2011+Accounting+Standards+In+Nigeria.doc

ACCOUNTING STANDARDS IN NIGERIA

ACCOUNTING STANDARDS AND OTHER REGULATIONS

TUTORIAL NOTESIntroductionThe objective of most academic research is to establish principles, theories or laws which make general statements about the detailed subject matter under investigation. The principles of magnetism in physics and the laws of demand and supply in economics are good examples. These concise general statements may be applied to a wide range of practical problems and changing circumstances.

Accounting itself is a practical activity and the purpose of accounting theory is to examine the assumptions and ways of treatment which lie behind current accounting practice. Accounting theory seeks to make general statements about basic accounting concepts which are widely accepted by practitioners at a given time. The principles which constitute the “general rules” for financial reporting are termed “Generally Accepted Accounting Practice (G.A.A.P.)”. Accounting principles are also referred to as Standards, Postulates. Concepts, etc.

Uses and Purpose of Accounting InformationThe purpose of Financial Accounting systems is to provide information in qualitative form for both internal and external users of the accounts. It is therefore of paramount importance to known the information that is needed and to what uses the information will be put.

The extensive uses to which the information is put have necessitated the need for regulating its content and format. Therefore, in preparation of company accounts, there are a number of legal and pseudo-legal requirements. The legal requirements are contained in the Company and Allied Matters Act (1990 as amended to date) and specialized acts such as Banks and Other Financial Institutions Act, Insurance Act, etc. These Acts cover the general precautions as to the form of accounts, including the Balance Sheet, Profit and Loss Accounts, and other supplementary statements such as the directors’, chairman’s and auditors; reports.

Evolusion of Accounting StandardsApart from the Acts mentioned above, there are also regulatory statements known as accounting standards. These are statements and pronouncements made by accounting bodies of each country in relation to publish accounts.

Accounting Standards are developed to ensure high degree of standardization in published financial statements thereby giving more meaning and relevance to its contents for uniform acceptability.

The objectives of accounting standards therefore are:1) To promote uniformity of accounting practices on important (material) issues 2) To promote greater disclosure of information in financial statements3) To raise and uphold the standard of accounting reports4) To promote the disclosure of deviations from normal accounting practices5) To intensify the concepts which are generally accepted on which financial statements

prepared are based.Examples of Accounting StandardsExamples of Accounting Standards include (but not limited to):

Rev E. B. ALAGBE FCA (September2011) 1


1) The Statement of Accounting Standards (SAS) so far issued by the Nigerian Accounting Standards Board (NASB)

2) The Statement of Standard Accounting Practice (SSAP) so far issued by the British Accounting Bodies

3) The Financial Accounting Standards (FAS) so far issued by the American Accounting Standards Board (AASB)

4) The International Accounting Standards (IAS) so far issued by the International Accounting Standards Committee (IASC)

Further DevelopmentsAs mentioned earlier, accounting standards are pronouncements issued by accounting bodies to indicate the best way of treating specific items in specific circumstances. They are a distillation of many years of diverse treatment of items, and as such, an attempt to indicate the current state of legislation and regulations.

When an item is treated in accordance with the recommendation of accounting standards, it is stated as having been properly treated. Accounting standards, therefore act as a lamp post in reflecting to the part of accounting practitioners, suggesting solutions on theory issues and in general, putting minds of accountants at rest that their treatment of theses items are in order.

THE STATEMENT OF ACCOUNTING STANDARD (SAS)These statements are issued by the Nigerian Accounting Standard Board (NASB) for use by all those who are interested in published financial statement either as preparers or users

The NASB which was inaugurated on 9th September 1982 has the following members:1) Central Bank of Nigeria (CBN)2) Corporate Affairs Commission (CAC)3) Federal Board of Inland Revenue (FBIR)4) Federal Ministry of Commerce (FMT)5) Federal Ministry of Finance (FMF)6) Nigerian Accounting Teachers Association(NATA)7) Nigerian Association Of Chambers Of Commerce, Industry, Mines And Agriculture

(NACCIMA)8) Nigerian Deposit Insurance Corporation (NDIC)9) Nigerian Bankers Employers’ Association10) The Chartered Institute of Bankers (CIBN)11) Nigerian Stock Exchange(NSE)12) Securities And Exchange Commission(SEC )13) The Institute of Charted Accountants of Nigeria(ICAN)14) Association of National Accountants of Nigeria (ANAN)15) Auditor-General of the Federation16) Accountant-General of the Federation17) Chartered Insitute of Taxation of Ngeria

Objectives of NASB (The Board) includea) To formulate and publish, in the public interest, accounting standards to be observed in

the preparation of financial statements and thereby promote world wide acceptance and observance.

b) To review from time to time the standards developed by the Board in the light of changes in social, economic and political environment.



The Board has so far issued about 23 standards for accounting preparation and presentations in Nigeria

INTERNATIONAL ACCOUNTING STANDARDS (IAS)

The IAS came into existence on 29th June 1973 as a result of agreement by accounting bodies in Australia, Canada, France, Germany, Japan, Mexico, Netherlands, United Kingdom, Ireland and United States of America. A reviewed agreement and constitution was signed in November 1982. The businesses of the International Accounting Standards Committee (IASC) is conducted by a board comprising representatives of countries and up to 4 organizations having interest in financial reporting. ICAN joined IAS in 1976.

The objectives of the IAS are to formulate and publish, in the public interest, accounting standards to be observed in the presentation of financial statement and to promote their world wide acceptance and observance and to work generally for the improvement and harmonization of regulations of accounting standards and procedures relating to the presentation of financial statement.

COMPLIANCE WITH ACCOUNTING STANDARDSAccounting standards are not expected to be comprehensive accounting codes of rigid rules of conduct but are intended to ensure conformity to certain principles; and although accountants are obliged to ensure that accounts with which they are associated conform with them, it is realized that circumstance may arise where standards must be modified and departure (deviations) disclosed.

THE DEVELOPMENT OF NIGERIAN ACCOUNTING STANDARDS

The Nigerian Accounting Standard Board (NASB) was formally inaugurated on September 9, 1982 after consultations initiated by the Institute of Charted Accountant of Nigeria (ICAN). The Board (NASB) consisted of 13 members drawn from not only accountants in practices but also from public sector, commerce, users of accounts, bankers, stock exchange and the academia. The composition of membership was as follows

Central Bank of Nigeria(CBN) 2 Federal Ministry of finance (FMT) 2 Nigerian Accounting Teachers Association(NATA) 2 Nigerian Association of Chambers of Commerce Industry Mines

and Agriculture (NACCIMA 1 Nigerian Bankers Association (NBA) 1 Nigerian Stock Exchange (NSE) 1 Securities and Exchange Commission (SEC) 1 The Institute of Chartered Accountant of Nigeria (ICAN) 4

Under its constitution, the business of the NASB is conducted by a council whose membership is presently made of representatives of bodies and associations identified above and others recently appointed by government.

Although inaugurated in 1982, the Board was formally established by the National Assembly vide the Nigerian Accounting Standards Board Act, 2003(signed on July 10, 2003)



FUNCTIONS OF THE BOARDThe functions of the NASB, among others, are to

1. Develop and publish Statements of Accounting Standards (SAS) to be observed in the preparation of the Financial statements

2. Promote the general acceptance and adoption of such standards by prepares (company accountants, directors and external auditors) and users of the financial statements

3. Promote and enforce compliance with the standards developed or reviewed by the Board

4. Review from time to time, the accounting standards developed, in line with the prevalent social economic and political environment

5. Receive, from time to time, notices of non-compliance of the accounts with the standards from the prepares (with the lower) user, or auditor

6. Receive copies of qualified audit reports together with detailed explanations for such qualifications from auditors, within a period of 60 days from the date of such qualification

7. The council of NASB, as earlier stated, responsible for issuing statement of accounting standards (SAS) after going through the process stipulated in the NASB constitution.

THE SCOPE OF SASEach statement of accounting standards will apply to all financial account of material significant items. A standard may however specify the scope of its application

Standards issued by NASB do not override the laws of Federal Republic of Nigeria or regulations and orders issued under such laws.

SAS may not apply to accounts prepared for the use of management

Although there are areas where the contents of SAS overlap with the provision of the company law, accounting standards are detailed working regulations within the frame work of government legislation and they cover areas where the related law is silent. They have no direct legal effect and are not intended to override exemptions from disclosures requirement which are enjoyed by certain classes of company under company law. However they are rules of professional conducts which ICAN regards as binding on its members.

To enforce SAS the ICAN requires its members to: Disclose and explain in the accounts any significant departures from the provision of SAS

and Disclose in the accounts the financial effect of any such departures

EXPOSURE DRAFT (ED)

Prior to the issuing of any standards a great deal of preparatory work is required which would culminate in the publication of an exposure draft

Copies of the exposure draft are sent to members and those with special interest in the topic.



After full and proper consideration and consultation, if it is seen to be desirable, an accounting standard on the topic may be issued. In Nigeria the SAS has precedence over foreign standard including International Accounting Standards (IAS). Each SAS however indicates the level of compliances with the relevant IAS.

Where the draft has been adequately exposed, and even a public hearing has been held, the council may decide to issue a discussion paper in place of standard order for example to promote further discussion and give the general public more time to be familiar with the implications of the proposed standard. A simple majority of the council is required to issue a discussion paper.

MERITS AND DEMERITS OF SASMERITS.

They reduce or eliminate confusing variations in the methods used to prepare accounts They provide a focal point for debate and discussion about accounting practice They oblige companies to disclose the accounting bases used in the preparation of

accounts. They are less rigid alternatives to enforcing conformity by means of legislation They have obliged companies to disclose more accounting information than they would

otherwise have done if SAS did not exist.

DEMERITS A set of rules which gives back up to one method of preparing accounts might be

inappropriate in some circumstances. For example IAS on depreciating was inappropriate for investment properties.

Standard may be subject to lobbying or government pressure They are not based on conceptual framework of accounting Although the NASB invites comments and discussion users groups are not directly

involved in the creation of SAS There may be a trend towards rigidity and away from flexibility in appling rules.

PUBLISHED STATEMENTS OF ACCOUNTING STANDARDS The NASB as published the following SAS as at dateSAS 1 - Disclosure Of Accounting PoliciesSAS 2 - Information To Be Disclosed In Financial StatementsSAS 3 - Accounting For Property, Plant And EquipmentSAS 4 - On StocksSAS 5 - Construction ContractsSAS 6 - On Extraordinary Items & Prior Year AdjustmentsSAS 7 - On Foreign Currency Conversions & TranslationsSAS 8 - Accounting For Employees' Retirement BenefitsSAS 9 - Accounting For DepreciationSAS 10 - Accounting By Banks And Non-Bank Financial Institutions (Part I) SAS 11 - On LeasesSAS 12 - Accounting For Deferred TaxesSAS 13 - Accounting For InvestmentsSAS 14 - Accounting In The Petroleum Industry:

Upstream ActivitiesSAS 15 - Accounting By Banks And Non-Bank Financial Institutions: (Part Ii)



SAS 16 - Accounting For Insurance Business SAS 17 - Accounting In The Petroleum Industry: Down Stream ActivitiesSAS 18 - Statement Of Cash FlowsSAS 19 - Accounting For TaxesSAS 20 - On Abridged Financial StatementsSAS 21 - On Earnings Per ShareSAS 22 - On Research And Development CostsSAS 23 - On Provisions, Contingent Liabilities And Contingent Assets SAS 24- Segment Reporting SAS 25- Telecommunications ActivitiesSAS 26- Business CombinationsSAS 27- Consolidated And Separate Financial StatementsSAS 28- Investment In Associates SAS 29- Interest In Joint VenturesSAS 30- Interim Financial ReportingSAS 31- Accounting for Intangible Assets

Summary Notes on applicable accounting standards

SAS 1 – DISCLOSURE OF ACCOUNTING POLICIES (ISSUED NOV. 1984)The purpose of this statement is to assist any reader in the understanding and interpretation of financial statements and the information disclosed thereiFinancial statements are based on conventions derived from experience. The purpose of this statement is, however, not to evolve a basic theory of accounting but to identify some of these concepts which are generally accepted.

Accounting MethodThe statements defines Accounting method as the medium through which accounting concepts are applied to financial transactions and to the preparation of financial statements.

Accounting Concepts Accounting concepts are recognized by the standard as the basic pillars upon which the preparation and presentation of financial information are hoisted, they are: Entity, Going Concern, Periodicity, Matching, Consistency, and Historical Cost Concepts.

Accounting BasisThese are the totality of methods adopted by an enterprise for applyingfundamental accounting concepts to its financial transactions. There twodistinctive accounting basis namely

(i) Accrual Basis(ii) Cash Basis

Acconting PoliciesThese are those bases, rules, principles, conventions and procedures consistently adopted in preparing and presenting financial statements

Acconting PrinciplesAccounting principles usually adopted in applying the accounting concepts are: Substance over form, Objectivity, Fairness, Maternity and Prudence.



SAS 1 has so far complied with the IAS 1.Ref GAAP Differences

IAS 1 Vs. SAS 1 & 2 The presentation requirement of financial statements under IFRS is very different from that of the Nigerian GAAP. IFRS treats presentation of financial statements under IAS1, the Nigerian GAAP treats this under SAS1 (Disclosure of Accounting Policies) and SAS2 (Information to be disclosed in financial statements).

Under the local GAAP, accounting policies are to be disclosed as part of the financial statements rather than as notes to the financial statements (SAS1 Chapter 16).

A complete set of financial statement under the Nigerian GAAP includes the following (SAS2)

Balance sheet

Profit and loss account

Statement of cash flows

There is no specific presentation of accounting policies and limited disclosures

Notes to the accounts

Value added statement

Five year financial summary

Under IFRS (IAS1 Presentation of Financial statements), accounting policies are disclosed by way of notes to the financial statements and according to IAS1 (Chapter 14);An entity whose financial statements comply with IFRSs shall make an explicit and unreserved statement of such compliance in the notes. Financial statements shall not be described as complying with IFRSs unless they comply with all the requirements of IFRSs.

A complete set of financial statement under IAS1 (Presentation of Financial Statements) includes ;

Statement of financial position

Statement of comprehensive income

Statement of changes in equity

Statement of cash flows



Notes, comprising of accounting policies and other explanatory information

Under IAS a minimum of one year comparative financial information is required

IFRS encourages disclosure of relevant information that would enable users of financial statements make decisions relating to their interest in a financial institution/company

IFRS does not allow exceptional and extraordinary items

SAS 2 – INFORMATION TO BE DISCLOSED IN FINANCIAL STATEMENT This standard requires that financial statements should provide quantitative and qualitative information to aid users in making informed economic decisions.

DEFINITION OF TERMSAccounting Information – refers to data that are found in financial statements.

Accounting Period – refers to the time span, usually one year, covered by Financial Statement.

Finanacial Staement – Consists of Balance Sheet, Profit and Loss Account or Income Statement, Notes to the Account, Cash Plow Statement, Value Added Statement, Historical Financial Summary, Directors Report, Auditors’ Report etc.

Long-Term – relates to a period in excess of 12 months.

