financial reporting and ethics
TRANSCRIPT
-
8/3/2019 Financial Reporting and Ethics
1/309
1
REGULREGULREGULREGULREGULAAAAATORY FRAMEWORKTORY FRAMEWORKTORY FRAMEWORKTORY FRAMEWORKTORY FRAMEWORK OFOFOFOFOFFINANCIAL REPORFINANCIAL REPORFINANCIAL REPORFINANCIAL REPORFINANCIAL REPORTINGTINGTINGTINGTING
1 .01 .01 .01 .01 .0 LEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVES
After studying this chapte r, the read er will be a ble to und erstan d the:
! Need for the existence of a reg ulatory framework;
! Various reg ulatory frame work for corporate fina ncial reporting ;
! Composition, functions a nd powers of the Nigerian Accounting Stand ard s Board;
! Processes involved in the production of an accounting standard; and
! Current Statements of Accounting Standards issued by NASB.
1 .11 .11 .11 .11 .1 INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTION
Regulation of accounting information is aimed at ensuring that users of
financial sta tements receive a minimum amount of information that will enable
them take mea ningful decisions regard ing their interest in a reporting entity.The b odies responsible for these regulations a re often sta tutory agencies such
as the Accounting Standa rds Board , Securities and Exchange Commission and
the Stock Exchange. The bulk of this framework is usually contained in
Accounting Standa rds. The Nigerian Accounting Standards Board is the b ody
responsible for the issua nce of Account ing Standa rds in Nigeria. This board,
was initially an advisory body responsible for the production of stand ards tha t
will serve a s a guide to Accountan ts in the prepa ration of financial statements.
Until 2003, when the Nigerian Accounting Standa rds Board Act was enacted ,
which now ma kes it manda tory for accountan ts prepa ring corporate reports to
adhere strictly to the provisions of the Accounting Standards issued by the
board, the standards were treated as just generally accepted accounting
principles. This manda tory approach a rises from the fact tha t there is the need
to:
(a) ensure uniformity in the preparation and presentation of corporate
reports throughout the country;
(b) ensure that accountants comply with the Generally Accepted Accounting
Principles in the d ischa rge of their functions;
(c) ensure that the standards comply with existing regulatory frameworks;
(d) ensure that the standards comply with the domestic accounting need of
our country.
With the p assing into law of the NASB Act 2003, the NASB is now the
11111
-
8/3/2019 Financial Reporting and Ethics
2/309
FINANCIAL REPORTING AND ETHICS
2
only body recognized by law for the development, issuance a nd review
of accounting standa rds for prepa rers and users of financial statements.
1 .21 .21 .21 .21 .2 OTHER REGULOTHER REGULOTHER REGULOTHER REGULOTHER REGULAAAAATORY FRAMEWORKTORY FRAMEWORKTORY FRAMEWORKTORY FRAMEWORKTORY FRAMEWORK
Other institutions responsible for the regulation of account ing informat ion in
Nigeria include:
(a) The Central Bank of Nigeria (CBN);
(b) The Nigerian Insurance Commission (NAICOM);
(c) The Securities and Exchange Commission.
Each of these regulatory authorities has an enabling law that guides the
activities of the various institut ions opera ting in the sector. The CBN has the
Banks and Other Financial Institutions Act (BOFIA) 1991, NAICOM has the
Nigerian Insurance Act 2003, while the Securities an d Exchange Commission
has the Investment a nd Securities Act, 1999. These Acts provide some specificrequirements relating to the Accounts of every corpora te en tity within its fold.
BOFIA, for insta nce p rovides specific requirements rela ting to the minimum
paid up capital, sta tutory reserves, lending limit, classification of assets, returns
and p ublication of annua l accounts by banks. The Insurance Act also provides
for the minimum paid up capital, types and classification of insurance
businesses, statutory deposit, books and accounting records to be kept,
maintenance of technical reserves and solvency margin required by all
insurance businesses in Nigeria. The Investment and Securities Act on the other
han d m akes provision for the reg istration of cap ital ma rket operators, public
offer and sale of securities an d mergers, take-over and a cquisitions. All these
requirements a re made to supplement the elaborate provisions of the NigerianAccounting Standards.
1 .31 .31 .31 .31 .3 COMPOSITION, FUNCTIONS AND POWERS OF THE NIGERIANCOMPOSITION, FUNCTIONS AND POWERS OF THE NIGERIANCOMPOSITION, FUNCTIONS AND POWERS OF THE NIGERIANCOMPOSITION, FUNCTIONS AND POWERS OF THE NIGERIANCOMPOSITION, FUNCTIONS AND POWERS OF THE NIGERIAN
ACCOUNTING STACCOUNTING STACCOUNTING STACCOUNTING STACCOUNTING STANDARDS BOARDANDARDS BOARDANDARDS BOARDANDARDS BOARDANDARDS BOARD
1.3 .11 .3 .11 .3 .11 .3 .11 .3 .1 CCCCComposit ionomposit ionomposit ionomposit ionomposit ion
The NASB was established in 1982 to issue accounting standards in
Nigeria which will take into cognizance our peculiar business
environment, customs, laws and level of economic development. From
inception to da te, the membership of the Board chan ged considerablyfrom 8 to 13, 13 to 14 and to the present a rrang ement wh ich provided
for a four strata membership comprising of 17 members all of whom
are appointed by the President. The p resent membership as p rovided
un der S. 2(2) of NASB Act, includes:
(a ) The Chairman;
(b) Two members each from the Institute of Chartered Accountants
of Nigeria (ICAN) and the Association of Nationa l Accountants of
Nigeria (ANAN).
(c) A representative each from the following:
-
8/3/2019 Financial Reporting and Ethics
3/309
3
(i) Federal Ministry of Commerce;
(ii) Federal Ministry of Finance;
(iii) Central Bank of Nigeria;
(iv) Nigerian Accounting Association (NAA);
(v) Corporate Affairs Commission;
(vi) Federal Inland Revenue Service;
(vii) Nigerian Deposit Insurance Corporation;
(viii) Securities and Exchange Commission;
(ix) Auditor General for the Federation;
(x) Accountant General of the Federation;
(xi) Chartered Institute of Taxation of Nigeria; and
(xii) Niger ian Assoc ia t ion of Cham bers of Commerce ,
Industries, Mines a nd Agriculture .
(d) The Executive Secretary of the Board.Each mem ber of the Board sha ll hold office for a period of four
years or on such terms or conditions that may be specified in
their letters of appointmen t.
1 .3 .21 .3 .21 .3 .21 .3 .21 .3 .2 FFFFFunctions of the Boarunctions of the Boarunctions of the Boarunctions of the Boarunctions of the Boarddddd
The Boards functions as provided in S. 6 of the Act, include the following:
(a) Developing and publishing in public interes t, accounting
standards to be observed in the preparation of financial statements;
(b) Reviewing from time to time the accounting standards developed
in line with the prevalent social, economic and politicalenvironments;
(c) Promoting and enforcing compliance with accounting standards
developed or reviewed by the Board ;
(d) Promoting the general acceptance and adoption of standards by
prepa rers of financial statemen ts;
(e) Receiving from time to time notices of non-compliance with its
standa rd from the prepa rers, users and a uditors of an account;
(f) Receiving copies of all qualified reports together with detailed
explanations for such qualificat ions from auditors of the a ccounts
within a period of 60 da ys from the d ate of such qualifications;(g) Advising the Minister on the making of regulations under S. 356
of Companies and Allied Matters Act;
(h) Advis ing the Federa l Government on mat te rs rela t ing to
accounting standa rds; and
(i) Performing such other duties which, in the opinion of the Council,
are necessary or exped ient to ensure the efficient performa nce
of the functions of the Board under th is Act.
REGULATORYFRAMEWORK OF FINANCIAL REPORTING
-
8/3/2019 Financial Reporting and Ethics
4/309
FINANCIAL REPORTING AND ETHICS
4
1.3.3 Powers1.3.3 Powers1.3.3 Powers1.3.3 Powers1.3.3 Powers
Powers of the Board include the following:
(a) Identifying accounting statements which require standardization
and e stablish order of priority for add ressing them;
(b) Determining the scope and objectives of each standard;
(c) Prescribing the methods and procedure for the production of
standards;
(d) Prescribing the time-table for the production of standards;
(e) Approving discussion papers, exposure drafts and standards;
(f) Enforcing and approving enforcement of compliance with
accounting sta nda rds in Nigeria; an d
(g) Exercising such powers as are necessary or expedient for giving
effect to the p rovisions of this Act.
1 .41 .41 .41 .41 .4 PROCESS OF PRODUCING AN ACCOUNTING STPROCESS OF PRODUCING AN ACCOUNTING STPROCESS OF PRODUCING AN ACCOUNTING STPROCESS OF PRODUCING AN ACCOUNTING STPROCESS OF PRODUCING AN ACCOUNTING STANDARDANDARDANDARDANDARDANDARD
The procedure to be a dopted in the production of an accounting sta nda rd is
provided under S.8 of the Act as follows:
(a) Choice of a topic for standardisation;
(b) Prepare and publish exposure draft ;
(c) Allow at least three months for comments by stakeholders;
(d) Conduct a public hearing where necessary;
(e) Incorporate all reasonable additional ideas to the documents;
(f) Issue a sta tement of accounting standard.
1 .51 .51 .51 .51 .5 STSTSTSTSTAAAAATEMENTS OF ACCOUNTING STTEMENTS OF ACCOUNTING STTEMENTS OF ACCOUNTING STTEMENTS OF ACCOUNTING STTEMENTS OF ACCOUNTING STANDARDS ISSUEDANDARDS ISSUEDANDARDS ISSUEDANDARDS ISSUEDANDARDS ISSUED
Since its establishment in 1982, the NASB has so far issued thirty (30)
account ing standards which include :
SAS 1 Disclosure of Accounting Policies
SAS 2 Information to be Disclosed in Financial Statements
SAS 3 Accounting for Property, Plant and Equipments
SAS 4 Stocks
SAS 5 Construction Contracts
SAS 6 Extraordinary Items and Prior Year AdjustmentSAS 7 Foreign Currency Conversions and Translations
SAS 8 Accounting for Employees Retirement Benefits
SAS 9 Accounting for Depreciation
SAS 10 Accounting for Banks and Non-Banks Financial Institutions (Part I)
SAS 11 Lea ses
SAS 13 Accounting for Investments
SAS 14 Accounting in the Petroleum Industry: Upstream Activities
SAS 15 Accounting for Ban ks and Non-Ban ks Financial Institutions
(Part II)
SAS 16 Accounting for Insurance Companies
-
8/3/2019 Financial Reporting and Ethics
5/309
5
SAS 17 Accounting in the Petroleum Industry: Downstream Activities
SAS 18 Statement of Cash flows
SAS 19 Accounting for Deferred Taxes
SAS 20 Abridge Financial Statements
SAS 21 Earnings Per Share
SAS 22 Research and Development Costs
SAS 23 Provisions, Contingent Liabilities and Contingent Assets
SAS 24 Segment Reporting
SAS 25 Telecommunications Activities
SAS 26 Business Combinations
SAS 27 Consolidated and Separate Financial Statements
SAS 28 Investments in Associates
SAS 29 Interests in Joint Ventures
SAS 30 Interim Financial Reporting
1 .61 .61 .61 .61 .6 SUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONS
This chapter has discussed the various bodies and laws regulat ing corporate
financial reporting in Nigeria. It ha s also given d eta ils about the composition,
functions and powers of the Nigerian Account ing Standa rds Board as well as
the p rocess involved in p roducing an Accounting Standa rd.
