FINANCIAL REPORTING SLIDES

NOTES COMPILED BY;
FAISEL ISHAK.
(054-7437-237)
THE FUTURE IS NOW.
You can change all things for the better when you change
yourself for the better.
FINANCIAL REPORTING
BACT 307
REGULATORY FRAMEWORK FOR THE PREPARATION

AND PRESENTATION OF FINANCIAL STATEMENTS
Regulatory Framework for the preparation and presentation of
financial statements
In Ghana, the regulatory framework for preparation of financial statements includes:

1) The companies code 1963 (Act 179)
• Section 41—Issue of Shares
• Section 42—Payment of Shares.
• Section 46—Classification of Shares
• Section 123. Keeping of books of account.
• Section 124. Circulation of profit and loss account, balance sheet, and reports.
• Section 125. Profit and loss account.
• Section 126. Balance sheet.
• Section 127. Group accounts
2) Ghana Stock Exchange listing rules and
3) International Financial Reporting Standards (IFRS)
2
INTODUCTION TO ACCOUNTING STANDARDS
Overview
 Meaning of Accounting Standards
 The Importance of Accounting Standards
 Limitations of accounting standards
 Options for the Development of Accounting Standards
 Benefits of the global harmonization of accounting standards
 Disadvantages of adopting International Accounting Standards
 Due Process for developing International Accounting Standards
3
What are accounting standards?
Accounting Standards are pronouncements, purposefully issued by a body with

authority to regulate the practices of accounting for the purpose of prescribing the
accounting treatments and disclosure requirements of financial transactions in
financial statements.
4
The Importance of Accounting Standards
 Accounting Standards prescribe treatments and disclosure requirements for
transactions in financial transactions.
 Accounting Standards enforce objectivity in reporting financial transactions.
 Accounting Standards enhance comparability of financial statements between

similar entities and between different accounting periods.
 Accounting Standards serve as a major source of authority for resolving issues of

accounting that may be in controversy.
 Accounting Standards help establish a body of theory and practice that act as a
general guide in accounting issues and promote best practices.
5
Limitations of accounting standards
 The standards setting process may be subjected to lobbying thereby tending to
serve the interest of groups with vested interest that have the strongest lobbying
powers;
 It is often argued that, the real user groups are often not actually involved to a
larger extent in the standards setting process.
 Sometimes, accounting standards may tend towards rigidity and move away from
flexibility thereby increasing the cost of compliance;
6
Options for the Development of Accounting
Standards
 Develop own national standards
 Adapt existing accounting standards
 Adopt International Accounting Standards
PAST QUESTION
7
Benefits of the global harmonization of accounting standards
 Convergence with best international accounting practices;

 Helps national accounting standard setters to save cost;
 Simplifies accounting theory and practice and further simplifies the training of
accountants for all countries of the world;
 Lends international credence to the reporting standards of the less developed
countries, reduces the accounting risk and thereby facilitates easy flow of foreign
direct investments.
 Most of-the-shelve accounting software are calibrated to be IFRS and IPSAS
compliant;( International Financial Reporting Standards and International Public
Sector Accounting Standards)
8
Disadvantages of adopting International Accounting
Standards
 Centralized political pressure on the global standards setting body;
 Monopoly conferred on the global standard setting body over the standard setting
process;
 A single set of global standards may not be suited to all economic environments;
 Cost of migration by local firms from existing national GAAP (Generally Accepted
Accounting Principles)
9
Due Process for developing International
Accounting Standards
The steps of the due process are as follow:
(1) Setting the Agenda
Topics to add to the IASB’s work programme are initially

identified and evaluated by reference to the needs of
investors.
10
(2) Planning the project
At this stage the IASB decides whether to work on the

project to develop or amend a standard. A work team is
then selected.
11
(3) Developing and publishing a discussion paper
A discussion paper is not mandatory, however the IASB

normally publishes it as the first publication on any major
new topic. The purpose of the discussion paper is to explain
the issue and solicit early comment. A discussion paper will
normally include:
•A comprehensive overview of the issue
•Possible approaches to addressing the issue
•The preliminary views of the IASB
•Invitation to comment
12
(4) Developing and publishing the exposure draft
An exposure draft is a mandatory step in the due process

and is the IASB main vehicle for consulting the public. An
exposure draft is draft of IFRS.
The public is invited to comment and this process may result
in the issue of a further exposure draft.
13
(5) Developing and publishing the Standard
When all issues from the exposure draft stage have been
resolved and the IASB members have balloted in favor of
publication, a final IFRS is published.
14
(6) After the Standard is issued
Post-issues of the implementation of the standard is

monitored in order that the IASB can identify any issue
arising from its application and its impacts.
Post-implementation reviews are carried out on major new

standards, usually after they have been applied
internationally for two years.
15
Status of IFRS in Ghana
 IFRS are not enshrined in international law and as a result their application is not
mandatory in a general sense.
 Their use in particular countries depends on adoption by local authorities
 The council of the Institute of Chartered Accountants (Ghana) voted to adopt IFRS
as Ghana National Accounting Standard with effect from 1st January, 2007. It later
adopted the IFRS for SMEs in 2010.
 As a result, all companies in Ghana are required to apply either:
◦ Full IFRS or The IFRS for SMEs
Currently (2017) we have 28 IAS and 15 IFRS in issue
16
17
FINANCIAL REPORTING
BACT 307
CONCEPTUAL FRAMEWORK FOR FINANCIAL

REPORTING
Meaning of Conceptual Framework
Conceptual Framework for financial reporting has to do with generally accepted theoretical principles and
concepts that form the basis for preparation of financial Statements. It also provides the basis for the
development of new accounting standards and evaluation of those already in existence.
These include:
 The Objective of General Purpose Financial Statement:
 Underlying assumptions
 The qualitative characteristics of financial information
 Elements of financial statements
 Recognition of the elements of financial statements
 Measurement of the elements of financial statements and
 Capital maintenance (not covered here)
2
Importance/Purpose of IASB Conceptual
Framework
 to assist the IASB in the development of future accounting standards and in its review of existing
accounting standards, ensuring consistency across standards
 to assist auditors in forming an opinion on whether financial statements comply with international
accounting standards; and
 to provide those who are interested in the work of the IASB with information about its approach to the
formulation of accounting standards.
 to assist national standard-setting bodies in developing national accounting standards;
 to assist preparers of financial statements in applying international financial reporting standards and in
dealing with topics that are yet to form the subject of an accounting standard.
 to assist users of financial statements in interpreting the information contained in financial statements
prepared in compliance with international financial reporting standards;
3
Importance/Purpose of IASB Conceptual
Framework
 to assist the IASB in promoting harmonization of regulations, accounting standards and procedures relating to
the presentation of financial statements by providing a basis for reducing the number of alternative
accounting treatments permitted by accounting standards,
 Keep in mind this Conceptual Framework is not an accounting standard itself, and it doesn’t override the
requirements of any existing accounting standard.
 Occasionally, an accounting standard may conflict with the Conceptual Framework, although this is rare.
When this happens the requirements of the accounting standard override the requirements of the Conceptual
Framework.
4
Objectives of Financial Reporting
General Purpose/Objective:
The purpose is to provide information about the
financial position, performance and changes in
equity that is useful to a wide range of users in
making economic decisions.
5
Derived External User Objective:

Provide information that is useful to present and
potential investors, creditors, and other users in
assessing the amounts, timing, and uncertainty of
prospective cash receipts from dividends and interest,
and the proceeds from the sale, redemption, or
maturity of securities or loans
6
Derived Company Objective:

Provide information to help investors, creditors,
and others in assessing the amounts, timing, and
uncertainty of prospective net cash inflows to
the related company
7
Provide information about a company’s economic
Provide information about a
resources, obligations, and owners’ equity.
company’s cash flows.
Provide information about a company’s profit or

loss and other comprehensive income and its
components.
Specific Objectives
8
Objectives of Financial Reporting:
Other Issues
First, financial reporting should provide
information about how the management of a
company has discharged its stewardship
responsibility.
9
Other Issues
Second, a company’s financial statements and other

means of financial reporting should include explanations
and interpretations by its management to help external
users understand the financial information provided.
10
Other Issues
Providing this critical information together with

those that can not be quantified in figures is
known as full disclosure.
11
The Qualitative Characteristics of financial
information
Accounting information should be understandable
Understandability to users who have a reasonable knowledge of
business and economic activities and who are
willing to study the information carefully.
information
Accounting information is relevant if it can make a
difference in a decision.
Relevance Example, the financial statements must show the
profit of a division which has been closed.
13
information
Accounting information is reliable when it is reasonably free

Reliability from error and bias, and faithfully represents what it is
intended to represent.
14
information
Comparability of accounting information enables users to

Comparability identify and explain similarities and differences between
two or more sets of economic facts.
15
Underlying Assumptions
Business Entity
The entity assumption assumes that a proprietorship, partnership, or

corporation’s financial activities are distinguished from other financial
organizations in keeping its own financial records and reports.
16
Continuity
This assumption assumes that the company will continue to operate in

the near future, unless substantial evidence to the contrary exists. This
assumption is also known as the going-concern assumption.
17
Period of Time
In accordance with the period-of-time assumption, a company prepares

financial statements at the end of each year and includes them its annual
report. The period-of-time assumption is the basis for the adjusting entry
process at period-end.
18
Monetary Unit
This assumption states that there must be some basis for measuring
exchange of goods or services. The Ghana Cedis (GH₵) is considered to be
the monetary unit for preparing a company’s financial statements in
Ghana.
The IASB encourages companies to prepare supplemental disclosures about

the impact of changing prices.
19
Historical Cost
Usually, the exchange price is retained in the accounting records as the value of an item until it is
removed from the records.
Cost
GH₵18,000
Replacement Cost Market Value

GH₵15,000 GH₵17,500
20
Historical Cost
Which amount should be

used?
21
Matching and Accrual Accounting
The accounting
Accrual matchingis the principle states
process of that
relating to determine
the financial the profit events,
effects of transactions, of a
and circumstances
company having
for an cash consequences
accounting period, to the
the period in which
company they occur rather
computes than
the total
to when the cash receipt or payment occurs.
expenses involved in obtaining the revenues of the period and relates
these total expenses to the total revenues recorded in the period.
22
Elements of Financial Statements
All the elements of the financial statements (Assets, Liability, Equity,

