SAS 1 Statement of Accounting Standards - Disclosure of Accounting Policies

Issued by the Nigerian Accounting Standards Board November, 1984. Preface This Statement is issued by the Nigerian Accounting Standards Board (NASB) for use by all those interested in published financial statements either as prepares or users.

PART 1 -

INTRODUCTION

1. The end product of financial accounting process is the preparation and publication of financial statements. A substantial number of alternative postulates, assumptions, principles and methods adopted by a reporting entity in the preparation of its accounts can significantly affect its results of operations, financial position and changes thereof. It is therefore essential to the understanding, interpretation and use of financial statements,, whenever there are several acceptable accounting methods which may be followed, that those who prepare them, disclose the main assumptions on which they are based. The Companies Acts, 1968 requires in the Eighth Schedule the disclosure of the method or basis used to deal with or calculate the amount of an item or information, where the accounts could be misleading by reason of failure to explain such method or basis. 2. The purpose of the relevant provisions of the Companies Act 1968 and this Statement is to assist any reader in the understanding and the interpretation of financial statements and the information disclosed therein. 3. This Statement does not seek to establish accounting standards for individual items as these will be dealt with in separate Statements of Accounting Standards to be issued from time to time.

PART 2 4.

EXPLANATORY NOTES

Financial Statements are based on conventions derived from experience. These conventions originate from such concepts as : entity, going-concern, periodicity, realisation, matching, consistency and historical cost. The purpose of this Statement is not to evolve a basic theory of accounting but to identify some of these concepts which are generally accepted. These fundamental accounting concepts are seldom disclosed because they are generally accepted as the underpinnings of the preparation and presentation of financial statements. Disclosure is however necessary if these fundamental accounting concepts are not followed. The fundamental accounting concepts referred to above are described below : (a) Entity Every economic unit, regardless of its legal form of existence, is treated as a separate entity (in accounting) from parties having proprietary or economic interest in it. Going Concern The assumption is that the business is not expected to be liquidated in the foreseeable

5.

6.

(b)

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future. A business is considered a going concern if it is capable of earning a reasonable net income and there is no intention or threat from any source to curtail significantly its line of business in the foreseeable future. (c) Periodicity Although the results of a business unit cannot be determined with precision until its final liquidation, the business community and users of financial statements require that the business be divided into accounting periods (usually one year) and that changes in position be measured over these periods. Realisation The concept establishes the rule for the periodic recognition of revenue as soon as (a) it is capable of objective measurement, and (b) the value of asset received or receivable in exchange is reasonably certain. It is possible to recognise revenue at a variety of points e.g. when goods are produced, when goods are delivered, or when the transaction is completed. Choice, in most cases, is an industrial norm; and depends on which of the points is the critical event. Only when this event is passed can revenue be legitimately recognised. Matching The concept holds that for any accounting period, the earned revenue and all the incurred costs that generated that revenue must be matched and reported for the period. If revenue is carried over from a prior period or deferred to a future period, all elements of cost and expense relating to that revenue are usually carried over or deferred as the case may be. Consistency Usually, there is more than one way in which an item may be treated in the accounts, without violating accounting principles. The concept of consistency holds that when a company selects a method it should continue (unless conditions warrant a change) to use that method in subsequent periods so that a comparison of accounting figures over time is meaningful. The concept ensures that the accounting treatment of like items is consistent, taking one accounting period with another.

(d)

(e)

(f)

(g) Historical Cost The historical cost concept holds that the is the appropriate basis for initial accounting recognition of all assets acquisitions, services rendered or received, expenses incurred, creditors" and owners" interests; and, it also holds that subsequent to acquisition, cost values are retained throughout the accounting process.

7.

Accounting Method
An accounting method is the medium through which the foregoing fundamental accounting concept are applied to financial transactions and to the preparation of financial statements. It is also the method adopted in recognising, measuring and valuing an item of revenue, expense, gain, loss or any asset or liability. Because accounting practices have evolves in response to the variety and complexity of types of enterprise and business transactions, the existence of more than one recognised accounting method can be rationalised.

8. Different Methods
There exist different methods of recording financial transactions, calculating profit, measuring depreciation, valuing stocks et cetera. therefore the disclosure of the accounting methods adopted in preparing financial statements usually assist readers in their interpretation.

9.

Accounting bases
These are the totality of methods adopted by an enterprise for applying fundamental accounting

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concepts to its financial transactions. They include, for example, the determination of the accounting , period for the purpose of revenue and costs recognition and the method used for measurement of the values to place on items appearing in the balance sheet as at the end of each accounting period. There are two distinctive accounting bases-the accrual and the cash. Accrual basis Under this basis revenue and expenses are recognised in the accounting period to which they are earned and incurred; and, not when they are received or paid. Cash basis Under this basis only revenue actually received and expense actually paid during an accounting period are recognised in that period. However, a modified cash basis permits the application of the accrual basis to selected transactions.

10.

Accounting policies - Criteria for choice

Accounting policies are those bases, rules, principles, conventions and procedure adopted in preparing and presenting financial statements. Judgment is required in the choice of accounting policies which are appropriate to the circumstances of an enterprise and are best suited to present the "true and fair view" of its results and financial position.

11.

There are alternative treatment for a number of items appearing in financial statements. The following non-exhaustive list, contains examples of areas in which differing accounting policies exist;General: Consolidation policy Taxation

Long term contracts Events subsequent to the balance sheet date Leases, hire purchase or installment transactions and related interest Conversion or translation of foreign currencies including the disposition of exchange gains and losses Franchises Overall accounting policy (e.g. historical cost, general purchasing power, replacement value). Assets: Debtors or receivable Stock and work-in-progress (inventories) and related cost of goods sold Depreciable assets and depreciation Growing crops Land held for development and related development costs Investments: subsidiary companies, associated companies, and other investments. Research and development Patent and trademarks Goodwill Liabilities and provisions: Warranties Commitments and contingencies Pension costs and retirement plans Severance and redundancy payments Profit and losses: Methods of revenue recognition Maintenance, repairs and improvement expenditure Gains and losses on disposal of property

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Reserve accounting, statutory or otherwise, including direct charges and credits to surplus accounts Establishment and building costs Examples of accounting policies are set out in the appendix 12. In the choice and application of the appropriate accounting policies, some fundamental concepts contradict one another. It is not possible to develop general rules for the exercise of judgment needed but some practical principles have been evolved for use in particular circumstances.

Some of these principles are explained below:(a) Substance Over Forms Although business transactions are usually governed by legal principles, they nevertheless accounted for and presented in accordance with their substance and financial reality and not merely with legal form. (b) Objectivity This principle connotes independence of judgment on the part of the accountant preparing the financial statements. Objectivity requires supports by verifiable evidence, in contrast to subjectivity or dependence on the unverifiable opinion of the accountant preparing the financial statements. (c) Fairness This is an extension of the objectivity principle. In view of the fact that there are many users of accounting information, all having differing needs, the fairness principle requires that accounting reports should be prepared not to favor any group or segment of society. (d) Materiality The principle holds that only items of material values are accorded their strict accounting treatment. (e) Prudence This principle demands exercising great care in the recognition of profit whilst all known losses are adequately provided for. This is, however, not a justification for the creation of secret or hidden reserves.

Users of Financial Statements

13. Financial statements are of interest to a variety of users, especially shareholders, banks, creditors, employees and revenue and regulating authorities. 14. The users of financial statements are not likely to make reliable evaluation of a reporting enterprise, unless its financial statements clearly disclose the significant accounting policies which have been adopted in preparation. Disclosure of Accounting Policies 15. Many more enterprises have in recent years disclosed in Note to their financial statements the significant accounting policies which they have adopted. However, the presentation of the disclosures of accounting policies in financial statement varies from enterprise to enterprise. Some present them boldly and separately from financial statements; some present them as an integral part of financial statement whilst others present them as supplementary information in footnotes to items appearing in the financial statements. In some cases, accounting policies are not disclosed. 16. It is particularly useful, in order to provide an overview of the accounting policies of an enterprise, that these accounting policies are disclosed together, rather than as notes to individual items in the financial statements.

Change in an Accounting Policy

17. Although every enterprise endeavors to be consistent in the use of accounting policies it has adopted. a change in an accounting policy is usually made to conform to: (a) a new Accounting Standards and (b) legislative regulation; or

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(c) when it is considered that the change would result in a more appropriate presentation of transaction in the financial statement of enterprise. A change in accounting policy is usually disclosed because it affects or have a potential effect on either net income or shareholders" equity and may also affect working capital or other items. 18. Changes in accounting policy would include, for example, a change in the basis of stock valuation or a change in the method of calculating depreciation. The following are some examples of circumstances which are usually not considered to amount to changes in accounting policies:i. a change in the rate at which depreciation is calculated arising from a re-appraisal of the useful or economic life of an asset ; ii. the adoption of an accounting policy for a transaction either not previously dealt in or which was previously not a significant part of the business of an enterprise; and iii. the initial adoption of an accounting policy in recognition of events or transaction occurring for the first time.

PART 3 ACCOUNTING

STANDARD

Disclosure of Accounting Policies

The Accounting Standard comprises paragraph 19-24 of this Statement. The Standard should be read in the context of all other parts of this Statement, and of the preface to the Statements of Accounting Standards published by the NASB. 19. Where fundamental accounting concept are followed in the preparation of financial statements, the disclosure of such concept is not required. If fundamental accounting concept is not followed, that fact should be disclosed. 20. Rational judgment aided by principles of economic substance over forms, objectivity, fairness, materiality and prudence should govern the selection and application of accounting policies. 21. Whenever there are several acceptable accounting bases that nay be adopted, a reporting enterprise should disclose, the basis used, especially where the knowledge of that accounting basis is significant in the understanding and interpretation of the financial statements. 22. Accounting policies should be prominently disclosed as an integral part of the financial statements under one caption rather than as notes to individual items in the financial statements. 23. An adopted accounting policy should be followed consistently, but a change may be made if it is decided that a different policy will better reflect the net profit or loss of current or subsequent period. When such a change is made , the nature, justification and the effect on current year" s profit or loss should be disclosed. The cumulative effect of such a change on the (net of taxes) profit or loss of prior periods should be adjusted in the retained earnings or appropriate reserve account of the year immediately preceding the year of change. Where such an amount is not ascertainable, wholly or in part, the fact should be indicated. 24. Wrong or inappropriate treatment of items in financial statements is not rectified either by disclosure of the accounting policies adopted or by notes or explanatory materials. 25. Effective Date This Standard becomes operative for Financial Statements covering periods beginning on or after 1st January, 1985.

PART 4 NOTE ON LEGAL REQUIREMENTS 26. The application of the foregoing Statement of Accounting Standard will provide the disclosure required by the 8th Schedule of the Companies Act, 1968, particularly paragraph 14(6) which requires the following to be stated by way of note if not otherwise shown::-

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" Any material respects in which any items shown in the profit and loss account are affected...... by any change in the basis of accounting."

PART 5 COMPLIANCE WITH INTERNATIONAL

Accounting Standard No. 1

" Disclosure of Accounting Policies"
27. The requirements of this Standard and the national legal requirement stated above accord very closely with the requirements of International Accounting Standard No. 1 - "" Disclosure of Accounting Policies". compliance with this Standard will ensure compliance with IAS 1 in all material respects. Appendix

Example Of Accounting Policies

BASIS OF ACCOUNTING
The financial statements are prepared under the historical cost convention except for certain fixed assets which are included at their professional valuation, and comply with all Statements of Accounting Standards issued to date by the Nigerian Accounting Standards Board.

CONSOLIDATION
The group profit and loss account and balance sheet include the accounts of the company and all its subsidiaries made up to ........19... The company" s share of the tax after tax profit less losses of associated companies is consolidated where the company participates significantly in the financial and operating policy decisions of the associates and its holding in their equity is substantial and long - term. Where a subsidiary or associated company is acquired or disposed of during the year , the group profit and loss account includes only the result from the date of acquisition or to the date of disposal.

GOODWILL
Any excess of the cost of acquisition over the fair values of the underlying net assets is recognised as an asset in the group balance sheet as goodwill arising on acquisition.

INVESTMENTS
Investments in subsidiary and associated companies are stated at the lower of cost or the company" s share of their net tangible asset values at the year end. Where cost is higher than the company" s share of net tangible asset values, the difference is written off to profit and loss account. Any excess of attributable net tangible assets of associated companies over their cost is included in nondistributable reserves.

FIXED ASSETS
Land and buildings are stated at their professional valuation at......19..... plus subsequent additions at cost. Other fixed assets are stated at cost.

DEPRECIATION
Depreciation on fixed assets is calculated to write off their cost or valuation on the straight line basis so

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as to write off each asset over its expected useful life. Periodic reviews are made to take into account greater or lower than normal usage and obsolescence; any adjustment necessitated by these reviews is recognised in the profit and loss account of the year in which the review is made. The principal annual rates of depreciation which applied consistently are:Per cent - Freehold land - Freehold buildings - Leasehold land and buildings more than 50 years unexpired less than 50 years unexpired - Plant and machinery - Heavy vehicles - Light vehicles - Furniture, fixtures and fittings

STOCKS AND WORK - IN - PROGRESS

Stocks are stated at the lower of cost and net realisable value after making adequate provision for obsolescence and damaged items. In the case of goods manufactured by the company, cost includes a proportion of factory overheads. Wok-in progress is stated at the lower of cost and net realisable value. Cost in this case consists of direct labor and materials plus appropriate proportion of factory overheads.

TURNOVER
Turnover represents the value of goods and services invoiced to third parties.

CONTRACTS IN PROGRESS
Contracts in progress are stated at the values of independent engineers" certificates for work done but in respect of which payment were not received in the year end plus estimated values, made by officials of the company, of the realisable value of work done not yet certified or charged to clients. Full provision is made for anticipated future losses on unprofitable contracts are accounted for when agreed or received.

LONG TERM CONTRACTS

In respect of uncompleted long - term contracts, credit is taken only for the proportion of the total profit estimated to arise from the contract which the directors consider is prudently attributable to the work done after making full provision for all anticipated losses.

FOREIGN CURRENCIES CONVERSION

Transactions in foreign currencies are translated into Naira at the rate of exchange ruling at the date the relevant invoices are received. Differences arising at the date of settlement are charged to profit and loss account. Balances in foreign currencies are converted to Naira at the rate of exchange ruling at the balance sheet date. All differences arising on conversion are charged or credited to profit and loss account.

DEFERRED TAXATION
Provision is made for deferred taxation by the liability method to take account of all timing differences between the accounting treatment of certain items and their corresponding treatment for corresponding tax purposed. No provision is made where there is reasonable evidence that these timing differences will not reverse for some considerable period (at least three years) ahead. The significant timing differences involved are: - the excess of capital allowances claimable over the charge for depreciation on qualifying

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capital expenditure; - retirement gratuity provision made in the accounts under the terms of an unapproved employees retirement gratuity scheme; - general provision for doubtful debts and other anticipated losses.

SAS 2 Statement Of Accounting Standards - Information To Be Disclosed In Financial Statements

Issued By The Nigerian Accounting Standards Board November, 1984 This Statement is issued by the Nigerian Accounting Standards Board (NASB) for use by all those interested in published financial statements either as preparers or users.

PART 1 INTRODUCTION 1. 2. Accounting Information about a business entity or enterprise is required by a variety of users. The need dictates the fundamental objectives of accounting and the mode of reporting information. Firms, organisations or enterprises carry on business activities in a given economic, social and political environment and there is public interest in their operations. For instance : (a) Individuals, financial institutions or group of investors need accounting information to determine the liquidity, profitability and viability of the enterprise. (b) Managers in an enterprise need accounting information to measure performance, plan and control operations. (c) Employees and customers of an enterprise need accounting information in order to assess the ability of the enterprise to produce goods or to render services on a continuous basis. (d) Governments and Regulatory bodies need accounting information in order to be able to impose and collect taxes, to regulate certain business activities and to plan, execute and evaluate government projects. (e) Quasi - government establishments need accounting information in order to meet their statutory obligation. Thus, the information expected to be provided in the financial statements are those that are quantitative and qualitative in nature to aid their users in making informed economic decisions. Financial statements are therefore expected to be simple, clear and easy to understand by all users. Financial statements are the means of communicating to interested parties information on the resources, obligations and performances of the reporting entity or enterprise. Meaningful information can be gathered, collated and presented in different forms. The format recommended in this SAS is expected to be the best practice in Nigeria.

3. 4. 5.

PART 2 DEFINITIONS
6. In this SAS, the following terms are used as described below :-

(a) (b) (c)

Accounting information refer to the data that are found in financial statements. Accounting Period refer to the span, usually one year, covered by financial statements. Financial Statements consist of Balance Sheet, Profit and Loss Account or Income Statement, the Notes on the Accounts, Source and Application of Funds Statements,

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Value Added Statement and Historical Financial Summary.

(d) Long Term relates to a period in excess of 12 mon ths.

PART 3 EXPLANATORY NOTES 7. Clear and understandable information, about the nature and ownership of an enterprise or entity reported on, are usually disclosed in one or more of the contents of the financial statements described in the following paragraphs : (a) The Balance Sheet shows the assets, liabilities and proprietors interest at a point in time. Generally, enterprises present their balance sheets in the form of assets and claims against those assets by creditors and owners. The Profit and Loss Account or the Income Statement reports revenue, earnings or turnover and the expenses of an enterprise for a given accounting period. Notes on the Accounts usually form an integral part of financial statements and provide detailed or supplementary information in respect of items disclosed in the Balance Sheet and the Profit and Loss Account. Source And Application Of Funds Statement provides information on the derivation and utilisation of funds during the period covered by the financial statements. When the statement of Source and Application of Funds is taken together with the Balance Sheet and the Profit and Loss Account, a better insight is obtained as to how the activities of an enterprise have been financed. Value Added Statement reports the wealth created by an enterprise during the period covered by the financial statements. It usually shows how the wealth created is distributed among various interest groups(e.g. employees, government, creditors and proprietors). Thus, the statement reports the claims of social and economic groups re - affirming the contemporary belief that enterprises do not exit for the benefit of their owners ( proprietors) only; but also for the society at large.

(b)

(c)

(d)

(e)

8.

9.

Historical Financial Summary enables an instant comparison over a period, usually five years, of vital financial information about an enterprise particularly with regards to its : turnover profit before and after tax dividends assets employed issued and paid - up capital reserves medium and long term liabilities earnings and dividends per share At present, the information disclosed by some enterprises is limited to the minimum legal requirements. Whilst other enterprises disclose additional information such as Source and Application of Funds Statement and Value Added Statement, little information is provided in respect of related company transactions. Disclosure of Information relating to financial implications of intercompany transfers and technical / management agreements between a subsidiary / associated company usually provides additional insight into the understanding of financial statements. This Standards takes the view that disclosures of financial statements. This Standards takes the view that disclosure which goes

(f)

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beyond minimum legal requirements is useful for a more meaningful understanding of financial statements.

PART 4 ACCOUNTING STANDARD

Information To Be Disclosed In Financial Statements

The Accounting Standard comprises paragraphs 10 -24 of this statement. The Standards should be read in the context of all the other parts of this statement and the preface to Statements of Accounting Standards published by the NASB. General Disclosures 10. All accounting information that will assist users to assess the financial liquidity, profitability and viability of a reporting entity should be disclosed and presented in a logical, clear and understandable manner.

11. The financial statement of an enterprise should state :

(a) The name of the enterprise (b) The period of time covered (c) A brief description of its activities (d) Its legal for (e) Its relationship with its significant local and overseas suppliers including the immediate and Ultimate parent, associated or affiliated company.

12. Financial statements should include the following :

(a) Statement of Accounting Policies (b) Balance Sheet (c) Profit and Loss Account or Income Statement (d) Notes On the Accounts (e) Statement of Source And Application of Funds (f) Value Added Statement (g) Five - Year Financial Summary 13. Financial implication of inter-company transfer and technical/management agreements between the enterprise and its significant local and oversea suppliers including its immediate and/ or ultimate, associated, affiliated company should be disclosed. 14. Financial Statement should show corresponding figures for the preceding period.

Balance Sheet
The Balance Sheet or related Notes should disclose the following information:

Specific Disclosures Assets

15. Fixed assets - Property, Plant and Equipment. (a) Land : Freehold and leasehold (b) Building (c) Plant and Equipment (d) Other categories of assets, suitably identified (e) Accumulated depreciation for each category. Separate disclosure in a note form should be made of assets on lease and assets acquired on installment purchase plans. Such a disclosures should include the type of assets involved, their amounts and the periods covered. 16. Other Long - term assets

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(a)

(b) (c)

Long-term investments (quoted or unquoted) distinguishing between: (i) Investment in subsidiaries (ii) Investment in associated companies (iii) other investments Long term debts All long term debts including their tenure. Intangible assets (I) goodwill (ii) patents, trademarks, and similar assets (iii) deferred charges such as: pre - incorporation and formation expenses pre-production expenses and re-organisation expenses Any write-offs during the period and the market value of investments should be

disclosed. 17.

Current assets (a) Stocks and spare parts (b) Current portion of long term debts (c) Trade debts (d) Prepayment and sundry debtors (e) Directors debit balances (g) Short - term investments (including Treasury Bills, Certificates of Deposit and commercial paper) (h) Deposit with central bank against import (I) Amount awaiting remittance to overseas creditors (j) Cash and bank balances 18. Capital and Reserves (a) The variety of ownership interests such as ordinary shares, preference shares, cumulative, non - cumulative and participating preference shares (i) the number, nominal value and amount of shares authorised and issued (ii) the rights, preferences and restrictions with respect to the distribution of dividends and to the repayment of capital (iii) cumulative preference dividends in arrears (iv) shares reserved for future issue under options, sales contracts and options for conversion of loans and debentures into shares, including the terms and amounts. (v) movement in share capital account during the period. (b) Other shareholder's interests, indicating movement during the period and any restrictions on their capitalisation by way of bonus shares: (i) Share premium or discount (ii) Revaluation Surplus (iii) Revenue and Capital reserves (iv) Retained earnings

LIABILITIES
19. Long - term liabilities (a) Secured loans (b) Unsecured Loans; and (c) Loans from Holding subsidiary and associated company Details of the applicable interest rates, repayment terms, convenants, subordinations, etc. should be disclosed. 20. Current Liabilities (a) Amount due to holding, subsidiary and associated company

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(b) (c) (d) (e) (f) (g) 21. General (a) (b) (c) (d) as to whether the (e) (f) (g) statements are

Trade creditors Other creditors and accrued expenses Dividends payable Current taxation Current portion of long term liability Bank Loans and Overdrafts Restriction on title to assets Restriction on distribution of dividends Securities given in respect of liabilities The method of providing for pension and retirement scheme together with stated scheme is funded or unfunded. Contingent assets and contingent liabilities Amount approved or committed for future capital expenditure Events that have occurred after the balance sheet date but before the financial approved by the Board.

PROFIT AND LOSS ACCOUNT(INCOME STATEMENT)

22. The following information should be disclosed : (a) Turnover/sales and other operating revenue (b) Other earnings : distinguishing between interest income, income from investment and other sources (c) Interest charges (d) Taxes on income (e) Unusual charges (f) Unusual credits (g) Depreciation (h) Auditors Remuneration (I) Directors emoluments (j) Net Income

SOURCE AND APPLICATION OF FUNDS

23. The following disclosures should be made : (a) Source of funds : funds generated from operations funds from other sources (b) Applications of funds : loan repayment fixed assets acquisition payments of dividends payments of taxation, etc. (c) increase or decrease in working capital in respect of stock debtors creditors etc. (d) movement in net liquid funds

Value Added statement

24. The Statement should show separately the following: (a) Sales to outsiders (b) Purchases (goods or services) : distinguishing between imported and local items

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(c)

(d)

Benefits to various groups such as (i) Employees (ii) Owners and other suppliers of capital (iii) Government Money retained for maintenance and expansion of the enterprise.

25. Effective Date

The Standards become operatives for Financial Statements covering period s beginn ing on or after 1st January , 1985.

PART 5 - NOTES ON LEGAL REQUIREMENTS 26. The requirements of this standards are complementary to any disclosure requirements of the Companies Act 1968 ( now Companies and Allied Matter Decree 1990) and related Regulations.

PART 6 COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARDS NO. 5 27. The requirements of this Standards accord substantially with the requirement of the International Accounting Standard No 5 - Information to be disclosed in Financial Statements.

SAS 3 Statement of Accounting Standard - Accounting for Property, Plant and Equipment
Issued by the Nigerian Accounting Standards Board November, 1984.

PART 1 1.

INTRODUCTION

2.

3.

4.

Property, Plant and Equipment, generally referred to as fixed assets, are those tangible resources of an enterprise which are employed in its operations. In many enterprises, these assets are grouped into various categories such as land and buildings, plant and machinery, equipment, furniture, fixtures and fittings, vehicles, etc. This Statement deals with accounting for property, plant and equipment under the historical cost concept and the revaluation of specific items of property, plant and equipment. It does not deal with the effect of changing prices in accounting for these assets This Statement does not deal with accounting for expenditure on: (a) regenerative natural resources such as forests, standing timber, cattle, etc. (b) non-regenerative resources such as mineral deposits, oil and gas deposits, etc. (c) real estate development by property companies. This Statement makes brief reference to the accounting treatment (under certain circumstances) of: (a) leasehold property (b) depreciation of property, plant and equipment; and (c) capitalization of borrowing cost.

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PART 2 DEFINITIONS
5. The follow ing terms are used in this Statement with the meanings specified:

Property, plant and equipment are tangible assets that: (a) have been acquired or constructed and held for use in the production or supply of goods and services and may include those held for maintenance or repair of such assets; and (b) are not intended for sale in the ordinary course of business. Leasehold rights over assets which meet the above criteria may also be treated as property, plant and equipment in certain circumstances.

The foregoing definition is provided as a guide only.

Fair value is the amount for which an asset could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm's length transaction. Net Book Value is the amount (historical cost or valuation) at which an asset is carried in the books less the related accumulated depreciation. Useful Life of an asset is the shorter of (a) the predetermined physical life and (b) the economic life during which it could be profitably employed in the operations of the enterprise. Recoverable Amount is that part of the net book value of an item of property, plant and equipment that the enterprise can recover in the future through depreciation of the item including its net realizable value on disposal.

PART 3 - EXPLANATORY NOTES 6. In many enterprises, the major part of total assets is represented by property, plant and equipment. Proper classification of, and accounting for, items of property, plant and equipment are essential for an understanding of financial statements. The classification of assets as property, plant and equipment is usually guided by their functions, physical attributes or expected useful lives. It may be appropriate to aggregate individually insignificant but homogeneous or diverse items such as molds, tools and dies, and apply the definition to the aggregate value. Specific industry norms, legal requirements and the overriding factor of presenting relevant and useful information may indicate modification in classification and presentation. In some cases, initial supply of spare parts are capitalized and minor servicing equipment are carried as stock. In certain situations, it may be necessary to buy a group of items of property, plant and equipment in order to obtain some particular items of property, plant and equipment that are of interest. Where such as purchase is made, the purchase price less any recoveries from the disposal of the unwanted items are usually allocated proportionately over the items retained. The basis for the allocation of the purchase price to the items retained is the far value of each of such item.

7.

8. 9.

COMPONENTS OF ACQUISITION COSTS

10. In general, the cost of an item of property, plant and equipment comprises: its purchase price, including import and non-recurring levies (e.g. development levies, consent fee, etc.) and any directly attributable costs of bringing the asset to its location and working condition for its intended use. Any trade discounts and rebates are deducted in arriving at the purchase price. The following are examples of elements of cost of different types of property, plant and equipment: (a) Original purchase price (b) Broker's or Estate Agent's commissions

11.

Land and Improvements

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(c) (d) (e) (f)

Legal fees for examining, recording and securing title Cost of survey Cost of obtaining vacant possession Payment of non-recurring levies on the land at date of purchase if payable by the purchaser.

Cost of demolishing any old structure (net of salvage) is sometimes added to the cost of land and sometimes to the cost of the building on the site. Some additional costs may be incurred subsequent to purchase in order to improve the land for the intended purpose. Such costs which are often capitalized include the following: (a) filling and draining (b) clearing (c) landscaping (d) grading and sub-dividing (e) access road, etc.

Buildings
(a) (b) (c) (d) (e) (f) (g) (h) Original purchase price or cost of construction Cost of remodeling, reconditioning, or altering a building to render it suitable for its intended use Cost of excavating or filling of land for the specific building Foundation costs such as rock blasting, piling and re-channeling of carnal or underground stream Cost of building permits Payment of development levies on the building at the date of purchase if payable by the purchaser Professional fees for design, supervision and management of the construction Cost of temporary buildings used during the construction period less disposal proceeds.

The cost of ancillary building plants such as lifts and air-conditioning systems, etc., are sometimes recorded separately from the cost of the building.

Plant and Equipment

(a) (b) (c) (d) (e) (f) (g) Original purchase price or cost of construction Freight, import duties and handling charges In-transit insurance charges Taxes and levies Cost of preparation of foundations, insulation, protective and other special devices. Commissioning, including testing and running-in costs in preparation for use If the item is a second-hand one, the cost of refurbishing it for the intended use.

Recognition of Interest on Deferred Payment Contracts

12. The acquisition of items of property, plant and equipment may involve the deferment of payment and such future payments usually include an element of interest. However, interest accruing before the item of property, plant and equipment is put to use is added to the cost of the item. Other subsequent interests are expensed.

Components of Cost of Self-constructed Property, Plant and Equipment

13. 14. Enterprises sometimes self-construct, for their own use, buildings, plant and equipment, furniture, fixtures and fittings, usually to save costs, meet unique specifications or utilize idle capacity. The cost elements of items of self-constructed property, plant and equipment are cost of materials, labor and overheads that are directly attributable to the construction less any trade discounts, rebates or internal profits. Interest costs which are attributable to the period of constructing the item, are sometimes added to its cost. Other costs, including costs of inefficiency in production of selfconstructed items of property, plant and equipment such as idle capacity, industrial disputes and similar costs, are expensed in the period in which they arise.

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Consideration other than cash

15. When an item of property, plant and equipment is acquired in exchange for another item of property, plant and equipment, its cost is usually determined by reference to the fair value of the consideration given. It may be appropriate to consider also the fair value of the items of property, plant and equipment acquired, if this is more clearly evident. An alternative accounting treatment that is sometimes used, for an exchange of items of property, plant and equipment, particularly when the items exchanged are similar, is to record the item of property, plant and equipment at the net book value of the item given up. In each case, an adjustment is made for any balancing receipt or payment of cash or other consideration. When an item of property, plant and equipment is acquired in exchange for shares or other securities in the enterprise, it is usually recorded at its fair value, or the fair value of the securities issued, whichever is the more readily ascertainable.

16.

Expenditure Subsequent to Acquisition

17. Expenditure incurred subsequent to the acquisition of an item of property, plant and equipment is either capitalized or expensed. The expenditure is generally capitalized if it is deemed to: (a) prolong the expected useful life of the item of property, plant and equipment, (b) improve significantly the performance of the item; or (c) enhance the quality of the output of the item.

The types of expenditure that are usually capitalized because they meet any or all criteria in 17(a), (b) and (c) above are: (i) major additions to existing items of property, plant and equipment and (ii) major improvements. Any other expenditure is charged to profit and loss account.

Amount Substituted for Historical Cost

18. Sometimes, financial statements that are otherwise prepared on a historical cost basis include part or all of property, plant and equipment at a valuation in substitution for historical cost and depreciation is calculated accordingly. Such financial statements are to be distinguished from financial statements prepared on a basis intended to reflect comprehensively the effects of changing prices. A commonly accepted method of restating property, plant and equipment is by appraisal, normally undertaken by professionally qualified valuers. Other methods sometimes used are indexation and reference to current prices. In practice, there are two methods of presenting revalued amounts of property, plant and equipment in financial statements. In the first method, both the gross amount and the accumulated depreciation are restated in order to give a net book value equal to the amount revalued. Under the second method, the accumulated depreciation is eliminated while the gross book value is adjusted to equal the newly established value. When the second method is used, the accumulated depreciation is often eliminated by a credit either to Revaluation Surplus Account or to Income Account. This later treatment is unacceptable because an upward revaluation does not provide a basis for crediting to an Income Account the accumulated depreciation existing at the date of revaluation. Different bases of valuation are sometimes used in the same financial statements to determine the net book value of the separate items within each of the categories of property, plant and equipment. In these cases, it is useful to disclose the gross book value included in each basis. Any surplus arising from a revaluation of an item or group of items of property, plant and equipment is usually credited to a revaluation surplus account. Revaluation deficits are usually charged to income.

19.

20.

21.

22.

23.

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Retirement and Disposal

25. Items of property, plant and equipment that have been retired from active use or held for disposal are usually stated at the lower of their net book values or net realisable values. Any anticipated loss is immediately charged to income for the period. When an item of property, plant and equipment is disposed of or retired, it is eliminated from property, plant and equipment; and, any gain or loss arising therefrom is transferred to Income for the period. Upon the disposal of a previously revalued item of property, plant and equipment, the difference between the net proceeds from disposal and the net book value is normally charged or credited to income. Any related revaluation surplus is transferred to income or retained profit. Where the usefulness of an item or group of items of property, plant and equipment is permanently impaired, in which case, the recoverable amount is less than the net book value, the net book value is usually reduced to the recoverable amount and the difference is charged to income immediately.

26.

27.

28.

PART 4

ACCOUNTING STANDARD

ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT

The Accounting Standard comprises paragraphs 29-45 of this Statement. The Standard should be read in the context of all other parts of this Statement and of the Preface to the Statements of Accounting Standards published by the NASB. 29. The items determined in accordance with the definitions in paragraph 5 of this Statement should be included under property, plant and equipment in financial statements and disclosed in accordance with SAS 2 - Information to be Disclosed in Financial Statements. 30. The gross book value of an item of property, plant and equipment should be either the historical cost or the revalued amount computed in accordance with this Standard.

Property, Plant and Equipment Carried at Historical Cost

31. At the date of acquisition, items of property, plant and equipment should be recorded at their initial cost including directly attributable expenses incurred in order to bring them into operation for their intended use. The cost of self-constructed item of property, plant and equipment should comprise those costs that relate directly and other expenses attributable to the construction of the item. Costs of in efficiencies in the construction of the item should not form part of its cost. When an item of property, plant and equipment is acquired in exchange or in part exchange for another item, the cost of the item acquired should be recorded either at its fair value or at an expert's valuation of the item exchanged, adjusted for any balancing payment or receipt of cash or other consideration. An item of property, plant and equipment acquired in exchange for shares or securities in an enterprise should be recorded at its fair value or the fair value of the shares or securities issued whichever is the more readily ascertainable. Expenditure made subsequent to the acquisition of an item of property, plant and equipment, should be added to the book value of the item if the expenditure improves significantly the performance of the item, enhances the quality of the output of the item or prolongs its expected useful life. If a permanent impairment to an item of property, plant and equipment causes the recoverable amount to fall below the net book value, the net book value should be reduced to the recoverable amount and the difference charged to income immediately. An item of property, plant and equipment should be eliminated from property, plant and equipment on its disposal or when a decision has been taken to discontinue its use. Any item of property, plant and equipment retired from active use and held for disposal should be treated as in 37 above and shown separately in the financial statement. Gain or loss resulting from the retirement or disposal of an item of property, plant and equipment should be recognised in the income statement.

32.

33.

34.

35.

36.

37. 38. 39.

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Property, Plant and Equipment Carried at Valuation

40. Where items of property, plant and equipment are to be carried at revalued amounts, an entire class of property, plant and equipment should be revalued or the selection of the items for revaluation should be systematic and consistent. 41. When an item of property, plant and equipment is revalued, any accumulated depreciation at the date of the revaluation should not be credited to income or retained profit. 42. On revaluation of property, plant and equipment, an increase in the net book value should be credited to a revaluation surplus account. A decrease in the net book value should be reduced by the amount of any existing revaluation surplus on the same item before it is charged to income. 43. Upon sale or disposal of an item of property, plant and equipment, the difference between the net proceeds and the net book value should be transferred to income. Any balance in the revaluation surplus account in respect of such item should be transferred to income or retained profit. 44. Subsequent depreciation on revalued items of property, plant and equipment should be calculated on the new value and charged to income. Disclosure 45. In addition to the disclosures required by SAS 1 - Disclosure of Accounting Policies, and SAS 2 Information to be Disclosed In Financial Statements, the following disclosures should be made: (a) The bases for determining the book value of property, plant and equipment. (b) When more than one basis has been used, the book value determined under each basis in each category of property, plant and equipment. (c) Where property, plant and equipment are stated at revalued amounts, the methods adopted to compute these amounts should be disclosed, including the policy with regard to the frequency of revaluations, the nature of indices used and whether external valuers are involved. (d) Movements in each category of property, plant and equipment (i.e. additions and disposals) during the year. (e) Contingent capital gains tax and deferred income tax liabilities attributable to any revaluation surplus incorporated in or referred to in financial statements.

Effective Date
46. This Standard becomes operative for Financial Statements covering periods beginning on or after 1st January, 1985.

PART 5 NOTES ON LEGAL REQUIREMENTS 47. The requirements of this Standard are complementary to any disclosure requirements of the Companies Act 1968 and related Regulations.

PART 6 COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARD NO. 16 48. The requirements of this Standard accord substantially with the requirements of the International Accounting Standard No. 16 - Accounting for Property, Plant and Equipment.

SAS 4 Statement of Accounting Standard - on

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Stocks
Issued by the Nigerian Accounting Standards Board March, 1986.

PART 1 - INTRODUCTION 1. 2. 3. Stocks (otherwise referred to as Inventories) are items of value held for use or sale by an enterprise and usually comprise, raw materials and supplies used in production, work-in-progress and finished goods. Depending on the nature of an enterprise, the value of stocks may be substantial, surpassing or only second to that of property, plant and equipment. Appropriate classification and accurate determination of the quantity and cost of stocks are necessary for proper determination of the result of the operations of an enterprise and for the presentation of current assets in its Balance Sheet. The use of several methods for valuing and reporting stocks gives rise to wide differences in the results of the operations of enterprises in the same line of business. This Statement seeks to narrow such differences by setting a Standard for the valuation and presentation of items of stock in the context of the historical cost concept. This Statement deals with the valuation and presentation of items of stocks including livestock and agricultural produce. This Statement does not deal with: (a) Valuation under the replacement cost accounting concept; (b) Valuation under the inflation accounting concept; (c) Valuation of work-in-progress under long-term contracts; (d) Valuation of by-products; (e) Valuation of forest products.

4.

5.

6.

PART 2 - DEFINITIONS 7. The following terms are used in this Statement with the meanings specified:i. Stocks include those finished goods and livestock awaiting sale, work-in-progress, raw materials and supplies to be consumed in the production of goods or the rendering of services. ii. Historical cost comprises the cost of purchase and other incidental costs incurred in order to bring the items of stocks to their present condition and location. For manufacturing enterprises, such costs would include the cost of conversion. iii. Cost of purchase usually includes the initial cash outlay or consideration given to acquire an item of stock and payments of duties, taxes, freight inwards and other costs necessary to bring the item to its location. Trade discounts and rebates, if any, are usually deducted in arriving at the cost of purchase. iv. Cost of conversion comprises direct labour and attributable production overhead costs incurred in bringing an item of stock to its present condition and location. v. Absorption costing is a method of costing stocks in which all production costs such as variable and fixed are included as part of the cost of such items. vi. Variable or direct costing is a method of costing of stocks in which only variable production costs form a part of the cost of items produced. Variable or direct costs change in proportion to the level of production.

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vii. Net Realisable Value is the estimated proceeds from sale less all additional costs incurred to the point of completion, marketing, selling and distribution of an item of stock. viii. Arable stocks are commercially grown farm produce. The value of such stocks would include the cost of tillage, planting and nurturing plants to harvesting stage. ix. Livestock refers to farm animals such as poultry, sheep, cattle, etc., which are specially raised for commercial purposes. x. Plantation products are: cocoa, coffee, kola, oil palm, plantain, rubber, tea and tobacco, etc., cultivated on a large estate. xi. Consumable Farm Stores include items such as seeds, fertilizers, sprays, feedstuffs, small implements, spares, fuel, silage, hay and straw, etc. xii. Replacement cost is the amount at which an identical stock could be bought or manufactured having regard to normal purchasing or production quantities and conditions.

PART 3 - EXPLANATORY NOTES

MANUFACTURED AND GENERAL PRODUCTS.

8. Stock values are sensitive to general fluctuations in economic activities. For example, in periods of high business activities, stocks are sold or utilized very rapidly; but during a downturn in economic activities, stock on hand may build up quickly resulting in over-stocking. Business enterprises minimize the cost of carrying stocks by carefully planning and timing their acquisition and utilization. 9. Cost is the usual basis for recording and carrying stocks in accounts because they are acquired and held either for use in producing goods and services or for direct sale to customers. 10. Where the utility or value of an item of stock is impaired through damage, deterioration or obsolescence, the value assigned to such item of stock will not be cost-based. In such situations, net realisable value is used. 11. When the value of an item of stock is less than its original cost, the rule of cost or net realisable value whichever is lower is applied. The value of such stock is written down to the net realisable value by charging the loss in value to income. Similar treatment is usually accorded the aggregate value of homogenous items of stock.
12. Two sy stems of stoc k-ta king are generally in use, namely :-

i) Perpetual - under this system, up-to-date records are kept of quantity and type of items of stock received, issued, and on hand. This system involves continuous physical count. ii) Periodic - under this system, records of quantity and type of items of stock are up-dated periodically after physical count. 13. In practice, problems may arise as to which items are to be included in closing stock. The following items are generally included:i. Goods in transit - when legal title is assumed to have passed to the enterprise. ii. Consigned goods - goods on consignment legally remain the property of the consignor and are accordingly included in the consignor's stock. 14. The amount reported for stocks by an enterprise at the end of the year is the result of the determination of the quantity of items on hand and the assignment of values to such items. 15. The following valuation methods facilitate the determination of both the quantity and the value of items of stock:i. Specific Identification - under this method, items of stock specifically identified by particular attributes are assigned their values. ii. Average - under this method, the closing stock is assigned a value determined by a weighted average of the cost of opening stock and all acquisitions during the period. Calculation may be made on a continuous basis after each acquisition or at fixed intervals. iii. First In, First Out (FIFO) - This is a method of computing the value of closing stock based on the assumption that the first items in stock or acquired are the first ones used in production or consumed. iv. Last In, First Out (LIFO) - This is a method of computing the value of closing stock based on the assumption that the last items purchased are the first issued or consumed.

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v. Standard Cost - This is a method of computing the value of closing stock based on a predetermined cost. For this method to reflect the actual cost, a system of allocation of variances as well as review of the standard cost must be in constant use. vi. Base Stock - Under this method, a minimum level of stock, carried at the historical cost of acquisition, is held at all times. However, any additions to or excesses over the base stock are carried at different bases such as FIFO, LIFO, etc. vii. Latest Purchase Price - Under this method, the value of closing stock is determined by applying the cost of the latest item purchased to the number of items on hand. viii. Adjusted Settling Price (Retail Inventory Method) - It is a method of determining the value of closing stock in which the historical cost of stock is estimated by applying the gross profit margin to the retail value of items or groups of items in stock. The amount so determined is then deducted from the retail price to arrive at the value of the stock. 16. The selection of each of these methods is usually guided by the principle of matching of costs with revenue. The LIFO, latest purchase price and the base stock methods of valuation do not always adequately match costs with revenue because the value of stocks reported in the balance sheet is either overstated or understated, and the profit for the period is similarly distorted. 17. In a manufacturing enterprise, the value of items of stock produced comprises: cost of direct materials and costs of conversion. These taken together are known as product costs and therefore, are carried as stock cost or work-in-progress until the items are sold or consumed. Where the intrinsic value of some products appreciate by virtue of storage over time e.g. timber, wines and spirits, such storage costs are sometimes included as part of the product cost. 18. Other costs which are not attributable to the production of items of stock are expensed in the period in which they are incurred. Thus, they do not form a part of the cost of the items of stock. 19. The value of work-in-progress is usually determined by aggregating actual direct material cost, direct labour cost and attributable overhead charges. The attribution of overhead costs is usually based on normal plant utilization so as to exclude production in efficiencies from the cost of stock. 20. A departure from historical cost is usually prudent where there is a decline in the value of items of stock due to physical deterioration, obsolescence, a fall in market price below cost or other causes. The loss is recognised by a write-down of the value of stock to its net realisable value. The valuation basis of lower of cost or net realisable value is usually applied to individual items, a sub-group or group of items. 21. The cost of conversion of raw materials to finished or semi-finished items of stock is often separated into variable and fixed costs. Under the absorption costing method, all production costs form a part of product cost; whereas, under the variable or direct costing method, only direct or variable costs of production form part of the product cost. Both methods are widely used in practice. 22. In computing the value of raw materials used in production or the value of work-in-progress, normal wastage or spoilage cost is included as part of product cost. By contrast, the cost of abnormal wastage or spoilage is expensed.

Arable Products
23. First-time land clearing and stumping may involve substantial costs which are sometimes capitalized. 24. Tillages, in-ground and harvested crops are three distinct operational stages requiring valuation. Each operational stage has its own peculiar problems of valuation and costs incurred are charged to each category. 25. The value of tillages usually includes the accumulated costs of labour and usage of machinery for preparing the land for planting, ploughing and fertilizer spreading. 26. In-ground crops are usually valued by including the costs associated with tillages, labour, seedlings, weeding, disease control and the attributable cost of machinery used. 27. The valuation of harvested crops involves the correct determination of actual input costs, labour, depreciation and storage costs at the time of harvest, and the proper allocation of in-ground costs to the portion harvested to ensure that the value of harvested crops includes all the costs incurred from tillage to harvesting. 28. Most farm products are perishable or deteriorate quickly, therefore, it is appropriate to make reasonable provision for deterioration or normal spoilage based on industry norm or after consultation with experts.

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29. Where there is adequate record-keeping and an appropriate cost accounting system, cost forms the basis for the valuation of arable products. In other situations, however, net realisable value is used. 30. Official prices for certain products such as maize, sorghum, and millet are published seasonally by the appropriate commodity Boards, for example, National Grains Board. The use of such official prices for valuing stock is generally not preferred, except where they are below cost, as the prices are intended market values.

