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Tutorial letter 102/0/2021
APPLIED FINANCIAL ACCOUNTING II
FAC4864/NFA4864/ZFA4864
Year Module
Department of Financial Governance
IMPORTANT INFORMATION:
This tutorial letter contains important information
about your module.
2
INDEX
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Page
Due date
3
Personnel and contact details
3
Prescribed method of study
3
Suggested working programme
4
SAICA’s Principles of Examination
4
Exam technique
5
United Nations Global Compact Principles
8
Learning unit
9
1
Consolidated and separate financial statements
2
Business combinations
31
3
Investments in associates and joint ventures
56
4
Disclosure of interests in other entities
69
Self assessment questions and suggested solutions
78
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DUE DATE
DUE DATE FOR THIS TUTORIAL LETTER:
19 FEBRUARY 2021
TEST 1 ON TUTORIAL 102:
23 MARCH 2021
PERSONNEL AND CONTACT DETAILS
Personnel
Lecturers
Ms T van Mourik (Course leader)
Ms S Aboobaker
Mr H Combrink
Mr M Hlongwane
Ms T Mahuma
Mr P Masha
Ms A Oosthuizen
Ms C Wright
Telephone
Number
012 429-3549
012 429-4373
012 429-4792
012 429-4511
012 429-4669
012 429-8971
012 429-2004
Please send all technical e-mail queries to: fac4864postgrad@unisa.ac.za
Please use the module telephone number to contact the lecturers: 012 429-4720
PRESCRIBED METHOD OF STUDY
1.
Firstly study the relevant chapter(s) in your prescribed textbook so that you master the basic principles
and supplement this with the additional information in the learning unit (where applicable).
2.
Read the standards and interpretation(s) covered by the learning unit.
3.
Do the questions in the study material and make sure you understand the principles contained in the
questions.
4.
Consider whether you have achieved the specific outcomes of the learning unit.
5.
After completion of all the learning units - attempt the self assessment questions (open book, but within
the time constraint) to test whether you have mastered the contents of this tutorial letter.
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SUGGESTED WORKING PROGRAMME
THURSDAY
FRIDAY
4
Consolidated
and separate
financial
statements
11
Investments in
associates and
joint ventures
5
Consolidated
and separate
financial
statements
12
Investments in
associates
and joint
ventures
FEBRUARY 2021
SATURDAY
SUNDAY
6
7
Consolidated
Consolidated
and separate
and separate
financial
financial
statements
statements
13
Investments in
associates
and joint
ventures
14
Disclosure of
interests in
other entities
MONDAY
TUESDAY
Business
combinations
Business
combinations
WEDNESDAY
10
Business
combinations
15
Do self
assessment
questions
16
Do self
assessment
questions
17
Do self
assessment
questions
8
9
SAICA’S PRINCIPLES OF EXAMINATION
The SAICA principles of examination levels provide guidance on how the standards (or topics
within a standard) will be examined.
Throughout the study material, we will refer you to the following principles of examination levels:
1.
Issues that are at a core level:
An issue is at core level if:
•
It is based on a significant conceptual underpinning/foundation of current financial
accounting (i.e. based on identification, recognition, measurement and presentation and
disclosure of elements); or
•
It is prevalent (i.e. issues and industries that would be commonly encountered in practice
in the course of an entry-level Chartered Accountant’s work). Here, the emphasis is on
issues that are of a more general nature.
2.
Issues that are at an awareness level:
Awareness means that the issue is not core but it is important for an entry-level. Chartered
Accountant to know about the issue. It is important for them to be able to identify that it is an
issue that potentially has significant accounting implications and requires additional or
specialist IFRS knowledge.
They would need to be able to identify and describe what the accounting issue is and read
up on it futher. Students would also be expected to perform basic processing of the transaction
when the numbers are given (e.g. obtained from an expert).
A good example might be borrowing costs i.e. students should be able to do the journal to
capitalise any qualifying borrowing costs to Property, Plant and Equipment when the borrowing
cost amount has been supplied.
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3.
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Issues that are excluded.
The following standards are excluded from the syllabus:
•
•
•
•
•
•
•
•
•
•
•
IFRS 1, First-time Adoption of International Financial Reporting Standards
IFRS 4, Insurance contracts
IFRS 6, Exploration for and Evaluation of Mineral Resources
IFRS 8, Operating Segments
IFRS 14, Regulatory Deferral Accounts
IAS 20, Government Grants
IAS 26, Accounting and Reporting by Retirement Benefit Plans
IAS 29, Financial Reporting in Hyperinflationary Economics
IAS 33, Earnings per Share
IAS 34, Interim Financial Reporting
IAS 41, Agriculture
Please note the scope of all standards is at an awareness level, even if the standard is
excluded. Exclusions within any standard will be specifically identified in your study material.
The treatment of any Interpetation Note will follow the principle of examination level of the related
standard.
EXAM TECHNIQUE
1.
Introduction
Examination technique remains the key distinguishing feature between candidates who pass
and those that fail. Practice by answering questions under exam conditions by preparing the
solution within the time limits and then by marking your solution. By marking your solution you
will learn from your mistakes.
2.
Examination technique
From a review of candidates’ answers to past examination questions, the general examination
technique issues were identified. These problems affected the overall performance of
candidates. Although these aspects seem like common sense, candidates who pay attention
to them are likely to obtain better marks.
To improve your overall examination technique and performance take note of the following:
•
Discussion questions
Lay the foundation of your answer by applying the relevant theory and to demonstrate
insight into the question.
Identify all the issues and address all considerations in your application. Remember to
conclude at the end.
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In addition markers found that candidates used their own abbreviations (sms messaging
style) in their answers. Marks could not be awarded here as it is not up to the markers
to interpret abbreviations that are not commonly used. The increased use of a sms style
of writing in a professional examination is a major concern. Candidates should pay
specific attention to the way in which they write their answers, and bear in mind
that this is a professional examination for which presentation marks are awarded.
The SAICA has adopted a Competency Framework that defines pervasive and technical
competencies that entry-level Chartered Accountants (CAs) must be able to
demonstrate. These competencies include a number of professional skills, one of which
is the ability to communicate effectively and efficiently. Refer to SAICA’s Guidelines for
candidates relating to the assessment of Communication Skills in the Initial Test of
Competency.
EXAM TECHNIQUE
Please note that NO marks will be awarded for theory in a discussion question.
The suggested solutions for discussion questions will however include the theory for
completeness purposes, and to assist students with the application of the theory.
Students should not waste time by stating the theory in the tests or the exam as no
marks are awarded for theory.
•
Journal entries
Describe the specific accounts affected by the journals and clearly convey the
classification of the account (e.g. P/L; OCI; SFP; SCE). Ensure that the journal entries
are processed the correct way around. Indicate the debit and credit of accounts clearly.
Narrations to journals should always be provided, except for when it is stated in a
question that it is not required.
•
Layout and presentation
Candidates should allocate time to planning the layout and presentation of their answers
before committing thought to paper. Very often, candidates start to write without having
read the question properly, which invariably leads to, for example, parts of the same
question being answered in several places or restatement of facts in different parts.
Marks are awarded for appropriate presentation and candidates should answer
questions in the required format, that is, in the form of a letter, memorandum or a report,
if this is what is required.
The quality of handwriting is also an ongoing problem. The onus is on the candidate
to produce legible answers.
•
Irrelevancy
Marks are awarded for quality, not quantity. Long-windedness is no substitute for clear,
concise, logical thinking and good presentation. Candidates should bear in mind that a
display of irrelevant knowledge, however sound, will gain no marks.
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•
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Calculations
Always show all your calculations. Remember that your calculations should contain a
reference when used in a solution. Calculations done in pencil will NOT be marked.
•
Time management
Use the reading time allocated to a question wisely, by highlighting important issues by
trying to envisage the required.
Candidates are advised to use their time wisely and budget time for each question. The
marks allocated to each question are an indication of the relevant importance the
examiners attach to that question and thus the time that should be spent on it.
Candidates should beware of the tendency to spend too much time on the first question
attempted and too little time on the last. They should never overrun on time on any
question, but rather return to it after attempting all other questions.
•
Recommendations / interpretations
Responses to these requirements are generally poor, either because candidates are
unable to explain principles that they can apply numerically or because they are reluctant
to commit themselves to one course of action. It is essential to make a recommendation
when a question calls for it, and to support it with reasons. Not only the direction of the
recommendation (i.e. to do or not to do something) is important, but particularly the
quality of the arguments – in other words, whether they are relevant to the actual case
and whether the final recommendation is consistent with those arguments. Unnecessary
time is wasted by stating all the alternatives.
•
Open-book examination
Candidates are reminded that they MUST familiarise themselves with the open book
policy. To this end candidates are advised of the following:
•
No loose pages (of any kind) may be brought into the exam.
•
Writing on flags – Candidates are only allowed to highlight, underline, sideline and
flag in the permitted texts. Writing on flags is permitted for reference and crossreferencing purposes only, that is, writing may only refer to the name or number of
the relevant discipline, standard, statement or section in the legislation.
Any contravention of this regulation will be considered to be misconduct.
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THE UNITED NATIONS GLOBAL COMPACT PRINCIPLES
INTRODUCTION
The United Nations Global Compact (UNGC) is underpinned on the principle of
corporate sustainability which emphasises on the value and principles-based approach
to doing business.
It established the ten principles based on the four main values: human rights, labour
practices, environmental concerns and anti-corruption.
The summary of the principles is provided on the table below.
OBJECTIVES/OUTCOMES
After you have engaged this topic, you should be able to demonstate an awareness of
the importance of the UNGC principles.
This topic is not examinable but it is important that you should have a sufficient
awareness of these principle as they are applicable in practice.
The summary of the 10 UNGC princinciples
UNGC
Human
Ten
rights
Principles
1. Businesses should support and respect the protection of
internationally proclaimed human rights and;
2. Make sure that they are not complicit in human rights abuses
Labour
3. Businesses should uphold the freedom of association and the
effective recognition of the right to collective bargaining
4. The elimination of all forms of forced and compulsory labour
5. The effective abolition of child labour
6. The elimination of discrimination in respect of employment and
occupation
Environment
7. Businesses should support a precautionary approach to
environmental challenges
8. Undertake
initiatives
to
promote
greater
environmental
responsibility
9. Encourage the development and diffusion of environmentally
friendly technologies
AntiCorruption
10.Businesses should work against corruption in all its forms,
including extortion and bribery
Source: Greenstone, 2014
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LEARNING UNIT 1 - CONSOLIDATED
STATEMENTS
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AND
SEPARATE
FINANCIAL
INTRODUCTION
IAS 27 prescribes accounting and disclosure requirements on how to account for the
cost of an investment in the separate records of the investor for investments in
subsidiaries, joint ventures and associates.
IFRS 10 deals with the definition of control and establishes control as the basis for
consolidation. IFRS 10 also sets out how to apply the principle of control and sets out
the accounting requirements for preparation of consolidated financial statements.
IFRS 10 deals with the principles that should be applied to a business combination
(including the elimination of intragroup transactions, consolidation procedures, etc.) from
the date of acquisition until date of loss of control.
OBJECTIVES/OUTCOMES
At the end of this learning unit, you should be able to:
1.
Define control (IFRS 10 Appendix A and IFRS 10.5 - 18).
2.
Identify situations in which consolidated financial statements should be presented
and the scope of consolidated financial statements (IFRS 10.4).
3.
Apply the consolidation procedure (IFRS 10.19 - 24 and IFRS 10.B86 - B96)
including:
3.1
3.2
3.3
3.4
3.5
3.6
3.7
Elimination of the parent’s investment in the subsidiary;
Account for non-controlling interests in the profit or loss of consolidated
subsidiaries;
Account for non-controlling interests in the net assets of consolidated
subsidiaries;
Elimination of intragroup balances, transactions, income and expenses;
Use of uniform accounting policies;
Use of the same end of reporting period date; and
Presentation of non-controlling interests in the statement of financial
position.
4.
Account for a loss of control transaction (IFRS 10.25 and IFRS 10.B97 - B99).
Assessed in Learning unit 7.
5.
Account for changes in ownership interest. Assessed in Learning unit 7.
6.
Account for the cost of investments in subsidiaries, joint ventures and associates
in the separate financial statements of the investor (IAS 27.9, .10, .13 and .14) at
cost (IAS 27.10(a)).
7.
Account for dividends from subsidiaries, joint ventures and associates (IAS 27.12).
8.
Disclosures in separate financial statements (IAS 27.15 - 17).
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PRESCRIBED STUDY MATERIAL
The following must be studied before you attempt the questions in this learning unit:
1.
Group Statements, 17th edition, Volume 1, ALL chapters
2.
Group Statements, 17th edition, Volume 2, Chapter 10.
3.
IAS 27 Separate Financial Statements.
4.
IFRS 10 Consolidated Financial Statements.
COMMENT
Please note that Group Statements, Volume 1, was covered thoroughly in your
undergraduate studies and therefore this tutorial letter is only a revision of the basic
consolidation principles. It is very important that you spend enough time to revise these
principles.
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THE REST OF LEARNING UNIT 1 IS BASED ON THE ASSUMPTION THAT YOU
HAVE ALREADY STUDIED THE RELEVANT PRESCRIBED STUDY MATERIAL.