Refer to Comprehensive Questions an d Suggested Solutions in Append ix II,
page 269.
1 .71 .71 .71 .71 .7 REVISION QUESTIONSREVISION QUESTIONSREVISION QUESTIONSREVISION QUESTIONSREVISION QUESTIONS
1.7 .11 .7 .11 .7 .11 .7 .11 .7 .1 MULMULMULMULMULTIPLE CHOICE QUESTIONSTIPLE CHOICE QUESTIONSTIPLE CHOICE QUESTIONSTIPLE CHOICE QUESTIONSTIPLE CHOICE QUESTIONS
1. Which of the following institutions is not responsible for the regulation of
accounting informat ion in Nigeria?
A. Cen tra l Ba nk of Nig eria .
B. Securit ie s and Exchange Commission .
C. Nig eria Accou nt in g Sta n da rd s Boa rd .
D. Nig eria In su ra n ce Com mission .
E. Corporate Affa ir s Commission .
2. The following are represented on the Nigerian Accounting Standards Board
except:
A. Inst itu te of Chartered Accountants of Nigeria .B. Fe de ra l Min ist ry of Com me rce .
C. Associa t ion of Nat ional Accountants of Nigeria ,
D. Economic and Financia l Crimes Commission.
E. Corporate Affa ir s Commission .
3. One of the following is not part of the processes to be adopted in producing
an accounting standard:
A. Choosing a top ic for st anda rd iza t ion .
B. Pre pa rin g an d pu blish in g an exp osu re dra ft .
C. Allowing a t least one month for comments by shareholders .
D. Conduct ing pub lic hea ring if necessa ry.
E. Incorpora ting a ll reasonable addit ional ideas to the document .
REGULATORYFRAMEWORK OF FINANCIAL REPORTING
-
8/3/2019 Financial Reporting and Ethics
6/309
FINANCIAL REPORTING AND ETHICS
6
4 . Which o f the fo llowing s ta tements o f Accoun t ing Standa rds gove rns
construction contracts?
A. SAS 5
B. SAS 10
C. SAS 2D. SAS 6
E. SAS 4.
5 . Sta tements of Account ing Standards Number 10 and 15 are concerned
with:
A. Accou ntin g for In vestm en ts
B. Accounting for Banks and Non-Bank Financial Institutions.
C. Leases
D. Segment for Reporting.
E. Business combina tions.
1 .7 .21 .7 .21 .7 .21 .7 .21 .7 .2 SHORT ANSWER QUESTIONSSHORT ANSWER QUESTIONSSHORT ANSWER QUESTIONSSHORT ANSWER QUESTIONSSHORT ANSWER QUESTIONS
1. In Nigeria, Accounting Standards are issued by the... .. .. .. .. .. .. .. .. .. .. .. .. ..
2. The acronym BOFIA stand s for.........................................................
3. Statement of Accounting Standard 29 is to regulate accounting information
on...........................
4. The subject of SAS 21 is.... .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..
5. Extraordinary Items and Prior Year Adjustments are the subject of SAS..... ..
Refer to Sugge sted Solutions in Appe nd ix I, Page 263.
-
8/3/2019 Financial Reporting and Ethics
7/309
7
ACCOUNTING AND REPORACCOUNTING AND REPORACCOUNTING AND REPORACCOUNTING AND REPORACCOUNTING AND REPORTINGTINGTINGTINGTINGPOLICIESPOLICIESPOLICIESPOLICIESPOLICIES
2 .02 .02 .02 .02 .0 LEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVES
After studying this chapte r, the read er will be a ble to und erstan d the:
! Genera l an d Specific reporting policies;
! Guidelines for the selection of Reporting Policies;
! Methods of recognizing Assets and Liabilities;
! Difference bet ween legal a nd commercial views of Account ing; an d
! Concepts of fair pre senta tion and true a nd fair view.
2 .12 .12 .12 .12 .1 INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTION
Accounting policies are specific bases used by a particular business and
regarded as a ppropriate to the circumstances of the business and suitable for
the fair presentation of its results and financial position. Disclosure ofaccounting policies becomes necessary in circumstances where alternative
trea tments for a n umber of items a ppearing in financial statements exist. As a
guide to users of financial statements, prepares of an entitys financial
statemen t a re requ ired to state categorically which of the various alternative
policies is ad opted . The Sta tement of Accounting Standard 1 (SAS 1) requires
that every company shall disclose its accounting policies in relation to the
following g eneral issues:
(a ) Overall accounting policy (e.g. historical cost, general purchasing power,
replacement value);
(b) Consolidation policy; ( for group entities)(c) Taxation;
(d ) Long term con tracts;
(e) Events subsequent to the balance sheet date;
(f) Leases, hire purchase or instalment transactions and related interest;
(g) Conversion or translation of foreign currencies including the disposition
of exchange ga ins and losses; and
(h) Franchises.
The presentation of accounting policies in financial statements varies from
one en terprise to another. In order to provide an over-view of the accounting
22222
-
8/3/2019 Financial Reporting and Ethics
8/309
FINANCIAL REPORTING AND ETHICS
8
policies of an enterprise, these accounting policies should be disclosed together,
rath er than as notes to individual items in the financial statements. However,
many enterp rises disclose in notes to their financial statements, the significant
accounting policies which they have adopted in treat ing the following items:
Assets Related Items:Assets Related Items:Assets Related Items:Assets Related Items:Assets Related Items:
(a ) Debtors or rece ivables;
(b) Stock and work-in-progress (inventories) and related cost of
goods sold;
(c) Deprecia tion;
(d) Investments, subsidiary companies, associated companies, and other
investments;
(e ) Resea rch and deve lopmen t;
(f) Pa tent a nd tra dema rks; a nd
(g) Goodwill.
Liabilities and provisions:Liabilities and provisions:Liabilities and provisions:Liabilities and provisions:Liabilities and provisions:
(a ) Warranties;
(b) Commitments and contingencies;
(c) Pension costs and re tirement plans; and
(d) Severance and redundancy payments.
Profit and losses:Profit and losses:Profit and losses:Profit and losses:Profit and losses:
(a) Methods of revenue recognition;
(b) Maintenance, repairs and improvement expenditure;(c) Gains and losses on disposal of property;
(d) Reserve accounting, statutory or otherwise, including direct charges and
credits to surplus a ccounts; and
(e) Establishment and building costs.
2 .22 .22 .22 .22 .2 IMPLEMENTIMPLEMENTIMPLEMENTIMPLEMENTIMPLEMENTAAAAATION OF ACCOUNTING POLICIES IN ANNUAL REPORTION OF ACCOUNTING POLICIES IN ANNUAL REPORTION OF ACCOUNTING POLICIES IN ANNUAL REPORTION OF ACCOUNTING POLICIES IN ANNUAL REPORTION OF ACCOUNTING POLICIES IN ANNUAL REPORTSTSTSTSTS
AND ACCOUNTSAND ACCOUNTSAND ACCOUNTSAND ACCOUNTSAND ACCOUNTS
Here we d iscuss a practical applicat ion of account ing policies adopted by real
businesses as shown in their annua l reports and a ccounts:
2 .2 .12 .2 .12 .2 .12 .2 .12 .2 .1 Excerpts from the Annual Report and Accounts of LionExcerpts from the Annual Report and Accounts of LionExcerpts from the Annual Report and Accounts of LionExcerpts from the Annual Report and Accounts of LionExcerpts from the Annual Report and Accounts of Lion Bank ofBank ofBank ofBank ofBank of
Nigeria, Plc (Single Entity)Nigeria, Plc (Single Entity)Nigeria, Plc (Single Entity)Nigeria, Plc (Single Entity)Nigeria, Plc (Single Entity)
The following are the significant accounting policies adopted and
consistently applied by the bank in the preparation of its financial
statements:
(a ) Basis of accountingBasis of accountingBasis of accountingBasis of accountingBasis of accounting
The a ccounts a re prep ared und er the historical cost convention.
-
8/3/2019 Financial Reporting and Ethics
9/309
9
(b ) Loans and AdvancesLoans and AdvancesLoans and AdvancesLoans and AdvancesLoans and Advances
Loans a nd advances are either performing or non-performing
and a re stated after deducting provisions aga inst debts
considered doubtful of recovery.
(c) Bad and doubtful debtsBad and doubtful debtsBad and doubtful debtsBad and doubtful debtsBad and doubtful debts
Provisions are ma de a ga inst loans and a dvances in accordance
with the Prudent ial Guide lines issued by the Cent ral Ban k of
Nigeria.
(d ) IncomeIncomeIncomeIncomeIncome
(i) Interest is accrued on a daily basis on all performing
ad vances. Interest a ccruing on non-performing accounts
is not taken to the credit of profit and loss account un til
the debt is recovered.(ii) Credit-related fee income, where material, is amortized
over the life of the credit. Otherwise, fees and commissions
are recognized as earned upon the completion of the
related services.
(e ) Fixed AssetsFixed AssetsFixed AssetsFixed AssetsFixed Assets
Fixed assets a re stated at cost less accumula ted depreciation.
(f) Assets on LeaseAssets on LeaseAssets on LeaseAssets on LeaseAssets on Lease
Assets on lease are accounted for strictly in a ccordance with the irlega l form as fixed a ssets. The relevan t assets a re purchased in
the na me of the ba nk and subsequen tly leased to customers as
operating leases.
(g ) Depreciat ionDepreciat ionDepreciat ionDepreciat ionDepreciat ion
(i) Depreciation charged on fixed assets is calculated on the
straight-line basis to write off their costs over their
estimated useful lives at the following annua l rates:
Freehold buildings 2%
Leasehold buildings and improvements:50 years and over 2%
Below 50 years over the term of the lease
Assets on lease over the term of the lease
Motor Vehicles 25%
Furniture and Fittings 20%
Machinery and Equipment 20%
Computer Equipment 20%
(ii) No depreciation is charged on assets until they are put
into use.