Income and Expenditure) have been defined by the conceptual
framework.
23
A Statement of financial position is a
Statement of financial financial statement that summarizes the
position. financial position of a company on a
particular date.
24
The elements of a balance sheet are:
Statement of Financial Position

Assets: is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.
Liability is a present obligation of the entity arising from past events, the statement of which is
expected to result in an outflow of resources from the entity.
Equity: the residual interest in the assets of the entity after deducting all its liabilities.
25
The elements of a balance sheet are:
Statement of Profit or Loss and other Comprehensive Income

Income: Increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than those
relating to contribution from equity participants.
Expenses: Decrease in economic benefits during the accounting period in the form of outflow or
depletions of assets that result in decreases in equity other than those relating to distribution to equity
participants.
26
Statement of Profit or Loss and other Comprehensive
Income
It is a financial statement that summarizes the

results of a company’s operations for a period of
time.
27
Recognition of the elements of
According to the framework, an item
must meet the definition of the elements (a) there should be the probability that any future
and must also meet further two (2) economic benefit associated with the item will
criteria before the item could be flow to or from the entity.
recognized in the financial statement. It is for this probability point that allows
receivables or debtors to be included in the
statement of financial position in the sense that
there is reasonable degree of certainty that the
credit customers will pay.
28
Recognition of the elements of
b) The item must have a cost or value that can be
measured with reliability. The recognition processes are of three stages:
•Initial recognition,
• subsequent measurement and
•de-recognition (e.g. disposal or destruction).
29
Measurement of the elements of
These are historic cost, current cost, realisable value and present value.
Historic cost according to the framework is often adopted even though a combination of basis could be used. E.g.
valuing inventories using the lower of cost and net realisable value.
Current cost: Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same asset
was acquired now.
Liabilities are carried at the undiscounted amount of cash or cash equivalents that would have to be required to settle
the obligation now.
Realisable Value (settlement): The asset is carried at the amount of cash or cash equivalents that would be obtained by
selling the asset in an ordinary disposal.
Present Value: This is the present discounted value of the future net cash flow in the normal course of business.
PAST QUESTION
30
31
FINANCIAL REPORTING
BACT 307
INTERNATIONAL FINANCIAL REPORTING STANDARDS

(IAS 1 & IAS 2)
IAS 1:
Presentation of Financial Statements
IAS 1: Presentation of Financial Statements
o Objective and scope
o Contents
o Components
2
Objective of IAS 1
• The purpose of IAS 1 is to provides guidelines on the presentation of the “general purpose
financial statements,”.
• To ensure comparability with the entity’s financial statements of previous periods and with
those of other entities.
• It provides overall requirements for the presentation of financial statements.
• It provides guidance on their structure, and the minimum requirements for their content.
3
Scope of the IAS 1
The requirements of IAS 1 are to be applied to all “general purpose financial statements” that have
been prepared and presented in accordance with International Financial Reporting Standards (IFRS).
 “General purpose financial statements” are those intended to meet the needs of users who are not in a
position to demand reports that are tailored according to their information needs.
IAS 1 is not applicable to condensed interim financial statements prepared according to IAS 34
4
Components of Financial Statements
Financial statements should contain following:
oA statement of financial position at the end of the period.
oA statement of profit or loss and other comprehensive Income for the period.
oA statement of changes in equity for the period
oA statement of Cash flow.
oNotes, comprising of summary of accounting policies and other relevant explanatory

notes to the financial statements.
5
COMPONENTS OF FINANCIAL STATEMENTS
Statement of
profit or Loss
Statement of
Changes
Components of in Equity
Financial
Statements
Cash Flow
Statement
Notes
6
Reporting Period
• The basic assumption is that the financial statement should be prepared

annually (i.e., 12 months).
• Any financial statements prepared that depart from the annual reporting period
should be disclosed by reason for this change and a warning associated with
comparability.
7
Current and noncurrent assets and liabilities should be classified separately on the face of the balance
sheet except in circumstances when a liquidity-based presentation provides more reliable and relevant
information (an example is reporting for financial institutions)
Current assets. A current asset is one that is likely to be realized within the normal operating cycle or 12
months after balance sheet date, held for trading purposes, or is cash or cash equivalent. All other assets
are noncurrent.
Current liabilities. A current liability is one that is likely to be settled within the normal operating cycle or
12 months after Statement of Financial Position date, held for trading purposes, or there is no
unconditional right to defer settlement for at least 12 months after Statement of Financial Position date.
All other liabilities are noncurrent.
8
The minimum line items to be included on the face of SFP are:
o Property, plant, and equipment
o Investment property
o Intangible assets
o Financial assets
o Inventories
o Trade and other receivables
o Cash and cash equivalents
o Trade and other payables
o Provisions
o Liabilities and assets for current tax
o Deferred tax etc.
o Issued capital and
o Reserves
9
Statement of Financial Position as at 31st December 2016
ASSETS
Non-Current Assets: GH¢'000
Property, Plant and Equipment 41,655 Current Liabilities:
Investment Property 9,000 Trade payables 3,400
Intangible Assets 700 Loan interest accrued (500-195) 305
51,355 Bank overdraft 910
Current Assets: Income tax accrued 7,000
Inventories 3,150 Total Equity and Liabilities 62,705
Trade Receivables (9,200-1000) 8,200
Total Assets 62,705
EQUITY AND LIABILITIES

Equity:
Stated capital 15,750
Retained Earnings 10,480
Revaluation Surplus 15,560
General Reserve 1,500
43,290
Non-Current Liability:
10% Loan Note 2,500
10% Preference shares (redeemable) 3,000
Deferred taxation 2,300
10
Statement of Profit or Loss and other Comprehensive
Income
Statement of Profit or Loss and other Comprehensive Income for the year ended 31st December 2016
GH¢’000
Revenue 68,865
Cost of sales (35,500)
Gross profit 33,365
Administrative expenses (10,695)
Selling, Marketing & Distribution costs (5,600)
Operating profit 17,070
Other incomes-investment 1,360
Profit before Interest and Tax 18,430
Finance Cost (500)
Profit before Tax 17,930
Income tax expense (7,000)
Profit after Tax 10,930
Other Comprehensive Income
Revaluation gain 14,760
Total Comprehensive Income 25,690
11
Statement of Changes in Equity
Statement of Changes in Equity for the year ended 31st December 2016
Stated Retained Revaluation General Total
Capital Earnings Surplus Reserve
GH¢’000 GH¢’000 GH¢’000 GH¢’000 GH¢’000
Balance as at 1/1/2016 14,500 3,600 800 1,500 20,400
Prior period adjustment (eg fraud) (400) (400)
Reinstated balance 3,200 20,000
Profit for the year 10,930 10,930
Revaluation gain on PPE 14,760 14,760
Bonus issue of shares (500000/4*10) 1,250 (1,250) 0
Dividends (2,400) 2,400
15,750 10,480 15,560 1,500 43,290
12
Cash Flow Statement
The cash flow statement serves as a basis for evaluating the entity’s ability to generate cash and
cash equivalents and the needs to utilize these cash flows.
Requirements of cash flow statement presentation have been elaborated in IAS 7, Cash Flow Statements.
13
Notes to the financial statements
IAS 1 suggested that note should be presented in the following order:
o A statement of compliance with IFRSs.
o A summary of significant accounting policies applied including.
o The measurement basis (or bases) used in preparing the financial statements.
o The other accounting policies used.
14
INVENTORIES: IAS 2
IAS 2 - Overview
Objective and scope

Measurement
Expense recognition
Disclosure
16
IAS 2 - Objective and Scope
• The Standard prescribes the accounting treatment for inventories.
• It provides guidance on the determination of the cost and subsequent recognition of

expense to be written down of inventory (i.e., Net realizable value).
• The Standard also provides guidance on the cost flow assumptions (“cost formulas”) that
are to be used in assigning costs to inventories.
• It is used to determine the costs to be recognized as inventory costs and the cost to be
transferred to the statement of profit or loss as expense
17
IAS 2 - Objective and Scope
IAS 2 applies to inventories excepts:
• construction work-in-progress (i.e., IAS 11).
• Financial instruments (i.e., IAS 32).
• Biological assets related to agricultural produce at the point of harvest (i.e., IAS 41).
18
Definition of Inventories
Inventories are assets:
oHeld for sale in the ordinary course of business (usually within the 12 months
of the entity)
oIn the process of production for such sale (W.I.P), or
oIn the form of materials or supplies to be consumed in the production process

or in the rendering of services (e.g., raw materials )
19
IAS
Measurement of Inventories:
2 - Measurement
There are three stages involved in valuing inventory.
1. Inventory should be value at cost or production cost.
2. Determine the Net realizable value of the inventory.
3. Using the standard measurement such as: the lower than cost/
production cost
20
Determination of Net realizable value (NRV)
NRV is the estimated selling price in the ordinary course of business
less Trade discount or rebate, the estimated costs of completion and
the estimated costs necessary to make the sale such as (Marketing,
selling and distribution expenses)
21
Determination of Cost
Cost includes:
o cost of purchase (exclude trade discounts and rebates)
o Actual cost of conversion (include ‘normal’ production overheads)
o Other costs incurred in bringing the inventories to their present location and
condition
Fixed production overheads must be allocated to items of inventory on the basis of normal
capacity of the production facilities
22
Determination of Cost
Cost excludes:
 abnormal amounts of wasted materials, labor or other production
costs
 storage costs, unless necessary in the production process before the
next production stage
 administrative overheads
 selling costs
IAS 2 – Measurement
Example 1-Valuing inventory
LBC manufactures mechanical talkative recorder, which trade under the name ‘Talkative’. In the year ended 31
December 2016, 10,000 Talkatives were manufactured and the related costs were:
GH₵
Materials 3,000
Labour 4,000
Depreciation of Machinery 2,000
Factory rates 1,000
Sundry factory expenses 3,000
Selling expenses 2,000
Expenses at head office 4,000
19,000
In addition to the information above, at 31 December 2016, there were 1,000 Talkative in inventory.
Requirement
Assuming that these have a resale value of GH₵4 and a Net Realizable Value of GH₵1.20 each, what value should
be placed on the closing inventory?
Solution
GH₵
Materials 3,000
Labour 4,000
Depreciation of machinery 2,000
Factory rates 1,000
Sundry factory expenses 3,000
Total cost 13,000
Units manufactured 10,000