Plantation Products
31. The major problem with the determination of the value of a plantation product is that a plantation does not usually start to produce until after a long gestation period. Thus, all costs associated with land preparation, planting, pruning and development are accumulated until the trees come to maturity or begin to bear fruits. The accumulated costs to maturity are amortized over the estimated productive life of the plantation. 32. It is normal practice to have planting done in lots or batches so as to have a continuous flow of plantation output. Where possible, costs of such lots or batches are accumulated separately so as to match their revenues with their costs when harvested and sold. 33. Each year, the cost of plantation output consists of the proportion of the cost accumulated for the quantities harvested plus the cost of extracting and transporting them to the point of sale. 34. Some enterprises prefer to use average costs of production in assigning value to the quantities harvested and those unharvested. This method is justifiable because most plantation products are homogenous. 35. Some plantation crops such as sugarcane and banana are annual crops which yield produce within the first year of being planted. Stocks of such produce are valued in the same manner as arable produce. On the other hand, certain fruit trees such as oranges, grapefruits, cashews and mangoes are often grown on a much smaller scale than would normally be regarded as plantations. However, stocks of their products are valued in the same manner as those in plantations.

Livestock
36. Two major problems are associated with the valuation of livestock, namely:(a) determining the actual number and their existence especially animals that graze, and (b) identifying and the various stages of their development. The services of experts are often required for the solution of these problems. 37. Animals may be segregated on the basis of their age, breed, sex or productivity. In some enterprises, appropriate and detailed records of costs are kept and such costs are accumulated in accordance with the categories named above. Such records help in the allocation of costs to animals that are on hand. A proper accumulation and recording of costs incurred for livestock are essential for determining the profitability of different categories of livestock. 38. The following three approaches to valuation of livestock are generally in use:a) Cost approach:- the value is based on the actual cost incurred on each category of livestock. b) Net Realisable Value:- the value is based on the expected returns allowing for the costs of fattening, preparation for sale and selling. c) Appraised Value:- the value is determined by a professional valuer, taking into consideration the current market value, the mortality factor and the relative marketability of the breed or class of stock. 39. Where livestock is raised primarily for its products rather than for consumption, for example, dairy cattle or egg-laying poultry, different considerations arise in the valuation of such livestock. It is usual to accumulate the cost of bringing such livestock to the point of maturity at which they begin to yield products and to amortise such costs over their estimated productive lives. 40. The stores in livestock enterprises usually include feedstock, drugs, small implements and other essential materials. They are usually valued at cost after a physical count.

Presentation in Financial Statements

41. In practice, different enterprises present items of stocks in financial statements using different titles for

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similar items. In addition, enterprises indicate the classes of stocks in their possession without specifying the amount for each class.

PART 4 - ACCOUNTING STANDARD

ON STOCKS
The Accounting Standard comprises paragraphs 242-59 of this Statement. The Standard should be read in the context of paragraphs 1-41 of this statement and of the Preface to Statements of Accounting Standards published by the NASB. 42. In order to provide proper understanding of the valuation methods adopted in arriving at the values of stocks, a reporting enterprise should state its accounting policies with respect to these items. 43. For accurate determination of the results of operations and fair presentation of items of stock in the Financial Statements, appropriate classification and determination of the quantity and cot of items of stocks should be undertaken. 44. Subject to certain exceptions stated herein, stocks should be valued at the lower of cost or net realisable value. 45. For the purpose of applying the lower of cost or net realisable value rule, items of stock may be treated individually or a group. 46. In determining the cost of stocks under the historical cost concept, one or more of the following valuation methods should be used where appropriate:a) First In, First Out b) Average Cost, where it consistently approximates historical cost c) Specific Identification d) Standard Cost with the adjustment for cost variances described in paragraph 15(v) which brings it close to actual cost e) The Adjusted Selling Price Method where bulk purchases are made in which the costs of individual items are not readily ascertainable. 47. The following stock valuation methods should not be used:a) Latest Purchase Price b) Last In, First Out c) Base Stock 48. Goods in transit should be included in closing stock as long a their legal titles are deemed to have passed to the enterprise. Goods on consignment remain the property of the consignor and therefore, should be included in the stock of the consignor but not of the consignee. 49. In a manufacturing enterprise, the cost of finished goods and work-in-progress should include: raw materials, labour and attributable overhead costs. Other production costs not attributable to the finished goods or work-in-progress should be expensed in the period incurred. 50. The historical cost of work-in-progress should be determined by aggregating the actual cost of direct materials, direct labour and attributable overheads based on normal production capacity. Abnormal costs due to inefficiency, spoilage or wastage should not be included in the cost of stock. 51. Where the intrinsic value of a product appreciates by virtue of storage over time e.g. timber, wines and spirits, such storage costs should be included as part of the product cost, and reflected in the value of stock. 52. The valuation of arable stock should be based on cost where adequate record-keeping and appropriate cost accounting system exist; otherwise, valuation should be based on net realisable value. 53. Reasonable provision for deterioration or normal spoilage should be made for perishable farm products. 54. Arable stocks have three distinct operational stages, namely: tillage, in-ground (growing crops) and harvested crops. Where practicable, costs should be accumulated separately for each stage. 55. The cost of plantation crops on hand at the end of the year should be determined by one of the methods specified in paragraphs 33

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and 35 above. 56. One or more of the following methods should be used where appropriate in valuing livestock:a) Cost Method b) Net Realisable Value c) Appraised Value Whatever method that is adopted should be applied consistently. Disclosure 57. Where differing methods of valuation have been adopted for different types of stocks, the amount included in the Financial Statements and the methods used in respect of each type should be stated. 58. Enterprises should classify, in a manner appropriate to their businesses, items of stocks so as to indicate the amounts held in each category, for example: raw materials, work-in-progress, finished goods, spare parts and stores. 59. Any change in the basis of valuation from that used in the previous period, should be disclosed in accordance with SAS 1.

PART 5 - NOTE ON LEGAL REQUIREMENTS 60. The requirements of this Standard are complementary to any disclosure requirements of the Companies Act 1968 and relevant regulations.

PART 6 - COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARD NO.2 61. The requirements of this Standard accord substantially with the requirements of International Accounting Standard No.2 - Valuation and Presentation of Inventories in the Context of the Historical Cost System.

Effective date
62. This Standard becomes operative for Financial Statements covering periods beginning or after January 1987.

SAS 5 Statement of Accounting Standards - on Contruction Contracts

Issued by the Nigerian Accounting Standards Board August, 1986. Preface This Statement is issued by the Nigerian Accounting Standards Board (NASB) for use by all those interested in published financial statements either as prepares or users.

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PART 1 -

INTRODUCTION

1. The main issues involved in accounting for Construction Contracts are the timing, measurement and recognition of revenue and asset created during the construction. 2. Costs on a Construction contract may start to accumulate even before the contract is won. It is, therefore, necessary to determine the accounting treatment that should be accorded to such costs as soon as there is a convincing evidence that the contract will be won. 3. The treatment of these costs may have significant effect on the reported result of an accounting period and on the assets and liabilities of the reporting enterprise. unless a correct treatment of such costs is adopted, it may lead to a wrong appraisal of the profitability of the construction contract. 4. The period for the execution of a construction contract depends on the nature, type and size of the contract. Some contracts run for only a short period of time as a result of which it may be more prudent to recognizes the profit on such a contract only on completion. Some other contracts, however, may extend over two or more accounting periods of the enterprises, in which case, a meaningful basis has to be adopted for the determination of the proportion of profit that has been earned as at each accounting date and the value that needs to be reported in the financial statement as work-in-progress in the books of the contractor. Most of the provisions of this statement apply to the Contractor.

5. The statement does not covers :(a) (b) (c) (d) Contracts that deals with the research into and the development of new products; Service Contracts that fall under job order costing; Property development projects including those often referred to in this country as Contractor Financed Projects; and The treatment of Construction Contracts in the books of the Employer (Contractee) because the value of any Construction Contract can be easily determined by the Employer through the analysis of cash outlays and the liabilities accrued on the contract.

PART 2 - DEFINITIONS 6. The following terms are used in this Statement with meanings specified : i. Construction Contract refers to the execution of building and civil engineering projects, mechanical and electrical engineering installations and other fabrications normally evidenced by an agreement between two or more parties. ii. Short-term Construction Contract refers to a contract which is expected to be completed within twelve months. iii. Long-term Construction Contract refers to a contract which is expected to take more than twelve months to complete. iv. Revenue Realization means that the portion of the work responsible for generating the revenue has been performed and therefore the revenue relating thereto has been earned. v. Revenue Recognition means accounting for revenue in the financial statements when it has been earned. vi. Percentage-of-Completion Method of Revenue Recognition. This is a method under which revenue is apportioned to each accounting period on the basis of the proportion of the contract executed during the period to the total value of the contract. vii. Completed-Contract Method of Revenue Recognition. Under this method, revenue is only recognized when the contract is completed. viii. Deferred Costs are costs that relate to aspects of a contract which are not immediately certifiable. ix. Contract Work-in-Progress are accumulated certifiable costs relating to a contract that is yet to be completed. Progress payments received and receivable are generally deducted therefrom. x. Mobilization Fee is the amount advanced by an employer to a contractor to enable construction work to start. xi. Under-billings arise where the rates used for progress billings for payment are lower than those used for revenue recognition.

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xii. Over-billings arise where the rates used for progress billings for payment are higher than those used for revenue recognition. xiii. Contract Certification. This is a process by which the project Architect/Engineer issues a certificate to evidence the value of work done on a construction contract as at a particular date.

PART 3 - EXPLANATORY NOTES 7. The main accounting problems associated with construction contracts are the timing, measurement and recognition of revenue and the assets created during construction. The value assigned to workin-progress has an effect on the Profit and Loss Account and the value reported as current asset on the Balance Sheet. It also ensures the proper matching of costs with revenue.
In practice, two methods are generally used for accounting for constructio n contracts, namely : (b) the percentage-of-completion method. Both method s are used, depending on the circumstances of each contract.

8. (a) the completed-contract method; and

The Completed-Contract Method

9. Under the completed-contract method, revenue is recognized when the contract is completed. Costs incurred on the contract and billings are accumulated until the contract is completed. No interim charges and credits are made to profit and loss account. Sometimes, there are costs to be incurred at the end of the contract which may not be material to warrant regarding the contract as uncompleted. Such costs are provided for and the contract is treated as completed. In the construction industry, this is referred to as practical completion stage. Usually, the completed-contract method for long term contracts is used by enterprises in a situation where there are no dependable estimates or where there are inherent uncertainties which make forecasts unreliable. Until the point at which contract is identified to be completed, revenue is not recognized. The completed-contract method has an appeal to many enterprises because the income that is reported in the accounts is the final result of the contract rather than an estimate of the result to date. The revenue at this point is terminal. The major drawback of the completed-contract method when applied to long term contracts is that periodic revenue is subject to distortion. Revenue prior to completion is not reflected in the accounts of the reporting enterprise even if operations on the contract are uniform over the construction period. Under the completed-contract method, although profit is not recognized prior to the completion of the contract, foreseeable losses on the contract are often charged in the accounts in the period they are identified.

1O.

11.

12.

13.

14.

The Percentage-of-Completion Method

15. Under the percentage-of-completion method, costs that are incurred on a contract are accumulated in an asset account. The proportion of revenue in relation to the work done, may be ascertained by one of the following two methods:(a) the percentage of estimated total revenue that the incurred costs to date bears to the estimated total costs. (b) the percentage of total contract value that the engineering and architectural work done to date bears to the engineering and architectural estimate of the whole contract. Where the percentage-of-completion method is used, it is usual to establish that the revenue is not overstated by computing the estimated total cost to completion and comparing it with the total estimated revenue.

16.

17.

The percentage-of-completion method is used when (a) there is a contract in which the following terms are included (i) the goods or services to be provided and received: (ii) the frequency of inspection of work-in-progress and the certification procedures for billing purposes;

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18.

(iii) the manner of billings for work done and the terms of payment. (b) The contractor has an adequate estimating process and the ability to estimate reliably both the cost to completion and the percentage of contract executed. (c) The contractor has a cost accounting system which adequately accumulates and allocates costs to final work in a manner consistent with his estimating process. The percentage-of-completion method is considered to give a fair measure of activities performed in each accounting period and the resultant revenue. Thus, revenue is adequately matched with cost in the accounting period.

General
19. There are several types of contracts. These include:(a) Fixed sum (lump sum) contract - the contractor undertakes or agrees to execute specific projects or works in consideration for a fixed sum. It excludes variations, escalations, etc. (b) Cost-plus a fixed rate contract - allows for reimbursement of agreed costs incurred plus a fixed fee or a percentage uplift on the agreed costs incurred. (c) Re-measure-contract - allows final contract price to be determined by the measurement of final quantities (d) Variable-price contract - contains one or more clauses regarding: i. price variation that allows adjustments to base price; ii. work variation for an additional work order from an employer; iii. prolongation that takes care of additional costs resulting from delays not caused by the contractor. 20. In general, costs of contracts begin to accrue with pre-contract costs which are expensed in the period incurred or deferred and charged to the contract where there is reasonable assurance that the contract will be won. 21. Some enterprises defer general and administrative expenses that relate to the contract but which cannot be immediately allocated to the contract until it is completed. This is to avoid overburdening the periods in which revenue is not recognized. Other enterprises expense them in the year incurred as long as the operations of the year can absorb them. 22. When a contract is in a very advanced stage of completion and the estimated cost to completion is small in relation to the work already done, the contract is often regarded as completed and provision is made for the cost to completion. 23. Long-term contracts may comprise clearly identifiable segments. Such segments, when completed, are generally treated in the accounts by recognizing the costs and revenues relating to them. In doing this, the estimated result of the entire contract is taken into consideration. 24. Cost-plus fixed rate contracts are peculiar to specialized industries such as defence and oil or where the risk associated with the contract is very high. Usually, the contractor is reimbursed for labour, material and plan costs and in addition, a fixed fee or an agreed percentage, to cover establishment costs and profit, is allowed. The nature of the items to be reimbursed are usually stated in the contract agreement. 25. Advance payments received by the contractor are either treated as unearned revenue and carried forward as a liability or as a deduction from work-in-progress. 26. Retentions are recorded in the books of accounts of the contractor as an asset or treated as a memorandum entry and shown as a note to the accounts. 27. In situations where there are no retentions, a contractor may be required to provide a third party guarantee. 28. Some main contractors sometimes withhold retentions from sub-contractors. Such retentions are generally treated as current liabilities until the end of the maintenance period. The main contractors may demand third party guarantees from the sub-contractors in lieu of retentions. 29. Some enterprises give warranties for the work done and such warranties may extend for a long period of time after the completion of the work. Provisions for such warranties are made in the accounts. On the other hand, other enterprises do not make provisions for warranties but recognize such claims in the accounts as they occur. 30. Where provision is not made for warranty and there is litigation which is not resolved within an

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31. 32.

33. 34.

35. 36.

37. 38. 39. 40.

41. 42. 43.

accounting period, a contingent liability arises. Mobilization fees are treated as liabilities until fully recovered in accordance with the contract agreement. Progress payments are settlement of fees for work already billed. Some enterprises take only the portion of the billing that represents work already performed as revenue and the other part is deferred. Under the completed-contract method, the whole revenue is deferred. Over billings and under billings may occur in either the completed-contract method or the percentage -of-completion method. These are adjusted for in the work-in-progress account. Claims and variations arise in long-term contracts due to changes in design, base prices or completion time. When these are subsequently agreed to by the employer, they are recognized as part of the revenue derived from the contract. In the event of a claim for liquidated damages by the employer arising from poor performance or late completion of the contract, such a claim is fully provided for in the contract account. Sometimes, contractors change the method of computing revenue on a particular type of contract from the percentage-of-completion method to the completed-contract method or vice versa. This is usually treated as a change in accounting policy. Preliminary costs attributable to a contract but which cannot be directly billed are generally deferred and are charged to revenue in proportion to the work certified. Other costs relating to aspects of a contract that are not immediately certifiable are not charged to revenue but are regarded as deferred costs until certifiable. Some enterprises are involved in contracts that have foreign exchange implications and these create problems of translation. Where the contractor is making payment in a currency other than the Naira the fluctuation in the rate of exchange between the date of transaction and the date of payment is charged to the Profit and Loss Account except in the case of a cost-plus a fixed rate contract where it forms a part of the contract cost. If the contract prescribes a fixed rate of exchange, the difference between this rate and the rate at the date of settlement or the translation rate at the reporting date is generally charged to revenue. Where foreign currency balances are translated at the rate ruling on the balance sheet date, the difference is not a contract cost and it is therefore taken to revenue. Where the contract stipulates the provision of foreign funds by the contractor, the exchange difference arising on settlement taken into the contract account.

PART 4 ACCOUNTING STANDARD

CONSTRUCTION CONTRACT
The Accounting Standard comprises Paragraphs 44-68 of this Statement. The Standard should be read in the context of all other parts of this Statement and of the Preface to the Statements of Accounting Standards published by the NASB 44. In accounting for each particular type of Construction Contract, every enterprise should use either the completed-contract method or the percentage-of-completion method. 45. The method selected should be consistently applied in compliance with

COMPLETED-CONTRACT METHOD
46. The completed-contract method should be used for: (a) short-term contracts, (b) long-term contracts where it is very difficult to have reliable estimates or forecasts of both costs to completion and the percentage of contract executed. Under the completed-contract method, costs incurred and the billings on the contract should be separately accumulated until the contract is completed. Foreseeable losses should be charged to Profit and Loss Account in the period they are identified. For the purpose of establishing foreseeable losses, each contract should be treated separately.

47. 48. 49.

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50.

51. 52. 53.

Foreseeable losses on any one contract should not be set off against anticipated profits of other contracts. A contract should be regarded as completed only when all the activities relating to it are accomplished. In a situation where the additional costs required to complete the contract are not significant, provision should be made for such costs and the contract treated as completed. General and administrative expenses relating to a particular period should be charged to the profit and loss account of the period. These are not contract costs. Under billing and over billings should be reported as part of work-in-progress. Where a long-term contract comprises clearly identifiable segments, foreseeable losses arising from one or more segments should be provided for and not offset against anticipated profits arising from others.

Percentage-of-Completion Method
54. 55. The percentage-of-completion method should be used when the conditions in paragraph 17 are met. Under the percentage-of-completion method, the proportion of revenue in relation to the work done, should be determined in one of the following ways:(a) the percentage of estimated total revenue that the incurred costs to date bear to the estimated total costs; (b) the percentage of total contract value that the certifiable work done to date bears to the estimated total value of the contract. Where the revenue computed under the cost to completion exercise is lower than either of the amounts arrived at in paragraph 55, the revenue to be recognized should be that derived under the cost to completion exercise referred to in paragraph 16.

56.

General
57. Pre-contract costs should be expensed in the period incurred unless there is reasonable assurance that the contract will be won, in which case, the costs incurred are deferred and charged to the contract account. In cost-plus a fixed rate contract only costs directly attributable to the contract and reimbursable by the employer should be charged to the contract account. Where a warranty or guarantee is given on a contract, on completion, adequate provision should be made against possible claims on the warranty or guarantee. Mobilization fees and other advance payments received from the employer should not be treated as revenues but carried forward and recovered over the contract period as follows:(a) in relation to the work done and certified or (b) as other wise provided in the contract agreement. Claims and variations should be recognized as revenues only when agreed to or paid by the employer. Only certifiable costs which cannot be immediately matched with the related revenue should deferred until they can be matched with the related revenue. Interest relating to funds specifically arranged from specific contracts and agreed to by the employer should be charged to the contract, all other interest costs should be charged to Profit and Loss Account. Claims for liquidated damages should be provided for as soon as there is notice of such claims by the employer unless there is ascertainable or verifiable evidence that the claims cannot be sustained.
Retention s shou ld be recognized as revenue only when certified.

58. 59. 60.

61. 62. 63.

64.

65.

Disclosure
66. 67. Every construction enterprise should state its accounting policies for contracts. The method or methods selected for asset and revenue recognition should be disclosed. The following items should be disclosed in the financial statements of a reporting enterprise:(a) the value of construction work-in-progress. (b) receivable, retentions, progress payments and advance payments.

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68.

When a change is made from the completed-contract method to the percentage-of-completion method or vice versa, the change and its effect should be disclosed in accordance with SAS 1 Disclosure of Accounting Policies.

PART 5 - NOTES ON LEGAL REQUIREMENTS 69. The requirements of this Standard are complementary to any disclosure requirements of the Companies Act of 1068 and related regulations.

PART 6 - COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARD NO.11 70. The requirements of this Standard accord substantially with the requirements of the International Accounting Standard No.11 - Accounting for Construction Contracts.

Effective Date
71. This standard becomes operative for financial statements covering periods beginning on or after 1st January, 1988.

SAS 6 Statement of Accounting Standard - on Extraordinary Items and Prior Year Adjustments
Issued by the Nigerian Accounting Standards Board August 1986

PART 1 - INTRODUCTION 1. Two opposing views that have considerable support for the determination of operating income in the year are: the Current Operating Performance Concept and the All-inclusive Concept. In the recent past, there has been considerable diversity of views as to what constitute extraordinary and unusual items, prior year adjustments and how they should be treated in accounts. The Primary objectives of this Statement are: (a) to examine the issues involved in the determination of operating income in any given accounting period, and (b) to prescribe the accounting treatment of extraordinary and unusual items and prior year adjustments as well as their appropriate disclosure in financial statements.

2.

PART 2 - DEFINITIONS 3. The following terms are used in this Statement with the meanings specified:-

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(a) Exceptional items: are those that though normal to an activity of an enterprise are abnormal as a result of their infrequency of occurrence and size e.g. abnormally high bad debts. (b) Extraordinary items: are those that occur outside the ordinary activities of an enterprise and are not expected to recur frequently. (c) Prior year adjustments: are items of revenue and expenses that were recorded this year but would have been recorded in a prior year or years if all of the facts had been known at that time. These do not include adjustments for differences between actual and accounting estimates. (d) Ordinary activities of an enterprise are normal product lines or day-to-day activities of an enterprise.

PART 3 - EXPLANATORY NOTES 4. 5. Two problems are associated with extraordinary items namely, their precise identification and their treatment in financial statements. For proper classification of revenue, expense or cost items of an enterprise as extraordinary, proper analysis of the ordinary activities of an enterprise is usually undertaken. Material items that are infrequent and fall outside the normal activities of the enterprise are classified as extraordinary. What items are regarded as extraordinary will depend on industry norm. For example, a company in the oil industry will treat an income or loss resulting from the sale of its buildings as an extraordinary item. On the other hand, a property holding company may treat an equally material gain or loss on the sale of a building as an exceptional item. The treatment of an item as extraordinary in the Profit and Loss Account depends on the concept of reporting that is adopted by the reporting entity. A reporting entity may either choose the CurrentOperating-Performance Concept or the all-inclusive Concept.

6.

7.

Current-Operating-Performance Concept
8. 9. 10. 11. 12. 13. Under the Current-Operating-Performance Concept, the Profit and Loss Account segregates the result of activities into two i.e. those that are from ordinary activities of an enterprise and those that are not. Revenue and expenses from ordinary activities of an enterprise are matched thereby providing the current operating performance of the enterprise. Similarly, non-operating items which include revenue and expenses not associated with the ordinary activities of an enterprise are matched and reported separately. Exceptional items are sometimes reported separately in the Profit and Loss Account to high-light their effects on the results of operations during the period. Extraordinary items are taken to reserves or retained earnings so as not to distort the result of operations during the period. One of the major advantages of this method of presentation of results of operations is that it makes it easy to evaluate the performance of management in terms of the main line of activities and other sideline activities. Because information is presented in such a way that attention can easily be drawn to certain sections that may have special significance to users, some financial analysts favour this format. Under the current operating format, the Profit and Loss Account is complicated. Besides, it is better for internal management reporting and control purposes than for external reporting. This concept is rarely used for external reporting especially in its strict sense. A modified version is often presented.

14. 15.

All-inclusive Concept
16. Several variations of the all-inclusive concept are in use, depending on the amount of detail an enterprise wishes to provide. Some enterprises present a non-segregated Profit and Loss Account in which the total revenues and expenses are shown. This is a single-step format and widely used these days by large enterprises. 17. The single-step format sacrifices detailed information for simplicity and thus makes it easy for readers

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to follow. 18. Some enterprises, on the other hand, present segregated Profit and Loss Account that clearly show total revenues (including a section for other income), expenses, extraordinary items (net of applicable taxes), and a section for Retained Profits/Reserves. The Statement of Retained Profits/Reserves excludes extraordinary items but includes prior-year adjustments. 19. The all-inclusive concept seems to be favoured by the majority of users because the net profit or loss for the year represents all the regular and extraordinary earnings or losses for the year irrespective of the source. Where there is consistency in presentation of financial information, trends in earnings can be easily established and overall performance of the enterprise can be judged.

Extraordinary Items
20. Extraordinary items are revenue and expense items of an enterprise that are distinguished because they are both unusual in nature and infrequent in occurrence. An item that is identified as extraordinary is usually abnormal and unrelated to the ordinary activities of the enterprise. 21. For proper distinction to be made, due consideration is usually given to the lines of business in which the enterprise is engaged, the environment in which the enterprise operates, the industry norm, and the government regulations affecting the industry. 22. The past occurrence or event in an enterprise usually provides sufficient evidence for the classification of an item as either extraordinary or ordinary. 23. Certain gains or losses are reported as extraordinary items because they are unusual in nature, occur infrequently and are unrelated to the ordinary activities of an enterprise. Examples of such items include:(i) Profit or loss arising from trade investments; (ii) Profit or loss arising on the sale of a segment, line of business or subsidiary; (iii) Profit or loss arising on the expropriation of an asset or nationalization of assets of an enterprise; (iv) Redundancy costs relating to discontinued product or business line. Costs relating to the closure of branches are not normally regarded as extraordinary items. 24. Extraordinary items are usually reported net of their associated taxes. The taxes on these items are rarely reported as part of the tax charge for the year.

Prior Year Adjustments

25. Prior year adjustments occur as a result of either the correction of fundamental errors that were previously made in the accounts or of the wrong application of accounting principles or a change in an accounting policy. 26. Usually, when errors are detected before accounts are finalized or published, such errors are corrected. In some cases, errors may escape detection in one period only to be discovered in another. The correction of such errors may require adjustments of past, present and future account balances. 27. Adjustments to accounting estimates are usually not classified as prior year adjustments and therefore are a part of income or loss in the current and subsequent years. Examples of this category of adjustments are: changes in the estimate of the useful lives of fixed assets, or net realizable value of stock believed to be obsolete. Any change in an accounting estimate is not usually treated as an extraordinary item although it could be treated as an exceptional item. 28. Changes in accounting estimate occur frequently in practice because, on the date the financial statements may be finalized, important events or conditions may be in dispute or uncertain. Where the outcome of such events or conditions are measurable and fairly predictable, provision is usually made for such events or conditions. 29. When an accounting principle is adopted that is different from the one previously used, a change in accounting principle has occurred. For example, a change from reducing-balance-method of depreciation to a straight-line method is a change in accounting principle. 30. The change in accounting principle is generally treated by including in the Profit and Loss Account of the current year, the portion that relates to the year, while the cumulative balance is taken to Retained Earnings/Reserves. 31. Misapplication of accounting principle may occur due to the careless mistake of an employee. For example, where a fixed asset is mistakenly treated as an expense for the period, a misapplication of

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accounting principle has occurred. Such an error is fundamental and therefore, affects the balances of accounts in the past and current year. 32. A fundamental error is usually corrected by making appropriate adjustments to the opening retained profits figure and other affected account balances. 33. Prior Year Adjustments are usually reported net of associated taxes.

Retained Profits/Reserves
34. Retained Profits usually form a detachable part of the Profit and Loss Account. Depending on the concept being used, extraordinary items are either reported as a part of the Profit and Loss Account (all-inclusive concept) or reported in the Retained Profits Account (the Current-Operating-Concept). The practice of reporting extraordinary items in the Retained Profits Account is unusual. 35. No matter the concept used, prior year adjustments are reported in the Retained Profits Account.

Financial Statement Presentation

36. Exceptional and Extraordinary items are usually shown on the face of the Profit and Loss Account; the former forms part of normal activities and the latter is shown after "Profit After Tax and Before Extraordinary Items."

PART 4 - THE ACCOUNTING STANDARD

EXTRAORDINARY ITEMS AND PRIOR YEAR ADJUSTMENTS

The Accounting Standard comprises paragraphs 37-49 of this Statement. The Standard should be read in the context of all other parts of this Statement and of the Preface to the Statement of Accounting Standards published by the NASB. 37. A reporting entity should adopt the All-inclusive Concept of reporting. 38. A multiple-step format that is appropriate for an enterprise or industry should be used and should normally include:(a) Profit After Tax and Before Extraordinary Items. (b) Extraordinary Items. (c) Profit after Extraordinary Items. 39. Retained Profits/Reserves should form part of the Profit and Loss Account and should be clearly identified. All prior year adjustments should be reported in the Retained Profits/Reserves Account net of associated taxes. 40. Items should be treated and reported as extraordinary only if they are unusual in nature, infrequent in occurrence and unrelated to the ordinary activities of the reporting enterprise. 41. Extraordinary items should be reported separately in the appropriate section of the Profit and Loss Account, net of their associated taxes. Such taxes, where material, should be disclosed in the Note to the Accounts. 42. Exceptional items should be separately reported as a part of the results of ordinary activities. 43. Errors that result from the use of incorrect accounting estimates including those of estimated tax should be treated in the current year, as part of the results of ordinary activities. 44. A change in accounting principle should be reported by including in the Profit and Loss Account of the current year, only the portion that relates to the year, and the cumulative amount resulting from the change to the new accounting principle should be taken to Retained Earnings. 45. Errors in misapplication of accounting principle, when discovered, should be corrected by adjusting the appropriate accounts including Retained Profits/Reserves 46. Prior year adjustments should be reported net of associated taxes.

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Disclosure in Financial Statements

47. Extraordinary items, net of associated taxes, should be disclosed in the appropriate section of the Profit and Loss Account. 48. Prior year adjustments, net of associated taxes, should be disclosed in the Retained Profits/Reserves Section of the Profit and Loss Account. 49. Exceptional items, gross of any associated taxes, should be disclosed in the Profit and Loss Account.

PART 5 - NOTES ON LEGAL REQUIREMENTS 50. The requirements of this Standard are complementary to any disclosure requirements of the Companies Act 1968 and related Regulations.

PART 6 - COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARD NO. 8 51. The requirements of this Standard accord substantially with the requirements of the International Accounting Standard No.8 - Unusual and Prior Period Items and Changes in Accounting Policies.

Effective Date
52. The Standard becomes operative for Financial Statements covering periods beginning on or after 1st January, 1988.

SAS 7 Statement of Accounting Standard - on Foreign Currency Conversions and Translations

Issued by the Nigerian Accounting Standards Board June, 1988.

PART 1 - INTRODUCTION 1. Organizations or individuals in Nigeria often engage in business dealings with governments, enterprises or individuals in other countries. These dealings may involve the payment, receipt or transfer of foreign currency or the creation of foreign currency assets and liabilities. In each transaction with a foreign party, the invoice price is usually quoted in terms of a foreign currency which is not necessarily the domestic currency of that part. For the transaction to be reflected in the accounts of the Nigerian enterprise, there must be conversion of the amount into Naira. Transactions between parties in different countries generally require one party to purchase some foreign currency in order to settle its obligations. Between the dates of the initial transaction and the final settlement, there may be fluctuations in the exchange rate and this may result in a gain or a loss. A Nigerian Company maintaining a branch office in a foreign country or holding an equity interest in a foreign company must translate the accounting data expressed in foreign currency into Naira before the

2.

3.

4.

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5.

financial statements can be consolidated or combined. The primary objectives of this Statement are to provide uniform accounting treatment for: (i) Foreign exchange transactions and, (ii) The translation by a Nigerian enterprise of the financial statements of its foreign branches, subsidiaries, associates, or joint ventures based in a country other than Nigeria.

PART 2 - DEFINITIONS
6. The follow ing terms are used in th is Statement with the meanings specified:

(a) Foreign Currency is any currency other than the domestic currency, the Naira. (b) Conversion is the process of expressing a foreign currency amount in Naira by the use of an appropriate rate of exchange. See Appendix. (c) Translation is the restating of accounting balances of foreign operations at their equivalents in Naira. (d) Exchange Rate is the rate at which the currency of a country is exchanged for the currency of another country. Some exchange rates that are used in practice are presented below: i. Official Exchange Rate is that established by the appropriate governmental agency for eligible transactions. A country may have several official rates, each of which is designated for use for a particular economic activity and which also reflects governmental policies with respect to desired economic goals. Before the introduction of the Foreign Exchange Markets in September, 1986, the Central Bank of Nigeria provided the only official exchange rate in Nigeria. ii. Spot Rate is the exchange rate prevailing on a particular day. This is usually the rate used to settle accounts at the end of the day for immediate delivery of currency. In Nigeria, each authorized dealer has spot rates determined either from biddings on Foreign Exchange Market or from negotiated rates on funds from other sources. iii. Closing Rate of Exchange is the exchange rate ruling at the balance sheet date. iv. Forward Rate is the rate quoted or agreed upon now for future delivery of currency between the parties involved. (e) Reporting Currency is the currency in which financial transactions are recorded and financial statements are presented. For Nigerian enterprises, the reporting currency is the Naira. (f) Foreign Operations refer to the business activities based in a country other than Nigeria, of a branch, subsidiary, associate or joint venture of a Nigerian enterprise. These may or may not form an integral part of the activities of the parent body in Nigeria. A foreign operation forms an integral part of a Nigerian enterprise if it has no separate cash flows. (g) A Foreign Entity is said to exist where the activities of a branch, a subsidiary, an associated company or a joint venture do not form an integral part of the activities of the related enterprise in Nigeria. (h) Monetary Items are monies held and items to be received or paid in money. All other assets and liabilities are Non-Monetary Items. (i) Foreign Currency Loan is an obligation repayable in foreign currency. (j) An Authorized Dealer in Foreign Currency is either a bank or a non-banking corporate organization so appointed by the Federal Minister of Finance.

PART 3 - EXPLANATORY NOTES

GENERAL
7. Some Nigerian enterprises have business dealings with their counterparts in other parts of the world. Such dealings may involve importation or exportation of goods and services, and the borrowing or lending of money. These business dealings give rise to the receipt, payment or transfer of foreign currency between the parties. The foreign currency that is remitted in meeting these financial obligations may be that of a

8.

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9.

10. 11.

12.

13.

country other than those of the parties concerned. Conversion to a third currency may thus be necessary. When an enterprise in Nigeria exports goods or renders services to a foreign company, the bill forwarded to the foreign company may be made out in Naira or a foreign currency such as the Pound Sterling or the United States Dollar. If the bill is in Naira, and the foreign company pays the bill in Naira, the transaction is treated like any other normal domestic transaction. Where the foreign company is billed in a foreign currency, the payment when received may be lodged into a foreign currency domiciliary account or sold to an authorised dealer. In both case, the payment is converted at the exchange rate ruling at the date of receipt. If the exchange rate in effect at the date of the receipt of payment is the same as it was at the date of sale, no exchange gain or loss has occurred. If, however, the rates at these dates are not the same, an exchange gain or loss has occurred and it is recognized. If a Nigerian enterprise imports goods or receives services from a foreign company and the bill is made out in Naira, the transaction is treated as though it were a domestic transaction.

Conversion
14. Transactions in foreign currencies are normally converted at the rates ruling on the transaction dates. 15. Exchange gains or losses may arise on conversion and they usually require recognition in the Profit and Loss Account. 16. Usually, gains or losses on transactions arise because of the movement in foreign exchange rate between the date of initial transaction and the date of settlement. Such gains or losses on conversion are taken to the Profit and Loss Account as part of the operations of the period. 17. At the balance sheet date, balances in foreign currencies including domiciliary accounts are converted into Naira using the closing rates. However, where a balance is to be settled at a contracted rate, that rate is used. All differences arising on conversion, are usually taken to the Profit and Loss Account, except differences on long-term foreign currency monetary items which may be deferred and taken to the Profit and Loss Account on a systematic basis over the remaining lives of the monetary items concerned. However, losses on such items are not usually deferred if it is reasonable to expect that exchange losses will recur on the same items in future.

Translation of the Accounts of Foreign Operations

18. Several methods of translating the foreign currency account balances representing assets, liabilities, revenues and expenses of foreign operations, are in use. The three main methods are: i. Closing Rate Method - Under this method, all assets and liabilities are translated at the rate ruling at the balance sheet date. This method is sometimes also referred to as the Current Rate Method. ii. Temporal Method - Under this method, current assets and liabilities are translated at the rate ruling at the balance sheet date and non-current assets and liabilities are translated at the applicable historical rates at the dates they were acquired or incurred. This method is sometimes referred to as the Current-Non-Current Method. iii. Monetary, Non-monetary Method - Under this method, monetary assets and liabilities are translated at the rates ruling at the balance sheet date and non-monetary assets and liabilities at the historical rates ruling at the dates they were acquired or incurred. Assets and liabilities are regarded as monetary if their nominal values are fixed. All other balance sheet items are classified as non-monetary. 19. Foreign operations may be conducted through a branch, a subsidiary, an associate or a joint venture. Depending on the relationship, foreign operations may or may not form an integral part of the activities of the related enterprise resident in Nigeria. 20. Usually, before the accounts of a foreign branch, a subsidiary, an associate or a joint venture of a Nigerian enterprise are translated for the purpose of combining or consolidating the financial statements, the relationships between them are carefully analyzed. The nature of the relationships

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21.

22.

23.

24.

25.

26.

27.

28.

29.

30.

between each of the foreign entities will determine whether the Temporal Method or the Closing Rate Method of translation is to be used. If the accounts of any foreign branch, subsidiary, associate or venture are not in conformity with the Statements of Accounting Standards, such accounts are adjusted to conform with the Nigerian Standards before combining or consolidating same with the accounts of the Nigerian parent enterprise. At present most enterprises in Nigeria tend to carry out their foreign based business activities through branches. However, because of exchange control restrictions, such branches usually maintain separate cashflows. The actual movements of funds between the branches and their Head Offices in Nigeria tend to be infrequent and mainly in an outward direction. In such circumstances, it is usual to translate the accounts of such foreign operations using the Closing Rate Method. In those special cases where foreign operations are carried on as an integral part of the activities of the parent enterprise in Nigeria with no separate cashflows being maintained by the foreign operations, the accounts of such foreign operations are sometimes translated using either the Closing Rate Method or the Temporal Method. In some enterprises, revenue and expense accounts of their foreign operations are translated at year end, under the Closing Rate Method, using the simple average of the opening and the closing rates. If the activities of the foreign operations are seasonal, a weighted average exchange rate is sometimes used. Some enterprises, under the Closing Rate Method, translate both fixed assets and their associated depreciation charges into Naira at the rate ruling at the balance sheet date. Sometimes, a weighted average exchange rate is used where additions or retirements of fixed assets are carried out at different times. A few enterprises use the Monetary, Non-monetary Method. A clear distinction is usually made between monetary assets and liabilities. Monetary items are translated at the rates ruling on the balance sheet date. Non-monetary assets and liabilities, on the other hand, are translated at the historical rates ruling at the dates they were acquired or incurred. Accruals and prepayments, resulting from services rendered or received, are usually translated to the reporting currency at the Closing Rate. Any exchange differences between the rate ruling on the translation date and settlement date are usually taken to the Profit and Loss Account. Exchange gains or losses may arise on translation and usually require recognition in the Profit and Loss Account, Revenue Reserve Account or Capital Reserve Account. However, exchange gains or losses resulting from translating the accounts of foreign entities that do not form an integral part of the activities of the Nigerian parent enterprise are sometimes taken to Revenue or Capital Reserve. If a foreign branch, a subsidiary or an associated company operates as an integral part of the operations of its Nigerian enterprise, the financial statements of such a branch, a subsidiary or an associated company are translated using the Temporal Method. Exchange gains or losses on such translations are taken to the Profit and Loss Account as a part of the results of the operations of the period.

Devaluation
31. Where there is a severe devaluation of a foreign currency as a result of acute depreciation or outright devaluation by the relevant government, this fact is usually recognized in the accounts as an exceptional event. 32. Where there is no means of hedging against exchange losses as a result of severe depreciation or formal devaluation and where liabilities resulting from recent acquisition of assets invoiced in foreign currency are affected, the exchange difference may be included as a part of the cost of the asset provided that the adjusted carrying amount does not exceed the lower of replacement cost or the amount recoverable from the use or sale of the asset.

Restrictions of Foreign Exchange Remittance

33. Where there are restrictions on the remittance of the profits of a foreign operation, the related Nigerian enterprise may not treat such profits as part of its earnings until received and if the operations form an integral part of the operations of the related Nigerian enterprise, combination or consolidation becomes inappropriate in the circumstance.

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34. Sometimes, a long-term receivable or payable is settled by a series of installments spread out over a period of years, and the portion of the long-term receivable or payable relating to each installment is considered to have a separate life; accordingly, any exchange gain or loss is calculated only for each portion of the long-term receivable or payable and amortized over its particular remaining life. 35. The life of a long-term monetary asset or liability may be changed by renegotiation of its terms or by refinancing. If the renegotiated or refinanced loan is in the same currency as that of the original loan, any unamortized balance of unrealized exchange gains or losses at the date of renegotiation or refinancing may be amortized over the lesser of: i. the remaining life of the original asset or liability, and ii. the life of the renegotiated or refinanced asset or liability. Any gains or losses arising from changes in exchanges in exchange rates occurring subsequent to the date of renegotiation or refinancing relating to the renegotiated or refinanced loan are often amortized over its remaining life.

Disclosure Patterns
36. At present, the information disclosed by enterprises in Nigeria is not uniform. For instance, some enterprises do not disclose: (a) their accounting policies with respect to foreign exchange conversions and translations, (b) the effects on the accounts of significant movements in exchange rates between the year end and the time the accounts are finalized. (c) the net total gains or losses in the Profit and Loss Account arising from changes in exchange rates.

PART 4 - ACCOUNTING STANDARD

FOREIGN EXCHANGE CONVERSIONS AND TRANSLATIONS

The Accounting Standard comprises paragraphs 3337-47 of this Statement. The Standard should be read in the context of all other parts of this Statement and of the Preface to Statements of Accounting Standards published by the NASB. 37. A reporting enterprise should state its accounting policy with respect to Foreign Exchange Conversions and Translations. Such an accounting policy should form an integral part of financial statements as prescribed by SAS 1 38. Since the Naira is the reporting currency and unit of measure, transactions in foreign currencies should be converted into Naira at the rates of exchange ruling at the dates of such transactions. Differences arising at the dates of settlements should be taken to the Profit and Loss Account. 39. At the balance sheet date, balances in foreign currencies should be converted into Naira using the closing rate. However, where a balance is to be settled at a contracted rate, that rate should be used. All differences arising on conversion should be taken to the Profit and Loss Account, except differences on long-term foreign currency monetary items which should either be written off or deferred and taken to the Profit and Loss Account on a systematic basis over the remaining lives of the monetary items concerned. However, losses on such items should not be deferred if it is reasonable to expect that exchange losses will recur on the items in future.

Translation of Financial Statements of Foreign Operations

40. Financial Statements of a foreign operation should be modified, where necessary, to meet the accounting Standards set in Nigeria before consolidation or combination with the accounts of the related Nigerian enterprise. 41. The financial statements of a foreign entity should be incorporated in the accounts of the related Nigerian enterprise using the Closing Rate Method as follows:(a) assets and liabilities, both monetary and non-monetary should be translated at the closing rate; (b) the exchange differences resulting from translating the opening net investment in the foreign entity at an exchange rate different from that at which it was previously reported should be taken to a Capital Reserve Account;

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42.

43. 44.

45.

46.

(c) income statement items should be translated either at the closing rate or at the exchange rates at the dates of the transactions. Differences arising from translating income statement items at exchange rates other than the closing rate whilst translating balance sheet items at the closing rate should be taken to Income or Revenue Reserve; (d) any exchange differences arising from other changes to shareholders' interest account in the foreign entity should be recognized in the appropriate shareholders' interest account such as Share Capital, Capital Reserve or Revenue Reserve. In those special cases where a foreign operation is carried on as an integral part of the activities of the parent enterprise in Nigeria with no separate cashflow being maintained by the foreign operation, the assets liabilities and capital accounts of such a foreign operation should be translated using either the Temporal Method or the Closing Rate Method. Revenue and expense accounts should be translated using the average exchange rate, under the Temporal Method or the Closing Rate Method. A parent enterprise should not treat the profits of its foreign operations, the remittance of which is restricted, as part of its earnings until received. When there is no means of hedging against foreign exchange losses as a result of severe depreciation or formal devaluation and where liabilities resulting from recent acquisition of assets invoiced in foreign currency are affected, the exchange difference may be included as a part of the cost of the asset provided that the adjusted carrying amount does not exceed the lower of replacement cost or the amount recoverable from the use or sale of the asset. Sometimes, a long-term receivable or payable is settled by a series of installments spread over a period of years. The portion of the long-term receivable or payable relating to each installment should be considered to have a separate life; accordingly, any exchange gain or loss should be calculated for each portion of the long-term receivable or payable and amortized over its particular remaining life. The life of a long-term monetary asset or liability is often changed by renegotiation of its terms or by refinancing. If the renegotiated or refinanced loan is in the same currency as that of the original loan, any unamortized balance of unrealized exchange gains or losses at the date of renegotiation or refinancing should be amortized over the lesser of: i. the remaining life of the original asset or liability and, ii. the life of the renegotiated or refinanced asset or liability. Any gains or losses arising from changes in exchange rates occurring subsequent to the date of renegotiation or refinancing, relating to the renegotiated or refinanced loan, should be amortized over its remaining life.

Disclosure
47. In addition to the disclosures required by SAS 1, Disclosure of Accounting Policies, and SAS 2, Information to be Disclosed in Financial Statements, the following disclosures should be made in appropriate sections of financial statements of a reporting Nigerian enterprise: (a) the accounting policy with respect to treatment of foreign exchange conversions and translations; (b) the treatment given to foreign exchange gains or losses; (c) the net total gains or losses arising from changes in foreign exchange rates taken to the Profit and Loss Account; (d) restrictions, if any, on repatriation of investments or returns thereon to Nigeria, (e) post balance sheet rate movement on transactions that have significant impact on the Profit and Loss Account and Balance Sheet items should be in Notes to the Accounts, (f) the amount of Gains or Losses deferred.