ACCOUNTING AND REPORTING POLICIES
-
8/3/2019 Financial Reporting and Ethics
10/309
FINANCIAL REPORTING AND ETHICS
10
(h ) Exchange ra tesExchange ra tesExchange ra tesExchange ra tesExchange ra tes
(i) Transactions in foreign currencies are translated to the
na ira at the ra tes of exchange ruling a t the da te of the
transactions.(ii) Foreign currency balances are converted to the naira at
the rate of exchange ruling a t the ba lance sheet da te and
the resultant p rofit or loss on exchange is taken to the
profit a nd loss account.
(i) Deferred taxationDeferred taxationDeferred taxationDeferred taxationDeferred taxation
Provision for deferred taxation is made using the liability method
and calculated at the current ra te of taxation on the differences
between the net book values of qua lifying fixed a ssets and their
corresponding ta x written down values in a ccordance with theSta tement of Accounting Standard No. 19 (SAS 19) issued by the
NASB in December 2000.
From the foregoing, it is clea r tha t sta ting the policies becomes
necessary as different m ethods of trea tmen t exist. For instance,
ba sis of accounting could be historical cost or current cost. Of
these options the bank chooses to adopt the historical cost
method. The bank has indicated its accounting policies in relat ion
to such items as loans and advances, bad an d doubtful debts,
income, fixed assets, depreciation and deferred taxation. The
statement of the policy provides a guide for the reader/user ofthe financial statements to have an ad equa te picture of certain
assumptions underlying the treatmen t of items in the accounts.
2 .2 .22 .2 .22 .2 .22 .2 .22 .2 .2 Excerpts froExcerpts froExcerpts froExcerpts froExcerpts from the Annual Reports and Accounts of Group Entitym the Annual Reports and Accounts of Group Entitym the Annual Reports and Accounts of Group Entitym the Annual Reports and Accounts of Group Entitym the Annual Reports and Accounts of Group Entity
(First Bank of Nigeria Plc)(First Bank of Nigeria Plc)(First Bank of Nigeria Plc)(First Bank of Nigeria Plc)(First Bank of Nigeria Plc)
The following a re the significant accounting policies adopted by the
Group in the prepa ration of its financial statements:
(a ) Basis of AccountingBasis of AccountingBasis of AccountingBasis of AccountingBasis of Accounting
The a ccounts a re prepa red under the historical cost convention
modified to include the revaluation of certain land a nd buildings
(own premises only).
(b ) Basis of ConsolidationBasis of ConsolidationBasis of ConsolidationBasis of ConsolidationBasis of Consolidation
(i) Subs id ia r i e sSubs id ia r i e sSubs id ia r i e sSubs id ia r i e sSubs id ia r i e s
The Group financial sta tements incorporate the financial
statements of the Bank and four of its wholly owned
subsidiaries, FBN Bank (UK) Limited, FBN Capital
Limited , First Trustees Nigeria Limited and First Registrars
Nigeria Limited, a ll made up to March 31, 2007. The other
-
8/3/2019 Financial Reporting and Ethics
11/309
11
subsidiaries whose results are considered immaterial
have not been consolida ted.
All intra-group transactions, balances, incomes and
expenses are eliminated on consolida tion.
(ii) Investments in Associated CompanyInvestments in Associated CompanyInvestments in Associated CompanyInvestments in Associated CompanyInvestments in Associated Company
Investments in associated company are carried on the
ba lance sheet a t cost. Profit and losses are elimina ted to
the extent of the Groups interest in the associated
company.
(iii) FFFFForororororeign Operationseign Operationseign Operationseign Operationseign Operations
The a ssets and liab ilities of foreign entities a re converted
to Naira a t the ruling exchange ra tes at the reporting da te
except for share capital and pre-acquisition reserves,which a re translated at the historical rates. Incomes and
expenses are tra nslated to Naira using a verage rate s.
(c) Goodwill on ConsolidationGoodwill on ConsolidationGoodwill on ConsolidationGoodwill on ConsolidationGoodwill on Consolidation
Goodwill represents the excess of the purchase consideration over
the fair value of the Groups share of the sepa rab le net a ssets of
the legacy banks acquired. Goodwill arising on consolida tion of
legacy banks is accounted for in line with the provision of
schedule 2 Section 65 of the Companies a nd Allied Matte rs Act
CAP C20 LFN 2004.
(d ) Ca sh a nd Short-Cash and Short-Ca sh a nd Short-Cash and Short-Ca sh a nd Short-TTTTTerm Ferm Ferm Ferm Ferm Fundsundsundsundsunds
Cash a nd Short-Term funds comprise cash balances on hand, cash
deposited with the Centra l Bank of Nigeria, cash deposited with
other ba nks and financial institutions (local a nd foreign) other
tha n the Central Ban k of Nigeria. The Balance is stated less
provisions for doub tful ba lances.
(e ) Bills DiscountedBills DiscountedBills DiscountedBills DiscountedBills Discounted
Holdings in bills discounted (treasury bills) are stated at facevalue as it is the Banks policy to hold these to maturity.
Diminution in value of investments is noted in the financial
statements.
(f) TTTTTrading Securi t iesrading Securi t iesrading Securi t iesrading Securi t iesrading Securi t ies
Trad ing securities comprise of government b onds and oth er
securities.
(i) Trading securities held for fixed redemption date are
stated at cost.
ACCOUNTING AND REPORTING POLICIES
-
8/3/2019 Financial Reporting and Ethics
12/309
FINANCIAL REPORTING AND ETHICS
12
(ii) Dealing securities are stated at the lower of cost and
market value.
(iii) P remiums and d is coun ts a r is ing on pu rchase a re
amortized on the yield to redemption.
(g ) Inves tmentsInves tmentsInves tmentsInves tmentsInves tments
Investments are classified as short or long term investments.
Those intended to be held for a period exceeding one year a nd
which are either held to ma turity or available for sale in response
to need s for liquidity or changes in interest ra tes are classified
as long term investments. Debt a nd equity securities held for a
period not exceeding one year are classified as short-term
investments.
(i) Quoted investments other than dated securities are stated
at the lower of cost and market value.(ii) Unquoted investments are stated at cost less provision
for doubtful investments.
(iii) Dated securities are stated at cost.
(iv) Investments in subsidiaries are stated at cost.
(h ) Bad and Doubtful AccountsBad and Doubtful AccountsBad and Doubtful AccountsBad and Doubtful AccountsBad and Doubtful Accounts
Loans and a dvances are sta ted a fter deducting provisions against deb ts
considered d oubtful of recovery. Loans are classified as performing and
non-performing. They a re considered n on-performing when principa l
and interest repa yment obliga tions are in a rrears for three months ormore. Specific provisions are made on non-performing accounts as
follows:
Interes t and/or principalInteres t and/or principalInteres t and/or principalInteres t and/or principalInteres t and/or principal ClassificationClassificationClassificationClassificationClassification ProvisionProvisionProvisionProvisionProvision
outs tanding for:outs tanding for:outs tanding for:outs tanding for:outs tanding for:
More than 90 days but less than Sub-standard 10%
180 days
180 days but less than 360 days Doubtful 50%
360 days and over Lost 100%
A gen era l provision of 1%is ma de on a ll performing ba lances in linewith the Prudentia l Guidelines of the Central Bank of Nigeria.
(i) In te res tIn te res tIn te res tIn te res tIn te res t
Interest on advances is accrued to the profit and loss account until such
a time as reasonable doubt exists about its collectability. Interest
accruing on non-performing a ccounts is not taken to the credit of the
profit and loss account un til the deb t is recovered.
-
8/3/2019 Financial Reporting and Ethics
13/309
13
(j) Advances Under Finance LeaseAdvances Under Finance LeaseAdvances Under Finance LeaseAdvances Under Finance LeaseAdvances Under Finance Lease
Advances to customers und er finance leases are sta ted net of unearned
income. Lease fina nce is recognized in a m an ner wh ich provides a
constan t yield on the outstanding net investment over the lease period.
(k) Fixed AssetsFixed AssetsFixed AssetsFixed AssetsFixed Assets
Fixed assets are stated at cost or valuation less accumulated
depreciation.
(l) Depreciat ionDepreciat ionDepreciat ionDepreciat ionDepreciat ion
Depreciation is provided to write off the cost of fixed assets over their
estimated useful lives on a straight line ba sis at the following annua l
rates:
Freehold buildings - 2%from date of useLeasehold bu ildings:
50 years and over - 2%from date of use.
Below 50 years - Over the term of the lease.
Assets on Lease - Over the term of the lease.
Motor Vehicles - 25%
Computer equipment - 331/3%
Other fixed assets - 20%
(m ) FFFFFororororore ign curreign curre ign curreign curreign currenciesenciesenciesenciesencies
Tran sactions in foreign currencies are tra nslated to Naira at the ra te ofexchange ruling a t the date of the transactions.
Foreign currency ba lances are converted to Naira a t the rate of exchange
ruling at the balance sheet date and the resultant profit/loss on
conversion is taken to profit and loss account in respect of Bank-owned
funds and th e rest charged/credited to third part ies. The Ban ks equity
investm ent in FBN Bank (UK) Limited is sta ted a t tra nsa ction cost.
(n ) TTTTTaxa t ionaxa t ionaxa t ionaxa t ionaxa t ion
Income ta x is provided on t axable profit at the current statutory rate.
Provision for deferred ta xat ion is mad e using th e liability method a nd
calculated at the current ra te of taxation on the differences between the
net book values of qualifying fixed a ssets and the ir correspond ing ta x
written down values.
(o) BorrowingsBorrowingsBorrowingsBorrowingsBorrowings
Borrowings are recorded a t the proceeds received, plus direct issue costs.
The cap italized direct issuing costs are amortized over the tenor of the
underlying instrument.
ACCOUNTING AND REPORTING POLICIES
-
8/3/2019 Financial Reporting and Ethics
14/309
FINANCIAL REPORTING AND ETHICS
14
(p) DividendDividendDividendDividendDividend
Proposed dividend for the yea r is recognized a s a liability only when
declared and approved by shareholders at the Annua l Genera l Meeting.
(q) Retirement BenefitsRetirement BenefitsRetirement BenefitsRetirement BenefitsRetirement Benefits
Arrangement for retirement benefits for memb ers of sta ff is based on
the provisions of the Nigerian Pension Act 2004, which is contribu tory.
The ma tching contribu tions of 8.5% and 16.5% for sta ff an d b an k
respectively are based on curren t salaries and eligible allowances and
are charged to profit and loss account. Membership of the scheme is
open to members of staff upon confirmation of employment with the
Bank.
The Bank also maintains the defined benefit plan scheme based on
16.5% an d 8.5% contribut ions on curren t sa laries a nd eligible
emoluments by the ban k and sta ff respectively for employees who are
not covered und er the Nigeria Pensions Act 2004.