General Disclosure

The Financial Statement of an enterprise should state(a) The name of an enterprise(b) The period of time covered(c) A brief description of its activities(d) Its legal form and(e) Its relationship with its significant local and overseas suppliers including

immediate and ultimate parent, associated or affiliated company.

SAS 2 is in harmony with IAS 1 Presentation of financial statements – see note on SAS 1 above.

SAS 3 – ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT

This statement deals with accounting for property, plant and equipment under the historical cost concept and the revaluation of specific items of property, plant and equipment.

DEFINTIONS



Property, Plant and Equipment – These are tangible assets that:(a) Have been acquired or constructed and held for use in the production or supply

of goods and services and may include those held for maintenance or repair of such assets and

(b) Are not intended for sale in the ordinary course of business.

Fair Value – Is the amount for which an asset could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm’s length transaction.Net-Book Value – Is the amount (historical cost or valuation) at which an asset is carried in the books less related accumulated depreciation.Useful Life – (of an asset) is the shorter of

(a) The predetermined physical life and (b) The economic life duration which it could be profitably employed in the

operations of the enterprise.Recoverable Amount – is that part of the NBV of an item of property, plant and equipment that can be recovered in the future through depreciation of the item including its net realizable value on disposal.

SAS 3 is in compliance with IAS 16.Ref GAAP Differences

SAS 3 vs. IAS 16IFRS Provision Under IFRS (IAS 16), an entity under the general recognition principle evaluates all property, plant and equipment costs at the time they are incurred. Those costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service an item.

SAS provisionWhile the provision of SAS 3 (p.32 requires that the cost of self-constructed item of property, plant and equipment should comprise of the cost that relate directly and other expenses attributable to the construction of the item. Cost of inefficiencies in construction of the item should not form part of this cost.

IAS 16 (P.16c) also takes recognition of the cost of dismantlement, removal or restoration, SAS 3 does not have this within its scope.

SAS 4 – ON STOCKS This statement deals with the valuation and presentation of items of stocks including livestock and agricultural produce. Stocks include those finished goods and livestock awaiting sale, work-in-progress, raw materials and suppliers to be consumed in the production of goods or the rendering of services.

Livestock – two major problems are associated with the valuation of livestock, namely:(a) Determining the actual number and their existence, especially animals that

graze, and(b) Identifying the various stages of their development.

The following three approaches to valuation of livestock are allowed by the standard.



(a) Cost Approach (b) Net Realizable Value (c) Appraisal Value

Systems of Stock-TakingTwo systems of stock taking in use are

(i) Perpetual, and(ii) Periodic

Valuation of StocksGenerally, stocks should be valued at the lower of cost or net realizable value. The following methods are recommended by the standard.

(a) First In First Out (FIFO)(b) Average Cost, where it consistently approximates historical cost.(c) Specific Identification(d) Standard cost with the adjustment for cost variances, and(e) The adjusted selling price (Retail Inventory Method).

The following stock valuation methods should not be used:(a) Latest Purchase Price (b) Last In First Out (LIFO) (c) Base Stock

SAS 4 is in harmony with IAS 2.

Fundamental Principles in IAS 2: Inventories are required to be stated at the lower of cost and

net realizable value (NRV).

Measurement of Inventories

Cost should include all:

1. costs of purchase (including taxes, transport, and handling) net of trade discounts

received

2. costs of conversion (including fixed and variable manufacturing overheads) and

3. other costs incurred in bringing the inventories to their present location and condition

Inventory cost should not include:

1. abnormal waste

2. storage costs

3. administrative overheads unrelated to production

4. selling costs

5. foreign exchange differences arising directly on the recent acquisition of inventories

invoiced in a foreign currency

6. interest cost when inventories are purchased with deferred settlement terms.



The standard cost and retail methods may be used for the measurement of cost, provided that the

results approximate actual cost.

For inventory items that are not interchangeable, specific costs are attributed to the specific

individual items of inventory. [IAS 2.23]

For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost formulas.

[IAS 2.25] The LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no

longer allowed.

The same cost formula should be used for all inventories with similar characteristics as to their

nature and use to the enterprise. For groups of inventories that have different characteristics,

different cost formulas may be justified. [IAS 2.25]

Write-Down to Net Realizable Value

NRV is the estimated selling price in the ordinary course of business, less the estimated cost of

completion and the estimated costs necessary to make the sale. [IAS 2.6] Any write-down to

NRV should be recognised as an expense in the period in which the write-down occurs. Any

reversal should be recognised in the income statement in the period in which the reversal occurs.

[IAS 2.34]

Expense Recognition

IAS 18, Revenue, addresses revenue recognition for the sale of goods. When inventories are sold

and revenue is recognised, the carrying amount of those inventories is recognised as an expense

(often called cost-of-goods-sold). Any write-down to NRV and any inventory losses are also

recognised as an expense when they occur. [IAS 2.34]

Disclosure

Required disclosures:

1. Accounting policy for inventories.

2. Carrying amount, generally classified as merchandise, supplies, materials, work in

progress, and finished goods. The classifications depend on what is appropriate for the

enterprise.

3. Carrying amount of any inventories carried at fair value less costs to sell.


http://www.iasplus.com/standard/ias18.htm


4. Amount of any write-down of inventories recognised as an expense in the period.

5. Amount of any reversal of a writedown to NRV and the circumstances that led to such

reversal.

6. Carrying amount of inventories pledged as security for liabilities.

Cost of inventories recognized as expense (cost of goods sold). IAS 2 acknowledges that some enterprises classify income statement expenses by nature (materials, labour, and so on) rather than by function (cost of goods sold, selling expense, and so on). Accordingly, as an alternative to disclosing cost of goods sold expense, IAS 2 allows an enterprise to disclose operating costs recognised during the period by nature of the cost (raw materials and consumables, labour costs, other operating costs) and the amount of the net change in inventories for the period). This is consistent with IAS 1, Presentation of Financial Statements, which allows presentation of expenses by function or nature.

SAS 5 – ON CONSTRUCTION CONTRACTS

The main issues involved in accounting for construction contracts are the timing, measurement and recognition of revenue and the asset created during construction.

Construction contract refers to the execution of building and civil engineering projects, mechanical and electrical engineering installations and other fabrications normally evidenced by an agreement between two or more parties.

In practice, two methods are generally used for accounting for construction contracts, namely:

1. The completed contracts method,

2. And the percentage-of-completion method

Several types of contracts exist including:

(i) fixed sum (lump sum) contract

(ii) Cost-plus a fixed rate contract

(iii) Re-measure contract

(iv) Variance-Price contract

SAS 5 complies significantly with IAS 11

SAS 6 – ON EXTRA-ORDINARY ITEMS AND PRIOR-YEAR ADJUSTMENTS ( AUG. 1986)

The statement is in harmony with IAS 18 and its primary objectives are:0.(a) to examine the issues involved in the determination of operating income in any

given accounting period, and



(b) to prescribe the accounting treatment of extra-ordinary and unusual items and prior year adjustments as well as their appropriate disclosures in financial statements.

DefinitionsExceptional Items – are those that, though normal to the activity of an enterprise, are abnormal as a result of their infrequency of occurrence and size e.g. abnormally high bad debts.Extraordinary Items – are those that occur outside the ordinary activities of an enterprise and are not expected to recur frequently.

Prior -Year Adjustments – are items of revenue and expenditure that were recorded this year but would have been recorded in a prior year or years if all the facts had been known at that time. These do not include adjustments for difference between actual and accounting estimates.

Ordinary Activities – of an enterprise are normal product lines or day-to-day activities.

There are two types of reporting concepts, namely:(i) Current-operating-performance concepts and(ii) All-inclusive concept.

Reporting entities are encouraged to adopt the All-Inclusive concept of reporting.

SAS 6 is in conformity with IAS 10

Provisions of IAS 10

Key Definitions

Event after the reporting period: An event, which could be favourable or unfavourable, that

occurs between the end of the reporting period and the date that the financial statements are

authorised for issue. [IAS 10.3]

Adjusting event: An event after the reporting period that provides further evidence of conditions

that existed at the end of the reporting period, including an event that indicates that the going

concern assumption in relation to the whole or part of the enterprise is not appropriate. [IAS 10.3]

Non-adjusting event: An event after the reporting period that is indicative of a condition that

arose after the end of the reporting period. [IAS 10.3]

Accounting

Adjust financial statements for adjusting events – events after the balance sheet date that

provide further evidence of conditions that existed at the end of the reporting period, including



events that indicate that the going concern assumption in relation to the whole or part of the

enterprise is not appropriate. [IAS 10.8]

Do not adjust for non-adjusting events – events or conditions that arose after the end of

the reporting period. [IAS 10.10]

If an entity declares dividends after the reporting period, the entity shall not recognise

those dividends as a liability at the end of the reporting period. That is a non-adjusting event.

[IAS 10.12]

Going Concern Issues Arising After End of the Reporting Period

An entity shall not prepare its financial statements on a going concern basis if management

determines after the end of the reporting period either that it intends to liquidate the entity or to

cease trading, or that it has no realistic alternative but to do so. [IAS 10.14]

Disclosure

Non-adjusting events should be disclosed if they are of such importance that non-disclosure

would affect the ability of users to make proper evaluations and decisions. The required

disclosure is (a) the nature of the event and (b) an estimate of its financial effect or a statement

that a reasonable estimate of the effect cannot be made. [IAS 10.21]

A company should update disclosures that relate to conditions that existed at the end of the

reporting period to reflect any new information that it receives after the reporting period about

those conditions. [IAS 10.19]

Companies must disclose the date when the financial statements were authorised for issue and who gave that authorisation. If the enterprise's owners or others have the power to amend the financial statements after issuance, the enterprise must disclose that fact. [IAS 10.17]

SAS 7 – ON FOREIGN CURRENCY CONVERSIONS AND TRANSLATIONThis statement is in line with IAS 21 and its primary objectives is to provide uniform accounting treatment for:

(a) foreign exchange transactions and,(b) the translation by a Nigerian enterprise of the financial statements of its

foreign branches, subsidiaries, associates, or joint ventures based in acountry other than Nigeria.

DefinitionsForeign Currency – is any currency other than the domestic, the naira.Conversion – is the process of expressing foreign currency amount in naira by the use of an appropriate rate of exchange.Translation – is the restating of account balances of foreign operations at their equivalents in naira.



Exchange Rate – is the rate at which the currency of a country is exchanged for the currency of another country.

Some exchange rates used in practice are:(i) Official Exchange(ii) Spot Rate(iii) Closing Rate of Exchange(iv) Forward Rate

Translation of the Accounts of Foreign OperationsThe main methods of translating foreign currency account balances are(i) Closing Rate method(ii) Temporal Method, and(iii) Monetary, Non-monetary Method

SAS 7 is in conformity with IAS 21Ref GAAP difference

IAS 21 Vs. SAS 7 Under the Nigerian GAAP

Naira is the reporting currency and unit of measurement. Functional currency is not defined, neither arefactors to be considered in determining functional currency mentioned. Under IFRS (IAS 21, P 9)Functional currency is the currency of the primary economic environment in which an entity operates.The following factors are considered in the determination of the functional currency

a) The currency that; mainly influences sales prices for goods and services

(this is usually the currency in which sales prices for its goods and services are denominated and settled

The currency of the whose competitive forces and regulation mainly determine the sales prices of its goods and services

The currency that mainly influences labor, material and other cost of providing goods and services (this will often be the currency in which such cost are denominated and settled)

Initial recognition of a foreign currency transactionRef GAAP differences

IAS 21 Vs. SAS 7 Under the Nigerian GAAP

Transactions in foreign currencies should be converted into naira at the rates of exchange ruling at the date of the transaction (spot rate).

Under IFRS (IAS 21 P.22)



Same applies except that it allows an entity to use a rate that approximates the actual rate at the date of the transaction for example an average rate for the week or month for all transactions in each foreign currency during a period where the exchange rate does not fluctuate significantly.

Subsequent measurement of foreign currency transactions.Ref GAAP differences

IAS 21 Vs. SAS 7 Under Nigerian GAAPAt the balance sheet date, balance in foreign currencies should be converted using the closing rate.

Under IFRSForeign currency monetary items shall be translated using closing rate.Nonmonetary items measured at historical cost are translated at the exchange rate at the date of the transaction.Non-monetary items measured at fair value are translated at the exchange rate when the fair value was determined.

Note: Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency. Others are non-monetary.

Recognition of exchange differences arising from translation of a foreign operation’s accountRef GAAP differences

IAS 21, IFRS 1 Vs. SAS 7 Under Nigerian GAAP

Exchange differences resulting from translating opening net investment in the foreign entity at a different rate than previously reported should be taken to capital reserves.

Differences from translating income statement items at exchange rate other than the closing rate while translating balance sheet items at the closing rate should be taken to income or revenue reserve.

Other exchange differences are recognized in the appropriate shareholder’s interest account.

Under IFRSIAS 21 states that all exchange differences shall be recognized in other comprehensive income.

However, IFRS 1 states that a first time adopter may use this exemption:

a. The cumulative translation differences for all foreign operations are deemed to be zero at the date of transition to IFRSs: and



b. The gain or loss on a subsequent disposal of any foreign operation shall exclude translation differences that arose before the date of transition to IFRSs and shall include later translation differences.

Translation from a functional currency to a presentation currencyRef GAAP difference

IAS 21 vs. SAS 7 Under GAAPIncome statement items are translated

a. at the closing rate or b. exchange rate at the date of transaction

Under IFRSIncome statement items are translated at the exchange rate at the date of transaction(average rate is allowed if exchange rate fluctuation is not significant)

SAS 8 ON ACCOUNTING FOR EMPLOYEES’ RETIREMENT BENEFITS The primary objectives of this statement are to narrow the differences in the methods or manners used in

a) measuring the amount of retirement obligations under retirement benefit plans,

b) allocating the cost of the plan and recognizing resulting gains or losses to the accounting periods, and

c) disclosing as accurately as possible, the plan and he effects of the plan implementation on the reporting enterprise.

Retirement benefits can be determined in either of two ways, namely: as a function of years of service and earnings as a function of accumulated contributions

Retirement costs are determined using Actuarial cost methods namely:i) accrued benefit cost method,ii) projected benefits cost method

Actuarial gains or losses are recognized in practice in either of 3 ways viz:i) immediate recognitionii) spreadingiii) averaging

SAS 8 is in compliance with IAS 19

Actuarial Valuation MethodRef GAAP Differences



IAS 19 Under IAS19 (P.64), The project unit credit method is used to determine the present value of the entity’s defined benefit obligation (DBO).

The Nigerian GAAP (SAS 8) Allows a choice of

Accrued benefit cost method or Project benefit cost method

SAS 9 – ACCOUNTING FOR DEPRECIATION (ISSUED

This statement is in harmony with IAS 4. It provides a guide for uniform and acceptable methods of determining and reporting depreciation on items of property, plant and equipment whether stated at historical costs or revalued amounts.

Depreciation – represents an estimate of the portion of the historical costs or revalued amount of a fixed asset chargeable to operations during an accounting period.

