Question

A Case Study of Brother and Olamide Limited
You are the Group Chief Accountant of Kofi Limited and Olamide Limited. Kofi Limited is a
holding company while Olamide Limited is a subsidiary company registered in Nigeria. Kofi
Limited is a medium-sized retailer of imported and retailer of hand sanitizers in Ghana. Due to
numerous requests from the customers in Nigeria for the company’s product, Kofi Limited decided
to expand its operations to Nigeria to increase sales and make more profits for the shareholders. In
2016 the business registered a new company in Nigeria and named it Olamide Limited. The sole
purpose of incorporating Olamide Limited in Nigeria was to boost the company’s market share
and make more profits for the shareholders. But the financial performance of Olamide Limited has
not been encouraging to the management of the business, and shareholders have complained about
the decision to expand into the Nigerian Market. Shareholders have noted with dismay that
Olamide Limited has reported continuous losses for the business for the past two years. The
financial statements show that the Nigeria expansion strategy was extremely bad and management
is blamed for the bad decision to expand into the Nigerian market. Management explained the past
performance at the Annual General Meeting and provide forecast to the future performance of the
business. At the meeting, the management assured the shareholders that measures taken in 2019 is
going to put an end to the loss making of Olamide Limited. The Managing Director explained that
the losses recorded were temporal and that the future financial performance will be better.
Contrary to the promise made to the shareholders, 2019 financial performance was also not
encouraging, because Olamide Limited has recorded a net loss of GH GHȼ100,000 for the year
ended 31st December, 2019. The Managing Director argued that unless something drastic is done
to the figures in the 2019 financial reports for the period under review, the going concern
assumption for Olamide Limited has to be revoked. This net loss recorded for 2019 was due to
high expenditure on advertisement incurred for that period, while sales fell below the expected
target. The Managing Director is concerned about Olamide Limited continuous reporting of losses
to the group and called for an emergency meeting to be held to decide on the figures to be included
in the 2019 financial statements. At the Board meeting to discuss the figure to be included in the
financial statements, the following key managers made some statements for the consideration of
the Managing Director. Notable among them were reprinted for the consideration of the board.
The Group General Manager argued and was quoted here that: “Figures to be included in the
financial statement are always grey and that there are very little absolute figures in the financial
statement. A smart manager is able to save the reputation of the business in times of financial
difficulties by simply changing accounting policies to boost performance of the business. Just a
change of the company’s depreciation policy from straight line method to reducing balance method
is enough to change the company’s net loss to net profit for the business”. The Group Operational
Manager sided with the comment made to change net loss to net profit using the company’s policy
and defended his position that “Managers are engaged to maximize profits for the shareholders,
therefore, any financial performance that does not show profit, simply means that management has
failed. Therefore, there is the need to adjust the company’s policy on depreciation in order to maximize profit for shareholders”. The Group Marketing Director contributed to the discussion and said that “He knows of companies
that have manipulated their financial statements and the reputations of the managers involved were
enhanced due to better performance recorded by the business. Therefore, to boost the financial
performance of Olamide Limited, there is the need to double the company’s sales figures and
reduce the operating expenses by half to boost net profit of the business”. He commented further
that the stakeholders will not know that the figures in the financial statements were manipulated
unless they are informed about it”.
As the Group Chief Accountant and a young professional accountant in the making, you tried to
object to some of the comments made by your colleagues at the meeting. You reiterated the
concerns of International Financial Reporting Standards (IFRS) regarding the issues of qualitative
characteristics of financial statement at the meeting. Your concerns were due to several seminars
you attended on IFRS on the conceptual and regulatory framework used to prepare financial
statements by businesses. IFRS requires that the financial statements prepared should comply with
accounting concepts, assumptions that are commonly referred to as qualitative characteristics.
Despite your worries, the Managing Director deliberately refused to take your advice into
consideration and prepared the final accounts of Olamide Limited against the ethical and moral
considerations that show the net profit for the business as shown below:
Statement of Financial Position as at 31st December, 2019
Olamide Limited Kofi Limited
GH¢000 GH¢000 GH¢000 GH¢000
Assets
Noncurrent assets (Note 1) 9,400 7,500
Current assets
Inventory 2,000 2,400
Trade receivables 2,400 3,700
Bank 600 1,200
5,000 7,300
Total Assets 14,400 14,800
Equity and liabilities
Equity
Stated capital (GH¢1 each) 2,000 2,000
Retained Earnings 3,500 800
5,500 2,800
Noncurrent liability
7% Debenture 4,800 6,300
Current liabilities
Bank overdraft 400 1,700
Trade payables 3,100 3,800
Taxation 600 200
4,100 5,700
Total equity and liabilities 14,400 14,800
Statement of Comprehensive Incomes for the year ended 31st December, 2019
Olamide
Limited
Kofi Limited
GH¢000 GH¢000
Revenue 12,000 20,500
Cost of sales 10,500 17,000
Gross profit 1,500 3,500
Operating expenses 240 500
Operating profit 1,260 3,000
Finance cost 210 600
Profit before tax 1,050 2,400
Tax expense 150 400
Profit after tax 900 2,000
Dividend paid for the year 250 700
Note 1: There were no disposals of plant during the year by either company.
Question 1
As a professional accountant who is concerned about the qualitative characteristics of preparing
financial statements.
(a) You are required to:
(i) Explain five (5) qualitative characteristics of IFRS that is used to prepare financial
statements to your colleagues at the meeting.
(ii) Explain the difference between profit and profitability.
(iii) Explain the concept of going concern and the implication of revocation of going
concern assumption when financial statements are prepared.
(Total marks 20)