SECTION A – SAICA’S PRINCIPLES OF EXAMINATION LEVELS
The SAICA principles of examination levels provide guidance on how the standards (or topics
within a standard) will be examined.
The principles of examination levels for IAS 27 are as follows:
Description
Objective
Scope
Definitions
Preparation of separate
financial
statements
Disclosure
Effective date and transition
Paragraph
1
2–3
4–8
8A
9
Level
Core
Awareness
Core
Excluded
Core
Notes
10(a)
10(b)
10(c)
10E1
11 – 11B
12
13 – 14
15 – 17
16A
18 – 20
Core
Excluded
Excluded
Core
Excluded
Core
Excluded
Core
Excluded
Excluded
Cost measurement
Fair value in separate AFS
Equity method in separate AFS
Cost measurement principles
Investment entity matters
Dividends received
Group reorganisations
Refer to learning unit 4
Investment entity matters
Investment entity matters
Separate financial statements
The principles of examination levels for IFRS 10 are as follows:
Description
Objective
Scope
Control
Accounting requirements
Paragraph
1
2–3
4
4A – 4B
5–9
10 – 14
15 – 16
17 – 18
19 – 21
22 – 24
25 – 26
Level
Core
Core
Awareness
Excluded
Core
Core
Core
Core
Core
Core
Core
Vertical
groups
Awareness
Change in Depends
ownership
IFRS 5 –
Excluded
Groups
Notes
Meeting the objective
Power
Returns
Link between power and returns
Non-controlling interests
Loss of control – refer to learning
unit 7
I.e. The parent’s subsidiary has an
investment in a subsidiary/
associate
Refer to learning unit 7
Subsidiaries acquired with a view
to resale and subsidiaries
classified as held for sale
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Description
Determining whether an entity
is an investment entity
Investment entities: exception
to consolidation
Defined terms
Application guidance
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Paragraph
27 – 30
Level
Excluded
Notes
Investment entity
31 – 33
Excluded
Investment entity
A
B1
B2 – B8
B9 – B10
B11 – B13
B14 – B28
B29 – B33
B34 – B50
B51 – B54
Core
Core
Core
Core
Core
Core
Core
Core
Core
B55 – B57
B58 – B72
Core
Excluded
B73 – B75
B76 – B79
B80 – B83
B84
B85
B85A – B85W
B86 – B88
B89 – B91
B92 – B95
B96
Excluded
Excluded
Core
Excluded
Core
Excluded
Core
Core
Core
Core
B97 – B99
Core
B99A
B100 – B101
Excluded
Excluded
Assessing control
Power
Relevant activities
Rights that give power
Franchises
Voting rights
Power when voting or similar
rights do not have a significant
effect
Exposure to variable returns
Link between power and returns –
Delegated power
Relationship with other parties
Control of specified assets
Continuous assessment
Principle/ agent
Market conditions
Investment entity
Accounting requirements
Potential voting rights
Reporting date
Changes in proportion held by
NCI
Loss of control – refer to learning
unit 7
Loss of control – not a business
Investment entity
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EXAMPLE
The following example illustrates the basic consolidation process:
Investment in subsidiary accounted for at cost
P Ltd acquired a 100% interest in S Ltd for R200 000 on 1 January 20.13 when S Ltd’s share capital
and retained earnings amounted to R80 000 and R120 000 respectively.
Investments in subsidiaries are accounted for at cost in terms of IAS 27.10(a).
Parent (P)
Separate Financial
Statements
Subsidiary (S)
Financial Statements
R’000
Assets
Investment in S Ltd
(cost)
Trade debtors
Equity
Share capital
Retained earnings
Liabilities
Long-term loan
R’000
Total
Pro
forma
journals
R’000
R’000
Assets
200
100
(50)
(150
)
(100
)
Investments
Trade debtors
Equity
Share capital
Retained earnings
Liabilities
Long-term loan
Note 1
280
200
380
(200)
(80)
(150
)
(130)
(300)
80
120
(50)
(150)
Note 2
Consolidated Financial
Statements
(P + S)
R’000
Assets
Investment in
S Ltd (cost)
Trade debtors
380
Equity
Share capital
Retained earnings
(50)
(180)
Liabilities
Long-term loan
(150)
Note 3
Notes
1.
When a parent prepares separate financial statements, it shall account for investments in
subsidiaries at cost. Separate financial statements are prepared by the parent and are
presented in addition to the consolidated financial statements.
2.
Broadly speaking, the first step in preparing consolidated financial statements is to combine
the financial statements of the parent and the subsidiaries (i.e. 100% of each line-item of the
subsidiary is added to each line-item of the parent).
3.
Pro forma journals are prepared for consolidation purposes only and are not recognised in
the individual records of either the parent or the subsidiary. The pro forma journals eliminate
common balances. The only two common items in this case is the investment in the
subsidiary on the statement of financial position in the parent (P) and the portion of the equity
of the subsidiary (S) held by the parent. The investment held by the parent in the subsidiary is
therefore set off against the equity of the subsidiary as follows:
Dr
R’000
Share capital (SCE)
Retained earnings (SCE)
Investment in S Ltd (SFP)
At acquisition elimination journal
Cr
R’000
80
120
200
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SECTION B – QUESTIONS ON CONSOLIDATED
FINANCIAL STATEMENTS
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SEPARATE
QUESTION 1.1 (45 marks - 68 minutes)
The following trial balances at 31 December 20.12 are presented to you:
Mickey
Ltd
R
Debits
Investment property - Land
Factory buildings
Equipment
Investment in Minnie Ltd
- 112 000 Ordinary shares at cost
- 12 000 12% Preference shares at cost
Inventory
Trade receivables
Bank
Cost of sales
Other expenses
Finance costs
Income tax expense
Preference dividends paid (up to 30 June 20.12)
Ordinary dividends
- Final dividend for the year ended 31 December 20.11
(declared and paid on 29 February 20.12)
- Interim dividend for 20.12: paid 30 September 20.12
Credits
Issued ordinary shares (640 000 shares; 160 000 shares)
Issued 12% Preference shares (20 000 shares)
Retained earnings (1 January 20.12)
Deferred tax
Trade payables
Bank overdraft
Revenue
Other income
Minnie
Ltd
R
1 200 000
236 000
700 000
125 000
140 000
26 880
80 000
114 953
90 000
1 375 000
254 320
14 000
239 260
-
26 000
40 000
591 499
406 000
88 700
7 200
60 000
3 830 413
20 000
2 004 399
640 000
260 000
150 500
61 593
2 700 000
18 320
3 830 413
160 000
40 000
174 950
102 449
122 000
25 000
1 200 000
180 000
2 004 399
Additional information
1.
Mickey Ltd obtained its interest in the non-redeemable cumulative preference shares of
Minnie Ltd on 1 January 20.12 at a cost of R26 880. Minnie Ltd is obliged to pay a preference
dividend for a financial year if an ordinary dividend is declared during the financial year. You
may assume that the preference shares were correctly classified as equity. The interest in the
ordinary shares was also acquired on 1 January 20.12. From this date Mickey Ltd had control
over Minnie Ltd as per the definition of control in terms of IFRS 10 Consolidated Financial
Statements. The acquisition of Minnie Ltd also met the definition of acquiring a business, as
defined in IFRS 3 Business Combinations.
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2.
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The details of acquisition of the interest in the ordinary shares in Minnie Ltd were as follows:
•
The purchase price agreed on, was payable in cash and a portion in shares.
•
A cash amount of R154 000 was payable by Mickey Ltd on 31 December 20.12.
•
The share portion was settled by the issue of 1 000 ordinary shares of Mickey Ltd worth
R105 000 on 1 January 20.12 and R110 000 on 31 December 20.12.
•
A contingent consideration of R10 000 was also payable on 30 June 20.13 if certain
profits were met. The fair value of the contingent consideration was R8 000 on
1 January 20.12 and R9 000 on 31 December 20.12.
•
The agreement determined that the seller of the shares will pay the costs relating to the
agreement and valuation expenses. The amount is R10 000 and is included in the
purchase price. You may assume that the tax effect of the R10 000 is correctly
accounted for.
•
With the exception of the items listed below, all assets and liabilities of Minnie Ltd were
deemed to be fairly valued on acquisition date:
Inventory
Trade receivables
Carrying amount
R
Fair value
R
20 000
27 000
36 000
19 500
The fair value of inventory represents the value at which it can be purchased.
2.
Mickey Ltd, a manufacturer of equipment, sold equipment to Minnie Ltd to the value of R50 000
on 1 January 20.12. Mickey Ltd sells equipment at cost plus 25%. Minnie Ltd uses the
equipment in the production of inventory and depreciates equipment at 20% per annum
according to the straight-line method.
3.
Minnie Ltd purchases all its inventory from Mickey Ltd at a gross profit percentage of 20%.
Inventory purchased from Mickey Ltd still on hand at year end was as follows:
31 December 20.12
-
R30 000
The inventory on hand at 31 December 20.12 was written down to net realisable value by
Minnie Ltd.
Total sales of Mickey Ltd to Minnie Ltd for the year ended 31 December 20.12 amounted to
R80 000.
4.
Minnie Ltd acquired the land on 30 June 20.12 at R550 000 for investment purposes. The land
is rented by Mickey Ltd at R5 000 per month and used as a storage facility for its inventory.
Rent paid and received are included in other expenses and other income respectively. No rent
was in arrears at 31 December 20.12. Minnie Ltd elected the fair value model to measure the
investment property. The investment property value increased with R150 000 for the year
ended 31 December 20.12.
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5.
It is the group accounting policy to disclose land at revalued amounts.
6.
It is the policy of Mickey Ltd to account for investments in subsidiaries at cost in accordance
with IAS 27.10(a) in its separate financial statements.
7.
Mickey Ltd elected to measure non-controlling interests at fair value at acquisition for all
acquisitions. The fair value of the non-controlling interests was R100 000 on 1 January 20.12.
8.
A market-related pre-tax discount rate is 10%, compounded annually.
9.
Assume a normal income tax rate of 28% and a Capital Gains Tax inclusion rate of 80%.
Ignore tax on financial instruments. Ignore the effects of Dividend Tax and Value Added Tax
(VAT).
REQUIRED
Marks
1.
Prepare the consolidated statement of profit or loss and other comprehensive
income of the Mickey Ltd Group for the year ended 31 December 20.12.
Income and expenditure should be indicated in terms of their function.
22
2.
Prepare the consolidated statement of financial position of the Mickey Ltd Group as
at 31 December 20.12.
22
Communication skills: presentation and layout
1
Please note:
•
•
•
•
•
Comparative figures are not required.
Notes are not required.
Show all your calculations.
Round all calculated amounts off to the nearest Rand.
Your answer must comply with International Financial Reporting Standards (IFRS).
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QUESTION 1.1 - Suggested solution
1.
MICKEY LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.12
R
Revenue [C7]
Cost of sales [C8]
Gross profit
Other income [C9]
Other expenses [C10]
Finance costs (given)
Profit before tax
Income tax expense [C11]
PROFIT FOR THE YEAR
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Gains on property revaluation [150 000 – (150 000 x 28% x 80%)]
Other comprehensive income for the year, net of tax
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Profit attributable to:
Owners of the parent (balancing)
Non-controlling interests (49 944[C2] + 1 920[C3])
Total comprehensive income attributable to:
Owners of the parent (balancing)
Non-controlling interests (51 864 + 34 920 [C2])
3 770 000
(1 862 499)
1 907 501
(633 820)
(14 000)
1 259 681
(289 180)
970 501
(4)
(4)
116 400
116 400
1 086 901
(1)
918 637
51 864
970 501
(1)
(1)
1 000 117
86 784
1 086 901
Total
Maximum
Communication skills: presentation and layout
(4)
(4)
(1)
(5)
(1)
(26)
(22)
(1)
COMMENT
The land will be recognised as investment property in the separate financial statements
of Minnie Ltd, as it was acquired for investment purposes. The fair value adjustment
and the deferred tax adjustment was thus recognised in profit or loss.
Since the land is rented by Mickey Ltd (parent), it now becomes owner occupied
property, plant and equipment in the group financial statements (IAS 40.15). The fair
value adjustment and deferred tax adjustment recognised in profit or loss by Minnie Ltd
must thus be reversed.
It is the group accounting policy to measure land in accordance with the revaluation
model. The increase in fair value of R150 000 must thus be recognised in other
comprehensive income, net of deferred tax.
MJM
18
2.
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NFA4864/102
ZFA4864/102
MICKEY LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.12
R
ASSETS
Non-current assets
Property, plant and equipment*
Goodwill [C1]
Current assets
Inventory (80 000 + 26 000 - 2 000[C5])
Trade receivables (114 953 + 40 000)
Cash and cash equivalents
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital (640 000 + 105 000[C6])
Retained earnings (260 000 + 918 637 (from 1 above) – 60 000 (div))
Other components of equity [C2]
Non-controlling interests (178 864[C2] + 16 000[C3])
Total equity
Non-current liabilities
Deferred tax (150 500 + 102 449 - 2 240[C4] - 560[C5])
Current liabilities
Bank overdraft
Trade payables (61 593 + 122 000 + 9 000[C6] (J2 Mickey))
Dividends payable [C3]
Total liabilities
Total equity and liabilities
*
Land (550 000 + 150 000)
Factory buildings
Equipment (236 000 + 125 000 – 8 000 [C4])
2 253 000
(3)
6 730 (10)
2 259 730
104 000
154 953
90 000
348 953
2 608 683
(1)
(1)
(1)
745 000
1 118 637
81 480
1 945 117
194 864
2 139 981
(1)
(1)
(1)
250 149
250 149
(1)
(2)
25 000
(1)
192 593
(1)
960
(1)
218 553
468 702
2 608 683
Total (25)
Maximum (22)
700 000
1 200 000
353 000
2 253 000
COMMENT
Note that the investment in Minnie Ltd was only carried at R140 000 in the trial balance
of Mickey Ltd, which thus indicates that the share issue, the contingent consideration
and the acquisition costs have not yet been recorded in the records of Mickey Ltd.
