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Incentives that may lead to manipulation of financial statements and the underlying
supporting records:
- Security prices in the securities market
The share price in the securities market for listed companies highly affected by a positive
or negative report arising from the reported financial statements. There is an incentive
for management to report financial performance that meets or exceeds current exceptions
and to manage these expectations going forward.
Companies will try to produce surprises in their earnings and therefore cause an interest
in the company's stock in the stock market.
- Mode of payment to the managers or re-appointment of financial directors.
Where some benefits are pegged to performance like Commissions, Bonuses, Employee
share schemes etc. the accountant/financial manager may report in a way to impress the
board. Where the financial director is targeting to be re-appointed, he may ensure good
financial reports, so as to be re-appointed.
- Debt covenants
Some debt covenants may require that companies achieve a certain level of performance
to avoid technical default and the cost of debt renegotiation.
The management may manipulate financial statements to meet the requirements of the
debt covenants.
- Tax avoidance/evasion within group companies.
This can be done through transfer prices and reporting higher profits in the countries
where the income tax rates are lower and reporting losses in the countries where the
taxes are higher.
marto answered the question on February 14, 2019 at 12:02
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The following trial balance relates to Ndovu Limited as at 31 March 2013:
Additional information:
1. The value of land in the trial balance is given as Sh.300 million. The buildings were revalued on 31 March 2013 at Sh.920 million. The estimated useful life of buildings was 20 years as at 1 April 2012. Depreciation on buildings is charged at 60% to cost of sales and 20% each to distribution costs and administrative expenses.
2. The company constructed its own plant at a total cost of Sh.240 million. The plant was brought into use on 1 October 2012 but its cost had not been capitalized. Instead, its cost had been included in the cost of sales. Plant is depreciated at 12.5% per annum using the reducing balance method (time apportioned) and charged to the cost of sales.
3. The fair value of the investments held at fair value was Sh.271 million as at 3 1 March 2013.
4. The balance of tax on the trial balance represents an overprovision of previous years" tax.
The estimate of tax for the current year is Sh.187 million. At 31 March 2013, there were Sh.400 million of taxable temporary differences. For deferred, tax assume an average tax rate of 30%.
5. The 2% loan note was issued on 1 October 2012 under the terms that require a large premium on repayment. The effective interest rate therefore is 6% per annum.
6. The suspense account relates to a rights issue of shares that was made on 1 January 2013. The terms of the issue were one share for every four held at Sh.8 per share. The par value of each share is Sh.5. The issue was fully subscribed.
Required:
Prepare the following statements in a format suitable for publication:
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b) Statement of financial position as at 31 March 2013.
Date posted: February 14, 2019. Answers (1)
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The following trial balance relates to Mapema Limited, a quoted company, as at 30 April 2013:
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Prepare for publication purposes:
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Date posted: February 14, 2019. Answers (1)
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Date posted: February 14, 2019. Answers (1)
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Date posted: February 14, 2019. Answers (1)
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Afya pensioners is a funded, non-contributory defined benefit scheme that was established by the management of Afya Food processors Limited in 1950. The directors have always expensed the company’s contribution to the scheme in the period of contribution and also credited to the income statement of any period, any refunds made from the scheme during the period in question.
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The auditors have suggested that either of two approaches (the accrued benefits or prospective benefits) be adopted the management in accounting for pension costs.
Required:
i) Do you agree with the auditors positions? Why?
ii) State and explain three reasons why there may be variations in the regular pension costs to the employer.
iii) Briefly explain the two accounting approaches suggested by the auditor. What is their effect on the pension fund?
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Date posted: February 14, 2019. Answers (1)
- Explain the meaning of the following terms as used in pension accounts
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Date posted: February 14, 2019. Answers (1)
- The following relates to Waastaafu Retirement Benefits Scheme, a defined benefit plan, for the years ended 31 December 2005, 2006, and 2007:(Solved)
The following relates to Waastaafu Retirement Benefits Scheme, a defined benefit plan, for the years ended 31 December 2005, 2006, and 2007:
Additional information:
1. As at 1 January 2005, the present value of plan obligations and fair value of plan assets were both sh. 1000 million.
2. Net cumulative unrecognized actuarial gains as at 1 January 2005 were sh. 140 million.
3. Assume all transactions occurred at the year end.
Required:
i) Actuarial gains or losses on the present value of plan obligations.
ii) Actuarial gains or losses on fair value of plan assets.
iii) Net pension cost to be charged in the income statement.
iv) Scheme balances to be reflected in the balance sheet
Date posted: February 14, 2019. Answers (1)
- Zedkey Ltd. operates a defined benefit pension plan The following financial data relates to the scheme for the past three years ended 30 April 2012:(Solved)
Zedkey Ltd. operates a defined benefit pension plan The following financial data relates to the scheme for the past three years ended 30 April 2012:
Date posted: February 14, 2019. Answers (1)
- In the context of IAS 19 (Employee Benefits), evaluate:
(i) When an amount should be recognized as a defined benefit liability.