Methods of Calculation DepreciationMethods based on the passage of time include(a) Straight Line(b) Decreasing Charge

(i) Sun-of-the-year-digit(ii) Reducing Balance

(c) Annuity and sinking FundMethods based on the level of usage or output are identified as(a) Service hour, and(b) Productive output(c) Depreciation

SAS 9 is in compliance with IAS 16Ref GAAP Differences



SAS 9 vs. IAS 16Local GAAPDepreciation begins when the asset starts being used and ceases when an asset is fully depreciated or disposed.IAS 16The depreciation charge for each period shall be recognized in profit or loss unless it is included in the carrying amount of another asset. However sometimes, the future economic benefits embodied in an asset are absorbed in producing other assets. In this case, depreciation charge constitutes part of the cost of the other asset and is included in the carrying amount.

Depreciation of an asset begins when it is available for use and ceases at the earlier of the date that the asset is classified as held for sale in accordance with IFRS 5 and the date that the asset is derecognized.

SAS 10 – ACCOUNTING BY BANKS AND NON-BANK FINANCIAL INSTITUTIONS (PART 1

This statement focuses on three main areas of concern relating to accounting practices followed by banks, namely;

(a) Income recognition(b) Loss recognition, and(c) Balance sheet classification

Income Statement – Each principal revenue item should be stated separately in a bank’s financial statements to enable the user access the contribution of that particular source of revenue.

Balance Sheet – a bank should group its assets and liabilities in the balance sheet according to their nature and list them in order of their liquidity and maturity.

SAS 11- ON LEASES The primary objectives of this statement are

1. To ensure that published financial statements consist sufficient information lease transactions to make it possible for user of such statements to determine the effect of lease commitments on on the present and future operations of the reporting enterprise

2. To ensure uniform disclosure of terms and classes of leases in financial statements



A lease is a contractual agreement between an owner (the lessor) and another party (the lessee) which conveys to the lessee the right to use the leased asset for a consideration usually periodic payments called rents.

Classification of Leasesa. Operating Leaseb. Finance or Capital Lease

Other varieties of Finance or Capital Leases are1. Leveraged Lease2. Sale & Lease Back Lease3. Direct Finance

SAS 11 is in compliance with IAS 17.

Ref IFRS requirement

IAS 17 Under Nigeria GAAP, SAS 11 states that leases are classified (e.g., as operating, finance lease) on the basis of specific criteria. SAS11 par.63 indicates that a lease qualifies as a finance lease if the following conditions are met:(a) lease is non-cancelable, and (b) any of the following is applicable:i. the lease term covers substantially (80% or more) the estimated useful life of the asset or,ii. the net present value of the lease at its inception using the minimum lease payments and the implicit interest rate is equal to or greater than the fair value of the leased asset or,iii. The lease has a purchase option which is likely to be exercised. If none of these criteria are met, the lease is classified as an operating lease.

Under IAS 17, a lease is not classified on the basis of specified criteria. Rather, it is classified according to whether it is in substance an operating or finance lease. IAS 17.10–11 provide the following examples and indicators that may lead to a lease being classified as a finance lease:

The “lease transfers ownership of the asset to the lessee by the end of the lease term.”

The lease contains a bargain purchase option. The “lease term is for the major part of the economic life of the

asset even if title is not transferred.” At “the inception of the lease the present value of the minimum

lease payments amounts to at least substantially all of the fair value of the leased asset.”

The “leased assets are of such a specialized nature that only the lessee can use them without major modifications.”

If “the lessee can cancel the lease, the lessor’s losses associated



with the cancellation are borne by the lessee.” “Gains or losses from the fluctuation in the fair value of the

residual accrue to the lessee (for example, in the form of a rent rebate equaling most of the sales proceeds at the end of the lease).”

The “lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.”

In addition, note that the above indicators may not be conclusive regarding a lease’s classification. IAS 17.12 states, “The examples and indicators in paragraphs 10 and 11 are not always conclusive. If it is clear from other features that the lease does not transfer substantially all risks and rewards incidental to ownership, the lease is classified as an operating lease.”

. An entity converting to IFRSs should closely review the classification of leases to determine whether there may be accounting differences.

SAS 12– ACCOUNTING FOR DEFERRED TAXES The primary objective of this statement is to provide a guide for uniform and

acceptable methods and based used in:(a) Providing for deferred taxes(b) Computation of deferred taxes, and(c) Presentation in the financial statements.

Timing Differences – are difference between the taxable income and income which arise because the periods in which some items of revenue and expense are included in taxable income differ from the periods in which they are included in accounting income. Such differences originate in one period and reverse in one or more subsequent periods.

Permanent Differnces – are differences between taxable income and accounting income for a period that do not reverse in subsequent periods.

Methods of ComputationGenerally, two methods are commonly used (i) Deferred Method(ii) Liability Method

The standard recommends that deferred tax should be computed using the liability method.

Financial Statement PresentationThere are two major methods of presenting the tax effects of timingdifferences in financial statements:(a) net-of-tax method, and(b) separate line item method

NB The provisions of this Standard have been subsumed in SAS 19 – On Taxes



SAS 13– ON ACCOUNTING FOR INVESTMENT (1992)

This statement which complies with IAS 25 focuses on three main forms of investments, namely:(a) Short-term Investments (Current Investments)(b) Long-term Investments, and(c) Investment Properties

Investments – are assets acquired by an enterprise for purposes of capital appreciation or income generation without any activities in the form of production, trade or provision of services.

ValuationShort-term Investment should be valued at the lower of cost and market value, while Long-Term Investment should be valued at cost except when there is permanent impairment in their values

Investment Properties should be carried in the balance sheet at their market value and revalued periodically on a systematic basis at least once in every three years.

SAS 14-ACCOUNTING IN THE PETROLUEM INDUSTRY (UPSTREAM ACTIVITIES ) {ISSUED IN 1993)

This statement deals with accounting and reporting for upstream activities. It does not cover the downstream activities. Upstream activities involve the acquisition of mineral interest in properties, exploration (including prospecting) development, and production of crude oil and gas.

Oil and gas producing activities involve costs which may be classified as:(a) Mineral right acquisition costs(b) Exploration and drilling costs(c) Development costs(d) Production costs(e) Support equipment and facilities costs, and(f) General costs.

Oil and Gas Accounting MethodsTwo basic accounting methods in common use are Full cost and the Successful methods. A third method known as Reserve Recognition Accounting (RRA). RRA allows an enterprise to recognize the value of proved oil and gas reserves as assets and changes in such reserve values as in earnings in the Financial Statements. This method is however not in common use and is not recommended.

SAS15 – ON ACCOUNTING BY BANKS AND NONBANK FINANCIAL INSTITUTIONS (PART II) (Issued Dec 1996)

This statement seeks to provide a guide for accounting policies and accounting methods that are to be followed by non bank financial institutions as:

Finance House/Companies Bureau De Change



Mortgage Institutions Discount Houses Stock Brokerage Firms; and Other Capital Market Operators

SAS 16 – ACCOUNTING FOR INSURANCE BUSINESS This statement establishes financial accounting and reporting standards for the financial statements of non-life and life assurance undertakings. The business of insurance can be broadly divided into two categories:

(a) General Insurance Business (non life) (b) Life Assurance Business (long term business)

Basis of accounting for Insurance transaction include:

Annual Accounting Deferred Annual accounting, and Fund accounting

General insurers are required to adopt the annual basis of accounting. Where it is not possible to determine underwriting results with reasonable certainty until the following accounting period, the deferred annual basis should be adopted.

Life assurance business should be accounted for on the fund accounting basis.

Balance sheet – both general insurers and life insurers should arrange their balance sheet items in the order of liquidity.

SAS 17 –ACCOUNTING IN THE PETROLEUM INDUSTRY: DOWNSTREMACTIVITIES This statement provides guide on accounting practices and reporting formats to be followed by companies operating in the downstream sector of the Nigerian Petroleum Industry.

Downstream activities involve transporting, refining and marketing of oil, gas and derivatives. Such companies include those engaged in:

Refining and petrochemicals Marketing and distribution; and Liquefied Natural Gas

SAS 18 – ON STATEMENT OF CASH FLOWS)

This statement requires that a statement of cash flows be part of the financial statements prepared by an organization. It replaces the statement of source and Application of Funds required by SAS No. 2

Cash – Comprises cash in hand and demand deposits, denominated in Naira and foreign currencies.



Cash Equivalents – are short-term, highly liquid investment that are readily convertible to known amount of cash and which are subject to an insignificant risk of change in value. Generally, they are within three months of maturity.

Cash-Flows – are inflows and outflows of cash equivalents. There are two methods of preparing a statement of cash-flows.

(a) Direct Method and

(b) Indirect Method

Classification of Cash Flows

The standard requires that cash flow items should be classified under the following:

- Operating Activities

- Investing Activities

- Financial Activities NB

Interest paid, dividend paid and other distributions to owners should be classified 1as cash flows from financing activities while interest received and dividend received should be classified as cash flows from investing activities except where the investor-company has significant control over the investee company and holds at least 20% of the equity. In such cases, dividends receivedshould be classified as cash flows from operating activities.

SAS 18 is in conformity with IAS 7Composition of cash equivalentsRef GAAP Differences

IAS 7 Vs. SAS 18 Under Nigerian GAAP (SAS 18 P.16) Cash equivalents are short-term highly liquid instruments which are:

(a) Readily convertible into known amounts of cash, whether in local or foreign currency

(b) So near to their maturity dates as to present insignificant risk of changes in value as a result of changes in interest rates.

Under IFRS

(IAS 7) Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. Investments must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value to qualify as a cash equivalent. Usually when it has a short maturity period of three months or less from the date of acquisition. Equity investments are excluded from cash equivalents unless they are in substance cash equivalents. Bank overdrafts are included as component of cash equivalent if they are repayable on demand.



Interest Paid

Ref GAAP Differences

IAS 7 Vs. SAS 18 Under Nigerian GAAP interest paid is usually classified as cash flow from financing activities.

Under IFRSs

IAS 7 allows an entity to determine the classification of interest paid that is most appropriate to its business as long as the classification remains consistent from period to period. Under IAS 7.33, it is generally accepted that interest paid is classified as an operating activity for a financial institution. For nonfinancial institutions, interest paid may be classified as an operating activity because it enters into the determination of profit or loss. Alternatively, interest paid may be classified as a financing activity because it is a cost of obtaining financial resources.

Dividend PaidRef GAAP Differences

IAS 7 Vs. SAS 18 Under Nigerian GAAP, dividends paid are classified as financing activities.

Under IFRSs

IAS 7 allows an entity to determine the classification of dividends paid that is most appropriate to its business, as long as the classification remains consistent from period to period. Under IAS 7, dividends paid may be classified as financing activities because they are a cost of obtaining financial resources. Alternatively, dividends paid may be classified as operating activities to assist users in determining the ability of an entity to pay dividends out of operating cash flows.

Interest receivedRef GAAP Differences



IAS 7 Vs. SAS 18 Under Nigerian GAAP, cash receipts such as interest are classified as investing activities.

Under IFRS

IAS 7 allows an entity to classify interest received as an operating or an investing activity according to what is appropriate to its business as long as the classification remains consistent from period to period.

Dividend receivedRef GAAP Differences

IAS 7 Vs. SAS 18 Under Nigerian GAAP dividend received is classified as cash flow from investing activities

Under IFRS

IAS 7 allows an entity to determine the classification of dividends received that is most appropriate to its business as long as the classification remains consistent from period to period. Under IAS 7.33, dividends received may be classified as operating activities because they enter into the determination of profit or loss. Alternatively, dividends received may be classified as investing cash flows as a return on investment.

Capitalization of InterestRef GAAP Differences

IAS 7 Vs. SAS 18 Under Nigerian GAAP interest paid is usually classified as cash flow from financing activities.

Under IFRSs

IAS 7 interest paid in cash should generally be included with other interest payments in the cash flow statement irrespective of whether the cost is charged in the income statement or capitalized as part of the acquisition, construction, or production of a qualifying asset. However, it may be appropriate to include the cash outflow relating to capitalized borrowing costs under investing activities (if the qualifying asset is PP&E or an intangible) or operating activities (if the qualifying asset is inventory) provided that the total amount of interest paid is also disclosed either on the face of the cash flow statement or in the footnotes.



Cash subject to restriction

Ref GAAP Differences

IAS 7 Vs. SAS 18 Under IFRS

IAS 7 does not prescribe a specific classification for restricted cash but does require disclosure of the amount where significant with management commentary. (IAS 7.48) An entity shall disclose together with a commentary by management, the amount of significant cash and cash equivalent balances held by the entity that are not available for use by the group.

SAS19 – ACCOUNTING FOR TAXES

This Statement replaces the Statement of Accounting Standard No. 12.

SAS 19 – Accounting For taxes covers taxes on business organizations including Companies Income Tax, Petroleum Profit Tax, Capital Gains Tax, Value Added Tax and Educatio Tax. The statement does not cover Customs and Excise Duties and Royalties.

Key Definitions1. Deferred Tax is the tax (liability or asset) attributable to timing differences.2. Input Tax (VAT ) is the tax paid on goods and services purchased.3. Output Tax (VAT ) is the tax collected by a taxable person from other parties for

goods and services supplied.4. Permanent Differences are differences between taxable and accounting income, for

a period, that are not expected to reverse in subsequent periods.

Tax Expense / tax Income is the total of current and deferred taxes charged against or credited to the income of the accounting period.Timing Differences are differences between the accounting income and taxable income which arise because the periods in which some items of revenue and expense are included in accounting income differ from the periods in which they are included in taxable income. Such differences originate in one period and are expected to reverse in one or other subsequent periods.

Bases of providing for deferred taxes1. Nil provision basis;2. Partial provision basis; and3. Full provision basis.

Methods of computing Deferred Tax1. Deferral method (FIFO or Average)2. Liability method



Presentation in financial statementsThere are two major methods of presenting tax effects of timing differences in the financial statements:

- net-of-tax method- separate line item method

Investment income should be accounted for at gross amounts and the tax withheld at sourse should be deducted from the tax payable.

Deferred taxes should be computed using the liability method

Only the timing differences that are expected to reverse during the period allowed by the tax law should be considered in computing deferred taxes for treatment either as an asset or as a charge to the deferred tax account.

Full provision should be made for deferred taxes.

Deferred taxes relating to ordinary activities should be shown as part of the tax on profit or loss resulting from ordinary activities.

Deferred taxes relating to extraordinary items should be shown as part of the tax extraordinary items.

Capital gains tax should be included in the tax expense for the period. Where capital gains tax relates to a disposal treated as an extraordinary item, it should be stated as a deduction from the item.

Notes on VAT1. Where non-recoverable VAT in respect of an expense item is incurred,

should be expensed.

2. Where a non-recoverable VAT is paid on an item of fixed asset, the VAT should be capitalized as part of the cost of the fixed asset.