MJM
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CALCULATIONS
C1.
Goodwill
Purchase price
Share issued (1 000 x 105)
Fair value of contingent consideration
Acquisition costs
Cash (FV = 154 000; n = 1; I = 10%; PV = 140 000)
Equity at acquisition:
- Share capital
- Retained earnings
- Given
- Preference dividend
- Inventory (16 000 x 72%)
- Trade debtors (7 500 x 72%)
(243 000)
105 000
8 000
(10 000)
140 000
336 270
160 000
176 270
174 950
(4 800)
11 520
(5 400)
Non-controlling interests
Goodwill
(100 000)
6 730
[1]
[1]
[1]
[3]
[1]
[1]
[1]
[1]
[10]
COMMENT
Preference dividend
The preference dividend paid of R7 200 up to 30 June 20.12 relates to a dividend for
the year ended 31 December 20.11 amounting to R4 800 (R40 000 x 12%). This amount
has to be accrued for at acquisition, since the preference shares are cumulative. The
remaining R2 400 (R7 200 – R4 800 or R40 000 x 12% x 6/12) relates to the six month
period ended 30 June 20.12. An amount of R2 400 must thus still be accrued for the last
six months, refer to [C3].
Inventory and trade debtors
The IFRS 3 fair value adjustments made to trade debtors and inventory at acquisition
must again be reversed when the underlying assets are derecognised. Since trade
receivables and inventory are current assets, they are expected to realise within
12 months if no other information is provided. These fair value adjustments are therefore
reversed at year end.
MJM
20
C2.
FAC4864/102
NFA4864/102
ZFA4864/102
Analysis of owners’ equity of Minnie Ltd – ordinary shares
Total
At acquisition
Share capital
Retained earnings:
Balance given
Debtors (7 500 x 72%)
Inventory (16 000 x 72%)
Preference dividend in arrears
NCI
160 000
Equity represented by goodwill
Consideration and NCI
174 950
(5 400)
11 520
(4 800)
336 270
6 730
343 000
Since acquisition
Current year
Profit (1 200 000 – 591 499 – 406 000 +
180 000 – 150 000 [J13] – 88 700 +
33 600 [J14])
Profit attributable to PSH
Debtors
Inventory
Total current year profit
177 401
(4 800)
5 400
(11 520)
166 481
116 537
49 944
116 400
(20 000)
605 881
81 480
(14 000)
184 017
34 920
(6 000)
178 864
Revaluation – land
[150 000 x (100% - (80% x 28%))]
Dividend
C3.
Mickey Ltd
(70%)
At
Since
235 389
7 611
243 000
100 881
(881)
100 000
Analysis of owners’ equity of Minnie Ltd – preference shares
Total
At acquisition
Share capital
Dividend in arrears
Consideration and NCI
40 000
4 800
44 800
Mickey Ltd
(60%)
At
Since
24 000
2 880
26 880
NCI
16 000
1 920
17 920
Since acquisition
Current year
Profit attributable to PSH (40 000 x 12%)
Dividend
Dividend accrued
4 800
(7 200)
(2 400)
40 000
2 880
(4 320)
(1 440)
(2 880)
1 920
(2 880)
(960)
16 000
MJM
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COMMENT
Preference shares have a preference to dividends over ordinary shares.
The profit attributable to preference shareholders of R4 800 is the preference dividend
for the current year. Please note that this profit attributable to preference shareholders
is deducted in the analysis of ordinary shares to ensure we don’t double account.
The preference dividend that was paid of R7 200 (as per the trial balance) is preference
dividends up to 30 June 20.12 only. The preference dividend for the period 1/7/20.12 –
31/12/20.12 is R2 400 which is calculated as R4 800 x 6/12. The parent thus has to
accrue for this as preference dividends as the amount is owed to the preference
shareholders at year end.
C4.
Equipment sold by Mickey Ltd to Minnie Ltd
Minnie
Ltd
Unrealised profit
(50 000 x 25/125)
Depreciation
(10 000 x 20%)
50 000
Group
40 000
Deferred taxation at 28%
Net
C5.
Difference
Tax
10 000
2 800
2 000
8 000
2 240
5 760
(560)
2 240
Unrealised profit in inventory
Closing balance: (30 000 x 20%) = R6 000 limited to R2 000*
Taxation effect: (2 000 x 28%) = R560
*
The inventory was already written-off from R30 000 to R26 000 (per trial balance) by
Minnie Ltd, an adjustment of R4 000. Therefore the remaining unrealised profit for group
statement purposes is R2 000 (R6 000 – R4 000).
MJM
22
C6.
FAC4864/102
NFA4864/102
ZFA4864/102
Journals in the records of Mickey Ltd
Dr
R
J1
J2
J3
*
#
Investment in Minnie Ltd (SFP)
Share capital (SCE)
Investment in Minnie Ltd (SFP)
Contingent consideration liability (SFP)
Fair value adjustment (P/L)
Acquisition costs (P/L)
Investment in Minnie Ltd (SFP)
Cr
R
105 000
105 000
8 000
9 000
1 000*
10 000#
10 000
Not tax deductible.
The given information states that you may assume that the tax effect of the R10 000 is
correctly accounted for.
COMMENT
Transaction costs should be carefully analysed as the accounting treatment for
transaction costs are not all the same. Acquisition-related costs (finder’s fees, advisory,
legal, valuation, professional fees, and administration fees) should be expensed in profit
or loss in the consolidated financial statements of the acquirer in accordance with
IFRS 3.53.
Costs to issue debt or equity are not acquisition-related costs as defined in accordance
with IFRS 3. Share issue costs shall be accounted for as a deduction from equity in
terms of IAS 32.35 in the separate and consolidated financials of the acquirer.
The parent will measure its investments in subsidiaries at cost in accordance with
IAS 27.10(a) in its separate financial statements. Acquisition-related costs in the
separate financial statements of the parent should thus also be expensed.
Students should read carefully how the parent treated the transaction costs in its
separate financial statements.
In this question, acquisition-related costs of R10 000 will be paid by the seller of the
shares (Minnie Ltd) and is included in the purchase price to be paid by Mickey Ltd.
In accordance with IFRS 3.53, these costs should however be expensed.
C7.
Revenue
Mickey
Minnie
Total intragroup sales
Intragroup equipment sold [C4]
2 700 000
1 200 000
(80 000)
(50 000)
3 770 000
[1]
[1]
[1]
[1]
[4]
C8.
Cost of sales
Mickey
Minnie
Total intragroup sales
Intragroup equipment sold [C4]
Depreciation on intragroup equipment [C4]
Unrealised profit – closing inventory [C5]
Reversal of at acquisition inventory adjustment [C2]
(1 375 000)
(591 499)
80 000
40 000
2 000
(2 000)
(16 000)
(1 862 499)
[1]
[1]
[1]
[1]
[4]
MJM
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COMMENT
The depreciation on the intragroup equipment will be included in cost of sales instead
of operating expenses as the specific machine is used in the production of inventory.
C9.
Other income
Mickey
Minnie
Intragroup rent paid
Reversal of fair value adjustment on investment property
Ordinary dividend elimination [C2]
Preference dividend elimination [C3]
18 320
180 000
(30 000)
(150 000)
(14 000)
(4 320)
-
[1]
[1]
[1]
[1]
[4]
C10. Other expenses
Mickey
Minnie
Fair value adjustment on contingent consideration [C6]
Acquisition cost [C6]
Reversal of at acquisition debtors adjustment [C2]
Intragroup rent paid
(254 320)
(406 000)
(1 000)
(10 000)
7 500
30 000
(633 820)
[1]
[1]
[1]
[1]
[4]
C11. Income tax expenses
Mickey
Minnie
Deferred tax on unrealised profit [C4]
Deferred tax on depreciation [C4]
Deferred tax on unrealised profit [C5]
Deferred tax on reversal of at acquisition inventory adjustment [C2]
Deferred tax on reversal of at acquisition debtors adjustment [C2]
Reversal of deferred tax on fair value adjustment on investment
property (150 000 x 80% x 28%)
(239 260)
(88 700)
2 800
(560)
560
4 480
(2 100)
33 600
(289 180)
[1]
[1]
[1]
[1]
[1]
[5]
MJM
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C12. Pro forma consolidation journals
The pro forma journals are provided for completeness only and explain the adjustments made
to the statement of profit or loss and other comprehensive income.
Cr
R
Dr
R
J1
J2
J3
J4
J5
J6
J7
J8
J9
J10
J11
J12
Investment in ordinary shares
Share capital (SCE)
Retained earnings (SCE) (174 950 – 4 800)
Inventory (SFP)
Debtors (SFP)
Deferred tax (SFP) ((16 000 - 7 500) x 28%)
Investment in Minnie (SFP)
Non-controlling interests (SCE/SFP)
Goodwill (SFP) (balancing)
At acquisition elimination journals
Cost of sales (P/L)
Inventory (SFP)
Reversal of fair value adjustment at acquisition
Debtors (SFP)
Other expenses (P/L)
Reversal of fair value adjustment at acquisition
Deferred tax (SFP) ((16 000 - 7 500) x 28%)
Income tax expense (P/L)
Reversal of deferred tax on fair value adjustments at
acquisition
Revenue (Mickey) (P/L) (50 000 x 25/125)
Cost of sales (Mickey) (P/L) (50 000 x 100/125)
Equipment (Minnie) (SFP)
Elimination of unrealised profit on intragroup equipment
sale
Deferred tax (SFP) (10 000 x 28%)
Income tax expense (P/L)
Deferred tax on intragroup sales
Accumulated depreciation (Minnie) (SFP)
(10 000 x 20%)
Cost of sales (Depreciation) (Mickey) (P/L)
Elimination of intragroup depreciation
Income tax expense (P/L) (2 000 x 28%)
Deferred tax (SFP)
Deferred tax on intragroup depreciation
Sales (Mickey) (P/L)
Cost of sales (Minnie) (P/L)
Elimination of intragroup sales
Cost of sales (Mickey) ((30 000 x 20%) - 4 000)
Inventory (Minnie) (SFP)
Elimination of unrealised profit on intragroup sales
Deferred tax (SFP) (2 000 x 28%)
Income tax expense (P/L)
Deferred tax on intragroup unrealised profit
Other income (rental income) (Minnie) (P/L) (5 000 x 6)
Other expenses (rental expense) (Mickey) (P/L)
Elimination of intragroup rental income and expense
160 000
170 150
16 000
7 500
2 380
243 000
100 000
6 730
16 000
16 000
7 500
7 500
2 380
2 380
50 000
40 000
10 000
2 800
2 800
2 000
2 000
560
560
80 000
80 000
2 000
2 000
560
560
30 000
30 000
MJM
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Dr
R
J13
J14
J15
J16
J17
J18
J19
J20
J21
J22
J23
J24
Other income (fair value adjustment) (P/L)
Investment property (SFP)
Reversal of the fair value adjustment on land included in
P/L
Deferred tax (SFP) (150 000 X 28% X 80%)
Income tax expense (P/L)
Reversal of deferred tax raised on the fair value
adjustment
Property, plant and equipment (SFP)
Investment property (SFP)
Reclassification of the land to owner occupied PPE
Property, plant and equipment (SFP)
Revaluation surplus (OCI)
Recognising the increase in the fair value of the owner
occupied land
Deferred tax (OCI) (150 000 x 28% x 80%)
Deferred tax (SFP)
Deferred tax on the revaluation surplus
Non-controlling interests (P/L)
Non-controlling interests (SCE/SFP)
NCI's share of profit for the year
Non-controlling interests (OCI)
Non-controlling interests (SCE/SFP)
NCI's share of other comprehensive income for the year
Other income (dividend received) (P/L)
Non-controlling interests (SCE/SFP)
Dividends paid (SCE)
Elimination of dividends paid
Investment in preference shares
Share capital (SCE)
Retained earnings (SCE)
Non-controlling interests (SCE/SFP)
Investment in Minnie (SFP)
At acquisition elimination journals
Non-controlling interests (P/L)
Non-controlling interests (SCE/SFP)
NCI's share of profit for the year
Other income (dividend received) (P/L)
Non-controlling interests (SCE/SFP)
Dividends paid (SCE)
Elimination of dividends paid
Non-controlling interests (SCE/SFP)
Dividends payable (SFP)
Reclassification of dividends payable
Cr
R
150 000
150 000
33 600
33 600
550 000
550 000
150 000
150 000
33 600
33 600
49 944
49 944
34 920
34 920
14 000
6 000
20 000
40 000
4 800
17 920
26 880
1 920
1 920
4 320
2 880
7 200
960
960
MJM
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QUESTION 1.2 (31 marks – 47 minutes)
Great White Ltd was established in 20.3 and their main business is to take tourists on shark cage
diving expeditions in Gansbaai. Great White Ltd has several investments as indicated below:
Whales Ltd
On 1 March 20.10 Great White Ltd acquired 60% of the issued share capital of Whales Ltd, a
company that is in the industry of arranging whale watching expeditions in the Hermanus area. One
voting right is attached to each share. The remaining 40% of the issued share capital is owned by
Mr Hlongwane, the managing director of the company. Mr Hlongwane is a meteorologist and an
expert in predicting weather patterns. According to a contractual agreement, Mr Hlongwane has
rights to refuse the boats of Whales Ltd to go out onto the sea when he expects severe weather
conditions that may damage the boats and/or place the lives of the crew and tourists in danger.