(r) Off Balance Sheet EngagementsOff Balance Sheet EngagementsOff Balance Sheet EngagementsOff Balance Sheet EngagementsOff Balance Sheet Engagements
Transactions tha t a re not currently recognized a s assets or liab ilities in
the balance sheet but which nonetheless give rise to credit risks,
contingencies and commitmen ts are reported off ba lance sheet. Such
transactions include letters of credit, bonds, guara ntees, indemnities,
acceptances, trade related contingencies such a s documentary credit,
etc.
Outstand ing an d unexpired commitments a t the year end in respect of
these transactions a re shown by way of note to the financial statements.
Income on off balance sheet engagements is in form of commission
which is recognized a s and when transactions are executed.
(s) Income RecognitionIncome RecognitionIncome RecognitionIncome RecognitionIncome Recognition
(i) Interest Income and Interest ExpenseInterest Income and Interest ExpenseInterest Income and Interest ExpenseInterest Income and Interest ExpenseInterest Income and Interest Expense
Interest is accrued on da ily balances on a ll assets and liab ilities
to which inte rest is ap plicable.
(ii) FFFFFees, Commissions and Other Incomesees, Comm issions a nd Oth er Incomesees, Commissions and Other Incomesees, Comm issions a nd Oth er Incomesees, Commissions and Other Incomes
Fees an d commissions, where ma teria l, are amortized over the
life of the related service. Otherwise fees, commissions and other
incomes are recognized as earned upon completion of the related
service.
(iii) Investment IncomeInvestment IncomeInvestment IncomeInvestment IncomeInvestment Income
This is recognized on an accrua l basis and credited to the profit
and loss account.
-
8/3/2019 Financial Reporting and Ethics
15/309
15
(iv) Lease Finance IncomeLease Finance IncomeLease Finance IncomeLease Finance IncomeLease Finance Income
This is recognized on a ba sis tha t provides a constant yield on
the outstanding p rincipal over the lease term.
(v) Dividend IncomeDividend IncomeDividend IncomeDividend IncomeDividend Income
This is recognized on actua l basis and credited to the p rofit and
loss account.
(t) ProvisionsProvisionsProvisionsProvisionsProvisions
Provision is recognized when the compa ny has a present obliga tion
whether lega l or constructive as a re sult of a past even t for which it is
probable that an outflow of resources embodying economic benefits
will be required to settle the obligation in accordance with the Statement
of Accounting Sta ndard (SAS) 23.The excerpt ab ove is similar to the ea rlier one except that in the la tter
excerpt, certain a ssumptions which guided group en tity were ma de.
These include; the ba sis used in consolidating the a ccounts and the
trea tmen t of the g oodwill arising on consolidation.
2 .32 .32 .32 .32 .3 CHOICE OF ACCOUNTING POLICIESCHOICE OF ACCOUNTING POLICIESCHOICE OF ACCOUNTING POLICIESCHOICE OF ACCOUNTING POLICIESCHOICE OF ACCOUNTING POLICIES
Judgment is required in the choice of the accounting policies which are
app ropriate to the circumstances of an en terprise and are best suited to present
the true an d fair view of its results an d financial position.
In the choice and application of the app ropriate accounting policies, there a re
instances where some fundamental concepts contradict one another. It is
however not possible to develop genera l rules for the exercise of judgmen t.
The following principles have been evolved for use in pa rticular circumstances:
(a ) Substance Over FSubstance Over FSubstance Over FSubstance Over FSubstance Over Formormormormorm
Although business transactions are often governed b y lega l principles,
but where the legal principles contradict the financial reality, such
transactions should be a ccounted for in accordance with their substance
an d fina ncial reality an d not merely with their lega l form.
(b ) ObjectivityObjectivityObjectivityObjectivityObjectivity
This principle provides that the accountant preparing the financial
statements should exercise independ ence of judgmen t supported b y
verifiable evidence in his choice of an accounting policy.
(c) FFFFFa i r n e s sa i r n e s sa i r n e s sa i r n e s sa i r n e s s
This principle requ ires tha t the choice of an a ccount ing policy should
be such that the reports prepared do not favor any user group or
segment of society.
ACCOUNTING AND REPORTING POLICIES
-
8/3/2019 Financial Reporting and Ethics
16/309
FINANCIAL REPORTING AND ETHICS
16
(d) Mater ia l i tyMater ia l i tyMater ia l i tyMater ia l i tyMater ia l i ty
The principle holds that only items of material values are accorded
their strict accounting trea tment.
(e ) PrudencePrudencePrudencePrudencePrudence
This principle demands exercising great care in the recognition of profit
whilst all known losses a re ad equ ately provided for.
2 .42 .42 .42 .42 .4 METHODS OF RECOGNIZING ASSETS AND LIABILITIESMETHODS OF RECOGNIZING ASSETS AND LIABILITIESMETHODS OF RECOGNIZING ASSETS AND LIABILITIESMETHODS OF RECOGNIZING ASSETS AND LIABILITIESMETHODS OF RECOGNIZING ASSETS AND LIABILITIES
Assets are resources controlled by the ente rprise as a result of past events a nd
from which future economic ben efits are expected to flow to the ente rprise.
Liab ilities on the other hand , represent obliga tions of the en terprise arising
from past events, settlement of which is expected to result in an outflow ofresources from the en terprise an d embodying economic benefits.
In circumstances where legal principles contrad ict the fina ncial rea lities of a
transaction, the substance of the t ransaction should be accounted for while its
lega l principles are ignored. Accountan ts are often faced with th is conflict in
certain transa ctions such as:
Sale and Repurchase Agreement: These arra ngements occur where a n a sset
is sold b y the seller to a buyer on terms that the seller repurchases the a sset
from the buyer at a future da te. This transaction has two possible interpretations
of either a secured loan or a sale and lease ba ck. If the arrangements providethat the seller retains right to determine assets use while the buyer only
receives return (secured loan ) the asset will only be recognized in the books of
the seller. The t ran sfer of title by way of purchase is ignored.
Where the transaction resembles a finance lease arrangement, that is, the
ownership t itle passes to the buyer, the assets shall be recorded a s tha t of the
buyer.
2 .52 .52 .52 .52 .5 SUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONSSUMMARY AND CONCLUSIONS
This chapter discussed the genera l and specific policies tha t could be a doptedby a reporting entity. The chapter also delved into guidelines for selecting
relevant policies, methods of recognising a ssets and liab ilities as well as the
distinction between lega l and commercial views of account ing. Excerpts from
annua l reports which h ighlight accounting policy implementa tion a re given
in the cha pter.
Refer to Comprehensive Questions an d Suggested Solutions in Append ix II,
page 269.
-
8/3/2019 Financial Reporting and Ethics
17/309
17
ACCOUNTING AND REPORTING POLICIES
2 .62 .62 .62 .62 .6 REVISION QUESTIONSREVISION QUESTIONSREVISION QUESTIONSREVISION QUESTIONSREVISION QUESTIONS
2.6 .12 .6 .12 .6 .12 .6 .12 .6 .1 MULMULMULMULMULTIPLE-TIPLE-TIPLE-TIPLE-TIPLE-CHOICE QUESTIONSCHOICE QUESTIONSCHOICE QUESTIONSCHOICE QUESTIONSCHOICE QUESTIONS
1. The Sta tement of Account ing Standard Number 1 requires every companyto disclose its a ccounting policies in relat ion to a ll the following except:
A. Franchises
B. Taxation
C. Board of Directors
D. Long Term Contra cts
E. Leases.
2. Goodwill on consolida tion rep resent s:
A. Excess of cos t of acquis it ion over the va lue acquired.
B. Excess of Assets over Liabilit ies.
C. Excess of liab ilit ie s ove r a sse ts.
D. Excess of tangible asse ts over in tangible assets.
E. Excess of the purchase consideration over the fair value of assets
acquired.
3. Which of the following is not an a sse t re la ted it em:
A. Stock a n d Work-In -Prog re ss.
B. Resea rch a nd Develop ment.
C. Warranties.
D. Patent and Tra demarks
E. Investments.
4 . A commercia l banks cash and short- te rm funds comprise :
(i) cash ba lances on hand
(ii) cash depos ited with the Centra l Bank of Nigeria(ii i) cash deposited with other banks and financial insti tutions.
A. (i) only
B. (i) and (ii) only
C. (ii) only
D. (i), (ii) and (iii)
E. (ii) and (iii) only.
5. A bank loan is regarded as lost if the interest and/or principal is outstanding
for:
A. More th an 30 d ays b ut le ss t ha n 6 0 d a ys.
B. More t ha n 6 0 d ays b ut le ss t ha n 9 0 d a ys.
C. More th a n 9 0 d ays b ut le ss t ha n 1 80 d a ys.D. More th an 18 0 d a ys b ut le ss t ha n 36 0 d a ys.
E. 360 days and above.
2 .6 .22 .6 .22 .6 .22 .6 .22 .6 .2 SHORT ANSWER QUESTIONSSHORT ANSWER QUESTIONSSHORT ANSWER QUESTIONSSHORT ANSWER QUESTIONSSHORT ANSWER QUESTIONS
1. In the preparation of consolidation schedule, goodwill represents the excess
of purchase consideration over the...........
2. The excess of the cost of acquiring a controlling interest in a subsidiary
over the value of interest acquired is the....................
-
8/3/2019 Financial Reporting and Ethics
18/309
FINANCIAL REPORTING AND ETHICS
18
3. The principle which st ipula tes tha t grea t care should be exercised in
recognising profit is known as..................
4 . The a ssumption tha t an enterp rise will cont inue in ope ra t ion for the
foreseeable future is referred to as the.................... concept.
5. The required provision on a sub-standard bank loan is .. .. .. .. .. .. .. .. percent.
Refer to Sugge sted Solutions in Appe nd ix I, Page 263.
-
8/3/2019 Financial Reporting and Ethics
19/309
19
AMALGAMAAMALGAMAAMALGAMAAMALGAMAAMALGAMATION, ABSORPTION ANDTION, ABSORPTION ANDTION, ABSORPTION ANDTION, ABSORPTION ANDTION, ABSORPTION ANDRECONSTRUCTIONRECONSTRUCTIONRECONSTRUCTIONRECONSTRUCTIONRECONSTRUCTION
3 .03 .03 .03 .03 .0 LEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVES
After studying this chapt er, it is expected tha t read ers will understa nd :
! The meaning of business combination;
! The reason(s) why businesses combine;
! The major types of business combinations;
! Accounting entries for bu siness combinations;
! When a company will embark on capital reduction scheme;
! The principles of implementing an already formulated capital reduction scheme;
! The differences between capital reduction and capital reconstruction scheme;
! Distinction between internal and external reconstruction schemes; and
! The formulation of an acceptable capital reduction scheme.