Unit cost GH₵1.30
Number of units on hand at year end 1,000

Value of closing inventory (1,000 x GH₵1.2) GH₵1,200
Finished Goods of dissimilar items at 31 December 2016:
Item Cost NRV Value
GH₵ GH₵ GH₵
Samsung 1,000 1,400
Nokia 800 700
Sony 2,500 2,800
Ericson 1,800 1,700
infinix 200 300
Dumsor 300 250 GH₵ 6350 should
6,600 7,150 be recorded
What figure should be recorded for the inventories in the financial statements at 31
December , 2016
Solution:
Finished Goods of dissimilar items at 31 December 2016:
Item Cost NRV Value
GH₵ GH₵ GH₵
Samsung 1,000 1,400 1,000

Nokia 800 700 700
Sony 2,500 2,800 2,500
Ericson 1,800 1,700 1,700
infinix 200 300 200
Dumsor 300 250 250
6,600 7,150 6,350
Cost Formulae
Methods of valuing inventory issues are:
 First In First Out (FIFO)
 Last In First Out (LIFO)
 Weighted Average
LIFO is not allowed under IAS 2

Disclosure
 Accounting policy adopted in measuring inventories, including cost formulas
 Carrying amount of inventories under major headings (e.g. raw materials, WIP
and finished goods)
 Carrying amount of inventories at fair value less costs to sell
 Amount expended in the period
 Amount of any write downs of inventories
 Amount of any reversal of write downs
 Cause of write downs
 Carrying amount of inventories pledged as security
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FINANCIAL REPORTING
BACT 307
INTERNATIONAL FINANCIAL REPORTING STANDARDS

(IAS 16 & IAS 40)
PROPERTY, PLANT AND EQUIPMENT
(IAS 16)
 Objective and scope

 Recognition
 Measurement at recognition
 Measurement after recognition (CM, RM)
 Derecognition
 Disclosure
2
IAS 16 - OBJECTIVE AND SCOPE
 IAS 16 objective:
Standards for the recognition and derecognition of PP&E assets, measurement at and
after acquisition, and disclosures
 Scoped out:
Assets held for sale, agricultural biological assets, non-renewable natural resource rights
and reserves and investment property. These are all treated under seperate standards
3
IAS 16 - OBJECTIVE AND SCOPE
Definition of PPE
“Tangible items that:
(a) are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes; and
(b) are expected to be used during more than one period”
4
IAS 16 – RECOGNITION CRITERIA
Costs are recognized as PP&E only if:
1. probable that future economic benefits associated with the item will
flow to the entity, and
2. the cost can be measured reliably.
Applies to costs at acquisition and after acquisition.
5
IAS 16 - MEASUREMENT AT RECOGNITION
Need to know:
1. What elements of cost are included?
2. How to measure cost
elements to include:?
1. Purchase price net of discounts, rebates, and add non-recoverable taxes, duties
2. Costs to get in place and ready to use as management intended
3. Borrowing cost if it is a qualifying asset.
4. Costs of obligation to decommission asset and restore site as a result of acquiring the
asset
6
A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or sale. [ IAS 23.5] That could be property,
plant, and equipment and investment property during the construction period, intangible assets during the development period, or "made-to-
order" inventories
A qualifying asset is an asset that ‘necessarily takes a substantial period
of time to get ready for its intended use or sale’. Is there any bright line for?
determining the ‘substantial period of time’?
No. IAS 23R does not define ‘substantial period of time’. Management exercises
judgement when determining which assets are qualifying assets, taking into account,
among other factors, the nature of the asset. An asset that normally takes more than a
year to be ready for use will usually be a qualifying asset. Once management chooses
the criteria and type of assets, it applies this consistently to those types of asset.
Management discloses in the notes to the financial statements, when relevant, how the
assessment was performed, which criteria were considered and which types of assets
are subject to capitalization of borrowing costs
EFFECTS OF AUDIT QUALITY AND COST OF CAPITAL IN GHANA

Cost elements to exclude:
1. Costs after asset in place and ready for use as management intended
2. Borrowing cost if the asset is not a qualifying asset
3. Costs to open a new facility, introduce a product, move to new location
4. General and administrative overhead type costs
8
If self-constructed or Qualifying asset:
1. Apply same principles
2. Charge abnormal costs to Profit or Loss account
3. Interest costs during construction: IAS 23
4. Government assistance: IAS 20
9
IAS 16 - ILLUSTRATION 1
Situation-equipment:
Price list GH₵ 100,000 cost,
7% sales tax
GH₵ 10,000 to transport to plant,
GH₵3,000 labor, GH₵2,000 materials to calibrate machine.
GH₵4,000 general administrative cost
GH₵ 11,000 to consultant for services related to choice of machine and calibration
10
IAS 16 – SOLUTION 1
Equipment cost: GH₵
Invoice price 100,000
I Sales tax: 7,000
Transportation 10,000
Material and Labour/Calibration 5,000
Professional fees 11,000
133,000
11
How to measure cost:
“Cost” is defined (IAS 16.6) as:

Cash or cash equivalents paid or the FV of other consideration given to acquire asset
when acquired or constructed…
Borrowing cost should be included if the asset is a qualifying asset.
12
IAS 16 - MEASUREMENT AFTER RECOGNITION
Choice of two models:
1. Cost model
2. Revaluation model
Separate decision for each class of PP&E assets. Examples of a class: land, office
equipment, machinery, buildings
13
Cost Model (CM):
PP&E are carried after acquisition at cost, less accumulated depreciation and accumulated
impairment losses
Fixed asset impairment accounting. An asset impairment arises when there is a sudden
drop in the fair value of an asset below its recorded cost. ... The amount of an impairment
loss is the difference between an asset's carrying amount (NBV) and its fair value
IAS 16 defines fair value as 'the amount for which an asset could be. exchanged between
knowledgeable, willing parties in an arm's length transaction'.
14
con’t
Revaluation Model (RM):
PP&E are carried after acquisition at fair value at date of revaluation, less any
accumulated depreciation and impairment losses after revaluation
a revaluation of fixed assets is an action that may be required to accurately describe the true
value of the capital goods a business owns. This should be distinguished from planned
depreciation, where the recorded decline in value of an asset is tied to its age.

Depreciation:
Each major component may have a different depreciation policy
Depreciable amount: carrying amount less residual value

Residual value defined:
- estimate of net amount entity would receive now from asset’s disposal, if
asset was as old and in same condition as expected at end of its useful life
16
IAS 16 - MEASUREMENT AFTER RECOGNITION:
COST MODEL (CM)
Depreciation (continued):
 Depreciation period begins when PP&E is in place and ready to use, continues even if not
used or is retired from active use
 Depreciation period ends when PP&E is derecognized or classified as held for sale (IFRS 5)
 Depreciate over useful life to entity
 Useful life – consider capacity, wear and tear, technology changes, changes in product
demand, contractual or legal limits
17
REVALUATION MODEL (RM)
RM accounting –
What happens if the carrying amount of an asset increases?
18
REVALUATION MODEL (RM)
RM accounting –
What happens if the carrying amount of an asset decrease?
19
IAS 16 - ILLUSTRATION 2
Facts:
On January 1, Year 1, LBC Limited acquires a building at a cost of GH₵ 10,000. The
building is expected to have a 25-year life and no residual value. The asset is accounted
for under the revaluation model and revaluations are carried out every three years.
On December 31, Year 3, the fair value of the building is appraised at GH₵ 9,000.
Required:
Prepare the entries required on December 31, Year 3
20
IAS 16 – SOLUTION 2
December, 31-Year 3 At December, 31 of Year 3

DR Building with GH₵ 200
GH₵
Building 10,000 CR Revaluation Surplus GH₵ 200
Accumulated Depreciation
(10,000/25 yrs) x 3yrs 1,200 New depreciation rate is needed as of
January 1, Year 4 end:
Carrying Amount 8,800 GH₵9,000 carrying amount = GH₵410 per year
Revaluation Amount 9,000 25 – 3 years
Revaluation Gain 200
21
IAS 16 –DERECOGNITION
When disposed off or when no future economic benefits can be derived from the use of
the assets:
PPE is derecognised on disposal or when no future economic benefit is expected from its
use or disposal. Gains on disposal should not be classified in the income statement as
revenue.
 Remove carrying amount from statement of financial position
 Gain or loss = difference between carrying amount of asset (or part of asset if a
replacement) and net proceeds on disposal
22
IAS 16 –DISCLOSURE REQUIREMENTS
Whether CM or RM:
Depreciation methods used
Depreciation rate or useful lives
Beginning and ending balances and reconciliation of the two for gross amount and total
of accumulated depreciation and impairment losses
23
IAS 16 –DISCLOSURE REQUIREMENTS
If RM used:
Date of revaluation
Independent valuation?
Methods, techniques used
Assumptions made in determining FV
Amounts if CM had been used
Details of changes in Revaluation Surplus
24
INVESTMENT PROPERTY
IAS 40
IAS 40 - OVERVIEW
 Objective and scope
 Recognition
 Measurement at recognition
 Measurement after recognition
 Transfers
 Derecognition
 Disclosures
26
IAS 40- OBJECTIVE AND SCOPE
 IAS 40 identifies what an investment property is,
 how it differs from property, plant and equipment (owner-occupied
property); and
 what recognition, measurement and disclosure standards apply to
investment properties.
27
Difference between investment property
and PPE
There are four main difference between IAS40 Na d IAS16
1- IAS40 investment property is applicable only on Land and building .. but IAS16 is applicable to all tangible
assets
2- IAS40 investment property allow two subsequent measurement Cost model or fair value model but IAS16 is
allowing two subsequent measurement Cost model or revaluation model
3- IAS40 investment property in subsequent measurement fair value model the gain or loss recorded in profit
and loss account but in IAS16 the subsequent measurement revaluation model recorded the loss in P&L
statement but gain in recorded under revaluation surplus in equity section. Eg. At December, 31 of Year 3
DR Building with GH₵ 200
CR Revaluation Surplus GH₵ 200

4- IAS40 investment property stipulate that if you choose cost model as subsequent measurement you have to
disclose also the fair value of the investment property but in IAS16 if you choose cost model you are not
obligated to do so.