Great White Ltd has the rights to make all other decisions regarding operating activities.
Dolphins Ltd
Great White Ltd acquired 50% of the issued share capital of Dolphins Ltd on 1 September 20.12, a
company situated in Ballito. Dolphins Ltd organises dolphin watching expeditions on the
North Coast. One voting right is attached to each share. Mrs Yen, a retired widow, acquired the
remaining 50% interest. Mrs Yen lives in Japan along with her children and rarely visits South Africa
and Dolphin Ltd. Mrs Yen has the rights to make decisions regarding the investment of surplus
funds. Great White Ltd has the rights to make decisions regarding the purchase and disposal of
boats, organising expeditions and appointing staff.
Rent-a-Boat Ltd
On 1 November 20.12, a new company was formed in Gansbaai, namely Rent-a-Boat Ltd, which
rents out charter boats. Hundred percent (100%) of the issued share capital is held by Mrs Nkwane,
a local business woman in the Gansbaai area. In terms of a contractual agreement, Rent-a-Boat Ltd
must have boats available for Great White Ltd at any given period. Great White Ltd also has the
rights to determine the accounting policies and to appoint the directors in terms of the contractual
agreement. The customers of Rent-a-Boat Ltd other than Great White Ltd contribute a very small
fraction of the revenue. Mrs Mrs Nkwane has the rights to decide which suppliers are used for the
purchase of boats.
REQUIRED
Marks
Discuss, with reasons, whether or not each of the companies indicated above is a
subsidiary of Great White Ltd for the year ended 31 December 20.12. Your answer
should address:
(a)
(b)
(c)
Whales Ltd
Dolphins Ltd
Rent-a-Boat Ltd
12
9
10
Please note:
•
Your answer must comply with International Financial Reporting Standards (IFRS).
MJM
27
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ZFA4864/102
QUESTION 1.2 – Suggested solution
General theory
Great White Ltd as the investor has to determine whether it is a parent by assessing whether
it controls the investee, Whales Ltd (IFRS 10.5).
An investor controls an investee when it is exposed, or has rights, to variable returns from
its involvement with the investee and has the ability to affect those returns through its power
over the investee (IFRS 10.6).
(a)
Whales Ltd
An investor has power over an investee when the investor has existing rights that give
it the current ability to direct the relevant activities, thus the activities that significantly
affect the investee’s returns (IFRS 10.10).
The power that Great White Ltd has over Whales Ltd results from the voting rights of
60%, which are the majority voting rights.
(1)
Mr Hlongwane has the rights to refuse the boats to go out to sea when he suspects
adverse weather conditions, due to his technical expertise as a meteorologist.
(1)
Mr Hlongwane can only protect the company and its assets and thus his own interest
in the company by refusing boats to go out in severe weather conditions, as boats might
be damaged and crew and tourists’ lives may be in danger should Mr Hlongwane not
exercise his rights.
(1)
The rights that Mr Hlongwane has are deemed to be protective rights, as it is rights
designed to protect the interest of Mr Hlongwane without giving him power over
Whales Ltd (IFRS 10 Appendix A).
(1)
(1)
(1)
Great White Ltd has the rights to make decisions regarding all other operating activities,
which is thus seen as the relevant activities, as it is the activities of Whales Ltd that
significantly affect the returns (IFRS 10 Appendix A).
(1)
Great White Ltd has, in terms of the 60% voting rights together with the rights to make
decisions regarding relevant activities of Whales Ltd, power over Whales Ltd.
(2)
Great White Ltd has rights to variable returns in the form of dividends due to its
involvement with Whales Ltd as a shareholder.
(1)
The power, together with the exposure to variable returns and the ability to affect the
amount of the returns, results in Great White Ltd having control over Whales Ltd.
(1)
Whales Ltd is thus a subsidiary of Great White Ltd.
(1)
(12)
MJM
28
(b)
FAC4864/102
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ZFA4864/102
Dolphins Ltd
Great White Ltd owns 50% of the voting rights of Dolphins Ltd, which does not constitute
the majority voting rights.
(1)
Great White Ltd has the rights to make decisions regarding the purchase and disposal of
boats, organising expeditions and appointing staff.
(1)
These activities are deemed to be relevant activities, as it significantly affects the returns
of Dolphins Ltd. This results in Great White Ltd having power over Dolphins Ltd.
(2)
Mrs Yen has the rights to make decisions regarding the investment of surplus funds,
which is not deemed to be relevant activities.
(1)
Mrs Yen does thus not have power over Dolphins Ltd.
(1)
Great White Ltd has exposure, or rights, to variable returns from its involvement with the
investee by means of the dividends received from the shares owned.
(1)
The power, together with the exposure to variable returns and the ability to affect the
amount of the returns, results in Great White Ltd having control over Dolphins Ltd.
(1)
Dolphins Ltd is thus a subsidiary of Great White Ltd.
(c)
(1)
(9)
Rent-a-Boat Ltd
Great White Ltd does not own any voting rights from shares in Rent-a-Boat Ltd and does
not have power in terms of voting rights.
Great White Ltd has the rights, in terms of a contractual agreement, to make decisions
regarding the accounting policies and appointment of directors of Rent-a-Boat Ltd, which
is deemed to be relevant activities as it significantly affects the returns of
Rent-a-Boat Ltd.
Mrs Nkwane has the rights to decide which suppliers are used for the purchase of boats,
which also constitutes relevant activities.
(1)
(1)
(1)
(1)
If two or more investors each have existing rights that give them the unilateral ability to
direct different relevant activities, the investor that has the current ability to direct the
activities that most significantly affect the returns of the investee, has power over the
investee (IFRS 10.13).
The rights that Great White Ltd has regarding the relevant activities together with the
contractual agreement that grants them almost exclusive use of Rent-a-Boat Ltd’s boats,
constitutes power over Rent-a-Boat Ltd.
(1)
(1)
Great White Ltd has exposure, or rights, to variable returns from its involvement with the
investee by means of the contractual agreement stating that Rent-a-Boat Ltd must supply
boats to Great White Ltd (ifrs 10.B57(c)).
(2)
The power, together with the exposure to variable returns and the ability to affect the
amount of the returns by means of the contract, results in Great White Ltd having control
over Rent-a-Boat Ltd.
(1)
Rent-a-Boat Ltd is a structured entity as defined and a subsidiary of Great White Ltd.
(1)
(10)
MJM
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EXAM TECHNIQUE
Please note that NO marks will be awarded for theory in a discussion question.
The suggested solutions for discussion questions will however include the theory for
completeness purposes, and to assist students with the application of the theory.
Students should not waste time by stating the theory in the tests or the exam as no
marks are awarded for theory.
QUESTION 1.3 (11 marks – 17 minutes)
Luke Ltd
Luke Ltd is primarily involved in astrological observation and research, from its base at the South
African Large Telescope in Sutherland in the Western Cape. Luke Ltd tenders for various contracts
and is commissioned for international astrological projects. The majority of Luke Ltd's funding for
projects is provided by a consortium of international investors from South Africa, the United States,
Germany, Poland and India. Luke Ltd is busy expanding its operations and has identified Leia Ltd
as a perfect synergistic investment. Luke Ltd and its subsidiaries have a February year end.
Leia Ltd
Leia Ltd is a company started by three Unisa computer engineering students with exceptional data
processing skills and registered patents. The company’s relevant activities are the development of
data processing and analysis software, which will come in very handy with the amount of data
streams that the scientists at Luke Ltd are creating.
Leia Ltd’s share capital consists of 100 issued ordinary shares. Each share carries one voting right.
Luke Ltd acquired 49 of the ordinary shares of Leia Ltd on 1 January 20.16. The StarCon Consortium
holds the remainder of the voting rights.
An extract of the shareholders’ agreement between Luke Ltd and the StarCon Consortium is as
follows:
(a)
Luke Ltd and the StarCon Consortium each have the right to appoint two of the four directors.
(b)
Luke Ltd has the right to establish Leia Ltd’s operating and capital decisions and policies.
(c)
The StarCon Consortium has the right, as a lender and provider of funds, to seize Leia Ltd’s
assets if Leia Ltd fails to meet the specified loan repayment conditions.
REQUIRED
Discuss, in terms of IFRS 10 Consolidated Financial Statements, whether Leia Ltd should
be consolidated in the consolidated financial statements of Luke Ltd for the year ended
29 February 20.16.
Communication skills: conclusion and logical flow
Marks
10
1
Please note:
•
•
Round off all amounts to the nearest Rand.
Your answer must comply with International Financial Reporting Standards (IFRS).
MJM
30
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QUESTION 1.3 - Suggested solution
Discussion whether Leia Ltd should be consolidated
Required to consolidate?
A subsidiary is an entity that is controlled by another entity (known as the parent).
Luke Ltd will need to consolidate Leia Ltd if control exists (IFRS 10 Appendix A).
(1)
Control
An investor controls an investee when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over
the investee (IFRS 10.6-7).
Power over the investee (IFRS 10.7(a))
To have power over an investee, an investor must have existing rights that gives it the current
ability to direct relevant activities (IFRS 10.B9).
Direct relevant activities
Establishing operating and capital decisions of the investee (IFRS 10.B12(a)).
According to the shareholders’ agreement, Luke Ltd can establish the operating and capital
policies of Leia Ltd. This indicates that Luke Ltd has the ability to direct relevant activities.
(1)
Appointing and remunerating an investee’s key management personnel (IFRS 10.B12(b)).
According to the shareholders’ agreement, Luke Ltd and the StarCon Consortium can each
appoint two members of the Leia Ltd’s key management. This indicates that Luke Ltd and the
StarCon Consortium have the ability to direct relevant activities.
(1)
(1)
An investor can have power over an investee even if other entities have existing rights that give
them the current ability to participate in the direction of the relevant activities.
However, an investor that holds only protective rights does not have power over an investee
and consequently does not control the investee. (IFRS 10.14)
According to the shareholders’ agreement, The StarCon Consortium can seize Leia Ltd’s
assets if Leia Ltd fails to meet the specified loan repayment conditions. This indicates that The
StarCon Consortium has a protective right but not power over Leia Ltd.
1B. Exposure/rights to variable returns (IFRS 10.7(b))
Luke Ltd and the StarCon Consortium have rights to variable returns in the form of dividends
due to its 49% and 51% shareholding in Leia Ltd respectively.
(1)
(1)
(1)
1C. Link between power and returns (IFRS 10.7(c))
…but also has the ability to use its power to affect the investor’s returns from its involvement
with the investee
By establishing the operating and capital decisions of Leia Ltd, the StarCon Consortium can
use its power to affect its returns from Leia Ltd.
(1)
By appointing Leia Ltd’s key management personnel, Luke Ltd can use its power to affect its
returns from Leia Ltd.
(1)
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Conclusion
• Both entities have the right to direct the relevant activities of Leia Ltd but Luke Ltd has the
right to establish the operating and capital policies of Leia Ltd as well.
• The StarCon Consortium holds the majority of the shares.
• The StarCon Consortium doesn’t have power over Leia Ltd because it has protective and
not substantive rights.
• Both entities have exposure/rights to variable returns.
• Both entities have the power to affect its returns from its involvement with Leia Ltd.
• StarCon Consortium is the majority shareholder but Luke has control over Leia Ltd.
(1)
• Luke will be required to consolidate Leia Ltd.
(1)
Total (11)
Maximum (10)
Communication skills: conclusion and logical flow
(1)
EXAM TECHNIQUE
Please note that NO marks will be awarded for theory in a discussion question.
The suggested solutions for discussion questions will however include the theory for
completeness purposes, and to assist students with the application of the theory.
Students should not waste time by stating the theory in the tests or the exam as no
marks are awarded for theory.
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LEARNING UNIT 2 - BUSINESS COMBINATIONS
INTRODUCTION
IFRS 3 deals with accounting for a business combination on date of acquisition and
outlines the principles on how to account for identifiable assets acquired and liabilities
assumed, non-controlling interests and goodwill or gain from a bargain purchase taking
into account certain exceptions to recognition, measurement and classification principles
as established in other IFRS standards.
OBJECTIVES/OUTCOMES
At the end of this learning unit, you should be able to:
1.
Identify a business combination.
2.
Account for business combinations by applying the acquisition method.
3.
Account for a business combination in which control is achieved in stages.
4.
Account for measurement period adjustments.
5.
Determine what forms part of a business combination.
6.
Recognition and subsequent measurement of particular assets acquired in terms
of IFRS 3.