3. The net amount owing to or due from the tax authority should form part of debtors or creditors.

4. Where recoverable VAT remains consistently outstanding for three years, it should be fully provided for.

5. Output VAT should be excluded from the turnover shown in the profit and loss account.

Disclosure RequirementsThe following components of tax expense or income) should be disclosed by way of notes:

1. Company income tax;2. Petroleum profit tax;3. Capital gains tax;4. Education tax; and5. Deferred tax.6. Taxes on extraordinary items and prior year adjustments



Deferred tax balance should be presented in the balance sheet separately. 1. In the case of liability, between long term and current liabilities. 2. In case of assets, between fixed and current assets.

Movement in tax accounts should be shown as follows;Current Taxes

1. Balance at the beginning of the period;2. Tax charge or credit for the period ;3. Payments made during the period;4. Tax credits received during the period; and5. Balance at the end of the period.

Deferred Taxes1. Balance at the beginning of the period;2. Current year provision (reversal); and3. balance at the end of the period.

SAS 19 complies significantly with IAS 12

SAS 20: ABRIDGED FINANCIAL STATEMENTS (Issued Dec 2001)

The primary objectives of this statement are to:

1. Specify the minimum contents of Abridged Financial Statements;2. Standardized formats for presentation of Abridged Financial statements; and3. Improve comparability and usefulness of Abridged Financial Statements.

Abridged Financial Statements should carry a declaration that They are abridged financial statements;

1. The financial statements and the specific disclosures included in them have been derived from the full financial statements of the company;

2. The abridged financial statements cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of the organization as the full financial statements; and

3. Copies of the full financial statements can be obtained from the Registrars of the company.

NBA company whose financial statements for a period are qualified by its auditors should not publish Abridged Financial Statements for that period.

ContentsAbridged Financial Statements must include the following as in the full financial statements:a) Accounting policies;b) Profit and loss account for the financial year;c) Balance sheet as at the end of the financial year;d) Statement of cash flows for the financial year;e) Notes in relation to exceptional and extraordinary items;f) Five-year financial summary; andg) Any other information necessary to ensure that the abridged financial statements

are consistent with full accounts and reports for the year.



Other items to be included in an abridged financial statement are:

a) Notice of Annual General Meeting;b) Names of Directors during the year and their shareholdings;c) Report of the Audit committee which should confirm that the auditors report is

unqualified;d) Financial highlights (Result at a glance); ande) Dividends paid or proposed and dates of payment.

Disclosure Requirements

Material events occurring after the balance sheet date; and where there is a change in accounting policy or estimates from the preceding corresponding financial year

EARNING PER SHARE (SAS 21 & IAS 33)

SAS 21 requires all enterprises with listed ordinary shares, or potential listed ordinary shares (e.g. convertible debt, preference shares) to disclose with equal prominence on the face of the income statement both basic and diluted EPS

Basic EPS is calculated by dividing the net profit or loss for the period by the weighted average number of ordinary shares outstanding (including adjustments for bonus and right issues)

For diluted EPS, the weighted average number of ordinary shares takes into account the conversion of any dilutive potential ordinary shares, for example, convertible debt and share options.

POINTS TO NOTE1. Preference dividend – is the amount actually proposed or paid. In the case of cumulative

preference shares, the dividends are treated in the period to which they relate and disregarded when subsequently paid.

2. Dividend waiver – where shareholders waive their dividends, the related shares are still regarded as ranking for dividends for the purpose of EPS calculation

3. Basis of Calculating EPS – there are two bases, the “net” and “nil” basis. The net basis incorporates the effect of all taxes both constant and variable while the nil basis takes into account only the constant tax element and ignores taxes that will vary due to dividend distribution.

4. Fully paid & partly paid equity – where there are both fully paid and partly paid equity shares in issue, the earnings should be apportioned over the different classes on basis of their participating rights in dividends or profit

5. Disclosure requirements – disclosure is required of the numerators used to calculate the EPS amounts and the weighted average number of ordinary shares used as denominators for the basic and diluted EPS calculations

6. Bonus issue – bonus issues are assumed to be from the beginning of the year they were issued and are usually treated as ranking for dividend except otherwise st



7. Right issue – a right issue is regarded as an issue for cash at full market price coupled with a bonus issue on the aggregate original issue and the assumed right shares. In this case, the previous year EPS should be adjusted to the same basis by multiplying with the factor of theoretical ex-right price [inverse of (ii) below]

Required stepsi) Compute the theoretical ex-right Priceii) Compute ratio of Mkt Price/Theoretical Ex. Right Pxiii) Compute the weighted average no. of shares. The pre-right period no of shares

should be adjusted by multiplying with (ii) above

8. Fully diluted EPS – various circumstances that will give rise to FDEPS include:i) a separate class of equity not ranking for dividendii) issue of convertible securitiesiii) issue of options and/or warrants

In each of the above circumstances, it will be necessary to calculate FDEPS to determine what the EPS would have been if the event had occurred and the resultant shares had ranked for dividends. FDEPS must be shown if the dilution is at least 5% of the basic EPS.

Note: 1) in calculating FDEPS, convertibles are assumed converted at the later of: (a) Beginning of the period or;

(a) date of issue

2) the conversion rate is the highest rate available over the conversion period.

SAS 22 – ACCOUNTING FOR RESEARCH AND DEVELOPMENT COSTS

ApplicationThe statement applies to all enterprises that engage in R&D activities whether for product or service development.

Key definitions

1. Research is a systematic investigation undertaken with the hope of gaining new scientific or technical knowledge and understanding.

2. Basic research are the efforts that seek to gain more comprehensive knowledge or understanding of the subject under study, without specific applications or commercial objectives in mind.

3. Applied research is the inquiry aimed at gaining the knowledge or understanding to meet a specific, recognized need of a practical nature, especially to achieve specific commercial objectives with respect to products, processes or services

4. Development is the systematic use of the knowledge or understanding gained from research to create or improve useful materials, devices, systems or methods through building and operating prototypes or test models.

Components of R&D costsThese include the following utilized in R&D activities:materials and services costs



salaries and wagescosts of assets constructed or acquired specifically for R&Ddepreciation charge for R&D assetsamortization of patents and license related to R&D

There are 2 major ways of treating R&D; they are write-off and deferral methods

Separate identification of R & D costsSAS 22 requires R&D costs to be separated into (a) research costs and (b) development costs

Treatment of R & D costs in the Income StatementThe amount of research cost should be expensed in the period in which they are incurred while development costs may be deferred if the following criteria are met:Clearly defined product or process with identifiable costsTechnical feasibilityIntention to produce and market, or use the product or processAbility to complete the project and market the product or processCurrent and future costs to be deferred are material and are expected beyond reasonable doubt to be recoverable

Development costs should be amortized over a period not exceeding 5 years from the inception of the benefits

Disclosure requirementsThe financial statement should disclose:The accounting policies adopted for development costsThe amortization methods usedThe useful lives or amortisation rates usedThe amount of R&D costs recognized as an expense in the period; andA reconciliation of the balance of unamortized development costs at the beginning and end of the period.

SAS 23 & IAS 37 – PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

Application The statement applies to entities in accounting for provisions, contingent liabilities and contingent assets except financial instruments carried at fair value, executory contracts, insurance contracts and those covere by more specific requirements in another SAS.

Key Definition

1. Assets: means resources controlled by an enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise.

2. Constructive obligation: is a commitment arising from an enterprise’ action to other parties based on established pattern of past practice or published policies that it will accept certain responsibilities and the enterprise has therefore created a valid expectation on the part of those other parties.



3. Contingency: refers to an existing condition, situation or set of circumstance not wholly within the control of an entity involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resoled when one or more future event(s) occur or fail to occur.

4. Contingent asset: is a possible asset that arises from past event (s) and whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future event(s) not wholly within the control of the entity.

5. Contingent liability: is a possible obligation that arises from past event (s) and whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future event(s) not wholly within the control of the entity; or a present obligation that arises from past event(s) where it is probable that a transfer of economic benefit will be required to settle that obligation and the amount can be measured with sufficient reliability.

6. Liability: is a present obligation of an entity to transfer economic benefit as a result of past transactions or events.

7. Obligating events: is a past event that leads to a present obligation.8. Provision: refers to a liability that is of uncertain timing or amount.

Relationship between Provisions and Contingent LiabilitiesAll provisions are usually contingent since they are uncertain in timing or amount. The term contingent is used for liabilities as well as assets whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise. The term “contingent liability” is used for liabilities that do not meet the recognition criteria of a “provision”.

Accounting treatment of provision, contingent assets and liabilitiesSAS 23 requires a provision to be recognized only if

a) an entity has a present obligation as a result of a past event; and (b) there is a reliable estimate of the amount of the obligation.

A provision should be used only for expenditures for which the provision was originally recognized.Contingent liabilities should not be provided for in the accounts and contingent assets should not be recognized. A disclosure should be made if it is probable that a transfer of economic benefit will be required to settle the obligation (in case of liabilities) or future economic benefit will flow to the entity (in case of assets).

Disclosure requirementsFor each class of provision, an entity should disclose:a) The carrying amounts at the beginning and end of the periodb) Additional provision made in the periodc) Amount utilized during the periodd) Unused amounts reversed during the period; ande) The increase in the discounted amount arising from the passage of time and the effect of any change in the discount rate.



f) a brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits;g) an indication of the uncertainties about the amount or timing of those outflowsh) the amount of any expected reimbursement, stating the amount of any asset that has been recognized for the expected reimbursement.

Disclosures required in respect of contingent liabilities include a brief description of the nature of the contingency on which it depends and where applicable:The degree of uncertaintyAn estimate of its financial effects; andThe possibility of any reimbursement.

An entity should disclose information on contingent assets where an inflow of economic benefit is probable.

SAS 24, SEGMENT REPORTING (IAS 14)IAS 14, Segment Reporting, became effective for annual financial statements covering periods beginning on or after 1 July 1998.

IAS 14 (revised) applies to enterprises whose equity or debt securities are publicly traded, including enterprises in the process of issuing equity or debt securities in a public securities market, but not to other economically significant entities.

Summary of IAS 14 Basis of Segment Reporting: Public companies must report information along product and service lines and along

geographical lines

One basis of segmentation is primary, the other is secondary Segment accounting policies the same as consolidated.

Segment Disclosures: The following should be disclosed for each primary segment:

--revenue (external and intersegment shown separately); --operating result (before interest and taxes);--carrying amount of segment assets;--carrying amount of segment liabilities;--cost to acquire property, plant, equipment, and intangibles;--depreciation and amortisation;--non-cash expenses other than depreciation;--share of profit or loss of equity and joint venture investments;--the basis of inter-segment pricing.

The following should be disclosed for each secondary segment:--revenue (external and intersegment shown separately);--carrying amount of segment assets;



--cost to acquire property, plant, equipment, and intangibles;--the basis of inter-segment pricing.

Segment definition: Segments are organizational units for which information is reported to the board of directors

and CEO unless those organizational units are not along product/service or geographical lines, in which case uses the next lower level of internal segmentation that reports product and geographical information.

Never construct segments solely for external reporting purposes. 10% materiality thresholds. Segments must equal at least 75% of consolidated revenue.

SAS 25- TELECOMMUNICATION ACTIVITIESSCOPE This standard covers mainly accounting issues relating toTelecommunication Activities. These are:{a}The timing, measurement and recognition of revenue;{b}Measurement and recognition of costs;{c}Depreciation, dismantling and removal cost of fixed assets;{d}Capitalization and amortization of intangibles; and{e}Calculation and treatment of impairments.

Key Definitions1. Available for use refers to when an asset is in the location and2. condition necessary for it to be capable of operating in the manner3. intended by management.

4. Amortization is the systematic allocation of depreciable amount of an asset over its useful life.

5. Bundled product is a set of different products provided together as if they were a single product.

6. Carrying amount is the amount at which an asset is recognized after7. deducting any accumulated depreciation and accumulated impairment losses.

8. Cash Generating Unit is the smallest identifiable group of asset that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets.

9. Co-location is the hosting and/or sharing of telecommunications sites and/or facilities by more than one telecommunications operator.

10. Connection fee is the consideration paid by a subscriber to a telecommunications operator to gain initial access the telecommunications network.

11. Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially



recognized in accordance with the specific requirements of other Statements of Accounting Standards {SASs}.

12. Decommissioning Cost is the cost of dismantling and removing items and restoring the site on which the item is located.

13. Deferred Income is the income received for which the related rendered has not been rendered.

14. Fair Value is the amount for which an asset could be exchanged and liability settled between knowledgeable willing parties at arms length transaction.

15. Impairment Loss is the amount by which the carrying amount of an asset or a cash generating unit exceeds its recoverable amount.

16. Indefeasible Right to Use {IRU} means an agreement whereby one party {the user} obtains the right to use the specific facility and/or fibre of another party {the Grantor}for a specified period of time.

17. Intangible asset is an identifiable non-monetary asset without physical substance. For the purpose of this standard license fee is intangible asset.

18. Interconnection means physical and logical connection of telecommunications networks enabling telecommunications services provided in a telecommunications network to operate within the termination points of different users.

19. Interconnection revenue {cost}is the revenue {cost}received {paid}or receivable {payable}by an operator for terminating{originating}or transmitting calls on or through the telecommunications network.

20. Operator means a provider of telecommunications services.

21. Recoverable Amount is the higher of an asset’s {or cash generating units} fair value less cost to sell and its value in use.

22. Residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated cost of disposal, if the assets were already of the age and in the condition expected at the end of the useful life.

23. Revenue is the gross inflow of economic benefit during the period arising in the course of the ordinary activities of an entity when those inflows result in equity, other than increases relating to contributions from equity participants.

24. Subscriber acquisition costs are costs incurred in obtaining telecommunications services contracts with supervisors.

25. Telecommunications activities are any form of transmission, broadcast or reception of signs, signals, texts, images sound or data by wire or wireless means.



26. Telecommunications Service means service whose provisions consist wholly or partly in the transmission and routing of signals an routing of sinals, texts, images, sounds or data or combination of these functions on telecommunications network using telecommunications process.

ACCOUNTING POLICIES: A telecommunications entity shall articulate and disclose as an integral part of its financial statements all the significant accounting policies adopted in the preparation of its financial statements. These include:

1. Fixed Assets:1.1 Decommissioning Costs1.2 Commencement of Depreciation of Network Assets1.3 Component Accounting (Separate Classification of Fixed Assets)

2. Intangibles2.1 Subscriber Acquisition Costs2.2 License Fee Derecognition2.3 Derecognition3. Co-Location Arrangements4. Interconnection Cost5. Revenue Recognition6. Exchange Transactions7. Connection fee8. Interconnection revenue9. Bundled Product10. Deferred Revenue/Unearned Revenue11. Discount12. Free Airtime13. Upfront sale of equipment with long service terms14. Principal and Agent Relationship

Disclosure RequirementsIn addition to the disclosure requirements of other applicable1. Statements of Accounting Standards, entities engaged in telecommunications

activities shall also disclose the following:2. Description of how revenues from various types of telecommunications activities are

recognized;3. Description of how deferred revenue is calculated;4. Description of how any expired deferred revenue is treated in the financial

statements;5. Description of how subscriber acquisition costs are treated in the financial

statements;6. Description of the amortization methods used for intangible assets (including license

fees);7. Free airtime given and the movement thereof;8. Treatment of dismantling, removal and site restoration costs; and9. The method, assumptions, external valuers involved (professional details), policy on

frequency, nature of indices used for probability analysis by management in arriving at the present value of the best estimate of decommissioning costs.