IAS 40- OBJECTIVE AND SCOPE
Investment property is defined as:
property held to earn rentals or for capital appreciation or both, rather than for
(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business
Examples of investment property are land held for appreciation and a building held for
current or future leases to third parties
29
IAS 40- RECOGNITION CRITERIA
Investment property is recognized as an asset when::
1. probable that future economic benefits associated with the item will
flow to the entity, and
2. the cost can be measured reliably.
30
IAS 40- INITIAL RECOGNITION
Investment property is recognized initially at cost –
 applying the cost model of IAS 16 Property, Plant and Equipment
 – including what is capitalized in cost and the principles for non-monetary transactions
 Leased investment property is measured according to IAS 17 Leases
31
IAS 40– MEASUREMENT AFTER RECOGNITION
 After initial recognition, an entity has a choice of methods to account for
investment property:
Use either
 Fair value model (FVM), or
 Cost model (CM)
 Must apply one model to all of its investment property
32
FVM example:
Investment property is acquired January 11, 2014, at a cost of GH₵200,000.
Fair values on:
December 31, 2014 - GH₵ 190,000
December 31, 2015 - GH₵ 198,000
December 31, 2016 - GH₵ 205,000
Required:
Account for how the above transaction should be treated.
33
FVM example:
Dec.31/2014 –Dr Loss in value or P & L GH₵10,000
Cr Investment property GH₵10,000
Dec.31/2015 Dr Investment property GH₵8,000
Cr Gain in value or P & L GH₵8,000
Dec.31/2016 Dr Investment property GH₵ 7,000
Cr Gain in value or P & L GH₵7,000
34
Cost model (CM)
 - Applies cost model described in IAS 16
 Assets reported at cost less accumulated depreciation and accumulated
impairment losses
 Depreciation expense recognized each period of the statement of profit or loss
35
IAS 40– TRANSFERS
36
IAS 40– DERECOGNITION
Derecognize investment property
 On disposal – when sold or transferred under a finance lease, or
 On retirement – when permanently removed from use and no benefits are
expected from its disposal
 Gains and losses on disposal generally recognized in profit or loss
37
IAS 40–DISCLOSURE REQUIREMENTS
whether the FVM or the CM is applied
 if FVM, whether and when any operating leases are classified as investment property
 criteria used to distinguish between owner-occupied investment property and
property held for sale where judgment is needed
 methods and assumptions underlying fair value measurements, including extent to
which market-related evidence is used
 extent to which the fair values were determined by an experienced, professional, and
independent appraiser
 existence of restrictions and contractual obligations related to the properties
 amounts and specific types of income and expense recognized in profit or loss
38
FINANCIAL REPORTING
BACT 307
ISSUE OF SHARES AND DEBENTURES
SHARES
• What is a share?
– It is a unit of ownership that represents an equal proportion of a

company’s capital.
– Share certificate provides evidence of ownership in a company.
– It is an ownership right acquired in a company which may be

transferable.
– Share is issued by a company at par value or no par value

SHARES
– Par value share is a share that has a face value, that is, its issue price
is written on it.
– No par value share has no face value. That is the issue price is not
stated on it.
– In Ghana, shares are issued at no par value.
– This means that future disposal of shares cannot be done at discount

or premium.
SHARES
No Par Value:
• Shares offered to the public do not have any fixed value.
• The prices of the shares are determined during the time of sale to the
public.
• These types of shares are called “Shares of No Par Value” or simply No Par
Value Shares.
• With no par value shares, there are no accounts for share premium or
discounts on shares.
SHARES
Classification of Shares:
– The law allows for the creation of different classes of shares with
certain rights regarding dividend, voting, repayment or otherwise.
– Generally, there are two main classes of share
• Preference shares
• Ordinary /equity or common shares
– Note that Americans refers to shares as Stock

SHARES
Preference shares
– These are shares that are entitled to a fixed and specified rate of
dividend.
– These are shares that are entitled to a capital redistribution before
ordinary shareholder when the company is winding up (liquidation).
– Preference shareholders do not have voting right (section 49 of the
companies code).
– Dividend payable on preference shares may be either cumulative or
non-cumulative.
SHARES
• Cumulative preference shares are entitled to dividend in
arrears in period where no dividends are declared and paid.
• Non-cumulative preference shares are not entitled to

dividend arrears.
• All preference shares are deemed to be cumulative unless

otherwise indicated.
SHARES
• Ordinary shares
– These are also known as equity shares or common shares.
– These are shares which entitled the holders to the residue of profit or
assets after the dividend or capital of preference shareholders has been
determined.
– Ordinary shareholders have the right to vote on any resolution placed

before the company.
– They do not carry fixed rates of dividends and usually bear the risk of
the company.
SHARES
• Treasury shares
– these are shares which have been lawfully redeemed, purchased or

acquired or forfeited and are in the company’s custody prior to their
re-issue.
– Notes that the consideration received in respect of re-issue of treasury

shares is not part of the stated capital.
– Issue share capital is the consideration received for shares issued and
paid for to date. This may be lower or equal to stated share capital.
SHARES
• There are different methods of issuing shares:
– Public issue (prospectus):
• This is where prospectus is advertised in the media inviting the

public to subscribe to the shares of the company.
– Offer for sale
• Here the company sells all the shares to an issuing house, usually a
financial institution which in turn sells them to the public at profit.
SHARES
Public Placement:
A stockbroker is contracted and he finds persons or financial institutions who
which to buy the shares. He reward is called brokerage.
Right Issue:
Existing company may wish to raise additional capital by offering the existing
shareholders an additional share to subscribe to on pro-rata basis. The price
of issue is usually lower than the existing market price. The shareholder has
the option to take up the offer, sell the right or refuse it.
Bonus issue or capitalization issue:

Existing shareholders are offered additional shares in the company without
payment of cash. The consideration involves transfer surplus to stated
capital.
DEBENTURES
• Definition
– Debenture is a written acknowledgement of
indebtedness by the company setting out the terms and
conditions of the loan.
– A company may raise loan by issue a debenture.
– A debenture holder is a special creditor who is entitled
to fixed interest whether profit is made or not.
DEBENTURES
Characteristics of Debentures:
• Debenture holders are the creditors of the company carrying a fixed rate
of interest.
• Debenture is redeemed after a fixed period of time.
• Debentures may be either secured or unsecured.
• Interest payable on a debenture is a charge against profit and hence it is a

tax deductible expenditure.
• Debenture holders do not enjoy any voting right.
• Interest on debenture is payable even if there is a loss.
DEBENTURES
No Par Value:
• Shares offered to the public do not have any fixed value.
• The prices of the shares are determined during the time of sale to the
public.
• These types of shares are called “Shares of No Par Value” or simply No Par
Value Shares.
• With no par value shares, there are no accounts for share premium or
discounts on shares.
DEBENTURES
• Types of debenture
– Redeemable (i.e. repayable at or by specified date) or
– Perpetual debenture (i.e., redemption taking place only when the

company is liquidated)
– Convertible debenture (i.e., can be converted into equity shares).
– Secured or naked debenture
– debenture may be secured by a floating charge or a fixed charge or both.

DEBENTURES
Merits of Debentures (Company):
• No dilution of control: Issue of debenture does not result in dilution of

interest of equity shareholders as they do not have right either to vote or
take part in the management of the company.
• It is allowable expense : Interest on debenture is a tax deductible

expenditure and thus it saves income tax.
DEBENTURES
Demerits of Debentures (Company):
• Payment of interest on debenture is obligatory and hence it becomes

burden when the company makes loss.
• Too much dependence on debentures increases the financial risk of the

company.
• Redemption of debenture involves a larger amount of cash outflow.

FINANCIAL STATEMENTS FOR PUBLICATION
COMPANIES TRADING IN GOODS
QUESTION 1
The trial balance of Beta Limited as at 31st December, 2016 is as follows:
Debit Credit
GH¢ GH¢
Sales and Purchases 20,000 50,000
Inventory 8,000
Distribution costs 8,000
Administration expenses 15,550
Trade Receivables and Payables 12,400 20,000
Cash and bank 8,100
Ordinary shares (GH¢0.50) 52,000
Revaluation reserve 8,000
10% Redeemable preference shares (GH¢1) 9,000
10% Loan Notes 8,000
Property, Plant and Equipment 75,000
Investment property 10,000
Rental income from investment property 1,000
Retained profits at 1st January, 2016 3,000
Loan note interest 400
Preference dividend 450
Interim ordinary dividend 1,600
Corporate Tax 500
Suspense 8,000
159,500 159,500
The following is to be taken into account:

1. The inventory at cost on 31st December, 2016 was GH¢14,500and the net realizable value
was GH¢12,000.
2. The Property, Plant and Equipment include a building whose net book value is currently
GH¢5,000 is to be revalued to GH¢9,000.
3. The balance on the corporation tax account represents an overprovision of tax for the
previous year. Tax for the current year is estimated at GH¢3,000.
4. The directors have decided to make an allowance for doubtful debts of 2% of trade
receivables. This amount should be charged to administrative expense.
5. Depreciation charges for the year ended 31st December 2016 amounted to GH¢800.
This figure should be included in the administrative expense.
1
6. The investment property was acquired in January, 2016. The rental income from the
investment property GH¢1,000 relates to the two-year period ending 31st December,
2017. The company adopts fair value model in subsequent measurement of the
investment property and fair value assessment at 31st December, 2016 puts the valuation
at GH¢15,000.
7. The suspense account represents the corresponding credit for cash received for a fully
subscribed issue of ordinary shares made on 30th December, 2016. The terms of the share
issue was 4,000 new ordinary shares were issued at GH¢2.00 each.
Required:
In compliance with the Companies’ Code provisions and in conformity with relevant
International Financial Reporting Standards, prepare for publication;
(i) the statement of profit or loss and other comprehensive income for the year ended 31st
December, 2016.
(ii) the statement of changes in equity for the year ended 31st December, 2016.
(iii) the statement of financial position as at 31st December, 2016.
d
QUESTION 2
The following is the trial balance of Kwei Limited, a dealer in Oracle Software, as at 31st
December, 2016.
GH¢ GH¢
Purchases and Sales 243,750 490,500
Ordinary shares (GHC1.00 per share) 221,500
Retained earnings 60,000
Revaluation Reserve 10,000
Trade Receivables and Payables 159,000 51,000
Inventory 99,000
Land and building (cost) 125,000
Delivery Vans: (cost) 105,500
Accumulated depreciation (31st December, 2015) 32,500
Plant and Equipment: (cost) 90,000
Accumulated depreciation (31st December 2015) 37,500
Administrative expenses 26,000
Selling and Distribution expenses 27,500
Investment property 100,000
Investment income 35,000
Cash and cash equivalents 27,000
Dividend paid 1,750
Provision for doubtful debts 14,000
2
Bad debts 17,500
Suspense 70,000
1,022,000 1,022,000
Additional information available is given below:

1) The inventory at cost on 31st December, 2016 was valued at GH¢137,500 and the net
realizable value was GH¢129,500.
2) Allowance for doubtful debt is to be increased to GH¢19,080 as at 31st December 2016.
3) An amount of GH¢6,000 in respect of rent and rates is included in administrative
expenses. This amount relates to 2017 financial year.
4) Depreciation for the year ended 31st December 2016 is to be calculated using the
following rates:
Plant and equipment 10% on cost Administrative expense
Delivery Vans 15% on cost Distribution cost.
5) To reflect a marked increase in property prices, Kwei Limited accepted the report of an
independent surveyor who valued the land and building up by GH¢15,000 on that on 31st
December 2016.
1) The audit fee of GH¢1,000 is to be accrued.
2) The suspense account represents the corresponding credit for cash received for a fully
subscribed issue of equity shares made on 30th December 2016. The terms of the share
issue was 35,000 new ordinary shares were issued at GH¢2 each.
3) The directors have estimated the provision for income tax for the year ended 31st
December 2016 at GH¢15,000.
Required:
In compliance with the Companies’ Code provisions and in conformity with relevant
International Financial Reporting Standards, prepare for publication;
(i) the statement of profit or loss and other comprehensive income for the year ended 31st
December, 2016.
(ii) the statement of changes in equity for the year ended 31st December, 2016.
(iii) the statement of financial position as at 31st December, 2016.
3
FINANCIAL STATEMENTS OF BANKS
QUESTION 3
The KK Rural Bank Ltd has presented the following trial balance for the 2016 financial year:
Debit Credit
GH¢’000 GH¢’000
Interest income 7,753
Interest on customers’ deposits 3,515
Commission and fee income 1,388
Dividends from investments 55
Profit on foreign exchange transaction 141
Operating expenses 1011
Directors Remuneration 39
Staff costs 2,213
Rental income from investment property 100
Motor vehicles/Accumulated depreciation 327 182
Equipment & Furniture/accumulated
depreciation 588 163
Computers/Accumulate depreciation 390 133
Land and buildings/Accumulated depreciation 776 83
Corporate tax 180
Investment property 980
Sundry payables 595
Amounts due to other banks 3,871
Customers' Current accounts 22,635
Customers' Savings accounts 7,819
Fixed/time deposits of customers 3,582
Loan, advances and overdraft granted 9,471
Loan impairment provision 01/01/2016 614
Stated Capital 4,823
Income surplus, 01/01/2016 1,146
Statutory reserves, 01/01/2016 3988
Capital surplus 444
Trade investments 1,343
Government Treasury bills 19,593
Deposits with other banks 12,794
Cash in hand 1,629
Balance with Bank of Ghana 4,666
59,515 59,515
4
Additional information:
i) Loan impairment provision at the end of the year as at 31st December 2016 is to be
increased to GH¢851,000.
ii) Provide for depreciation at the following rates:
Land and buildings 5% on cost.
Equipment and furniture 20% on cost.
Computers 20% on cost.
Motor vehicles 20% on cost.
iii) Provide for Audit fees of GH¢60,000.
iv) In compliance with the Banking Act 12.5% of profit after tax is to be transferred to
statutory reserve.
v) Interim tax for 2016 based on self assessment was settled at GH¢180,000. Corporate
tax applicable to the bank is 25%.
vi) Directors have agreed to pay end-of-year bonus to staff estimated at GH¢72,000. This
is yet to be paid. This should be accounted for as an operating expense.
Required:
Prepare the following financial statements of KK Rural Bank for publication in accordance with
relevant legislations and International Financial Reporting Standards (IFRS):
a) The Statement of Profit or Loss and other Comprehensive Income for the year ended 31st
December, 2016.
b) The Statement of Changes in Equity for the year ended 31st December, 2016.
c) The Statement of Financial Position as at 31st December, 2016.
QUESTION FIVE
The trial balance below was extracted from the records of Asempa Commercial Bank year ended
31st December, 2016.
Debit Credit
GH¢’000 GH¢’000
Interest income 19,800
Interest on customers’ deposits 3,400
Net commission and fees income 3,600
Gains on foreign currency transactions 160
Dividend income 120
Operating expenses 9,600
Directors emolument 80
Auditors fees 160
Dividend paid (note vi) 80
Loan impairment provision (1/1/2016) 1,640
5
Rental income from investment property 360
Corporate current income tax 400
Income surplus (1/1/2016) 6,800
Capital surplus (1/1/2016) 80
Statutory reserve (1/1/2016) 2,560
Stated capital (50,000 equity shares) 1/1/2016 400
Cash on hand 1,360
Balance with central bank 12,200
Investment in government securities 43,600
Investment in listed financial institutions 640
Receivables from other banks 6,440
Payables to other banks 200
Overdraft, loans and advances 62,800
Sundry receivables and prepayments 2,000
Property plant and equipment 4,960
Accumulated depreciation of PPE (1/1/2016) 1,640
Investment property (note i) 960
Customers’ deposits 98,120
Expense trade payables and accruals 13,200
148,680 148,680
The following additional notes are relevant:

i) The investment property was acquired in January 2016. The rental income from the
investment property GH¢360,000 relates to the three-year period ending 31st December,
2018. The bank adopts fair value model in subsequent measurement of the investment
property and fair value assessment at 31st December, 2016 puts the valuation at
GH¢1,000,000.
ii) Loan impairment provision at the end of the year as at 31st December 2016 is to be
increased to GH¢2,040,000
iii) Property, plant and equipment is analysed as follows:
Cost Acc dep rate of depreciation
GH¢000 GH¢000
Land 1,000 0 Nil
Building 800 360 20% p.a straight line
Computers and equipment 3,000 1,200 25% p.a straight line
Motor vehicles 160 80 25% p.a straight line
iv) There was neither current tax liability nor current tax asset as at 1 Jan 2016. During 2016,
the company paid GH¢400,000 for corporate tax on interim assessment. The bank is
subject to 20% corporate tax. The company adopts nil provision for deferred tax.
v) In compliance with the Banking Act 12.5% of profit after tax is to be transferred to
statutory reserve.
vi) On 15th November 2016, the directors paid an interim dividend of GH¢1.60 per share. No
further dividend is recommended for the year.
6
vii) In order to satisfy the central Bank minimum stated capital requirement, the shareholders,
at an emergency meeting on 24th December 2016, approved a bonus issue of one share for
each two held (out of income surplus) to be credited at the current market price of GH¢20
per share. This decision is to be reflected in the 2016 financial statements.
Required:
Prepare the following financial statements of Asempa for publication in accordance with relevant
legislations and International Financial Reporting Standards (IFRS):
a) The Statement of Profit or Loss and other Comprehensive Income for the year ended 31st
December, 2016.
b) The Statement of Changes in Equity for the year ended 31st December, 2016.
c) The Statement of Financial Position as at 31st December, 2016.
FINANCIAL STATEMENTS OF INSURANCE COMPANIES
QUESTION SIX– Life Business