7.
Test goodwill for impairment annually, or more frequently if events or changes in
circumstances indicate that the asset might be impaired in accordance with
IAS 36.10(b).
PRESCRIBED STUDY MATERIAL
The following must be studied before you attempt the questions in this learning unit:
1.
IFRS 3 Business Combinations.
2.
Group Statements, 17th edition, Volume 1, Chapter 2.
3.
Group Statements, 17th edition, Volume 2, Chapter 9.
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THE REST OF LEARNING UNIT 2 IS BASED ON THE ASSUMPTION THAT YOU
HAVE ALREADY STUDIED THE RELEVANT PRESCRIBED STUDY MATERIAL.
SECTION A - SAICA’S PRINCIPLES OF EXAMINATION LEVELS
The SAICA principles of examination levels provide guidance on how the standards (or topics
within a standard) will be examined.
The principles of examination levels for IFRS 3 are as follows:
Description
Objective
Scope
Identifying a business
combination
The acquisition method
Subsequent measurement and
accounting
Disclosures
Effective date and transition
Reference to IFRS 9
Withdrawal of IFRS 3 (2004)
Defined terms
Paragraph
1
2(a) – 2(b)
2(c)
2A
3
Level
Core
Core
Awareness
Excluded
Core
4–5
6–7
8–9
10 – 28
Core
Core
Core
Core
28A – 28B
Core
29
30
Excluded
Excluded
31
32
Core
Core
33
34 – 36
37 – 40
41 – 44
45 – 50
51
52(a)
52(b) – 52(c)
53
54
55
56
57
58
59 – 63
64 – 67
67A
68
Excluded
Core
Core
Core
Core
Core
Excluded
Core
Core
Core
Excluded
Core
Core
Core
Core
Excluded
Excluded
Excluded
Core
Notes
Identify the acquirer
Determine the acquisition date
Recognise and measure assets,
liabilities and NCI
Leases in which the acquiree is
the lessee
Reacquired rights
Share-based payment transactions
Assets held for sale
Goodwill or gain from bargain
purchase
Exchange of only equity interests
Bargain purchases
Consideration transferred
Particular types of combinations
Measurement period
What is included in transaction
Pre-existing relationships
Separate transactions
Transaction costs
Reacquired rights
Contingent liabilities
Indemnification assets
Contingent consideration
Refer to learning unit 4
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Description
Application guidance
Paragraph
B1 – B4
B5 – B6
B7 – B12
B13 – B18
B19 – B27
B28 – B30
B31 – B34
B35 – B36
B37 – B40
Level
Excluded
Awareness
Awareness
Excluded
Excluded
Deleted
Core
Excluded
Core
E5 (B38)
B41 – B45
Excluded
Core
B46
Core
B47 – B49
B50
B51 – B53
Excluded
Core
Excluded
B54 – B55
Core
B56 – B62
Excluded
B62A
B62B
B63
B64 – B67
B68 – B69
– Excluded
Core
Core
Excluded
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Notes
Entities under common control
Identify a business combination
Definition of a business
Identifying the acquirer
Reverse acquisitions
Intangible assets
Reacquired rights
Assembled workforce and other
items that are not identifiable
Put options to NCI
Fair value of particular assets and
NCI
Goodwill or gain from bargain
purchase
Combinations of mutual entities
What is included in transaction
Pre-existing
relationship
settlement
Contingent
payments
to
employees or selling shareholders
Share-based payment awards
exchanged for acquiree’s awards
Equity-settled
share-based
payment transactions of acquiree
Other
IFRSs
that
provide
guidance
Disclosure - refer to learning unit 4
Transitional provisions
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IDENTIFY A BUSINESS COMBINATION
In order to identify a business combination, the definition of a business as stated in IFRS 3 should
be considered and applied.
The definition had been amended in July 2019. The amendment is effective from 1 January 2020
with an option to pre-adopt.
It is important that you first work through IE74 to IE123 in your IFRS textbook as the IFRS is what
you have in the exam/test and it is for your benefit to familiarise yourself with it.
To enhance your understanding of the relevant illustrative examples of the IFRS 3 amendment,
please refer to the following screencasts that may be found on MyUnisa under the lessons tab for
tutorial letter 102.
-
Part 1 – Overview
Part 2 – Concentration test (numeric application)
Part 3 – Similar Assets
Part 4 – Further criteria assessed
The amended definition of a business that is found in IFRS 3 is as follows:
An integrated set of activities and assets that is capable of being conducted and managed
for the purposes of providing goods or services to customers, generating investment income
(such as dividends or interest) or generating other income from ordinary activities.
The application of the guidance layed out in paragraphs B7 to B12D is summarised into a mindmap
found below. Please note you are still required to go to these paragraphs in IFRS and read them
and familiarise yourself with them. The mindmap summary below is merely an illustration to enhance
your understanding of these paragraphs.
The question 2.1 below highlights the major changes in the application of the definition, and may be
used as practice questions once you have already studied the IFRS application paragraphs,
illustrative examples and the screencasts indicated above.
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APPLICATION GUIDANCE TO DETERMINE ACQUISITION OF A BUSINESS
Do the acquired assets and liabilities meet the definition of a business?
Do you want to apply the concentration test?
Yes
No
Have you met the
criteria for the
concentration
test?
No
Business = inputs + a substantive process + the ability to
contribute to the ability to create outputs.
Do the activities and assets have outputs at acquisition date?
Yes
No
No
Yes
Is the process critical when applied to the
inputs to continue producing outputs, AND
there is a skilled, knowledgeable or
experienced organised workforce to
perform the process?
Is the process critical to
the ability to develop or
convert the inputs into
outputs?
Yes
No
Yes
No
Do the inputs include a skilled,
knowledgeable or experienced
organized workforce to perform
the process AND other inputs
the workforce could develop or
convert into outputs?
Yes
Acquisition is NOT a
business
Purchased assets:
Apply asset standards
(i.e IAS 16,38,40; etc.)
Does the process significantly
contribute to the ability to
continue producing output and
is considered unique/scarce;
or cannot be replaced without
significant impact on the ability
to continue producing outputs?
Yes
No
Acquisition is a
business
Purchased assets:
Apply IFRS 3 Business
combinations
(SAICA – adapted)
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ACQUISITION METHOD (Applying IFRS 3 Business Combinations)
Step 1
Who is the acquirer?
Step 2
When did the acquisition
occur?
Step 3
Recognise the
identifiable assets and
liabilities acquired in the
business combination
The entity that obtains control of the acquiree (IFRS 3.6-.7).
See control as defined in IFRS 10.5-.18
The date on which the acquirer obtains control of the acquiree
(IFRS 3.8-.9).
Recognition criteria:
To qualify for recognition the:
• Assets and liabilities should meet the definitions of the
Conceptual Framework.
• Assets and liabilities must be part of what is exchanged in the
business combination (not a separate transaction)
Exceptions:
• Contingent liabilities should be recognised if there is a
present obligation and its fair value can be measured reliably
(IFRS 3.22-.23).
• Recognise indemnification asset (debtor) only if indemnification item (liability) is recognised on acquisition date
(IFRS 3.27-.28).
Note that the acquiree may not have recognised certain assets
and liabilities in its own financial statements that do qualify for
recognition in the group financial statements. Examples are:
• Identifiable intangible assets not recognised by the acquiree
(IFRS 3.13).
• Restructuring provisions (meeting the liability definition).
Step 4
Measurement criteria:
Measure the assets and
liabilities acquired in the
business combination
Assets and liabilities acquired should be measured at their fair
values at acquisition date.
Remember:
• Restatement of assets and liabilities to fair value has deferred
tax implications for the business combination.
• The restatement of assets to fair value may also result in an
additional
depreciation/amortisation
charge
in
the
consolidated financial statements (and again deferred tax
implications)
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Step 5
Recognise and measure
NCI
Step 6
Measure consideration
transferred
Step 7
Recognise and measure
goodwill
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Measure NCI at (IFRS 3.19):
• Fair value or
• The proportionate share of the acquiree’s identifiable net
assets.
Consideration is measured at fair value on acquisition date
(except for share based payments)
Note: If the transferred
Consideration includes:
• Assets transferred
• Liabilities incurred
• Equity interests issued
asset remains within the
group, the asset should be
measured at its carrying
amount at acquisition
Goodwill = Consideration transferred + NCI
acquired
- net assets
Goodwill is recognised as an asset and tested annually for
impairment.
Gain on bargain purchase is recognised as a gain in profit or
loss on acquisition date.
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SECTION B - QUESTION ON BUSINESS COMBINATIONS
QUESTION 2.1A (10 marks – 15 minutes)
Designa Cars Ltd is a motor car dealer and purchased a portfolio of cars for resale. Within this
portfolio are 19 different cars. The fair value of the price paid for the portfolio of cars is equal to the
aggregate fair value of the 19 cars acquired.
The vehicles are of different makes and models specifically five BMW’s of different models, five
Mercedes Benz of different models, seven Toyota’s of different models and two Fords of different
models.
Two of the BMW’s and two of the Mercedes Bens were made as a customised order per specific
customer requirements. These changes are cosmetic and do not change the risks associated with
these vehicles.
Due to the wide range of cars in the portfolio the class of customers would not be similar.
The risks associated with operation in the motor vehicle industry for the vehicles acquired is not
significantly different. No employees, other assets other processes and other activities are
transferred.
REQUIRED
Marks
Designa Cars Ltd opted to apply the concentration test to the purchase of the portfolio in
terms of IFRS 3.B7A. Discuss if the concentration test is met or not in terms of IFRS3.
B7B. Conclude if this acquisition results in acquisition of a business or not.
10
Please note:
•
•
Round off all amounts to the nearest Rand.
Your answer must comply with International Financial Reporting Standards (IFRS).
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QUESTION 2.1A - Suggested solution
Designa Cars Ltd opted to apply the concentration test to the purchase of the portfolio in
terms of IFRS 3.B7A. Discuss if the concentration test is met or not in terms of IFRS3. B7B.
Conclude if this acquisition results in acquisition of a business or not.
Single identifiable asset/group:
Each vehicle is an individual asset and can be used separately from another tangible asset.
(1)
The assets acquired are all motor vehicles and are therefore the same in nature.
(1)
They are all purchased for the same purpose of resale by Designa Cars Ltd and are
therefore all of the same class of assets namely; inventory (IFRS 3. B7B (e)) Consequently,
they share the same risks.
(1)
It does not matter that some of the vehicles have come with some changes to customise to
customer needs as it is still one asset. The customisation has not changed the risks attached
to the assets. Therefore, these vehicles still all share similar risks. (IFRS 3. B7B (e))
(1)
Therefore the group of assets are of the same nature and share similar risks.
(1)
Therefore the portfolio of vehicles are considered a single identifiable asset group and
recognised and measured as such in a business combination. (IFRS 3. B7B (c))
(1)
Fair value:
The fair value of the price paid for the portfolio of cars is equal to the aggregate fair value
of the 19 cars acquired.
(1)
This indicates that substantially all of the fair value of the assets acquired are concentrated
in the group of vehicles purchased (IFRS 3. B7B (b)).
(1)
Concentration test:
Therefore we can confirm that the concentration test is met.
Conclusion:
We can conclude that the acquisition of the portfolio is not a business. (IFRS 3. B7A (a)).
(1)
(1)
(10)
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QUESTION 2.1B (15 marks – 23 minutes)
Designa Cars Ltd is a motor car dealer and purchased a portfolio of cars. This portfolio of cars
consisted of are 22 different vehicles. 19 of these motor vehicles are luxury vehicles purchased for
resale while three of them are large delivery trucks used to deliver motor vehicles to other car dealers
and bulk buyers.
The three large delivery trucks purchased includes contracts for outsourced trained drivers to drive
these specialised trucks as well as a specialised motor plan to maintain and service these trucks
regularly as well as outsourced security needed whilst transporting deliveries. The processes and
services performed through these outsource contract are minor in considering all the processes
involved in generating the required income (output).
No employees, other assets, other processes and other activities are transferred.
The aggregate fair value of the 19 luxury cars is similar to the aggregate fair value of the three
delivery trucks acquired.
The 19 cars are all of different makes and models specifically five BMW’s of different models, five
Mercedes Benz of different models, seven Toyota’s of different models and two Fords of different
models.
Two of the BMW’s and two of the Mercedes Benz were made as a customised order per specific
customer requirements. These changes are cosmetic and do not change the risks associated with
these vehicles.
Due to the wide range of cars in the portfolio the class of customers would not be similar.
The risks associated with operation in the motor vehicle industry for the vehicles acquired for resale
is not significantly different.
REQUIRED
Marks
(a)
Designa Cars Ltd opted to apply the concentration test to the purchase of the
portfolio in terms of IFRS 3.B7A. Discuss in terms of IFRS3. B7B if the
concentration test is met or not. Conclude if this acquisition results in acquisition of
a business or not.
8
(b)
Designa Cars Ltd did not opt to apply the concentration test to the purchase of the
portfolio in terms of IFRS 3.B7A. Discuss in terms of IFRS3. B8 – B12D if the results
in acquisition of a business or not.
7
Please note:
•
•
Round off all amounts to the nearest Rand.
Your answer must comply with International Financial Reporting Standards (IFRS).