Part 5 - Note on Legal Requirements 48. The requirements of this Standard are complementary to any disclosure requirements of the Companies Act of 1968 and other relevant Legislation.

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PART 6 - COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARD NO. 21 49. The requirements of this Standard accord substantially with the requirements of the International Accounting Standards No.21 - Accounting for the Effects of Change in Foreign Exchange Rates.

Effective Date
50. This Standard becomes operative for Financial Statements covering periods beginning on or after June, 1988.

Appendix
Difficulties in Establishing a Single Foreign Exchange Rate At present, fortnightly biddings for foreign exchange are held in the official Foreign Exchange Market (FEM) and each successful bank at the bidding is compelled to sell foreign currency won at a fixed small percentage over the particular price it bid for the foreign currency. As a result, at any point in time, the selling rates for foreign currency under FEM vary from bank to bank. Apart from the foreign currency purchased by banks under FEM and which they can sell only for stipulated transactions, the banks are allowed to purchase foreign currency ("Autonomous Funds") at any rate they wish subject to the restriction that they cannot resell it at more than a fixed percentage over the price at which they purchased the particular funds concerned. Since no averaging of purchased price is permitted, a bank has to match every specific purchase of foreign currency with specific sales of the funds concerned. As a result, apart from the fact that at any point in time each bank may be quoting a different rate for autonomous funds each bank on a particular day may be applying more than one rate for transactions in autonomous funds. Thus, at present, each bank has its own FEM rate determined at fortnightly biddings. Similarly, each has its own rate derived from autonomous funds. In the circumstance, it becomes rather difficult for enterprises to have and the NASB to select and recommend a single rate ruling on a particular date.

SAS 8 Statement of Accounting Standard - on Accounting for Employees' Retirement Benefits

Issued by the Nigerian Accounting Standards Board June 1990

PART 1 - INTRODUCTION 1. Many charitable organizations, government and business establishments provide retirement benefits for their employees. Retirement benefits can consist of monthly payments to former employees or a lump sum upon attainment of a specified retirement age and may include additional payments in case of death or disability. Depending on the terms of a retirement benefit plan, some employers bear the entire cost of a retirement plan whilst other employers contribute a proportion of the cost of the plan with the employee bearing the remaining fraction. Some retirement plans are evidenced by a well articulated document forming a part of the total employment contract of employees. Some plans are not so clear and can only be inferred

2.

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3.

4.

5.

from the employers' policies or practices. In some countries, laws prescribe the minimum benefits payable to a qualified employee to protect the employee, but this is not presently the case in Nigeria. The main issues involved in accounting for retirement benefits are the determination of the: (a) amount due to employees before or after the date of implementation of a plan, (b) amount of funding required in order to meet employees' entitlements upon retirement, and (c) amount of information to be disclosed in financial statements. The primary objectives of this statement are to narrow the differences in the methods or manner used in: (a) measuring the amount of retirement obligations under retirement benefits plans, (b) allocating the cost of the plan and recognizing resulting gains or losses to the accounting periods, and (c) disclosing as accurately as possible, the plan and the effects of the plan implementation on the reporting enterprise. This Statement will not cover: (a) benefits resulting from termination indemnities; (b) long-term leave benefits; (c) redundancy plans or strictly gratuitous schemes, health and welfare or bonus plans; and (d) national insurance benefit schemes, government pension schemes and social security arrangements such as National Provident Fund.

PART 2 - DEFINITIONS 6. In this statement, the following terms are used as described below: i. Provident, pension, retirement benefit schemes are contracts, formal or informal, between employers and employees specifying what benefits accrue to employees upon the attainment of a specified age or length of serve and other obligations and responsibilities of the two parties. ii. A funded retirement scheme is one in which the employer agrees to make periodic payments to an agency usually an insurance company, bank or a trustee that manages the plan. iii. Funding is the process of making irrevocable periodic payments towards a plan to meet future obligations for the payment of retirement benefits. iv. Unfunded scheme is one in which there is no specific periodic payment towards a plan. v. A qualifying scheme is one that meets all the requirements of the Joint Tax Board as to the employers' and employees' contribution and investment of trust funds with respect to status. vi. Contributory schemes are those requiring the employers and the employees to contribute to the schemes. vii. Non-contributory schemes are those which require no contributions by the employees. viii. Vested benefits refer to the portion of retirement benefits that have accrued to the employee whether or not he remains in the employment of the enterprise. ix. Self-administered scheme is one in which the investment and management of the scheme are undertaken in-house. x. Beneficiaries are those employees covered by a scheme or persons nominated by them as recipients of benefits. xi. Net asset available for benefits refers to the excess of assets over liabilities. xii. Actuarial assumptions refer to the set of assumptions as to rates of mortality of employees, interest, inflation, etc., used by the actuary in arriving at any actuarial calculations or valuations. xiii. Actuarial value of assets is the value determined by the actuary based on estimated future income, proceeds of sales or redemptions of assets. xiv. Actuarial value of liabilities is the estimated value of expenditures of the fund. xv. Actuarial deficiency is the excess of actuarial value of liabilities over the actuarial value of

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xvi. xvii. xviii. xix.

xx. xxi.

assets. Actuarial surplus is the excess of actuarial value of assets over the actuarial value of liabilities. Provident fund is a scheme in which the employee receives a lump-sum upon cessation of membership of the scheme. Pensionable service may include years of service before, during and after the introduction of a scheme. A normal retirement age is the earliest age a fund beneficiary is entitled to receive benefit under the scheme without regard to disability or ill-health provisions that may allow for early retirement. Transfer payment is a payment made to another scheme when a beneficiary of the former scheme changes employment. Top hat scheme is a scheme planned for top executives or directors of an organization to augment the benefits received from the general scheme.

PART 3 - EXPLANATORY NOTES 7. In the recent past, employee retirement costs or pension plan costs have become an important portion of the operating costs of many business enterprises. Consequently, the manner in which such costs are calculated and accounted for may have a significant effect on the reported profits of business enterprises and may result in lack of comparability between the results of such enterprises from one period to the other. 8. Employee retirement schemes or pension plans are usually designed with a view to providing enough funds for current or former employees. Such entitlements may include widow's, widower's, orphan's and disability benefits. 9. A pension plan or retirement scheme means a formal or informal contract between employers and employees specifying what benefits accrue to employees upon the attainment of a specified retirement age. Other obligations and responsibilities of the parties under the contract are usually specified. Under this kind of arrangement, there may also be conditions for qualification for membership. A formula for calculating the amount receivable by an employee or his beneficiaries and a commencement date for an employee to qualify for benefit may also be given. 10. Gratuitous payments or arbitrary amounts decided only on or after retirement of an employee do not constitute a pension plan or retirement scheme for the purpose of this statement. However, any scheme that systematically provides retirement benefits to employees after they have left employment will be considered a pension scheme. 11. Sometimes, company practices may provide conclusive evidence that a plan is in effect although such a plan may not be in writing. The provisions of this statement cover such a situation and also refer to unfunded plans, insured plans, trust fund plans, defined-contribution plans and defined-benefit plans. 12. Different obligations are assumed by different employers. For example, some employers may take direct responsibility for meeting the benefits specified in retirement plans. In such a situation, any deficiency in funding of the plan is made up by the company. (This is also known as defined benefit plan). 13. Retirement benefits can be determined in either of two ways, namely:(a) as a function of years of service and earnings, (b) as a function of accumulated contributions. In the first case, retirement plan specifies certain benefits or entitlements. This is a benefit-based plan. In the second case, the contributions out of which benefits are purchased are specified. This is a cost-based plan or a defined contribution plan. In practice, a funded retirement benefit plan can be either a defined contribution plan or defined benefit plan each having its own characteristics. Under the defined contributions plan, the employer and often the employees make contributions to a fund or plan at intervals and in specified amounts. The fund or plan generates earnings that enhance its value.

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When needed, actuarial advice may be obtained if the fund is to provide expected future benefits based on present contributions and projected investments earnings. Usually, contributions that incorporate actuarial factors do not discharge employers from their obligations under the scheme. 14. When a pension scheme is introduced or an improvement is made on an old scheme, pension entitlements are often granted to employees who had been working before the new scheme or the improvement as though the new scheme or the improvement had been applicable from the commencement of their service or some other agreed period. Past service liability is, therefore, recognized and the funding thereof usually can be spread over a number of years. 15. Under a benefit-based scheme any subsequent increase in the pay of employees will include a proportionate increase in past service liability to reflect the under-funding. Thus, any current pay increase creates two liability components, i.e. past service liability and current pension cost. 16. Disbursement of pension benefits in Nigeria may rest with: (a) an employer who administers his own scheme; (b) a life insurance company; (c) an agent or trustee; (d) an industry-wide pension fund, or (e) a combination of (a) to (d). 17. 18. In order to quality as a pension/provident fund scheme, certain conditions stipulated by the Joint Tax Board must be met. Those schemes that qualify will gain tax advantages. Retirement plans may provide for a measure of vesting, in which case, there is the passing over of rights to an employee either to pension benefits or to withdrawal privileges as regards the contributions of the employer. The employee who remains with the employer until his retirement is usually not affected by vesting. Benefits to beneficiaries of a plan may fall into two categories: those to which rights are vested and those that are yet to vest within the accounting period. At the end of an accounting period, the liability for beneficiaries' benefits may include both. Thus, it is usually advisable to indicate which benefits are vested and which are yet to be vested so that workers as well as readers of financial statements may assess the ability of the plan to meet its obligations when workers withdraw from it or retire under the plan. The way in which funds are provided to cover pension entitlements is called funding or financing. The two main methods used can be distinguished as either: advance financing (sinking fund financing) system or pay-as-you-go system. Under the advance financing method, funds are provided for on a regular basis during the active working life of employees. Payments into the fund are usually based on actuarial calculations and may be in the form of a lump sum or regular contributions. An advance funding may be fully, under or over funded. Non-self-administered pension schemes are financed through the advance financing method and, therefore, are funded. Under pay-as-you-go system, the active working generation provides the funds for pensions of those who have retired. In practice, a funded retirement benefit plan can be either a defined contribution plan or defined benefit plan each having its own characteristics. Under the defined contribution plan the employer and often the employees make contributions to a fund or plan at intervals and in specified amounts. The fund or plan generates earnings that enhance its value. When needed, actuarial advice may be obtained if the fund is to provide expected future benefits based on present contributions and projected investment earnings. Usually, contributions that incorporate actuarial factors do not discharge employers from their obligations under the scheme. For employers that wish to have a funded scheme, the services of an insurance company may be engaged. Insurance companies provide a wide variety of contracts as far as contributory plans are concerned. All parties to a retirement benefit plan are interested in its level of funding and management. Beneficiaries are interested because they are directly affected by the level of funding whereas the employers are under moral and sometimes legal obligation to provide benefits to their retiring employees.

19.

20.

21.

22. 23.

24.

25.

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DETERMINATION OF RETIREMENT COST

26. Cost-based retirement schemes are relatively easy to compute since they are made up of past service and current costs arrived at on the basis of the formula contained in the scheme. The two costs combined give the retirement expense for the period. In the case of benefit-based schemes, many factors are considered in actuarial computations in arriving at the estimated retirement cost for the period. Some factors that are considered include mortality rate, salaries, inflation, trend of employment and the amounts of interest to be earned on the fund. Although the accountant may not be involved in actuarial computations, he is expected to be able to understand the actuarial assumptions made to assure himself that they are realistic, consistent and defensible. The costs that are arrived at will reflect benefits that will accrue to employees. Another aspect of benefit cost consideration is funding. Whilst accounting for retirement cost is concerned with the build-up of retirement benefits obligations during the working lives of employees, funding deals with provision of cash or other considerations for discharging such obligations. A distinction between accounting for and funding of retirement benefits is not always made in practice. In order to properly match costs with revenue generated, full retirement benefits costs are accrued and charged to operations in the periods they are generated. If there are past service costs associated with employees, such costs are usually allocated systematically and consistently to relevant accounting periods on the basis of employees' expected working lives. Where a retirement benefit scheme is amended and there is a past service cost associated with the amendment, such cost is also usually allocated systematically and consistently to relevant accounting periods as in paragraph 32. Often the introduction of a new retirement scheme results in a lump-sum benefit cost that is associated with past services of employees. Some companies take the view that such past service costs relate to past periods and, therefore, reflect such costs as an adjustment to retained earnings. Other companies take the view that past service costs still relate to the current workforce and, therefore, years subsequent to the introduction of the scheme bear the past service costs. If vested past service benefits are totally unaccounted for previously or only partially accounted for, such vested past service costs are often charged to operations and a liability recognized until funded. The liability is gradually liquidated with periodic funding in accordance with the provisions of the scheme.

27.

28.

29.

30.

31.

32.

ACTUARIAL COST METHODS

33. Many actuarial cost methods that are in sue were developed for funding purposes although some are also good for accounting purposes. The two broad categories of actuarial methods in use are: accrued benefit cost method and projected benefit cost method. i. Accrued benefit cost method - under this method, the amount assigned to the current year usually represents the present value of the increase in present employees' retirement benefits resulting from that year's services. This method incorporates increases in the benefits of the individual employee as he approaches his retirement age. In most plans, the retirement benefits may be related to salary levels which may increase from year to year. The aggregate retirement cost for the work-force increases with any increase in its average age. ii. Projected benefit cost method - under this method, the amount assigned to the current year usually represents the level of amount that will provide for the estimated projected retirement benefits over the service lives of either the individual employees or the employees' group. Costs computed under this method tend to vary year by year depending on the actuarial assumptions made. Some actuarial cost methods assign to subsequent years the cost arising at the adoption or amendment of a plan. Other methods assign a portion of the cost to years prior to the adoption or amendment of a plan and assign the remainder to subsequent years. At the adoption of a plan, the portion of cost assigned to prior years is known as past service cost; whilst the cost assigned to

34.

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35.

36.

37.

subsequent years is known as normal cost. For accounting purposes, past service costs are usually accrued and a liability is established. Such a liability is extinguished through funding. Often, a valuation is made at a later date after the adoption of a scheme in which additional cost may be assigned to the prior years. This cost is known as prior service cost which is accrued like past service cost as in paragraph 30. Past service costs or prior service costs may be fully funded, partially funded, or not at all funded, depending on the requirements of a scheme. It is usually more advantageous to fund past or prior service costs. For accounting purposes such costs are included in the accounts as part of current operating cost. Actuarial cost methods that are used are those that measure retirement benefit of employees systematically from year to year. Methods that result in huge differences between actual employees' annual remuneration and actuarial calculations are therefore avoided.

ACTUARIAL GAINS OR LOSSES

38. Actuarial gains or losses result from the divergence between actual remuneration of employees and that projected. Several factors can be responsible for the divergence among which are assumptions about: salary, turnover of employees, mortality rate, inflation and rate of return on investment earnable by the fund. In order to recognize the differences between estimated future events and actual, reviews are made periodically. These periodic reviews, usually between three years and five years, help to make actuarial assumptions more realistic. 39. The primary concern with respect to actuarial gains or losses is the time to recognize them in the accounts. In practice, three methods are in use: i. Immediate recognition in which gains are immediately taken as deductions from current or future retirement costs whilst losses are treated as additions; ii. Spreading in which the net gains or losses are applied to current and future costs either through the normal cost or through past service cost; and iii. Averaging in which case, an average is taken of net annual gains or losses developed from past occurrences but projected on future events, and applied to normal costs. 40. Unrealized appreciation and depreciation in the value of investments in retirement benefit funds are often considered as forms of actuarial gains or losses. In practice, they are not consistently treated as deductions or additions to current or future retirement benefit expenses. 41. Some employee retirement benefit plans make provision for employees to be eligible immediately they are employed; some other plans put restrictions on age or length of service before qualification; whilst the rest state different conditions that must be met by employees before they qualify. Coverage may be detailed or broadly outlined. Depending on the provisions of the retirement benefit plan, actuarial calculations may exclude employees on the basis of age, probability of retirement, disability or death. 42. If provisions are made for employees at the time of employment and actuarial assumptions turn out to be unduly favorable, over-funding occurs. In such a situation, employees' current retirement costs may be reduced by the over-funding; whilst any under-funded amount is added the current retirement cost. It is safer to include all potential beneficiaries of a retirement benefit scheme and to make provision for turnover, mortality, inflation and other factors if fluctuations in funding are to be minimized.

INSURED PLANS
43. Insured plans are always undertaken by insurance companies. Such insured plans funding arrangements are often used for accounting purposes also. Like the other methods already discussed, certain elements of pension cost account for the difference between the amount paid to an insurance company and that charged to the accounts during the period. Defined benefit plans maintain a set of accounts ordinarily associated with business enterprises. Asset, liability and revenue accounts are often maintained and general purpose financial statements are prepared and forwarded to employers and beneficiaries alike. For very large organizations operating trust and pension departments, statement of source and application of funds may be included.

44.

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ASSETS
45. The assets of a defined benefit plan will include: i. contributions receivable (due from employers, employees); ii. investments of the plan (these include equity or debt securities and real estate); iii. cash and other monetary assets; iv. other operating assets. Assets of defined benefit plans are usually measured at market value (net realizable value) or cost whichever is lower, unless there had been a subsequent revaluation. The lowest value is used because it provides beneficiaries and employers reliable information for evaluating the plan's ability to meet its obligations under the scheme. Some plans invest in insurance policies in order to meet members' benefits. Such policies are valued at their current net realizable values by actuarially-determined assessment of the amount recoverable from the policies.

46.

47.

LIABILITIES
48. Liabilities of a defined benefit plan will include: i. accounts payable or creditors, ii. borrowings, iii. liability for members' vested benefits and iv. current pensioners' benefits. Accounts payable and borrowings are easy to determine and, therefore, do not create measurement problems. However, liability for members' benefits could create measurement problems. In the measurement of liability for members' benefits, all benefits due to all beneficiaries of the plan resulting from their past and present services are expected to be taken into consideration. The liability so determined reflects the fact that future sacrifices of economic benefits by the reporting entity are expected to be made to meet the needs of the fund. This sacrifice is in the form of transfer of assets (cash and marketable securities) in order to fund the plan. The liability of a defined benefit plan in respect of benefits payable is calculated on the basis of the present value of expected future payments which arise from membership of the plan up to the reporting date or balance sheet date. Actuarial assumptions are usually the basis for such calculations. At the balance sheet date, liability for members' benefits will include benefits which have vested to members and those that have not. Although vesting is a legal matter, for accounting purposes all future benefits are to be accrued. In order to help readers of financial statements to understand the financial position of a fund, it is advisable to disclose the vested and non-vested amounts separately.

49.

50.

51.

REVENUES
52. Revenues of the defined benefit plan will include: i. investment revenue ii. contributions revenue iii. other items of revenue Investment revenues may include interest and dividends, property rentals and profits from sale of investments. Contributions from members, employers and others constitute the contributions revenue. Other revenue items will include insurance policy payments and short-term gains on investments or foreign currency conversions. All these items of revenue are reported in the Income and Expenditure Account of the Fund.

EXPENSES
53. Expenses of a defined benefit plan will include: i. general administration expenses, ii. contributions paid or payable,

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iii. investment-related expenses, iv. benefit-related expenses. All these expenses are usually incurred in maintaining the fund and in transferring benefits to the beneficiaries. They encompass current expenses and those accrued for the purpose of showing benefits due to members in the future.

CHANGE IN ACCOUNTING METHOD

54. Where an enterprise changes from one acceptable method to the other, such a change is often disclosed in the Notes to the Accounts. If the change is from an old acceptable method to an unknown method, a change in accounting policy may have occurred in which case SAS 1 Disclosure of Accounting Policies will apply.

DISCLOSURE
55. Most enterprises in Nigeria do not disclose any information about the existence or non-existence of retirement or pension plans for their employees. The few that make any disclosures do so in the Notes to the Accounts. Users of financial statements would be better informed, if disclosures are made in the Notes to the Accounts of: (a) the existence of retirement or pension plans specifying the categories of employees that are covered by the plan or plans; (b) the company's accounting and funding policies; (c) provision made for pension cost in the year; (d) the actuarial gains or losses in the year, if any, and how treated; and (e) whether separate accounts are prepared for the scheme.

PART 4 - ACCOUNTING STANDARD

EMPLOYEE RETIREMENT BENEFITS

The Accounting Standard comprises paragraph 56-76 of this Statement. The Standard should be read in the context of all other parts of this Statement and the Preface to the Statements of Accounting Standards published by the NASB. 56. This Statement covers employee retirement schemes or provident pension plans in which there are formal or implied contracts between employers and employees specifying benefits or specific amounts due to employees upon the attainment of a retirement age or due to disability, early leaving or death. Furthermore, the provisions of this Statement cover unfunded plans, insured and uninsured plans, trust fund plans, defined contribution plans and defined benefit plans. A reporting enterprise should state its accounting policy with respect to funding of employee retirement benefits and this should be in compliance with the provisions of SAS 1 - Disclosure of Accounting Policies. In determining the costs of benefit-based plans or schemes: (a) calculations should be made such that full retirement benefits are accrued to cover the active working lives of employees with reporting employer, (b) the basis for the calculations in (a) above should be consistently applied, (c) the assumptions on which the calculations are based should be realistic and reviewed regularly. When a pension or retirement scheme is introduced or an improvement is made on an old scheme, retirement entitlements due to employees may be computed as though the new scheme or the improvement had been applicable from the commencement of their services. If there are past service costs associated with employees, such costs should be deferred and charged to current and future operations over a period not more than five years in a systematic and consistent manner. Funds for retirement or pension entitlements should be provided under the advance financing system.

57.

58.

59.

60.

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Pay-as-you-go system and unfunded scheme are unacceptable because they fail to anticipate and provide in advance the entitlement of employees upon their retirement, withdrawal or death. 61. A funded retirement benefit scheme or plan should be either a defined contribution plan or a defined benefit plan with the characteristics of each properly documented and understood by the employees and employers. A funded retirement benefit scheme or plan may be self-administered or administered by a third party. 62. In order to match costs properly with revenues generated, full retirement benefit costs should be accrued and charged to operations in the periods to which they relate. 63. Where vested past service benefits are unaccounted or only partially accounted for, such vested service costs should be charged to current operations with a corresponding liability recognized. The liability should be reduced b y related periodic funding payments until extinguished. 64. Since all actuarial cost methods cannot be used as a basis for accounting entries for retirement benefit costs, proper evaluation must be made of the method used by an enterprise. Actuarial cost methods that should be used for the dual purposes should be those that measure retirement benefits of employees systematically from year to year. 65. Any adjustment in accrued benefit cot calculations brought about by actuarial revaluations should be included in the retirement benefit costs of the current period or spread over a period not exceeding 5 years. 66. Where past service costs have been paid or reflected in the accounts in excess of the amounts charged to operations, the unabsorbed debit should be written off immediately to the income statement of the reporting entity. In the event of plan termination, any unfulfilled obligation should be charged to income unless taken over by another plan.

TRUSTEES ACCOUNTS
67. Under the defined benefit plans, assets, liabilities and revenue accounts should be maintained. General purpose financial statements such as income and expenditure account, balance sheet and statement of source and application of funds should be prepared and forwarded to the employers and the employees or their trustees, at least once a year. 68. Assets of defined benefits plans should be measured at the market value or cost, whichever is lower, unless a current actuarial valuation is available. 69. Where a plan invests in insurance policies in order to meet members' benefits, such policies should be valued at their current net realizable values which are actuarially determined. 70. In the measurement of liability for members' benefits, all benefits due to all beneficiaries either related to past or current services should be taken into consideration. Such a liability created should be funded by transfer of funds to the plan or scheme within a period not exceeding 5 years. 71. The liability of a defined benefit plan in respect of benefits payable should be calculated on the basis of the present value of expected future payments that arise from membership up to the reporting or balance sheet date. Relevant actuarial assumptions should be the basis for such calculations. 72. At the balance sheet date, liability for members' benefits should include benefits which are vested. For accounting purposes, all future benefits should be provided for and funded. 73. Revenues of a defined benefit plan should include, investment income, property rentals, profits from sale of investments, contributions from members and employers, insurance policy payments, shortterm gains on investments including foreign currency gains and losses and all other income. All these items should be reported in the revenue accounts of the fund. 74. Expenses of a defined benefit plan should include general administrative expenses, premiums paid or payable, investment-related expenses, benefit-related expenses and others accrued with a view to reflecting benefits due to members in the future. All these expenses should be shown in the appropriate section of the revenue accounts of the fund. 75. For defined benefit plans, separate financial statements should be prepared in accordance with relevant statement of accounting standard and sent to the employers and employees or their trustees at least once a year.

DISCLOSURES
76. Every enterprise should disclose in the notes to the accounts the following information:

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(a) (b) (c)

the existence of a retirement provident or pension plan and the categories of employees covered, the accounting, actuarial and funding methods used, and changes thereto, where a defined contribution or benefit plan exists; and the provisions made for retirement, provident or pension costs for the year.

PART 5 - NOTES ON LEGAL REQUIREMENTS 77. The requirements of this Standard are complementary to the requirements of the Companies and Allied Matters Decree of 1990 and other relevant Laws and Regulations.

PART 6 - COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARDS NOS. 19 AND 26

78. The requirements of this Standard accord substantially with the requirements of International Accounting Standards Nos.19 and 26 respectively.

EFFECTIVE DATE
79. This Standard becomes operative for financial statements covering periods beginning on or after 1st January 1991.

SAS 9 Statement of Accounting Standard - Accounting for Depreciation

Issued By The Nigerian Accounting Standards Board August 1989 PART 1 - INTRODUCTION 1. Property, plant and equipment, generally referred to as fixed assets, are those tangible resources of an enterprise which are employed in its operations. Each item of fixed asset usually has a limited useful economic life during which it can be profitably used in the operations of the enterprise. Depreciation is the method of charging the cost of these fixed assets to operations. When the use of such an item of fixed assets is no longer of economic benefit to the enterprise, the item is usually retired or disposed of. 2. The purpose of this Statement is to provide a guide for uniform and acceptable methods of determining and reporting depreciation on items of property, plant and equipment whether such items are stated at their historical costs or re-valued amounts. 3. The statement does not deal with depreciation on the following assets : (a) regenerative natural resources such as forests, standing timber, cattle, etc. (b) non-regenerative resources such as mineral deposits, oil and gas deposits etc. (c) real estate development by property companies. (d) goodwill and other intangible assets such as trademarks, patents, etc.

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PART 2 - DEFINITIONS 4. The following terms are used in this statement with the meanings specified. (a) Depreciation represent an estimate of the portion of the historical cost or re-valued amount of a fixed asset chargeable to operations during an accounting period. In determining depreciation, cognizance is usually taken of the wear and tear of an asset resulting from use, effluxion of time or obsolescence dictated by changes in technology and market force. (b) Depreciable Assets are items of property, plant and equipment with the following characteristics: i. have lived of over one year; ii. are acquired primarily for use in production of goods or services for an enterprise; iii. have limited useful economic life; iv. are not intended for sale in the ordinary course of business. (c) An Investment Property is an investment in land or buildings held primarily for generating income or capital appreciation and not occupied substantially for use in the operations of the enterprise. (d) Depreciable Value refers to that part of the Net Book Value of a depreciable asset that an enterprise can allocate to future operations through depreciation. (e) Estimated Useful Life Of An Asset is the shorter of: i. the pre-determined physical life; and ii. the useful economic life during which it could be profitably employed in the operations of the enterprise. (f) Residual Value of A Depreciable Asset is the estimated net amount recoverable from its disposal after its expected useful economic life. (g) Revaluation of Depreciable Asset is the process by which a new value is determined for a depreciable asset having regards to its state, the prevailing economic and market conditions at the time of the revaluation.

PART 3 - EXPLANATORY NOTES 5. Depreciation is the systematic and periodic allocation of the historical cost or re-valued amount less estimated residual value of a depreciable assets over its estimated useful life. 6. There are some common misconceptions about depreciation. It sometimes wrongly believed that depreciation: (a) is a valuation process attempting to the value or worth of a depreciable asset; (b) may not be provided on an asset that is appreciating in value e.g. building, and, (c) is intended to provide enterprises with funds with which to replace their assets 7. Depreciation is not a valuation process because it is not the means by which a value or worth is assigned to an asset. Also depreciation does not necessarily by itself provide an enterprise with funds for the replacement of its depreciable assets. Because depreciation represents an estimate of that portion of the historical cost or re-valued amount of a fixed asset chargeable to operations irrespective of any appreciation in the value of the asset that may have occurred during the accounting period. 8. Some factors which are usually taken into consideration when estimating the useful economic life of a depreciable asset are : (a) expected physical wear and tear due to usage; (b) obsolescence due to changes in technology , production requirements or consumer taste; and (c) legal or other restrictions placed on the assets, for example, by a lessor or government. 9. Freehold land, having an indefinite life, is usually not depreciable.

Method of Calculating Depreciation

10. The method which is chosen for calculating depreciation on a depreciable asset may be based on the

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usage or contribution contemplated or on the passage of time. Usually, the nature of the asset determines the appropriate method to be used. Methods based on Passage of Time 11. Some depreciation method based on passage of time are: (a) Straight - Line (b) Decreasing Charge i. Sum-of-the-year-digit; ii Reducing Balance (c) Annuity and sinking fund. 12. Under the straight-line method, the depreciable value of an asset is allocated equally to operations over the relevant years on the basis of the estimated useful economic life of the assets. 13. The Sum-of-the-year-digit and the Reducing Balance Methods allocate the highest depreciation in the first few years that an asset is in use declining as the asset becomes older. 14. The Sum-of-the-year-digit Method provides for decreasing charges to operations through the application of fractions determined by adding the sum - of - the - years - Digits of the assets useful life in a reverse order. 15. The Reducing-Balance Methods applies a constant depreciation rate to a declining net asset book value. 16. Annuity and Sinking Fund Methods regard each item of property, plan and equipment as an investment that is expected to generate cash in flows and make a rate of return equal to or greater than the internal rate of return of the reporting enterprise. Under each method, depreciation is equal to the excess of the cash in flow for the period over the return on the book value using the internal rate of return. These two methods are rarely used in practice.

Methods Based on the level of usage or output

17. Some depreciation methods based on the level of usage or output are : (a) Service - Hour; and (b) Productive output 18. Under the service-hour method, the life span of the depreciable asset is determined by the total numbers of hours it can be used in producing goods and services. The depreciable amount of the asset is divided by the estimated total service hours to obtain an hourly depreciation rate which is then applied to the total hours of use during the period. 19. Under the productive output method, the life span of the depreciable asset is estimated in terms of the total number of units it could produce. The depreciable amount of the asset is divided by the estimated total number of units to obtain a unit depreciation rate which when applied to the total output for the period gives the depreciation expenses for the period.

Group or Composite Depreciation

20. In some cases, similar assets are collected and grouped as though they were a single asset and a single depreciation rate is then determined using any of the above methods considered appropriate. This approach is adopted by organisations that have small but highly valuable variety of items such as tools and dies.

Retirement or Disposal of an item of Property, Plan or Equipment

21. When an enterprise decides to retire or dispose of an item of Property, Plant and Equipment, usually fractional depreciation calculated up to date of retirement or disposal is charged to the Profit and Loss Account. All related accounting balances are eliminated from the Property, Plant and Equipment and Accumulated Depreciation Accounts.

Depreciation on Re-valued Items Of Property, Plant or Equipment

22. When at item of property, plant and equipment is re-valued, the previously determined depreciation

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rate or an appropriately adjusted rate is usually applied to the new value in determining the current depreciation rate. 23. The depreciation charge based on the new value of an item of property, plant and equipment is sometimes allocated between historical cost of the item and the surplus arising on the revaluation of the item and charged to income and the revaluation surplus account respectively. This practice, however, is generally considered unacceptable.

Depreciation of Investment Property

24. Whilst property, plant and equipment are purchased by an enterprise for use in producing goods and services, investments in properties are sometimes made for rental income and capital appreciation by non - property dealing enterprises. 25. Items of property pose some problems for non-property dealing enterprises. Some argue that properties should not be depreciated since they are held for income and capital appreciation; rather, they should be re-valued yearly to reflect their current market values. The difference between the value at the beginning and the end may be treated as unrealized profit or loss and taken to Capital Reserve Account or to the Profit and Lass Account, respectively. 26. Some enterprise takes the initial revaluation surplus directly to Owners equity. Any subsequent gains or losses are taken also directly to Owners Equity except losses whose effects more than wipe out the previous gains. Such losses are taken to the profit and loss account. 27. Other enterprise take the initial revaluation surplus on an item to a special Revaluation Account. Any subsequent gains are taken directly to the account; whilst losses are taken to the Profit and Loss Account only if related to a previous decrease which had been put through the profit and loss account. 28. There are those who argue that there should be no difference in the treatment of investment in properties and properties held for us in producing goods and services. They are of the view that all should be subject to depreciation since they are maintained in the books because of their income generating potentials. 29. This statement takes the view that the intention behind the holding of item of property determines its classification and whether or not depreciation may be taken on it or not. 30. A property qualifies to be treated as an investment property and it is decided to be accounted for as such, the property is usually removed from its group of depreciable assets. The related accumulated depreciation charged, to the extent that it is no longer required, is taken to the profit and loss account. Any related revaluation surplus is usually transferred to capital reserve and not to income or retained earnings.

Changes in Depreciation Rate

32. A change in depreciation rate may be made by an enterprise due to new information about the actual life of such an asset. Such a change is usually considered as a change in an accounting estimates. Accordingly, no restatement of the depreciation charges in the prior periods is required. A Change from One Depreciation Method to Another 33. A change from one depreciation method to another may be necessitated by the desire to show better the true and fair view of the affairs of an enterprise. Such a change is usually considered a change in an accounting policy.

Disclosure
34. Enterprise in Nigeria generally disclose the following : (a) the accounting policies with respect to depreciation; (b) the aggregate amount charged by categories of depreciable assets; (c) the amount charged as depreciation in the period; (d) methods used in computing depreciation for the period; (e) the aggregate accumulated depreciation by major categories of depreciable assets.

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PART 4 - ACCOUNTING STANDARDS

ACCOUNTING FOR DEPRECIATION

The Accounting Standards comprises paragraphs 35 - 46 of this statement. The Standard should be read in the context of all other parts of this statement and of the Preface to the Statement of Accounting Standards published by the NASB. 35. The depreciable value of an item of property, plant or equipment should be either the historical cost or the re-valued amount computed in accordance with SAS 3 and the Standards. 36. The useful economic life over which the allocation of the depreciable value takes place should be determined after due consideration of : (a) expected physical wear and tear due to usage; (b) obsolescence due to changes in technology, production requirements or consumer taste; and (c) legal or other restrictions placed on the asset, for example, by a lessor or government. 37. Several methods for calculating depreciation are available. The method that is selected by an enterprise should reflect the character of the asset, its intended use and the practice in the industry in which the enterprise operates. The only methods that currently meet these requirements are the straight-line and Reducing Balance. 38. Where a group of asset are depreciated as though it were a single asset, efforts should be made to ensure that the applicable rate is representative, consistently applied and constantly reviewed to reflect internal changes in the group. 39. When an item of property, plant and equipment is re-valued, the previously determined depreciation rate or an appropriately adjusted rate should be applied to the new value to determine the current depreciation charge. 40. The depreciation charge so determined in paragraph 39 should be charged entirely to income and should not be charged partly to income and partly against revaluation surplus on the basis of a pro rata allocation between the historical cost of the item and the surplus which arose on its revaluation. 41. A piece of property qualifies to be treated as an investment property if it is not occupied substantially for use in the operations of an enterprise for the purpose of this statement, an occupation of more than 15% of the property should be considered substantial. 42. When on revaluation there is an increase over the original cost in the carrying amount of a depreciable asset or an investment property, an enterprise should take the increase to Capital Reserve as a revaluation surplus. Provided that the surplus had not been earlier reversed or utilised, and subsequent decrease on a revaluation of the same asset should be charged against the revaluation surplus. In case where the decrease is more than the previous increase, the difference should be charged to income. An increase on revaluation which is directly related to previous decrease in carrying amount of the same asset that was charged to income, either through the charging of depreciation or arising from a revaluation should be credited to income to the extent that it offsets the previously recorded decrease. 43. When a piece of property is reclassified as an investment property and it is decided to be accounted for as such, the property should be removed from its group of depreciable assets. The accumulated depreciation on it, to the extend that it is no longer required, should be taken to the profit and loss account. Any related revaluation surplus should not be transferred to income or retained earnings but should be transferred to Capital Reserve. 44. A change from one depreciation method to another should be considered a change in an accounting policy and should be treated in accordance with the provisions of SAS 1 , Disclosure of Accounting Policies, and SAS 6, Extraordinary items and Prior Year Adjustments.

Disclosure
45. A reporting enterprise should state its accounting policy with respect to depreciation. 46. In addition to the disclosure requirements of SAS 2, Information to be disclosed in Financial Statements, and SAS 3, Accounting for Property, Plant and Equipment, the following disclosures are to be made in the Notes To The Accounts : (a) The amount charged as depreciation during the period; (b) the effect of any change in depreciation rate on the operating results of the period;

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(c) the method or methods used in computing depreciation in the period; (d) the accumulated depreciation for each category or group of assets held by an enterprise; and (e) the book value and the amount that would otherwise have been charged by way of depreciation on any item of property, plant or equipment reclassified during the accounting period as an investment property.

PART 5 - LEGAL REQUIREMENTS 47. Requirement of this standards are complementary to any disclosure requirements of the Companies and Allied Matters Decree, 1990 and related Regulations.

PART 6 - COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARDS NOS. 4 AND 25. 48. The requirements of the Standards accord substantially with the requirements of International Accounting Standards No. 4 - Depreciation Accounting and the relevant parts of IAS 25 - Accounting for Investments.

Effective Date
49. The Standard becomes operative for financial Statements covering periods beginning on or after January 1, 1990.

SAS 10 Statement of Accounting Standard - Accounting by Banks and Non-Bank Financial Institutions Part 1
Issued by the Nigerian Accounting Standards Board October, 1990

PART 1- INTRODUCTION 1. In recent times, national attention has focused on the banking industry and the accounting practices followed by banks due to the: (a) importance of the sector in the industrial and commercial development of the economy; (b) inconsistent accounting policies and reporting practices which make comparison of performance difficult; (c) allegedly overstated profits reported by banks; (d) survival problems of "troubled" banks; (e) probable "shakeout" that may be ahead as a result of increased competition in the industry; and (f) resulting need to sustain public confidence in the banking sector. This Statement seeks to provide a guide for accounting policies and accounting methods that should be followed by banks in the preparation of their financial statements. Improved accounting and

2.

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3.

4. 5.

reporting practices are important in ensuring reliable financial statements that are comparable across the industry. This Statement (Part 1) focuses on three main areas of concern relating to accounting practices followed by banks, namely: (a) Income recognition; (b) Loss recognition, and (c) Balance Sheet Classification. For the purposes of this Statement, the term "bank" is used as defined by the Banking Act 1969, as amended, which applies to merchant and commercial banks. This Statement, (Part 1) does not cover all aspects of banking activities nor the activities of financial institutions not covered by the Banking Act 1969, as amended. Part 2 will cover other aspects of banking activities and will be extended to cover non-bank financial institutions.

PART 2 6.

DEFINITIONS The following terms are used in this Statement with the meanings specified below: (a) Credit Risks include the loss contingencies attaching to all forms of credit which a bank may enter into, e.g. loans, overdrafts, leases guarantees, acceptances and other similar items. (b) Risk Assets are funded credit risks. (c) Reported Credit represents the aggregate amount of credit reported under loans and advances, leases and other risk assets. (d) Syndicated Loans are agreements between two or more lending institutions to provide a borrower with credit facility utilizing common loan documentation. (e) Loan Losses include bad debts written off, provisions made against losses arising on a bank's credit risks, losses on loans and advances considered doubtful of collection and all other loss contingencies attaching to a bank's credit risks. The provisions may be general or specific. (f) Loan Loss Expense is the amount charged to income in the current period in respect of loan losses. (g) Specific Loan Loss Provisions are amounts provided for in respect of specific loans and advances considered to be doubtful of recovery. (h) General Loan Loss Provisions are amounts provided against the as yet unidentified losses which are known to exist in any portfolio and, which relate to the balance of loans and advances which have not been the subject of a specific loan loss provision. (i) Leases are contractual agreements between an owner (the lessor) and another party (the lessee) which convey to the lessee the right to use the lessor's property for an agreed period of time in return for a consideration, usually periodic payments called rentals. (j) Operating Leases are those in which the lessor, while giving the lessee the use of the leased property, retains practically all the risks, obligations and rewards of ownership (e.g. early obsolesence or appreciation). (k) Finance Or Capital Leases are those in which ownership risks and rewards are substantially transferred to the lessee, who is obliged to pay such costs as insurance, maintenance and similar charges on the property. Usually the agreement is noncancellable and the lessee has the option to buy the property for a nominal amount upon the expiration of the lease term. (l) Non-performing Loans are those that are for a period of time not performing in accordance with the terms of the credit facility and are unable to meet principal and/or interest repayment obligations in full, and thus may be doubtful of collection. (m) Loan Rescheduling include restructuring, refinancing or new arrangements for the payment of interest and liquidation of principal, with customers whose loan accounts had earlier been judged to be non-performing. Situations where additional credit facilities are granted to an existing non-performing loan and new payment terms agreed also constitute loan rescheduling.

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(n)

(o)

(p) (q)

(r)

Credit-related Fee Incomes are fee incomes resulting from services that constitute an integral part of a credit facility. These include all fees charged in connection with arranging a credit facility, such as loan arrangement fees, legal costs, syndication fees and commitment fees, exclusive of interest charges. A credit related service should always be interpreted to constitute an integral part of a credit facility if a customer does not have a choice but to utilize for the service, the bank providing the credit. Non-credit Related Fee Incomes include all other fees and commissions charged for banking services in which the bank retains no credit risk and include commission on turnover, corporate finance fees, financial advisory fees, commissions on letters of credit and foreign exchange dealings etc. Such fees can be contingent on the occurrence of a future event, e.g. underwriting commissions, or are earned in stages in accordance with a contract or on completion of a service. Fixed Facilities are facilities repayable in accordance with defined repayment terms and include term loans, installment credits and leases. Revolving Facilities are facilities with no periodic or stage repayment terms but with specific upper limits, for example overdrafts and other revolving credits that are renewable periodically. Off-Balance Sheet Engagements include letters of credit, bonds, guarantees, indemnities, acceptances, trade related contingencies such as documentary credits etc.

PART 3 7.

EXPLANATORY NOTES

8.

9.

Banks represent a significant and influential sector of the economy and play a major role in maintaining confidence in the monetary system. There is therefore considerable and widespread interest in their management and performance. The quality of their financial statements will help to foster public confidence in the banks as well as in evaluating their performance. Following the recent deregulation of the banking industry in Nigeria, many new banks were licensed and bank financial statements have attracted national attention because of the diversity in profitability often attributed to differences in recognizing and recording of financial transactions and their presentation in financial statements. There is a need to ensure that banks' financial statements are uniformly presented and that their contents are reliable, factual and comparable so as to assist the users in evaluating banks' performance. Uniform presentation will also assist regulatory agencies to properly classify banks and to better regulate their operations.

ACCOUNTING POLICIES
10. 11. Accounting policies provide well articulated bases for the preparation of financial statements of which they form an integral part. most banks, however, do not disclose all their accounting policies under one caption and on a separate page and still present some as part of the notes to individual items in the financial statements. The accounting policies most commonly disclosed but only in general terms, include: (i) determination of provision for loan losses; (ii) accrual of interest on non-performing and doubtful loans; (iii) translation and conversion of foreign currencies; (iv) valuation of investments; (v) deferred taxes; and (vi) depreciation of fixed assets and leased properties. At present, most banks do not present accounting policies, in specific terms, with respect to: (i) off balance sheet engagements which give rise to contingencies and commitments; (ii) specific and general loan provisions; (iii) uncollectible debts; and (iv) income recognition, especially of interest on non-performing and doubtful loans.

12.

13.

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INCOME RECOGNITION
14. Banks generally derive revenues from interest income on loans and advances, commissions on turnover, transfer fees, arrangement fees, syndication fees, commitment fees, lease rentals, income from the sale of commercial paper, foreign exchange, bankers acceptances and discounts of bills. Banks also charge for rendering other financial and trust services to their customers. Banks generally recognize their revenues when they are earned or realized. However, many banks recognize credit-related fee income which is significant in relation to interest earned, when the credit facilities are granted rather than deferring such income recognition over the life of the related credit risk as adjustment of the yield on the credit. Some banks take account of the size of the credit-related fee when negotiating the interest rate on the related facility thereby front ending income which would otherwise be recognized over the tenor of the credit risk. This is not regarded as good practice. In case of loans and advances, income is usually earned over the period of the outstanding credit at contracted yield, in proportion to the outstanding balance, to the extent that collectibility is not in doubt. The timing of classification of loans and advances as non-performing, so as to put the related interest income in suspense, is a controversial issue. Whilst some banks take such interest income on non-performing loans into their interest suspense account, others take it into interest income thereby overstating profits.

15.

16.

17.

LOSS RECOGNITION
18. In the ordinary course of business, banks normally suffer some losses on loans, advances and, other credits as a result of their becoming partly or wholly uncollectible. Such losses are usually recorded in the periods they are first recognized. 19. Banks usually make specific provisions for loan losses that have been identified as non-performing. In addition to specific provisions, some banks also make general provisions for loan losses. 20. It is the responsibility of bank management to assess its credit portfolio and make provisions for nonperforming and doubtful credit risks. It is comparatively easy to identify fixed facilities which are non-performing but revolving facilities are more complex. Normally the first indication that a revolving facility may be non-performing is where the turnover on the account is considerably less than anticipated or when interest is charged which takes the balance above the credit limit. 21. The standard of credit analysis and the detailed credit documentation available on customers' files vary widely in the industry. Further, loan losses are generally not assessed regularly and the criteria for the assessment are not usually clearly defined and consistently applied from period to period. This inadequacy of credit documentation, analysis and assessment of loan losses is not regarded as good practice.

BALANCE SHEET CLASSIFICATION

22. There are a number of practices followed by banks in classifying balance sheet items which result in favorable asset and liability presentations and sometimes border on "window dressing". Usually the objectives of such practices are to:
(a) (b) (c) These are not regarded as good practices. reduce reported credit; reduce reported deposits; and enhance reported liquidity .

23. There is diversity in the treatment of uncleared inter-branch and inter-bank items. Some banks treat them under other assets, liabilities or even cash; others treat them as cheques for collection.