3 .13 .13 .13 .13 .1 INTROINTROINTROINTROINTRODUCTIONDUCTIONDUCTIONDUCTIONDUCTION
The te rm business combination is used to describe an arrangem ent where
two or more businesses owned and operated as separate en tities come together
to become a single entity under the same ownership. The implication of this is
tha t the sepa rate businesses will discontinue their ownership and come under
a single ownership. Business combina tions can be found in sole- proprietorship,
partnership and compa nies business arrangements. Compan ies combine with
a view to elimina ting or reducing competition, to carry on business on a la rgescale or to control prices and ma rkets.
Business combina tion can take two forms:
(a ) Amalgamation
(b) Absorption
Sometimes compa nies are dissolved due to financial problems and after several
adjustments they re-register to carry on normal businesses. This process is
called reconstruction or reorga nisat ion. This exercise is und erta ken by those
companies which either incur heavy losses for a long time and were unabletime and were unabletime and were unabletime and were unabletime and were unable
33333
-
8/3/2019 Financial Reporting and Ethics
20/309
FINANCIAL REPORTING AND ETHICS
20
to write off such losses, or those ha ving substa ntia l fictitious assets such a s
goodwill, preliminary expenses, profit and loss account debit balances.
Reconstruction can either be internal or externa l.
3 .23 .23 .23 .23 .2 AMALGAMAAMALGAMAAMALGAMAAMALGAMAAMALGAMATIONTIONTIONTIONTION
This refers to a situation where companies tha t exist sepa rately under different
ownerships combine to form a new one. The major feature of this arrangemen t
is tha t the two businesses that a ma lgama te will no longer exist, that is, they
are liquidated . For example, company A may combine with compa ny B to form
company AB which is expected to be la rger a nd more viable. Idea lly suited to
this method a re similar businesses of the same sizes, opera ting on a relatively
small scale.
Reasons/benefits of amalga ma tion include:
(a) The desire to gain larger share of the market.
(b) The desire to a t ta in synergy.
(c) The desire to establish a solid capital base.
(d) To provide efficient customer service.
(e) To acquire a base adequately for raw material sourcing in the case of a
manufacturing firm.
(f) To be able to challenge a major competition.
(g) In order to meet legal and statutory requirement.
When businesses ama lgama te, two major accounting p roblems arise,
viz:
(i) Those concerned with closing the books of the discontinuingbusinesses which a re being wound up;
(ii) Those concerned with the establishment of the new business.
3 .33 .33 .33 .33 .3 CLOSING THE BOOKS OF THE DISCONTINUING COMPCLOSING THE BOOKS OF THE DISCONTINUING COMPCLOSING THE BOOKS OF THE DISCONTINUING COMPCLOSING THE BOOKS OF THE DISCONTINUING COMPCLOSING THE BOOKS OF THE DISCONTINUING COMPANIESANIESANIESANIESANIES
To close the books of the discontinuing compa nies, the following ledger accounts
are necessary;
(a ) Rea lisa tion account.
(b ) New company account.
(c) Sundry members account.
(d) Each liability account, for example creditors, liquidation expenses
pa yable/creditors for dissolution expenses, loan or debenture account.
(e) Bank account.
(f) Components of purchase consideration, for example ordinary shares
issued, preference shares issued, debenture stock issued a nd cash pa id.
3 .43 .43 .43 .43 .4 REALISAREALISAREALISAREALISAREALISATION ACCOUNTTION ACCOUNTTION ACCOUNTTION ACCOUNTTION ACCOUNT
This is the a ccount in which the profit or loss on the dissolution of a compa ny is
determined . It is usua lly prepared in a columnar form. The number of columns
will depend on the number of compa nies amalga mat ing.
-
8/3/2019 Financial Reporting and Ethics
21/309
21
The following transactions or events a re usually accounted for in the rea lisation
account:
(a) Debit all assets at book values to realisation account;
(b) Determine the purchase consideration and credit it to the realisation
account;
(c) Amalgamation, dissolution or liquidation expenses should be debited
to rea lisation account. This will in effect reduce the profit on rea lisation
or increase the loss on rea lisat ion
(d) Profit or loss on realisation is determined; that is, the balance on
realiation account is transferred to the sundry members account
(ordinary).
3 .53 .53 .53 .53 .5 NEW COMPNEW COMPNEW COMPNEW COMPNEW COMPANY ACCOUNTANY ACCOUNTANY ACCOUNTANY ACCOUNTANY ACCOUNT
This is the account where the purchase considera tion and related transactionsare treated . The purchase considera tion, when agreed, is debited to this account
(remember that the credit entry goes to rea lisation account) while transactions
relating to the purchase consideration are credited to the account when
settlement of the ag reed purchase considera tion is mad e. The a ccount can
therefore be regarded a s a self ba lancing account.
3 .5 .13 .5 .13 .5 .13 .5 .13 .5 .1 Sundry Members Account (Ord inary Shares and Prefe renceSundry Members Account (Ord inary Shares and Prefe renceSundry Members Account (Ord inary Shares and Prefe renceSundry Members Account (Ord inary Shares and Prefe renceSundry Members Account (Ord inary Shares and Prefe rence
S h a r e s )S h a r e s )S h a r e s )S h a r e s )S h a r e s )
The following a ccounting transactions/events are effected in the sundry
members account:(a) Transfer the components of the shareholders fund (for example,
ordinary shares, preference shares, and reserves) to the account
by debiting each of the components of the sha reholders fund
and crediting sundry members account;
(b) The profit/loss on realisation is also transferred to this account;
and
(c) Each of the components of purchase consideration, when settlement
is effected as agreed, including cash, are transferred to this
account and th e a ccount will automatically balance.
This account is similar to the partn ers account in the a ma lgamation of
partnership.
It should be noted, however, that if there is more than one class of
preference shares, the classes should be sepa rated and different ledger
accounts opened for each class. For example, if in the balance sheet
there a re 10%preference shares, 8%cumu lative preference shares and
5%redeema ble preference shares, these a re three different classes of
preference shares. Therefore, three different sund ry members preference
accounts mu st be opened to present each of them separa tely.
AMALGAMATION, ABSORPTION AND RECONSTRUCTION
-
8/3/2019 Financial Reporting and Ethics
22/309
FINANCIAL REPORTING AND ETHICS
22
3.5 .23 .5 .23 .5 .23 .5 .23 .5 .2 Liability AccountsLiability AccountsLiability AccountsLiability AccountsLiability Accounts
Balances on each liab ility account such as trade creditors and long term
loans/debentures should be brought down in their respective ledger
accounts. Each liab ility is either settled by the d iscontinu ing bu sinessor taken over by the new bu siness.
Where the liab ility is settled by the d iscontinu ing bu siness, the liability
account is debited a nd cash/bank account credited. However, where the
liability is taken over by the new business it becomes part of the purchase
considera tion and is trea ted a s follows:
Dr. Liability account
Cr. New Company account
3 .5 .33 .5 .33 .5 .33 .5 .33 .5 .3 Discount Received from CreditorsDiscount Received from CreditorsDiscount Received from CreditorsDiscount Received from CreditorsDiscount Received from Creditors
Where the liability has been settled at less than the book value a nd this
is rega rded a s full and final settlement . It mea ns discount ha s been
received from creditors. The accounting entries a re:
Dr. Liability account
Cr. Realisa tion Account
ILLILLILLILLILLUSTRAUSTRAUSTRAUSTRAUSTRATION 3.1TION 3.1TION 3.1TION 3.1TION 3.1
The illustra tion be low shows clearly how the d iscount received from
creditors is trea ted .
The following ba lance shee ts of two different compan ies were given a s
at 31 December 2004.
ABC LABC LABC LABC LABC LTDTDTDTDTD
Balance Sheet as at 31/12/04Balance Sheet as at 31/12/04Balance Sheet as at 31/12/04Balance Sheet as at 31/12/04Balance Sheet as at 31/12/04
Fixed AssetsFixed AssetsFixed AssetsFixed AssetsFixed Assets Nm m
Motor Vehicles 40
Plant and Equipment 60
Furniture & Fittings 20 120
Current AssetsCurrent AssetsCurrent AssetsCurrent AssetsCurrent Assets
Stock 12.0
Debtors 26.8
Cash & Bank 9.2
48
Current liab ilities (creditors) (28)
Net Current Assets 20
Net Assets 140
-
8/3/2019 Financial Reporting and Ethics
23/309
23
Financed by:Financed by:Financed by:Financed by:Financed by:
Capital & Reserves
Ordinary share capita l 100
Reserves 40
140
XYZ LXYZ LXYZ LXYZ LXYZ LTDTDTDTDTD
Balance sheet as at 31/12/04Balance sheet as at 31/12/04Balance sheet as at 31/12/04Balance sheet as at 31/12/04Balance sheet as at 31/12/04
Fixed Asset m m
Goodwill 20
Premises 20
Motor Vehicles 40
80
Curren t Assets
Stock 18Debtors 24
Bank & Cash 8
50
Current liabilities (creditors) (40)
Net Current Assets 10
Net Assets 90
Financed by:
Capital & Reserves
Ordinary share capita l 100
Unappropria ted loss (10)90
ABC Ltd decided to a ma lga ma te with XYZ Ltd on 31 December 2004 to form a
compa ny known as ABAK Ltd under the following term s:
The assets a nd liab ilities of ABC Ltd are to be taken over a s follows:
m
Motor Vehicles 80
Plant & Machinery 40
Furniture & Fittings 20
Stocks 8
Debtors 24
The cash of the firm was to be retained to pay in full 12,000,000 of the tra de
creditors and the balance of the creditors to be ta ken over by the new company.
Ama lgam at ion expense of 1,200 ,000 was incurred a nd pa id by ABC Ltd .
Required :Required :Required :Required :Required :
Prepare
(i) Cred itors Account
(ii) Cash Account.
AMALGAMATION, ABSORPTION AND RECONSTRUCTION
-
8/3/2019 Financial Reporting and Ethics
24/309
FINANCIAL REPORTING AND ETHICS
24
SUGGESTED SOLUTION 3.1SUGGESTED SOLUTION 3.1SUGGESTED SOLUTION 3.1SUGGESTED SOLUTION 3.1SUGGESTED SOLUTION 3.1
In closing the books of ABC Ltd, the creditors and cash account will be as follows:
Creditors AccountCreditors AccountCreditors AccountCreditors AccountCreditors Account m m
Cash 8 Bal b/d 28
Rea lisat ion (Discount
from creditors) 4
ABAK Ltd 16
2828282828 2828282828
Cash AccountCash AccountCash AccountCash AccountCash Account
m m
Bal b/d 9.2 Creditors foramalga ma tion expenses 1.2
Creditors 8.0
9.2 9.2
NotesNotesNotesNotesNotes
1. Amalgamation expense is a priority item and therefore should be settled
before trade creditors. Hence the pa yment of 1.2 million. The balance
of cash of 8 million was used to settle a debt of 12 million. It implies
tha t a discount of 4 million was received from creditors.