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QUESTION 2.1B - Suggested solution
(a) Designa Cars Ltd opted to apply the concentration test to the purchase of the portfolio
in terms of IFRS 3.B7A. Discuss in terms of IFRS3. B7B if the concentration test is met
or not. Conclude if this acquisition results in acquisition of a business or not.
Single identifiable asset/group:
Each vehicle is an individual asset and can be used separately from another tangible
asset.
(1)
The assets acquired are all motor vehicles, so they are of the same in nature.
(1)
However, they are all not purchased for the same purpose by Designa Cars Ltd and
are therefore all not of the same class of assets.
(1)
The 19 luxury cars are purchased for the purpose of resale by Designa Cars Ltd and
are classified as inventory. While the three delivery trucks will be used by
Designa Cars Ltd for other activities and are classified as property plant and
equipment.
Therefore, they and are not of the same class of assets and not considered similar
(IFRS 3. B7B (f(ii))).
(1)
(1)
Consequently, the portfolio of assets purchased do not share the same risk
associated with managing and creating output and may not be grouped as a singles
identifiable asset group (IFRS 3. B7B (e)).
(1)
They may not be recognised and measured as a single identifiable asset in a business
combination (IFRS 3. B7B (c)).
(1)
Fair value:
There substantially two groups of assets (i.e the luxury cars and delivery trucks).
(1)
This indicates that substantially all of the fair value of the assets acquired are not
concentrated in just one group of vehicles purchased [IFRS 3. B7B (b)].
(1)
Concentration test: Therefore we can confirm that the concentration test is not met.
(1)
Conclusion:
Designa Cars Ltd shall further assess in terms of IFRS3.B8 – B12D to determine if
the portfolio of vehicles acquired is a business or not. [IFRS 3. B7A (b)].
(1)
Total (11)
Maximum
(8)
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(b) Designa Cars Ltd did not opt to apply the concentration test to the purchase of the
portfolio in terms of IFRS 3.B7A. Discuss in terms of IFRS3. B8 – B12D if the results
in acquisition of a business or not.
IFRS 3.B12C
The purchasing the portfolio of vehicles activity generates revenue from the resale of the
luxury cars. This revenue output from the activity of purchasing the portfolio of vehicles.
Therefore, we apply IFRS3.B12C to assess if the acquired process is substantive.
(1)
The outsource services provided by outsourced personnel are not critical to the ability to
continue producing outputs.
(1)
They are minor/ancillary in the context of all processes involved in generation the
required output (IFRS 3. B12C (a)).
(1)
The relevant inputs do not include an organised workforce with the necessary skills,
knowledge or experience to perform the process and do not include other inputs the
workforce could develop or convert into outputs (IFRS 3.B12C (a)).
(1)
The process of purchasing vehicles for resale and delivering such vehicles is a process
that is readily accessible in the marketplace. They are not unique or scarce and can be
replaced without significant cost [IFRS 3. B12C (b)).
(2)
Therefore, the process acquired is not substantive and the acquisition of the portfolio of
vehicles is not a business.
(1)
(7)
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QUESTION 2.1C (11 marks – 17 minutes)
Designa Cars Ltd is a motor car dealer and owns a 10% interest in Car Security Ltd. Car Security Ltd
specialises in the installation of car security such as gearlocks and anti-hijack systems into all types
of motor cars. At 31 March 20.20 Designa Cars Ltd purchased a further 75% interest in
Car Security Ltd for cash consideration of R3 000 000. On this date Designa Cars Ltd obtained
control over Car Security Ltd in accordance with IFRS 10 Consolidated Financial Statements. The
fair value of Car Security Ltd shares is R60 per share on 31 March 20.20 with a total of 200 000
shares in issue. Both companies have a 31 December year end.
The extracted trial balance of Car Security Ltd are shown in the table below at their fair values on
the relevant dates:
31 March 20.20
Dr/(Cr)
R
Retained earnings
Long-term liabilities
Property, plant and equipment
Financial asset
Intangible assets
Cash and cash equivalents
Trade and other receivables
Trade and other payables
Deferred tax liability
(10 000 000)
(9 700 000)
9 500 000
600 000
3 000 000
1 500 000
400 000
(800 000)
(840 000)
30 June
20.20
Dr/(Cr)
R
(14 000 000)
(9 600 000)
10 300 000
670 000
3 000 000
1 800 000
530 000
(840 000)
(920 000)
REQUIRED
Marks
Calculate the fair value of gross assets acquired i.t.o IFRS3.B7B (a) and (b) and conclude
if the concentration test has been met.
11
Please note:
•
•
Round off all amounts to the nearest Rand.
Your answer must comply with International Financial Reporting Standards (IFRS).
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QUESTION 2.1C - Suggested solution
The concentration test is met if substantially all of the fair value of the gross assets acquired
is concentrated in the groups of similar identifiable assets. The group of assets acquired of
R13 500 000 [C3] is substantially all of the fair value of gross assets R15 000 000 [C3] in (10)
terms of IFRS 3.B7B.
Therefore, the concentration test is met for the purchase of the interest in Car Security Ltd.
(1)
(11)
CALCULATIONS
C1.
Fair value of net identifiable assets acquired [IFRS3.B7B (b)]
R
Property, plant and equipment
Intangible asset
Financial asset
Cash and cash equivalents
Trade and other receivables
Long-term liabilities
Trade and other payables
Deferred tax liability
9 500 000
3 000 000
600 000
1 500 000
400 000
(9 700 000)
(800 000)
4 500 000
[½]
[½]
[½]
[½]
[½]
[½]
[½]
[1]
[4½]
C2.
Fair value of gross assets acquired i.t.o IFRS 3.B7B (b)
Consideration paid
NCI at fair value ((200 000 x R60) x 15%)
Fair value of remaining interest ((200 000 x R60) x 10%)
Net identifiable assets acquired [C1]
Excess i.t.o IFRS3.B7B(a)
C3.
3 000 000
1 800 000
1 200 000
6 000 000
(4 500 000)
1 500 000
[½]
[1]
[1]
Assets acquired excluding IFRS3. B7B (a) assets
Property, plant and equipment
Intangible asset
Financial asset
Trade and other receivables
Cash and cash equivalents (excluded)
Plus: Excess [C2]
Fair value of gross assets acquired
9 500 000
3 000 000
600 000
400 000
13 500 000
1 500 000
15 000 000
(1)
(1)
(7)
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R
OR
IFRS 3.B7B (b) check:
Consideration paid
NCI at fair value ((200 000 x R60) x 15%)
Fair value of remaining interest ((200 000 x R60) x 10%)
Cash and cash equivalents
payables
Long-term liabilities
3 000 000
1 800 000
1 200 000
(1 500 000)
800 000
9 700 000
15 000 000
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QUESTION 2.2 (45 marks – 68 minutes)
Italia Ltd is a glass manufacturing company operating in Johannesburg. The management of
Italia Ltd has identified external acquisition as an area of expansion. As a result, Italia Ltd purchased
a 60% interest in Colour Ltd on 1 January 20.11. On this date Italia Ltd obtained control over
Colour Ltd when the share capital and retained earnings of Colour Ltd amounted to R800 000 and
R1 050 000 respectively.
All the companies in the group have a 31 December year end.
The following matters were identified to be taken into account in calculating the identifiable assets
and liabilities of Colour Ltd at fair value at the acquisition date:
1.
The fair value of the non-controlling interests was R805 000 on 1 January 20.11.
2.
Machinery was valued at R300 000 more than the carrying amount. The remaining useful life
from the date of acquisition is four years. Colour Ltd continued to account for machinery in
accordance with the cost model as per IAS 16.
3.
Land with a cost price of R300 000 had a fair value of R400 000 on 1 January 20.11. The value
of the land has increased to R450 000 at 31 December 20.11. It is the policy of Colour Ltd to
account for land in accordance with the cost model as per IAS 40 Investment Property.
4.
Colour Ltd disclosed a contingent liability of R450 000 in their financial statements on
1 January 20.11 relating to a court case involving a patent right not meeting industry
standards. The claim represents a present obligation but at this point in time the attorneys of
Colour Ltd are of the opinion that it is unlikely to lead to an outflow of economic benefits due
to a lack of evidence to support the claim. The R450 000 is the fair value of the claim taking
into account all possible outcomes on 1 January 20.11.
As part of the purchase agreement by Italia Ltd, the shareholders have guaranteed to
reimburse Italia Ltd 40% of the claim, should it be successful.
On 31 December 20.11 the court case has progressed to such an extent that it is virtually
certain that Colour Ltd will have to pay R550 000. Colour Ltd recognised a provision of
R550 000 in its financial statements on 31 December 20.11. The related transaction have
been recorded correctly in Colour Ltd’s financial statements.
The claim will not be deductible for taxation purposes should it succeed.
5.
Details of the consideration transferred to the shareholders of Colour Ltd are as follows:
•
•
Cash consideration of R620 000 was paid on 1 January 20.11 into the lawyer’s trust
account.
Italia Ltd will make a cash payment of R225 060 on 31 December 20.12.
The South African Revenue Services agrees with the accounting treatment and will
allow the tax deduction for interest expense.
MJM
48
•
•
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Italia Ltd issued 1 000 ordinary shares to the shareholders of Colour Ltd. The fair value
of the shares was R460 each on 1 January 20.11. On registration date of the shares on
22 January 20.11, the shares were valued at R465 each. The total number of shares in
issue by Italia Ltd was 1 000 000 at 1 January 20.11.
Italia Ltd is required to make an additional cash payment of R150 000 on 30 June 20.13
if the share price of Colour Ltd increases by more than 20%. The fair value of the
contingent consideration was estimated to be R60 000 on 1 January 20.11 and R85 000
on 31 December 20.11. The share price of Colour Ltd had increased by 32% by
31 December 20.11. The changes in fair values on the contingent consideration is as a
result of after acquisition date events.
Included in the cash consideration paid is acquisition related costs in respect of valuations and
lawyer’s fees of R120 000 which was paid by Italia Ltd.
6.
Colour Ltd has a licensed customer list on 1 January 20.11. The agreements relating to the
customer list does not prohibit the selling or leasing thereof. The useful life of the customer list
is four years on 1 January 20.11 and the fair value is R175 794. Colour Ltd has not recognised
an asset in this regard.
7.
The abridged statement of profit or loss and other comprehensive income of Italia Ltd and
Colour Ltd for the year ended 31 December 20.11 is as follows (before taking the above
information into account):
Italia Ltd
R
Colour Ltd
R
2 600 000
601 876
Statement of profit or loss and other comprehensive income
Profit for the year after tax
Dividends paid on 31 December 20.11
150 000
Additional information
•
It is the group’s policy to measure investment property using the fair value model as per IAS 40
Investment Property.
•
Intangible assets are accounted for using the cost model as per IAS 38 Intangible Assets.
•
Italia Ltd elected to measure the non-controlling interests in Colour Ltd at fair value.
•
Investments in subsidiaries are accounted for at cost in terms of IAS 27.10(a).
•
The normal income tax rate is 28% and the Capital Gains Tax inclusion rate is 80%.
Ignore Value Added Tax (VAT) and Dividend Tax.
•
A market-related interest rate (before tax) is 10%, compounded annually.
•
The acquisition of Colour Ltd also met the definition of acquiring a business, as defined in
IFRS 3 Business Combinations.
MJM
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REQUIRED
Marks
(a)
Prepare the journal entries in the separate records of Italia Ltd for the year ended
31 December 20.11, relating to the information in the question. Journal entries
relating to deferred taxation are also required.
12
(b)
Prepare the pro forma journal entries for the Italia Ltd Group for the year ended
31 December 20.11. Journal entries relating to deferred taxation are also required.
32
Communication skills: presentation and layout
1
Please note:
•
•
Round off all amounts to the nearest Rand.
Your answer must comply with International Financial Reporting Standards (IFRS).
MJM
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QUESTION 2.2 - Suggested solution
(a)
Journal entries in the accounting records of Italia Ltd
Dr
R
J1
1 January 20.11
Investment in Colour Ltd (SFP) (balancing or [C1])
Acquisition cost (P/L) (given)
Share capital (SCE) (1 000 x R460)
Contingent consideration (SFP) (given)
Deferred consideration (SFP) [C6]
Bank (SFP)
Accounting for the investment in Colour Ltd
Cr
R
1 206 000
120 000
460 000
60 000
186 000
620 000
(1)
(1)
(2)
(1)
(3)
(1)
COMMENT
Transaction costs should be carefully analysed as the accounting treatment for
transaction costs are not all the same.
Acquisition-related costs (finder’s fees, advisory, legal, valuation, professional fees, and
administration fees) should be expensed in profit or loss in the consolidated financial
statements of the acquirer in accordance with IFRS 3.53.
Costs to issue debt or equity are not acquisition-related costs as defined in accordance
with IFRS 3. Share issue costs shall be accounted for as a deduction from equity in
terms of IAS 32.35 in the separate and consolidated financials of the acquirer.
The parent will measure its investments in subsidiaries at cost in accordance with
IAS 27.10(a) in its separate financial statements. Acquisition-related costs in the
separate financial statements of the parent should thus also be expensed. Students
should read carefully how the parent treated the transaction costs in its separate
financial statements.
In this question, acquisition-related costs of R120 000 was paid by the acquirer and
included in the cash payment of R620 000 that was paid on 1 January 20.11.
