ACC Theory and Practices

Individual Assignment

QUESTION 1
DeltaTech Ltd., a technology manufacturing company, owns a production plant that specializes in producing microprocessors. Due to rapid technological advancement and a significant shift in customer preferences toward newer chipsets, the future cash inflows from the plant have declined. As of 31 December 2024, the carrying amount of the plant is GH¢18 million. The company performs an impairment review under IAS 36. The fair value less costs of disposal (FVLCD) of the plant is estimated at GH¢13 million, while the value in use (VIU), calculated based on discounted future cash flows using a pre-tax discount rate of 10%, is GH¢14.2 million. Additionally, the plant is part of a cash-generating unit (CGU) that includes specialized machinery with a carrying amount of GH¢4 million and goodwill of GH¢2 million. Management is unsure whether to allocate the impairment loss only to the plant or to the entire CGU.
Required:
In accordance with IAS 36, determine how the impairment loss be allocated. (5 marks)

QUESTION 2
Omega Furniture Ltd. is a medium-sized company that manufactures custom wooden furniture. At the end of the financial year on 31 December 2024, the company’s accountant is preparing the financial statements. The company purchased new machinery during the year for GH¢200,000 and estimated it would be useful for 10 years, applying straight-line depreciation. However, due to a recent decline in demand for wooden furniture, the estimated useful life is revised to 6 years, effective immediately.
The accountant also notes that Omega has been consistently using the FIFO method of inventory valuation for the past five years, even though market prices have changed significantly. Additionally, the company had a pending lawsuit that was settled after the reporting period but before the financial statements were authorized for issue. The accountant includes a note in the financial statements about this event.
Omega’s CEO insists on recognizing a large order (worth GH¢500,000) from a new overseas customer, even though the goods will be manufactured and delivered three months after the reporting date. The accountant refuses, stating that revenue cannot be recognized yet. Finally, the accountant ensures that the financial statements are prepared assuming that the business will continue to operate in the foreseeable future, despite current cash flow difficulties.
Required:

Identify and explain five (5) accounting concepts or principles demonstrated in the case study above. You should identify at least five of the accounting concepts. (10 marks)

QUESTION 3

In January 2024, EcoBuild Ltd., a sustainable construction company, commenced the construction of a new manufacturing facility that qualifies as a qualifying asset under IAS 23. The total cost of construction is expected to be GH¢12 million and will take 18 months to complete. To finance the project, the company obtained a specific construction loan of GH¢6 million at an interest rate of 8% annually on 1 January 2024. Additionally, EcoBuild has general borrowings of GH¢10 million at an average interest rate of 6%. By 31 December 2024, the company had incurred GH¢8 million in construction expenditures evenly throughout the year.
In February 2024, EcoBuild also received a government grant of GH¢2 million, conditional on the construction and operation of the facility in an environmentally sustainable manner. The grant does not need to be repaid unless the company fails to comply with the sustainability requirements for at least five years after the facility becomes operational. EcoBuild intends to recognize the grant as a deduction from the carrying amount of the asset, as permitted under IAS 20.
Required:
Management is unsure how to treat the borrowing costs for capitalization purposes, how much to capitalize, and how to apply the grant against the cost of the asset under both IAS 23 and IAS 20. They also want to understand whether the entire interest on borrowings should be capitalized or
partially expensed. (8 marks)

QUESTION 4
AquaDrill Ltd., an offshore drilling company, is facing multiple legal and operational uncertainties at the end of its financial year, 31 December 2024. The company was informed by an environmental agency that it may be fined for a possible oil spill that occurred during offshore exploration in November 2024. The agency is still investigating the incident, but initial reports suggest AquaDrill is likely to be held responsible. The company’s legal team estimates a 75% chance of losing the case and a fine of approximately GH¢3 million if found liable. However, the outcome is expected to be confirmed by mid-2025.
In a separate matter, AquaDrill is involved in a lawsuit against a former supplier for breach of contract. The company is claiming GH¢5 million in damages. Based on advice from its legal counsel, there is a 65% chance of winning the case, but if successful, the company expects to recover the full GH¢5 million. The finance director is considering whether this should be recognized as a contingent asset or included in the financial statements.
Additionally, AquaDrill has entered into a non-cancellable maintenance agreement for its drilling equipment for the next 3 years. Due to falling oil prices, the company plans to suspend operations at two rigs covered by the contract. If this happens, the maintenance contract will result in unavoidable costs of GH¢1.2 million annually with no associated economic benefit. Management is uncertain whether they should recognize any liability related to this contract.
Required:
Demonstrate how AquaDrill should account for the above cases as at 31 December 2024 in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. (7 marks)