to improve their knowledge of basic accounting and financial management concepts.
QUESTION 5
a. The amount transferred in appendix II should read amount transferable while amount not transferred shared read amount transferred, and the last column is assured loss on transfer which be treated as loss to HQ. Conversion to Naira Amount transferred to HQ: (5,766,923 cfa x 260) (8,696,154 x 260) (761,600,000 cedi x 5) Total revenue transferred to HQ Nigeria BENIN N000 1,499,400 2,261,000 1,499,400 2,261,000 3,808,000 3,808,000 TOGO N000 GHANA N000 Total N000 1,499,400 2,261,000 3,808,000 7,568,400
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b. Standard cost of production of life Rich Beverage Total as per appendix v Less: Division admin. expenses Group price/QH Number of tins = 800,000 tins Standard cost for tin = = c. Actual Amount transferred (2) above Less cost of tins transferred (6.180 tons x 2000 tons/500gm) (12,360,000 x standard cost per tin) (12,360,000 x 1.33) Loss N 25,000 35,000 N 1,121,200 60,000 1,061,200 N 1,061,200 800,000 N1.33
N000 7,568,400
(16,438,800) (8,870,400)
In view of the above, export sales of life Rich Beverage to subsidiary companies was not profitable. EXAMINERS REPORT The question tests candidates knowledge of the financial relationship between parents and subsidiary companies. As simple as the question is, over 90% of the candidates did not understand it. The commonest pitfall was the lack of understanding of the concept and appropriate technique to use in answering the question. Candidates are advised to pay more attention to their studies.
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QUESTION 6
(a) (i) (ii) Organisation structure of Acenco Tea Plc is described as follows: A public limited liability company capable of being listed on the stock exchange. It is a Holding Company which will have: The Group Managing Director reporting to the Board of Directors Chief Executives of subsidiary companies reporting to the Group Managing Director. Line Managers reporting to the Chief Executives of subsidiary companies.
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ACENCO TEA PLC
Board of Directors Group Managing Director
Chief Executive Acenco Tea (Togo)
Chief Executive Acenco Tea (Benin)
Chief Executive Acenco Tea (Ghana)
Sales Manager
Financial Accountant
Manager
Manager
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b.
PURCHASE OF ZK107 MACHINE Year Cost Factor 0 3,850,000 1.000 1 1,050,000 0.8333 2 1,050,000 0.6944 3 1,050,000 0.5787 4 1,050,000 0.4823 5 1,050,000 0.4019 6 1,050,000 0.3349 7 1,050,000 0.2791 8 1,050,000 0.2326 9 1,050,000 0.1938 10 1,050,000 0.1615 NPV PV -3,850,000 874,965 729,120 607.635 506,415 421.995 351,645 293,055 244,230 203,490 169,575 N552,125 N - 3,850,000 4,402,125
552,125
OR Initial cost Savings - 10 years
= (1,050,000 x 4.1925)
NPV
The machine, 2K107 should be purchased.
EXAMINERS REPORT
The question tests candidates knowledge of organisational structure and replacement theory. Many of the candidates criticised the organizational structure instead of describing it as required by the question. The candidates performance was below average. Candidates are advised to study widely on other subjects which are linkages especially management concepts.
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

MAY 2010 PROFESSIONAL EXAMINATION II & MDCS

Question Papers Suggested Solutions Plus Examiners Reports

PROFESSIONAL EXAMINATION II MAY 2010

SUBJECT FINANCIAL REPORTING AND ETHICS

STRATEGIC FINANCIAL MANAGEMENT ADVANCED TAXATION MULTI-DISCIPLINARY CASE STUDY

33-63 64-96 97-148

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

Ethics is also referred to as A. Psychological Ethics B. Moral Ethics

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

MULTIPLE CHOICE QUESTIONS

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

(ii) (iii) (iv)

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

69,000 1,380 20,700 = 327k

20,700 5,175 25,875 69,000 1,380 25,875 = 261k

EPS = PAT Pref Div x 100 No. of shares

69,000 1,380 22,648 = 299k

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

SECTION A: Attempt All Questions PART I

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

14. 15. 16. 17. 18. 19.

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010

PROFESSIONAL EXAMINATION II MAY 2010