(ii) The treatment of actuarial gains...(Solved)
In the context of IAS 19 (Employee Benefits), evaluate:
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(ii) The treatment of actuarial gains or losses.
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Date posted: February 14, 2019. Answers (1)
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Date posted: February 14, 2019. Answers (1)
- i) In the context of IFRS 2 (Share Based Payments), explain three types of share-
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ii) Zawadi Ltd. grants to each of its 400 employees...(Solved)
i) In the context of IFRS 2 (Share Based Payments), explain three types of share-based payments.
ii) Zawadi Ltd. grants to each of its 400 employees 10,000 options to purchase shares in the company on condition that they remain in Zawadi Ltd/s employment for the next four years. Each option has been valued at Sh.15. Zawadi Ltd. predicts that 5% of its employees will leave the Company in each of the next four years and will thus lose their option rights.
Required:
Show how Zawadi Ltd. should reflect this arrangement for each of the next four years in the statement of comprehensive income and in the statement of financial position.
Date posted: February 14, 2019. Answers (1)
- At the beginning of year 1, a company grants 20 senior executives 1.000 share options, each based on two conditions. First, the executive has to...(Solved)
At the beginning of year 1, a company grants 20 senior executives 1.000 share options, each based on two conditions. First, the executive has to remain with the entity until the end of year 3. Second, the share options may not be exercised unless the share price has increased from Sh.100 at the beginning of year 1 to above Sh,130 at the end of year 3. If the share price is above Sh. 130 at the end of year 3. the share options may be exercised at any time during the next five years.
The entity applies a binomial option-pricing model, which takes into account the possibility that the share price will exceed Sh.130 at the end of year 3 (in this case the share options become exercisable) and the possibility that the share price will not exceed Sh.130 at the end of year 3 (and then the options will be forfeited). The company estimates the fair values of the share options with this market condition to be Sh.48 per option.
At the end of year 1, the company estimates the turnover of senior executives at 2%. In the second year, one executive leaves the company but the turnover estimate remains the same. During the third year, two executives leave the company.
Required:
The remuneration expense for each year in which an expense needs to be recorded indicating which account will be credited when the remuneration expense is recorded.
(Your answer should be in conformity with the requirements of 1FRS 2 - Share Based Payment).
Date posted: February 14, 2019. Answers (1)
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Date posted: February 14, 2019. Answers (1)
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Date posted: February 14, 2019. Answers (1)
- Jallam Co. Ltd. had been preparing its financial statements using actual taxes payable method for computing tax expense. In the year ended 30 June 2000,...(Solved)
Jallam Co. Ltd. had been preparing its financial statements using actual taxes payable method for computing tax expense. In the year ended 30 June 2000, the company changed to deferred tax method and the new policy was to be applied retroactively to the accounts of the years ended 30 June 1999 and 2000.
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No acquisition or disposal of fixed assets took place in the year ended 30 June 2000
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4. Stocks as at 30 June 2000 are net of a general provision for price fluctuation of 10% of the cost. The provision is not allowed for tax purposes.
5. Accruals include leave passage provision of Sh.2, 500,000 as at 30 June 1999 and Sh.1, 800,000 as at June 2000
6. Prepayments for the year 2000 include Sh.2, 000,000 allowed as a deduction on computation of current tax.
7. Assets subjects to wear and tear allowance were first revalued in 1999 and revaluation repeated in 2000. No adjustments were made to the tax base of the assets following the revaluations.
8. Foreign exchange loss balances amounted to Sh.3, 600,000 and Sh.2, 800,000 on 30 June 1999 and 2000 respectively.
9. Donations in the year 2000 were Sh.5, 000,000.
10 Tax rates in 1999 and 2000 were 40% and 50% respectively.
Current tax for a year is paid on 15 September of the following financial year.
Required:
a) Current tax for the year ended 30 June 2000
b) Using the method recommended by the revised IAS 12, calculate deferred tax expense or income for the years 1999 and 2000
c) The current tax account, deferred tax account and revaluation account for the years 1999 and 2000
Date posted: February 14, 2019. Answers (1)