Notes to the Accounts



1. A breakdown of revenue and cost of sales by significant category (including those on collocation arrangements);

2. The amount of any levy charged to income statement in respect of telecommunications activities by significant category;

3. Any impairment loss recognized in the period;4. The number of active subscribers at the end of the period and a reconciliation of

movements in subscriber number form previous year;5. Specific details of how active subscribers are calculated, clearly stating when a

subscriber becomes non-active;6. A reconciliation of the carrying amount of interconnection revenue and costs

showing receivables and payables, and7. The different categories of telecommunications licenses indication the dates of issues

and expirations.8. An entity engaged in telecommunications activities shall disclose the following for

capitalize license cost:9. The gross carrying amount and any accumulated amortization and impairment loss

at the beginning and end of the period;10. A reconciliation of the carrying amount at the beginning and end of the period

showing:10.1 additions10.2 disposal; and10.3 other changes in the carrying amount, during the period.11. The amount of irrecoverable sales written off against profit shall be disclosed in the

accounts by way of note, showing the amount and relevant period.

SAS 26 & IFRS 3 - BUSINESS COMBINATIONSObjective: is to enhance the relevance, reliability and comparability of the information that an entity provides in its financial statements about a business combination and its effects as follows:(a) Recognizes and measures in its financial statements the identifiable assets acquired, the liabilities, assumed and any non-controlling interest in the acquiree;(b) Recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and(c) Determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

Core principleAn acquirer of a business recognizes the assets acquired and liabilities assumed at their acquisition-date fair values and discloses information that enables users to evaluate the nature and financial effects of the acquisition

Applying the acquisition methodA business combination must be accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control. One of the parties to a business combination can always be identified as the acquirer, being the entity that obtains control of the other business (the acquiree).

Disclosure RequirementThe IFRS requires the acquirer to disclose information that enables users of its financial statements to evaluate the nature and financial effect of business combinations that occurred during the current reporting period or after the reporting date but before the financial statements are authorized for issue. After a business combination, the acquirer must disclose any adjustments



recognized in the current reporting period that relate to business combinations that occurred in the current or previous reporting periods.

SAS 27 & IAS 27 – CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS

Key Definitions 1. Consolidated financial statements : The financial statements of a group presented as those

of a single economic entity.

2. Subsidiary : An entity, including an unincorporated entity such as a partnership, that is

controlled by another entity (known as the parent).

3. Parent : An entity that has one or more subsidiaries.

4. Control : The power to govern the financial and operating policies of an enterprise so as to

obtain benefits from its activities.

Identification of Subsidiaries

1. Over more than one half of the voting rights by virtue of an agreement with other

investors; or

2. To govern the financial and operating policies of the other enterprise under a statute or an

agreement; or

3. To appoint or remove the majority of the members of the board of directors; or

4. To cast the majority of votes at a meeting of the board of directors

Presentation of Consolidated Accounts: A parent is required to present consolidated

financial statements in which it consolidates its investments in subsidiaries except in one or

more of the following circumstances:

1. The parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of

another entity and its other owners, including those not otherwise entitled to vote, have

been informed about, and do not object to, the parent not presenting consolidated

financial statements;

2. The parent's debt or equity instruments are not traded in a public market;

3. The parent did not file, nor is it in the process of filing, its financial statements with a

securities commission or other regulatory organisation for the purpose of issuing any

class of instruments in a public market; and

4. The ultimate or any intermediate parent of the parent produces consolidated financial

statements available for public use that comply with International Financial Reporting

Standards.



The consolidated accounts should include all of the parent's subsidiaries, both domestic

and foreign

Consolidation Procedures

Intergroup balances, transactions, income, and expenses should be eliminated in full. Intragroup

losses may indicate that an impairment loss on the related asset should be recognized.

The financial statements of the parent and its subsidiaries used in preparing the consolidated

financial statements should all be prepared as of the same reporting date, unless it is

impracticable to do so. [IAS 27.26] If it is impracticable a particular subsidiary to prepare its

financial statements as of the same date as its parent, adjustments must be made for the effects of

significant transactions or events that occur between the dates of the subsidiary's and the parent's

financial statements. And in no case may the difference be more than three months.

Consolidated financial statements must be prepared using uniform accounting policies for like

transactions and other events in similar circumstances.

Minority interests should be presented in the consolidated balance sheet within equity, but

separate from the parent's shareholders' equity. Minority interests in the profit or loss of the group

should also be separately presented.


1. The nature of the relationship between the parent and a subsidiary when the parent does

not own, directly or indirectly through subsidiaries, more than half of the voting power;

2. \The reasons why the ownership, directly or indirectly through subsidiaries, of more than

half of the voting or potential voting power of an investee does not constitute control;

3. The reporting date of the financial statements of a subsidiary when such financial

statements are used to prepare consolidated financial statements and are as of a reporting

date or for a period that is different from that of the parent, and the reason for using a

different reporting date or period; and

4. The nature and extent of any significant restrictions on the ability of subsidiaries to

transfer funds to the parent in the form of cash dividends or to repay loans or advances.

SAS 28 & IAS 28 INVESTMENTS IN ASSOCIATES

Key Definitions [



1. Associate : An enterprise in which an investor has significant influence but not control or

joint control.

2. Significant influence : Power to participate in the financial and operating policy decisions

but not control them.

3. Equity method : A method of accounting by which an equity investment is initially

recorded at cost and subsequently adjusted to reflect the investor's share of the net profit

or loss of the associate (investee).

Identification of Associates: A holding of 20% or more of the voting power (directly or

through subsidiaries) will indicate significant influence unless it can be clearly demonstrated

otherwise. If the holding is less than 20%, the investor will be presumed not to have

significant influence unless such influence can be clearly demonstrated as in:

1. :Representation on the board of directors or equivalent governing body of the investee;

2. Participation in the policy-making process;

3. Material transactions between the investor and the investee;

4. Interchange of managerial personnel; or

5. Provision of essential technical information

Accounting for Associates

In its consolidated financial statements, an investor should use the equity method of accounting

for investments in associates, other than in the following three exceptional circumstances:

1. An investment in an associate that is acquired and held exclusively with a view to its

disposal within 12 months from acquisition should be accounted for as held for trading

under IAS 39. Under IAS 39, those investments are measured at fair value with fair value

changes recognised in profit or loss. [IAS 28.13(a)]

2. A parent that is exempted from preparing consolidated financial statements by paragraph

10 of IAS 27 may prepare separate financial statements as its primary financial

statements. In those separate statements, the investment in the associate may be

accounted for by the cost method or under IAS 39. [IAS 28.13(b)]

3. An investor need not use the equity method if all of the following four conditions are

met: [IAS 28.13(c)]

. the investor is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of

another entity and its other owners, including those not otherwise entitled to vote, have

been informed about, and do not object to, the investor not applying the equity method;



the investor's debt or equity instruments are not traded in a public market;

the investor did not file, nor is it in the process of filing, its financial statements with a

securities commission or other regulatory organisation for the purpose of issuing any

class of instruments in a public market; and

the ultimate or any intermediate parent of the investor produces consolidated financial

statements available for public use that comply with International Financial Reporting

Standards.

Separate Financial Statements of the Investor: Equity accounting is required in the

separate financial statements of the investor even if consolidated accounts are not

required, for example, because the investor has no subsidiaries. But equity accounting is

not required where the investor would be exempt from preparing consolidated financial

statements under IAS 27. In that circumstance, instead of equity accounting, the parent

would account for the investment either (a) at cost or (b) in accordance with

Disclosure

1. fair value of investments in associates for which there are published price quotations;

2. summarised financial information of associates, including the aggregated amounts of

assets, liabilities, revenues, and profit or loss;

3. explanations when investments of less than 20% are accounted for by the equity method

or when investments of more than 20% are not accounted for by the equity method;

4. use of a reporting date of the financial statements of an associate that is different from

that of the investor;

5. nature and extent of any significant restrictions on the ability of associates to transfer

funds to the investor in the form of cash dividends, or repayment of loans or advances;

6. unrecognised share of losses of an associate, both for the period and cumulatively, if an

investor has discontinued recognition of its share of losses of an associate;

7. explanation of any associate is not accounted for using the equity method; and

8. summarised financial information of associates, either individually or in groups, that are

not accounted for using the equity method, including the amounts of total assets, total

liabilities, revenues, and profit or loss.

Presentation

1. Equity method investments must be classified as non-current assets.



2. The investor's share of the profit or loss of equity method investments, and the carrying

amount of those investments, must be separately disclosed. [

3. The investor's share of any discontinuing operations of such associates is also separately

disclosed.

4. The investor's share of changes recognised directly in the associate's equity are also

recognised directly in equity by the investor, with disclosure in the statement of changes

in equity as required by IAS 1 Presentation of Financial Statements.

SAS 29 & IAS 31 INTERESTS IN JOINT VENTURES

Key Definitions

1. Joint venture : A contractual arrangement whereby two or more parties undertake an

economic activity that is subject to joint control.

2. Venturer : A party to a joint venture and has joint control over that joint venture.

3. Investor in a joint venture : A party to a joint venture and does not have joint control over

that joint venture.

4. Control : The power to govern the financial and operating policies of an activity so as to

obtain benefits from it.

5. Joint control : The contractually agreed sharing of control over an economic activity such

that no individual contracting party has control

Classes of Joint Ventures

3. Jointly Controlled Operations: Jointly controlled operations involve the use of assets

and other resources of the venturers rather than the establishment of a separate entity.

Each venturer uses its own assets, incurs its own expenses and liabilities, and raises its

own finance.

4. Jointly Controlled Assets: Jointly controlled assets involve the joint control, and often

the joint ownership, of assets dedicated to the joint venture. Each venturer may take a

share of the output from the assets and each bears a share of the expenses incurred

5. Jointly Controlled Entities: A jointly controlled entity is a corporation, partnership, or

other entity in which two or more venturers have an interest, under a contractual

arrangement that establishes joint control over the entity. Each venturer usually

contributes cash or other resources to the jointly controlled entity. Those contributions

are included in the accounting records of the venturer and recognised in the venturer's

financial statements as an investment in the jointly controlled entity



Accounting Treatment

a. Jointly Controlled Operations: IAS 31

requires that the venturer should recognise in

its financial statements the assets that it

controls, the liabilities that it incurs, the

expenses that it incurs, and its share of the

income from the sale of goods or services by

the joint venture

b. Jointly Controlled Assets: IAS 31 requires

that the venturer should recognise in its

financial statements its share of the joint

assets, any liabilities that it has incurred

directly and its share of any liabilities

incurred jointly with the other venturers,

income from the sale or use of its share of the

output of the joint venture, its share of

expenses incurred by the joint venture and

expenses incurred directly in respect of its

interest in the joint

c. Jointly Controlled Entities: IAS 31 allows

two treatments of accounting for an

investment in jointly controlled entities –

except as noted below:

Proportionate consolidation. [IAS 31.30]

Equity method of accounting. [IAS 31.38]

Proportionate consolidation or equity method are not required in the following exceptional

circumstances: [IAS 31.2]

1. An investment in a jointly controlled entity that is acquired and held exclusively with a

view to its disposal within 12 months from acquisition should be accounted for as held

for trading under IAS 39. Under IAS 39, those investments are measured at fair value

with fair value changes recognised in profit or loss. [IAS 28.13(a)]

2. A parent that is exempted from preparing consolidated financial statements by paragraph

10 of IAS 27 may prepare separate financial statements as its primary financial



statements. In those separate statements, the investment in the jointly controlled entity

may be accounted for by the cost method or under IAS 39. [IAS 28.13(b)]

3. An investor in a jointly controlled entity need not use proportionate consolidation or the

equity method if all of the following four conditions are met: [IAS 28.13(c)]

a. 1. the investor is itself a wholly-owned subsidiary, or is a partially-owned

subsidiary of another entity and its other owners, including those not otherwise

entitled to vote, have been informed about, and do not object to, the investor not

applying proportionate consolidation or the equity method;

b. 2. the investor's debt or equity instruments are not traded in a public market;

c. 3. the investor did not file, nor is it in the process of filing, its financial

statements with a securities commission or other regulatory organisation for the

purpose of issuing any class of instruments in a public market; and

d. 4. the ultimate or any intermediate parent of the investor produces consolidated

financial statements available for public use that comply with International

Financial Reporting Standards.


A venturer is required to disclose:

1. Information about contingent liabilities relating to its interest in a joint venture. [IAS

31.54]

2. Information about commitments relating to its interests in joint ventures. [IAS 31.55]

3. A listing and description of interests in significant joint ventures and the proportion of

ownership interest held in jointly controlled entities. A venturer that recognises its

interests in jointly controlled entities using the line-by-line reporting format for

proportionate consolidation or the equity method shall disclose the aggregate amounts of

each of current assets, long-term assets, current liabilities, long-term liabilities, income,

and expenses related to its interests in joint ventures. [IAS 31.56]

4. The method it uses to recognise its interests in jointly controlled entities. [IAS 31.57]

SAS 30 & IAS 34 INTERIM FINANCIAL REPORTING

Key Definitions



1. Interim period : A financial reporting period shorter than a full financial year (most

typically a quarter or half-year).

2. Interim financial report : A financial report that contains either a complete or condensed

set of financial statements for a period shorter than an enterprise's full financial year.

Matters Left to Local Regulators

IAS 34 specifies the content of an interim financial report that is described as conforming to

International Accounting Standards. However, IAS 34 does not mandate:

1. Which enterprises should publish interim financial reports,

2. How frequently, or

3. How soon after the end of an interim period.

Minimum Content of an Interim Financial Report

1. Balance Sheet as of the end of the current interim period and a comparative balance sheet

as of the end of the immediately preceding financial year;

2. Income Statements for the current interim period and cumulatively for the current

financial year to date, with comparative income statements for the comparable interim

periods (current and year-to-date) of the immediately preceding financial year;

3. Statement showing Changes in Equity cumulatively for the current financial year to date,

with a comparative statement for the comparable year-to-date period of the immediately

preceding financial year; and

4. Cash Flow Statement cumulatively for the current financial year to date, with a

comparative statement for the comparable year-to-date period of the immediately

preceding financial year

Note Disclosures: The explanatory notes required are designed to provide an explanation of

events and transactions that are significant to an understanding of the changes in financial

position and performance of the enterprise since the last annual reporting date. IAS 34 states a

presumption that anyone who reads an enterprise's interim report will also have access to its most

recent annual report. Consequently, IAS 34 avoids repeating annual disclosures in interim reports.