TRANSFERS OF REPORTED CREDIT

24. Banks may borrow money and pledge their risk assets as collateral and may sell them with or without recourse. 25. In the case of sale of risk assets, the risks and rewards of title are passed on to the buyer. Where the sale is made without recourse, the principal is usually removed from reported credit, a profit or loss is recognized on disposal at the date the asset is sold and no off balance sheet risk contingency is recorded.

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26. Practice varies where the sale is made with recourse to the seller, meaning that the reward of the risk asset is transferred to the buyer but the credit risk is retained. The selling bank may treat the transaction as a secured borrowing, recording the proceeds from the transfer as a liability. Alternatively, the transfer may be accounted for as a sale, whereby the principal is removed from reported credit, and, usually included amongst off balance sheet risk contingency. The profit on sale is usually amortized over the period of the related credit risk in proportion to the outstanding principal. Losses thereon are usually recognized as soon as they can be estimated. Determination of the appropriate accounting method would normally be influenced by the substance of the transfer and the extent to which the underlying credit risk is retained or transferred by the transferor. 27. Transfer of a risk asset sometimes attracts different accounting treatment in the financial statements of the parties involved. For example, a swap of placements of equal tenor and maturity may be presented by one bank as a secured borrowing, whilst the other bank may treat the same item as a sale thereby improving its liquidity and reducing its reported credit.

LEASES
28. Most banks in Nigeria account for all leases as operating leases despite the fact that most of such leases are finance leases. Under this practice, the leased assets are recorded as fixed assets in the balance sheet and depreciated over the lease term using either the sum-of-digits or the straight line method. This is not regarded as good practice. 29. Following the balance sheet treatment described in paragraph 28, the related lease rental income is recognized when due on a straight line basis over the lease term. This pattern of income recognition taken together with the depreciation method has the undesirable consequence of not recognizing lease finance income in a manner which provides a constant yield on the lessor's net investment in the lease. 30. Most banks follow the lease accounting method outlined in paragraphs 28 and 29 because of their concern that they may not be able to claim capital allowances on the leased assets if they are not shown as fixed assets on the balance sheet.

FINANCIAL STATEMENTS PRESENTATION

31. Banks normally prepare financial statements which provide information about their liquidity, solvency and risks that may attach to their assets, liabilities and off balance sheet engagements. 32. Typical financial statements generally include: - Statement of Accounting Policies - Balance Sheet - Income Statement or Profit and Loss Account - Statement of Source and Application of Funds - Notes on the Accounts - Five year Financial Summary - Statement of Value Added 33. Typically, each principal revenue source in the financial statements is stated separately to enable users assess the performance of that particular source of revenue. Similarly, each principal item of expense is stated separately in the financial statements. 34. Assets and liabilities are generally grouped according to their nature and listed in order of their liquidity. Assets are usually listed from the most liquid in the form of cash and short-term funds to the most illiquid in the form of fixed assets. Liabilities are similarly listed. 35. It is not desirable to offset an asset or liability by deduction of another asset or liability unless a legal right of set-off exists. Such offsetting reduces the usefulness of the balance sheet and is not regarded as good practice.

OFF BALANCE SHEET ENGAGEMENTS

36. Banks also enter into transactions that are not currently recognized as assets or liabilities in the balance sheet but which nonetheless give rise to credit risks, contingencies and commitments. Such transactions include letters of credit, bonds, guarantees, indemnities, acceptances, trade related

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37.

contingencies such as documentary credits, etc. These types of transactions are referred to as "Off Balance Sheet Engagements". It is good practice for banks to disclose the nature and amount of contingencies and commitments arising from different classes of off balance sheet engagements.

PART 4 ACCOUNTING STANDARD Statement of Accounting Standard 10 comprises paragraphs 38-72. The Standard should be read in the context of paragraphs 1-37 of this Statement, and of the Preface to the Statements of Accounting Standards, SAS 2 and other relevant Standards published by the Nigerian Accounting Standards Board.

ACCOUNTING POLICIES
38. 39. A bank should articulate and disclose as an integral part of its financial statements all the significant accounting policies adopted in the preparation of its financial statements. The accounting policies should be prominently disclosed under one caption rather than as notes to individual items in the financial statements.

INCOME RECOGNITION
40 On straight forward loans, overdrafts and other risk assets, interest income should be recognized so as to record a constant yield on the outstanding principal over the life of the credit at the interest rate applicable to the facility. 41. For discount products, on which interest is often settled upfront or in arrears, the discount should be amortized over the life of the product so as to give a constant yield on the outstanding principal. 42. Credit-related fee income, where material and its collectibility not in doubt, should be deferred and amortized over the life of the related credit in proportion to the outstanding credit risk. Credit related fee income should be regarded as material in all situations where in aggregate, they constitute at least 10% of the projected average annual yield over the life of the facility to which they relate. Related direct expenses should be deducted from the fees before deferral. Specific examples include: (a) Loan arrangement fees, including legal fees and other upfront fees, should be deferred and amortized over the life of the loan as an adjustment of yield. Where direct loan arrangement costs are significant, they should be deducted from the related fees before deferral. (b) In cases where a loan is syndicated, the lead bank should recognize loan syndication fees when the syndication is complete except to the extent that a proportion of the loan is retained. Where the yield on the portion of the loan retained by the syndicator is less than the average yield to the other syndication participants after considering any fees passed through by the syndicator, the syndicator should defer a portion of the syndication fees to produce a yield on the portion of the loan retained that is not less than the average yield on the loans held by the other participants. (c) Commitment fees should be deferred and, if the commitment is exercised, amortized over the life of the loan as an adjustment of yield or, if the commitment expires unexercised, recognized in income upon expiration of the commitment. Exceptions would be: (i) if the bank's experience with similar arrangements indicates that the likelihood that the commitment will be exercised is remote, the commitment fee should be recognized on a straight line basis over the life of the facility, or (ii) if the commitment fee is determined retrospectively as a percentage of the unused facility in a previous period, the fee should be recognized in income on the determination date. 43. In situations where credit-related fee income is not material as defined in paragraph 42 above, the fees may be recognized at once provided all associated costs are expensed in the same period. 44. Non-credit related fee income should be recognized as earned. Fees earned over a long period of time or in stages, (and which are not contingent upon the occurrence of a future event), should be

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recognized when the related service is performed, or on the completion of contracted stages. Fees relating to a transaction in which some portion of related credit risk is retained, should be treated as in paragraph 42 above. 45. Lease rental income should be recognized in a systematic manner so as to record a constant yield on the lessor's net investment in the lease over its term. If the lease contains an interest rate variation clause the yield should be adjusted in the appropriate period. 46. Profits or losses arising on sale of loans or discounts without recourse to the seller should be recognized by the seller when the transaction is completed. 47. Profits arising on sale of loans or discounts with recourse to the seller should be amortized by the seller over the remaining life. Losses should be recognized as soon as they can be reasonably estimated.

LOSS RECOGNITION
48. Banks should make provision for all losses as soon as they can be reasonably estimated. Losses can arise on any asset considered doubtful of being realized in full and can include loan loss provisions, provisions against diminution in the value of other assets and other loss contingencies.

Loan Loss
49. Banks should make provisions for loan loss after a thorough and systematic review of all its credit risks, including loans and advances, leases and off-balance sheet engagements. The precise time at which a provision should be made against a credit risk is a matter of judgement, especially in the case of revolving facilities such as overdrafts. Each bank should develop a formal procedure for identifying non-performing facilities and evaluating loan losses and a systematic method of making provisions for loan losses. Each bank should consider other indications that a loss may arise on a credit risk, since for example, a loan may be doubtful of recovery even if it is performing in accordance with its terms. Paragraphs 51 to 55 set out rules which should be followed in determining provisions for loan losses.

50.

Fixed Facilities
51. Indications that a fixed facility is non-performing include a situation in which interest and/or principal repayments are in arrears of the facility terms. In that case: (a) Interest overdue by more than 90 days (or such shorter period as may be specified by regulatory authorities) should be suspended and recognized on a cash basis. (b) Principal repayments which are overdue by more than 120 days (or such shorter period as may be specified by regulatory authorities) should be fully provisioned and recoveries recognized on cash basis. (c) When individual principal repayments are subject to provision, banks should make provision against the outstanding principal repayments not yet due as follows:

No. of days for which principal Minimum percentage provision is overdue required for principal not due 180 days 50% 360 days 100% Where regulatory authorities stipulate shorter periods or higher percentages than indicated above, such shorter periods or higher percentages should be followed. (d) Where the facility is secured by a perfected fixed legal charge over, or by title to, tangible property, the principal provisioning could cease once the outstanding principal is less than a specified proportion of the estimated net realizable value of the security as follows: (i) Where the principal repayment is overdue by more than one year, the outstanding unprovided principal should not exceed 50% of the estimated net realizable value of the security. (ii) Where the principal repayment is overdue by more than two years, there should be no

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(e)

outstanding unprovided portion of the credit facility irrespective of the estimated net realizable value of security held. (iii) In both (i) and (ii) above, where regulatory authorities stipulate shorter periods or lower percentages, such shorter periods or lower percentages should be followed. Where a facility is secured by a floating charge or by an unperfected or equitable charge over tangible property, it should be treated as an unsecured credit and no account taken of any security held in determining the provision for loan loss.

Revolving and Overdraft Facilities

52. Normally the first indication that a revolving or overdraft facility may be non-performing is when the turnover on the account is considerably lower than anticipated when the facility was arranged or when interest is charged which takes the facility above its credit limit. In these circumstances: (a) A revolving facility should be classified as non-performing and unpaid interest suspended once 90 days (or such shorter period as may be specified by regulatory authorities) elapses after the facility limit is exceeded. (b) Where credit limits are not exceeded, each bank should have a systematic method for the identification of non-performing revolving credits. Once classified as non-performing, all unpaid interest on the facility should be suspended. (c) Once a facility is classified as non-performing, provision against principal and unpaid interest should be made in accordance with a systematic method to reduce the outstanding principal to the estimated net realizable value of any security held (following the criteria in paragraphs 51(d) and (e) above) over a specified period. 53. In the case of revolving and overdraft facilities, where a loan rescheduling is agreed with a customer, the rescheduling should be treated as a new facility but provisioning should continue until it is clear that the rescheduling is working. Interest previously suspended and, provisions against principal previously made, should be recognized on cash basis.

Facilities Performing in Arrears

54. In many cases, short term cash flow difficulties result in a customer temporarily falling behind its facility terms. In these cases, provision should be made in accordance with the principles set out in paragraphs 51 and 52 above. Once the facility begins to perform, interest previously suspended and provisions against principal previously made should be recognized on cash basis.

General Provisioning
55. Banks should make general loan loss provisions of at least 1% of risk assets not specifically provided for, in addition to specific provisions, to provide against the as yet unidentified losses which are known to exist in any portfolio using a systematic method which should be consistently followed from period to period.

Investments in Securities
56. Long term investments in marketable securities should be stated at the lower of cost and net realizable value. Market value should be disclosed. Short term investments in marketable securities should be stated at net realizable value. Original cost should be disclosed. Investments in securities for which there is no active market should be stated at the lower of cost and net realizable value.

BALANCE SHEET CLASSIFICATION

Leases 57. Banks should record the net investment in finance leases granted to customers as "advances under

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finance leases". Incomplete Transactions 58. All transactions should be reported as having been completed unless the expense and delay associated with the analysis and proper classification of such items are out of proportion to the materiality of the reported balance. The following items are often included in other assets and liabilities but where material and identifiable, should be treated as set out below: (a) Interest receivable, from customers, where not debited to customers should be included in reported credit. (b) Interest received in advance, from customers where already debited to customers but not yet earned, should be deducted from report credit. (c) Cheques in the course of collection which clear subsequently, should be shown as a component of the balance with the CBN and also either in deposit liabilities, or deducted from reported credit, as appropriate. (d) Cheques in the course of collection which are subsequently dishonored should be reversed. (e) Cashier's cheques and other demand notes payable should be deducted from cash with CBN, unless the demand note payable evidences a deposit, in which case it should be included in deposit liabilities. (f) Notes payable with fixed maturates should be included in deposit liabilities unless the maturity is over one year from the balance sheet date in which case the repayment terms should be disclosed. (g) Cash collateral against advances should be separately disclosed. (h) Matured funds or deposits awaiting remittance should be reported as a component of deposit liabilities. (i) Suspended interest should be deducted from outstanding credit as a component of the loan loss provision.

Disposals of Reported Credit

59. A transfer of reported credit without recourse to the seller should be accounted for by the seller as a disposal and the risk asset excluded from the balance sheet. A transfer of reported credit, with recourse to the seller, that purports to be a sale must satisfy the following conditions: (a) Control over the economic benefits of the asset sold must be passed to the buyer. (b) The seller can reasonably estimate its obligations under the recourse provisions. (c) There must not be any repurchase obligations or options involved, except as stipulated by the recourse provisions. If the above conditions are satisfied and a transfer of reported credit with recourse to the seller is accounted for as a sale, the contingency resulting from the recourse should be disclosed. If the above conditions are not met the transfer should be recorded as a borrowing.

60.

DISCLOSURE
In addition to the disclosure requirements of SAS 2, Information to be Disclosed in Financial Statements, banks should also disclose the following:

Accounting Policies
61. The statement of significant accounting policies should include: (a) a brief description of the systematic method by which non-performing loans are identified and the method by which the provision for loan losses are determined. This should include an outline of the periods over which non-performing loans are provided for and the bases upon which recoveries against provisions previously made and interest previously suspended are released to income. (b) the nature of off-balance sheet engagements and the methods used to recognize income thereon.

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Income Statement
62. Each principal revenue item should be stated separately in a bank's financial statements to enable the user assess the contribution of that particular source of revenue. 63. The disclosure in the income statement and the notes to the financial statements should include, but are not limited to, the following income and expense captions: Income Interest and discount income Lease finance income Fees for services rendered Foreign exchange income Commission income Income from investments Expenses Interest expense Loan loss expense, showing separately any release of provisions previously made Commissions paid Foreign exchange losses General and administrative expenses Diminution in asset values A bank should disclose the following items in its financial statements: (i) interest income split between bank and non-bank sources; (ii) interest expense split between bank and non-bank sources; (iii) credit-related fee income and expenses where such fees and expenses are treated as in paragraph 43. 64. A bank should not offset one item of revenue or expense by deducting from it another item of revenue or expense.

Balance Sheet
65. A bank should group its assets and liabilities in the balance sheet according to their nature and list them in order of their liquidity and maturity. The disclosures in the balance sheet and the notes to the financial statements should include but are not limited to the following assets and liabilities: Assets Cash and short-term funds Due from other banks Bills discounted Investments Loans and advances Advances under finance leases Other assets Fixed assets

Liabilities Deposits and current accounts Due to other banks Taxation payable Dividend payable Other liabilities Long term loans Shareholders funds 66. Banks should provide in their financial statements a maturity profile of their risk assets and deposit liabilities into the following categories: Under - 1 month

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1 - 3 months 3 - 6 months 6 - 12 months Over - 12 months The above maturity profile should be based on the expected normal repayment periods of the assets and liabilities. 67. The amount of provision for loan losses, segregated between principal and interest, should be disclosed and deducted from the relevant asset category. Provision for losses of off balance sheet engagements should be shown separately as a component of other liabilities. An analysis of the movement in the various categories of loan loss provision should be disclosed. 68. One item of asset or liability should not be offset by deducting another asset or liability unless a legal right of set-off exists.

Loans and Advances

69. A bank should disclose an analysis of loans and advances between performing and nonperforming loans.

Off Balance Sheet Engagements and Contingencies

70. A bank should disclose the nature and amount of contingencies and commitments arising from the off balance sheet engagements it has undertaken and analyze between the different classes of contingencies. Off balance sheet engagements should not form part of balance sheet totals and their disclosure in note form should distinguish between: (a) direct credit substitutes, such as guarantees, acceptances and standby letters of credit serving as guarantees; (b) transaction-related contingencies, such as bid bonds, performance guarantees and standby letters of credit related to particular transactions; (c) short term self liquidating trade-related contingencies resulting from the movement of goods, and (d) other contingencies.

Other Assets and Liabilities

71. In the Notes on the Accounts, a bank should disclose the major items that make up its "Other Assets" and "Other Liabilities".

Relation to Other Statements of Accounting Standards

72. This Statement supplements the requirements set out in other Statements of Accounting Standards. It has been framed on the basis that other Statements of Accounting Standards apply to the financial statements of banks unless where banks are specifically exempted from the scope of a Standard.

PART 5

73.

NOTE ON LEGAL REQUIREMENT

The requirements of this Standard are complementary to the requirements of the Banking Act of 1969, as amended, Companies and Allied Matters Decree of 1990, as amended, and other relevant laws and regulations.

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PART 6

74. COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARD NO.30

The requirements of this Standard accord substantially with the requirements of International Accounting Standard No.30 - Disclosures in the Financial Statements of Banks and Similar Financial Institutions. Effective date 75. This Standard becomes operative for financial statements covering periods ending on or after 31 December, 1990.

SAS 11 Statement of Accounting Standard - on Leases

Issued by the Nigerian Accounting Standards Board March 1991

PART 1 1.

INTRODUC TI ON

Leasing has in recent times in Nigeria become an attractive means of financing the acquisition and use of fixed assets such as land, buildings, plant and equipment. The attraction of leasing is heightened by the very high cost of fixed assets, the scarcity of foreign exchange to pay for imports, and the relative ease of access to credit facilities for leasing. 2. At present, financial statements published in Nigeria contain little or no information on lease transactions, some of which involve huge annual financial commitments. There is the need, therefore, to consider appropriate treatment and disclosure of lease transaction in the books of both the lessor and the leasee. 3. This Statement does not cover: (a) lease agreements pertaining to exploration for or exploitation of, natural resources such as oil, gas, minerals and timber; (b) licensing agreements relating to intellectual properties such as motion pictures, video recordings, plays, manuscripts, patents and copyrights; and (c) leases in favour of contractor financing the development of landed property. 4. The primary objectives of this Statement are: (a) to ensure that published financial statements contain sufficient information about lease transactions to make it possible for users of such statements to determine the effects of lease commitments on the present and future operations of the reporting enterprises; (b) to ensure uniform disclosure of terms and classes of leases in financial statements.

PART 2 DEFINITIONS 5. The following terms are used in this Statement with the meanings specified: i. A lease is a contractual agreement between an owner (the lessor) and another party (the lessee) which conveys to the lessee the right to use the leased asset for an agreed period of time

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in return for a consideration, usually periodic payments called rents. ii. Operating Lease is one in which the lessor, while giving the lessee the use of the leased property, retains practically all the risks, obligations and rewards of ownership (e.g. early obsolescence and appreciation). iii. Finance or Capital Lease is one in which ownership risks and rewards are transferred to the lessee, who is obligated to pay such costs as insurance, maintenance and similar charges on the property. Usually, the agreement is non-cancelable and the lessee has the option to buy the property for a nominal amount upon the expiration of the lease. Other variants of Finance or Capital Leases are: (a) Leveraged Lease is a three-party lease involving a lender (often a financial institution) in addition to the usual lessor and lessee. The lender supplies, in most cases, the greater part of the purchase price of the leased asset. (b) Sales-Type Lease is one where the offerer or dealer (the lessor) transfers substantially all the ownership risks and benefits of the property to the lessee and, at the inception of the lease, the fair value of the leased property is greater or less than its carrying amount in the books of the lessor resulting in a profit or loss to the lessor who is often a manufacturer or dealer. (c) Direct Finance Lease is one which transfers substantially all the ownership risks and benefits of the property to the lessee and at the inception of the lease, the fair value of leased asset is the same as its carrying amount to the lessor (often not a manufacturer or dealer). iv. Sale and Leaseback is one in which the seller of the property leases it back from the buyer. v. Bargain Purchase Option is a provision in the lease agreement granting the lessee the option to purchase the leased property for a nominal sum considered lower than the likely prevailing fair value of the property at the time the option is exercisable. Given the attractiveness of the option, it is reasonably certain that it will be exercised by the lessee. vi. Fair Value is the amount that can be realized upon the sale of the property in a free market and in an arm's length transactions between knowledgeable parties. vii. Inception of the Lease is the date both parties agree and make definite commitments to the principal lease agreement. viii. Initial Direct Lease Costs are those costs incurred by the lessor which are directly attributable to a particular lease agreement. They include commissions, legal fees, documentation costs and stamp duty. ix. Minimum Lease Payments are the payments over the lease term that the lessee is required to make or can make: (a) From the viewpoint of the lessee, minimum lease payments will normally include any full or partial guarantee by the lessee or his related party of a residual value of the leased asset at the expiry date. The amount of the guarantee is the minimum amount that could, in any event, become payable. Where the lessee has an option to acquire the equipment at the end of the lease, the option payment, if the option is likely to be exercised, is part of the minimum lease payments. (b) From the viewpoint of the lessor, minimum lease payments will normally include any residual value guaranteed by the lessee or by a third part, unrelated to the lessor, who is financially capable of discharging the obligations under the guarantee. x. Residual Value of a Lease is the estimated fair value of the leased asset at the end of the lease term. xi. Useful Life of an asset is the shorter of (a) the pre-determined physical life and (b) the economic life during which it could be profitably employed in the operations of the enterprise. xii. Unguaranteed Residual Value is the portion of the residual value of the leased asset that is not guaranteed by the lessee or guaranteed only by a third party related to the lessor. xiii. Credit Provider for Leased Asset is the third party in a leveraged lease who substantially finances the acquisition of the leased property. xiv. Lessor's Investment in a Leveraged Lease is the lessor's contribution to the acquisition cost of the leased asset plus initial direct cost less rental received. xv. Lease Term is the duration of the lease which may vary from a few months to the entire expected

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economic life of the asset. xvi. Non-cancelable Lease is one that is not easily terminated by the lessee except under one or more of the following conditions, where: (a) There is an occurrence of some remote contingency, (b) The lessor agrees to cancel, (c) The lessee replaces the existing lease with another one with the same lessor, (d) The lessee pays a penalty which was meant to deter cancellation. xvii. Contingent Rentals are increases or decreases in lease payments made by the lessee as a result of changes occurring after the inception of the lease. xviii. Premium on Land and Building Transaction refers to the excess of the obligations of a lease over the combined fair value of both land and building in a lease transaction. xix. Gross Investment in the Lease is the aggregate of minimum lease payment under a finance lease from the point of view of the lessor and any unguaranteed residual value accruing to the lessor. xx. Unearned Finance Income is the difference between the gross investment in the lease and the fair value of the leased assets at the inception of the lease. xxi. Net Investment in the lease is the difference between the gross investment in the lease and the balance of the unearned finance income. xxii. Rate of Interest Implicit in the Lease is the discount rate that causes the present value at the beginning of the lease term of the minimum lease payments and any unguaranteed residual value accruing to the lessor to be equal to the fair value of the leased asset at the inception of the lease.

PART 3 EXPLANATORY NOTES

PROVISIONS OF A LEASE AGREEMENT

6. Lease agreements cover a variety of assets both moveable and immovable, tangible and intangible. The provisions agreed by the lessor and the lessee are situation specific but most often include: i. Duration or lease tenor; ii. Rental payments which are periodic cash outlays. These may be made in fixed or variable amounts, increasing or decreasing as the case may be. Such payments may also be predetermined as a function of the usage of the assets. They are set at a level that enables the lessor to recover the initial investment plus a fair return on the investment over the asset's economic life; iii. Restrictions which may be the prohibition of further acquisition of debt or the use of the asset for certain operations. iv. Imposition of obligations in certain areas such as obligations for taxes, insurance and maintenance. These obligations may be imposed on the lessor or lessee or shared. v. A default clause always spells out what constitutes a default, the rights of the lessor and the penalties imposed under such a condition. For instance, the lessor may demand all past and future payments of rent in case of a default or he may have the right to sell and collect any shortfall between the sale price and the amount due. vi. Termination provisions which often prohibit cancellation of a lease agreement. Where cancellation is allowed, the conditions for effecting it and the penalties for such action are included. vii. Options which are available to the lessee where the lease runs its full course. Examples are: (a) No option where the lessor takes back his asset with no choice to the lessee, (b) Bargain renewal option where the lessee has the choice to renew the lease at lower than usual rental, and (c) Bargain purchase option where the lessee is given the choice to acquire the asset for a nominal sum.

Hire Purchase
7. Lenders are sometimes willing to lend to high risk businesses or individuals only on the basis of longterm direct reduction loans. Direct reduction loans require the borrower to repay the principal and the interest in uniform installments throughout the life of the loan. Thus, the principal borrowed is

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constantly decreased during the financing period. Hire purchase is an example of a direct reduction loan, often associated with high risk. 8. Under the hire purchase plan, the economic ownership is vested in the purchaser from the moment the agreement for hire purchase is entered into. The inclusion of the asset in the books of the purchaser is thus appropriate. The obligations arising from the hire purchase agreement are recognized under liabilities. 9. With hire purchase, the vendor retains the legal ownership of the asset sold until the entire cost of the asset is paid up. The asset, however, is no longer recorded as a part of the assets of the vendor. 10. Assets usually traded under hire purchase are motor vehicles and home appliances. A wider range of assets is traded under other types of leasing, for example, commercial vehicles, computers, generating sets, photocopiers, printing machines, forklifts, earth-moving equipment and aircraft.

Classification of Leases
11. Leases are classified as either finance leases or operating leases as defined in paragraph 5 above. 12. Ownership of property entails risks and benefits. Some of the risks include: losses due to poor performance, obsolescence, idle capacity, losses in residual value and un-insured damage. Some of the benefits include the use of the asset as collateral, freedom to use the asset as one desires and appreciation in value. 13. The main criterion for the classification of a lease as either a finance lease or an operating lease is whether the risks and benefits associated with a lease have been transferred substantially to the lessee or retained by the lessor. 14. A lease is said to qualify as a finance lease if the following conditions are met: (a) the lease is non-cancelable, and (b) any of the following is applicable; i. lease term covers substantially (80% or more) the useful life of the asset, or the net present value of the lease at its inception, using minimum lease payments and the implicit interest rate, is equal to or greater than the fair value of the leased asset, or ii. the lease has a purchase option, which is likely to be exercised. 15. Any other lease that does not qualify as a finance lease is usually treated as an operating lease.

Sub-Leases
16. Sometimes a lease agreement permits the lessee to sublease to a third party who becomes a sub-leasee. The original lessee, for the purpose of the new lease, becomes the lessor. All or some of the obligations and the rights under the original lease are transferred to the new lessee. 17. The accounting treatment of a sublease is not different from that accorded a normal or original lease because there is a lessor and a lessee, respectively. The original lessee treats all the transaction pertaining to a sublease as a lessor while the sub-lessee treats them as a lessee accordingly. The initial lessee continues to account for the original lease as a lessee.

Leases Involving Land and Buildings

18. Leases involving real estate require certain classification and accounting treatment by the lessees. The land, and buildings or equipment if a part of a lease agreement, can be classified as either a finance lease or an operating lease. In Nigeria, the ownership of all land is vested in the State by virtue of the Land Use Act of 1978. Leases involving land in Nigeria are operating leases.

Capital Allowances on Qualifying Assets under Lease

19. Only the lessor can claim capital allowances under leases in accordance with current tax legislation (CITA 1979 as amended) except in the case of hire purchase transactions where the hirer (the lessee) can claim capital allowance to the exclusion of the lessor.

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Accounting for Finance Leases By the Lessee

20. Under the finance lease, the lessee treats the lease transactions as if an asset was being purchased. That is very much like a financing transaction in which an asset is acquired and an obligation created. 21. The usual legal form of a lease agreement is such that the lessee does not acquire legal title to the leased asset. However, in the case of finance lease, the substance and financial reality are that the lessee acquires the economic benefits from the use of the leased asset for the major part of its useful life. Thus, the capitalization of finance leases in the accounts of the lessee is justified by consideration of substance over form. 22. Proponents of lease capitalization argue that, by recognizing leases that are in essence purchase of assets as such, the true economic resources and obligations of an enterprise are reflected in the accounts. Leaving them out usually results in understatement of assets employed and obligations incurred by an enterprise in generating revenues. 23. Opponents of capitalization argue that since the assets are not legally owned by the lessee, they should not be included among the assets of the lessee. Besides, proper disclosure of lease transactions in the notes to the accounts will provide the same information to users of financial statements. 24. The two alternative methods of accounting for finance leases by lessees are: (a) record the leases as acquisition of assets and incurrence of liabilities; or (b) account for each lease payment as an expense of the period in which it is incurred. 25. In accounting for finance lease under the first method (24a), the lessee records an asset and a liability at an amount equal to the present value of the minimum lease payments during the term of the lease. 26. Where, however, the lessee is committed to guaranteeing all the residual value of the leased asset, the lessee records an initial asset and liability equal to the fair value of the leased asset at the inception of the lease. 27. In the event that the residual value is only partially guaranteed by the lessee or where no residual value is specified in the lease agreement, the lessee's interest in the leased asset is diminished by the amount of any unguaranteed residual value expected to accrue to the lessor at the end of the lease term. Thus, the initial amount recorded by the lessee as at the beginning of the lease term, would be the fair value of the asset at the inception of the lease minus the present value of the estimated unguaranteed residual value, if any, expected to accrue to the lessor at the end of the lease term. 28. In order to determine the discounted present value of leased assets and liabilities, two interest rates can be used. (a) interest rate implicit in the lease; or (b) lessee's incremental borrowing rate. 29. The interest rate implicit in the lease is the discount rate that causes the present value at the beginning of the lease term of the minimum lease payments and any unguaranteed residual value accruing to the lessor to be equal to the fair value of the leased asset at the inception of the lease. In practice, some form of approximation is sometimes used to simplify the calculations, e.g., sum of the years digit. 30. Lessee's incremental borrowing rate of interest is a substitute rate applicable to borrowed funds obtainable under similar security and for the same term by the lessee. 31. Each lease payment made by the lessee comprises two elements: i. interest expense, and ii. an amount that reduces the lease obligation. The outstanding lease liability multiplied by the interest rate gives the interest expense. 32. Where the lease agreement contains a provision for the transfer of the asset to the lessee, or contains a bargain purchase option, the leased asset is often amortized in a manner consistent with the lessee's normal depreciation policy. 33. If the lease does not provide for the transfer of ownership of the asset to the lessee, or does not contain a bargain purchase option, the leased asset is amortized over the term of the lease or the useful life of the asset, whichever is shorter.

Accounting for Operating Leases By the Lessees

34. With an operating lease, the lessee assigns rent to the periods benefiting from the use of the asset and ignores, in the accounts, any commitments to make future payments. Appropriate accruals are usually made if the accounting period ends between cash payment dates.

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Accounting for Finance Leases by the Lessor

35. In recognition of the financing aspect of the investment in a finance lease, the lessor usually records a lease payment receivable rather than a fixed asset that is owned.

Direct Finance Leases

36. In a direct finance lease, the lease contract usually establishes the lessor's right to receive a series of payments from the lessee in return for providing the right to use the asset. The lessor recognizes, at the beginning of the lease term, the total minimum lease payments receivable plus any unguaranteed residual value expected to accrue to the lessor. 37. Unearned interest income in a finance lease is the difference between the lease rental receivable and the fair value of the leased asset at the inception of the lease. This amount is amortized systematically over the lease term. 38. The lessor's investment in the lease is represented by the lease rental receivable less the balance of unearned income and any provisions for items such as bad and doubtful debt. 39. The periodic minimum lease payment that is usually received is made up of two components: i. interest income earned, and ii. an amount that reduces the lease rental receivable. The opening balance of lessor's investment multiplied by the interest rate gives the interest income earned for the period.

Accounting for Operating Leases by the Lessor

40. If the lessor classifies a lease as an operating lease, it means that he has retained the risks and benefits of ownership and, therefore, accounts for the leased property as a fixed asset. 41. The lease payment that he receives periodically are accounted for as lease rental income. 42. Initial direct costs incurred in respect of operating leases are usually written off in the periods incurred.

Sale and Leaseback Transactions

43. Under a sale and leaseback transaction, the owner of property (seller or lessee) sells the asset to another person and simultaneously leases it back from the new owner. The use of the asset is usually uninterrupted. 44. In a sale and leaseback transaction, the asset may be sold at a price equal to or greater than current market value. It is then leased back for a term approximating the useful life of the asset and for payments that are sufficient to cover the new owner's investment plus a reasonable return thereon. 45. A sale and leaseback lease can be either classified as an operating lease or a finance lease depending on whether the lease meets the criterion specified in paragraphs 14 and 15. 46. If the lease qualifies as a finance lease, the excess of sales proceeds over the carrying amount is usually deferred by the seller-lessee and amortized over the term of the lease or the useful life of the asset, whichever is shorter. 47. If the lease qualifies as an operating lease, the income generated by the seller-lessee is usually deferred and amortized in proportion to the rental payments over the period of time the asset is expected to be used by the lessee. 48. Where the market value is less than the net book value of the asset on a sale and leaseback date, the loss is usually recognized immediately.

Sales - Type Leases

49. The primary difference between a direct finance lease and a sales-type lease is the manufacturer's or dealer's profit (loss) resulting from the sale to the lessee. This is usually a means of promoting the sale of the manufacturer's products. 50. In order to account for sales-type lease, the following are needed: i. gross investment in lease or lease payments receivable with residual value being zero, ii. unearned interest income, iii. sales price of the assets, and iv. the cost or carrying value of the asset sold.

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51. Each datum can be explained as follows: (a) The lessor's gross investment in a lease is the undiscounted total returns the lessor expects to receive from the leased asset. (b) The unearned interest income is the difference between the gross investment in the lease and the present value of the minimum lease payment. (c) The sales price of the leased asset is the market value at the inception of the lease. 52. Sales-type leases usually contain two profit elements: (a) the initial profit or loss on the transaction at the inception of the lease; and (b) the interest income to be earned over the lease term. 53. In view of the fact that this transaction is recognized by the lessor as sale, the cost or carrying amount of the asset is removed from the books. The profit or loss resulting from the transaction is usually recognized. 54. The treatment of lease payments receivable and unearned interest income follows the pattern for direct finance leases set out in paragraphs 36-37.

OTHER RELATED ACCOUNTING MATTERS

Initial Direct Costs

55. In an attempt to negotiate and execute a lease agreement, a lessor may incur initial direct costs. Where such costs are specifically identified with a lease, their treatment will be dictated by the type of lease. 56. The initial direct cost may be written off immediately or allocated against the income over the lease term. 57. Under the sales-type lease, the initial cost may be charged to cost of sales as a part of the sales promotion cost of the asset sold. There is usually no reason to amortize it over the life of the lease contract.

Reappraisal of Unguaranteed Residual Value

58. Due to uncertainties associated with the estimation of residual values, it is usually advisable to have them reassessed periodically so as to confirm that they are reasonable and in line with the initial estimate. If a periodic reassessment reveals a value that is not in conformity with initial estimate, a write-down or increase in the lessor's investment may be made.

Contingent Rentals
59. Contingent rentals are increases or decreases in the minimum rental payments due to changes in some factors occurring after the inception of the lease such as: (a) changes in hours of use of a leased asset, (b) legislation, (c) increase (decrease) in interest rate, and (d) volume of sales. Since these factors are not predictable or measurable at the inception of the lease, they do not usually form a part of the minimum lease payments. They account for the variations between the predetermined and the actual rental payments. 60. Due to the uncertainties associated with contingent rentals, they are usually written off by the lessee in the period in which they are incurred and taken to income by the lessor when earned.

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PART 4 ACCOUNTING STANDARD

ACCOUNTING FOR LEASES

The Accounting Standard comprises paragraphs 61-89 of this Statement. The Standard should be read in the context of paragraphs 1-60 of this Statement and of the Preface to the Statements of Accounting Standards published by the Nigerian Accounting Standards Board.

GENERAL
61. A reporting enterprise should state, in the appropriate section of its financial statements, its accounting policy with respect to leases. 62. A reporting enterprise should, at the inception of a lease, classify it as either a finance lease or an operating lease. 63. A lease qualifies as a finance lease if the following conditions are met: (a) lease is non-cancelable, and (b) any of the following is applicable: i. the lease term covers substantially (80% or more) the estimated useful life of the asset or, ii. the net present value of the lease at its inception using the minimum lease payments and the implicit interest rate is equal to or greater than the fair value of the leased asset or, iii. the lease has a purchase option which is likely to be exercised. 64. A lease that does not qualify as a finance lease as specified in paragraph 63 should be treated as an operating lease.

ACCOUNTING FOR LEASES IN THE FINANCIAL STATEMENTS OF LESSEES:-

Finance Leases
65. The reporting enterprise should account for a finance lease by recording the lease as an acquisition of an asset and the incurrence of a liability. 66. Where lease right is capitalized by the lessee as above, the following should be determined: i. the initial value of the leased asset and the corresponding liability. ii. the amortization rate or amount; and iii. the amount by which the lease liability is to be reduced. 67. At the beginning of the lease term, the lessee should record the initial asset and liability at amounts equal to the fair value of the leased asset less the present value of an unguaranteed or partially guaranteed residual value which would accrue to the lessor at the end of the term of the lease. The discount factor to apply in calculating the present value of the unguaranteed residual value accruing to the lessor is the interest rate implicit in the lease. 68. Where the lessee cannot determine the fair value of the leased asset at the inception of the lease or is unable to make a reasonable estimate of the residual value of the lease without which the interest rate implicit in the lease could not be computed, the initial asset and liability should be recorded at amounts equal to the present value of the minimum lease payments using the lessee's incremental borrowing rate as the discounting factor. 69. The leased asset should be depreciated or the rights under the leased asset should be amortized in a manner consistent with the depreciation policy on the lessee's own assets. 70. The minimum lease payment in respect of each accounting period should be allocated between finance charge and the reduction of the outstanding lease liability. The finance charge should be determined by applying the rate implicit in the lease to the outstanding liability at the beginning of the period. The "sum of the years digit" may be used as an approximation. 71. Contingent rentals should be written off in the period in which they are incurred.

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Operating Leases
72. The rental expense should be charged into the income account on a systematic basis in line with the time pattern of the user's benefit, not on the basis of the rental payments made by the user.

ACCOUNTING FOR LEASES IN THE FINANCIAL STATEMENTS OF LESSORS

Finance Leases
73. An asset under a finance lease should be recorded in the financial statements of the lessor, not as property, plant and equipment, but as an investment in a lease. 74. At the inception of the lease the lessor should recognize in the accounts simultaneously: (a) gross investment in the lease; and (b) unearned finance income from the lease. 75. The unearned finance income should be deferred and allocated to income of the lessor over the lease term based on a pattern reflecting a constant periodic rate of return on the lessor's net investment outstanding. 76. Contingent rentals should be recognized in the accounts of the period to which they relate. 77. Initial direct costs that are identifiable with direct financing leases should be taken to the income statement in the period in which the costs were incurred. 78. In sales types leases the manufacturer or dealer-lessor should take to the income statement the difference between the fair value of the asset at the inception of the lease and its carrying amount. 79. Investment in leases should be reviewed periodically for recoverability in the same manner as other receivable, but having regard to the security, if any, held by the lessor, e.g., recourse to the leased asset. 80. Where a reappraisal is made of the residual value of the asset and this shows a dimunition, the resulting loss should be charged to the income statement. Gross investment in the lease should similarly be written down.

Operating Leases
81. Where the lessor classifies a lease agreement as an operating lease, it should be accounted for by the lessor as an item of property, plant and equipment. Accordingly, the periodic rentals that are receivable should be treated as rental income. 82. The depreciation of a leased asset by the lessor should be on the basis of the lessor's normal depreciation policy for that class of assets leased out. 83. The initial direct costs associated with the operating lease should be charged as incurred to the income statement.

Accounting for Sale and Leaseback Transactions

84. Where in a sale and leaseback transaction an asset is sold at a price equal to or greater than the current market value and it is leased back for a term approximating the useful life of the asset and for payments that are sufficient to cover the new owner's investment plus a reasonable return thereon, the transaction should be classified as a finance lease by the seller-lessee. 85. If a sale and leaseback qualifies as a finance lease, the profit generated by the seller-lessee should be deferred and amortized systematically over the useful life of the asset. 86. Where a sale and leaseback qualifies as an operating lease, that is, when it does not meet the conditions

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of a finance lease, the profit generated by the seller-lessee should be deferred and amortized in proportion to the rental payments over the term of the lease. 87. Where the market value of the asset is less than the carrying amount on the date of the sale and leaseback transaction, the difference should be charged immediately to the income statement of the seller-lessee. Similarly, costs associated with the transaction, e.g., legal and professional fees, should be charged to the income statement.

Disclosures in Financial Statement of Lessees

88. In addition to the disclosure requirements of SAS 2 - INFORMATION TO BE DISCLOSED IN FINANCIAL STATEMENTS and SAS 3 - ACCOUNTING FOR PROPERTY PLANT AND EQUIPMENT, the following disclosures should be made:i. the amount and the major classes of assets being leased at the balance sheet date. Liabilities related to these leased assets should be separately disclosed from other liabilities and at the same time differentiating between current and long-term portions of the liabilities. ii. commitments for minimum lease payments with a term in excess of one year, in summary, stating the amount and the yearly future payments due. iii. any significant financing restrictions, renewal or purchase options, contingent rentals and other contingencies arising from leases.

Disclosures in Financial Statements of Lessors

The following disclosures should be made in the financial statements of the lessor: 89. i. the gross investment in leases classified as finance leases, the related deferred income and the unguaranteed residual values of the leased assets should be disclosed at the balance sheet date, ii. the net investment in leases should be broken into current and non-current portions. iii. the basis or bases used to allocate income, iv. for assets under operating lease, the amount of assets under each category and the accumulated depreciation at the balance sheet date.

PART 5

NOTES ON LEGAL REQUIREMENTS

90. The requirements of this Standard are complementary to any disclosure requirements of the Companies and Allied Matters Decree 1990 and other relevant laws and regulations.

PART 6 - COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARD NO.17 91. The requirements of this Standard accord substantially with the requirements of the International Accounting Standard No.117 - Accounting for Leases.

Effective Date
92. This Standard becomes operative for Financial Statements covering periods beginning on or after 1st January 1992.

Transitional Provisions for Finance Leases

93. Whilst lessees and lessors are encouraged to apply the full provisions of the Standard, leases contracted before the effective date may continue to be accounted for as in the past in financial statements for periods ending not later than 31st December, 1994.

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SAS 12 Statement of Accounting Standard - on Accounting for Deferred Taxes

Issued by the Nigerian Accounting Standards Board February, 1992.

PART 1 INTRODUCTION 1. Profits and other gains of business organizations are sometimes recognized in one accounting period but brought into taxation in another period. In this situation, there is need to consider deferred taxes and how to account for them properly in the financial statements of the related periods. 2. This Statement deals with accounting for deferred taxes on income and other gains in the financial statements arising from differences in the timing of income recognition and assessment. It relates primarily to the deferred tax aspects of companies income tax, capital gains tax and petroleum profits tax in Nigeria. 3. The primary objective of the Statement is to provide a guide for uniform and acceptable methods and bases used in: (a) Providing for deferred taxes; (b) Computation of deferred taxes; and (c) Presentation in the financial statements. 4. This Statement does not cover royalties, excise duties and sales taxes. These are indirect taxes charged and payable on production or sales and as such are usually not subject to timing differences with respect to accounting and tax treatments except to the extent that a portion of what is produced remains unsold at the end of the accounting period. Such differences are easily accounted for through appropriate adjustment.

PART 2 DEFINITIONS 5. The following terms are used in this Statement with the meanings specified: i. Deferred Tax is the tax attributable to timing differences. ii. Timing Differences are differences between the taxable income and accounting income which arise because the periods in which some items of revenue and expense are included in taxable income differ from the periods in which they are included in accounting income. Such differences originate in one period and reverse in one or more subsequent periods. iii. Permanent Differences are differences between taxable income and accounting income for a period that do not reverse in subsequent periods. iv. Tax Expense or Tax Saving is the amount of tax charged against or credited to the income of the period. v. Accounting Income/Loss is the aggregate income or loss for the period as reported in the income statement, including unusual and extraordinary items but before deducting related income tax expense or adding related income tax saving. vi. Taxable Income (Tax Loss) is the amount of income or loss for a period, determined according to the rules prescribed by the relevant tax authority.

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PART 3 6.

EXPLANATORY NOTES

7.

Generally, the amount of tax payable in any particular period does not bear a direct relationship with the amount of income or loss shown on the income statement. This is so because the tax authorities compute the taxable income for a period based on a set of rules different from the generally accepted accounting principles followed while preparing the income statement. Both the degrees of recognition and disclosure of deferred taxes in financial statement vary widely in Nigeria. Some subsidiaries of overseas companies operating in Nigeria tend to make provision for deferred taxes in compliance with the requirements of the parent's home country. Other international and major Nigerian companies tend to acknowledge deferred tax but generally make no provision for it. It is usually by way of footnotes that these companies mention the amount of liability for deferred taxes.

PERMANENT DIFFERENCES
8. One reason for permanent differences is that certain items are considered to be properly included in one calculation but are required to be excluded from the other. For example, donations other than those specified in Sections 20 and 21 of Companies Income Tax Act, 1979 are not allowable deductions in determining taxable income. Similarly, certain items of income which are properly included in the income statement are not subject to tax, for example, interest arising on certain Government Securities. Differences such as these are described as permanent differences.

TIMING DIFFERENCES
9. A good example of timing differences is where the depreciation rate used in determining taxable income differs significantly from that used in determining accounting income. Also, expensing intangible development cost by taking hundred per cent deduction in the year the expenditure is incurred instead of the normal depreciation spread for accounting purposes is another example. 10. The incorporation in the balance sheet of the revaluation of an asset, including an investment in an associated or subsidiary company, could create a timing difference because the profit or loss that would result if the asset is realized at its revalued carrying amount, would be taxable, unless the disposal of the revalued asset and of any subsequent replacement asset would not result in a tax liability, after taking account of any expected roll-over relief.