Answer 1

ANSWER :

A. FIVE QUALITATIVE CHARATERESTICS OF IFRS THAT IS USED TO PREPARE FINANCIAL STATEMENTS

1. The objective of General Purpose Financial reporting.

The primary purpose of financial statements are the informations given should be useful to the existing and potential investors , lenders and other creditors in making their decisions about financing the entity . So they should be given the True information about the financial position of the entity.  

2. THE QUALITATIVE CHARATERESTICS OF USEFUL FINANCIAL INFORMATION

The concept of prudence, measurement of uncertanity and the iportance of "Substance over Form"along with explanations of the qualitative characteristics are the concept in preparing a financial statement. Faithful representation of informations does not mean that they are accurate in all respects. But misinformation or misrepresentation is not expected from an entity.

3. FINANCIAL STATEMENTS AND THE REPORTING ENTITY

The general purpose financial statements are prepared on the assumption that the reporting entity is a "Going Concern". This means that the entity will continue to exisit and has neither the intention nor the need to enter liquidation or cease to be in the business in the immediate future. Here if the decision of the Top managent are to be followed it fundamentaly goes wrong against this cardinal principle in the industry.

4. ELEMENTS OF THE FINANCIAL STATEMENT.

The main elements of a financial statement are :

1. Resources of the entity - Assets

2. Claims against the entity - Liabilities and Equity

3. Financial performance ( changes in

the resources and claims ) - income and Expenditure.

It is expected that all the above are reported in the actuals , subject to the permited estimation and the possible small error in the estimations that can happen. But in this case the top managemnet repots only those figures and values they want to disclose so as to give a rosy picture. Its a fraud on the stake holders.

Changing depreciation methos, derecognising going concern concept inflating sales and deflating expenditue etc etc only result in giving a financial statement which is totally against ethics and Morality.

5. PRESENTATION AND DISCLOSURE

These are communication tools for giving effective communication of information in the financial statements require. Hiding of information is not expected from the management . Here the top management does not want to give correct information.

These are the important concepts that can be placed by the CFO , who is put in a fix in the meeting.

Part 2. DIFFERENCE BETWEEN PROFIT AND PROFITABILITY

The Profit is an absolute number which is obtained by arriving ( Total Revenue minus Total Expenses) .

Example : If the concern has $ 500 in revenue and $ 400 as expenses , its profit is = ( $500 - $400 ) = $100

Profitability is only a relative figure ( a percentage) and expresses the Ratio between Profit and Revenue.

In the example given the Profitability is = $100/$500 * 100 = 20 %

Part 3 . GOING CONCERN CONCEPT AND REVISION OF IT

This going concern concept is a fundamental principle of accounting. It assumes that during and beyond the next immediate fiscal period a company will complete its current plans , use its existing resources and continue to meet its fuinancial obligations. This is also known as continuing concern concept.

With out the going concern assumptions , companies wouldn't have the ability to prepay or accrue expenses. Revision of this or not following this cardinal principle of accounting , it sates that the prospect of the company being in operation is in doubt. If that is the case there will be no stake holders to stick to it.