The acquisition-related costs should thus be expensed in accordance with IFRS 3.53.
J2
31 December 20.11
Fair value adjustment (P/L) (85 000 - 60 000)
Contingent consideration (SFP)
Fair value adjustment on contingent consideration payable
25 000
25 000
(1)
(1)
COMMENT
As part of the acquisition of the subsidiary, a contingent consideration is due if the share
price of the subsidiary, Colour Ltd, increase by more than 20% at 30 June 20.13. In
terms of IFRS 3.39 this contingent consideration is recognised at the acquisition date
fair value of R60 000. Subsequently, the contingent consideration is measured at fair
value and the liability needs to be remeasured to fair value at year end, R85 000.
MJM
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Dr
R
J3
J4
Finance costs (P/L) (10% x R186 000 (J1))
Deferred consideration (SFP)
Interest on the deferred payment
Bank (SFP) (150 000 x 60%)
Other income (P/L)
Dividends received from Colour Ltd
Cr
R
18 600
18 600
(1)
(1)
90 000
(1)
(1)
90 000
Total
Maximu
m
(15)
(12)
COMMENT
The carrying amount and the tax base of the liability are equal since the interest on the
liability is deductible for tax purposes. There are therefore no deferred tax implications
on journals 2 and 3.
No journals are necessary in the records of Colour Ltd as the transaction by Italia Ltd to
acquire the shareholding involves the previous shareholders of Colour Ltd. It therefore
does not have an impact on the issued share capital of Colour Ltd.
(b)
Pro forma journal entries in the group’s accounting records
Dr
R
J1
1 January 20.11
Share capital (SCE) (given)
Retained earnings (SCE) (given)
Machinery (SFP) (given)
Land (SFP) (400 000 – 300 000)
Intangible asset – customer list [C2] (SFP)
Goodwill (SFP) [C3] or (balancing)
Indemnification asset (SFP) (450 000 x 40%)
Non-controlling interests (SFP/SCE) (given)
Recognised contingent liability (SFP) (given)
Deferred tax (SFP) [C4]
Investment in Colour Ltd (SFP) (part (a))
Elimination of investment – at acquisition journal
Cr
R
800 000
1 050 000
300 000
100 000
175 794
10 828
180 000
805 000
450 000
155 622
1 206 000
(1)
(1)
(1)
(1)
(2)
(1)
(1)
(3)
(1)
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COMMENT
Italia Ltd recognises and measures all identifiable assets acquired and the liabilities
assumed in the business combination at their acquisition date fair values.
Take note of the group’s policy in terms of the measurement of non-controlling
interests (NCI). In this case, it is mentioned in the information that the NCI is measured
at fair value and it is given as R805 000 at acquisition date.
The contingent liability in respect of the legal claim is recognised as a liability assumed
in a business combination since it is a present obligation resulting from past events
and its fair value can be measured reliably (IFRS 3.23).
Also take note that the indemnification asset (debtor) may only be recognised if the
indemnification item (in this case the contingent liability) was recognised on acquisition
date (IFRS 3.27). The indemnification asset should be measured on the same basis as
the indemnification item (fair value in this case).
COMMENT
Deferred tax on contingent liability
The tax base of a liability is the carrying amount, less any amount that would be
deductible for tax purposes in future periods. The question states that the claim will not
be deductible for taxation purposes should it succeed. This will result in the tax base
being the carrying amount. There is thus no temporary difference and deferred tax will
not be provided.
Dr
R
J2
J3
31 December 20.11
Depreciation (P/L) (300 000 x ¼)
Accumulated depreciation (SFP)
Provision for depreciation on machinery revalued
Deferred tax (SFP) (75 000 x 28%)
Income tax expense (P/L)
Taxation on depreciation adjustment
Cr
R
75 000
75 000
(1)
(1)
21 000
(1)
(1)
21 000
COMMENT
At acquisition, the fair value of machinery was R300 000 higher than the carrying amount
in the separate records of Colour Ltd. Colour Ltd recognised depreciation in its separate
financial statements on the cost price of the machinery (this is in terms of its accounting
policy). At consolidation however, the value of the machinery is R300 000 higher
resulting in an additional depreciation charge that is calculated over the remaining useful
life (four years) of the machinery.
J4
Contingent liability (SFP) (given)
Indemnification asset (SFP)
Legal expense (P/L)
Reversal of contingent liability raised at acquisition
450 000
180 000
270 000
(1)
(1)
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COMMENT
Colour Ltd raised a provision in its own accounting records of R550 000 at
31 December 20.11 relating to the legal claim. A contingent liability was also
recognised as a liability (in respect of the legal claim) in the consolidated financial
statements at acquisition date (R450 000). This contingent liability and indemnification
asset previously recognised in the group’s financial statements (J1) on acquisition date
must now be reversed in order to avoid “double accounting” for this liability.
Dr
R
J5
J6
Amortisation – customer list (P/L) (175 794 [C2] / 4)
Intangible asset – customer list (SFP)
Amortisation of customer list
Deferred tax (SFP) (43 949 x 28%)
Income tax expense (P/L)
Taxation on amortisation
Cr
R
43 949
43 949
(1)
(1)
12 306
(1)
(1)
12 306
COMMENT
The customer list is recognised as an intangible asset and is accounted for in
accordance with IAS 38. We therefore amortise the intangible asset over the useful life
of the asset.
J7
J8
Land (SFP) (450 000 - 400 000)
Fair value remeasurement (P/L)
Remeasurement in terms of IAS 40
Income tax expense (P/L) (50 000 x 28% x 80%)
Deferred tax (SFP)
Taxation on fair value adjustment
50 000
50 000
(1)
(1)
11 200
(1)
(1)
11 200
COMMENT
Land is carried at cost in the separate records of Colour Ltd. However, it is the group’s
policy to account for investment property (which includes land) in accordance with the
fair value model as per IAS 40. We therefore need to account for the fair value
movement in the value of land at year end. In this case we use the CGT inclusion rate
of 80% as the fair value adjustment is higher than the original cost price.
J9
Non-controlling interests (P/L) [C5]
Non-controlling interests (SFP/SCE)
NCI share of profits
330 013
330 013
(5)
(1)
COMMENT
At consolidation, we add 100% of the line items of the statement of profit or loss and
other comprehensive income of the subsidiary to the statement of profit or loss and other
comprehensive income of the parent to calculate the consolidated figures.
However, we are only entitled to 60% of the line items of the statement of profit or loss
and other comprehensive income of the subsidiary. We therefore allocate the 40% share
of the non-controlling interests via one line item: non-controlling interests (P/L).
MJM
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Dr
R
J10
Other income - dividends received (P/L) (150 000 x 60%)
Non-controlling interests (SFP/SCE) (150 000 x 40%)
Dividends paid (SCE) (given)
Elimination of intragroup dividends
Cr
R
90 000
60 000
150 000
(1)
(1)
(1)
Total
Maximum
Communication skills: presentation and layout
(35)
(32)
(1)
CALCULATIONS
C1.
Consideration transferred
Cash (given)
Shares (1 000 x R460)
Deferred consideration [C6]
Contingent consideration (given)
Acquisition costs paid (given)
C2.
175 795
[1]
Calculation of goodwill (IFRS 3.32)
+ Consideration transferred
+ Non-controlling interests
-Net identifiable assets acquired
Share capital
Retained earnings
Adjustments to the net assets (J1)
Contingent liability recognised
Machinery – revaluation surplus
Land – fair value adjustment
Indemnification asset raised recognised
Intangible asset (customer list)
Deferred tax
Goodwill
C4.
[1]
Customer list
Intangible asset – customer list (given)
C3.
620 000
460 000
186 000
60 000
(120 000)
1 206 000
[C1]
(given)
(given)
(given)
(J1)
(J1)
(J1)
(J1)
(J1)
[C4]
1 206 000
805 000
2 011 000
2 000 172
800 000
1 050 000
(450 000)
300 000
100 000
180 000
175 794
(155 622)
10 828
Deferred tax
Machinery (300 000 x 28%)
Land (100 000 x 28% x 80%)
Intangible asset – customer list (175 794 x 28%)
Indemnification asset
Recognised contingent liability (indemnified item)
84 000
22 400
49 222
155 622
[1]
[1]
[1]
[3]
MJM
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COMMENT
A deferred tax liability is recognised on the customer list (intangible asset) since the
carrying amount of the customer list exceeds its tax base (the tax base of the customer
list is nil as no amounts in respect of this asset will be deductible for tax purposes in the
future against any taxable economic benefits) (IAS 12.7).
Deferred tax is not recognised on the indemnification asset since the carrying
amount and tax base of the indemnification asset is equal (the economic benefits from
the indemnification asset will not be taxable in the future) (IAS 12.7).
Deferred tax is not recognised on the recognised contingent liability (indemnification
item) since the carrying amount and tax base of the liability is equal. The tax base of the
contingent liability is its carrying amount minus amounts that will be tax deductible in the
future. In this case no amounts will be deductible in the future in respect of this liability,
therefore the carrying amount and tax base is equal (IAS 12.8).
C5.
Non-controlling interests
Profit for the year (given)
Depreciation on machinery (J2)
Income tax on depreciation (J3)
Legal expense (J4)
Amortisation (J5)
Income tax on amortisation (J6)
Fair value remeasurement on land (J7)
Income tax on fair value remeasurement (J8)

C6.
601 876
(75 000)
21 000
270 000
(43 949)
12 306
50 000
(11 200)
825 033
NCI for the year = 825 033 x 40% = 330 013
[½]
[½]
[½]
[½]
[½]
[½]
[½]
[½]
[½]
[4½]
Deferred consideration
HP 10BII
1.
2.
3.
4.
5.
nd
2 FC
0
10
2
225 060
6. PV

SHARP EL-733A
nd
(Clear All)
PMT
I/YR
N
FV
1.
2.
3.
4.
5.
2 FC
0
10
2
225 060
(Clear All)
PMT
i
n
FV
186 000
6. Comp PV  186 000
SHARP EL-738
1.
2.
3.
3.
5.
2ndF MODE
0
10
2
225 060
(Clear All)
PMT
I/Y
N
FV
[1]
[1]
[1]
6. Comp PV  186 000
[3]
MJM
56
C7.
FAC4864/102
NFA4864/102
ZFA4864/102
Analysis of owners’ equity of Colour Ltd
Total
At acquisition
Share capital
Retained earnings
Equity (Contingent liability)
Equity (Machinery)
Deferred tax
Equity (Land)
Deferred tax
Equity (Indemnification asset)
Intangible asset (customer list)
Deferred tax
Equity represented by goodwill
Consideration and NCI
Since acquisition
Current year
Comprehensive income for the year
Depreciation on machinery
Income tax on depreciation
Legal expense
Amortisation
Income tax on amortisation
Fair value adjustment on land
Income tax on fair value adjustment
Total current year profit
Dividends
800 000
1 050 000
(450 000)
300 000
(84 000)
100 000
(22 400)
180 000
175 794
(49 222)
2 000 172
10 828
2 011 000
Italia Ltd
60%
At
Since
1 200 103
5 897
1 206 000
NCI
800 069
4 931
805 000
601 876
(75 000)
21 000
270 000
(43 949)
12 306
50 000
(11 200)
825 033
495 020
330 013
(150 000)
2 686 033
(90 000)
405 020
(60 000)
1 075 013
EXAM TECHNIQUE
It was not necessary to make use of an owners’ equity analysis in this question.
Nonetheless, one is provided for those students who make use of the analysis method.
MJM
57
LEARNING UNIT 3 – INVESTMENTS
VENTURES
FAC4864/102
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IN
ASSOCIATES
AND
JOINT
INTRODUCTION
IAS 28 deals with the accounting for investments in associates and joint ventures and
specifies the use of the equity method. The accounting treatment of the investments in
associates and joint ventures in the separate financial statements of an investor is
prescribed in IAS 27. The method to follow in determining whether a joint arrangement
must be classified as a joint venture is discussed in IFRS 11 and will be covered in
learning unit 5.
OBJECTIVES/OUTCOMES
At the end of this learning unit, you should be able to:
1.
Define an associate in accordance with IAS 28.
2.
Discuss the existence or absence of significant influence in an investment held
and the appropriate accounting treatment of the investment.
3.
Identify evidence of existence of significant influence in cases where an investor
holds directly or indirectly less than 20% of the voting power of the investee.
4.
Apply the equity method in accounting for investments in associates and joint
ventures in the consolidated or group financial statements of the investor.
5.
Account for the investment in associate or joint venture in the separate financial
statements of the investor at cost (IAS 27.10(a)).
PRESCRIBED STUDY MATERIAL
The following must be studied before you attempt the questions in this learning unit:
1.
Group Statements, 17th edition, Volume 2, Chapter 11.
2.
IAS 28 Investments in Associates and Joint Ventures.
COMMENT
The disposal of interests in investees and piecemeal acquisition of interests in investees
will only be covered and assessed in tutorial letter 104 and test 3.
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THE REST OF LEARNING UNIT 3 IS BASED ON THE ASSUMPTION THAT YOU
HAVE ALREADY STUDIED THE RELEVANT PRESCRIBED STUDY MATERIAL.