BASES OF PROVIDING FOR DEFERRED TAXES

11. The objective of providing for deferred taxes is to ensure that the tax expense reported in an income statement of a particular period reflects the tax effects of revenues and expenses included in the pre-tax accounting income of the period. Permanent differences are not taken into consideration as they do not affect other periods. 12. In providing for deferred taxes, three major bases are commonly in use. These are the nil provision basis, the full provision basis, and the partial provision basis. 13. Under the nil provision basis, the tax effects of timing differences are ignored completely. Only the tax payable in respect of the accounting period is charged to income in that period and no provision is made for deferred taxes. Proponents of this treatment hold the view that since tax liability arises only on taxable income and not on accounting income, there is no need to provide for deferred taxes. 14. The full provision basis takes into account all the timing differences. Support for this view is based on the principle that financial statements of a particular period are expected to recognize the tax effects of all the transactions occurring in that period. 15. Under the partial provision basis, the tax effects of some timing differences are excluded from the computation of deferred taxes when there is reasonable evidence that those timing differences will not reverse for some considerable number of years. Supporters of the view argue that deferred tax has to be provided only where it is probable that tax will become payable as a result of the reversal of timing differences. 16. The partial provision basis has one major advantage over the other two bases discussed above. Under this method, the provision for deferred taxes is based on an assessment of the ultimate tax liability.

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METHOD OF COMPUTATION
17. The tax effect of a timing difference (deferred tax) is usually computed as the difference between the tax computed after taking into account the transaction giving rise to the timing difference, and the tax computed without including such transaction. 18. As tax rates change over time, giving rise to the question of what rate to use in computing deferred taxes, the choice o either the deferral or the liability method becomes fundamental to the method of computation of deferred taxes.

DEFERRAL METHOD
19. Under the deferral method, deferred taxes are determined on the basis of the tax rates in effect when the timing differences originate. No adjustments are made later to take account of subsequent changes in tax rates. Reversals of the tax effects of timing differences are accounting for using the tax rates current at the time the timing differences arose. For practical purposes, the rates used may be either an average rate to date, or a rate determined through the first-in-first-out (FIFO) approach. 20. A basic argument against the deferral method is that under this method, the balance of deferred taxes may not represent the actual amount of additional taxes payable or receivable in the periods that timing differences reverse.

LIABILITY METHOD
21. Under the liability method, the amount of deferred tax is computed by using the tax rate expected to be in force during the period in which the timing differences reverse. Usually, the current tax rate is used as the best estimate of the future tax rates, unless changes in tax rates are known in advance. 22. Under this method, the deferred tax provision represents the best estimate of the amount which would be payable or recoverable if the relevant timing differences reverse. Thus, the difference between income tax expense and income tax payable for the period is directly adjusted on the deferred tax balance. 23. When accounting for timing differences results in a debit balance, prudence requires that such a debit be carried forward in the balance sheet only if there is a reasonable expectation of realization; that is, if sufficient future taxable income will be generated in the period in which the timing differences will reverse.

TAX LOSSES
24. The Nigerian Tax Laws provide that tax losses of current period may be used to reduce or eliminate tax to be paid in future periods. However, in the cases of cessation of business, such losses may be used to reduce or eliminate tax payable in the current period. The Companies Income Tax Act, 1979 allows maximum carry forward period of four years. The use of a current loss to reduce or eliminate tax payable or paid in earlier periods is not allowed except in the year of cessation of business. 25. Tax losses result in tax savings provided there is taxable income against which the losses could be relieved. Consequently, such potential tax savings relating to a tax loss carry-forward may be included in the income statement. 26. Since the tax laws limit the period over which a tax loss may be carried forward for offset against future taxable income, only the related timing differences that will reverse during the limited period are considered in computing deferred taxes and treated either as a debit balance or as a debit to the deferred tax account. 27. The tax saving that results from offsetting a tax loss is included in the net income.

FINANCIAL STATEMENT PRESENTATION

28. There are two major methods of presenting the tax effect of timing differences in the financial statements: (a) Net-of-tax method, and

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(b) Separate line item method.

NET-OF-TAX METHOD
29. Under this method, the tax effects of timing differences (determined by either the deferral or liability method) are not reported separately. Instead, they are reported as adjustments to the carrying amounts of specific assets or liabilities and the related revenues or expenses. 30. Whilst the net-of-tax method rightly recognizes that the value of assets and liabilities is affected by tax consideration, it fails to distinguish between a transaction and its tax effects. This method is generally discouraged.

SEPARATE LINE ITEM METHOD

31. Under this method, the tax effects in the financial statements are shown separately from the items or transactions to which they relate. The main advantage of this method is that it distinguishes between an item and its tax consequences.

PART 4 - ACCOUNTING STANDARD ON ACCOUNTING FOR DEFERRED TAXES Statement of Accounting Standard 12 comprises paragraphs 32-41. The Standard should be read in the context of paragraphs 1-31 of this Statement, and of the Preface to the Statements of Accounting Standards and other relevant Standards published by the Nigerian Accounting Standards Board. 32. Deferred tax should be computed using the liability method. 33. The tax effects of timing differences should be shown separately from the items or transactions to which they relate. 34. Provision for deferred taxes should be made except where there is reasonable evidence that the timing differences will not reverse for some considerable period (at least three years) ahead. There should also be no indication that after this period, these timing differences are likely to reverse. 35. The provision for deferred tax liabilities should be reduced by any deferred tax debit balances arising from separate categories of timing differences. A debit balance in deferred tax account should not be carried forward as an asset unless there is a reasonable expectation of realization. 36. Deferred taxes relating to ordinary activities should be shown separately as part of tax on profit or loss resulting from ordinary activities. 37. Deferred tax relating to extraordinary items should be shown as part of the tax on extraordinary items. 38. The potential tax saving from tax loss that is available for carry-forward to future periods should not be included in the net income unless there is reasonable certainty that there will be future taxable income against which the loss will be relieved within the limited period allowed by the tax laws.

DISCLOSURE
39. Deferred tax balance should be presented in the balance sheet separately from the shareholders interest. In case of a debit balance, it should be shown as an asset. 40. The disclosure required in paragraphs 36 and 37 above may be shown either on the face of the income statement or as notes. 41. The total amounts of any deferred taxes, both current and cumulative, not provided for, should be disclosed by way of a not and analyzed.

PART 5

NOTE ON LEGAL REQUIREMENTS

42. The requirements of this Standard are complementary to any disclosure requirements of the Companies and Allied Matters Decree (No.1) 1990 and any other relevant laws and regulations.

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PART 6 - COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARD NO.12 43. The requirements of this Standard accord substantially with the requirements of the International Accounting Standard No.12 - ACCOUNTING FOR TAXES ON INCOME as they relate to deferred taxes.

EFFECTIVE DATE
44. This Standard becomes operative for financial statements covering periods beginning on or after 1st January, 1993.

SAS 13 -Statement of Accounting Standard - on Accounting for Investments

Issued by the Nigerian Accounting Standards Board November, 1992.

PART 1 INTRODUCTION 1. Organizations, in the course of their business operations, apply all or some of their resources in acquiring assets to be held for capital appreciation, income generation, or other purposes such as securing trading advantages. Many financial statements published in Nigeria do not disclose adequate information about the investments held by the reporting enterprises. This Statement therefore seeks to provide a guide for the accounting treatment of investment transactions and their disclosure in the financial statements. This Statement deals primarily with situations where the size of the investments do not enable the investor to exercise significant influence or control over the financial and operating decisions of the investee companies. This Statement does not cover; i. Stocks/Inventory covered in SAS No.4; ii. Property, Plant and Equipment covered in SAS No.3; iii. Accounting for Leases SAS No.11; iv. Investment in pension benefit plans and Life Assurance Enterprises; v. Investment in subsidiaries and associates; vi. Investment in Joint Ventures; vii. Goodwill, patents, trademarks and similar assets. The Statement focuses on three main forms of investments, namely; a. Short-term investments (current investments); b. Long-term investments, and c. Investment properties.

2.

3.

4.

5.

PART 2 DEFINITIONS 6. The following terms are used in this Statement with the meanings specified below: a. Investments are assets acquired by an enterprise for purposes of capital appreciation or income generation without any activities in the form of production, trade, or provision of

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b. c. d.

e. f. g. h.

services. Short-term Investments are investments which are readily realizable and intended to be held for not more than one year. Long-term Investments are investments other than short-term investments. An Investment Property is an investment in land or building held primarily for generating income or capital appreciation and not occupied substantially for use, or in the operations of, the investing enterprise or another enterprise in the same group as the investing enterprises. A property is deemed to be substantially occupied if the owner of another enterprise in the same group occupies more than 15% of the lettable space. Carrying Amount means, in relation to an asset, the amount at which the asset is recorded in the books of account at a particular date. Market Value is the amount obtainable from the sale of an investment in an active market such as the Stock Exchange. Fair Value is the amount for which an asset could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm's length transaction. Marketable means that there is an active market from which a market value or an indicator of such value could be obtained.

PART 3 EXPLANATORY NOTES

Nature of Investments
7. Business organizations often employ funds not immediately needed in the conduct of regular operations advantageously without any activities being involved in the form of trade, production or the provision of services. Such investments could be in the form of equity securities, debt securities or investment in tangible assets such as land and building. However, some organizations have as their primary business the making of such investments.

Classification of Investments
8. For Balance Sheet purposes, investments are usually classified as short-term investments (current investments) or long-term investments.

Short-term Investments
9. Short-term investments are investments held temporarily in place of cash and which can be converted into cash when current financing needs make such conversion desirable. In order to be classified as short-term, an investment must be readily realizable. In addition, it must be the intention of management to hold such an investment for not more than one year. Short-term investments may be in ordinary shares, preference shares, bonds, treasury bills, commercial papers, bankers' acceptances, etc.

Valuation of Short-term Investments

10. There is a wide difference in practice as to the carrying amount of short-term investment. Some organizations carry such investments at: i. cost, ii. market value, or iii. lower of cost and market value (LCM).

Cost
11. Valuation of short-term investments at cost requires that such investments be recorded at cost at the date of acquisition and carried at cost unless their market value becomes less than cost by a

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substantial amount and the decline in market value is due to a permanent condition. Subsequent to such decline, recoveries in market value is viewed as "cost" for future accounting purposes. Cost will include such charges as brokerages, fees, duties, etc. relating directly to the acquisition.

Market Value
12. Under the market value method of valuation, the investment portfolio is revalued at the end of each accounting period at market value, irrespective of the cost. Accounting for short-term investments at market value poses two problems: i. determination of the market value of the securities at the end of each accounting period, and ii. the method of recognizing the holding gain or loss that may result. Supporters of the market value method argue that since they are easily realizable stores of wealth or cash substitutes, the organization is not concerned with the cost of such items but the cash it could realize from their disposal. It is further argued that reporting investments at cost will enable management to recognize income at its discretion by selling selected investments and repurchasing them immediately, and reporting the resulting profit in the income statement. This will have the effect of increasing the reported income even though the transactions have not changed the organization's economic position.

13.

Lower of Cost and Market Value (LCM)

14. Another method of valuing marketable securities is the lower of Cost and Market Value (LCM). Under the LCM method, short-term investments are carried as a portfolio. Portfolios of short-term investments are carried at their aggregate acquisition cost unless their aggregate market value is lower, in which case the portfolio is carried at market value and the unrealized loss is recognized. The amount by which aggregate cost exceeds aggregate market value (the net unrealized loss) of the short-term equity investments portfolio is accounted for as unrealized loss and charged for the period. Proponents of the Lower of Cost and Market Value(LCM) method argue that it makes for a prudent balance sheet amount. It also prevents situations where temporary swings in stock market prices, which may reverse, are brought into the accounts merely as a result of the choice of a particular balance sheet date. Critics of this method argue that the use of portfolio basis results in unrealized losses being offset against unrealized gains.

15.

16.

17.

Lower of Cost and Market Value (Modified).

18. Under this method, short-term investments are valued at lower of cost and market value, on an item-by-item basis. This approach avoids setting off unrealized losses against unrealized gains as is the case under the portfolio basis.

Long-term Investments
19. Long-term investment exists where management decides to employ funds over a long period of time to earn income. Classification of an investment as long-term must be justified not only by management intention but also by the circumstances of the individual case. Long-term investments may include debt and equity securities. Carrying amount of Long-term Investments The current market value of long-term investments is of less immediate relevance as the management of an enterprise does not intend, or is unable, to secure that value by their disposal. As such, long-term investments are usually carried at historical cost, less provision for impairments in their value. Alternatively, they may be carried at current market value. Where a long-term investment is carried at current market value, it is not appropriate to account for any increase in the current value as a realized profit for the period. Instead, the amount of any increase is accounted for as surplus on revaluation and taken to a revaluation reserve.

20.

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21.

22.

23.

24.

25.

26.

27.

Where management decides to carry long-term investments at market value, such value is expected to be kept up to date. In other words, enterprises are expected to carry long-term investments at either current value or historical cost. When a permanent decline is value of an investment occurs, the carrying amount is usually reduced to recognize the loss. Such a reduction is charged to the income statement for the period. However, to the extent that decrease in carrying amount offsets a previous increase for the same investment, which has been credited to revaluation surplus and not subsequently reversed or utilized, it is charged against revaluation surplus. When an investment has been written down as in Paragraph 22 above, the new carrying amount is deemed to be the new basis for subsequent accounting purposes. Reductions in carrying amount may be reversed when there is an increase, other than temporary, in the value of the investment, or if the reasons for the reduction no longer exist. In the case of investments in debt securities, it would be appropriate to amortize any discount or premium arising on acquisition over the period to maturity so that earnings from the investment would reflect a constant yield based on acquisition cost which may be higher or lower than the coupon rates. The amortized discount or premium is credited or charged to income as though it were interest and added to or subtracted from the carrying amount of the security. The resulting carrying amount are then regarded as cost. Where dividends received represent a distribution of earnings retained in the business prior to the acquisition of the stock by the investor, the amount received relating to the pre-acquisition period is usually deducted from the cost of the investment. This is distinguished from post-acquisition dividend which are credited to the income statement. Where interest received on dated stocks includes interest accrued before the date of purchase, the relevant amount is usually credited to acquisition cost and the portion of interest relating to postacquisition period is credited to income statement. An increase in the carrying amount of a long-term investment arising from a revaluation is usually credited directly to owners' equity as a revaluation surplus. However, an increase on revaluation, which is directly related to a previous decrease in carrying amount for the same investment as that charged to income as in paragraph 22 above, is credited to income but only to the extent that it offsets the decrease previously charged to income.

Investment Properties
28. Investment properties represent an enterprise's interest in land and buildings held primarily for their investment potentials and not occupied substantially by the enterprise itself or a member of its group of companies. A property is deemed to qualify as an investment property if not more than 15% of the lettable space is occupied by the owner or another enterprise in the group. Since investment properties, by definition, are not employed in the business for operational purposes and their disposal would not normally affect the manufacturing or trading operations of the enterprise, the current value of such investment and changes in the market value are more important than the calculation of depreciation. Investment properties are usually carried in the balance sheet at their market values and revalued periodically on a systematic basis. At present, most enterprises account for their investment properties in accordance with SAS 3: Accounting for Property, Plant and Equipment, providing depreciation as required by SAS 9: Accounting for Depreciation. However, some carry their investment properties in the balance sheet at market value revalued periodically on a systematic basis.

29.

30.

Gains and Losses on Sale of Investments

31. When an investment is sold, the gain or loss on the sale is usually taken to the income statement of the period of sale. Such gain or loss is computed as the difference between the proceeds of sale net of expenses and its carrying amount. If the investment sold had previously been revalued and the increase in the carrying amount has been credited to and still remains in a revaluation surplus account within the owner's equity, amount of the increase is transferred to income.

32.

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33.

When only part of an enterprise's holding of a particular investment is disposed of, the carrying amount of the part sold will be calculated on the basis of the average carrying amount of the total holdings.

Transfer of Investments
34. Where long-term investments are re-classified as short-term investments, transfers are made at the lower of cost and market value. If the investment was previously revalued, any remaining revaluation surplus is reversed on the transfer. Investments re-classified from short-term to long-term are each transferred at historical cost less provision for impairment in their value or at market value if they were previously stated at the value.

35.

PART 4 ACCOUNTING STANDARD

ACCOUNTING FOR INVESTMENTS

The Accounting Standard comprises paragraphs 36-59 of th is Statement. The Stan dard should be read in the context of paragraphs 1-35 of this Sta tement and of the Preface to the Statements of Accounting Standards pub lished by the Nigerian Accounting Standards Board.

CLASSIFICATION OF INVESTMENTS
36. A reporting enterprise should classify its investments into short-term investments, long-term investments, and investment properties.

Short-term Investments
37. 38. 39. Short-term investments should be valued at the lower of cost and market value. The carrying amount should be determined on an item by item basis. The amount by which cost exceeds market value (unrealized loss) should be charged to the income statement for the period. Realized gains and losses on disposal of short-term investments should be taken to the income statement for the period of disposal.

Long-term Investments
40. 41. Long-term investments should be carried at cost or at a revalued amount. When there has been a permanent decline in value of an investment, the carrying amount of the investment should be written down to recognize the loss. Such a reduction should be charged to the income statement. Reductions in carrying amount may be reversed when there is an increase, other than temporary, in the value of the investment, or if the reasons for the reduction no longer exist. An increase in carrying amount arising from the revaluation of long-term investments should be credited to owners' equity as revaluation surplus. To the extent that a decrease in carrying amount offsets a previous increase, for the same investment that has been credited to revaluation surplus and not subsequently reversed or utilized, it should be charged against that revaluation surplus rather than income. An increase on revaluation which is directly related to a previous decrease in carrying amount for the same investment that was charged to income, should be credited to the extent that it offsets the previously recorded decrease. When a reporting enterprise receives dividends that represent a distribution of earnings retained in the business prior to acquisition of stock in an investee company, such dividends should be treated as deductions from the cost of the investment. When a reporting enterprise receives interest on dated stock which includes interest accrued before the date of purchase, the relevant amount should be credited to acquisition cost and the portion of interest relating to post-acquisition period should be credited to income statement. When an investment has been written down as in paragraphs 40-44 above, the new carrying amount

42.

43.

44.

45.

46.

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47.

is deemed to be the new basis for subsequent accounting purposes. Any discounts or premiums arising on acquisition of debt securities should be amortized over the period to maturity so that earnings from the investment would reflect a constant yield based on acquisition cost. The amortized discount or premium should be credited or charged to income as though it were interest and added to or subtracted from the carrying amount of the security. The resulting carrying amount should then be regarded as cost.

Investment Properties
48. 49. 50. 51. Every enterprise should have a policy on accounting for investment properties either in accordance with SAS 3 and SAS 9, or in accordance with this Standard as stated below. Investment properties should be carried in the balance sheet at their market value and revalued periodically on a systematic basis at least once in every three years. Investment properties should not be subject to periodic charged for depreciation. A decrease in carrying amount of an investment property should be treated in the manner specified in paragraphs 41 and 46. An increase in carrying amount should be treated in accordance with paragraphs 42 and 43.

Transfer of Investments
52. Where long-term investments are re-classified as short-term investments, transfers should be made at the lower of cost and market value. If the investment was previously revalued, any remaining revaluation surplus should be reversed on the transfer. Investments reclassified from short-term to long-term should each be transferred at historical cost less provision for impairment in their value or at market value if they were previously stated at that value.

53.

Disclosures
54. 55. 56. A reporting enterprise should state, in the appropriate section of its financial statements, its accounting policies with respect to investments. When investments include securities of quoted companies, the aggregate quoted market value of such securities as well as their corresponding carrying amounts should be disclosed. A reporting enterprise should disclose in its statements, significant amounts included in income in respect of (a) interest, dividends and rentals on short-term investments, long-term investments, and investment properties. (b) profits and losses on disposal of short-term investments, (c) profits and losses on disposals of long-term investments, and (d) the amount by which aggregate cost exceeds market value (the net unrealized loss). An enterprise should disclose any significant restrictions on the realizability of investments or the remittance of investment income and proceeds of disposal. An enterprise whose main business is the holding of investments should show an analysis of the portfolio of investments. A reporting enterprise should disclose the names of the persons making the valuation of its investment properties or other long-term investments for which an active market does not exist, their professional qualifications, the dates and bases of valuation. Where the persons marking the valuation are employees or officers of the company or group which owns the properties, this fact should also be disclosed.

57. 58. 59.

PART 5 NOTES ON LEGAL REQUIREMENTS 60. The requirements of this Standard are complementary to any disclosure requirement of the Companies and Allied Matters Decree of 1990 and other relevant laws and regulations.

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PART 6 COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARD NO.25. 61. The requirements of this Standard accord substantially with requirements of the International Accounting Standard No.25 - Accounting for Investments.

EFFECTIVE DATE
62. This Standard becomes operative for financial statements covering periods beginning on or after January 1, 1994.

SAS 14 Statement of Accounting Standard - Accounting in the Petroleum Industry: Upstream Activities.
Issued by the: NIGERIAN ACCOUNTING STANDARDS BOARD December, 1993.

Part 1 - INTRODUCTION 1. The petroleum industry occupies a very strategic position in the Nigerian economy as the nation's major provider of foreign income. The industry plays a major role in facilitating the economic development of the nation. 2. To date there is no authoritative pronouncement on accounting rules to be followed in the industry, inspite of existing legislation. Since the oil companies operating within the industry come from different countries of the world, the industry has developed a wide diversity of accounting practices. There is, therefore, a need to develop an accounting standard to be used by all the companies within the industry in order to ensure the comparability of financial statements. 3. Activities of the industry can be divided into two broad categories: upstream and downstream. Upstream activities involve the acquisition of mineral interest in properties, exploration (including prospecting), development, and production of crude oil and gas. Downstream activities involve transporting, refining and marketing of oil, gas and derivatives. 4. This statement deals with accounting and reporting for upstream activities. It does not cover the downstream activities.

Part 2 - DEFINITIONS 5. The following terms are used in this Statement with the meanings specified: i. Abandonment is the process of giving up further exploration activities in a well or field in which oil or gas has not been found in commercial quantity. This does not include capped (plugged) wells. It can also relate to the giving up of production wells or field at the end of their productive lives. ii. Acquisition Costs are costs of acquiring concession rights in a lease area. iii. Amortization is used generically to mean the depreciation of tangible costs, depletion of mineral

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acquisition costs and intangible costs. iv. Appraisal Well is a well drilled to ascertain the commercial potentials of a reservoir discovered from exploratory activities. v. Barrel is standard of measurement in the oil industry. One barrel equals 42 U.S gallons (35 Imperial gallons) at standard conditions. vi. Bottom Hole Agreement refers to an agreement in which cash consideration or property is given to another party for his use in drilling a well on property in which the parties has no mineral rights, in exchange for technical information from the drilling of the well. vii. Carried Interest is a working interest arrangement involving two or more parties, in which a carrying party or the assignee finances the exploration and development activities in consideration for a reward out of future production (if any) and if necessary from the carried party's or the assignor's share of such future production. The assignor is usually the carried party while the assignee is the carrying party. A Production Sharing Contract (PSC) is a form of carried interest. viii. Casing Point is the point at which the drilling has reached its objective depth, in which case determination can be made as to its productivity or otherwise. ix. Ceiling Test is a test to determine whether the recorded capitalized exploration, appraisal and development costs are recoverable from proved reserves. x. Commercial Quantity is the quantity of oil or gas in a reservoir that can be produced economically at current prices using existing technology. The Petroleum Act 1969, however, defines commercial quantity as daily production of 10,000 barrels of crude oil. xi. Completion is the process of bringing an oil or gas well into production. The process begins only after the well has reached the depth where oil or gas is thought to exist, and generally involves installation of casing pipes, perforation of the casing pipes, and acidizing and fracturing operations. xii. Concession is a right granted to a company by the federal government on behalf of the Federation to explore and produce oil and gas within a given area. In Nigeria this involves the granting of oil exploration license, oil prospecting license or oil mining lease. xiii. Conservation refers to the preservation or restoration of a drilling site to its natural state after drilling. It may also be related to economy and avoidance of waste during drilling. xiv. Cost Pool is a cost center comprising a defined geographical area used under the full cost method of accounting as a basis for accumulating depreciable capitalized exploration, appraisal and development expenditure. Cost pools are usually not smaller in size than a country except where warranted by major differences in economic, fiscal or other factors in that country. xv. Development Costs are additional capital costs incurred following a decision to develop a reservoir. xvi. Discovery Well is an exploratory (wildcat) well that finds a new deposit of oil or gas. xvii. Discovery Value is the estimated value of oil and/or gas at the date of discovery. xviii. Dry Hole (also referred to as a duster or wet hole) is a well that either finds no oil or gas, or finds too little to make it commercially viable. xix. Dry Hole Agreement is similar to bottom hole agreement except that money or property contributions are made to another party only in the event that the well reaches an agreed depth and is found to be non-productive. xx. Exploration and Appraisal Costs are costs incurred in the search for oil and gas deposits after obtaining a license but before a decision is taken to develop a reservoir. xxi. Exploratory Project Area is an acreage usually larger than a field where initial finding efforts such as geological and geophysical surveys are undertaken. xxii. Exploratory Well is a well drilled to ascertain whether or not oil or gas exists in a field. xxiii. Farm In refers to the transfer of all or part of an oil and gas interest in consideration for an agreement by the transferee (farmee) to meet certain oil exploration and development costs which would otherwise have been undertaken by the owner (farmor). See farm Out. iv. Farm Out is a sharing of oil exploration and development activities and costs whereby a company with a concession, either because it has more potential oil acreage than it can handle or wishes to share risks, invites others to explore all or portions of the tract in return for a share of whatever oil is found. See Farm In. xxv. Federal Government refers to the Federal Government of Nigeria. xxvi. Federation means the Federal Government, State Governments, the Federal Capital Territory and Local Governments.

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xxvii. Field is a given area or region, usually comprising a number of individual reservoirs in which oil and gas reserves exist. xxviii. Impairment is the possible diminution in the value of unproved properties of an exploration and production company arising from events or circumstances outside its control. xxix. Joint Venture is a contractual arrangement whereby two or more parties undertake an economic activity which is subject to contractually agreed basis of sharing of control. xxx. Oil Exploration Licence (OEL) is a licence granted to a company under the Petroleum Act of 1969 to explore for petroleum and does not confer an exclusive right over the area of the licence. This usually has a one year term. xxxi. Oil Mining Lease (OML) means a licence granted to a company under the Petroleum Act, 1969 for the purpose of winning petroleum, or any assignment of such lease. This usually has a term of between twenty and thirty years. xxxii. Oil Prospecting Licence (OPL) means a licence granted to a company under the Petroleum Act, 1969 for the purpose of winning petroleum, or any assignment of such licence. The term is usually between three and five years. xxxiii. Operator is the party that conducts the operations, under a joint venture. This may include the drilling of a well and/or the production of oil from a tract or field under an agreed contract. xxxiv. Pre-licence Costs are costs incurred in the period prior to the acquisition of a legal right to explore for oil and gas in a particular location. Such costs include the acquisition of speculative seismic data and expenditure on the subsequent geological and geophysical analysis of these data. xxxv. Production Costs (operating or lifting costs) are the recurrent costs incurred in oil and gas production activities. xxxvi. Property includes leases, reservations, royalty rights, and similar rights. xxxvii. Proved Developed Reserves represent oil and gas reserves that can be expected to be recovered from existing wells and facilities using existing technology. xxxviii. Proved Reserves represent estimated quantity of oil and gas that can be recovered from known reservoirs using existing technology. xxxix. Proved Undeveloped Reserves include all proved oil and gas reserves that do not qualify to be described as proved developed reserves. xi. Reservoir is a natural formation of porous and permeable spaces in the earth's crust containing accumulation of oil and gas. Each distinct reservoir is confined by impermeable rocks or barriers which help to trap oil and gas. xii. Stratigraphic Test Well is a well drilled to obtain information about the geological conditions of an exploration area. xiii. Wildcat Well is any well drilled in unproved territory. xiiii. Workover is a remedial operation required to restore oil flow from a well to its maximum production capacity or to enhance its production capacity following a decline in production.

PART 3 - EXPLANATORY NOTES

Distinctive Features of Upstream Activities

6. The petroleum industry is capital intensive and the probability of not discovering oil in commercial quantity is high. As a part of the effort to reduce the risks inherent in oil and gas exploration, companies typically engage in arrangements such as joint ventures, farmouts, carried interest, bottom hole and dry hole agreements, production sharing agreements and others. 7. The elapsed time between initial exploration, and the bringing of such reserves into production, often run into several years, particularly in offshore locations. Consequently, the risk of loss of capital is high. This risk is affected by the nature of the location, availability of funds and government legislation. 8. The major economic assets of an oil company are its oil and gas reserves. These are usually not recorded in the balance sheets because several factors in the recovery cannot be readily quantified owing to uncertainties.

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9.

Recognition of gains and losses on disposals, retirements, and surrenders of oil and gas assets are treated in a special manner due to these uncertainties.

ACTIVITIES PRIOR TO THE START OF PRODUCTION

10. These can be subdivided into three separate phases: mineral rights acquisition, exploration and drilling and development. 11. Mineral Rights Acquisition Phase covers: (a) the period prior to the acquisition of a legal right to explore for petroleum in a particular location; (b) initial acquisition of seismic data and the geological and geophysical evaluation of the relevant area; (c) obtaining oil prospecting licence, oil mining lease or other concessions to explore for and exploit oil and gas in an area of interest. 12. The Exploration and Drilling Phase normally involves: (a) the conduct of geological and geophysical surveys in order to identify the most promising structures; and (b) the drilling of exploration wells to establish the presence or otherwise of petroleum in those structures. 13. If evaluation during drilling strongly indicates the presence of oil, tests may be carried out to determine the productibility of the well. Further wells known as appraisal wells may be necessary to determine the extent of the reservoir and the flow rate of oil and gas. 14. Development Phase commences if the results of the appraisal and the evaluation mentioned above are positive. Usually, a single well may not be adequate to extract the oil in the reservoir on time and economically, thus more wells would be drilled and the boundaries of the reservoirs delineated. In addition to the drilling of more development wells, facilities such as pipelines, separators, treaters, Christmas trees and tank farms are usually installed for the treatment and storage of production.

Classification of Costs
15. Oil and gas producing activities involve costs which may be classified as: (a) mineral rights acquisition costs; (b) exploration and drilling costs; (c) development costs; (d) production costs; (e) support equipment and facilities costs; and (f) general costs.

Mineral Rights Acquisition Costs

16. Mineral rights acquisition costs are the costs of acquiring concession rights in a lease area. They include signature bonus (initial consideration paid by the lessee to the lessor), legal fees, local statutory land acquisition fees/levies, reserves value fees, etc. Acquisition costs may relate to proved or unproved properties. 17. Under the Nigerian Constitution, all mineral rights are vested in the Federation. This is in contrast with the practice in some other countries where individuals may hold mineral rights. Concessions are therefore issued by the Federal Government on behalf of the Federation in the form of oil prospecting licenses, oil exploration licenses and/or oil mining leases - normally in that sequence. These rights are assignable subject to the permission of the Federal Government. 18. Costs incurred to purchase, lease, or otherwise acquire a property (whether proved or unproved) are initially capitalized when incurred. They include the costs of: i. Oil Prospecting License (OPL); ii. Oil Exploration License (OEL); iii. Oil Mining Lease (OML); iv. Bonuses and options to purchase or lease properties; v. Minerals, when land, including mineral rights is purchased; and vi. Recording fees, legal costs and other costs incurred in acquiring properties.

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Exploration and Drilling Costs

19. Exploration and Drilling involve: (a) identifying areas that may warrant evaluation; and (b) evaluating specific areas that are considered to have petroleum prospects, largely through drilling of exploratory wells. 20. Exploration costs may be incurred both before obtaining concessions (sometimes referred to in part as pre-license costs) and after acquiring concessions. 21. Principal types of exploration costs, which include depreciation and applicable operating costs of support equipment and facilities and other costs of exploration activities, are: (a) Costs of geological and geophysical studies, rights of access to properties to conduct those studies, and salaries and other expenses of geologists, geophysical crews, and others conducting those studies; (b) Costs of carrying and retaining undeveloped properties, such as rentals, legal costs for title deeds, stamp duties, and the maintenance of lease records; (c) Dry hole contributions and bottom hole contributions; (d) Costs of drilling and equipping exploratory wells; and (e) Other associated costs such as resettlement of local communities, compensation for economic crops, surface rights and road building. 22. Exploration Costs include appraisal costs which are costs incurred to determine the size and characteristics of a reservoir discovered, in order to assess its commercial potentials. 23. The costs of drilling exploratory wells are usually capitalized as part of the company's uncompleted wells, equipment and facilities pending determination of whether the well has found proved reserves. If the well has found proved reserves, the capitalized costs of drilling the well become part of the company's wells and related equipment and facilities (even though the well may not be completed as a producing well). On the other hand, if the well is dry, the treatment will depend on the accounting method adopted by the company. 24. An exploratory well may have found oil and gas reserves, but classification of those reserves as proved reserves cannot be made until drilling is completed. 25. On completion of drilling, classification of the reserves as proved reserves depends on whether a major capital expenditure can be justified, which in turn, depends on whether additional appraisal wells confirm sufficient quantities of reserves. This situation arises principally with exploratory wells drilled in remote areas for which production would require construction of a network of pipelines and/or production facilities. 26. In such a case, the cost of drilling the exploratory well is usually carried as an asset provided sufficient quantity of reserve to justify its completion as a producing well exists and the drilling of additional wells has been firmly planned for the near future. Otherwise, the exploratory well is considered impaired and the exploratory well costs written off if the company adopts successful efforts method of accounting. 27. It is not unusual for oil companies to carry wells in progress for more than two years before a decision is taken to capitalize or expense costs of exploration or appraisal activities.

Development Costs
28. Development costs are incurred to obtain access to proved reserves and to provide facilities for extracting, gathering, treating, and storing the oil and gas. These costs are incurred after a decision has been taken to develop a field or reservoir, and include the following: - drilling, equipping and testing development and production wells; - production platforms, downhole and wellhead equipment, pipelines, production and initial treatment and storage facilities and utility and waste disposal systems; and - improved recovery systems and equipment. 29. Development costs are usually capitalized as part of the costs of a company's wells and related equipment and facilities. Thus, all costs incurred to drill and equip development wells and service wells are development costs and are capitalized whether the well is successful or unsuccessful. Costs of drilling those wells and costs of constructing equipment and facilities are usually included in the

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company's uncompleted wells, equipment, and facilities until drilling or construction is completed.

Production Costs
30. Production involves lifting the oil and gas to the surface, gathering, treating, field processing and storage. Production costs are usually determined to be all costs incurred from the maintenance of the wells and well heads to the storage facilities when the oil and gas are ready for export or delivery to a refinery. 31. Production costs are those costs incurred to operate and maintain a company's wells and related equipment and facilities, including depreciation, depletion and applicable operating costs of support equipment and facilities. Examples of production costs include: (a) costs of personnel engaged in the operation of wells and related equipment and facilities; (b) repairs and maintenance of production facilities; (c) materials, supplies, fuel consumed and services utilized in such operations; and (d) royalties.

Support Equipment and Facilities Costs

32. Costs incurred on support equipment and facilities in oil and gas producing activities, such as vehicles, repair shops, warehouses, supply points, camps, and division, district or field offices, aircrafts and helicopters, safety and environmental facilities are usually accumulated and reallocated to the six classes of costs identified earlier as items (a) to (f) in paragraph 15, on some rational basis. For example, use of vehicles may be reallocated on kilometers, use of power house on the basis of wattage reading, and so on.

General Costs
33. Some costs incurred in a company's oil and gas producing activities do not always result in acquisition of an asset and, therefore, are usually charged to expense. Examples include geological and geophysical costs, the costs of carrying and retaining undeveloped properties, and the cost of drilling those exploratory wells that do not result in proved reserves. 34. The costs of a company's wells and related equipment and facilities and the costs of the related proved properties are usually amortized as the related oil and gas reserves are produced from the reserves. Depreciation, depletion, and amortization of capitalized acquisition, exploration, and development costs also become part of the cost of oil and gas produced along with production (lifting) costs identified above. 35. Oil companies incur substantial costs in providing amenities for the communities where they operate. Such costs which do not have future benefits to the company are usually expensed. Oil companies also incur costs on such matters as corporate affairs and staff training and development.

Oil and Gas Accounting Methods

36. Methods and procedures followed by oil companies in accounting for exploration and development costs diverge significantly. Two basic accounting methods in common use are the Full Cost and the Successful Efforts methods. Both methods are widely followed and each of them has a valid conceptual justification. Companies using the full cost method are referred to as "full cost companies" while those using successful efforts method are referred to as "successful efforts companies". A third method known as Reserves Recognition Accounting (RRA) allows an enterprise to recognize the "value" of proved oil and gas reserves as assets and changes in such reserve values as earnings in the financial statements. This method is however not in common use and is not recommended.

Full Cost Method

37. Under this method, all costs associated with acquisition, exploration and development activities are capitalized irrespective of whether or not the activities resulted in the discovery of reserves. Such costs are usually amortized against successful finds on gross revenue or unit-of-production basis. A

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38.

39.

40.

41.

42.

ceiling test is required in order to determine whether the costs capitalized can be recovered from the proved reserves. Proponents of the full cost method argue that the method recognizes that all acquisition, exploration and development activities are an integral part of and necessary for the ultimate production of reserves, and as such their costs should be viewed in total as successful activities will eventually absorb the unsuccessful. It is further argued by proponents of this method that the intricacies and the enormous capital outlay involved in the oil and gas business require that the search for oil and gas be looked at more globally rather than on well by well basis. Oil companies view the cost of oil and gas reserves discovered in terms of the overall exploratory effort and total costs incurred. Oil and gas reserves cannot be found without first incurring such costs. It is not contended that unsuccessful efforts add value to the already existing reserves but that without such cost oil may not likely be discovered. Such costs therefore enable the valuable oil and gas to be discovered ultimately. Furthermore, they feel that full cost accounting provides more meaningful financial statements. The primary assets of an oil company are its underground oil and gas reserves but not the individual wells drilled in producing them. Finally, it is argued that the amortization of the pooled costs over time produces more meaningful income statement through improved matching of cost with the related revenue. It also makes comparison more meaningful. Opponents of the full cost method argue that it may result in a situation where assets reported on the balance sheet may not be recoverable from the reserves. Accumulating losses in asset accounts amounts to window dressing. The method is also more cumbersome to operate as it requires ceiling tests and adjustments. It is further argued that the method flouts the prudence principle by deferring obvious losses.

Successful Efforts Method

43. Under the successful efforts method, costs associated with successful wells are capitalized while costs of unsuccessful acquisition and exploration activities are expensed. The use of ceiling tests is not mandatory under the successful efforts method and the basis of amortization of pooled costs is only on unit-of-production. 44. The proponents of successful efforts contend that: (a) It ensures that all assets are backed by adequate reserves. A dry hole or surrendered lease cannot possibly be an asset as it has no reserve backing and therefore is expensed. (b) It complies with the accounting principle of prudence which demands that known losses be immediately recognized in the accounts. (c) It is simple to operate as the need for periodic ceiling computations and adjustments is avoided. (d) Successful efforts method ensures that costs of inefficient exploration efforts are not hidden in assets as is the case with the full cost method. (e) It facilitates appraisal of the contributions of individual leases to total revenue or income. 45. Opponents of the successful efforts method argue that, in the search for oil and gas, all costs should be regarded as integral to the ultimate discovery of reserves. Attempting a cause and effect relationship between costs incurred and specific reserves is not relevant at all. It is further argued that huge writeoffs may result in very low profits coupled with unattractive asset base, thus, making it extremely difficult for such a company to raise external funds. The method also results in low stock market ratios which may affect the company's share price in the market.

Full Cost Method vs. Successful Efforts Method

46. Both successful efforts and full cost methods use proved reserves to amortize acquisition costs. They differ, however, in respect of amortization of wells and related facilities. Whereas full cost companies usually use proved reserves for determining the unit of production, successful efforts companies use proved developed reserves. This difference arises because full cost companies usually include future development costs in the cost subject to amortization. 47. Generally, small and new companies use full cost method until their asset bases have been substantially built up.

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Assessment of Unproved Properties

48. Unproved properties are usually assessed periodically to determine whether they have been impaired. A property would likely be impaired, for example, if a dry hole has been drilled on it and the company has no firm plan to continue drilling. Also, the likelihood of partial or total impairment of a property increases as the expiration of the lease term approaches and drilling activity has not commenced on the property. If the results of the assessment indicate impairment, a loss is usually recognized by making a valuation provision. 49. Impairment of individual unproved properties whose acquisition costs are relatively significant are usually assessed on a property-by-property basis, and any losses recognized by making a valuation provision. 50. When a company has a relatively large number of unproved properties whose acquisition costs are not individually significant, it is usually not practicable to assess impairment on a property-by-property basis. In such situations, the amount of impairment to be recognized is determined by amortizing those properties, either in the aggregate or by groups on the basis of: i. information about such factors as the terms of the OPL, OML, or OEL; ii. the experience of the company in similar situations; iii. the extent of the acreage leased; iv. the average holding period of unproved properties; and v. the relative proportion of such properties on which proved reserves have been found in the past. 51. If an unproved property on which impairment has been recorded on a group basis is surrendered or the rights released, the book value is charged to the accumulated impairment account and no loss is recognized. 52. When an unproved property on which impairment has been recorded on individual basis is surrendered or the rights released, the net book value is charged to expense.

Reclassification of an Unproved Property

53. A property may be reclassified from unproved property to proved property when proved reserves are discovered on, or otherwise attributed to, the properties. When a single concession covers a vast area, only the portion of the property to which the proved reserves relate is usually reclassified from unproved to proved. For a property whose impairment has been assessed individually, the net book value (acquisition costs minus impairment provision) is usually reclassified to proved properties; whereas for properties amortized on a group basis, the gross acquisition costs are usually reclassified.

Depletion of Acquisition costs of Proved Properties

54. Capitalized acquisition costs of proved properties are usually depleted by the unit-of-production method so that each unit produced is assigned a pro-rata portion of the unamortized acquisition costs. Under the unit-of-production method, depletion may be computed either on a property-by-property basis or on the basis of reservoir or field.

Amortization and Depreciation of Capitalized Exploratory Drilling and Development Costs

55. Capitalized costs of exploratory wells that have found proved reserves and capitalized development costs are usually amortized (depreciated) by the unit-of-production method so that each unit produced is assigned a pro rata portion of the amortized costs. The unit costs are usually computed on the basis of the total estimated units of proved developed reserves in the case of a successful efforts company and on the basis of proved reserves in the case of a full cost company. 56. If significant development costs (such as the cost of an offshore production platform) are incurred in connection with a planned group of development wells before all of the planned wells have been drilled, it is usually necessary to exclude a portion of those development costs in determining the unitof-production amortization rate until the additional development wells are drilled. 57. Similarly, the practice is to exclude, in computing the amortization rate, those proved developed reserves that will be produced only after significant additional development costs are incurred, such as

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for improved recovery systems. 58. A full cost company usually includes estimated future development costs in computing its unit rate since its amortization is based on proved reserves. Conversely, future development costs may not be anticipated by a successful efforts company in computing the amortization rate since it uses proved developed reserves.

Depreciation of support equipment and facilities

59. Depreciation of support equipment and facilities used in oil and gas producing activities is usually allocated to exploration cost, development cost, or production cost as appropriate.

Revision of estimated reserves

60. Unit of production depletion rates are revised whenever there is a revision of estimated proved reserves. Such a revision is usually carried out annually and any adjustments are made prospectively. The unit costs are usually computed on the basis of total estimated units of proved developed reserves by successful efforts companies and proved reserves by full cost companies.

Restoration and abandonment costs

61. Restoration and abandonment involve giving up further exploration activities in a well head or field in which oil or gas has not been found in commercial quantity. It can also occur where the operators are of the view that oil or gas is exhausted and can no longer be profitably produced. On the other hand, restoration involves bringing the exploration site to its original ecological state. 62. Subsequent to granting an oil prospecting license (OPL), an oil mining lease (OML) is granted. An OML entitles the lessee to enter a property, survey it, locate a well site, perform drilling operations and remove any minerals found. The lessee is also given the right to perform all acts necessary and incidental to these operations. 63. However, on termination of each mining lease, the lessee shall, with the permission of the Federal Government, remove all related facilities. Regulation No.35 of Petroleum (Drilling and Production) Regulations 1969 under Petroleum Act 1969 (No.51), stipulates that an abandonment programme has to be approved or agreed to by the Head of Petroleum Inspectorate. 64. The actual restoration and abandonment costs in respect of each facility will become known once the facility ceases to produce and abandonment commences. Therefore it is important that the periodic charge for such costs less estimated salvage value are recognized in the accounts based on the best available estimates by: (a) a charge against income on a systematic basis over the full productive lives of the facilities concerned so that the accumulated provision will equal the cost of restoration and abandonment, or (b) recognizing the eventual liability at the outset, treating the corresponding charge as a capital cost to be depreciated or as deferred expenses to be amortized using the unit-of-production method.

Abandonment of unproved assets - successful efforts method

65. Where a company abandons an unproved property, the practice is to charge the relevant capitalized acquisition costs against the related provision for impairment to the extent that such a provision has been made. If the provision is inadequate, then a loss is usually recognized. Normally, there is no problem in identifying the loss where the company has evaluated unproved properties individually.

Abandonment of proved properties - successful efforts methods

66. Generally, companies using this method do not recognize any gain or loss on the partial abandonment of proved properties. Instead, the particular property being abandoned is usually deemed to be fully amortized and its costs charged to accumulated depreciation, depletion or amortization. When the entire property is abandoned, then the company may recognize a gain or loss. Where there is a partial abandonment caused by any force majeure, the company usually recognizes a loss.

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Abandonment of unproved and proved properties - full cost method

67. Abandonment of oil and gas properties are usually accounted for as adjustments of capitalized costs; that is, the costs of abandoned properties are charged to the full cost center and amortized and no gains or losses are recognized. Where the abandonment is sufficiently significant to alter the amortization per unit of reserves, a gain or loss is usually recognized.

Deferred taxes
68. In the petroleum industry, deferred tax is very significant because of the huge investments associated with the industry. Among the major expenditure items that result in timing differences are geological and geophysical costs, development costs, intangible drilling costs, depletion costs, abandonment costs, and accelerated depreciation by way of enhanced capital allowances in tax computation. The choice between successful efforts and full cost methods of accounting affects the resulting deferred tax. 69. Currently, most companies in the petroleum industry recognize deferred taxes by way of notes in their financial statements. Others provide for deferred taxes in their financial statements.