2. Although the question did not specify the position of other creditors. It
is assumed that the creditors tha t were not paid off by the discontinuingbusiness are ta ken over by the new compan y.
3 .5 .43 .5 .43 .5 .43 .5 .43 .5 .4 Liab ilities settled a bove the b ook valueLiabilities settled above the book valueLiab ilities settled a bove the b ook valueLiabilities settled above the book valueLiabilities settled above the book value
Where a liab ility has been se ttled a bove its book value, the difference
between the book value a nd the take over value is debited to realisation
account. This implies tha t a loss was incurred in settling the liab ility.
The a ccounting entries will be:
Dr. Realisation account with the difference between the book value
and the ta ke-over valueCr. Liability account with the amount paid.
ILLILLILLILLILLUSTRAUSTRAUSTRAUSTRAUSTRATION 3.2TION 3.2TION 3.2TION 3.2TION 3.2
Assume the figures in illustra tion 3.1 except that the a ssets and liabilities of
XYZ Ltd were ta ken over as follows:
-
8/3/2019 Financial Reporting and Ethics
25/309
25
million
Goodwill Nil
Premises 16
Motor vehicles 32Stock worthless
Debtors 12
All the tra de creditors were ta ken over for 46m, the excess resulting from a
dispute over undisclosed purchases. The amalgamation expense of 2.4m was
fully borne by the new firm.
Required:Required:Required:Required:Required: Prepare the following accounts:
(a ) Cred itors accoun t
(b) Amalgamation expense account .
SUGGESTEDSUGGESTEDSUGGESTEDSUGGESTEDSUGGESTED SOLUTION 3.2SOLUTION 3.2SOLUTION 3.2SOLUTION 3.2SOLUTION 3.2
In closing th e books of XYZ Ltd , the cred itors and cash account will be a s
follows:
Creditors AccountCreditors AccountCreditors AccountCreditors AccountCreditors Account
m m
ABAK LTD 46 Bal b/d 40
__ Realisation (loss) 6
46 46
Creditors for Amalgamation ExpensesCreditors for Amalgamation ExpensesCreditors for Amalgamation ExpensesCreditors for Amalgamation ExpensesCreditors for Amalgamation Expenses
m m
ABAK LTD 2.4 Realisation 2.4
NotesNotesNotesNotesNotes
The 6m on creditors account is the difference between the book value of
creditors and the ta keover value tha t is, the excess resulting from a dispute
over undisclosed pu rchases.
3 .63 .63 .63 .63 .6 PURCHASE CONSIDERAPURCHASE CONSIDERAPURCHASE CONSIDERAPURCHASE CONSIDERAPURCHASE CONSIDERATIONTIONTIONTIONTION
This is the aggregate amount, which the new company is to pay the owners
(tha t is the sta keholders) of the d iscontinuing business and cred itors.
The components of the purchase considera tion in amalgamation of compa nies
ma y comprise of some or all of the following:
(i) Ordinary shares issued by the new company.
(ii) Preference shares issued by the new company.
(iii) Debenture stock issued by the new company.
(iv) Cash given by the new company.
(v) Liabilities of the old companies taken over by the new company.
AMALGAMATION, ABSORPTION AND RECONSTRUCTION
-
8/3/2019 Financial Reporting and Ethics
26/309
FINANCIAL REPORTING AND ETHICS
26
Where liab ilities are ta ken over, they form pa rt of the purchase considera tion.
Such liabilities are debited to the liabilities account a nd credited to the new
companys account.
3 .6 .13 .6 .13 .6 .13 .6 .13 .6 .1 Compone nts of the p urcha se considera tion accountCompon ent s of the p urcha se considera tion accountCompone nts of the p urcha se considera tion accountCompon ent s of the p urcha se considera tion accountCompon ent s of the p urcha se considera tion account
Ledger accounts are opened for each of the components of purchase
consideration treated in pa ragraph 3.6 ab ove.
On settlement of the p urchase considera tion a s agreed , the a ccount of
each of the components of the purchase considera tion is deb ited while
the new companys account is credited.
On distribu tion to the owners of discontinuing b usinesses, the sundry
members account is debited and the account of each of the components
of the purchase considera tion is credited.The accounting entries necessary to close the book of discontinuing
businesses being liquidated are summ arized below.
Dr. Rea lisa tion Account
Cr. Individual Assets Account
S/No.S/No.S/No.S/No.S/No. EventsEventsEventsEventsEvents Account to be Deb ited Account to be Cred itedAccount to be Deb ited Account to be Cred itedAccount to be Deb ited Account to be Cred itedAccount to be Deb ited Account to be Cred itedAccount to be Deb ited Account to be Cred ited
1. Book va lue of the a sset Rea lisa tion Accoun t In divid ua l Asset Account
taken over by the company
at th e da te of cessation.
2. Liabilities taken over by Individual Liability Account New Company Accountthe new company at the
da te of cessation, (if pa rt
of purcha se considera tion).
3. Agreed purchase New Companys Account Realisa tion Account
consideration (including
liabilities ta ken over).
4. Realisa tion expenses Realisa tion Account Realisa tion expenses
payable/creditors for payable account/
realisa tion expenses. creditors account for
realisation expen ses.
5. Portion of th e rea lisa tion Liq uid ation exp en ses Ba nk Accou nt
expenses paid by the existing
company being discontinued.
6. Port ion of the realisa tion Included in the purchase Realisa tion Account
expenses to be paid by the consideration recorded in
new company. (3) above. OR New
Comp anys Account
7. Discount received from Creditors account Realisa tion Account
creditors.
8 . Profit on rea lisa t ion (this is Rea lisa t ion account Sundry shareholders and
to be derived) debenture holders account
-
8/3/2019 Financial Reporting and Ethics
27/309
27
9. Loss on rea lisa tion Sun dry sha reh olders a nd Rea lisa tion Accoun t
(this is to be derived) debenture holders account
10. Transfe r of ba lances Share capita l rese rves and Sundry shareholders and
on share capita l, debentures account. debenture holders accountreserves and deb entures
Accounts.
11. Settlement of the agreed Bank and/or shares and/or New Companys Account
purchase consideration by deben tures in new
the new company. company account.
12. Settlement of lia bilities Creditors a ccount Ba nk a ccount
not taken over by the new
company.
13. Distribution of balances. Sundry shareholders and Bank and/or shares and/
debenture holders account or debentures in the
New compan y accoun t.
1 4. Arrea rs of p referen ce Preferen ce d ivid en ds in Su nd ry mem bers
dividend included in the arrears. Preference Shares account
balance sheet as a liability.
1 5. Cu mu la tive p referen ce Ret ain ed p rofit or a ny Su nd ry m emb ers
dividend in arrears but not other revenue reserve preference account.
included in the ba lance account.
sheet and not to be forfeited.
16. Arrears of debenture interest Reta ined profit or an y Debenture Stock Account
(if any). other revenue account.
17. Ordinary share dividend Proposed dividend account Sundry members shares
included in the balance sheet. account.
3 .73 .73 .73 .73 .7 ESTESTESTESTESTABLISHMENT OF THE NEW COMPABLISHMENT OF THE NEW COMPABLISHMENT OF THE NEW COMPABLISHMENT OF THE NEW COMPABLISHMENT OF THE NEW COMPANYANYANYANYANY
The a ccounting en tries in the books of the new compa ny can be divided into
two:
(a ) Th e a ma lg am ation journ al
(b) The balance sheet after amalgamation.
3 .7 .13 .7 .13 .7 .13 .7 .13 .7 .1 Amalgamat ion Journa lAmalgamat ion Journa lAmalgamat ion Journa lAmalgamat ion Journa lAmalgamat ion Journa lThis is a composite journa l which is prepa red to reflect the a ssets and
liabilities taken over as well as goodwill or capital reserve on
amalgamation.
On the debit side of the journal a re all tang ible assets taken over at
revaluat ion value or ta ken over value. However, if the take over values
are not given, it is assumed that the assets are taken over at book values.
The ta ke over value will only be used when such assets are not revalued.
If revalued, the revaluation value will be used instead of the takeover
value.
AMALGAMATION, ABSORPTION AND RECONSTRUCTION
-
8/3/2019 Financial Reporting and Ethics
28/309
FINANCIAL REPORTING AND ETHICS
28
On th e credit side of the journal a re a ll the components of purchase
consideration (including liab ilities taken over) as contained on the credit
side of the new company account in the books of the discontinuing
businesses.
The d ifference between the debit side and the credit side of the journa l
represents goodwill or capital reserve. If the ba lancing figure on the
journa l is an asset (i.e. deb it ba lance) it is referred to as goodwill. If it
is a claim over the a ssets (i.e. credit ba lance) it is referred to as cap ital
reserve.
Proforma of the Amalgamation JournalProforma of the Amalgamation JournalProforma of the Amalgamation JournalProforma of the Amalgamation JournalProforma of the Amalgamation Journal
Dr Cr
Land & Building XPlant & Machinery X
Furniture & Fittings X
Motor Vehicles X
Stocks X
Debtors X
Goodwill (balancing figure) X
Creditors X
Bank overdraft X
3%Debenture X
Ordinary shares XPreference shares __ X
X X
Being a ssets and liab ilities taken over on ama lgam at ion of A ltd and B
ltd to form AB Ltd .
N. BN. BN. BN. BN. B
It is instructive to note that the values of individual a ssets mentioned
above are a combined amount of the takeover values of all the
companies that amalgamate. The amounts on the credit side of thejournal a re a lso combined figures of each item on the n ew company
account as they appeared in the book of the d iscontinuing compa ny.
All transactions after ama lgama tion in the book of the n ew compa ny
must b e journalized by mea ns of a simple journal. Such transactions
may include fresh issue a t or above the nomina l value.
3 .7 .23 .7 .23 .7 .23 .7 .23 .7 .2 Issue of SharesIssue of SharesIssue of SharesIssue of SharesIssue of Shares
Where fresh issues of shares are m ad e for cash, the a ccounting entries
will be:
-
8/3/2019 Financial Reporting and Ethics
29/309
29
Dr - Bank/Cash a ccount
Cr - Ordina ry sha re cap ital account with the nomina l value
Cr - Share premium a ccount with th e prem ium.
After this, the ba lance sheet of the new company can be prepa red.