Examples of such notes include:

1. accounting policy changes

2. seasonality or cyclicality of operations

3. unusual items



4. changes in estimates

5. issuances, repurchases, and repayments of debt and equity securities

6. dividends

7. a few items of segment information (for those entities required by IAS 14 to report

segment information annually)

8. significant events after the end of the interim period

9. business combinations

10. long-term investments

11. restructurings and reversals of restructuring provisions

12. discontinuing operations

13. corrections of prior period errors

14. write-down of inventory to net realisable value

15. impairment loss on property, plant, equipment, intangibles, or other assets, and reversal

of such impairment loss

16. litigation settlements

17. any debt default or any breach of a debt covenant that has not been corrected

subsequently

18. related party transactions

19. acquisitions and disposals of property, plant, and equipment

20. commitments to purchase property, plant, and equipment

SAS 31 & IAS 38 INTANGIBLE ASSETS

Key Definitions

1. Intangible asset : An identifiable nonmonetary asset without physical substance. An asset

is a resource that is controlled by the enterprise as a result of past events (for example,

purchase or self-creation) and from which future economic benefits (inflows of cash or

other assets) are expected. Thus, the three critical attributes of an intangible asset are:

[IAS 38.8]

2. identifiability

3. control (power to obtain benefits from the asset)

4. future economic benefits (such as revenues or reduced future costs)

5. Identifiability : An intangible asset is identifiable when it: [IAS 38.12]

6. is separable (capable of being separated and sold, transferred, licensed, rented, or

exchanged, either individually or as part of a package) or


http://www.iasplus.com/standard/ias14.htm


7. arises from contractual or other legal rights, regardless of whether those rights are

transferable or separable from the entity or from other rights and obligations.

Acquisition of Intangible assets could be by way of:

1. by separate purchase

2. as part of a business combination

3. by a government grant

4. by exchange of assets

5. by self-creation (internal generation

Recognision

a. Recognition criteria. IAS 38 requires an enterprise to recognise an intangible asset,

whether purchased or self-created (at cost) if, and only if:

1. it is probable that the future economic benefits that are attributable to the asset will flow

to the enterprise; and

2. the cost of the asset can be measured reliably

b. If recognition criteria not met. If an intangible item does not meet both the definition of

and the criteria for recognition as an intangible asset, IAS 38 requires the expenditure on

this item to be recognised as an expense when it is incurred.

c. Business combinations. There is a rebuttable presumption that the fair value (and

therefore the cost) of an intangible asset acquired in a business combination can be

measured reliably. [IAS 38.35] An expenditure (included in the cost of acquisition) on an

intangible item that does not meet both the definition of and recognition criteria for an

intangible asset should form part of the amount attributed to the goodwill recognised at

the acquisition date. IAS 38 notes, however, that non-recognition due to measurement

reliability should be rare

d. Reinstatement. The Standard also prohibits an enterprise from subsequently reinstating as

an intangible asset, at a later date, an expenditure that was originally charged to expense

Specific Recognisions{



a. Initial Recognition: Research and Development Costs

b. Initial Recognition: In-process Research and Development Acquired in a Business

Combination

c. Initial Recognition: Internally Generated Brands, Mastheads, Titles, Lists

d. Initial Recognition: Computer Software

e. Initial Recognition: Certain Other Defined Types of Costs

Initial Measurement: Intangible assets are initially measured at cost

Measurement Subsequent to Acquisition: Cost Model and Revaluation Models Allowed

a. Cost model. After initial recognition the benchmark treatment is that intangible assets

should be carried at cost less any amortisation and impairment losses. [IAS 38.74]

b. Revaluation model. Intangible assets may be carried at a revalued amount (based on fair

value) less any subsequent amortisation and impairment losses only if fair value can be

determined by reference to an active market. [IAS 38.75] Such active markets are

expected to be uncommon for intangible assets. [IAS 38.78] Examples where they might

exist:

Milk quotas.

Stock exchange seats.

Taxi medallions.

Disclosure Requirements:

a. useful life or amortisation rate

b. amortisation method

c. gross carrying amount

d. accumulated amortisation and impairment losses

e. line items in the income statement in which amortisation is included

f. reconciliation of the carrying amount at the beginning and the end of the period showing:

g. additions (business combinations separately)

h. assets held for sale

i. retirements and other disposals

j. revaluations

k. impairments

l. reversals of impairments

m. amortisation



n. foreign exchange differences

o. basis for determining that an intangible has an indefinite life

p. description and carrying amount of individually material intangible assets

q. certain special disclosures about intangible assets acquired by way of government grants

r. information about intangible assets whose title is restricted

s. commitments to acquire intangible assets

TUTORIAL QUESTIONS

SECTION A – MULTIPLE CHOICE QUESTIONS

1. The method of accounting for oil and gas exploration and development cost recognized by SAS 14 but prohibited is:

a. Successful Effort Accounting (SEA)b. Reserve Recognition Accounting (RRA)c. Full Cost Accounting (FCA)d. Revenue Recognition Accounting (RRA)e. Full Effort Accounting (FEA)

2. Based on the provisions of SAS 5 On Construction Contracts one of the following is not a justification for using the percentage of completion method of accounting for construction contract

a. the contract included a term for the frequency of inspection of work-in-progress and the certification procedures for billing purposes

b. The contractor has an adequate estimating process and the ability to estimate reliably both the cost to completion and the percentage of contract executed

c. The contractor has a cost accounting system which adequately accumulates and allocates costs to final work in a manner consistent with his estimating process

d. The contractor has incurred significant cost and percentage of completion method would help to reduce the incidence of bad debt

e. the contract terms include frequency of inspection of work-in-progress and the certification procedures for billing purposes

3. A pension scheme where both the employer and the employee are expected to contribute is known as ------

a. Scheme of contributionb. Contribution schemec. Contributory schemed. Defined contributione. Joint contribution scheme

4. Y purchased some plant on 1 January 2005 for N38,000. The payment for the plant was correctly entered in the cash book but was entered on the debit side of plant repairs account. Y charges depreciation on the straight line basis at 20% per year, with a proportionate charge in the year of acquisition and assuming no scrap value at the end of the life of the asset.

How will Y.s profit for the year ended 31 March 2005 be affected by the error?

a. Understated by N30,400



b. Understated by N36,100c. Understated by N38,000d. Overstated by N1,900e. No effect

5. SAS 18 - Cash Flow Statements requires the cash flow statement to open with the calculation of net cash from operating activities, arrived at by adjusting net profit before taxation.

Which of the following lists consists only of items which could appear in such a calculation?

a. Depreciation, increase in debtors, decrease in creditors, proceeds from sale of equipment, increase in inventories

b. Increase in creditors, decrease in inventories, profit on sale of plant, depreciation, decrease in debtors

c. Increase in creditors, proceeds from sale of equipment, depreciation, decrease in debtors, increase in inventories

d. Depreciation, interest paid, proceeds from sale of equipment, decrease in inventories.e. Depreciation, increase in debtors, decrease in creditors, proceeds from issue of shares, increase in

inventories

6. Based on IFRS 3 Business Combination, one of the following correctly describe the treatment of goodwill acquired in a business combination

a. Recognise as asset at cost and subsequently measure at cost less any accumulated impairment losses

b. Capitalise under fixed assets and amortise over 20 yearsc. Recognise as asset at cost or fair value and amortise over estimated useful lifed. Write off immediately against reserve or income statemente. Should not be capitalised since it is not a tangible asset and its determination is very subjective

7. For the purpose of measuring a financial asset after initial recognition, IAS 39 – Financial Instrument Recognition & Measurement classifies financial assets into four categories including all but one of the following:

(a ) financial assets at fair value through profit or loss(b) held-to-maturity investments(c) loans and receivables(d) available-for-sale financial assets(e) loan and payables

8. ---------- is the amount for which an asset could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm's length transaction.

(a) Recoverable amount(b) Carrying value(c) Net realisable value(d) Fair value(e) Forced sale value

SECTION B – SHORT ANSWER QUESTIONS

1. ------------ is the amount advanced by an employer to a contractor to enable construction work to start.

2. ------ and -------- are the two methods of accounting for construction contracts according to SAS 5



3. A contracts whose final price depends on the measurement of work by an architect or engineer is known as -----------------------

4. Define the term “short term investment”

5. Describe the term “matching concept”

6. --------- are the totality of methods adopted by an enterprise for applying fundamental accounting concepts to its financial transactions

7. What is “fair value” as it relates to an asset?

8. Define the term “prior year adjustments”

9. State two characteristics of a finance lease.

10. Explain the term exceptional item

11. In cash flow statement, state two items that could be classified under investing activities other than purchase and proceed of fixed assets

12. Two methods of accounting for exploration and development costs allowed by SAS 14 are ---- and -----

13. IFRS stands for -------------------- published by ---------

14. Two examples of major non-cash items requiring disclosure in the notes to the cash flow statement are ---

15. According to SAS 18, cash equivalent is defined as ------

16. Define the term “impairment loss”

17 ---(i)---- is the process of expressing a foreign currency amount in Naira by the use of an appropriate rate of exchange while --–(ii)--- is the restating of accounting balances of foreign operations at their equivalents in Naira.

SECTION C – THEORY QUESTIONS

QUESTION 1

Adtech manufactures and sells high quality printing paper. The auditor has drawn the company’s attention to the sale of some packs of paper on 20 October 2001 at a price of N45 each. These items were included in closing inventory on 30 September 2001 at their manufactured cost of N48 each. Further investigations revealed that during the inventory count on 30 September 2001 a quantity of packs of A3 size paper had been damaged by a water leak. The following week the company removed the damage by cutting the paper down to A4 size (A4 size is smaller than A3). The paper was then repackaged and put back into inventory. The cost of cutting and repackaging was N4 per pack. The normal selling price of the paper is N75 per pack for the A3 and N50 per pack for the A4, however on 12 October 2001 the company reduced the selling prices of all its paper by 10% in response to similar price cuts by its competitors.

Easyprint, one of the customers that bought some of the damaged paper had used it to print some share certificates for a customer. Easyprint informed Adtech that these share certificates had been returned by the customer because they contained marks that were not part of the design. Easyprint believes the marks were part of a manufacturing flaw on the part of Adtech and is seeking appropriate compensation.



Required:Discuss the impact the above information may have on the draft financial statements of Adtech for the year to 30 September 2001.

QUESTION 2

The timing of revenue (income) recognition has long been an area of debate and inconsistency in accounting. Industry practice in relation to revenue recognition varies widely, the following are examples of different points in the operating cycle of businesses that revenue and profit can be recognised:

a) on the acquisition of goods;b) during the manufacture or production of goods;c) on delivery/acceptance of goods;d) when certain conditions have been satisfied after the goods have been delivered;e) receipt of payment for credit sales;f) on the expiry of a guarantee or warranty.

In the past the “critical event” approach has been used to determine the timing of revenue recognition. The International Accounting Standards Committee (IASC) in its “Framework for the Preparation and Presentation of Financial Statements (Framework)” has defined the “elements” of financial statements, and it uses these to determine when a gain or loss occurs.

Required:(a)Explain what is meant by the critical event in relation to revenue recognition and discuss the criteria used in the Framework for determining when a gain or loss arises. (5 marks)

(b) For each of the stages of the operating cycle identified above, explain why it may be an appropriate point to recognise revenue and, where possible, give a practical example of an industry where it occurs. (12 marks)

(c) Babson has entered into the following transactions/agreements in the year to 31 March 2000:

(i) Goods, which had cost of N20,000, were sold to Wholesaler for N35,000 on 1 June 1999. Babson has an option to repurchase the goods from Wholesaler at any time within the next two years. The repurchase price will be N35,000 plus interest charged at 12% per annum from the date of sale to the date of repurchase. It is expected that Babson will repurchase the goods.

(ii) Babson owns the rights to a fast food franchise. On 1 April 1999 it sold the right to open a new outlet to Mr Cody. The franchise is for five years. Babson received an initial fee of N50,000 for the first year and will receive N5,000 per annum thereafter. Babson has continuing service obligations on its franchise for advertising and product development that amount to approximately N8,000 per annum per franchised outlet. A reasonable profit margin on the provision of the continuing services is deemed to be 20% of revenues received.

(iii) On 1 September 1999 Babson received total subscriptions in advance of N240,000. The subscriptions are for 24 monthly publications of a magazine produced by Babson. At the year end Babson had produced and despatched six of the 24 publications. The total cost of producing the magazine is estimated at N192,000 with each publication costing a broadly similar amount.

Required:Describe how Babson should treat each of the above examples in its financial statements in the year to 31 March 2000.



QUESTION 3

The broad principles of accounting for tangible non-current assets involve distinguishing between capital and revenue expenditure, measuring the cost of assets, determining how they should be depreciated and dealing with the problems of subsequent measurement and subsequent expenditure. IAS 16 “Property, Plant and Equipment” has the intention of improving consistency in these areas.

Required:(a) Explain:(i) how the initial cost of tangible non-current assets should be measured and; (4 marks)(ii) the circumstances in which subsequent expenditure on those assets should be capitalised. (3 marks)(b)Explain IAS 16 requirements regarding the revaluation of non-current assets and the accounting treatment of surpluses and deficits on revaluation and gains and losses on disposal. (8 marks)

(c) ‘Konko-Below’ has recently purchased an item of plant from Plantco, the details of this are:

N NBasic list price of plant 240,000trade discount applicable to ‘Konko-Below’ 12·5% on list price

Ancillary costs:shipping and handling costs 2,750estimated pre-production testing 12,500maintenance contract for three years 24,000

site preparation costs:electrical cable installation 14,000concrete reinforcement 4,500own labour costs 7,500 26,000

‘Konko-Below’ paid for the plant (excluding the ancillary costs) within four weeks of order, thereby obtaining an early settlement discount of 3%. ‘Konko-Below’ had incorrectly specified the power loading of the original electrical cable to be installed by the contractor. The cost of correcting this error of N6,000 is included in the above figure of N14,000. The plant is expected to last for 10 years. At the end of this period there will be compulsory costs of N15,000 to dismantle the plant and N3,000 to restore the site to its original use condition.

Required:Calculate the amount at which the initial cost of the plant should be measured. (Ignore discounting) (5 marks)

QUESTION 4

X Ltd. is a retail supermarket chain which regularly constructs its own superstores. During the year ended 31 December 20x5, X Ltd. began work on a new site.

On 1 January 20x5, a leasehold interest in the site (of 50 years) was purchased for N20 million.

It was considered that a further N10 million would be required to build and fit the superstore. N6 million of the additional N10 million would be spent on construction of the building and N4 million on fixtures and fittings. Past experience has led the management of X Ltd to believe that the fixtures and fittings would have an average useful economic life of ten years from first use before requiring replacement.



On 1 January 20x5, X Ltd borrowed N30 million to finance the project. The N30 million carries no interest but is repayable on 31 December 20x7 at a premium of N9.93 million (ie N39.93 million is to be repaid in total).

The superstore is to be brought into use on 1 January 20x6.

Required

(a) Set out the arguments for and against the capitalisation of borrowing costs on constructed fixed assets. (9 Marks).

(b) Assuming that borrowing costs are capitalised where appropriate, calculate:(i) The total amount to be included in fixed assets in respect of the development at 31 December

20x5; and(ii) The total amount to be charged to the profit and loss account in respect of the development for the

year ending 31 December 20x6. (11 Marks)Total Marks = 20

Present value factors are shown below.