Conveyances
70. A mineral conveyance is a transfer of any type of ownership interest in minerals from one entity to another. In the initial mineral conveyance, the lessor conveys to the lessee a mineral interest in the property, and the lessor retains a royalty interest such as when the Federal Government grants a concession to an oil company. The lessee may, in turn, transfer in another conveyance all or part of the mineral interest to a third party. 71. There are many reasons why owners, especially working interest owners, convey interests in mineral properties. These reasons include the desire to share the risks of ownership and the cost of exploration and development with others, to obtain financing, to improve operating efficiency or conservation and to achieve tax benefits.

Types of conveyances
72. A conveyance agreement may take any of the following forms: - a sale; - an exchange of non-monetary assets; - a pooling of assets in a joint undertaking, or - some combination of the above. Conveyance arrangement involving farmouts, carried interest, unitization and production payments fall within the above broad categories.

Carried interest
73. Under this arrangement, the transferee (the carrying party) agrees to pay for a portion or all of the preproduction costs of another party (the carried party) for a share of the working interest. The arrangement is usually adopted when the carried party is either unwilling to bear the risk of exploration or is unable to fund directly the cost of exploration and development. 74. The transferee is usually reimbursed either in cash, out of the proceeds of the carried party's share of production, or by receiving a disproportionately high share of the production until the carried costs have been recovered. However, if the project is unsuccessful, the carrying party may not be able to recoup all or part of the costs it has incurred on behalf of the carried party. 75. The accounting treatment given to carried interest arrangement usually depends on the terms of the agreement. Where the carrying party is to be reimbursed in cash, the arrangement is essentially a contingently repayable financing. On the other hand, in the case of reimbursement by increased share of production, the arrangement represents acquisition of additional reserves by the carrying party.

Farmout
76. This is a financing arrangement in which the concession holder (the farmor) transfers part of the oil and gas interest to another party (the farmee) in consideration for an agreement by the farmee to

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bear the costs of exploration and development which would otherwise have been borne by the farmor. Farmouts are usually adopted where the concession holder does not have the resources or does not intend to explore it in the near future. 77. Farmouts are usually considered to be a pooling of assets in a joint undertaking and as such no gain or loss is recognized. The capitalized costs previously incurred by the farmor become the cost of interest retained.

Unitization
78. Unitization is a form of joint undertaking whereby concession holders pool their interest together to form a single unit in return for a participating interest in the combined unit of reservoir. Among the reasons for undertaking unitization are to increase operational efficiency, achieve tax advantages and minimize risks. 79. Unitization is governed by a unit operating agreement which usually includes the list of the parties and their fractional interests referred to as participation factors. The participation factors form the basis for the equalization of individual investment, joint costs distribution and the sharing of production and/or production proceeds. Since the original factors are determined using limited data about the reservoir, agreements usually provide for one or more re-determination. Revision of participation factors may lead to adjustment of the unit members' share of production and costs. Such re-determination adjustments are usually accounted for on a prospective basis rather than by way of prior period restatement.

Production sharing contracts

80. Exploration costs incurred on a concession which is subject to a production sharing contract are normally recovered out of production that will be made from the concession. The operator is normally paid in quantities of oil and not in cash. The operator usually treats the costs incurred as direct exploration costs or as a loan, bearing in mind the terms of the contract and the possibility of repayment. 81. Where costs under a production sharing contract are treated as a loan, and before establishing commercial reserves, a provision equivalent to exploration cost is usually made if the effort is determined to be unsuccessful under the successful efforts method or impaired under the full cost method. Where commercial reserves are found, the provisions against all costs incurred are reserved to income subject to the limit of the loan being recovered from the reserves. Future exploration costs in the contract area are usually carried as exploration costs if the costs will be recoverable from future production. The balance outstanding at the end of each year is usually written down to the outstanding balance of recoverable costs at the time. 82. Where costs under a production sharing contract are treated as concession costs, the costs incurred are usually accounted for in accordance with the company's accounting policy - using either the successful efforts or the full cost method. Capitalized exploration and development costs are depreciated on a consistent basis subject to impairment and ceiling tests, in line with the established accounting policy. 83. In accounting for production sharing contracts, reference is made to the agreement, and the operator and the non-operator usually record their share of assets, liabilities, costs and revenues, in accordance with the terms of the agreement and their respective accounting policies.

General Principles for Accounting for Conveyances

84. There are several important issues in respect of accounting for conveyance transactions, among which are: - determination of gain or loss, if any, of the parties involved; - determination of when revenue and expenses are to be recognized; - determination of the exact costs involved; and - determination of how to reflect the relevant information in financial statements of the parties concerned. 85. Sometimes, oil companies in order to secure the supply of oil or gas make funds available to operators in consideration for a right to purchase oil or gas when discovery is made. In such a situation,

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conveyance is in essence, a borrowing repayable in cash or its equivalent. Thus, one party to the transaction is treated as a borrower while the other is a lender, especially where cash refund is expected if the oil or gas discovered is insufficient to offset the cash advance received. 86. When a conveyance is consummated with a view to retaining the assets in the production of gas or oil, gains or losses are usually not recognized in the accounts of the parties concerned. For example: i. a transfer of assets used in oil and gas producing activities exchanged for other assets also used in oil and gas producing activities; and ii. a pooling of assets in a joint venture situation for the purpose of finding, developing or producing oil and gas from a joint concession. 87. However, the parties involved generally recognize losses but not gains in conveyance in circumstances such as: i. the disposal of part of the interest or if there are doubts concerning the recoverability of the remaining interests in the concession; and ii. the disposal of part of the interest, since the seller remains obligated to drill a well or to operate the property if both activities are expected to result in future loss.

Conveyances under successful efforts method

88. Successful efforts companies may recognize gains and losses on other types of conveyances in line with generally accepted accounting principles. In determining the appropriate accounting treatment for a company using the successful efforts method, the factors to be considered include whether: - the property is classified as proved or unproved; - impairment of an unproved property is being recorded on an individual basis or on the basis of a geological group; and - only partial or entire interest is conveyed. 89. The general practice for recognition of gains or losses are as follows: (a) If the entire interest in an unproved property, for which impairment is recorded on an individual basis is sold, gain or loss is recognized to the extent of the difference between the proceeds and net book value. (b) If entire interest in an unproved property for which impairment is recorded on a group basis is sold, no gain or loss is recognized unless the proceeds exceed the original cost of the lease. (c) If a portion of interest in unproved property for which individual impairment is recorded is sold, and the proceeds exceed the total carrying value of the entire property, the excess of proceeds over net book value is recognized as a gain. (d) If a portion of interest in unproved property for which group impairment is recorded is sold and the proceeds exceed the total cost of the property, the excess of proceeds over the net book value of the group is recognized as a gain. (e) If the entire interest in a proved property on which amortization is individually computed is sold, the difference between the proceeds and the net book value is recognized as a gain or loss. (f) If a portion of an interest in a proved property on which amortization is individually computed is sold, the difference between the proceeds and a proportionate share of each cost and amortization provision (book values) is recognized as gain or loss. (g) If an unproved property on which impairment has been recorded on an individual basis is surrendered or the rights released, the book value of the property is charged to expense. (h) If an unproved property on which impairment has been recorded on a group basis is surrendered or the rights released, the book value of the property is charged to the accumulated impairment account and no loss is recognized.

Conveyances under full-cost method

90. (a) Under full cost method, mineral property conveyances, whether or not the properties are currently amortized, do not result in recognition of gain or loss. In other words, under full cost, disposal proceeds are credited to fixed assets and no gain or loss is recorded. Therefore the sale is usually recognized in lower depletion charges in the future. (b) If the conveyance would significantly alter the relationship between capitalized costs and proved reserves of oil and gas attributable to the cost center, then a gain or loss may be recognized in the

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income statement. (c) A significant alteration would not ordinarily be expected to occur for conveyances involving less than 5% of the reserve quantities in the cost center or when the unit-of-production amortization rate is altered by less than 25%. A cost value attributable to a significant conveyance may be calculated by multiplying the current depletion rate by the amount of reserves sold.

JOINT VENTURES
91. In the oil industry, a joint venture or unit operation of an oil and gas pool is the cooperative effort of two or more mineral interest owners, usually called joint venture partners. The partners accomplish, through their combined effort and knowledge, the maximum amount of recovery from a common concession. 92. Joint Venture operation may also be referred to as the practice of consolidating under a single operational responsibility, the separate concessions whereby each concession holder receives the amount of production from the entire pool that is attributable to his separate ownership. 93. This relationship is usually governed by a written operating agreement which gives the joint venture partners joint control. Under the agreement, one of the parties is appointed the operator and an accounting procedure adopted. 94. In Nigeria, joint ventures arose historically from participation of the Federal Government in the existing concessions held by major oil producing companies. By this arrangement, the Federation through the Federal Government acquired up to sixty percent working interest in the concessions held by those companies. Subsequently, cash calls are made on the joint venture partners to contribute their shares of such costs as acquisition, exploration and drilling, development and production in the agreed participating interest. Similarly, the production from their joint venture is shared proportionately. 95. Joint ventures evolve in various forms such as the conventional joint ventures, production sharing and service contracts. The need for joint ventures may arise from any of the following: minimization of risks, operational efficiency, sharing of huge capital outlay and political consideration. A joint venture may be long-term as in the case of conventional joint venture agreements and production sharing or short-term as in the case of unitization.

Accounting treatment of joint ventures

96. There are three ways the transactions of a joint venture could be recorded. These are: (a) Separate set of books for the joint venture Under this method, the operator maintains a separate set of books dedicated solely to recording the transactions relating to the venture. (b) Common set of books for the joint venture and the operator Under this approach, the operator maintains common set of books in which it maintains both the joint venture and its exclusive transactions. (c) Memorandum entries This method is similar to (a), but with one difference. While under (a) the joint venture account is part of double entry system, under (c) it is merely a memorandum entry. This method is rare in practice. 97. Returns are usually rendered by the operator to the joint venture partners to enable them prepare their own financial statements. These returns show how cash calls received have been expended.

Accounting for crude oil overlifts and underlifts

98. The joint venture arrangements under which most exploration and production operations are conducted give rise to special accounting issues in reporting turnover and crude oil stock by upstream companies. Oil produced under joint venture arrangements are shared according to equity participation. Typically, crude oil is lifted in complete tanker loads by each member in a joint venture according to agreed nomination and lifting schedules. However, tanker loads usually do not equate to the joint partners' exact entitlements at the date of each lifting. Therefore, at any reporting date, each partner would have overlifted or underlifted its proportionate share of total

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production. 99. A company may choose to account for its equity interest in oil production on the basis of the quantities physically received and delivered (liftings basis) or on the basis of entitlements (entitlements basis). The method adopted would impact differently on the reported stock and sales/turnover. Generally, large companies report stocks and sales simply on liftings basis as the impact of overlifts and underlifts are considered immaterial to their financial statements. On the other hand, smaller companies generally report on the basis of entitlements, and usually adjust reported turnover and stock for their net overlifts or underlifts positions. The overlifts or underlifts are recorded as creditors and debtors respectively, or as part of stock. Turnover would therefore reflect the value of a company's share of production during an accounting period. 100. In practice, one of the following methods is used to account for underlifts and overlifts: - underlifts and overlifts are included as stock at the lower of cost or market value. - revenue is adjusted to exclude overlifts and to include underlifts at the lower of cost or market value.

Functional currency
101. An oil company in Nigeria must, by virtue of the provisions of the Companies and Allied Matters Decree 1990, prepare its statutory accounts in Naira. However, because most of their expenses and income are incurred and earned in U.S. dollars, most oil companies have always used U.S. dollars as their functional currency for accounting purposes and they are also now required to do so for the purpose of petroleum profits tax. These dollar accounts are translated into Naira accounts for statutory purposes in accordance with the provisions of SAS 7 - Statement of Accounting Standard on Foreign Currency Conversions and Translations.

PART 4 - ACCOUNTING STANDARD

ACCOUNTING IN THE PETROLEUM INDUSTRY: UPSTREAM ACTIVITIES.

The Accounting Standard comprises paragraphs 102-138 of this Statement. The Standard should be read in the context of all other parts of this Statement and the Preface to the Statements of Accounting Standards published by the NASB.

Accounting policy
102. All companies engaged in oil and gas exploration, development and production activities shall state in their financial statements, the policy for accounting for costs incurred and the manner of disposing of capitalized costs in respect of such activities. In addition, the policy on accounting for restoration and abandonment costs and the total restoration and abandonment costs should be disclosed in their financial statements, even if already included in cost of sales. 103. A company may use either the "full cost" method or the "successful efforts" method. The method used should be consistently applied and disclosed.

Classification of costs
104. Oil and gas producing activities involve special types of costs which should be classified as follows: Mineral rights acquisition costs; Exploration and drilling costs; Development costs; Production costs; Support equipment and facilities costs; and General Costs.

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FULL COST METHOD

Initial treatment of costs 105. Costs incurred on mineral rights acquisition, exploration, appraisal and development activities should be capitalized. Amortization of capitalized costs 106. All capitalized costs incurred in a cost center should be depreciated on the unit of production basis using proved reserves. The determination of the capitalized costs to be amortized should be on a country-wide basis. Ceiling test 107. Ceiling tests should be conducted at least annually at balance sheet date on a country-wide basis. Such tests should use discounted values for revenues, costs, estimated future taxes, and estimated future development costs. 108. The price used for the test should be that ruling at the balance sheet date, while the reserve used should be proved reserves. Where the accounts are prepared in U.S. dollars the discount rate to be used for estimating future cash flow shall be ten per cent. Where accounts are prepared in Naira, the CBN rediscount rate should be used. 109. If the net discounted revenue is lower than the capitalized costs, the difference should be written off.

SUCCESSFUL EFFORTS METHOD

Initial treatment of costs 110. Costs incurred prior to acquisition of mineral rights and other exploration activities not specifically directed to an identifiable structure should be expensed in the period they are incurred. 111. All costs incurred on mineral rights acquisition, exploration, appraisal and development activities should be capitalized initially on the basis of wells, field or exploration cost centers, pending determination. Such costs should be written off when it is determined that the well is dry.

Retention period pending determination

112. If further appraisal of a concession is planned, cost of exploration and appraisal activities may be carried forward pending determination of proved reserves in commercial quantities of a period of: (a) not more than 3 years following completion of drilling in an offshore area where major development costs may need to be incurred, or (b) for a maximum of 2 years in an onshore area.

Amortization of capitalized costs

113. Mineral rights acquisition costs which have not been allocated should be amortized over the remaining life of the license. Net book value of underappreciated mineral rights acquisition costs should be reviewed annually for impairment on a well-by-well basis. Any impairment discovered should be written off. 114. Amortization of exploration and drilling costs incurred within each well, field or property, should be on a unit-of-production basis using proved developed reserves.

DEFERRED TAXES
115. Deferred tax provision should be made in the accounts in accordance with SAS 12 - Accounting for Deferred Taxes.

COST OF PROVIDING AMENITIES FOR COMMUNITIES

116. Costs of providing amenities for communities in areas of operation should be written off as incurred.

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CONVEYANCES
117. Recognition of gains or losses under conveyance should be as follows: (a) If the entire interest in an unproved property for which impairment is recorded on an individual basis is sold, gain or loss should be recorded to the extent of difference between the proceeds and net book value. (b) If the entire interest in an unproved property for which impairment is recorded on a group basis is sold, no gain or loss is recognized unless the proceeds exceed the original cost of the lease. (c) If a portion of interest in an unproved property for which individual impairment is recorded is sold, and the proceeds exceed the total carrying value of the entire property, the excess of the proceeds over the net book value should be recognized as a gain. (d) If a portion of interest in an unproved property for which group impairment is recorded is sold and the proceeds exceed the total cost of the property, the excess of the proceeds over the net book value of the group should be recognized as a gain. (e) If the entire interest in an unproved property on which amortization is individually computed is sold, the difference between the proceeds and the net book value should be recognized as a gain or loss. (f) If a portion of interest in an unproved property on which amortization is individually computed is sold, the difference between the proceeds and a proportionate share of each cost and amortization provision (book values) should be recognized as a gain or loss. (g) If an unproved property on which impairment has been recorded on an individual basis is surrendered or the rights released, the book value of the property should be expensed. (h) If an unproved property on which impairment has been recorded on a group basis is surrendered or the rights released, the book value of the property should be charged to the accumulated impairment account and no loss should be recognized.

Carried Interests
118. The carrying party should record the total cost incurred in respect of the carried interest as capital expenditure. Disclosure should be made of the carrying arrangements, including the amount of carried expenditure to date. 119. The carrying party should record recoveries made out of production from the carried interest as follows: (a) The whole amount should be credited to the appropriate cost center if full cost method is adopted; recovery of carried costs should be credited to the appropriate fixed asset account if successful efforts method is adopted. Where recoveries exceed the amount of carried costs, the surplus should be recognized as income on an appropriate basis. This step should be taken only when full recovery of all carried costs is reasonably certain. (b) The expenditure borne by the carrying party should not be recorded in the carried party's book, nor production from the carried interest to the extent that it is used by the carrying party to recover costs. 120. The carried party should record all expenditure and production after pay-out. 121. Where reimbursement is in cash, the following practice should be followed: i. neither the carried party nor the carrying party should accrue any contingent repayment of the financing until the outcome of the specified event i.e. discovery of reserves, commencement of production or declaration of reserves in commercial quantity can be determined; ii. in a carried interest arrangement involving exploration cost, the carrying party should capitalize or expense the costs borne on behalf of the carried party in accordance with its normal accounting practice. If the costs become reimbursable by the carried party, the carrying party should record a debtor and should credit the accounts, whether capital or revenue, in which the costs have been charged; iii. in a carried interest arrangement involving development cost, where the carrying party is assumed to be fully reimbursed, the reimbursable costs incurred should be classified as a debtor and provided for, to the extent that recovery is reasonably assured; iv. if the amounts to be reimbursed by the carried party include interest or a premium, these additional costs should be accounted for by both parties in accordance with the accounting policy for fixed assets and interest expense or income;

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v. following the occurrence of the specified event the carried party should record any sums repayable directly in cash within creditors and fixed assets; vi. once production commences the carried party will reimburse the carrying party out of the proceeds of its share of production, and the debtor and creditor balances should be eliminated. 122. Exploration and drilling costs of the carried party should be amortized using the reserves and production estimates of the carried interest after pay-out.

Farmouts and similar arrangements

123. The farmor should not record any expenditure made on its behalf by the farmee. Any capitalized costs previously incurred by the farmor in relation to the whole interest should be redesignated as relating to the partial interest retained. 124. Where cash reimbursement of past costs takes place, the farmor should credit any proceeds to the accounts, whether capital or expense, in which such costs were originally recorded. 125. The farmee should record all of its expenditure relating to the arrangement, both in respect of its own interest and that retained by the farmor as and when the costs are incurred.

Unitization and redetermination

126. No gain or loss should be recognized on a unitization arrangement except where cash received exceeds costs. 127. Where there is a redetermination of interest, the resulting adjustment of the unit members' shares of production and costs should be accounted for on a prospective basis rather than by way of prior period restatement.

Joint venture
128. The operator of a joint venture should maintain a separate set of books dedicated solely to recording the transactions relating to the venture. 129. Each partner should account for its proportionate share of the costs, production, assets and liabilities of the joint venture in line with its accounting policy.

Overlifts and underlifts

130. One of the following methods should be used to account for underlifts and overlifts: - Both underlifts and overlifts should be accrued for. Underlifts should be included as stock at the lower of cost or market value while overlifts should be valued at year end spot price. - Invoiced sales should be adjusted to exclude overlifts at year end spot price and to include underlifts at the lower of cost or net realizable value.

Restoration and abandonment

131. Companies should make provision for restoration and abandonment costs less estimated salvage values based on the best available estimate by: (a) a charge against income on a systematic basis over the full productive lives of the facilities concerned so that the accumulated provision will cover the cost of restoration and abandonment, or (b) recognizing the eventual liability at the outset, the corresponding debit should be treated as a capital cost to be depreciated or as deferred expenses to be amortized using the unit-of-production basis. 132. Restoration and Abandonment costs should be deducted in arriving at estimated future net revenues for ceiling test calculation.

Functional currency
133. The dollar accounts of an oil company should be translated to Naira in accordance with the provisions of SAS 7 - Statement of Accounting Standard on Foreign Currency Conversions and Translations.

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DISCLOSURE
134. The oil industry is peculiar in the sense that a large proportion of its assets (reserves) is off-balancesheet. Furthermore, the diversity of treatment between full cost and successful efforts demands that some efforts be made at harmonization to enhance comparability. As such, the following disclosures are required: (a) total proved developed and undeveloped reserves, for oil and condensates expressed in barrels, and for gas expressed in cubic feet. The disclosure should show movements in reserves during the year under such headings as: * revision of previous estimates, * purchase of reserves in place, * new discoveries, * sales of reserve in place and * production. In addition, each of the joint venture partners should show its share of joint venture proved developed and undeveloped reserves. The foregoing reserves information should be disclosed for the current year and the preceding four years. (b) costs relating to oil and gas exploration for the current year, setting out proved and unproved properties, accumulated depreciation, depletion and amortization and share of net capitalized costs of joint ventures, distinguishing between offshore and onshore; (c) capitalized costs relating to oil and gas producing activities; (d) details of concessions (OEL, OPL and OML), showing the original and the unexpired terms of the concessions; (e) the amount of depreciation, depletion and amortization and the average rates used; (f) results of operations from producing activities showing revenues (both third party and intra), production costs, exploration costs, depreciation and amortization and income taxes; (g) standardized measure of oil and gas (SMOG), using 10% discount rate where the accounts are prepared in U.S. dollars and Central Bank of Nigeria rediscount rate as at the balance sheet date, where the accounts are prepared in Naira; (h) significant non-producing development costs such as offshore production platform, which have been excluded from the amortization base in determining the unit of production amortization; (i) total cash calls made on the partners for the year and the amount of such cash calls received, indicating clearly the U.S. dollar and Naira components; (j) deferred taxes; (k) costs of providing amenities for communities in areas of operation of the company; (l) summarized comparative balance sheet and income statements for five years, including the current year; (m) the prices used for purposes of the ceiling test and the prices at the measurement date and, if the use of prices at the measurement date would have resulted in a write off, the amount so written off; (n) the total estimated liability of the company for restoration and abandonment costs calculated at current year-end prices.

Farmout
135. If the consideration for the farmout includes an arrangement for the farmee to bear subsequent costs which would otherwise fall to the retained interest of the farmor, the farmor should disclose the amount of such expenditure incurred by the farmee in aggregate during the accounting period to provide an indication of the consideration received from the farmouts.

Construction in progress
136. Where there are in progress items, these should be disclosed separately.

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Functional currency
137. Where an oil company uses functional currency other than the Naira in keeping its books, it should disclose the currency and the basis of translation in its accounting policies.

Group Accounts
138. Where group accounts including downstream activities are prepared, and the turnover from the exploration and production activities exceeds 10% of the group turnover, the above disclosure requirements will apply.

PART 5

139. NOTES ON LEGAL REQUIREMENTS

The requirements of this standard are complementary to any accounting and disclosure requirements of the Companies and Allied Matters Decree 1990 and other relevant laws and regulations.

140. EFFECTIVE DATE

This standard becomes operative for financial statements covering periods beginning on or after January 1, 1994.

SAS 15 Statement of Accounting Standard - Accounting by Banks and Non-Bank Financial Institutions (Part 2)
This statement is issued by the Nigerian Accounting Standards Board (NASB) for use by all those interested in published financial statements either as prepares or users.

PART I - INTRODUCTION 1. Following the publication in October 1990 of the Statement Accounting Standard (SAS) 10, "Accounting by Banks and Non-Bank Financial Institutions (Part 1)", which dealt primarily) with Banks, new developments in Non-Bank Financial 1nstitutitions have created an urgent need to develop an accounting standard to meet -the needs of that sub-sector. This Statement seeks to provide a guide for accounting policies and accounting methods that are to be followed by Non-flank Financial Institutions such as: i) Finance Houses/Companies; ii) Bureaux De Change; iii) Mortgage Institutions; iv) Discount Houses; v) Stock Brokerage Firms; and vi) Other Capital Market Operators. To the extent that Banks perform activities similar to those carried out by the above institutions, this statement also applies to them. This Statement focuses on three main areas, namely:a) Income recognition;

2.

3. 4.

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5.

b) Loss recognition; and c) Classification and disclosures in Financial Statements It is noted that Non-Bank Financial Institutions are an emerging and dynamic sub-sector of the finance industry, with new types of business constantly evolving. This Statement is intended to establish minimum accounting and disclosure requirements for existing business activities in the sub-sector. Activities in the sub-sector not specifically covered by this Statement should be treated in accordance with the general framework and objectives of the Statement.

PART 11 -DEFINITION 6. The following terms are used in this Statement with the meanings specified:i) Credit-Related Fee Income is the fee income resulting from services that constitute an integral part of a credit facility. I includes all fees charged in connection with arranging a credit facility, such as legal costs and fees for loan arrangements, syndications and commitments, but excluding interest charges. ii) Credit Rescheduling includes restructuring, refinancing or new arrangements for the payment of interest and principal with customers whose credit had earlier been adjudged to be nonperforming. Situations where additional credit facilities are granted to an existing non-performing loan and payment terms agreed also constitute credit rescheduling. iii) Credit Risks mean the loss contingencies attaching to all forms of credit such as loans, leases, hire purchase, factoring and other similar transactions. iv) Finance or Capital Leases are those in which ownership r and rewards are substantially transferred to the lessee, who is normally obliged to pay such costs as insurance, maintenance and similar charges on the property. Usually, tie agree Is non-cancellable and the lessee has the option to buy property for a nominal amount upon the expiration of the lease term. v) Fixed Facilities are facilities repayable in accordance with defined repayment terms and include term loans, instalment credits and leases. vi) Rate Fee means a fee quoted without regard to a period. vii) Floating Rate Facility is one in which the interest charged on a facility is determined by the relevant prevailing rate of interest, as opposed to a fixed' rate facility where interest rate is specified in the contract. viii) Forward Contracts are agreements to buy or sell foreign currency or other trading commodities at a specified future time and at a specified price. ix) General Loan Loss Provisions are amounts provided against the as yet unidentified losses which are known to exist in any portfolio and which relate to the balance of loans and advances which have not been the subject of a specific loan loss provision. x) Investment Profile refers to the spread of a companys investments in the financial markets. xi) Licensed to Commence Operations means that a company has obtained the official licence (duly singed by the CBN Governor) needed to carry on the business of a Non-Bank Financial Institution. . An Approval-In-Principle is not a licence. xii) Listed Securities refer to the securities listed for trading at a stock exchange. xiii) Loan Losses include bad debts written off, provisions made against losses arising on credit risks and loss on loans considered doubtful of collection and all other loss contingencies attaching to credit risks. xiv) Loan Loss Expense is the amount charged to income in the current period in respect of loan losses. xv) Mortgage Loan Commitment is a written offer from a Primary Mortgage Institution to a borrower specifying the purpose and term of a loan. xvi) Non-Credit-Related Fee Income refers to all fees and commissions charged for services in which a company retains no credit risk and includes corporate finance fees, financial advisory fees, commissions, etc. Such fees can be contingent on the occurrence of a future event, or be earned either in stages in accordance with the terms of a contract or on completion of a service. xvii) Non-Performing Credits are those that are for a period of time not performing in accordance with the terms of the credit facility and are unable to meet principal and/or interest repayment

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obligations in full, and thus may be doubtful of collection. Off-Balance Sheet Items include bonds, guarantees, indemnities, acceptances, unfunded treasury operations and trade related contingencies. xix) Offer Price refers to the price at which a security is offered to the public. xx) Open Market Operation (OMO) refers to the purchase and sale of government and other eligible securities by the CBN in the open market, with a view to regulating the liquidity in the financial system. xxi) Operating Leases are those in which the lessor, while giving the lessee the use of the leased property, retains practically all the risks, obligations and rewards of ownership (e .g. obsolescence or appreciation). xxii) Outstanding Deliveries are stock traded on a stock exchange where the transactions had not been concluded due to non-delivery of the applicable instrument. xxiii) Primary Market is the one in which new government and corporate securities are issued. xxiv) Risk Assets are funded credit risks. xxv) Ruling Market Price refers to the price at which a listed security is trading at a given time. xxvi) Securities Underwriting refers to a conditional commitment to take up to a specified number of shares offered to the public, for a commission. xxvii) Servicing Rights are rights to service a debt and to receive associated income and other payments therefrom. xxviii) Share Box Load refers to the aggregate value of shares held in a stockbrokers portfolio. xxix) Syndicated Loans are agreements between two or more lending institutions to provide borrowers with credit facilities utilising common loan documentation. xxx) Specified Loan Loss Provisions are amounts provided against specific loans or credits that are considered to be doubtful of recovery. xviii)

PART 111- EXPLANATORY NOTES

FINANCE HOUSES/COMPANIES
7. For the purpose of this Statement, a Finance House or Company is one licensed by the CBN as a finance company to provide specified financial services.

This is a sub-sector of the finance industry which shares business terrain with the following sub-sectors: i) Banking - Merchant, Commercial and other specialised banks; ii) Mortgage Institutions; iii) Stock Brokerage and Securities Companies; iv) Insurance Companies; and v) Discount Houses. 9. The sub-sectors activities are largely of a short-term nature. The sources of its funds are also shorttenured. On average, the maturity structure of the financial transactions of Finance houses ranges between one and twenty-four months and their transactions have a risk profile different from that of Banks. 10. The providers of funds to the sub-sector including individuals, insurance companies, pension funds, corporate lenders and other operators in the finance industry. The lending portfolio of Finance Houses is usually dominated by small and medium sized borrowers. 11.In general, the activities of Finance Houses include: i) lending to supplement working capital; ii) funds management; iii) leasing business; iv) hire-purchase services; v) debt factoring; vi) project financing and advisory services; vii) debt administration; viii) Local Purchase Order financing;

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ix) export finance and advisory services; x) financial and management advisory services; xi) procurement involving credit; xii) import finance and advisory services; xiii) discounting activities; xiv) forward contracts; and xv) other personal credits.

Income Recognition
12. 13. Finance Companies obtain their revenues from interest on loans, arrangement and commitment fees, lease rentals, commission on factoring and discounting activities, etc. Revenues are generally either recognised immediately or deferred depending on when they are earned. Interest on loans , arrangement and commitment fees, lease rentals, commission on factoring, etc.; may be earned at the time the transactions take place. In case of loans, interest may be assumed to be earned evenly over the period of the facility. However, with the advent of up-front interest negotiations, some operators have recognised interest at the time the facility is drawn; this is not considered good practice. When the recoverability of a loan is in doubt, income is usually recognised only on a cash basis or, if a request for rollover is made, when all the conditions for rollover or rescheduling are met. Lease rental income is deemed to be earned over the life of a lease. Provision is usually made against the interest element of outstanding or overdue rentals. Credit-related fee income usually recognised at the time service is rendered or credit is granted. If such income is substantial or disproportionate, this may not be appropriate. In practice, each company decides whether or not interest income accruing on non-performing loans is recognised or credited to suspense account. This situation is not considered acceptable.

14.

15. 16. 17. 18.

Loss Recognition
19. Usually, losses on credit facilities that occur as a result of the failure of a debtor to pay are reported in the period in which they are first identified. In addition to specific provisions against loans that have been identified as non-performing, some companies also make general provisions.

Transfer of reported credit

20. In the case of sale of risk assets, the industry practice is to transfer the risks and rewards of ownerships to the buyer. Where the sale is made without recourse, the principal is usually removed from reported credit and a profit or loss is recognised at the date the asset is sold. 21. If the sell is made with recourse to the seller, the reward of the risk asset is transferred to the buyer but the credit risk is retained by the seller. The selling company treats the transaction as a secured borrowing, recording the proceeds from the transfer as a liability. However, some Finance Companies prefer to treat such a transfer as a sale. In such a case, some of them record the principal as a contingent liability. 22. Profits on sale with recourse are sometimes amortised over the period of the remaining related credit risk in proportion to the outstanding principal. Losses, on the other hand, are recognised at the time of sale or as soon as they are identified.

Leases
23. In order to be able to claim capital allowances, some Finance Companies record assets leased out under a finance lease arrangement as fixed assets in their balance sheets. This is not considered good practice.

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Financial Statements Classification and Disclosures

Income Statement
24. Usually, Finance Companies group revenues into two, namely, interest income and other income and revenue. This may not be sufficient information to enable users of financial statements to assess the activities of the company.

Balance Sheet Classification

25. Not all Finance Companies follow a uniform format in classifying balance sheet items. 26. In the balance sheet, assets and liabilities are usually grouped in order of liquidity. 27. There is evidence that some Finance Companies indulge in window dressing to strengthen their disclosed balance sheets. This is not considered good practice. 28. Some Finance Companies off-set an asset or liability by deducting the amount from another liability or asset. This is only acceptable where a legal right of set-off exists.

Off-Balance Sheet Items

29. Some finance companies enter into off-balance sheet transactions such as bonds, guarantees, indemnities and acceptances that cannot be classified as assets or liabilities at the balance sheet date, but which give rise to credit risks, contingencies and commitments are properly reported.

BUREAUX DE CHANGE
30. Bureaux De Change are business organisations licensed by the Federal Ministry of Finance and Economic Development to deal in foreign currencies. Their activities are regulated by the Central Bank of Nigeria.

Income and Loss Recognition and Balance Sheet Classification

31. Foreign currencies held by Bureaux De Change are treated as stocks. 32. Stocks of various foreign currencies are valued at the exchange rates ruling at the balance sheet date. Valuation gains or losses therefrom are usually taken to the income statement for the period.

Disclosure in Financial Statements

33. The quantity and Naira equivalent of different foreign currencies traded in during the reporting period are usually reported in the profit and loss account. The stocks at the end of the period are separately converted and reported as current assets in the balance sheet. Details of the composition of the stocks and the different conversion rates are sometimes reported in the Notes to the Financial Statements.

MORTGAGE INSTITUTIONS
34. Primary Mortgage Institutions (PMIs) are organisations engaged in originating, marketing and servicing real estate mortgage loans as principal or agents. Since the promulgation of the Mortgage Institutions Decree 53 of 1989, there has been a significant increase in the number and activities of Primary Mortgage Institutions (PMIs). 35. Primary Mortgage Institutions engage in four main activities, namely:i) Mobilisation of savings; ii) Lending of funds for the acquisition of real estate; iii) Servicing of mortgage loans; and iv) Purchase and sale of mortgage loans, together with Secondary Mortgage Institutions. 36. Secondary Mortgage Institutions (SMIs) are operators dealing in mortgage instruments arising from transactions in the primary mortgage market. 37. Both Primary and Secondary Mortgage Institutions also deal in commercial papers, treasury bills,

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bankers acceptances, etc.

Accounting Policies
38. Primary and Secondary Mortgage Institutions often state the accounting policies adopted with respect to the treatment of performing and non-performing loans. 39. In addition they disclose, they disclose their accounting policies in respect of the following : i) depreciation and diminution in the value of assets; ii) accounting for and valuation of various securities held; iii) valuation of investment properties (if applicable); and iv) provision for losses on mortgage loans and advances.

Income Recognition
40. PMIs and SMIs derive a bulk of their revenues from interest on mortgage loans, servicing fees, loan origination fees, syndication fees, commitment fees and income from treasury activities. 41. It is common practice for Mortgage Institutions to recognise their revenues when they are earned. Some Mortgage Institutions defer their loan-related fee income and amortise it over the life of the mortgage in line with the revenue principle. Other believe that no benefit is derived from its deferral since fee income is non-refundable. This however, ignores the fact that subsequent default by the mortgagor may prove the earning of the fee illusory. 42. Fees for arranging a commitment directly between a permanent investor and a borrower (loan placement fees) are usually recognised as revenue when all significant services have been performed. However, a commitment which is not yet at draw-down stage does not normally qualify as one on which all significant services have been performed.

Loss Recognition
43. Mortgages are often carried in the books at costs. However, at year end, some Mortgage Institutions compare cost with the market value of the security to determine if a permanent diminution in value below the carrying amount of the loan has occurred. The amount by which cost exceeds market value of the security is considered a loss and is so recognised in the income statement. However, this treatment is not correct as it seems to assume that the asset owned by the Mortgage Institution is the property rather than the loan secured on it. A provision should only be necessary in such a situation if the loan itself is non-performing.

Balance Sheet Classification

44. Mortgage Institutions do not classify their balance sheet items uniformly, although they engage in similar activities. Some classify their balance sheet items in descending order of liquidity while others present theirs in reverse order.

DISCOUNT HOUSES
45. Discount Houses are trading houses specialising in money market instruments, to improve liquidity in the secondary money market. 46. Activities of Discount Houses include:a) taking deposits from banks; b) dealing in various money market instruments such as:i) Treasury Bills; ii) Treasury Certificates; iii) Bankers Acceptances; iv) Promissory Notes; v) Commercial Papers; and c) rendering advisory services to money market operators and other institutional investors.

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Income Recognition
47. The revenues of Discount Houses consist of trading income derived from dealing in securities, interest on advances and placement on fixed-interest securities, and fees on advisory services provided to clients. 48. Income on trading activities is recognised on realisation while interest income and fees are recognised as earned.

Asset Valuation and Balance Sheet Presentation

49. Short-term marketable securities are valued at the lower of cost and net realisable value. Other investments are valued at cost. 50. Some operators treat assets sold subject to repurchase arrangements as off-balance sheet items, included in contingent liabilities at the value at they will be repurchased. Other treat them as both assets and liabilities in the balance sheet. Items sold with recourse or subject to buy-back arrangements are sometimes treated as on-balance sheet items. 51. Items in the balance sheet are presented in order of liquidity, with the most liquid assets and current liabilities presented first.

Disclosure
52. Discount Houses present a limited breakdown of the sources of revenues resulting from their principal and secondary activities. 53. Off-balance sheet items that have a material influence in the interpretation of balance sheet figures are usually reported in the Notes to the Financial Statements.

CAPITAL MARKET OPERATORS

54. A capital market operator is one licensed by the Securities and Exchange Commission as such. 55. The capital market mobilises and channels funds into long term investments. It also provides liquidity for those securities. 56. The activities of Capital Market Operators include:i) Stock brokerage; ii) Issuing and marketing of primary securities; iii) Underwriting of securities; iv) Share registration; v) Trusteeship; vi) Unit Trust Schemes; vii) Portfolio management; and viii) Other financial and advisory services.

Income Recognition
57. Capital market operators derive their revenue from:i) brokerage and stock brokerage commission; ii) issuing house fees; iii) underwriting commission; iv) registrars fees; v) portfolio management fees; vi) advisory fees; vii) dividends and interest; viii) profit from sale of owned shares; and ix) others. 58. Revenues are generally recognised when services are rendered and commissions and fees earned. Fees are often deemed earned at various stages of a transaction. 59. On a transaction where success is doubtful and income contingent on completion, income is not recognised until there is relative certainty that the transaction will be completed (e.g. mandate letter

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received). 60. In the case of sale of owned securities at a profit, such profit is usually taken to the income statement of the period of sale.

Loss Recognition
61. When there is diminution in the aggregate value of the portfolio of the securities owned as at the balance sheet date, such a diminution is usually recognised as a loss. 62. Capital market operators usually make provisions for losses as soon as they can be reasonably estimated.

Balance Sheet Classification

63. In the balance sheet, assets and liabilities are usually grouped according to their nature and in order of liquidity.

PART IV - ACCOUNTING STANDARD The Accounting Standard comprises paragraphs 64-94 of this statement. The Standard should be read in the context of paragraphs 1-63 of this Statement and of the Preface to the Statements of Accounting Standards, Statement of Accounting Standard on Accounting by Banks and Non-Bank Financial Institutions (Part 1)and other relevant standards published by the Nigerian Accounting Standards Board.

ACCOUNTING POLICIES
64. Non-Bank Financial Institutions (NBFIs) should articulate and disclose, as an integral part of their financial statements, all the significant accounting policies adopted in the preparation of their financial statements. 65. The accounting policies should be prominently disclosed, under one caption, rather than as notes to individual items in the financial statements. Income Recognition 66. Each significant item of revenue should be separately reported by a Non-Bank Financial Institution to enable the user of its financial statements to assess the contribution of that particular source of revenue. 67. Income from loans, lease rentals, factoring, and other transactions for which collectibility is not in doubt should be recognised in the accounts as earned. 68. Interest on loans should be assumed to be earned in proportion to the outstanding principal over the period of the facility. However, when the collectibility of a loan is in doubt, further income should be recognised only after principal due and already-recognised interest are paid or if a request for rollover has been agreed and relevant conditions met. 69. Credit-related fee income, where material to the transaction and its collectibility not in doubt, should be deferred and amortised over the life of the credit in proportion to the outstanding credit risk. Creditrelated fee income should be regarded as material where in aggregate it constitutes at least 10% of the projected average annual yield over the life of the facility to which it relates. Related direct expenses should be deducted from the fees before deferral. 70. Non-credit related fee income should be recognised as and when earned. Fees earned over a long period of time or in stages (e.g. issuing house fees), which are not contingent upon the occurrence of future events, and for which collectibility is not in doubt, should be recognised when the related services are performed or on the completion of contracted stages. 71. On a transaction where success is doubtful and income contingent on completion, income should not be recognised until it is reasonably certain that the transaction will be completed.

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LOSS RECOGNITION
72. NBFIs that have loan portfolios should analyse and classify them between performing and nonperforming. 73. Each NBFIs should estimate and make general and specific provisions against loan losses in the manner set out paragraphs 74 and 75 after a thorough and systematic review of all its credit risks, including loans, leases and off-balance sheet engagements. 74. for mortgage transactions, provisions should take due account of the long-term nature of the loans and the security available. If a repayment becomes overdue for three months, no further income should be recognised until regular payments resume. Provision against principal should be considered if payment becomes overdue for more than six months. Where principal repayment is overdue by more than one year, the outstanding unprovided principal should not exceed 50% of the estimated net realisable value of the security. Where principal repayment is overdue by more than two years, there should be no outstanding unprovided portion of the credit facility, irrespective of the estimated net realisable value of security held. 75. For all other NBFIs transactions: a) Where lending is related to a specific transaction, and there is evidence that the transaction will not be successful, provision should be made immediately in full against interest and principal outstanding, net of collateral realised or in possession and in the process of realisation. b) Where lending is not related to a specific transaction or evidence on the status of the transaction is not readily available, and success of the transaction is doubtful, the following minimum guidelines should be followed: i) Interest overdue by more than 30 days should be suspended and recognised on a cash basis. ii) Principal repayments which are overdue by more than 90 days should fully provided for and recoveries recognised on a cash basis. iii) When individual principal repayments have been overdue for more than 180days, NBFIs should make full provision against the outstanding principal repayments not yet due. 76. Except as noted in paragraph 79 below, short-term investments should be carried at the lower of cost and net realisable value, with disclosure of market or directors valuation. 77. Long-term investments should be carried at cost, with disclosure of market or directors valuation, unless a permanent decline in the value in the occurs, when the carrying amount of the asset in the NBFIs book should be reduced or recognise the loss. A permanent decline in value of a long term investment should be determined strictly in accordance with SAS 13 - Accounting for investment. 78. Reductions in carrying amounts should be charged to the income statement of the period. Unrealised gains on other holdings should not be offset against such losses. However, subsequent gains on an individual holding against which previous loss provisions had been made should be credited to the income statement to the extent of such provisions previously charged, that is, to restore the carrying amount to original cost. 79. For Unit Trusts, Investment Trusts and other entities established for the sole purpose of trading in marketable securities, investments should be carried at market values. Any gain or loss arising from the movement in value of the assets portfolio of such an entity should be treated in the Revaluation Reserve Accounts or in a statement of total returns, and not in the income statement, unless a net cumulative loss has been incurred, in which case the said net loss should be charged to the income statement in the period it first arises. Any subsequent net gains should be credited to the income statement to the extent that the losses have been previously charged. 80. For a sale of loans or securities to be regarded as without recourse, it must satisfy all the following conditions : (a) Control over the economic benefits of the asset must be passed on to the buyer; (b) the seller can reasonably estimate any outstanding cost; and (c) there must not be any repurchase obligations Any sale not satisfying these conditions will be regarded as with recourse. 81. Profits or losses on sale of loans or securities without recourse to the seller should be recognised by the seller when the transaction is completed. 82. Profit arising from sale or transfer of loan or securities with recourse to the seller should be amortised over the remaining life. However, losses should be recognised as soon as they can reasonably estimated. 83. A sale of loans or securities without recourse to the seller should be accounted for by the seller as a

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disposal and the assets excluded from the balance sheet. 84. A sale or transfer of loans or securities with recourse where there is an obligation to, or an assumption of, repurchase should not be treated as a sale, and the asset should remain in the sellers balance sheet, with any related cash received recognised as a liability. Where there is no obligation to or assumption of repurchase, the sale should be treated as a disposal and the asset excluded from the balance sheet, and any contingent liability should be disclosed. 85. Foreign exchange transactions should be converted strictly in accordance with SAS 7 - On Foreign

Currency Conversion and Translations.

86. On forward contracts, losses should be recognised as soon as they appear likely, while gains should not be recognised until they are realised. However, gains may be recognised or losses deferred when the forward contracts in question are perfectly matched or hedged and the appropriate loss or gain has been recognised on the matching or hedging investment.

DISCLOSURE
Accounting Policies 87. In addition to the disclosure requirements of SAS 2 - Information to be Disclosed in Financial Statements, NBFIs should also disclose the following : (a) The methods and bases by which provisions for loan or securities losses are made. (b) The nature of off-balance sheet engagements and the methods used to recognise income or loss thereon.

INCOME STATEMENT
88. The disclosures in the Income Statement and the Notes to the financial Statements should include, but not necessarily be limited to, the following income and expense captions, where material :

Income
Interest and discount income Lease finance income Fees for services rendered Foreign exchange income Commission income Investment income

Expenses

Interest Expenses Loan loss expenses Commissions Expenses Foreign Exchange Loss General and Administrative Expenses Diminution in asset values The above captions should be further analysed across lines of business where material.