Brilliant Life Assurance Company was incorporated in January 2010 following National
Insurance Commission directive to all insurers to separate life business from general business.
The following trial balance was extracted from the financial records of the company as at 31st
December 2016.
CREDITS GH¢ ‘M
Stated Capital 200
Contingency Reserve fund (1/1/2016) 250
Income Surplus (1/1/2016) 108
Premium Income 19,108
Commission received 385
Income from investment 1,505
Interest from life policy loans 740
Provisions for claims (1/1/2016) 426
Amount due to General Business 1,165
Sundry trade payables 585
Life Fund 1 January 2016 18,853
Provision for Depreciation for PPE: 1/1/2016
7
Land and buildings (freehold) 3
Land and buildings (leasehold) 81
Furniture and fittings 48
Office and bungalow equipment 67
Motor Vehicles 210
Computers 570
44,304
DEBITS
Re-insurance premium 302
Claims paid 2,500
Surrenders 1,160
Commission paid 800
Staff costs 6,000
Directors emoluments 510
Accountants remuneration 40
Other operating costs 1,600
Plant, property and equipment (31/12/2016)
Land and buildings (freehold) 200
Land and buildings (Leasehold) 1,500
Furniture and fittings 190
Office and Bungalow equipment 454
Motor Vehicles 564
Computers 884
Capital work- in progress 200
Long term investments 6,790
Life policy loans 2,200
Staff loans and advances 310
Amount due from directors 80
Premiums receivable 2,300
Prepayments 320
Short term investments 11,000
Cash at bank and in hand 1,400
Investment properties 3,000
44,304
The following additional information is relevant:
i) Full provision is made for estimated cost of claims notified but not settled at the
statement of financial position date using the best information available. This is estimated
at GH¢ 400 million. Provision is also made for estimated cost of claims incurred by the
statement of financial position date but not reported. This is also estimated at GH¢ 200
million
8
ii) Liabilities relating to the policy holders under life policy contracts in force at 31st
December 2011, based on actuarial valuation are estimated at GH¢ 20,700 million.
iii) The company depreciate s all assets based on estimated useful economic life .The applied
rates are as follows:
Freehold land and buildings 2.5%
Leasehold land and buildings 5%
Furniture and fittings 10%
Office and bungalow equipment 10%
Motor vehicles 20%
Computers 25%
iv) During the year ended 31st December, the company acquired some computers at a cost of
GH¢200 million. This transaction is already included in the financial records.
v) The capital work in progress relates to installation of new computer software for client
database which commenced in January, 2016. The installation is still in process as at 31 st
December, 2016
vi) Utility bills were not received as at the end of the year. They are estimated at GH¢20
million. Agent’s commission for the last quarter of the year estimated at GH¢40 million
remained unpaid as at 31st December, 2016, this amount should be accrued. Ignore
adjustment for deferred acquisition cost.
vii) The company enjoys tax holiday for the first five years of operation but any loss cannot
be carried forward for tax purposes.
viii) The investment properties were acquired in February, 2016. The directors have adopted
fair valuation model of accounting for investment properties in line with IAS 40. At 31st
December, 2016, they were fair valued at GH¢3,400 million. The rental income for the
year amounting to GH¢150 million has not been accrued in the financial records.
ix) No dividend is proposed for 2016
x) Transfer to Contingency reserve is to be made at 25% of profit after tax
Required:
a) Prepare the statement of profit or loss and other comprehensive income for the year
ended 31 December 2016
b) Prepare the statement of changes in equity for the year ended 31 December 2016
c) Prepare the property, plant and equipment schedule showing the movement during the
year
9
What is 'Reinsurance'
Reinsurance is the insurance of insurance companies. It is also known as insurance for insurers
or stop-loss insurance. It is a practice where insurer(s) transfer portions of risk portfolios to other
parties by some form of agreement to reduce the likelihood of having to pay a large obligation
resulting from an insurance claim. The party that diversifies its insurance portfolio (collection) is
known as the ceding (surrendering) party. A reinsurance ceded is the portion of risk that a
primary insurer passes to a reinsurer. The parties transfer risk either on individual policies of
insurance called facultative reinsurance or by reinsuring entire blocks of business called treaty or
excess treaty reinsurance. Reinsurance business may be on the basis of legal cession (statutory)
The two most common forms for reinsurance are proportional and non-proportional, also called
excess. Proportional relates to the sharing of premium and losses in the same percentage while
non-proportional involves a negotiated premium with reinsurance coverage above a specific
amount called a retention. Under excess treaty reinsurance contracts, the reinsurance premium is
a negotiated percentage of the premium for all insurance subject to the treaty. Losses are reported
to the reinsurer on an individual basis. The party that accepts a portion of the potential obligation
in exchange for a share of the insurance premium is known as the reinsurer.
Reinsurer
A company that provides financial protection to insurance companies. Reinsurers handle risks
that are too large for insurance companies to handle on their own and make it possible for
insurers to obtain more business or underwrite more policies than they would otherwise be able
to. Reinsurers also make it possible for primary insurers to keep less capital on hand to cover
potential losses.
Advantages of reinsurance
Reinsurance boosts Insurance Business
Reinsurance assists in the boom of insurance business. It enables every insurer to accept
insurance business as the total risk will be distributed among other reinsurers. This means that,
without reinsurance, the insurer may not be willing to take up risks, particularly when the risk
exceeds beyond his capacity to manage.
Reinsurance reduces the risks
The prime principle of insurance is to reduce risk. As the risks are spread across wider area, the
loss of the individual is minimized which gives the insurer the secured feel.
Furthermore, the revenue of insurance companies are stable due to reinsurance.
1
It also helps the insurance companies to gain knowledge about various types of risks and the
basis of rating the risks in the future.
Reinsurance Increases Goodwill of Insurer
Reinsurance helps to boost the overall confidence and goodwill of insurer. When the insurer
develops confidence, he understands the nature of risks involved beyond his capacity.
Reinsurance Limits the Liability
Reinsurance motivates the insurers to undertake and spread the risks. The liability of insurer is
limited to the maximum.
Reinsurance Stabilizes premium Rates
The premium rates of insurance are stabilized by reinsurance. Generally, the premium rates are
calculated on the basis of the loss experienced by the insurer in the past, due to the risk
concerned. Reinsurance takes into account of all these data and fixes the premium rate according
for various types of risks under mutual agreement.
Thus reinsurance stabilizes the fluctuations in the premium rates of various types of risks.
Reinsurance Protects the Insurance Funds
The insurance funds of the insurer is well protected due to reinsurance. Additional security and
peace of mind is an added advantage of reinsurance for the insurer and the company that offers
the insurance.
Reinsurance Reduces Competition
The competitions between inter company is reduced as everyone work in a cooperative manner
and with the helping tendency in the insurance business. Thus reinsurance helps to control
competition and increase overall morale of the employees in the insurance business.
Reinsurance Reduces profit fluctuations
The reinsurance plans reduce, to a considerable extent the violent fluctuations in the profits of
the company. For eg. When re-insurance is nonexistent heavy risks are retained by the original
insurer, his profits are greatly upset due to a heavy single loss.
Reinsurance can provide financing for the primary company s growth Reinsurance encourages
new enterprises
It encourages the new underwriters, who in their early period of development, have limited
retentive capacity. In the absence of reinsurance facility, the tremendous growth of new
enterprises is doubtful.
2
Reinsurance Minimizes dealings
Due to the reinsurance scheme, the insurer is required to indulge in the minimum dealings with
only one insurer. In the absence of insurance facility, the insured will have to approach several
insurers to enter into various individual insurance agreement on the same property. This involves
considerable cost, loss of valuable time and slower down the pace of protection cover.
Disadvantages of reinsurance
The main disadvantage for insurance companies is that buying reinsurance is costly. Thus
purchasing an expensive insurance policy although expensive may be worth it even though the
risk is small. This is because the primary insurance company may go bankrupt if claims become
too much to pay.
Excess reinsurance can be difficult to price.
It may enhance the Moral hazard in the society. Moral hazard refers to the situation where people
become reckless or careless because they feel they are 'covered'.
It may enhance the Morale hazard in the society. Morale hazard on the other hand refers to the
situation which encourages some individuals to cheat and to try to benefit from insurance claims
by either staging fake accidents or exaggerating their claims
XYZ INSURANCE COMPANY LIMITED

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER
2006
stated share capital income contingen Total

capital deals surplus surplus cy reserve
GHC GHC GHC GHC GHC GHC
Balance as of x x x x x X
31december,2005
Prior year adjustment x X
Adjusted balance x x x x x X
Surplus on revaluation of x X
PPE
Deficit on revaluation of (x) (x)
Investments
Net profit for the period x X
Transfer to contingency (x) x
reserve
3
Dividends (x) (x)
issue of share x X
Balance as of 31 x x x x x X
December,2006
Note: where the statement of changes in equity is prepared, income surplus account may
not be prepared.
XYZ INSURANCE COMPANY
STATEMENT OF FINANCIAL POSITION AS OF 31 D ECEMBER, 20XX
Stated capital XXX
Share deals XXX
Contingency reserve XXX
Capital surplus XXX
Income surplus XXX
Share holders’ funds XXX
Represented by:
Non- current assets

Property, plant and equipment XXX
Investment property XXX
Investments in financial instruments XXX
Intangible Assets XXX
XXX
Current assets
Premium debtors XXX
Amount due from reinsurers XXX
Deferred acquisition costs XXX
Other debtors XXX
Short-term investments XXX
Cash and bank XXX
4
XXX
Current liabilities
Prov. for unearned premium XXX
Provision for claims XXX
Amount due to reinsurers XXX
Creditors XXX
Dividend payable XXX
XXX
Net current assets XXX
NET ASSETS XXX
Format for life business

XYZ LIFE ASSURANCE COMPANY
LIFE REVENUE ACCOUNT FOR THE YEAR ENDED DECMBER 31, 20XX
GH₵
Gross premium income XXX
Less: reinsurance XXX
Net premium income XXX
ADD: XXX
Commission receivable XXX
DEDUCT:
Claims incurred: less: recoveries
Commission expense XXX
Management expense XXX
Increase in fund during the year XXX
Under writing profit/ (loss) XXX (XXX)
XXX
5
XYZ LIFE INSURNACE COMPANY LIMITED
INCOME STATEMENT FOR THE YEAR ENDED DECMBER 31,2XXX

GH₵
Under writing profit/ (loss) XXX

Investment income XXX
Other income XXX
Net profit XXX
Taxation (XXX)
Net profit after tax
Transferred to income surplus account XXX

11
I INCOME SURPLUS ACCOUNT FOR THE YEAR ENDED DECEMBER31, 20XX

GH₵
Balance as at 1st January XXX
Net profit after tax XXX
Less:
Dividends XXX
Transfers to surplus, etc XXX XXX
Balance as at December 31,20XX XXX
6
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECMBER 31,
2006
share share capital income contingency Total

capital deals surplus surplus reserve
GH₵ GH₵ GH₵ GH₵ GH₵ GH₵
Balance as at 31 x x x x x X
December,2005
prior year adjustment x X
adjusted balance x x x x x X
surplus on revaluation of PPE x X
deficit on revaluation of (x) (x)
investments
net profit for the period x X
transfer to contingency reserve (x) x
dividends (x) (x)
issue of share x X
balance as at 31 December,2006 x x x x x X
Note: where the statement of changes in equity is prepared, income surplus account may not be
prepared

STATEMENT OF FINANCIAL POSITION AT DECMBER 31,2006
Stated capital XXX
Share deals XXX
Capital surplus XXX
Income surplus XXX
SHAREHOLDERS’ FUND XXX
REPRESENTED BY
Non-current assets 11
7
Property, plant and equipment XXX
Investment property XXX
Investment in financial instruments XXX
Intangible assets XXX
XXX
Current assets
Premium debtors 12 XXX
Life policy loan XXX
Amount due from reinsurers XXX
Deferred acquisition costs XXX
Other debtors XXX
Short term investments 13 XXX
Cash and bank XXX
XXX
Current liabilities
Provision for claims XXX
Amount due to reinsurers 14 XXX
Creditors XXX
Dividend payable XXX
Taxation XXX
Net current assets XXX
Total assets less current liabilities XXX
Less: life fund (XXX)
NET ASSETS XXX
Notes
Gross premium income is shown less returns and cancellations. Gross premium represents the
sales of an insurance company. They are amounts receivable by an enterprise for underwriting
8
risks. They can arise mainly from direct business (where the insurer has a direct contractual
relationship with the insured) and also from indirect business (business accepted through
reinsurance inwards)
Reinsurance outwards - It represents premium turned over to reinsurers for business ceded
(SURRENDEDED, RELINQUISHED) out to them.
Reinsurance inwards - This is treated as part of Gross Premium Income.
Reinsurance business inwards and outwards may be on the basis of legal cession (statutory),on
the basis of individual optional risks (facultative), or on the basis of groups of risks falling under
the terms of an agreement(treaty)
(Non-current assets) Investment -This applies to long term investments such as shareholding
in other companies (listed and unlisted securities), and generally investments with maturities
spanning two years and beyond.
Premium debtors is an alternative name for outstanding premium owed by individual
enterprises or more commonly by brokers/agents .it is therefore more commonly referred to as
Agents’ Balances where agents is used in a broad sense to include brokers.
Short –term investments cover such instruments as treasury bills, fixed deposits; call deposits,
etc., generally, instruments with maturities of not more than one year. It consists of government
securities and deposits with other financial institutions.
Amounts due from reinsurers - It is possible to have reinsurers as debtors in circumstances
where large claims have been paid up front by the direct insurer pending recovery cheques.
9
CORPORATE ANNUAL REPORTING OF A BANK
The lecture notes will focus on the relevant provisions in the Banking Act 2004, Act 673. It will
also discuss the provisions in IAS 30 and finally prepare the financial statements of a bank.
Some relevant provisions of the Banking Act
Functions of the Bank of Ghana