Years (t) Present value of N1 to be received after t years5% 10% 15%

1. 0.952 0.090 0.8702. 0.907 0.826 0.7563. 0.864 0.751 0.6584. 0.823 0.683 0.5725. 0.784 0.621 0.497

QUESTION 5

Osmosis plc had been highly profitable and expanding its fixed asset base annually. At 30 November 20x4 the net book value in the balance sheet exceeded the tax written-down values by N1,200,000 and the company has not provided for deferred tax. The pattern of capital expenditure is likely to be more irregular in the future and the following forecast has been prepared.

CapitalAllowances DepreciationN’000 N’000

20x4-5 2,560 2,24020x5-6 2,800 2,56020x6-7 1,760 2,672

The corporation tax rate for 20x3-4 is 33%. Assume that it has been announced that the rates for future years are to increase to 35%.

RequiredCalculate the charge or credit for deferred tax that will appear in the profit and loss account for the years ended 30 November 20x4 and 20x5.

Draft an appropriate note to the profit and loss accounts in accordance with the provisions of SAS19 Accounting for taxes. (10 marks)QUESTION 6 – Current & Deferred Tax

In January 2000, Bobby Plc purchased N450,000,000 worth of computer equipment. The company initially intended to depreciate it over six years on a straight-line basis. However, in Year 2002 the fast pace of technological change in its business sector caused Bobby Plc to write off the book value at once. The capital allowance on this asset is granted at 20% on cost per annum on straight-line basis.



The current tax rate was 25% from Year 2000 to Year 2002. In 2003 and 2004 it was 35%. Bobby’s profits before depreciation are N420,000,000 for each of the five years. The carrying value and tax written down value of its other fixed assets are nil.

You are required to:

(a) Calculate the current tax charges for the years ended 31 December 2000 to 2004.

(b) Calculate the deferred tax balances and charges for the years ended 31 December 2000 to 2004.

(c) Prepare the profit and loss accounts for the years ended 31 December 2000 to 2004 and calculate the total tax charge as percentage of profit before tax.

(15 Marks) – ICAN

QUESTION 7

Recent corporate failures and scandals have raised concerns about the standard of financial reporting and corporate accountability. In response to these concerns, there have been significant developments made in developing codes of corporate governance. However, recent failures of corporate governance, particularly the collapse of Enron in 2001, and other corporate failures in the United States (U.S.) market, principal among which were Worldcom, Tyco and Global Crossing, are quite disturbing as they come at the end of a period of time when unprecedented attention has been given to the concept.

Influential working groups in many countries have created corporate governance codes, spelt out best practice, and sought to impose internal board structures. The "Code of Corporate Governance in Nigeria" an outcome of a committee set up by the Securities and Exchange Commission (SEC), and the Corporate Affairs Commission (CAC) was launched in November 2003 to guide the performance and running of public companies as well as conduct of public officers to ensure accountability and fairness in the economy. It is a general belief that effective corporate governance can safeguard investors but the directors of a company need to be committed to the principles that underpin them.

Required(a) Describe the main principles of an effective code of corporate governance under the headings:

(i) Directors and directors’ remuneration; (7 marks)(ii) Accountability and audit. (3 marks)

(b) Discuss whether current codes of corporate governance seem to be providing the necessary safeguards to investors. (10 marks)

SOLUTION TO TUTORIAL QUESTIOS

SECTION A – MULTIPLE CHOICE QUESTIONS

1. B2. D3. C4. B5. B6. A7. E8. D

SECTION B – SHORT ANSWER QUESTIONS

1: Mobilisation fee



2: Percentage-of-completion and completed-contract

3: Re-measure Contracts

4: Short-term Investments are investments which are readily realizable and intended to be held for not more than one year

5. The matching concept holds that for any accounting period, the earned revenue and all the incurred costs that generated that revenue must be matched and reported for the period. If revenue is carried

over from a prior period or deferred to a future period, all elements of cost and expense relating to that revenue are usually carried over or deferred as the case may be.

6: Accounting bases

7: Fair value is the amount for which an asset could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm's length transaction

8: Prior year adjustments: are items of revenue and expenses that were recorded this year but would have been recorded in a prior year or years if all of the facts had been known at that time. These do not

include adjustments for differences between actual and accounting estimates.

9: Two from:a. The risk and reward of ownership are transferred to the lesseeb. The Present value of rental is substantially the same as the fair value at inceptionc. The Lease agreement covers substantially the economic life of the assetd. The lease agreement is non-cancellablee. The lessee has an option to acquire the asset

10: Exceptional items are those items that though normal to the activity of an enterprise are abnormal as a result of their infrequency of occurrence and size e.g. abnormally high bad debts.

11: Two from - Dividend received- Interest received- Acquisition of long term investment- Proceed of long term investment

12: Full Cost Accounting (FCA) and Successful Effort Accounting (SEA)

13. International Financial Reporting StandardInternational Accounting Standard Board (IASB)

14. Any two from:a. acquisition of assets by assuming liabilities;b. exchange of non-monetary assets;c. refinancing of debts;d. conversion of debts or preference shares to ordinary shares;e. issuance of equity securities to retire debt; andf. bonus issue of shares.

15: Cash Equivalents are short-term, highly liquid investments that are readily convertible to known amount of cash and which are subject to an insignificant risk of changes in value. Generally, they

are within three months of maturity



16. Impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount.

17(i) Conversion(ii) Translation

SECTION C – THEORY QUESTIONS

SOLUTION 1

ADTECHThis is a complex situation. The selling prices of some items of inventory after the balance sheet date appear to be below their cost and this indicates that part of the closing inventory (at 30 September 2001) may require writing down to net realizable value with the resultant loss recognised in the current year. This is an adjusting post balance sheet event if the losses are due to circumstances that occurred before the year-end. However, if the losses are due to circumstances that developed in the post balance sheet period, they should be included in the following year’s financial statements (to 30 September 2002). If these losses (in 2002) are material they should be brought to the attention of shareholders in the notes to the financial statements for the year to 30 September 2001 as a non-adjusting event. Applying the above to the circumstances of the question would give the following analysis:

NCost 48Net realisable value (NRV) 41Apparent loss 7 per pack

The NRV of N41 is the reduced selling price for A4 paper of N45 less the cost of getting the goods into a saleable condition of N4.

From the question it would appear that this loss is partly attributable to the remedial cost of the water leak. This is an adjusting event requiring a write down of N2 per pack of the relevant items. The net realisable value at the year-end would have been N46 (original selling price of N50 less N4 remedial costs), which is N2 below the cost of N48. The remainder of the loss, N5 (N50 - N45), is caused by the price reduction in response to competitive pressure in the post balance period. This is a non-adjusting event requiring appropriate disclosure if material.

The above ignores the effect of the information concerning the sale to Easyprint. If the ‚marks are due to the water leak or other flaw in manufacture, Adtech will probably be liable to pay compensation to Easyprint. This would be an actual liability requiring a provision to be made in the current year unless the amount cannot be determined reliably. The provision would be for a refund of the cost of the goods sold and compensation for consequential losses caused by the faulty goods. If the marks were not due to the actions of Easyprint then there would be no liability. It may be that at this early stage there is insufficient information to come to a conclusion as to who is at fault, but this represents at least a contingent liability on the part of Adtech and should be disclosed appropriately in the notes to the financial statements. The information may also indicate that other customers could have similar claims against Adtech.

A final point to consider is that if the above fault is not due to Easyprint, it may mean that all of the inventory affected by the water leak is still damaged (despite the remedial work). If so, this would be evidence that the value of the inventory is impaired and a further provision would be required to write down the inventory (probably to nil) in the current year. Clearly no more of this inventory should be sold until the problem is resolved.



SOLUTION 2

(a) Problems of revenue recognition in accounting arise from the requirement to produce financial statements for specific periods of reporting. Consequently accounting principles and practices have evolved which focus on when and at what value transactions should be recognised in financial statements. Annual reporting creates artificial periods that are not related to the natural operating cycle of enterprises.

A typical operating cycle (for a manufacturing company) would comprise of acquiring goods or raw materials from which a saleable product is manufactured, at some stage orders would be obtained for these goods and they would then be delivered to and accepted by customers. The collection of cash for these sales is often considered to be the end of this process, but it should be borne in mind that in some cases further risks can exist in relation to product warranties or other after-sale commitments. The critical event theory argues that there comes a stage in the operating cycle, beyond which there is either no further significant risks or uncertainties or that they can be estimated with sufficient accuracy to enable revenue to be recognised. The point at which there remain no further risks is referred to as the critical event. For most transactions the critical event is synonymous with full performance, but in theory, the critical event could occur at almost any point in the operating cycle.

The traditional view of determining profit involves matching revenues earned with the related cost of earning those revenues. This involves the use of the accruals, matching and prudence concept, with prudence being closely related to the principle of realisation. Under this approach the balance sheet is effectively a statement of unexpired costs and undischarged liabilities.

In its Framework, the IASC advocates a different approach, it takes a balance sheet approach to the process of revenue recognition. It chooses to define the elements of financial statements, principally assets and liabilities, and uses these to determine income (gains) and expenses (losses). Recognition of gains and losses takes place when there is an increase or decrease in equity other than from contributions to, or withdrawals of, equity. Thus increases in economic benefits in the form of enhancements of assets or decreases in liabilities result in income, and decreases in economic benefits in the form of outflows or depletions of assets or incurrences of liabilities results in losses (expenses).

Recognition is the incorporation of an item in the financial statements. It involves the depiction of the item in words and at a monetary amount. For a transaction to be recognised as giving rise to a new asset or liability, or to add to an existing one it must meet the following recognition criteria:

(i) it is probable that any future economic benefit associated with the item will flow to the enterprise; and(ii) the item has a cost or value that can be measured with reliability.

(b) Acquisition of goods or raw materials:For most industries this event is a routine occurrence that could not be considered as critical. However where this is a very difficult task, perhaps due the rarity or scarcity of materials, then it may be critical. A rare practical example of this is in the extraction of precious metals e.g. gold mining. Because gold is a valuable and readily marketable commodity the real difficulty in deriving income from it is obtaining it, so this is the critical event. A logical progression of this point would be to say that any industry whose products are normally sold on a commodities market could consider the obtaining of the product to be the critical event. Such industries may include, for example, growing coffee beans.

During the manufacture or production of goods:Again for most industries this is not the critical event. Normally there would be far too many uncertainties remaining in the operating cycle. For example the manufacturing process could be flawed and therefore not produce saleable goods. Even if the goods are manufactured properly, it does not necessarily mean someone will buy them. It could be argued that where there is a firm order for the goods this would overcome some of the uncertainties, but it would still be imprudent to recognize firm orders as sales. There are however some industries where, due to a long production period, revenues are recognized during the production or manufacturing period. The most common example of this is the percentage of completion



method of profit recognition for construction contracts under IAS 11 ‚Construction Contracts. Where companies adopt this approach to revenue (and profit) recognition it is generally referred to as the ‚accretion approach.

Delivery/acceptance of the goods:For the vast majority of businesses this is the point at which revenue is recognised, and it usually coincides with the transfer of the legal title to the goods and represents the point of full performance. Although there may be some uncertainties beyond this point (for example, the goods may prove to be faulty or the customer may not be able to pay for them), these can usually be quantified and provided for with reasonable accuracy based on past experience.

When a condition has been satisfied after the goods have been delivered:The most common occurrence of this type of sale is where the customer has the right to return goods and not incur a liability for them. In most cases the condition is the passage of time (e.g. goods may be returned within three months of delivery), but it may also occur in relation to some other event such as their subsequent resale to another party. Traditionally with this type of sale, its recognition is delayed until the condition has been met, however one could argue that the substance of these transactions should be considered. Although a customer may have the right to return goods, if it can be demonstrated that in practice this never actually occurs, then recognising the sale before the expiry of the return period could be justified.

Another example of this type of condition is where the terms of a sale of say an item of equipment required the seller to install and test the equipment. If this involves significant expense or risk then recognition of this type of sale would be deferred until completion of the installation.

Collection of cash:For most (credit) sales the risk of non-payment is relatively low. Revenue recognition would only be delayed to the point of receipt of cash if its collection was perceived to be particularly difficult or risky. Revenues (and profits) from high risk credit sale agreements may be examples of this. Another possibility is sales made to risky overseas countries/customers, particularly if they are in non-convertible currencies or the country has strict exchange controls.

Expiry of guarantees/warranties:This serves as a reminder that not all the risks and associated costs are resolved when cash is received. For some products such costs can be significant (e.g. with the supply of new motor vehicles or rectification work on construction contracts); however it is normally possible to reliably estimate these costs and provide for them at the time of the sale. It would be unrealistic, and may cause distortions, if revenues were not recognised until such obligations had elapsed.

(c)(i) Although this agreement may be worded as a sale, and even if the title to the goods passes to Wholesaler, it seems clear that this is not a sale - it is a secured loan. Therefore Babson should not treat the income from Wholesaler as revenue, but instead as a loan in its balance sheet. The goods should continue to be recognised as inventory on the balance sheet, and accrued interest of N3,150 (N35,000 x 12% x 9/12) should be provide for in the income statement.

(ii) It appears that the ongoing fees after the first initial payment are insufficient to cover Babson’s servicing cost and provide a reasonable profit. In these circumstances IAS 18 ‚Revenue requires part of the initial fee of N50,000 to be deferred and recognised in future periods as the servicing costs are incurred. As there is a requirement to earn a (reasonable) profit of 20% on revenues, with ongoing servicing costs of N8,000, revenues of N10,000 would need to be recognized in the next four years. The actual fees receivable are N5,000, therefore Babson will have to defer N20,000 (N5,000 x four years) of the initial fee. Thus in the year to 31 March 2000 Jenson would recognise N30,000 (N50,000 - N20,000) of the initial franchise fee.



(iii) An accruals/matching approach to this problem would be to say that the profit on each publication would be N2,000 ((N240000 - N192,000)/24). In the year to 31 March 2000, as six of the 24 publications have been produced and delivered, the income statement would be:

NSales (6 x 240,00/24) 60,000Cost of sales (6 x 192,000/24) (48,000)Profit 12,000

Deferred income on the balance sheet would be N180,000 (N240,000 - N60,000).

SOLUTION 3

(a) (i) Although the broad principles of accounting for non-current assets are well understood by the accounting profession, applying these principles to practical situations has resulted in complications and inconsistency. For the most part, IAS 16 codifies existing good practice, but it does include specific rules which are intended to achieve improved consistency and more transparency.

CostThe cost of an item of property, plant and equipment comprises its purchase price and any other costs directly attributable to bringing the asset into a working condition for its intended use.This is expanded upon as follows:

- purchase price is after the deduction of any trade discounts or rebates (but not early settlement discounts), but it includes any transport and handling costs (delivery, packing and insurance), non-refundable taxes (e.g. sale taxes such as VAT, stamp duty, import duty). If the payment is deferred beyond normal credit terms this should be taken into account either by the use of discounting or substituting a cash equivalent price;

- directly attributable costs are the incremental costs that would have been avoided had the assets not been acquired. For self constructed assets this includes labour costs of own employees. Abnormal costs such as wastage and errors are excluded;

- installation costs and site preparation costs; and- professional fees (e.g. legal fees, architects fees)

In addition to the traditional costs above two further groups of cost may be capitalised:- IAS 23 ‚Borrowing Costs allows (under the allowed alternative method), directly attributable borrowing costs to be capitalised. Directly attributable borrowing costs are those that would have been avoided had there been no expenditure on the asset.