BALANCE SHEET
89. NSFIs should group their assets and liabilities in the balance sheet according to their nature, liquidity and maturity. The disclosures in the Balance Sheet and the Notes to the Financial Statements should include but not necessarily be limited to the following assets and liabilities captions :

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Assets
Cash Short term funds and short term investments Due from banks/due from non - banks financial institutions Bills discounted Loans and Advances Other assets Fixed assets

Liabilities
Depositors funds, current accounts or clients funds Due to bank/due to non bank financial institutions Taxation payable Dividend payable Other or sundry liabilities Long - term loans

Shareholders Equity
Share capital Statutory reserves General reserves Retained earnings/accumulated deficit

90. Assets included in the balance sheet which have been sold with recourse as defined in paragraph 80 should be separated quantified and disclosed. 91. Off - balance items that may have material influence in the interpretation of balance sheet figures should be accurately reported in the Notes to the Financial Statements by stating the nature of credit risk, contingencies and commitments involved. 92. Off - balance sheet engagements should not form part of the balance sheet totals. 93. A credit-granting NBFI should disclose an analysis of the facilities given, distinguishing between performing and non - performing, and their maturity profiles. 94. In addition to the above disclosures requirements, all NBFIs should disclose the following in their financial statements as they relates to their specific activities: (i) Brokers/Dealers Brokers/Dealers should disclose: Values of outstanding deliveries at the ruling market price. Value of the share box load at the ruling market price. Investment profile i.e. the amount of money market/capital market assets of the company. Balance on client account. (ii) Capital Market Underwriters Capital market underwriters should disclose : Value of securities underwritten but not yet disposed of, distinguishing between listed and those awaiting listing. (iii) Discount Houses Discount Houses should make full disclosures of : Securities analysed into treasury bills and certificates, other government securities and private sector

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securities. Deposits, split between call and term deposits, with their maturity profiles. (iv) Finance Houses should disclose : Total values of placements with other Finance Houses with analysis of the period to maturity/period from maturity. Schedule of sectoral allocation of risk assets such as Trade Finance, Leases , Money market instruments, etc. Breakdown of items that constitute Other Asset and Other Liabilities (v) Bureaux De Change Bureaux De Change should treat their foreign currencies as stocks. Stocks of foreign currencies held at the balance sheet date should be valued at the lower of cost and market value. The following disclosures should be made by Bureaux De Change : Quantity and Naira equivalent of the different foreign currencies traded in during the period. Value of foreign currency stocks held and conversion rates used at the balance sheet date. (vi) Mortgage Institutions The following disclosures should be made by Mortgage Institutions : Total liabilities to National Housing Fund. Total value of Mortgage Assets and movement thereon, showing : asset brought forward; addition during the year disposal and realisation during the year; and balance carried forward. Other sources of funds apart from share capital and National Housing Fund. Classification of mortgage loans receivable and mortgage backed securities into those held for sale and those held for long term investments. Detailed breakdown of servicing rights acquired during the year stating : (a) the amount capitalised; (b) the method of amortisation; and (c) the amount amortised.

PART V - NOTES ON LEGAL REQUIREMENTS 95. The requirements of the Standard are complementary to the requirements of the Bank and other Financial Institutions Decree (BOFID) 1991, Companies and Allied Matters Decree 1990, and other relevant laws and regulations.

COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARDS NO. 30

96. The requirements of this Standards accords substantially with the requirements of International Accounting Standards No. 30 - Disclosures in the Financial Statements of Banks and Similar Financial Institutions.

EFFECTIVE DATE

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97. This Standards become operative for Financial Statements covering periods beginning on or after 1 January, 1997.

SAS 16 Statement of Accounting Standards On Accounting For Insurance Business

This statement is issued by the Nigerian Accounting Standards Board (NASB) for use by all those interested in published financial statements either as preparers or users.

PART 1 INTRODUCTION 1. The Primary purpose of insurance is to provide economic protection from identifiable risks that may occur during a specified period. Insurance business can be divided into two main categoriesgeneral (also called non-life) and life (also called long-term). Among the types of risks commonly insured are: Property damage, fire, accident, burglary and theft under non-life insurance; disability, survival and death under life assurance. The business activities of the insurance industry are unique and at the moment, there is a wide diversity of accounting practices. There is therefore the need to set out uniform accounting standards for the industry in order to streamline the areas of differences and variations in accounting treatments so as to enhance the comparability and usefulness of financial statements. This statement establishes financial accounting and reporting standards for the financial statements of non-life and life assurance undertakings. This statement is intended to apply to the financial statements prepared in accordance with the requirements of Companies and Allied Matters Decree, 1990 and the Insurance Decree, 1997 but not to the regulatory returns drawn up for submission to the National Insurance Commission. This statement does not cover the activities of : a) friendly societies; b) pension or provident funds; c) loss adjusters; and d) Insurance brokers/agents.

2.

3.

4.

5.

PART II DEFINITION OF TERMS

6.

The following terms are used in this Statement with the meanings specified:

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i. Accounting Period is a specified period for which a revenue and/or a profit and loss account is prepared. ii. Actuarial Valuation is the valuation of the long-term insurance business liabilities determined from an actuarial investigation that a company transacting a long-term insurance business is required to carry out periodically as prescribed by S.27(3) of the Insurance Decree, 1997. iii. Actuary is an expert appointed to carry out the function specified in (ii) above.

iv. Annuity Contract is a contract that pays periodical income benefits to a person (the annuitant) for a fixed period or for the rest of the life of the annuitant. An annuity may be bought by a lump sum or by installmental payments. v. Attachment Date means, for direct insurer, the date from which the insurer accepts a risk from the insured under and insurance contract and for a reinsurer, the date from which the reinsurer assumes or accepts the risks from the direct insurer or another reinsurer under a reinsurance arrangement. vi. Cedant is an insurance company which places risks with a reinsurance company or another insurance company. A reinsurance company can also be a Cedant. vii. Claim is the amount payable under a contract of insurance on the occurrence of the insured event. viii. Claims Handling Expenses are expenses incurred by an insurance company in the process of investigating and settling claims either by the use of its own staff or by the services of third parties. They can either be direct or indirect. Direct claims handling expenses are those expenses which are attributable to a particular claim. Indirect claims handling expenses on the other hand, are expenses of running claims operations which are not readily attributable to specific claims. ix. Claims Incurred are all claims paid during the accounting period including claims handling expenses adjusted by the movement of claims outstanding provisions between the beginning and the end of the accounting period. x. Claims Incurred But Not Reported (IBNR) are provisions for claims resulting from the occurrence of events by the end of the accounting period but which have not been reported by the insured to the insurer at that date. xi. Claims Outstanding are the estimated final cost of settling claims arising from the events which nave occurred by the end if the accounting period including claims incurred but not reported and claims handling expenses less the amount already paid for those claims. In the case of life business, claims outstanding are those amounts provided to cover the final cost of settling claims arising from events which have been notified by the end of the accounting period less the amount already paid on those claims. xii. Co-insurance is and arrangement whereby two or more insurance companies enter into a single contract with the insured to cover a risk in agreed proportions at an overall premium. xiii. Deferred Acquisition Expenses are acquisition expenses in respect of the unexpired period of risks which are carried forward from one accounting period to another. xiv. Direct Business is the business where the insurer has a direct contractual relationship with the insured. xv. Earned Premiums are written premiums adjusted for the unearned premium provisions at the beginning and at the end of the accounting period.

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xvi. Endowment Policy is contract of life assurance whereby the sum assured is paid at the end of a fixed period or at death of the assured whichever occurs first. xvii. General Business is an insurance business other than life assurance business. It is also called Non-Life Business. xviii. cover. Gross Written Premium is written premium before deducting the cost of reinsurance

xix. Group Life Assurance is life assurance cover for a group of persons, usually employees of an organisation or members of an association. xx. Inception of Risk is the time at which a risk commences under a contract of insurance. However, where the contract of insurance provides for continuing open cover, the inception of the risk is deemed to commence on each anniversary date of the contract. xxi. Investment Income refers to earnings of an insurance company from dividends on its equity portfolio, rents, interest on debentures and money market instruments. xxii. Investment Expenses are the expenses arising from the buying, holding and selling of investments but do not include such expenses as stamp duty and brokerage. xxiii. Life Assurance Business is an insurance business under which, in consideration for a premium, the company undertakes to pay an agreed benefit primarily on the survival of the policyholder to a specified age or on death. Life assurance business includes whole life, endowment, annuity, pensions, permanent disability, capital redemption and pension fund management business. It is also called Long-Term Business. xxiv. Net Written Premium is the gross written premium less the cost of reinsurance cover.

xxv. Non-Forfeiture Benefits are benefits in life assurance contracts which the policyholders remain entitled to even when premiums due under the policies are not paid, for example, cash surrender values. xxvi. Non-Proportional Reinsurance is a reinsurance contract whereby in return for a premium, the reinsurer accepts liability for losses or claims incurred by the cedant in excess of an agreed amount. The liability is normally subject to an upper limit. xxvii. Portfolio Claims are amounts payable for the transfer between the cedant and the reinsurer of a liability under a reinsurance contract for claims incurred prior to a fixed date, normally the date at which the contract commences or ends. xxviii. Portfolio Premiums are Premiums payable for the transfer between the cedant and the reinsurer of a liability under a reinsurance contract for premiums terminating after a fixed date, normally the date on which the contract commences or ends. xxix. Premium is the amount charged by an insurer for accepting a risk for a specified period.

xxx. Proportional Reinsurance is a reinsurance arrangement whereby in return for a proportion of the original premium the reinsurer accepts liability for the same proportion of each related claim incurred by the cedant. xxxi. Reinsurance is a method of ceding to another insurer or a reinsurer, part of a risk or liability accepted, so that there is greater spread and reduced liability on the part of the primary

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insurer. xxxii. Reinsurance Inwards and Outwards. Reinsurance inwards is the acceptance of risk while reinsurance outwards is the placement of risks under a reinsurance agreement. The company which accepts the risk is the reinsurer and the company placing the risk is the cedant. The placing of inwards reinsurance already received y the cedant is called retrocession and the recipient is known as the retrocessionaire. Reinsurance inwards and outwards risks are called facultative, or treaty; where they are a group or pool of risks. xxxiii. Reinsurer is an insurance company or an underwriter which assumes part of risks in an insurance or reinsurance policy. xxxiv. Retrocession see Reinsurance Inwards and Outwards above (xxxii).

xxxv. Revenue Account is an account showing the financial result of the underwriting transactions for an accounting period. xxxvi. Salvage refers to the amount received by an insurer from the sale of property (usually damaged) on which the insurer has paid a total claim to the insured and had obtained title thereto. xxxvii. Statutory Contingency Reserve is a reserve that S.24(1&2) of the Insurance Decree, 1997 requires an insurer to make each year to cover fluctuations in securities and variation in statistical estimates. xxxviii. Statutory Deposit is a deposit that the Insurance Decree, 1997 requires and insurer to maintain at all times with the Central Bank of Nigeria. xxxix. Subrogation is a right of the insured surrendered to an insurer to take action against a third party who was responsible for a loss or injury sustained by the insured. xl. Surrender Value is the sum payable on termination of a life assurance contract before its maturity. xli. Term Assurance is a life assurance contract which runs for limited period whereby the sum assured is paid if the assured dies within this period. However, if the assured survives, the contract is determined and there is no benefit payable to the assured. xlii. Unearned Premiums are the portions of written premiums relating to a period of risk after the end of the accounting period. xliii. Underwriting Year means the accounting period in which a contract of insurance commences. xliv. Unexpired Risks Provisions are the estimated amounts required over and above provisions for unearned premiums to meet future claims and related expenses on businesses in force at the end of the accounting period. xlv. Whole Life Policy is a contract of life assurance whereby the sum assured is payable only on the death of the assured. xlvi. Written Premiums are premiums in respect of contracts which commence during the accounting period.

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PART III EXPLANATORY NOTES

CLASSIFICATION OF INSURANCE BUSINESS

7. The business of insurance can be broadly divided into two categories: a. b. 8. General; and Life.

General insurance business - also referred to as non-life business provides protection against losses which may result from occurrence of specified events within specified periods. The types of risks which are usually insured range from accidents, property damage, fire, flood, work-related injury, to general business interruption, disability and death. In consideration for indemnity against specified losses, the insured usually pays an amount called premium to the insurer. Life assurance business (also referred to as long-term business) is that in which the benefits due to the policyholder become payable on the attainment of a stipulated age, at death, or on the occurrence of a specified event. Thus life assurance other than term assurance, is normally an assurance that a benefit will be paid on the occurrence of a specified event that will definitely take place, but the timing of which may be uncertain.

9.

BASIS OF ACCOUNTING
10. There are several bases of accounting for insurance transactions. However, three bases commonly adopted are as follows: a. b. c. Annual accounting; Deferred annual; and Fund accounting.

Annual Accounting Basis

11. The annual accounting basis is used where it is possible to determine the underwriting result of an insurance business written in an accounting period at the end of that period. The underwriting results that are disclosed in the financial statements, under this basis, usually include the result of the current accounting period and adjustments, if any, made to estimates used in determining the underwriting result of the previous accounting period.

Deferred Annual Basis

12. The deferred annual basis is adopted where it is not possible to determine the underwriting result of an insurance business until the following period. There are two variants of deferred annual basis. Under the first variant, items relating to business written in an accounting period are accounted for one year in arrears. Therefore, the revenue accounts of the current period will relate to transactions conducted in the previous year (usually called the closed year) and any adjustments made to estimates used in arriving at the result of the previously closed years. All underwriting items for the current accounting period. However, provision is usually made for anticipated losses in respect of the business written in the current period (open year).

13.

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14.

Under the second variant, underwriting transactions are recognised in the accounting period in which they are notified. However, the total net revenue at the end of the accounting period, adjusted for any anticipated losses, is not recognised but is carried forward as a fund to the following accounting period. The underwriting result for the period will include the result of the closed year, adjustments to estimates used in determining the result of previously closed years and provision for expected losses for the open year. The fund at the end of the accounting period will consist of outstanding liabilities of the closed years, the net income of the open year and any provision for anticipated losses thereof.

Fund Accounting Basis

15. Where it takes a long time to determine the underwriting result with a reasonable degree of certainty, the fund accounting basis is usually adopted. Under this basis, a fund is created for each underwriting year. Premiums on business written during the year and the related claims or expenses are posted to the fund. The fund for each underwriting year will remain open until there is enough information to determine the underwriting result. No profit is recognised for open years but provisions are usually made for any anticipated losses. The underwriting results at the end of an accounting period will include the results of the underwriting years closed during the period, adjustments to estimates of the previously closed years, adjustments to provisions previously made for open years and anticipated loss in respect of the open year. The fund at the end of the accounting period will include outstanding liabilities for closed years, the net income for each open year and provisions for anticipated losses.

16.

GENERAL INSURANCE BUSINESS

Basis of Accounting
17. Most insurers adopted the annual accounting basis but for certain classes of business such as marine and aviation, some insurers adopt the deferred annual accounting basis.

Premiums
18. In general business, premiums are charged in consideration for the insurance cover provided for the insured. As such, premiums are supposed to cover acquisition, administration, other costs, expected claims, and a margin for profit. Premium revenues are usually recognised in the financial statements only when they have been earned. Therefore, the gross written premium for a reporting period would normally not equate with premium revenue because the gross written premium would normally include amounts which are unearned at the reporting date. These amounts would be earned by the insurer in the subsequent reporting period(s). The recognition of premium revenues usually involves two principal issues. The first is the date of recognition while the other is the pattern of recognition. Premiums revenues are usually recognised from the date of the attachment of risks. This is because premium revenues are earned only when the insurers assume risks on behalf of the insured. In some cases, insurers often adopt bases of recognition which approximate the date of attachment of the risks. Such bases are acceptable as long as they do not cause material distortions to the amount of premium revenues recognised in a particular reporting period.

19.

20.

21.

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22.

The amount of premiums recognised in an accounting period can be determined on the basis of passage of time or on the pattern of risk exposure. Where there will be no significant fluctuation in the level of risk during the risk period, the passage of time basis can be adopted by assuming premium revenues as being earned evenly over the period of risks. However, where the level of risk is expected to witness significant fluctuation over the risk period, the amount of premium revenue to be recognised may be determined on the basis of the pattern of risk exposure. The period of risk to which written premiums relate may not coincide with the accounting period of the insurers. Any written premiums in a risk period not falling within an insurance company's accounting period are usually carried forward as unearned premium. Unearned premium is therefore a deferral of premium revenue which will be regarded as earned in the subsequent accounting period(s). In some classes of business, premiums charged by insurers are subject to future adjustments. In such cases, the insured usually pays a deposit premium at the inception of the contract period which may later be adjusted in the light of subsequent declaration by the insured, for example, Workmen's Compensation and Goods in Transit insurance.

23.

24.

Expenses
25. Insurance companies usually classify expenditures into capital and revenue components. The revenue components are usually classified according to the activity to which they relate. For accounting purposes, the nature of activity to which the expenses relate can be classified under the following broad headings: Underwriting; Claims; Investment; and Management.

Underwriting
26. Underwriting expenses can be sub-divided into acquisition and maintenance expenses. Acquisition expenses are those incurred in obtaining and renewing insurance contracts. They include commissions or brokerage paid to agents or brokers and indirect expenses such as salaries of underwriting staff. Maintenance expenses are those incurred in servicing existing policies/contracts. These include processing cost, preparation of statistics and reports, and other incidental costs attributable to maintenance. Acquisition costs are incurred at the point of acquisition of policy/contract whereas the earnings relating to them will occur throughout the risk period, which may extend over more than one accounting period. Consequently, acquisition costs are usually deferred and amortized in proportion to the amount of premium recognised in the reporting period in line with the matching concept. To match acquisition costs with the related premium it will be necessary to allocate acquisition expenses to classes of insurance contracts in accordance with the company's manner of classification. where it is difficult to associate an acquisition cost with the related premium revenue, such cost is usually expensed in the accounting period in which it is incurred.

27.

Claims
28. The revenue of an accounting period is usually charged with the cost of settling all claims, together with related claims handling expenses resulting from events which occurred before the end of the accounting period whether or not reported by the end of the accounting period. A provision is also usually made for settlement of claims arising from events which have occurred but which claims are yet to be settled during a reporting period. In addition, provisions are made for claims incurred but not reported (IBNR) together with the estimated associated claims handling expenses. These provisions are based on latest information available at the time of

29.

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30.

preparing the financial statements and other factors such as trends in the economy, previous experience in claim notification and changes in volume or mix of risks underwritten. If it is possible for an insurer to recover a portion of its claims expense through salvage and subrogation, the amounts so recovered are regarded as an asset and used to reduce the claims incurred.

Investment
31. This refers to all expenses arising from the buying, holding and selling of all types of investments, including the emolument and related expenses of the staff involved, their office space, computer usage etc., but does not include such expenses as stamp duty, brokerage, etc., which are regarded as part of the cost of investments.

Management
32. Management expenses are expenses other than claims, investment and underwriting expenses. They include salaries and wages, directors' remuneration, statutory supervisory levies, auditors' fees, depreciation, advertising, printing and stationery, rent and other non-operating expenses.

Unexpired Risk
33. Under the annual and deferred annual bases of accounting, a possible loss on insurance contracts may occur where the total of anticipated claims and related expenses exceed related unearned premium. In this case, there is a need to allow the prudence concept to override the accrual concept by making a provision for unexpired risk in line with the prudence concept. The decision as to whether such provision should be made is usually based in the underwriting experience of the entire classes of business written and not in the experience from a particular line of business. However, in companies where certain classes of business are distinctly managed, the provision for unexpired risk may be determined with regard to the separate classes of business. Unexpired risks provision can be arrived at in two ways. It can be presented in a way that allows for proper segregation of items of income and expenditure. In this case, deferred acquisition expenses are disregarded and a provision is made for the entire shortfall in the unearned premium provision with deferred acquisition expenses being carried forward separately. Alternatively, the shortfall in the unearned premium provision is first recognised by writing off deferred acquisition expenses to the revenue account and, if the shortfall is greater than the deferred acquisition expenses, a provision is made for the excess. The first alternative is usually preferred because it does not result in the distortion of operating ratios.

34.

LIFE ASSURANCE BUSINESS

Basis of Accounting
35. Life assurance business is accounted for on the fund accounting basis because underwriting result is only determinable with reasonable certainty in the long-term. The balance of the fund at the end of each accounting period should, at least, be sufficient to meet the long-term business liabilities.

Premiums
36. The nature of life assurance business often generates a controversy over whether premium from policyholders should be treated as liability or revenue. Some life assurance contracts are purely a form of savings. Premiums received from such contracts may be compared to deposits accepted by bankers in which case they are regarded as liabilities of the insurers, for example, pure endowment contracts.

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37.

38.

39.

There are also some premiums which can be regarded as revenue to the life fund, for example, premiums received from term assurance. The general characteristic of this category of premiums is that their acceptance does not give rise to the creation of immediate corresponding liabilities. The third category of premiums is that which possesses characteristics of both revenue and liability. The premiums from a whole life or endowment policy, for instance, comprises a savings component and an amount for death risk. The savings component could be treated as a liability of the life assurer while the death risk component is usually treated as a revenue item. For this category, it is difficult to separate premiums into revenues and liabilities. As a result, life assurers usually do not separate premiums into their component parts but treat this third category as a revenue item. Premium revenue of life assurers is usually recognised when due for payment from policyholders. There is also usually no allocation of premiums between reporting periods.

Claims
40. The revenue of an accounting period is usually charged with all claims due or notified during the period with a specific provision being made in the financial statements for claims due but not settled by the end of the accounting period. Costs of settling life assurance claims are usually charged to revenue in the accounting period in which they are incurred.

41.

Expenses
42. The nature of activity to which the expenses relate for life assurance is the same for general insurance, except that for life business: Renewal costs are not incurred because of its long-term nature. Commissions paid on policies are not recoverable because they are usually paid in arrears and premiums would have been earned before payment of commission. Acquisition costs are expensed as incurred.

Policy Liabilities
43. Policy liabilities refer to the policyholder's interest in the life assurance business. It is the amount which is required by the life assurer to meet obligations under existing contracts. The determination of the amount of policy liabilities usually depends on the nature of life contracts involved. For savings contracts, the policy liabilities are determined by the accrued benefits of relevant policyholders. However, in contracts that are either entirely protection policies or partly so, the policy liabilities are determined after taking into consideration the length of the contract period, assumptions on human mortality, interest rate level, and all related expenses in accordance with generally accepted actuarial principles.

Valuation of Life Business

44. The Insurance Decree, 1997 requires actuarial valuation for the purpose of determining life assurance contract liabilities. The purpose of the valuation is to determine whether the value of the assets representing the funds maintained by the assurer in respect of the insurance business exceeds the value of the liabilities to the policyholders.

Valuation Surplus/Deficiency
45. Where the net assets exceed the policy liabilities, the difference is a surplus which should be shared between the ''with-profit'' policyholders and the shareholders (S.27 (4d) of the Insurance Decree 1997). The shareholders interest in the surplus, which by law should not be more than 10 percent, constitutes their profit from the life assurance business and is therefore transferred to the profit and loss account. However, where the liabilities exceed the net assets there is a deficiency which has to be met by the shareholders. This loss from life business is transferred to the profit

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and loss account.

INVESTMENTS
46. Insurance companies are required to hold their investments in accordance with the provisions of S.26 of the Insurance Decree, 1997 and account for the same in accordance with the provisions of SAS 13 - Accounting for Investments. An insurer usually reviews the quality of its investments on a regular basis. Where there is compelling evidence that the realisability of an investment is doubtful, insurers usually make adequate provision for the same. The amounts of such provision are usually highlighted in the financial statements.

47.

REINSURANCE
48. It is common for insurers to spread the risks assumed by passing part of those risks to other insurers for a premium. This is known as reinsurance. Reinsurance can be broadly classified into two: treaty; and facultative. A treaty reinsurance exists when a direct or ceding insurer compulsorily passes to a reinsurer, who also must compulsorily accept, a specified portion of risks and associated premiums for a particular class of business that it underwrites. In facultative reinsurance however, reinsurance arrangements are made with respect to individual risks on and ad-hoc basis. At present, it is common practice to show in the financial statements the net written premiums and net claims incurred after deducting reinsurance components. However, it is more informative for direct insurers and reinsurers to report their transactions on gross basis. This arrangement enables the users of financial reports to appreciate the extent and effectiveness of the reinsurance arrangements. For direct insurers, Premiums earned during a period are recognised as revenue irrespective of the reinsurance arrangements. Similarly, the gross amount of claims incurred during the period will need to be recognised. Premiums ceded to reinsurers (outward reinsurance premiums) are therefore recognised as an expense of the direct insurer and are not netted off against premiums revenues. Reinsurance earnings received or receivable during the reporting period are recognised by reinsurers as revenue and are not netted off against claims expense or outward reinsurance premium expense.

49.

50.

Legal Cession
51. The law provides for compulsory ceding of 20% of any insurance to the Nigerian Reinsurance Corporation (S.7 of the Nigerian Reinsurance Act, 1997). It also makes it mandatory for Nigerian Reinsurance Corporation and African Reinsurance Corporation to be ceded 20% and 5% respectively of any treaty arrangement (Nigerian Reinsurance Corporation Amendment Decree, 1998).

Retrocession
52. Usually, a reinsurer passes a portion of the risks assumed from direct insurer to another reinsurer, underwriter or an insurance company. This arrangement is called retrocession. The accepting reinsurer is referred to as the retrocessionaire and the premiums passed by the reinsurer to the retrocessionaire are called retrocession premiums. Retrocessions are viewed by the cedant as outward reinsurance and retrocession premiums are therefore recognised as expenses. Consequently, claims recovered or recoverable from retrocessionaires during the reporting period will be recognised as revenue.

53.

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Pooling
54. 55. A pool is an association of insurers, reinsurers or underwriters formed for the purpose of providing joint insurance cover for particular risks or types of risk. There are many variants of pooling arrangements. One variant involves an entity accepting risks on behalf of pool members in an agency capacity. The entity will receive premiums from the insurers, pay claims as they arise, and distribute shares of the business to the members in agreed ratios. As the entity is acting in an agency capacity, the business allocated to other pool members is not reinsurance business. The pool members usually treat their shares of allocated business as direct insurance business. Under the second variant, an insurer or reinsurer manages a pool into which business underwritten according to the pooling agreement are ceded. The businesses are then shared amongst the pool members in agreed proportions.

56.

Co-insurance
57. Co-insurance is an arrangement whereby two or more insurance companies enter into a single contract with the insured to cover a risk in agreed proportions at an overall premium.

PART IV ACCOUNTING STANDARD

ACCOUNTING FOR INSURANCE BUSINESS

The Accounting Standard comprises paragraphs 58-94 of this statement. The Standard should be read in the context of paragraphs 1 - 57 of this statement and the Preface to the Statements of Accounting Standards published by the Nigerian Accounting Standards Board.

Accounting Policies
58. 59. An insurance company should articulate and disclose as an integral part of its financial statements, all the significant accounting policies adopted in the preparation of its financial statements. The accounting policies should be prominently disclosed under one caption rather than as notes to individual items in the financial statements.

GENERAL BUSINESS

Basis of Accounting
60. General insurers should adopt the annual basis of accounting. Where it is not possible to determine underwriting results with reasonable certainty until the following accounting period, the deferred annual basis should be adopted. The accounting basis or bases adopted should be disclosed. Where the deferred annual basis is used, the classes of business involved and the extent of the time deferral for profit should also be disclosed.

Premium Recognition
61. 62. Premium revenue should be recognised from the date of attachment of risk. Premium revenue should be assumed to earned evenly over the period of risk. Where there is a marked variation in the pattern of risks within the risk period, premium revenue should be accounted for in accordance with the pattern of risk exposure All written premiums relating to risk for a period not falling within the accounting period should be carried forward as unearned premium.

63.

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Expenses
64. General insurers should classify their expenses under the following captions: a) Underwriting; b) Claims; c) Investment; and d) Management. Underwriting expenses should be subdivided into maintenance and acquisition expenses. Maintenance expenses should be charged to the revenue account in the accounting period in which they are incurred. The portion of acquisition expenses relating to unearned premiums should be deferred. Deferred acquisition expenses should be determined separately for each class of business. Such deferred acquisition expenses should be calculated by applying to the acquisition expenses the ratio of unearned premium to written premium. The movement in deferred acquisition expenses between two accounting periods should be expensed in the revenue account. Claims and claims handling expenses incurred during the accounting period should be charged to the revenue account. Adequate provision should be made for the settlement of claims incurred but not reported by the end of the accounting period. Any amount recoverable through salvage or subrogation should be used to reduce claims incurred. Investment and management expenses should be charged to the profit and loss account in the accounting period in which they are incurred.

65. 66. 67. 68. 69. 70.

71.

Unexpired Risks
72. 73. Unexpired risks provision should be determined based on the underwriting experience of each class of business. Provision should be made for unexpired risks where the total of anticipated claims and related expenses exceeds the related unearned premiums.

Financial Statements
74. The financial statements of General Insurers should include a revenue account for each class of insurance business undertaken.

DISCLOSURES 75. In addition to the disclosure requirements of SAS 2 - Information to be Disclosed in the Financial Statements - General Insurers should disclose the following :

Revenue Account 76. The Revenue Account referred to in paragraph 74 should disclose the following : Income Direct premiums; Inward reinsurance premiums; Gross written premiums; Net written premiums; Decrease in provision for unexpired risks; and commissions received. Deductions from Income Outward reinsurance premiums; and Increase in provision for unexpired risks.

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Expenses -

Direct claims paid; Inward reinsurance claims paid; Increase in provision for outstanding claims.

Recoveries from Expenses Outward reinsurance recoveries; and Decrease in provision for outstanding claims. Underwriting Expenses Acquisition; and Maintenance. 77. Outward reinsurance expense should be reported separately as a deduction from premium revenue, while reinsurance and other recoveries should be reported separately as a deduction from claims expense. Profit and Loss Account The disclosure in the Profit and Loss Account and the Notes to the Financial Statements should include the following income and expenses captions (unless they have been disclosed in the Revenue account). Income -

78.

Gross written premiums; Outward reinsurance premiums; Earned premiums; Investment income (net); Commissions received; and Other income.

Expenses Underwriting expenses; Claims incurred; Management expenses; and Provision for bad and doubtful debts.

Balance Sheet 79. General insurers should arrange their balance sheet items in order of liquidity. The disclosure in the Balance Sheet and Notes to the Financial Statements should include the following assets and liabilities captions: Assets -

Cash; Short term investments; Debtors; Deferred acquisition expenses; Long term investment; Statutory deposit; and Fixed assets.

Liabilities Creditors and accruals; and Insurance fund (including provisions for unearned premiums, outstanding claims unexpired risks).

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Shareholders' Funds Authorised share capital; Called-up share capital; Statutory contingency reserves; Capital reserves; and General reserves.

LIFE ASSURANCE BUSINESS

Basis of Accounting
80. Life assurance business should be accounted for on the fund accounting basis.

Premium Recognition
81. Premium revenues should be recognised and credited to the fund account when due for payment from policyholders. There should be no allocation of premium revenue between accounting periods. Receipts from deposit administration and other businesses of a savings nature should not be treated as revenue but as liabilities. Interest accruing to the life assurers from investment of such deposits should be recognised in the profit and loss account in the period in which it is earned, while interest paid to depositors should be recognised as an expense.

82.

Claims
83. All claims due or notified in an accounting period should be charged to the fund in that period.

Expenses
84. 85. Expenses of life assurers should be classified in accordance with paragraphs 64 -71 of this statement. All incurred expenses should be charged to the fund during the accounting period.

Policy Liabilities
86. Policy liabilities should be as determined by the actuarial valuation.

Valuation Surplus/Deficiency
87. A valuation surplus should be shared between the ''with-profit'' policyholders and shareholders in accordance with the advice of the actuary and subject to the legal provisions as set out in paragraph 45. A valuation deficiency should be transferred to the profit and loss account.

88.

Financial Statements
89. The financial statements of a life assurer should include a life revenue account only if it has other classes of insurance business.

DISCLOSURES 90. In addition to the disclosure requirements of SAS 2 - Information to be Disclosed in the Financial Statements - life assurers should disclose the following :

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Revenue Account 91. The Revenue Account of a life assurer should disclose the following : Income -

Direct premiums; Inward reinsurance premiums; Gross written premiums; Net written premiums; and Commissions received.

Deduction from Income Outward reinsurance premiums. Claims Incurred Direct claims; Inward reinsurance claims; Reinsurance recoveries; and Surrenders. Underwriting Expenses Acquisition; and Maintenance.

Profit and Loss Account

92. The disclosure in the Profit and Loss Account and Notes to the Financial Statements should include the following income and expenses captions (unless they have been disclosed in the Revenue account). Income -

Gross written premiums; Earned premiums; Investment income (net); Commission received; Shareholders Portion of Life assurance Surplus/deficit; and Other income.

Deduction from Income Outward reinsurance premiums. Expenses Claims incurred; Underwriting expenses; Management expenses; and Provision for bad and doubtful debts.

Balance Sheet
93. Life assurers should arrange their balance sheet items in order of liquidity. The disclosure in the Balance Sheet and Notes to the Financial Statements should include the following :

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Assets Cash; Short term investments; Debtors; Loans to policyholders; Long term investments; Statutory deposit; and Fixed assets. Liabilities Creditors and accruals; Outstanding claims; Insurance funds; and Deposit administration. Shareholders' Funds Called-up share capital; Statutory contingency reserves; General reserves; and Retained earnings/accumulated losses.

COMPOSITE BUSINESS (LIFE AND GENERAL)

94. An insurer carrying on both life and general business should follow the same disclosure requirements set out above. In addition, its financial statements should include a separate life balance sheet.

PART V 95.

NOTES ON LEGAL REQUIREMENTS

The requirements of this Standard are complementary to the requirements of the Insurance Decree 1997, Companies and Allied Matters Decree 1990, as amended, and other relevant laws and regulations.

EFFECTIVE DATE
96. This Standard becomes operative for financial statements covering periods beginning on or after January 1, 1998.

SAS 17 Accounting in the Petroleum Industry: Downstream Activities

PART 1 INTRODUCTION 1. Statement of Accounting Standard (SAS) 14 was issued in 1993 as part of efforts to enhance the comparability of financial statements prepared by the companies operating in the upstream sector of the petroleum industry. 2. In order to complete the standardisation process for the industry, there is a need to develop an accounting standard for the downstream sector.

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3. This Statement therefore provides a guide on accounting practices and reporting formats to be followed by companies operating in the downstream sector of the Nigerian petroleum industry. Such companies include those engaged in: Refining and Petrochemicals; Marketing and Distribution; and Liquefied Natural Gas.

PART 2 DEFINITION OF TERMS 4. The following terms are used in this statement with the meanings specified: i Automotive Turbine Kerosene (ATK) is a refined petroleum product used as fuel in aircraft. ii. ATK Overbilling Claim is the claim made by a marketer for ATK billed at international rate, where the product is sold for local use. The price for ATK sold to aircraft thast ply local routes is usually lower than that for ATK sold to aircraft that ply international routes. iii. Black Products are heavier and darker refined petroleum products, mainly Low Pour Fuel Oil (LPFO) and High Pour Fuel Oil (HPFO), which are used in most cases to operate big industrial machinery. iv. Bridging Claim is the entitlement of a marketer for transportation of bulk petroleum products from a depot outside the specified area of that depot's government approved zones of distribution. v. Cracking is a process whereby large hydrocarbon molecules are broken down into smaller ones through a heating process and use of catalysts. vi. Crude Oil Distillation refers to the basic refining process in which crude oil is heated in order to break it down into a number of fractions (intermediate components) which are separated at different temperatures. vii. Debottlenecking is the installation of additional equipment in or change to and existing plant to achieve a higher capacity than it was designed for. viii. Downstream Activities refer to those activities that take place from receipt of crude oil into crude oil tanks or gas into petrochemical tanks to the transportation of refined products to the final user or of processed priducts to secondary industries. These activities encmpass transporting, refininf, liquefaction of natural gas, distributing and marketing of refined petroleum products, gas and derivatives. ix. Feedstock is raw material for petroleum refinery, petrochemical process units and liquefied natural gas plants. x. Hydrocarbon is a compound of carbon and hydrogen or a mixture of such compounds which may exist in solid, liquid or gaseous form. xi. Natural Gas Lisquids (NGL) are liquids which can be extracted from natural gas in gas field facilities. They generally include propane and heavier fractions such as butane and in some cases ethane. xii. Off-site Facilities refer to the various equipment, pipelines and tanks in a refinery or petrochemical plant outside the processing area. xiii. Olefins are a class of hydrocarbons which includes ethylene and propylene. The polymerisation of ethylene and propylene yields polyethylene and polypropylene which are used in the manufacture of plastics. xiv. Petrochemical is a chemical derived from petroleum or natural gas processing. xv. Polymerisation is the process of chemically joining molecules of hydrocarbons into long chins of complex molecules. xvi. Petroleum Equalisation Fund is a fund set up to harmonise the selling price of white products throughout the Federation and to compensate the marketers for transport cost differentials. xvii. Refining is the process of distilling crude oil into light or heavy fractions or cracking

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xviii. xix. xx.

xxi.

xxii. xxiii.

heavy products into lighter ones, thereby converting them into usable products or feedstock. Regeneration is the process of extending the useful life of a used catalyst. Shut-down refers to a temporary closure of a refinery or petrochemical process unit or LNG plant for maintenance. Stream Days refer to the number of days per year that a refinery or petrochemical plant actually operates, allowing for routine maintenance. This is a more realistic measure of capacity than calendar days. Turn-around Maintenance (TAM) refers to the overhaul of a refinery or a petrochemical plant normally carried out after operating the plant for a specified period, usually two years. Throughput is the estimated quantity of crude oil that a refinery can process over its useful life. White Products refer to refined petroleum products usually Premium Motor Spirit (PMS or Petrol ), Automotive Gas Oil (AGO or diesel) and kerosene that are relatively lighter than black products and are dispensed at retail outlets.

PART 3

EXPLANATORY NOTES

Distinctive Features of Refining and Petrochemical Operations

5. The operations of petroleum refineries and petrochemical plants can either be on a stand-alone or integrated basis. They are both capital and technology intensive. This segment of the downstream sector of the petroleum industry has peculiar complexities in its operations and accounting. These complexities include plant mix or varied technological configurations, extensive maintenance, large stocking of spares, components and chemicals, and difficulty in determining comparative running or processing costs.

REFINING
6. Refining is simply the breaking down of the hydrocarbon mixture of crude oil into useful petroleum products. This is done through distillation, cracking, reforming and extraction processes. Petroleum products and derivatives include fuel gases, gasoline, kerosene (paraffin), diesel oils, lubricant oils, waxes, bitumens, etc. As a process industry, the refining operations or processes result in the continuous flow of intermediate products (distillates), finished products and byproducts. The industry is technology-driven and various processes which improve the relative yield of the more valuable products are under patents and are normally available for use only under license.

7.

8.

Refinery Operations
9. 10. 11. 12. Refinery operations can be sub-divided into crude oil acquisition, crude oil storage, processing, blending and finished products storage. Crude Oil acquisition involves procuring crude oil (e.g. through purchase or swap) and transporting it by pipelines, railways, barges and road tankers. Crude oil is stored in large tanks and allowed to settle so that water and other sediments can be removed. It is then tested and checked for conformity with specification. Refining is a process that involves continuous pumping of crude oil through the distillation unit where heat is applied and the mixture of hydrocarbon vapors separated in the various trays in the cooling towers where water is continuously sprayed as a cooling agent. Volatile gases pass through pipes at the top of the column to be either liquefied for bottling as cooking gas, used for firing burners or flared. Hydrocarbon compounds that are liquid at room temperatures, after

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13. 14.

separation, pass through pipelines to tanks for blending into finished products or other process units for further processing. This process goes on continuously until the plant is shut down. Due to high market demand for lighter products, the heavier products (intermediates) are pumped through other units such as vacuum distillation, fluid catalytic cracker, hydrofluoric alkylation and Dimersol for secondary processing as a means of converting the heavier products further into lighter products. Chemicals and catalysts are used in these units for the conversion process. Blending is the mixing of refined products coming out of different process units to give the desired specification. Chemicals, and colour (dye) are added as additives during blending. Petroleum products are stored in tanks located in the refiner tank farms from where they are pumped through pipelines to depots or barges. Volatile light products are stored in floating roof tanks while heavier products are stored in fixed roof tanks.

PETROCHEMICALS
15. The manufacturing of petrochemicals is the processing of crude oil intermediates and natural gas into usable products. Such products include polypropylene, polyethylene, carbon black, linear alkyl benzene (LAB), etc. The manufacturing processes result in the continuous flow of intermediate products which serves as industrial inputs for the production of a wide variety of end products in building, textile, packaging, electrical, automotive, agricultural, medical and aromatic industries. Petrochemical plants may be regarded as the ''downstream'' of the refineries. The products are usually solids and liquids as against liquids and gases from the refineries.

16.

Petrochemical Operations
17. Petrochemical operations can be sub-divided into feedstock acquisition, feedstock storage, processing, packaging finished products, storage and sales. Feedstock to petrochemical plants are either outputs from the refineries or treated natural gas. Feedstock are pumped to the plants where they are either cracked under very high temperature or treated with chemicals and catalysts. In the case of olefin-based plants, natural hydrocarbon gases are passed through an olefin plant where ethylene and propylene are produced. Polyethylene and polypropylene plants are secondary processing plants where ethylene and propylene are polymerised into polyethylene and polypropylene resins used for the manufacture of plastics. A petrochemical company could own a packaging factory to manufacture for its use, but such manufacture of packaging materials is not a part of the petrochemical industry.

18.

DEBOTTLENECKING
19. Debottlenecking is a form of plant modification in refining and petrochemical companies which essentially results in increased capacity. The cost involved is usually capitalised.

PLANT REHABILITATION
20. Plant or equipment rehabilitation is a major repair and maintenance exercise intended to prolong the economic life of the assets. Rehabilitation costs are usually capitalised.

STAND-BY EQUIPMENT
21. Stand-by equipment refers to plant and other facilities which are not constantly used in production activities. They are acquired to provide back-up in case of break-down of operating plants. There is a school of thought which holds that these assets should not be depreciated like other fixed assets. The proponents of this position argue that stand-by equipment does not contribute to revenue generation and moreover its value may appreciate during inflationary periods. They, therefore, conclude that it will be improper to depreciate these assets. The opponents of this line of thought argue that stand-by equipment should be depreciated because it is like other fixed assets with future service potentials. Stand-by equipment, they argue, guarantees the uninterrupted flow

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of production activities. They argue further that the purpose of depreciation is not to determine the value of an asset, but to allocate its cost. They, therefore, conclude that the costs of stand-by equipment should be depreciated notwithstanding that its value may increase during inflationary periods.

TURN-AROUND MAINTENANCE (TAM)

22. Refinery and petrochemical plants are expected to run continuously for about two years until they are shut down fully for major maintenance called turn-around maintenance. Total costs of turnaround maintenance are significant and are usually amortised over two years, while routine maintenance costs are expensed in the year in which they are incurred. Critics of the amortisation method argue that turn-around maintenance is not always done at a planned period of once every two years and therefore the total cost should be written off in the year of turn-around maintenance. The proponents of amortisation are of the view that performance comparisons would be difficult; moreso, when the production during the TAM year would be lower because of the loss in number of stream days.

DEPRECIATION
23. Refining and petrochemical plants and equipment costs are usually depreciated on a straight-line bases. Arguments against the straight-line method are: that with adequate maintenance the plant could last significantly beyond its estimated useful life; and that it does not give an even spread of the sum of depreciation charges and maintenance costs as the plant ages. Critics, therefore, propose the reducing balance method. However, the proponents of the straight-line method are of the opinion that it is a generally accepted method and it is simple in application.

TRANSFER PRICING
24. In a refining and petrochemical company, some of the output of the company (like unsaturated propane, decant oil) form the feedstock for the petrochemical plants. To have a fair performance appraisal of the plant and cost allocation to each of its units, transfer pricing is inevitable. The methods in use for setting transfer pricing is inevitable. The methods in use for setting transfer prices include: market-based pricing; cost-based pricing; and negotiated pricing.

REPLACEMENT OF MAJOR COMPONENTS

25. The cost of replacing major components of a plant is usually expensed in the year in which it is incurred. Opponents of this method argued that it distorts financial statements, while proponents of the method are of the view that since the replacements do not increase the output or efficiency, but could only bring the plant to its original performance level, it should not be capitalised.

CATALYSTS
26. Catalysts are chemical substances that are used to speed up the cracking of hydrocarbons. There are short-life (consumable) and long-life catalysts. Short-life catalysts last for less than a year

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whereas long-life catalysts last longer. Cost of the platinum content of long-life catalysts is usually capitalised and amortised over the expected life span while the regeneration cost is usually capitalised and amortised over the life of the regeneration. The cost of the short-life catalysts is usually expensed.

VALUATION OF PRODUCTS AND INTERMEDIATES

27. There are two main methods used in the valuation of products and intermediates, namely the process cost method and the relative sales value method. Under the prices cost method, total costs are accumulated for cost centres and allocated to products on volume basis. Some products which are intermediates carry their allocated costs to the next unit where further costs are allocated. Relative sales value method assumes that all products from crude oil or gas are joint products and each yields the same rate of profit. Costs are allocated based on the market value of each end product. The argument against the traditional process cost method is that the purpose of refining crude oil or gas may be to get white products while other products could be considered as by-products. The argument against relative sales value method is that prices are not always determined through the market forces of supply and demand, but may be regulated.

28.

PACKAGING FACTORY
29. Refineries and petrochemical companies sometimes build factories to produce packaging materials like bags, drums, tins and other containers f packaging their products. Income from such operations is usually included in the profit and loss account of the refineries or petrochemicals as sundry income. There are arguments that separate accounts should be maintained in order to disclose total costs of such operations, including allocations of utilities and other services.

DISTRIBUTION AND MARKETING OPERATIONS

DISTRIBUTION
30. Distribution and marketing of refined petroleum products are complementary activities. Distribution has to occur before sales can be made. In terms of accounting for activities in the marketing sector, distribution cost is usually distinctly classified.

MARKETING
31. Oil marketing can be described as the procurement of refined petroleum products by marketers and selling of the products through a network of stations, peddling trucks and vessels (for sales on land and water). Oil marketing also involves marketing of locally blended and imported lubricants, insecticides, liquefied petroleum gas (LPG), bitumen and other special petroleum products.

PRODUCT SCOPE
32. The products handled by oil marketing companies are numerous. They include:

White Products i) ii) iii) iv) v) Premium Motor Spirit (PMS or Petrol); Automotive Gas Oil (AGO or Diesel); Household Kerosene (HHK); Dual Purpose Kerosene (DPK); and Automotive Turbine Kerosene (ATK).

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Black Products i) ii) Low Pour Fuel Oil (LPFO); and High Pour Fuel Oil (HPFO).