The Bank of Ghana shall have an overall supervisory and regulatory authority in all matters
relating to banking business and shall be responsible for
(a) Promoting an effective banking system;
(b) Dealing with any unlawful or improper practices of banks, and
(c) Considering and proposing reforms of the laws relating to banking business.
(2) The Bank of Ghana shall establish within its organisation, a Banking Supervision
Department.
(3) The Bank of Ghana may authorise the Head of the Banking Supervision
Department or any other official or person to exercise a power and do an act that it
considers appropriate in order to discharge its responsibilities under this Act.
(4) The Bank of Ghana may, in relation to the operation of a bank; authorise any
other person either generally or in respect of a particular matter, to perform a function
that otherwise would be performed by the Bank.
Banking license mandatory

(1) No person shall carry on the business of banking except by or under the authority of a license
issued in accordance with this Act.
(2) A person who carries on banking business without a license commits an offence and is liable
on summary conviction
(a) in the case of a body corporate or other body of persons to a fine not exceeding three
thousand penalty units, and
(b) in the case of an individual to a fine not exceeding three thousand penalty units or to a
term of imprisonment not exceeding ten years
Permissible activities of banks

(1) A bank shall not carry on any business other than any of the following:
(a) acceptance of deposits and other repayable funds from the public:
(b) Lending;
(c) Financial leasing;
(d) Investment in financial securities:
(e) Money transmission services;
(f) Issuing and administering means of payment including credit cards,
travelers cheques and bankers’ drafts;
(g) Guarantees and commitments;

(h) Trading for own account or for account of customers in,
(i) Money market instruments,
(ii) foreign exchange, or
(iii) transferable securities;
(i) participation in securities issues and provision of services related to those
issues;
(i) advice to undertakings on capital structure, acquisition and merger of
undertaking;
(k) portfolio management and advice;
(l) the keeping and administration of securities;
(m) credit reference services;
(n) safe custody of valuables;
(o) electronic banking; and
(p) any other services as the Bank of Ghana may determine.
(2) The Bank of Ghana may by notification, restrict the permissible activities of
banks in general or a class of banks or an individual bank or remove the restriction so
imposed as it considers appropriate
Restrictions on commercial, agricultural or industrial activities and immovable property

SECTION 12. (1) Subject to subsections (2), (3) and ( 4 ), a bank shall not directly engage in
any commercial, agricultural or industrial undertaking unless it establishes for that
purpose a subsidiary company of the bank registered in Ghana.
(2) The equity capital invested in a subsidiary company by the bank shall not
exceed fifteen per cent of the net worth of the bank and where the bank has more than
one subsidiary company the equity capital invested in those subsidiary companies by
the bank shall not exceed in the aggregate twenty-five per cent of the net worth of the
bank.
(3) The aggregate amount of any loan, advance, credit or other facility and equity
capital which a bank may grant and invest under subsection (2) shall not at any one time
exceed
(a) twenty-five per cent of the net worth of the bank, in the case where the bank owns one
subsidiary company; or (b) thirty-five per cent of the net worth of the bank, in the case
where the
bank owns more than one subsidiary company.
(4) A bank shall not build, purchase or take a lease of immovable property except
(a) for the provision of premises or housing the business or staff of the bank; or
(b) for the provision of amenities for its staff.
(5) Notwithstanding anything in this section, a bank may accept immovable
property as security for any debt or other liability and may acquire an interest which a
bank may lawfully acquire in the satisfaction of a debt due to it:
(6) An interest acquired under subsection (5) shall be disposed of by the bank
within one year after the acquisition or within a longer period that may be determined by
the Bank of Ghana on application made by the bank
(7) This section does not prevent a bank from letting or subletting a part of
immovable property which is ordinarily used for housing its business where the property
is in excess of the immediate requirements of the bank
(8) A bank which contravenes a provision of this section commits an offence and
is liable on summary conviction to a fine not exceeding 1,500 penalty Units.
Opening of representative office

SECTION 21. (1) A foreign bank incorporated abroad shall not set up a representative office
in the country, unless it has obtained the prior approval in writing of the Bank.
(2) A foreign bank setting up a representative office shall apply to the Bank of
Ghana with the information and documents that the Bank of Ghana may require,
including permission from the supervisors in the country where that bank is incorporated.
(3) A representative office permitted to be set up shall not transact any form of
banking business in the country.
(4) A foreign bank which does not comply with this section commits an offence
and is liable on summary conviction to a fine not exceeding 2,000 penalty units.
Capital adequacy
SECTION 23. (1) A bank shall at all times while in operation maintain a minimum capital
adequacy ratio of ten per cent.
(2) The Bank of Ghana may by directives prescribe a higher capital adequacy
ratio with respect to a particular bank or all banks for the period that the Bank may
prescribe
(3) The capital adequacy ratio shall be measured as a percentage of the adjusted
capital base of the bank to its adjusted asset base in accordance with Regulations made by
the Bank of Ghana.
Guidelines on accounting standards and disclosures in balance sheet and profit and loss
account
70. (1) The Bank of Ghana may lay down the guidelines to be followed by banks in
respect of accounting policies, practices, presentation of annual accounts and disclosure
of information in the annual accounts.
(2) A bank which does not comply with subsection (1) shall pay to the Bank of
Ghana a fine not exceeding 1000 penalty units.
Accounting records
71. (1) A bank shall keep accounting records in a manner that gives an accurate and
reliable account of its transactions and the accounts prepared from the records shall give a
true and fair view of the state of affairs of the bank and its results for the accounting
period.
(2) The accounting records of the bank shall be kept at the bank’s head office in
Ghana.
(3) A bank which contravenes a provision of this section commits an offence and
is liable on summary conviction to a fine not exceeding one thousand penalty units.
Financial statements
72. (1) A bank shall prepare, at the expiration of each calendar year in respect of the
business transacted by it with reference to that year, financial statements comprising
balance sheet, profit and loss account and cash flow statement.
(2) The financial statements referred to in subsection (1) shall be approved by
the board of directors of the Bank and signed by at least two directors of the bank.
(3) A bank which fails to prepare a financial statement in accordance with this
section is liable to pay to the Bank of Ghana, a fine not exceeding 1000 penalty units.
Audit of bank’s accounting records

73. The balance sheet and profit and loss account referred to in section 73 and the
accounting records of the bank for the period shall be audited by qualified auditors duly
appointed in accordance with this Act.
Appointment of auditors
74. (1) An auditor of a bank shall, except as provided in subsection (2) of this section
and subsection (2) of section 75 be appointed at an annual general meeting of the bank.
(2) The directors of a bank may appoint
(a) the first auditor of the bank; or
(b) an auditor to act in place of the auditor who is for any reason unable or
unwilling to act until a new auditor is appointed at an annual general
meeting or until the Bank of Ghana appoints an auditor under section
75(2).
(3) A person shall not be appointed an auditor of a bank unless that person
(a) is a member of the Institute of Chartered Accountants under the Chartered
Accountants Act, I963 (Act 170); or
(b) is not disqualified by a law in force in this country or in any other country
from being appointed as an auditor of a body corporate.
The Bank of Ghana’s powers to appoint auditors

75. (1) A bank which for a continuous period of three months is without an auditor
shall notify the Bank of Ghana.
(2) The Bank of Ghana shall upon being notified under subsection (1) appoint an
auditor for that bank to hold office until the next annual general meeting of that bank.
(3) A bank which fails to notify the Bank of Ghana as required under subsection
(1) shall pay to the Bank of Ghana a fine not exceeding 1000 penalty units.
WEEK 11
CASH FLOW
WE ALREADY HAVE A PRINTED COPY OF THE NOTES
FINANCIAL REPORTING
•
BACT 307
ANALYSIS AND INTERPRETATION OF

FINANCIAL STATEMENTS
Ratio Analysis
Introduction to Ratio Analysis
• The bare figures are not useful to the users of the financial statements.
• It is only through comparisons (usually of ratios) that their significance can be

established.
2
Meaning of Accounting Ratio
• Ratio is an arithmetical relationship between two figures.
• It is expressed when one figure is divided by another.
• Ratio analysis is the process of determining and interpreting numerical relationship

between figures of financial statements.
• Ratio is used as an index or yardstick for evaluating the financial position and
performance.
• “An accounting ratio can also be defined as the quantitative relationship between
two or more items of the financial statements connected with each other.”
3
Analysis and Interpretation of Financial Statements (cont.)
The various accounting ratios used to analyses financial statements are:
• Liquidity ratios (i.e., short term solvency)
• Profitability ratios
• Activity ratios (Efficiency ratios)
• Shareholders investment ratios
• Long term solvency and stability
4
Liquidity ratios
• This is also known as short-term solvency ratios.
• Liquidity ratios are used to determine a company’s ability to meet its short-term debt
obligations.
• Investors often take a close look at liquidity ratios when performing fundamental
analysis on a company.
• A company that is consistently having trouble meeting its short-term debt is at a

higher risk of bankruptcy. 5
• Types of Liquidity Ratios: Current ratio and quick ratio
Current assets
• Current ratio = :1
Current liabilities
• Generally, higher numbers are better, implying that when a company has a higher
amount of current assets when compared to current liabilities and it can pay easily its
short-term debt.
• A ratio above 1: 1 is an ideal (e.g., current ratio is 2:1). Else the company will find it
difficult to settle their indebtedness.
6
• Sometimes companies cannot convert their current assets quickly into cash, especially the
manufacturing companies that hold large amount of raw materials.
• It must be converted into finished goods before it can be sold.
• To overcome this challenge, another liquidity ratio known as quick ratio or acid test ratio is
used.
• Current assets−𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦:
Quick ratio = 1
Current liabilities
• Weak liquidity ratio is an indication of aggressive policy of managers.