3 .7 .33 .7 .33 .7 .33 .7 .33 .7 .3 Ba lan ce Shee t of the New Comp a nyBalance Sheet of the New CompanyBa lan ce Shee t of the New Comp a nyBalance Sheet of the New CompanyBalance Sheet of the New Company
The balance sheet of the new company, after ama lgama tion is prepared
using the figures from the opening journa l subject to adjustments for
transactions after a malgama tion as enu merated above.
ILLILLILLILLILLUSTRAUSTRAUSTRAUSTRAUSTRATION 3.3TION 3.3TION 3.3TION 3.3TION 3.3
The Moon Company Limited a nd the Rising Star Company Limited have
ag reed to ama lgam ate. A new compa ny Sunshine Compa ny Limited
has b een formed to take over the combined concerns on 31st January,
2009. The Balance sheet of the two companies as at 31 st December,
2008 were a s follows:
The Moon Company LimitedThe Moon Company LimitedThe Moon Company LimitedThe Moon Company LimitedThe Moon Company Limited
Liabil i t iesLiabil i t iesLiabil i t iesLiabil i t iesLiabil i t ies Assets:Assets:Assets:Assets:Assets:
Issued and paid up capita l: Buildings 50,000
100,000 ordinary shares Machinery 20,000
of 1 each 100,000 Stock 26,00015%Debentures 2,000 Debtors 12,000
Creditors 6,000 Cash 5,000
Unappropria ted profit 5,000 _______
113,000 113,000
The Rising Star Company LimitedThe Rising Star Company LimitedThe Rising Star Company LimitedThe Rising Star Company LimitedThe Rising Star Company Limited
Liabil i t ies :Liabil i t ies :Liabil i t ies :Liabil i t ies :Liabil i t ies : Assets:Assets:Assets:Assets:Assets:
Issued and paid up capita l: Buildings 30,000
5,000 ordinary shares Machinery 25,000of 10 each 50,000 Goodwill 5,000
Creditors 3,000 Stock 3,000
Bill payable 2,000 Debtors 2,000
General reserves 5,000
Retained Earning 5,000 ______
65,000 65,000
The new compa ny (Sunshine) will take over the assets a nd liab ilities as follows:
AMALGAMATION, ABSORPTION AND RECONSTRUCTION
-
8/3/2019 Financial Reporting and Ethics
30/309
FINANCIAL REPORTING AND ETHICS
30
MoonMoonMoonMoonMoon
All assets at book value, except cash; buildings and machinery to be depreciated
at the rate of 10%. Debentu res will be redeemed by the Moon Company Limited
Rising StarRising StarRising StarRising StarRising Star
All assets at book value, except goodwill and stock. All liabilities, except
creditors will be sa tisfied by paying in the form of stock-in-tra de by the Rising
Star Comp any.
The n ew compa ny will pa y purchase considerat ion as follows:
(a) To Moon Company Limited:
( i) 7 ,000 ord inary shares of 10 each
(ii) 2 ,000 preference shares of 10 each
(b) To Rising Star Company Limited:
( i) 5 ,000 ord inary shares of 10 each
(ii) 2 ,000 preference shares of 10 each
Required :Required :Required :Required :Required :
Prepare
(a) Realisation Accounts of Moon and Rising Star Companies.
(b) Shareholders Accounts for Moon an d Rising Star Companies.
(c) Cash account of Moon Company.
(d) Goodwill Account of Rising Star Company.
(5) Balance Sheet of Sunshine Company Limited as at 31st January, 2009.
SUGGESTED SOLUTION 3.3SUGGESTED SOLUTION 3.3SUGGESTED SOLUTION 3.3SUGGESTED SOLUTION 3.3SUGGESTED SOLUTION 3.3
WorkingsWorkingsWorkingsWorkingsWorkings
The net a ssets and the p urchase consideration of the two old compan ies have
to be determined and compared for identification of goodwill or cap ital reserve.
Moon Company LimitedMoon Company LimitedMoon Company LimitedMoon Company LimitedMoon Company Limited
AssetsBuildings 50,000 - 5,000 (depreciation) 45,000
Machinery 20,000 - 2000 (depreciation) 18,000
Stock 26,000
Debtors 12,000
101,000
Less Creditors 6,000
Net Assets 95,000
N
N
N
N
-
8/3/2019 Financial Reporting and Ethics
31/309
31
Less purcha se considerat ion (shares issued):
7,000 ordinary shares 10 = 70,000
2,000 pref. share 10 = 20,000 90,000
Capita l Reserve 5,000
Rising Star Company LimitedRising Star Company LimitedRising Star Company LimitedRising Star Company LimitedRising Star Company Limited
Assets:Assets:Assets:Assets:Assets:
Buildings 30,000
Machinery 25,000
Debtors 2,000
57,000
Less bills payable 2,000
Net Assets 55,000
Less purcha se considerat ion (shares issued):
5,000 ordinary shares 10 = 50,0002,000 pref. shares 10 = 20,000
70,000
Goodwill 15,000
AAAAACCOUNTS FOR MOON COMPCCOUNTS FOR MOON COMPCCOUNTS FOR MOON COMPCCOUNTS FOR MOON COMPCCOUNTS FOR MOON COMPANYANYANYANYANY
Realisation AccountRealisation AccountRealisation AccountRealisation AccountRealisation Account
Buildings 50,000 Creditors 6,000
Machinery 20,000 Sunshine (P.C) 90,000
Stock 26,000 S/holders A/c (loss) 12,000
Debtors 12,000 _______
108,000 108,000
* PC is purchase consideration
Sun shine Comp an ySunshine CompanySun shine Comp an ySunshine CompanySun shine Compa ny
Rea lisation 90,000 Shareholders (shares) 90,000
Shareholders AccountShareholders AccountShareholders AccountShareholders AccountShareholders Account
Realisa tion (loss) 12,000 Ord inary shares 100,000
Sunshine (shares) 90,000 Profit and loss 5,000
Cash 3,000 _______
105,000 105,000
AMALGAMATION, ABSORPTION AND RECONSTRUCTION
NN
N
N
N
-
8/3/2019 Financial Reporting and Ethics
32/309
FINANCIAL REPORTING AND ETHICS
32
Cash AccountCash AccountCash AccountCash AccountCash Account
Opening balance 5,000 Debentures (15%) 2,000
_____ Shareholders 3,0005,000 5,000
ACCOUNTS FOR RISING STACCOUNTS FOR RISING STACCOUNTS FOR RISING STACCOUNTS FOR RISING STACCOUNTS FOR RISING STAR COMPAR COMPAR COMPAR COMPAR COMPANYANYANYANYANY
Realisation AccountRealisation AccountRealisation AccountRealisation AccountRealisation Account
Building 30,000 Bills payable 2,000
Machinery 25,000 Sunshine (P.C) 70,000
Debtors 2,000
Shareholders (profit) 15,000 ______72,000 72,000
Sunshine Company AccountSunshine Company AccountSunshine Company AccountSunshine Company AccountSunshin e Comp a ny Accoun t
Realisa tion 70,000 Shareholders 70,000
Balance Sheet of Sunshine CompanyBalance Sheet of Sunshine CompanyBalance Sheet of Sunshine CompanyBalance Sheet of Sunshine CompanyBa lan ce Shee t of Sun shine Compa ny
Limited as a t 31 Janu aryLimited a s at 31 Janua ryLimited as a t 31 Janu aryLimited a s at 31 Janua ryLimited as a t 31 Janu ary, 2006., 2006., 2006., 2006., 2006.
Fixed Assets:Fixed Assets:Fixed Assets:Fixed Assets:Fixed Assets:
Goodwill ( 15,000 - 5,000) 10,000Buildings ( 45,000 + 3,000) 75,000
Machinery ( 18,000 + 25,000) 43,000
128,000
Current Assets:Current Assets:Current Assets:Current Assets:Current Assets:
Stock 26,000
Debtors ( 12,000 + 2,000) 14,000
40,000
Less Current Liabilities:Less Current Liabilities:Less Current Liabilities:Less Current Liabilities:Less Current Liabilities:
Creditor 6000
Bills payable 20008000
Net Current Asset:Net Current Asset:Net Current Asset:Net Current Asset:Net Curren t Asset: 32,000
160,000
Issued Sha re Cap ital:Issued Sha re Cap ital:Issued Sha re Cap ital:Issued Sha re Cap ital:Issued Sha re Cap ital:
12,000 ordinary shares a t 10 per share 120,000
4,000 preference shares a t 10 per share 40,000
160,000
N
N
N
N
N
-
8/3/2019 Financial Reporting and Ethics
33/309
33
ILLILLILLILLILLUSTRAUSTRAUSTRAUSTRAUSTRATION 3.4TION 3.4TION 3.4TION 3.4TION 3.4
The following are the summa rized ba lance sheets of two companies, Rose Ltd
an d Blacky Ltd as a t 31 October 2008.
Rose LtdRose LtdRose LtdRose LtdRose Ltd
SHARE CAPITSHARE CAPITSHARE CAPITSHARE CAPITSHARE CAPITAL:AL:AL:AL:AL: ASSETSASSETSASSETSASSETSASSETS
Ordinary shares of N1 each 150,000 Freehold property (at cost) 45,000
Forfeited share capital 150 Plant & Machinery (at cost) 35,000
Reserve account 10,000 Goodwill 10,000
Profit & loss account 16,865 Stock 68,276
5% Debenture 35,000 Sundry Debtors 25,850
Sundry creditors 5 ,785 Balance a t bank 33,674
217,800 217,800
Blacky LtdBlacky LtdBlacky LtdBlacky LtdBlacky Ltd
ORDINARY SHARESORDINARY SHARESORDINARY SHARESORDINARY SHARESORDINARY SHARES ASSETSASSETSASSETSASSETSASSETS
of 1 ea ch fully paid 39,000 Freehold property (a t cost) 13,000
5% Debentures 7,000 Plant & machinery (a t cost) 11,000
Sundry creditors 25,700 Goodwill 10,000
Bank overdraft 600 Stock 15,200
Sun dry deb tors 9,500______ Profit & loss a ccount 13,600
72,300 72,300
The two compa nies decided to ama lgama te as on 31st December, 2008 and a
new compan y ca lled Yellow Ltd wa s formed with a n a uthorized capita l of
250,000 in ordina ry shares of 1 each. The following terms were agreed on:
Rose LtdRose LtdRose LtdRose LtdRose Ltd
( i) The considera t ion was 6 shares of 1 each fully paid to Rose Ltd in
exchan ge for every 5 sha res in Yellow Ltd and 1,000 cash .
(ii) The debenture holders were to be allotted such debentures in Yellow
Ltd b earing interest at 3 %per a nnum a s would bring them in the
same a mount of interest.
(iii) Yellow Ltd is to take over all assets and liab ilities at their book values.