- IAS 37 ‚Provisions, Contingent Liabilities and Contingent Assets says that if the estimated costs of removing and dismantling an asset and restoring its site qualify as a liability, they should be provided for and added to the cost of the relevant asset.

Finally the carrying amount of an asset may be reduced by any applicable government grants under IAS 20 ‚Accounting for Government Grants and Disclosure of Government Assistance.

(ii) Subsequent expenditure:Traditionally the appropriate accounting treatment of subsequent expenditure on non-current assets revolved around whether it represented a revenue expense, in effect maintenance or a repair, or whether it represented an improvement that should be capitalised. IAS 16 bases the question of capitalisation of subsequent expenditure on whether it results in a probable future economic benefit in excess of the amount



originally assessed for the asset. All other subsequent expenditure should be recognised in the income statement as it is incurred.

Examples of circumstances where subsequent expenditure should be capitalised are where it: represents a modification that enhances the economic benefits of an asset (in excess of its previously

assessed standard of performance). This could be an increase in its life or production capacity; upgrades an asset with the effect of improving the quality of output; or is on a new production process that reduces operating costs.

In addition to the above the Standard says it is important to take into account the circumstances of the expenditure. For example normal servicing and overhaul of plant is a revenue cost, but if the expenditure represents a major overhaul of an asset that restores its previous life, and the consumption of the previous economic benefits has been reflected by past depreciation charges, then the expenditure should be capitalised (subject to not exceeding its recoverable amount). A further example of where subsequent expenditure should be capitalised is where a major component of an asset that has been treated separately (for depreciation purposes) is replaced or restored (e.g. new engines for an aircraft).

(b) Revaluation (particularly of properties) has been an area of great flexibility and inconsistency, often leading to misleading financial statements and accusations of ‚creative accounting. Under IAS 16 revaluations are permitted under its allowed alternative treatment rules for the measurement of assets subsequent to their initial recognition. The Standard attempts to bring some order and consistency to the practice of revaluations.

Where an entity chooses to revalue a tangible non-current asset, it must also revalue the entire class of assets to which it belongs. Further, sufficiently regular revaluations should be made such that the carrying amounts of revalued assets should not differ materially to their fair values at the balance sheet date. The Standard stops short of requiring annual valuations, but it does contain detailed rules on the basis and frequency of valuation. It should be noted that where an asset has been written down to its recoverable amount due to impairment, this is not classed as being a policy of revaluation. The effect of the above is that it prevents selective or favourable valuations being reported whilst ignoring adverse movements, and where a company has chosen to revalue its assets (or class thereof), the values must be kept up-to-date.

Surpluses and deficits:These are measured as the difference between the revalued amounts and the book (carrying) values at the date of the valuation. Increases (gains) are taken to equity under the heading of revaluation surplus,unless, and to the extent that, they reverse a previous loss (on the same asset) that has been charged to the income statement. In which case they should be recognized as income.

Decreases in valuations (revaluation losses) should normally be charged to the income statement. However, where they relate to an asset that has previously been revalued upwards, then to the extent that the losses do not exceed the amount standing to the credit of the asset in the revaluation reserve, they should be charged directly to that reserve.

Any impairment loss on revalued property, plant and equipment, recognisable under IAS 36 ‚Impairment of Assets, is treated as a revaluation loss under IAS 16.

Gains and losses on disposal:The gain or loss on disposal is measured as the difference between the net sale proceeds and the carrying value of the asset at the date of sale. In the past some companies reverted to historic cost values to calculate a gain on disposal thus inflating the gain (assuming assets had increased in value). All gains and losses should be recognised in the income statement in the period of the disposal. Any revaluation surplus standing to the credit of a disposed asset should be transferred to accumulated realised profits (retained earnings) as a movement on reserves.

(c) (i) The initial measurement of the cost at which the plant would be capitalised is calculated as follows:



N Nbasic list price of plant 240,000less trade discount of 12·5% on list price (30,000)

210,000shipping handling and installation costs 2,750estimated pre-production testing 12,500

site preparation costs:electrical cable installation (14,000 - 6,000) 8,000concrete reinforcement 4,500own labour costs 7,500 20,000

dismantling and restoration costs (15,000 + 3,000) 18,000Initial cost of plant 263,250

Note: the early settlement discount is a revenue item (probably deducted from administration costs). The maintenance cost is also a revenue item, although a proportion of it would be a prepayment at the end of the year of acquisition (the amount would be dependent on the date on acquisition). The cost of the specification error must be charged to the income statement.

SOLUTION 4

Arguments for and against capitalisation of borrowing cost

a. The arguments for and against the capitalisation of borrowing costs are as follows:-Fori. Borrowing costs which are incurred in order to acquire an asset are no different from other costs

incurred.

ii. Capitalisation of borrowing costs meets the matching concept as costs are carried forward to be offset against revenues which the asset generates.

iii. It allows for greater comparability between those companies that construct their own assets and those that purchase them already completed.

Againsti. It is inconsistent to capitalise borrowing costs during a period of construction and then convert to

expensing them when the asset is complete.

ii. It is arbitrary to assign finance costs to a particular assets. These costs are part of the normal costs of an on-going business.

iii. Similar types of asset will have different costs depending on how they are financed.

iv. Inclusion of all borrowing costs as an expense when incurred means that profit and loss accounts are more comparable between different financial periods.

b). N9.93m payable in year 3 over and above the original amount of N30m borrowed translates to an effective annual interest rate of 10% per annum.

30Present value factor = ----------- = 0.751

39.93

Period of loan is 3 years, therefore effective rate of interest = 10% (see present value table in question)



i. Balance Sheet As At 31 st December, 20x5 (Extract)

N’mAssets in course of construction (W) 33

------

Working: asset N’mLease 20Interest (N30m x 10%) 3Construction costs 6Fixtures and fittings 4

------33

===

ii. Profit and Loss Account For The Year Ending 31 st December, 20x6 (Extracts)

=N=Depreciation (W) 991,836Interest charges (N30m + N3m) x 10% 3,300,000

------------4,291,836=======

Working: Depreciation =N=

Lease (49 years to run): N20m 49 408,163Buildings: N6m 49 122,449Fittings: N4m 10 400,000Interest capitalised: N3m 49 61,224

-----------991,836======

Solution 5 – Osmosis Deferred Taxation

Workings

20x4

Year CapitalAllowances

N’000

Depreciation

N’000

TimingOriginatingN’000

differencesReversingN’000

Cumulative

N’00020x4 – 5 2,560 2,240 320 32020x5 – 6 2,800 2,560 240 56020x6 – 7 1,760 2,672 912 (352)

Balance sheet/P & L a/c = 352 @ 35% = 123.2

20x4

Year CapitalAllowances

N’000

Depreciation

N’000

TimingOriginating

N’000

differencesReversing

N’000

Cumulative

N’00020x5 – 6 2,800 2,560 240 24020x6 – 7 1,760 2,672 912 (672)



Balance sheet = 672 @ 35% = 235.2P & L a/c = 235.2 – 123.2 = 112.0

Unprovided deferred tax

20x4 N’000Total potential deferred tax (1,200 x 35%) 420.0Less deferred tax balance 123.2

----------296.8

======20x5 N’000Total potential deferred tax (1,200 + 320) x 35%) 532.0Less deferred tax balance 235.2

----------296.8

======Profit and loss accountYear ended 30 November

20x4 20x5N’000 N’000

Deferred taxation charge 123.2 11.20--------- ----------

Balance sheetYear to 30 November

20x4 20x5N’000 N’000

Balance on deferred taxation account 123.2 11.20--------- ----------

Notes to the Accounts

Year ended 30th November, 20x4 Deferred taxation not provided on capital allowances amounts to N296,800 at a rate of 35%.

Year ended 30th November, 20x5 Deferred taxation not provided on capital allowances amounts to N29,800 at a rate of 35%.

SOLUTION 6

(a) Bobby PlcCurrent Tax Charges

2000 2001 2002 2003 2004N’000 N’000 N’000 N’000 N’000

Profit before dep’n 420,000 420,000 420,000 420,000 420,000

Capital allowance (20% x 450m)

(90,000) (90,000) (90,000) (90,000) (90,000)

330,000 330,000 330,000 330,000 330,000

Tax rate 25% 25% 25% 35% 35%

Tax charge (N’000) 82,500 82,500 82,500 115,500 115,500



(b) Deferred Tax Provision and Charges

2000 2001 2002 2003 2004N’000 N’000 N’000 N’000 N’000

Accounting NBV 375,000 300,000 - - -Tax WDV 360,000 270,000 180,000 90,000 -Difference 15,000 30,000 (180,000) (90,000) -Tax rate 25% 25% 25% 35% 35%Provision (N’000) 3,750 7,500 (45,000) (31,500) -

Increase/Credit (N’000) 3,750 3,750 (52,500) 13,500 31,500

(c) Profit and Loss Account for the year ended 31 December 2004

2000 2001 2002 2003 2004N’000 N’000 N’000 N’000 N’000

Profit before tax (Note 2) 345,000 345,000 120,000 420,000 420,000

Taxation (Note 1) (86,250) (86,250) (30,000) (129,000) (147,000)Profit after tax 258,750 258,750 90,000 291,000 273,000Tax as % of profit 25% 25% 25% 31% 35%

Workings

1 – Taxation 2000 2001 2002 2003 2004

N’000 N’000 N’000 N’000 N’000

Current year 82,500 82,500 82,500 115,500 115,500

Deferred Tax (b) 3,750 3,750 (52,500) 13,500 31,500Total 86,250 86,250 30,000 129,000 147,000

2 – Profit before Tax N

2000 and 2001 - N420 m – N75 m depreciation = 345 m2002 - N420 m – N300 m depreciation = 120 m2003 and 2004 - N420 m and no depreciation = 420 m

3 – The deferred tax charges and credit were obtained as follows:

N‘000 N‘000Year 2000 - 3,750 – 0 = 3,750Year 2001 - 7,500 – 3,750 = 3,750Year 2002 - 45,000 – 7,500 = (52,500)Year 2003 - 31,500 + 45,000 = 13,500Year 2004 - 0 + 31,500 = 31,500



Solution 7

(a)The main principles which underlie an effective code of corporate governance are set out below:

Directors and directors’ remuneration

(i) Every public company should have an effective board of directors which controls and leads the company. In the case of a unitary board, this essentially means a team of executive and non-

executive directors under the leadership of a chairman.

(ii) There should be clear division of the executive responsibilities for the running of the board and the company’s business. In principle the roles of ‘chairman’ and ‘chief executive officer’ should be separate.

(iii) A board should have a balance of executive and non-executive directors such that no party can dominate the board’s decision making.

(iv) The board should be provided with appropriate and timely information and of sufficient quality to enable it to carry out its duties.

(v) New appointments to the board should be made via a formal and transparent procedure. Decisions as regards appointments should be taken in reality as well as in form by the board.

(vi) All directors would be presented for regular re-election and at least every three years. Non-executive directors should be appointed for a specific period of time and be subject to re-election.

(vii) Remuneration levels should be sufficient to attract and retain directors without paying more than is necessary for the purpose. Part of the remuneration should be linked to corporate and individual

performance.

(viii) A formal and transparent procedure should be established for developing policy on executive remuneration with no directors being involved in deciding their remuneration.

(ix) The annual report should contain a statement of the remuneration policy and details of the remuneration of each director.

Accountability and audit

(i) In the financial statements, the board should present a balanced and understandable assessment of corporate performance and prospects, including an explanation of the directors’ responsibilities for those statements.

(ii) The board should maintain a sound system of internal control in order to safeguard the company’s assets and the shareholder’s investment.

(iii) Formal and transparent procedures for the application of financial reporting and internal control principles should be established, and for maintaining an appropriate relationship with the auditors. This would normally involve the establishment of an audit committee.

(b) The Enron scandal and other such corporate scandals in the USA illustrated the current failure of

corporate governance codes to protect investors from unscrupulous directors. Current voluntary codes are failing to protect against senior executives who sanction misleading accounting treatments, or audit committees that agree misleading financial statements. There is an argument that corporate governance



under existing voluntary codes is dependent upon the attitudes of the directors. It is a state of mind and personal relationships. Any code will not work if the viewpoint of the directors is that such a code is a set of procedures which must only be given lip service to. No rules will work if the directors are not committed to the principles which underpin them.

There is a need to ensure that current best practice is implemented. Further codes of governance are probably not required as existing codes provide the necessary framework and principles. Formal procedures are necessary in order to have effective corporate governance. In particular the role of non-executive chairman or a senior independent member of the board is of paramount importance. Many boards have non-executive directors but in many companies there is no clear leader to provide an effective, independent check on the actions of executive management. The division of the role of the ‘chairman’ and ‘chief executive officer’, and executive and non-executive directors is critical.

Often non-executive directors are involved in consultancy work for the company or are dependent upon the company for their livelihood. Thus a question as to their independence could be raised and, therefore, the definition of what constitutes an independent non-executive director must be revisited.

Non-executive directors do not normally spend a great deal of time at the company because of the pay structure and often have several non-executive directorships. These directors need to spend more time understanding the needs of the individual company, and the culture and systems of the company, in order to act effectively.

The audit committee is not functioning efficiently in many companies. The members of the committee may not possess the requisite accounting knowledge to be able to scrutinise the financial statements effectively or query accounting practices with the preparers of those statements. In some companies there has been a presumption that the financial statements will be automatically approved by the audit committee.

Contentious issues have not been dealt with by the auditors in conjunction with the audit committees.The importance of the audit committee and the further development of its role as an independent watchdog is quite critical. The committee should have a special role in appointing and reviewing the performance of the chief executive officer and ensuring that internal control procedures are satisfactory. Further the audit committee should be well placed to act as a focal point for internal ‘whistle blowers’ rather than senior management dealing with the issues.

Current compensation plans for executives are often geared to the share price of a company. This policy has risks and rewards for a company. These plans may lead to management attempting to manipulate the share price. Share option grants may compromise shareholders’ interests by the potential dilution and this was particularly so during the ‘high-technology bubble’.

There is a need to impose a stricter regulation on the timing of option sales by executives in order to reconcile the interests of insiders and outsiders. The remuneration packages of executives should be such that short-term share price movements should not be of paramount importance.

Current codes lay out the principles behind good corporate governance but the application of the principles is failing. A strong board with the correct balance of directors (executive and non-executive), and a leader of the non-executive directors is required. The audit committee should have a greater role in the approval of financial statements and control, and compensation plans should not overemphasise the importance of share price movements. However, the corporate governance culture within companies needs to change. Many companies do not see the benefits but only the costs of implementation with the result that lip service only is paid to the codes.


2011+Accounting+Standards+In+Nigeria.doc

Documents

Transcript of 2011+Accounting+Standards+In+Nigeria.doc