Others i) ii) iii) iv) Liquefied Petroleum Gas (LPG); Bitumen; Lubricants, comprising local and imported items of various grades; and Insecticides.

CHANNELS OF TRADE
33. These include accredited outlets, such as: Service stations and filling stations;

Commercial and industrial consumers (some of whom, are supplied with equipment, like tanks and pumps for dispensing their products). These are referred to as major consumers; Airlines, at airports through hydrant systems or bowsers; Exports, through ocean-going vessels or by bulk road vessels; Bunkering sales to local or international ocean going vessels; and Surface tank retailers of kerosene.

34.

35.

Products from Nigerian National Petroleum Corporation (NNPC) depots are transported to retail outlets of marketers and industrial consumers by rail and bulk road vessels (BRVs). Products from ocean-going vessels are pumped into major marketers' installations where they are stored and sold to retail outlets and industrial consumers. BRVs are also used for transportation in this regard. Some marketers also have plants for blending various grades of lubricating oils. The basic ingredients are base oils and additives. Special grades of lubricants are also imported directly.

BRIDGING CLAIM
36. Bridging claims are supposedly refundable to the marketers by the government through the NNPC. The expected reimbursement is usually credited to transportation cost and a receivable account is debited pending reimbursement. However, reimbursement is often considerably in arrears. Most marketing companies therefore, usually provide for the likelihood of not recovering this amount after a certain period of time.

AUTOMOTIVE TURBINE KEROSENE OVERBILLING CLAIM

37. ATK Overbilling Claim represents the claim made by a marketer for ATK billed by NNPC at international rate when the product is sold for local use. The unit cost of ATK to a marketer who fuels an international aircraft is higher than the unit cost when the marketer fuels an aircraft on local routes. Sometimes, all ATK sold to marketers is billed out at the higher rate. Thus, a marketer is entitled to make a claim with appropriate documents for ATK that has been billed and paid for at international rate which however has been sold for local use. A receivable account is

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debited for such claims and product purchase account is credited. Unsettled claims may span over some years with partial or total non-recovery. Provision is therefore usually made by marketers for the likelihood of not recovering such amounts.

LIQUEFIED NATURAL GAS (LNG)

Natural Gas
38. The usefulness of natural gas has increased significantly, especially as it became possible to transport it through pipelines. The qualitative advantage that gas has over other types of fuels in terms of flexibility in use and concern over environmental pollution has led to increased demand for gas. Advancement in technology has led to the building of special vessels that can withstand the pressure under which gas is transported in liquid form to buyers across the oceans.

39.

Liquefied Natural Gas Operations

40. The LNG operations involve collection of natural gas at the fields and transmitting it through pipeline to a liquefaction plant where the gas is treated and then compressed into liquid. After an initial storage, the liquefied gas is transported by ship to the buyer at whose facility the LNG will be regassed for storage before it is distributed for power generation, for use as domestic gas and as feedstock for petrochemical operations.

PROCESSES INVOLVED IN LNG OPERATIONS

41. i) Gas Gathering and Collection The quantity and quality of gas required may demand that supplies are received from more than one field. The identified gas fields are connected to be able receive the quantity of gas required and within the desired specification. ii) Transmission of Gas

The gas has to be transferred from the field to the plant by means of a pipeline. A slug catcher is installed to allow liquids to be separated from the gas. iii) The Liquefaction Trains

These are the main process plants where impurities in the gas are removed and the gas is compressed to liquefy it. The LNG produced is then stored in tanks in readiness for delivery. iv) Condensate Facility In the course of producing the LNG, condensates, which are hydrocarbons that remain liquid at ambient temperature, are also produced. These are separated from the LNG and sold to local refineries as high grade component for the production of premium motor spirit or exported.

TAKE OR PAY PROVISION

42. Gas sales are usually contracted on take or pay basis. This implies that if the LNG is produced and delivered (loaded into ships or pipeline) the buyers must pay for it whether they take it or not. Sometimes, the contract allows the buyer to take delivery in subsequent periods instead. In some cases, the customer pays for (and he is willing to take) the minimum contracted quantity of gas, but the supplier is unable to deliver the contracted quantity. The shortfall will be made up in subsequent deliveries at the rates specified in the contract. The buyer would set off the cost of

43.

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the additional gas received against the cost of gas earlier paid for but not delivered. The unearned amount is usually treated as deferred revenue until gas is delivered by the supplier.

PART 4 ACCOUNTING STANDARD

Accounting in the Petroleum Industry: Downstream Activities

The accounting standard comprises paragraphs 44-57 of this statement. The standard should be read in the context of paragraphs 1-43 of this statement and the Preface to the Statements of Accounting Standards, Statement of Accounting Standard on Accounting in the Petroleum Industry - Upstream Activities (SAS 14) and other relevant standards published by the Nigerian Accounting Standards Board. Accounting Policies 44. All companies engaged in downstream activities in the petroleum industry should state in their financial statements all significant accounting policies adopted in the preparation of those statements. 45. The accounting policies should be prominently disclosed under one caption rather than as notes to individual items in the financial statements.

REFINING AND PETROCHEMICALS OPERATIONS

Catalysts 46. Costs of short-life catalysts should be expensed in the year in which they are incurred while costs of long-life catalysts should be capitalised and written off over the life of the refinery. Where long life catalysts are regenerated, the costs of regeneration should be capitalised and amortised over the life of the regeneration. Turn-around Maintenance 47. Turn-around maintenance costs should be capitalised and amortised over the expected period before the next turn-around maintenance will be due. Stand-by Equipment 48. Stand-by equipment should be depreciated over the expected useful life of similar equipment in use. Depreciation of Plant and Equipment 49. The costs of refining or petrochemical plants and equipment should be depreciated on a straightline basis over the useful life of the assets or, if operating at normal levels of production, on the basis of expected throughput. The method used should be disclosed and consistently applied. Debottlenecking, Major Plant Rehabilitation and Replacement of Major Components 50. Where major plant rehabilitation, debottlenecking or replacement of major components result in a significant and identifiable increase in output or betterment of the plant, the cost should be capitalised and amortised over the period over which the benefit is expected to last. In any other case, it should e expensed as incurred.

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MARKETING AND DISTRIBUTION OPERATIONS

Bridging Costs Claims 51. Bridging costs which are recoverable from government through NNPC should be set up as claims receivable. Where they remain outstanding for and unreasonable length of time, adequate provision should be made for them. Claims not recovered within two years should be fully provided for. ATK Overbilling Claims 52. ATK Overbilling claims should be set up as a receivable. Where they remain unpaid for and unreasonable length of time, they should be provided for. Claims not recovered within two years should be fully provided for. Liquefied Natural Gas Operation - Take or Pay Contracts 53. Where a purchaser is unable to take his entitlement under a take or pay contract, with a right of make-up, the purchaser should treat the amount paid as a receivable. Conversely, the supplier should treat the advance received as a deferred revenue. The deferred revenue should be recognised when the make-up right is exercised by the purchaser. 54. Where a supplier is unable to deliver the quantity contracted, the amount received from the purchaser should be treated as a liability by the supplier while the purchaser should treat the amount paid as a prepayment. DISCLOSURES 55. In addition to the disclosure requirements of SAS 2 - Information to be Disclosed in Financial Statements, companies operating in the downstream sector of the petroleum Industry should disclose the following as they relate to their activities: a) Refining and Petrochemical Companies i) Processing fees from third parties;

ii) Any amount of turn-around maintenance capitalised and/or expensed split into materials costs and labour costs and, where capitalised, the rate of amortisation; iii) Debottlenecking, major plant rehabilitation and replacement of major components costs incurred, capitalised or expensed and, where capitalised, the rate of amortisation; iv) v) vi) b) The cost of research and development; Basis of valuation of products and products and intermediates; For and integrated plant, revenue earned for each class of activities.

Marketing and Distribution Companies i) ii) Bridging claims and related provision made; and ATK overbilling claims and related provision made.

c)

Liquefied Natural Gas Companies

Details of Take or Pay contracts not yet fulfilled and the related deferred revenue or prepayment.

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Packaging and Non-core Businesses

56. The Operating results of packaging and other non-core businesses owned by companies operating in the downstream sector of the petroleum industry should be separately disclosed.

Transfer Pricing
57. The transfer pricing methods adopted should be disclosed.

PART 5 NOTES ON LEGAL REQUIREMENTS 58. The requirements of this standard are complementary to any accounting and disclosure requirements of the Companies and Allied Matters Decree, 1990 and other relevant laws and regulations.

EFFECTIVE DATE
59. This Standard becomes operative for financial statements covering periods beginning on or after January 1, 1998.

SAS 18 Statement of Accounting Standard On Statement Of Cash Flows

This statement is issued by the Nigerian Accounting Standards Board (NASB) for use by all those interested in published financial statements either as preparers or users.

PART 1 - INTRODUCTION 1. A Statement of Cash Flows provides information about the cash receipts and cash payments of an enterprise over a given period. It indicates the pattern of cash generation and utilization. It reveals how cash is generated from operations or through new investments and debts. It is designed to shed light on an enterprise's financial strength. The information provided in a Statement of Cash Flows, if used with related disclosure and other information in the financial statements, will over a period assist users to: a). assess the impact of its current transactions - operating, investing and financing activities - on its performance and financial position; b). assess the ability of the enterprise to meet its debt obligations, pay dividends and meet other claims; c). assess the ability of the enterprise to finance ongoing operations and growth from internal sources and determine the amount of external financing required; d). reconcile profit/loss and cash flow; and e). assess the ability of the enterprise to generate positive net future cash flows. A Statement of Source and Application of Funds is based on movements in working capital encompasses capital components. Working capital encompasses cash, cash equivalents and other assets which are convertible into cash within an accounting year,

2.

3.

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4.

such as debtors and stocks. The main reason why the Statement of Cash Flows is now regarded as a preferred parameter for evaluating corporate liquidity is that the Statement of Source and Application of Funds based on movements in working capital can obscure movements relevant to the viability and liquidity of an enterprise. For example, a potentially disastrous decrease in cash available can be masked by an increase in stock or debtors. Enterprises may therefore run out of cash while reporting increases in working capital. This standard requires that a Statement of Cash Flows should be part of the financial statements prepared by an organization.

PART II - DEFINITION OF TERMS 5. The following terms are used in this Statement with the meanings specified: i). Cash: comprises cash on hand demand deposits, denominated in Naira and foreign currencies. ii). Cash Equivalents: are short-term, highly liquid investments that are readily convertible to known amount of cash and which are subject to an insignificant risk of changes in value. Generally, they are within three months of maturity. iii). Cash Flows: are inflows and outflows of cash and cash equivalents.

PART III - EXPLANATORY NOTES

The Need for Cash Flow Information

6. 7. Financial statements usually provide information to help present and potential investors, creditors and other users to assess the profitability, liquidity, financial flexibility and risk of an enterprise. A Statement of Cash Flows on its own will not provide all the information required by investors to assess the profitability, liquidity, financial flexibility and risk of a particular enterprise. Much of this information will be provided by a combination of the balance sheet, profit and loss account and the Statement of Cash Flows, when taken together with related disclosures. The profit and loss account will provide information on profitability. Cash flow information, adjusted to eliminate the leads and lags created by the allocations associated with accrual accounting, gives an indication of the relationship between earnings and cash flows, and therefore, of the quality of earnings. The balance sheet provides information on the structure of the assets, liabilities and equity of an enterprise at a point in time. When it is taken together with information on the pattern of cash inflows and outflows associated with these items, users of financial statements are better able to assess the liquidity and financial flexibility of the enterprise. Investors and creditors are interested in the ability of an enterprise to generate sufficient cash flows to pay dividends and interest on its equity and debt respectively on a sustainable basis. Other users of financial statements also interested in how an enterprise generates and utilizes cash and whether the enterprise is generating sufficient cash to pay dividends and interest, repay its debts obligations, and finance asset replacement and expansion, among other issues.

8.

9.

10. 11.

Statement of Source and Application of Funds

12. 13. The Statement of Source and Application of Funds attempts to show the sources and uses of funds of an enterprise by reporting changes in assets and liabilities during a reporting period. The focus of this statement on changes in working capital rather than on cash creates problem of interpretation, as positive working capital does not necessarily indicate positive cash flow, nor does negative working capital necessarily indicate illiquidity. Other problems associated with the statement include ambiguity in the definition of funds, non-inclusion or unclear presentation of

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cash flows in the statement, as well as inconsistent presentation.

Cash and Cash Equivalents

14. Cash is the most useful and readily understood concept of funds. It includes cash in hand demand deposits with banks or other licensed deposit takers, both in Naira and freely convertible foreign currencies, However, enterprises usually invest cash which is in excess of immediate requirements in short-term liquid instruments primarily to improve the yield on such excess liquidity rather than to make investments for any significant length of time. Such instruments include treasury bills, call and time deposits and other similar money market instruments. Enterprises usually borrow by means of overdrafts and short-term advances in order to cover temporary shortages in liquidity. In assessing the liquidity of an enterprise, it is irrelevant whether cash surpluses are held in the form of physical cash, demand deposits or cash equivalents. Cash equivalents are short-term, highly liquid instruments which are: a). readily convertible into known amounts of cash, whether in local or foreign currency; and b). so near to their maturity dates as to resent insignificant risk of changes in value as a result of changes in interest rates. As these items usually represent short-term uses of excess cash balances, their purchase and liquidation are part of an enterprise's cash management and strictly, not operating, investing or financing activities. The items are therefore treated like cash for the purpose of a Statement Cash Flows. Accordingly, the statement explains changes in cash and cash equivalents during a given reporting period. Where an enterprise maintains accounts with more than one bank, a right of set-off does not exist between demand deposit accounts which are funded and overdrawn accounts. The netting-off overdrafts against cash balances may mask a significant reliance on borrowings as well as possible inefficiency in cash management. Overdrafts are therefore, classified as borrowings and the utilization and repayment of such facilities during the year are usually included as financing during activities in the Statement of Cash Flows.

15. 16.

17.

18. 19.

Preparation and Format of a Statement of Cash Flows

20. The Statement of Cash Flows presents the cash inflows and outflows of an enterprise during a reporting period. However, it excludes inflows arising from changes in cash as a result of the purchase and liquidation of cash equivalents. The Statement of Cash Flows also excludes transactions which do not result in cash flows of the reporting entity. Generally, information on gross cash flows is more relevant and meaningful than information on the net amounts. The Statement of Cash flows should therefore, report gross cash flows cash flows except in the instance where net cash flows would be more relevant and meaningful. There are two methods of preparing a Statement of Cash Flows: a). Direct method; and b). Indirect method.

21.

22.

Direct Method
23. The direct method describes the system of reporting operating cash flows where and enterprise reports gross cash receipts and gross cash payments which, when aggregated, make up the net operating cash flow. These gross cash flows may be either collected directly from the recording of the amounts paid or received in any transaction or calculated by adjusting as appropriate the figures recorded on the accrual basis.

Indirect Method
24. The indirect method describes the system of reporting operation cash flows where an enterprise reports the same net operating cash flows as under the direct method, but produces that figure by reporting the adjustments to net profit for the effects of any deferrals or accruals of operating

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25.

cash receipts and payments and for any items whose cash effects relate to investing or financing activities or which are items of a non-cash nature such as depreciation. The use of the direct method improves the quality of financial reporting and enables users to appreciate cash flow information more readily.

Classification of Cash Flows

26. A Statement of Cash Flows presents cash flows according to the activities which gave rise to them. Most of the activities of an enterprise can be grouped under the following broad headings: a). operating activities; b). investing activities; and c). financing activities. Operating Activities involve the normal trading activities of an enterprise- production, delivery of goods or services and other support activities. They consist of those transactions usually included in determining operating profit. Cash flows from operating activities are the cash effects of these transactions. They include, but are not limited to: 1). payments for the purchase of stock, other goods and services from suppliers for cash 2). payment of salaries, wages and other staff costs 3). payment of rent, rates, levies, duties and taxes related to the normal operations of the enterprise 4). cash receipts from sale of goods and services 5). dividends received from enterprises where the reporting entity exercises significant control, and holds at least 20 percent of the investee enterprise's equity. There is another school of thought which believes that operating activities are those items normally included in the determination of nit profit. Although interest costs are usually included in the determination of net profit, they represent the cost of using borrowings to finance the assets of the enterprise. Similarly, dividend represents the cost of equity financing. Interest and dividends are therefore the outcome of financing decisions rather than normal operating costs and are not included in the determination of operating profit. Interest and dividend payments should therefore not be classified as operating cash flows. Cash flows from operating activities may also include all other cash flows which cannot be classified as investing or financing cash flows. Investing Activities relate to the acquisition and disposal of fixed assets, investment properties, investments and other productive assets held for or used in producing the enterprise's usual goods and services other than stock held for processing or resale. Cash flows from investing activities include the following: 1). payments to acquire fixed assets, investment properties, other investments and long term assets; 2). payments relating to increases in fixed assets under construction; 3). payments for debt and equity instruments other than cash equivalents of a third party; 4). payments for the acquisition of the net assets of a subsidiary less any cash equivalents acquired; 5). cash receipts from sale of fixed assets, investment properties, other investments and long term assets; 6). cash receipts from sale or liquidation of debt and equity instruments of third parties; 7). receipts from sale of the net assets of a subsidiary less cash and cash equivalents; 8). interest received; and 9). dividend received where the reporting entity does not exercise significant control over the investee's enterprise. Financing Activities include obtaining resources from lenders and owners of the enterprise, and

27.

28.

29. 30.

31.

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repaying the amounts obtained either as they become due or when they are surplus to the requirements of the enterprise. They also include the payment of returns to the providers of such financing in form of interest and dividends as well as expenses directly related to obtaining the financing. Cash flows from financing activities include: 1). cash proceeds from the issue of equity instruments; 2). cash proceeds from the issue of debentures, bonds, loan stock. commercial paper and other debt securities; 3). draw-down on loan and over draft facilities including the discounting of acceptances; 4). repayments of principal on all forms of borrowing; 5). finance lease repayments; 6). payments of interest and dividend; 7). payments relating to the issue of debt and equity securities such as credit-related fees, issuing house and underwriting fees, etc; 8). receipts and payments relating to obtaining and repaying long term credit; and 9). payments relating to the acquisition of the enterprise's own equity instruments.

Exceptional and Extraordinary Items

32. Cash flows from exceptional transactions whose effects are included in the profit and loss account are usually reported under the appropriate standard headings- operating, investing or financing activities - according to the nature of each item. There is usually sufficient disclosure of the nature of cash flows relating to the exceptional items, by way of note. Cash flows from extraordinary transactions whose effects are included in the profit and loss account are usually reported under the appropriate standard headings according to the nature of each item. In extremely rare circumstances where it is too complex and arbitrary to include cash flow from extraordinary items under one or more of the standard headings within the Statement of Cash Flows, the cash flow is shown under a separate section in the statement. There is usually sufficient disclosure of the nature of cash flow relating to the extraordinary items, by way of note.

33.

Interest Paid and Received

34. Interest paid is usually classified as cash flow from financing activities while interest received is usually classified as cash flow from investing activities. These classifications are based on the view that operating activities should not be affected by the capital structure decisions of an enterprise. It is generally accepted that items of income and expense should be shown gross rather than being netted off in order to provide for fuller disclosures of the origin and nature of reported items. Interest paid is the outcome of a financing while interest received is the outcome of an investing decision. The netting off of interest paid with interest received would obscure the distinction between the underlying nature of these different decisions. Therefore, interest is better reported in the Statement of Cash Flows on the gross basis. Interest received or paid are reported gross of taxes. Interest paid and capitalized are reported in the Statement of Cash Flows. The interest element of finance lease rental payments is usually shown separately by the lessee.

35.

Dividend Received and Paid.

36. There is wide agreement that cash flows from dividends received arise from investing activities while cash flows on dividends paid arise from financing activities. It is also held that there may be cases where the investor-company has significant control over the activities of the investeecompany. In these cases it is argued that dividends received form part of operating activities. Dividends received can therefore, be classified either as operating activities or investing activities depending on the nature of the dividends. In those cases where the investor-company gas significant control over the activities of the investee-company and holds at least 20 percent of the equity, dividends received are classified as operating activities.

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37.

Dividends paid and other distributions to owners are classified under financing activities. This classification is consistent with the view that financing activities include obtaining resources from owners and providing them with return or their investments.

Foreign Currency Cash Flows

38. The foreign currency cash flows of a reporting entity with foreign transactions or foreign operations are converted to Naira using the exchange rates ruling at the time the cash flows occurred. However, the use of specific rates for specific cash flows may be impracticable, especially where foreign currency cash flows occur frequently. The rates used to translate individual items may therefore be the same as the rates used to translate related items in the profit and loss account or the balance sheet. The position is consistent with the provisions of SAS 7Statement of Accounting Standard on Foreign Currency Conversions and Translations. The Statement of Cash Flows normally indicates the effect of exchange rate changes on cash balances held in foreign currencies as a separate part of the reconciliation of the change in cash and cash equivalents during the period where material.

39.

Taxation
40. 41. The total amount of income taxes paid is separately disclosed and classified as an operating cash outflow. It is considered impracticable, complex and arbitrary to specifically identify cash flow from taxes on income with financing, investing or operating activities. For instance, tax cash flows may arise in periods different from the underlying individual transactions. This would not allow for objective identification or classification into specific investing or financing activities. In the ordinary course of business, the cash flows of an enterprise will include Value Added Tax (VAT) paid or received. However, cash flows are usually shown net of VAT and any other sales taxes. This is because VAT cash flows would normally be short-term timing differences in the context of an enterprise's overall cash flows and their inclusion in the reported cash flows may distort the allocation to the standard headings. The net amounts paid or received with respect to VAT and other sales taxes are usually shown separately as cash flows from operating activities. When the effect of taxes paid on the purchase and sale of fixed assets or other capital items is substantial, the net amount of the taxes paid or received may distort the operating cash flows if arbitrarily allocated thereto. Therefore, taxes paid or received in respect of capital profits (such as Capital Gains Tax) are reported in line with the underlying transactions giving rise to them.

42.

43.

Groups
44. The financial statements of a group exclude all inter-group transactions and balances. Therefore, for the purpose of a Statement of Cash Flows, all cash flows that are internal to the group are eliminated. Dividends paid to minority shareholders are usually reported as financing cash flows and separately disclosed. In cases where investments are accounted for using the equity method, only the actual cash flows between the reporting entity and the investee-company are included in the group Statement of Cash Flows. The reporting entity therefore, does not account for its proportion of all the cash flows of the investee-company. Where a group acquires or disposes of a subsidiary undertaking, the amount of cash and cash equivalents paid or received in respect of the consideration is shown net of any cash and cash equivalent balances transferred as part of the purchase or sale of the subsidiary undertaking. In addition, a note to the Statement of Cash Flows shows a summary of the effects of acquisitions and disposals indicating how much of the consideration comprised cash and cash equivalents and amounts of cash and cash equivalents transferred as a result of the acquisition and disposal. Where a subsidiary joins or leaves a group during a financial year, the cash flows of the group usually include the cash flows of the subsidiary concerned for the same period as that for which

45.

46.

47.

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48.

49.

50.

the group's profit and loss account includes the results of the subsidiary. Material effects on amounts reported under cash of the standard headings reflecting the cash flows of a subsidiary acquired or disposed of in the period are usually disclosed as a note to the financial statements. Where a reporting entity operates in more than one sector or major industry segment of the economy, it may disclose segmental cash flows to enable users obtain a better understanding of the relationship between the cash flows of the business as a whole and those of its component parts. The disclosure of segmental cash flows is summarized into the major headings operating, investing and financing activities.

Maintenance and Expansion Expenditure

51. The cash flows relating to investing activities are further classified into expenditure for maintenance of existing capacity and expenditure for expansion of capacity. The distinction between expenditure for maintenance and that for expansion would enable bankers, creditors, investors, financial analysts and other users to determine the amount of cash available for discretionary purposes, such as paying dividends. The distinction also enables users to determine whether the enterprise is investing adequately in the maintenance of its operating capacity. An enterprise that does not invest adequately in the maintenance of its operating capacity may be prejudicing future profitability for the sake of current liquidity and distributions to owners.

52.

Major Non-Cash Transactions

53. There are significant non-cash transactions which do not involve current movement of cash but have substantial effect on prospective cash flows of an enterprise. Examples of major non-cash transactions are: 1. acquisition of assets by assuming liabilities (including finance lease obligations) or by issuing equity securities; 2. exchange of non-monetary assets; 3. refinancing of debt; 4. conversion of debt or preference shares to ordinary shares; 5. issuance of equity securities to retire debt; and 6. bonus issues. These non-cash transactions are not to be incorporated in the Statement of Cash Flows. Non-cash transactions of the reporting entity should be disclosed in the notes to the financial statements in a way that provides all the relevant information about their cash flow implications. The exclusion of non-cash transactions from the Statement of Cash Flows is consistent with the objective of reporting only actual cash flows of the reporting period.

54.

Reporting Cash Flows of Financial Institutions

55. Banks and other financial institutions contend that the nature of their business and the resulting cash flows are substantially different from those of non-financial institutions. It is further argued that banks create money through lending and the 'product' of their earning activities is cash just as finished goods are the product of a manufacturer's earning activities. As a result of these significant differences they conclude that a Statement of Cash Flows presented by a financial institution would be meaningless. Such Statements of Cash Flows according to them will be similar to a combined statement of cash and inventory for non-financial institution. Therefore, financial institutions request to be exempted from presenting Statements of Cash Flows as these statements will not be helpful in evaluating their liquidity. The uniqueness of a bank's earning activities should not serve as a basis for exemption. Every business enterprise has some unique attributes, and the more important thing is that a bank needs cash for essentially the same reasons as a manufacturer does- to invest in its operations, to meet its

56.

57.

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58.

obligations, and to provide returns to its investors. Given the nature of financial institutions' cash flows - turnover is quick, maturities are short, amounts are large and are mainly results of decisions by third parties - financial institutions should report cash flows from operations relating to major balance sheet items on a net basis (i.e. net cash inflows or outflows relating to specific items). For instance, rather than reporting the gross amount of fresh loans and loan repayments, the net increase or decrease in loans should be reported. Other instances include: a). Cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customers rather than those of the enterprise; and b). Cash receipts and payment for items in which the turnover is quick, the amount is large and maturity is short; such as: i). The acceptance and repayment of demand deposit of a bank; ii). Funds held for customers by an investment enterprise; iii). Rents collected on behalf of, and paid over to, the owners of properties; iv). Cash receipts and payments for the acceptance and repayment of deposits with a fixed maturity date; v). The placement of deposits with and withdrawal of deposits from other financial institutions; and vi). Cash advances and loans made of customers and the repayment of those advances and loans. Financial institutions, particularly banks, argue that they hold highly liquid financial instruments which are for investment and trading purposes and not for cash management. They want such investments to be classified as investing activities. They want such investments be classified as investing activities. This position is acceptable as items that meet the definition of cash and cash equivalents in paragraph 14 form part of their investing activities. It is considered that each financial institution should disclose its policy for treating items as cash equivalents and be consistent with the position in subsequent years. Any change that policy is a change in accounting classified and shall be treated as such . Cash receipts and cash payments resulting from purchases and sales of securities for trading accounts are usually classified as operating cash flows. Cash receipts and cash payments resulting from purchase and sale of securities which are not classified as operating cash flows are usually classified as investing cash flows.

59.

60.

Reconciliation with Balance Sheet Figures

61. To allow for a fuller assessment of liquidity by relating balance sheet information to the Statement of Cash Flows, it is important for users of financial statements to see a clear relationship between balance sheet and cash flow information. The Statement of Cash Flows usually therefore reconciles the change in cash and cash equivalents during the reporting period with opening and closing balances of these items. The reconciliation will include the changes as a result of cash flows as well as changes related to exchange rate movements where foreign currency cash balances exist. Balance sheet classifications are therefore modified to ensure that cash and cash equivalents are classified in a uniform manner. Otherwise, a reconciliation of cash and cash equivalents as disclosed in the Statement of Cash Flows to the amounts in the balance sheet is usually provided.

62.

Comparative Figures
63. Comparative figures are normally shown for prior year in respect of all the information in the Statement of Cash Flows and related disclosures.

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PART IV - ACCOUNTING STANDARD STATEMENT OF CASH FLOWS The Accounting Standard comprises paragraph 64 - 82 of this statement. The Standard should be read in the context of all other parts of this statement and the Preface to the Statements of Accounting Standards published by the Nigerian Accounting Standards Board.

Preparation and Format.

64 65. A reporting enterprise should prepare a Statement of Cash Flows in line with the provisions of this Standard as an integral part of its financial statements. The Statement of Cash Flows should include all cash inflows and outflows of the enterprise during a reporting period. It should, however, exclude cash flows arising from the purchase and liquidation of cash equivalents; it should show only the net change in cash and cash equivalents. An enterprise should report its cash flows according to the activity which gave rise to them and the cash flows should be grouped under the broad headings of operating activities, investing activities and financing activities. An enterprise should use either the direct or indirect method in preparing its Statement of Cash Flows. However, the direct method is preferred. The Statement of Cash Flows should report gross cash flows except in the instances where net cash flows would be more relevant and meaningful, such as: a). where the enterprise is, in substance, holding or disbursing cash on behalf of its customers; and b). where turnover of investments and loans is rapid and the total volume of transactions is large.

66.

67. 68.

Interest Paid and Received

69. Interest paid should be classified as cash flows from financing activities while interest received should be classified as cash flows from investing activities. The interest element of finance lease rental payments should be shown separately by the lessee. Interest received or paid should be reported gross of taxes. Interest capitalized should also be reported in the Statement of Cash Flows.

70.

Dividends Paid and Received

71. Dividends received should be classified as cash flows from investing activities except in cases where the investor-company has significant control over the investee-company and holds at least 20 percent of the equity. In such cases, dividends received should be classified as cash flows from operating activities. Dividends paid and other distributions to owners should be classified as cash flows from financing activities.

72.

Foreign Currency Cash Flows

73. Cash flows resulting from foreign currency transactions should be translated using the rates applicable at the time the cash flows occurred. A weighted average exchange rate for a period should be used for translation if the result is substantially the same as if the rates applicable at the dates of the cash flows were used.

Taxation
74. The total amount of income taxes paid should be classified as operating cash outflows and should be separately disclosed. 75. The net amount paid or received with respect to Value Added Tax and other sales taxes should be shown separately as cash flows from operating activities.

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76.

Taxes paid or refunds received in respect of capital profits (such as Capital Gains Tax) should be reported in line with the underlying transactions giving rise to them.

Exceptional and Extraordinary Items

77. Cash flows from exceptional and extraordinary items whose effects are included in the profit and loss account should be reported under appropriate headings - operating, investing and financing activities - according to the nature of each item. There should be sufficient disclosure of the nature of cash flows relating to exceptional and extraordinary items, by way of note to the financial statements.

Acquisition and Disposal of Entities

78. The cash flow effects of acquisitions and disposals of subsidiaries and other business units should be classified as investing activities and presented separately in the Statement of Cash Flows. The details required should be presented in aggregate for all entities acquired or disposed of during the financial year.

Major Non-Cash Transactions

79. Non-cash transactions of a reporting entity should not be incorporated in the Statement of Cash Flows. However, such transactions should be disclosed in the notes to the financial statements in a way that provides all the relevant information about their cash flow implications.

Cash Flows to be Highlighted

80. The following cash flows, however classified, shall be disclosed separately in the Statement of Cash Flows: a). interest received; b). dividends received; c). interest paid; d). dividends paid; and e). income taxes paid.

Reporting Cash Flows of Financial Institutions

81. Financial institutions should prepare a Statement of Cash Flows as part of their financial statements. However, such organizations should report cash flows from operations on a net basis .

Reconciliations
82. An enterprises should show by way of note a reconciliation of the amounts in its Statement of Cash Flows with equivalent items reported in the profit and loss account and the balance sheet. It should also shoe by way of note a reconciliation of cash flows from operating activities to operating profit or loss after income tax as reported in the profit and loss account. Finally, the Statement of Cash Flows should include separately a reconciliation the increase and decrease in cash and cash equivalents during the reporting period with the opening and closing balances.

PART V - NOTES ON LEGAL REQUIREMENTS 83. A Statement of Cash Flows prepared in compliance with this standard replaces the Statement of Source and Application of Funds required by Statement of Accounting Standard No. 2; on Information to be Disclosed in Financial Statements, and the Companies and Allied Matters Decree, 1990.

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PART V - COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARD NO. 7 (REVISED) 84. The requirements of this Standard accord substantially with the requirements of International Accounting Standard No. 7 (revised) Cash Flow Statements.

EFFECTIVE DATE
This Standard becomes operative for financial statements covering periods beginning on or after 1 January, 1998.

APPENDICES
The appendices provide illustrations for the preparation of Statement of Cash Flows. Appendix 1 illustrates a Statement of Cash Flows under the direct method for single enterprise, Appendix 2 illustrates a Statement of Cash Flows under the direct method for an insurance company. Appendix 3 illustrates a Statement of Cash Flows under the direct method for a Financial Institution and Appendix 4, a Statement of Cash Flows under the indirect method for a group. These appendices show only some possible ways of setting out the information to be given in a statement of Cash Flows and are not meant to be prescriptive.

Appendix

STATEMENT OF CASH FLOWS FOR A BUSINESS ENTITY.

XYZ NIGERIA PLC STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER, 1997

(Direct Method)

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N000 Cash Flows from Operations Activities Cash receipts from customers Payment to suppliers and employees Input VAT Output VAT Income Tax Paid Net cash provided by operating activities Cash Flows from Investing Activities Proceeds from sale of equipment Interest received Payment for purchase of fixed assets Net cash provided by investing activities Cash Flows from Financing Activities Proceeds from issue of long term debt Interest paid Dividend paid Repayment of debt Net cash provided by financing activities Net decrease in cash Cash at the beginning of the financial year Effects of exchange rate changes on the balance of cash held in foreign currencies at the beginning of the year Cash at the end of the financial year 6,913 (6,320) -0-0(203)

N000

390

2 1 (300) (297)

110 (100) (170) (20) (180) (87) 125 (8) 30

NOTES ON THE STATEMENT OF CASH FLOWS

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1)

Reconciliation of net income to net cash provided by operating activities N000 N000 Net income after tax 318 Adjustments to reconcile net income to net cash provided: Depreciation 18 Provision for doubtful debts 27 Changes in assets and liabilities: Increase in trade debtors (13) Decrease in inventories 25 Increase in prepaid expenses (10) Decrease in trade creditors (8) Decrease in accrued expenses (7) Increase in interest payable 2 Increase in tax payable 38 Total Adjustments 72 Net cash provided by operating activities 390

2)

Non-cash Financing and Investment Activities

During the year, the company acquired property, and equipment worth N200,000 by means of finance leases. These transactions are not reflected on the Statement of Cash Flows.

3)

Reconciliation of cash

For the purpose of the Statement of Cash Flows, cash comprises cash on hand and in banks and investment in short term liquid instruments, net of outstanding bank overdrafts. Cash at the end of the financial year as shown in the Statement of Cash Flows is reconciled to the related items in the balance sheet as follows:

Cash Deposits at call Bank overdraft

1000 6 45 (21)

Appendix 2

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STATEMENT OF CASH FLOWS FOR AN INSURANCE COMPANY. INSURANCE COMPANY (NIGERIA) PLC STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31ST DECEMBER, 1997

(Direct Method)

1000 Cash Flows from Operating Activities Premium received from policy holders Reinsurance receipts in respect of claims Cash paid to and on behalf of employees Reinsurance premiums paid Other operating cash payments Claims paid Companies Income Tax paid Net cash provided by operating activities 12,050 2,175 (635) (2,002) (3,284) (8,170) (660) (526)

Cash Flows From Investing Activities

Purchasing of fixed assets Purchase of liquid investments Sale of liquid investments Sale of other investments Purchase of other investments Dividend received Interest received Net cash provided by investing activities

(84) (250) 1,820 240 (1,910) 832 763 1,411

Cash Flows From Financing Activities

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Interest paid Issue of ordinary shares Dividend paid Repayment of loans Net cash provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year.

(505) 31 (120) (281) (875) 10 620 630

The accompanying notes form an integral part of this Statement of Cash Flows.

NOTES TO THE STATEMENT OF CASH FLOWS

1.

Reconciliation of operating profit to the cash provided by operating activities. Operating profit after tax Depreciation Increase in unearned premiums Increase in creditors Increase in claim provisions Increase in debtors Cash provided by operating activities N000 530 60 53 60 35 (1,264) (526)

2.

Analysis of Changes in Cash and Cash Equivalents and Other Liquid Investments

Balance as at 1 Jan. 1997 Net cash inflow Purchase of liquid investment Sales of liquid investments

Cash & Cash equivalents N000 620 10 630

Other liquid investments N000 18,000 250 (1,820) 16,430

Total N000 18,620 10 250 (1,820) 17,060

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3. Analysis of the Balance of Cash and Cash Equivalents and Other Liquid Investments

Cash at bank and in hand Bank Overdrafts Total cash and cash equivalents Other liquid investments

1997 N000 845 (215) 630 16,430 17,060

1996 N000 1,050 (435) 620 18,000 18,620

Changes during the year. (210) 220 10 (1,570) (1,560)

Appendix 3

STATEMENT OF CASH FLOWS FOR A FINANCIAL INSTITUTION. XYZ NIGERIAN BANK LIMITED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER, 1997.

(Direct Method)

Cash Flows from Operating Activities

Interest received Fees and commission received Financing revenue received under leases Dividends received from associated companies Recoveries on loans previously written off Interest payments Cash payments to employees and suppliers Income taxes paid

16,750 6,235 100 10 6,000 (11,995) (1,555) (1,475)

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Operating profit before changes in operating assets Input VAT Output VAT (Increase) Decrease in operating assets: Short term funds Deposits held for regulatory or monetary control purposes Funds advanced (overdraft) to customers Short-term negotiable securities

14,070 -0-0-0(10,000) (35,000) -0(45,000)

Increase (Decrease) in operating liabilities: Deposits from customers (including demand and 61,000 savings) Proceeds from sale of certificates of deposit 60,000 Payments for maturing certificates of deposit (20,000) Proceeds from sale of Negotiable certificate 25,000 Certificates of deposit (22,000) Net cash provided by operating activities

104,000 73,070

Cash Flows from Investing Activities

Proceeds from sales of trading and investment securities Purchase of trading and investment securities Principal collected on term loans Long term loans made to customers Purchase of assets to be leased Principal payments received under leases Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Dividend received from subsidiary companies Investment in associated/subsidiary companies Proceeds from sale of investment in associated/ subsidiary companies Net cash used in investing activities

28,680 (28,000) 35,000 (92,580) (1,700) -0(1,400) 1,250 -0(350) -0(59,100)

Cash Flows from Financing Activities:

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Issue of ordinary shares Issue of loan stock Repayment of long-term borrowings Net decrease in other borrowings Dividends paid Net cash provided by financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year

3,000 1,700 -0(175) (1,100) 3,425 17,395 21,469 38,864

Reconciliation of Net Income to Net Cash provided by Operating Activities:

Net income after tax Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Provision for bad debts Provision for deferred taxes Increase in taxes payable Gain on sale of equipment Gain on sale of trading and investment securities Decrease in interest receivable Increase in interest payable Decrease in fees and commissions receivable Increase in accrued expenses Increase in prepayments Total adjustments Recoveries on loans previously written off Net change in operating assets Net change in operating liabilities Overall net change Net cash provided by operating activities

N 5,800

200 2,580 -075 (200) (2,680) 200 150 -02,945 (1,000) 2,270 8,070 6,000 14,070 (45,000) 104,000 59,000 73,070

Supplemental schedule of non-cash investing and financing activities:

There was no major non-cash transaction during the year.

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DISCLOSURE OF ACCOUNTING POLICY ON CASH AND CASH EQUIVALENTS.

For the purpose of reporting cash flows, cash and cash equivalents include coins, bank notes, balances with Central Bank, amounts due from banks and money at call and short notice. Summarized below is the financial information for the current year which provides the basis for the Statement of Cash Flows presented above. XYZ NIGERIAN BANK LIMITED BALANCE SHEET AS AT 31 DECEMBER,1997

ASSETS Cash Balances with banks: Central Bank of Nigeria Due from other banks in Nigeria Due from banks outside Nigeria Money on call and short notice Total cash & cash equivalents
Stabilization securities Investment and trading Securities (including TBs & BAs) Advances-overdraft loans (net) Advances under finance lease Accrued interest Prepayments Investment in sub/ associated undertakings Property, plant & equipment

31/12/97 N 12,233 2,595 14,979 3,700 5,357 38,864

26,262

31/12/96 N 4,212 7,557 4,200 3,000 2,500 21,469

16,262

CHANGE N 8,021 (4,962) 10,779 700 2,857 17,395

10,000

12,000 55,000 70,000 11,700 400 3,000 987 1,650 219,863

10,000 20,000 21,000 10,000 600 2,000 637 1,500 103,468

2,000 35,000 49,000 1,700 (200) 1,000 350 150 116,395

LIABILITIES

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Deposit and other accounts Certificates of Deposits Negotiable certificate of deposit Interest payable Accrued expenses Taxes payable Dividend payable Other borrowings Long-term borrowings

130,850 54,650 5,000 350 3,445 525 200 1,350 6,700

69,850 14,650 2,000 200 500 450 200 1,525 5,000

61,000 40,000 3,000 150 2,945 75 -0(175) 1,700

Capital and Reserves

Called-up capital Reserves

7,700 9,093 219,863

XYZ NIGERIAN BANK LIMITED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER, 1997

4,700 4,393 103,468

3,000 4,700 116,395

Interest income Interest expenses Net interest income Provision for loan losses Other incomes: Fees and commission Lease income Gain on sale of equipment Gain on sale of trading investment securities Dividend received

N 16,550 (12,145)

4,405 (2,580) 6,235 100 200 2,680 10 9,225 11,050

EXPENSES:

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Operating Depreciation Profit before taxation Provision for income taxes Profit after taxation Dividend declared Transfer to Reserves

(3,500) (200)

(3,700) 7,350 (1,550) 5,800 (1,100) 4,700

The following transactions were entered into during 1996 and are reflected in the above financial statements: a). The bank sold an equipment for N1,250 which had a book value of N1,050. In this same period it sold trading and investment securities which had a book value of N26,000 for N28,680 and purchased N28,000 in new trading and investment securities. b). The bank made long term loans of N92,580. The money came from principal collections of N35,000, recoveries of loans previously written off which amounted to N6,000 and incremental lending of N49,000. The provision for bad debts amounted to N2,580.

Appendix 4

STATEMENT OF CASH FLOWS FOR A GROUP. ABC GROUP PLC STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER, 1997.

(Indirect Method)

Operating activities

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*Operating profit Adjustment for non-cash items: depreciation share of associated company profit provision for retirement benefits Other adjustments to reconcile operating profit to cash from operating activities: increase in deposits for imports increase in stocks increase in trade debtors increase in amounts due from related parties increase in other debtors and prepayments increase in trade creditors increase in amounts due to related parties increase in other creditors and accruals dividend received from associated company taxes paid
Cash Flows from Operating Activities

N000 1,446,250

N000

431,672 (98,470) 24,125 1,803,577

(99,997) (250,018) (18,961) (32,500) (7,562) 245,774 17,000 82,766 (63,498) 40,000 (297,834) (257,834) 1,482,245

Investing activities

Purchase of fixed assets Sale of fixed assets Purchase of subsidiary undertakings Purchase of investment properties Sale of investments Interest received Exceptional item - sale of investment property Cash used in investing activities

(785,677) 32,500 (6,267) (145,000) 18,470 (885,974) 68,750 (817,224) 255,000 (562,224)

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Financing activities

Decrease in bank overdrafts Increase in commercial paper & other short-term loans Repayment of convertible debentures Share issue proceeds Interest paid on loans Dividend paid to shareholders Dividend paid to minority shareholders Cash used in financing activities Increase in cash Cash and cash equivalents at the beginning of the year Cash and cash equivalents at end of the year

(116,125) 20,000 (50,000) -0(146,125) (47,400) (184,000) (12,000) (389,525) 530,496 286,487 816,983

*(Operating profit is arrived at before including profit/loss on sale of fixed assets, therefore no adjustment is required).

ABC GROUP PLC NOTES TO THE STATEMENT OF CASH FLOWS 1(a) Major non-cash transactions: During the year, the Group acquired the net assets of PQR Limited. The purchase consideration of N23,516,000 was made up of cash payments of N8,517,000 and the allotment and issue of 15million ordinary shares of N1.00 each to the shareholders of PQR Limited as fully paid shares. 2(b) Acquisition of subsidiary: The Group acquired 100% of the equity of PQR Limited on 12 June 1997. Further details of the acquisition are set out below:

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Fixed assets Investment properties Investments Deposits for imports Stocks Trade debtors Other debtors & prepayments Cash and bank balances Trade creditors Bank loans & overdrafts Commercial Paper Tax payable Other creditors & accruals Net assets acquired Shares allotted Cash paid Purchase consideration Goodwill on acquisition

N000 35,973 25,000 5,000 18,450 10,750 1,350 4,500 2,250 103,273 (15,640) (35,750) (10,000) (22,000) (11,366)

8,517 15,000 8,517 23,517 15,000

2.

Exceptional transaction

During the year, the Group sold an investment property, details of which are set out below:

Net proceeds of sale Carrying value of property Profit on sale Revaluation surplus realised Exceptional item

N000 255,000 (120,000) 135,000 45,000

180,000

3.

Analysis of Group Cash Flows

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Operating activities Investing activities Financing activities Increase/(decrease) in cash and cash equivalents

ABC PLc N000 1,016,456 (463,505) (221,560)

XYZ Ltd. N000 (2,436) 28,650 (69,008)

PQR Ltd. N000 468,225 (127,369) 98,957)

Total N000 1,482,245 (562,224) 389,525

331,391

(42,794)

241,899

530,496

ABC GROUP PLC

Group Balance sheet as at 31 December,

Fixed assets Investment properties Investments Goodwill

Long-term assets

1997 N000 1,438,910 230,000 75,000 80,000 1,823,910 141,983 675,000 673,788

1996 N000 1,079,182 180,000 30,000 65,000 1,354,182 131,487 155,000 555,341

Cash and bank balances Time deposits and money market securities Deposits for imports

Stocks
Trade debtors Due from related parties Other debtors & prepayments

Current assets

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