(iv) The 2,500 expenses of dissolution is to be pa id by Rose Ltd.
Blacky LtdBlacky LtdBlacky LtdBlacky LtdBlacky Ltd
( i) The considera tion was 1 share of 1 each, fully pa id in Yellow Ltd in
exchan ge for every 3 share s in Blacky Ltd an d 500 in cash.
(ii) The debenture holders were to be allotted such debentures in Yellow
Ltd b earing interest at 3%per annum as would bring them in the
same a mount of interest.
AMALGAMATION, ABSORPTION AND RECONSTRUCTION
N
-
8/3/2019 Financial Reporting and Ethics
34/309
FINANCIAL REPORTING AND ETHICS
34
(iii) Yellow Ltd to take over all the assets and liabilities (including the bank
overdraft) at their book values.
(iv) Cost of liquidation to be paid by Yellow Ltd 1,000.
The ba lance of the a uthorized share cap ital of Yellow Limited was issued b y
public offer through prospectus. The offer which was payable in full on
app lication was fully subscribed a nd allotted.
YYYYYou arou arou arou arou are re re re re requirequirequirequirequired toed toed toed toed to:
(a) Show the necessary ledger accounts to close the book of each company
(b) The journal entries to open the book of Yellow Ltd
(c) Prepare the balance sheet of Yellow Ltd after amalgamation.
SUGGESTED SOLUTION 3.4SUGGESTED SOLUTION 3.4SUGGESTED SOLUTION 3.4SUGGESTED SOLUTION 3.4SUGGESTED SOLUTION 3.4
Realisation AccountRealisation AccountRealisation AccountRealisation AccountRealisation Account
RoseRoseRoseRoseRose BlackyBlackyBlackyBlackyBlacky Rose BlackyRose BlackyRose BlackyRose BlackyRose Blacky
Goodwill 10,000 10,000 Yellow Ltd (pc) 181,785 50,800
Freehold property 45,000 13,000 Sundry members
Plants & Machinery 35,000 11,000 (Loss on 51,015 11,900
Stock 68,276 15,200 rea lisat ion)
Sund ry deb tors 25,850 9,500
5%Debentu re 15,000 3,000
Creditors forDissolution expen ses 2,500 1,000
Bank 31,174 ________ _________________
232,800 62,700 232,800 62,700
Sundry Members Accoun t (Ordinary)Sundry Members Account (Ordina ry)Sundry Members Accoun t (Ordinary)Sundry Members Account (Ordina ry)Sundry Memb ers Account (Ordinary)
Rose BlackyRose BlackyRose BlackyRose BlackyRose Blacky Rose BlackyRose BlackyRose BlackyRose BlackyRose Blacky
Ltd LtdLtd LtdLtd LtdLtd LtdLtd Ltd Ltd LtdLtd LtdLtd LtdLtd LtdLtd Ltd
Profit & Loss Ordinary share
Account 13,600 capita l 150,000 39,000
Ord share in Forfeited share
Yellow 125,000 13,000 capita l 150 __
Bank 1,000 500 Reserves 10,000 __
Realisation Loss 51,015 11,900 Profit & loss 16,865________
177,015 39,000 177,015 39,000
N N N N
-
8/3/2019 Financial Reporting and Ethics
35/309
35
YYYYYellow Ltd Accountellow Ltd Accountellow Ltd Accountellow Ltd Accountellow Ltd Account
Rose BlackyRose BlackyRose BlackyRose BlackyRose Blacky Rose BlackyRose BlackyRose BlackyRose BlackyRose Blacky
LtdLtdLtdLtdLtd LtdLtdLtdLtdLtd Ltd LtdLtd LtdLtd LtdLtd LtdLtd Ltd
Rea lisat ion Account 181,785 50,800 Ordina ry shares 125,000 13,000
3%Debentu re 50,000 10,000
Cash 1,000 500
Sundry creditors 5,785 25,700
Cred itors for
Dissolution
__________________ expen ses 1,000
181,785 50,800 181,785 50,800
Bank AccountBank AccountBank AccountBank AccountBank Account
Rose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky Ltd Rose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky Ltd
Bal. b/d 33,674__
Bal. b/d __ 600
Yellow Ltd. 1,000 500 Creditors for
Dissolution
expenses 2,500 __
Yellow Ltd. __ 600 Su nd ry mem ber
(ord.) 1,000 500
_______ ______ Realisation 31,174 ______
34,674 1,100 34,674 1,100
5% Deb en tu re Accoun t5% Deb en tu re Accoun t5% Deb en tu re Accoun t5% Deb en tu re Accoun t5% Deb en tu re Accoun t
Rose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky Ltd Rose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky LtdRose Ltd Blacky Ltd
3 % Debenture 50,000 10,000 Bal. b/d 35,000 7,000
Account Realisa tion
______ ______ Account 15,000 3,000
50,000 10,000 50,000 10,000
3 % Deb en tu r3 % Deb en tu r3 % Deb en tu r3 % Deb en tu r3 % Deb en tu re in Ye in Ye in Ye in Ye in Yellow Ltd. Accountellow Ltd. Accountellow Ltd. Accountellow Ltd. Accountellow Ltd. Account
Rose LtdRose LtdRose LtdRose LtdRose Ltd Blacky Ltd Rose Ltd Blacky LtdBlacky Ltd Rose Ltd Blacky LtdBlacky Ltd Rose Ltd Blacky LtdBlacky Ltd Rose Ltd Blacky LtdBlacky Ltd Rose Ltd Blacky Ltd
Yellow Ltd. 50,000 10,000 5% Debenture 50,000 10,000
Sundry Creditors AccountSundry Creditors AccountSundry Creditors AccountSundry Creditors AccountSundry Creditors Account
Rose LtdRose LtdRose LtdRose LtdRose Ltd Blacky Ltd Rose Ltd Blacky LtdBlacky Ltd Rose Ltd Blacky LtdBlacky Ltd Rose Ltd Blacky LtdBlacky Ltd Rose Ltd Blacky LtdBlacky Ltd Rose Ltd Blacky Ltd
Yellow Ltd. 5,785 25,700 Ba l. b/d 5,785 25,700
AMALGAMATION, ABSORPTION AND RECONSTRUCTION
-
8/3/2019 Financial Reporting and Ethics
36/309
FINANCIAL REPORTING AND ETHICS
36
OrOrOrOrOrdinary Shardinary Shardinary Shardinary Shardinary Shares in Yes in Yes in Yes in Yes in Yellow Ltd Accountellow Ltd Accountellow Ltd Accountellow Ltd Accountellow Ltd Account
Rose Ltd Blacky Ltd Rose Ltd Blacky LtdRose Ltd Blacky Ltd Rose Ltd Blacky LtdRose Ltd Blacky Ltd Rose Ltd Blacky LtdRose Ltd Blacky Ltd Rose Ltd Blacky LtdRose Ltd Blacky Ltd Rose Ltd Blacky Ltd
Ye llow Ltd. 125 ,000 13,000 Sundry members 125 ,000 13,000
(ord.) account
N.B.:N.B.:N.B.:N.B.:N.B.: The amount of 15,000 and 3,000 on 5%Deben ture account transferred
to realisation account represen ts the surplus on issue of 3 %deb enture over
the existing 5%Debentu re.
Dissolution Expenses AccountDissolution Expenses AccountDissolution Expenses AccountDissolution Expenses AccountDissolution Expenses Account
RoseRoseRoseRoseRose BlackyBlackyBlackyBlackyBlacky ----- RoseRoseRoseRoseRose BlackyBlackyBlackyBlackyBlacky
Lt dLt dLt dLt dLt d Lt dLt dLt dLt dLt d Ltd LtdLtd LtdLtd LtdLtd LtdLtd Ltd
Bank 2,500 Realisa tion 2,500 1,000
Yellow Ltd. _____ 1,000 _____ _____
2 ,5002 ,5002 ,5002 ,5002 ,500 1 ,0001 ,0001 ,0001 ,0001 ,000 2 ,5002 ,5002 ,5002 ,5002 ,500 1 ,0001 ,0001 ,0001 ,0001 ,000
Determ inat ion of Purchase Considera tionDeterm inat ion of Purcha se Considera tionDeterm inat ion of Purchase Considera tionDeterm inat ion of Purcha se Considera tionDeterm ina tion of Purcha se Considera tion
Rose Ltd.Rose Ltd.Rose Ltd.Rose Ltd.Rose Ltd.
(a) Ordina ry Sha res
6 sha res in Rose = 5 Shares in Yellow
1 sha re in Rose = 5/6 in Yellow
150,000 sha res in Rose = 5/6 x 150,000= 125,000 shares of 1 each
= 125,000
(b) Cash = 1,000
(c) 5%Debenture
Present interest is 5/100 x 35,000 = 1,750
Futu re Interest is 3 X = 1,750100
X = 1,750 x 100 = 50,000
3
(d) Creditors taken over = 5,785
Blacky Ltd.Blacky Ltd.Blacky Ltd.Blacky Ltd.Blacky Ltd.
(a ) Ordina ry Sha res
3 shares in Blacky = 1 in Yellow
1 share in Blacky = 1/3 in Yellow
39,000 shares in Blacky = 1/3 x 39,000
= 13,000 shares of N1each
= 13,000
N
-
8/3/2019 Financial Reporting and Ethics
37/309
37
(b) Cash 500
(c) 5% Deb en tu re5% Deb en tu re5% Deb en tu re5% Deb en tu re5% Deb en tu re
Present Interest = 5/100 x 7,000 = 350
3 %Deben ture to be issued th at will genera te the sam e interest of
350 will be:
3X = 350
100
3 X = 35,000
X = 35,000
3
= 35,000
7/2
= 35000 x 2/7
= 5000 x 2
= 10,000
(d ) Cred itors taken over
Sundry creditors - 25,700
Ban k overdra ft - 600
Cred itors for dissolut ion expenses 1,000
SUMMARY OF PURCHASE CONSIDERASUMMARY OF PURCHASE CONSIDERASUMMARY OF PURCHASE CONSIDERASUMMARY OF PURCHASE CONSIDERASUMMARY OF PURCHASE CONSIDERATIONTIONTIONTIONTION
Rose Ltd . Blacky Ltd .Rose Ltd . Blacky Ltd .Rose Ltd . Blacky Ltd .Rose Ltd . Blacky Ltd .Rose Ltd . Blacky Ltd .
Ordinary share capita l 125,000 13,000
3 %Debenture 50,000 10,000
Cash 1,000 500
Creditors taken over 5,785 25,700
Creditors for Dissolution expenses - 1,000
Bank overdraft _______ 600
181,785 50,800
NoteNoteNoteNoteNote
(a) The purchase consideration, as calculated above, is debited to the new
company account (Yellow Ltd) a nd credited to the