7
• Working Capital: This is the amount of money needed to run the day to day
activities of the business.
o This also refers to as the net current assets.
• This is the difference between the current assets and current liabilities.
• A larger working capital is an indication that the business in solvent (financially

healthy) and can take advantage of trade conditions.
• Working capital = Current assets- current liabilities.

8
Profitability and Return on Capital Employed
• Profit before tax is the better figure to use than profit after taxation (because of
variation of tax charges from to year).
• PBT means profit before tax.
• Some of profitability ratios are gross profit ratio and net profit ratio.
9
• Gross profit ratio: This shows the relationship between gross profit and sales.
Gross profi𝑡
• Gross profit = x 100%
Net sales
• Net sales = Sales – sales return, if any.
• Net profit ratio: It indicates the relationship between the net profit and sales.
Net sales
• 𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥
Net profit =
10
x 100%
11
• Sometimes profitability is better measure on the long performance indicators such as
ROCE and ROI rather on the short profit measures.
• Return on Capital Employed (ROCE): It expresses the profit as a percentage of

the amount of capital employed.
PBIT PBIT
• ROCE = x 100% or x 100%
Capital employed Total assets −current liabilities
o A low ratio compared to industry means that the competitors are operating efficiently.
11
• Return on Investment (ROE): Rate of return on investment by shareholders.
• It is restricted only to equity capital.
• 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 x 100%

ROI =
Equity shareholders capital
• This is one of the most important ratios to investors
• Sometimes shareholders compares their returns to less risky investments like bonds.
• Efficiency ratios (Activity ratios): These ratios are used to measure the level of company’s
operating performance or the level of the company’s efficiency.
• These ratios are used to measure efficiency and effectiveness with which assets have been
managed.
• Some of the ratios to be looked at are:

o Rate of inventory period (times)
o Receivable collection period in (days, weeks, and months)
o Payable collection period in (days, weeks, and months)
o Sales to capital employed
13
• Rate of inventory period (times): This indicates the speed (i.e., number of times
period) at which average trading stock is being sold.
• Inventory turnover period = cost of sales

= X times
Average inventory
• (opeing inventory+closing inventory)

Average inventory =
2
14
• The higher the inventory turnover period is an indication that the company is taking
longer time in converting inventory into sales.
• It shows how many times a company’s inventory is sold and replaced with another
inventory over a period of time.
• The shorter the period (i.e., days, weeks or months) the better it is and longer the
period less efficient is the rate inventory period.
15
• Receivable collection period: It measures the average length of time it takes for a
company’s customers to pay what they owe to the company.
• Accounts receivable collection period= Trade receivables

x 365days
Sales 𝑜𝑟 𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠
• The higher account receivable collection period is an indication that there is weak
asset management by company.
• This means the company’s is locking its cash in the form of debt.
16
• Payable payment period: It often used to assess a company’s liquidity, an increase
is often a sign of lack of long-term finance or poor management of current assets.
Trade account payable

• Accounts payable payment period= x 365days
𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑜𝑟 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠
• It measures the rate at which funds are collected from debtors.
• Operating cycle= Inventory turnover + Receivable collection period – Payable

payment period
17
• Shareholders’ investment ratios: This ratio helped the equity shareholders and
other investors to assess the value and quality of their investments.

o Earnings per share (EPS)
o Dividend per share
o Dividend cover
o Dividend yield
o P/E ratio
18
• EPS = This is used to measure the return on each ordinary share for the year.
• PAT−Preference dividend or
Net profit after interest, tax and preference dividend
EPS = 𝑁𝑜. 𝑜𝑓 𝑜𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑖𝑠𝑠𝑢𝑒𝑑
𝑁𝑜. 𝑜𝑓 𝑜𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑖𝑠𝑠𝑢𝑒𝑑
• This ratio throws light on the company’s performance in terms of ordinary shareholders.
• The higher the EPS, the better the performance of the company but it is not an indication
that shareholders will receive all of these returns.
19
• Ordinary dividend paid or proposed

Dividend Per Share (DPS) = = Ghc per share
Total number of oordinary
shares
• Ordinary shareholders are interested in this ratio, because this the actual dividend
paid to them.
20
𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝐸𝑃𝑆)
• Dividend cover = PAT
or
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑑𝑒𝑐𝑙𝑎𝑟𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
• PAT = Net profit after interest of long term loan and tax.
• If the dividend coverage ratio is sufficiently high, it is an indication that there will be
sufficient amount to pay shareholder dividend or to retained sufficient profit as
reserve.
• If the dividend coverage ratio is low, it means there is inadequate funds to pay
dividend to shareholders (i.e., higher the ratio better it is for the investor). 21
• Dividend yield: This ratio compares the earning yields of companies.
• Dividend per share x 100%

Dividend yield=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑠ℎ𝑎𝑟𝑒
• This ratio measures the real rate of return on the company’s share. This is what the
shareholders are currently expecting from their shares.
• If the dividend yield is higher in company A than B, the investor will be interested in the
company with the higher dividend yield.
22
Market (current) price
• Price Earning (P/E) ratio=
EPS
• This ratio measures the relation between the market value of the company’s shares
and the earning from those shares.
• Higher P/E ratio reflects confidence that investors have in the market.
23
Long term solvency and stability:
• Many companies finance their long term operation with long term capital (i.e., Equity and
debt capital).
• Debt capital is cheaper but riskier than equity capital (It exposed equity shareholders to risk).
• Therefore excessive borrowing of debt capital can create problem for the company.

o Debt ratio
o Gearing ratio
o Interest cover
24
• Debt ratio: This measures the ratio of a company’s debt capital to its total assets.
• Total debt (Noncurrent liability+current liability)

Debt ratio= =
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
• Long term debt capital

Gearing ratio=
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 (𝑒𝑞𝑢𝑖𝑡𝑦 𝑎𝑛𝑑 𝑑𝑒𝑏𝑡)
• Gearing ratio: This is concerned with the company’s long capital structure to the percentage
of long term capital.
25
• Interest cover: This ratio looks at the ability of a company to pay its interest when
due.
• Interest cover = PBIT

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐ℎ𝑎𝑟𝑔𝑒𝑑 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
26
Advantages of Ratio Analysis
• This simplifies the content of the financial statements and makes understanding of
financial statements better.
• This can be used to establish relationship between the various financial figures in
financial statements.
• This is used as instrument to diagnose the financial health or condition of a business.
• This is used to aids the management in their discharge of their basic functions of
forecasting, planning, communication, control, etc. 27
• It is used to provide data necessary for comparison of the performance of the
different departments or divisions of the same firm.
• Other stakeholders (i.e., creditors and long term capital providers) apart from
management also used to ascertain the extent of security in respect of their
indebtedness or amount due to him.
28
Limitations of Ratio Analysis
• The ratios generated from the financial statements are dependent on the financial data
used to prepare the financial statements (manipulated FS will not serve any
usefulness).
• Financial statements are prepared based on accounting conventions and concepts, this
creates disparate in comparisons (different depreciation rates and other estimates
etc.,).
• Ratios cannot be used to predict the future but only used to explain historical
performance of the company.
29

FINANCIAL REPORTING SLIDES

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FINANCIAL REPORTING SLIDES

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NOTES COMPILED BY;

REGULATORY FRAMEWORK FOR THE PREPARATION

In Ghana, the regulatory framework for preparation of financial statements includes:

Accounting Standards are pronouncements, purposefully issued by a body with

 Accounting Standards enforce objectivity in reporting financial transactions.

 Accounting Standards enhance comparability of financial statements between

 Accounting Standards serve as a major source of authority for resolving issues of

 Adapt existing accounting standards

 Adopt International Accounting Standards

 Convergence with best international accounting practices;

(1) Setting the Agenda

Topics to add to the IASB’s work programme are initially

(2) Planning the project

At this stage the IASB decides whether to work on the

A discussion paper is not mandatory, however the IASB

(4) Developing and publishing the exposure draft

An exposure draft is a mandatory step in the due process

(5) Developing and publishing the Standard

(6) After the Standard is issued

Post-issues of the implementation of the standard is

Post-implementation reviews are carried out on major new

CONCEPTUAL FRAMEWORK FOR FINANCIAL

 to assist national standard-setting bodies in developing national accounting standards;

Derived External User Objective:

Derived Company Objective:

Provide information about a company’s profit or

Second, a company’s financial statements and other

Providing this critical information together with

Accounting information is reliable when it is reasonably free

Comparability of accounting information enables users to

The entity assumption assumes that a proprietorship, partnership, or

This assumption assumes that the company will continue to operate in

In accordance with the period-of-time assumption, a company prepares

The IASB encourages companies to prepare supplemental disclosures about

Replacement Cost Market Value

Which amount should be

All the elements of the financial statements (Assets, Liability, Equity,

Statement of Financial Position

Statement of Profit or Loss and other Comprehensive Income

It is a financial statement that summarizes the

INTERNATIONAL FINANCIAL REPORTING STANDARDS

IAS 1: Presentation of Financial Statements

o Objective and scope

• It provides overall requirements for the presentation of financial statements.

oA statement of financial position at the end of the period.

oA statement of changes in equity for the period

oA statement of Cash flow.

oNotes, comprising of summary of accounting policies and other relevant explanatory

• The basic assumption is that the financial statement should be prepared

EQUITY AND LIABILITIES

IAS 1 suggested that note should be presented in the following order:

o A statement of compliance with IFRSs.

o A summary of significant accounting policies applied including.

o The other accounting policies used.

Objective and scope

• It provides guidance on the determination of the cost and subsequent recognition of

• construction work-in-progress (i.e., IAS 11).

• Financial instruments (i.e., IAS 32).

oIn the process of production for such sale (W.I.P), or

oIn the form of materials or supplies to be consumed in the production process