SECTION A – SAICA’S PRINCIPLES OF EXAMINATION LEVELS
The SAICA principles of examination levels provide guidance on how the standards (or topics
within a standard) will be examined.
The principles of examination levels for IAS 28 are as follows:
Description
Objective
Scope
Definitions
Significant influence
Equity method
Application of equity method
Paragraph
1
2
3–4
5–7
10 – 15
16 – 17
18 – 19
Level
Core
Awareness
Core
Core
Core
Core
Excluded
20 – 21
22 – 24
Excluded
Core
25
Excluded
IFRS 5 – Excluded
Groups
26 – 36
Core
36A
Excluded
37 – 39
Core
40 – 43
Core
Separate financial statements 44
Core
Effective date and transition
45 – 46
Excluded
Withdrawal of IAS 28 (2003)
47
Excluded
Notes
Venture capital organisation or
similar
Classifications as held for sale
Discontinuing the use of equity
method
Change in ownership – Interest
remains an associate or joint venture
Classification as held for sale
Equity method procedures
Investment entity matters
Equity method procedures
Impairment losses
MJM
59
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EXAMPLE
The following example illustrates the basic equity accounting procedures:
Investment in associate accounted for at cost
On 1 January 20.17 I Ltd acquired a 30% interest in A Ltd for R200 000 and exercised significant
influence over the financial and operating policy decisions of A Ltd from that date.
I Ltd accounts for investments in associates at cost in terms of IAS 27.10(a).
A Ltd recorded profit after tax of R500 000 and other comprehensive income after tax (revaluation
surplus) of R100 000 for the year ended 31 December 20.17.
Investor (I)
Separate financial statements
Pro
forma
journals
R’000
Assets
Investment in A Ltd (cost)
Trade debtors
Equity
Share capital
Retained earnings
Revaluation surplus
Liabilities
Long-term loan
200
100
(50)
(120)
(30)
R’000
180
(150)
(30)
(100)
Note 1
Group financial statements
R’000
Assets
Investment in A Ltd
Trade debtors
380
100
Equity
Share capital
Retained earnings
Revaluation surplus
(50)
(270)
(60)
Liabilities
Long-term loan
(100)
Note 2
Notes
1.
When an investor prepares separate financial statements, it shall account for investments in
associates at cost (IAS 27.10).
2.
Pro forma journals are prepared in order to equity account for the investment in associate in
the group financial statements. I Ltd’s share of A Ltd’s profits and other comprehensive income
for the current and prior years must thus be recognised in the group financial statements. The
pro forma journal will be as follows:
Dr
R’000
Investment in A Ltd (SFP)
Share of profit of associate (P/L) (500 000 x 30%)
Share of other comprehensive income of associate (OCI)
(100 000 x 30%)
Equity accounting of investment in associate for the current year
Cr
R’000
180
150
30
MJM
60
SECTION B –
FAC4864/102
NFA4864/102
ZFA4864/102
QUESTION ON INVESTMENTS IN ASSOCIATES AND
JOINT VENTURES
QUESTION 3.1 (40 marks – 60 minutes)
Furnit-Your-World Ltd is a retailer of office and household furniture and was established in 19.9 by
Mr Brian Pillay. The company has a number of high-profile customers, such as hotels and banks.
On 1 March 20.4 Furnit-Your-World Ltd acquired 120 000 shares of Urban Drapes Ltd, a company
that manufactures and retails drapes, curtains and bedding, for an amount of R3 766 000 which was
paid in cash. Furnit-Your-World Ltd obtained control of Urban Drapes Ltd in accordance with
IFRS 10 Consolidated Financial Statements. The assets and liabilities were fairly valued on the date
of acquisition. No additional assets, liabilities or contingent liabilities were identified at that date.
Furnit-Your-World Ltd has been making every effort to expand their customer base during the last
year. The company aims to be a "one-stop shop" for large corporate companies by supplying them
with all their furniture, curtains and electronic appliances. As a result of this objective, the company
purchased 75 000 shares in Digital Décor Ltd, a company that retails electronic equipment, on
1 August 20.11 for an amount of R485 000 which was settled in cash. Since the need for electronic
equipment in buildings such as hotels and banks are immense, Furnit-Your-World Ltd identified this
as a gap in their market. From 1 August 20.11 Furnit-Your-World Ltd exercised significant influence
over the financial and operating policy decisions of Digital Décor Ltd. The assets and liabilities of
Digital Décor Ltd were deemed to be fairly valued on 1 August 20.11. No additional assets or
liabilities were identified at that date. You may assume that no excess arose on the acquisition of
Digital Décor Ltd.
The following was extracted from the trial balances of Furnit-Your-World Ltd, Urban Drapes Ltd and
Digital Décor Ltd for the year ended 31 March 20.12:
Debits
Cost of sales
Other expenses
Finance costs
Income tax expense
Credits
Ordinary share capital
- 500 000 shares
- 200 000 shares
- 300 000 shares
Revenue
Other income
Mark-to-market reserve - 31 March 20.12
Mark-to-market reserve - 1 April 20.11
FurnitYour-World
Ltd
R
Urban
Drapes Ltd
R
12 865 000
1 289 000
104 500
631 058
5 450 000
412 000
31 600
246 954
Digital
Decor Ltd
R
8 721 000
571 000
58 200
230 196
1 300 000
450 000
16 081 250
514 500
333 500
213 600
6 812 500
13 000
16 000
14 800
300 000
10 203 570
32 000
12 200
10 700
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Furnit-Your-World Ltd has other equity investments (apart from its investments in Urban Drapes Ltd
and Digital Décor Ltd), but does not hold a shareholding of more than 5% in each of those
investments.
Additional information
1.
Relevant accounting policies
Furnit-Your-World Ltd has the following relevant accounting policies:
2.
•
Investments in subsidiaries and associates are measured at cost in the separate
financial statements.
•
Equity investments are accounted for in accordance with IFRS 9 Financial Instruments
in its separate financial statements. Furnit-Your-World Ltd irrevocably elected to present
subsequent changes in the fair value of its equity investments in other comprehensive
income in a mark-to-market reserve.
•
Other comprehensive income is disclosed net of tax in the statement of profit or loss and
other comprehensive income.
•
Furnit-Your-World Ltd elected to measure non-controlling interests at the proportionate
share of the acquiree’s identifiable net assets at the acquisition date.
Dividends
Urban Drapes Ltd declared and paid a dividend on 31 May 20.11 amounting to R40 000.
Digital Décor Ltd declared and paid a dividend on 28 February 20.12 amounting to R44 000.
3.
Group transactions
During June 20.11 Furnit-Your-World Ltd redecorated their office and purchased curtains from
Urban Drapes Ltd to the amount of R54 000 on 30 June 20.11. This was sold at a gross profit
percentage of 15% to Furnit-Your-World Ltd. Furnit-Your-World Ltd depreciates the curtains
over the useful life of six years on a straight-line basis.
During February 20.12 Urban Drapes Ltd received a large order from a customer in Swaziland.
The customer has been dealing with Urban Drapes Ltd for a number of years and prefers to
deal with this company rather than any other South African company. The customer requested
Urban Drapes Ltd to sell beds to him, in addition to the bedding required. In order to
accommodate this established customer, Urban Drapes Ltd purchased several beds from
Furnit-Your-World Ltd for an amount of R89 000 in February 20.12, at a mark-up of 20% on
cost. At year end, not all the beds have been delivered to Swaziland and beds to the value of
R23 000 were still on hand.
From the date of acquisition, Urban Drapes Ltd purchased inventory from
Furnit-Your-World Ltd. Furnit-Your-World Ltd sold the inventory to Urban Drapes Ltd at a
mark-up of 25% on cost. Total sales amounted to R620 000 for the current financial year.
Inventory of R130 000 was still on hand in the records of Urban Drapes Ltd at year end.
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4.
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Redeemable preference shares
Furnit-Your-World Ltd issued compulsory redeemable preference shares amounting to
R100 000 to Urban Drapes Ltd on 1 November 20.11 at a premium of 8%. It is redeemable
on 31 October 20.14 at the nominal value. A payment of R9 000 is made annually on
31 October. Furnit-Your-World Ltd classified the redeemable preference shares as debt and
both companies accounted for the dividends as interest (you may assume that this
classification is correct).
5.
Digital Decor Ltd
The retained earnings of Digital Décor Ltd amounted to R1 620 000 on 1 August 20.11.
Digital Décor Ltd earned its profits evenly throughout the year, with the exception of machinery
with a carrying amount of R90 000 that was sold on 1 August 20.11. The machinery was sold
for R93 500 to an employee. The employee settled the purchase price on 31 January 20.12 in
terms of an arrangement that he had with the company. Digital Décor Ltd recognised a profit
on sale of machinery of R3 500 which was included in other income. You must assume that
6 months is a significant amount of time.
All Digital Décor Ltd s other comprehensive income for the 20.12 financial year was earned
after the acquisition by Furnit-Your-World Ltd.
6.
Taxation
Assume an income tax rate of 28% and a Capital Gains Tax inclusion rate of 80%.
Ignore Value Added Tax (VAT) and Dividend Tax. You may assume that the income tax
expense given is correctly calculated before any adjustments related to the above information
are made.
The income tax expense of Digital Decor Ltd attributable to the first four months was R80 320
and the remaining balance is attributable to the last eight months. You may assume that this
is correct and that no adjustments are necessary.
7.
General
All the companies in the group have a year end of 31 March 20.12.
A market-related pre-tax discount rate is 9% per annum compounded annually.
There have been no changes in the issued ordinary share capital of any of the companies in
the group since incorporation.
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REQUIRED
Marks
(a)
Prepare the correcting and/or additional journal(s) required to account for the profit
or loss on sale of machinery to the employee in the separate financial statements
of Digital Decor Ltd for the year ended 31 March 20.12. Journal narrations are not
required.
5
(b)
Prepare the consolidated statement of profit or loss and other comprehensive
income of the Furnit-Your-World Ltd Group for the year ended 31 March 20.12.
Income and expenditure should be presented in terms of their function.
33
Communication skills: presentation and layout
2
Please note:
•
•
•
•
•
Comparative figures are not required.
The allocation of profit attributable to owners of the parent and non-controlling
interests is not required.
Round off all amounts to the nearest Rand and percentages to two decimal points.
Notes to the consolidated financial statements are not required.
Your answer must comply with International Financial Reporting Standards (IFRS).
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QUESTION 3.1 – Suggested solution
(a)
Correcting journal entry
Profit on sale of equipment (other income) (P/L) (given)
Loss on sale of equipment (other expenses) (P/L) [C7]
Interest received (P/L) [C7]
Correction of sale of equipment to include interest effect
Dr
R
3 500
443
Cr
R
3 943
(1)
(3)
(1)
(5)
(b)
FURNIT-YOUR-WORLD LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 MARCH 20.12
20.12
R
Revenue
(16 081 250 + 6 812 500 - 54 000 [C4] - 89 000 [C1] – 32 500 [C5])
Cost of sales (12 865 000 + 5 450 000 - 89 000 [C1] + 3 833 [C1] 45 900 [C4] – 26 000 [C5])
Gross profit
Other income
(514 500 + 13 000 - 24 000 [C2] - 11 000 [C2] - 2 705 [C3])
Other expenses (1 289 000 + 412 000 - 1 013 [C4])
Finance costs (104 500 + 31 600 - 2 705 [C3])
Share of profit of associate [C6]
Profit before tax
Income tax expense
(631 058 + 246 954 - 1 073 [C1] - 2 268 [C4] + 284 [C4] – 1 820
[C5])
PROFIT FOR THE YEAR
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Mark-to-market reserve [(333 500 – 213 600) + (16 000 - 14 800)]
Share of other comprehensive income of associate
[(12 200 - 10 700) x 25%]
Other comprehensive income for the year, net of tax
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
22 718 250
(5)
(18 157 933)
4 560 317
(3)
489 795
(1 699 987)
(133 395)
110 384
3 327 114
(7)
(1)
(1)
(12)
(873 135)
2 453 979
(3)
121 100
(4)
375
121 475
2 575 454
Total
Maximum
Communication skills: presentation and layout
(1)
(37)
(33)
(2)
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COMMENT
Furnit-Your-World Ltd has two main equity investments during the current financial year,
an investment in a subsidiary, Urban Drapes Ltd, and an investment in an associate,
Digital Decor Ltd. In accordance with IFRS 10.B86 Furnit-Your-World Ltd will combine
its trial balance with the trial balance of Urban Drapes Ltd by combining all like items
(i.e. add the revenue of Furnit-Your-World Ltd of R16 081 250 to the revenue of
Urban Drapes Ltd of R6 812 500 etc.). In accordance with IAS 28.10
Furnit-Your-World Ltd will apply the equity method to account for Digital Decor Ltd by
recognising its share of the profits of Digital Decor Ltd in the line item “share of profit of
associate” and the share of other comprehensive income in “share of other
comprehensive income of associate”.
CALCULATIONS
C1.
Calculation of unrealised profit in inventory
Sales price of inventory on hand at year end (given)
Unrealised profit (23 000 x 20/120)
Decrease in deferred tax expense / increase in deferred tax asset
(3 833 x 28%)
23 000
3 833
1 073
[1]
[1]
[2]
Pro forma journals (for completeness purposes only)
Dr
R
J1
J2
J3
C2.
Revenue (P/L) (Furnit-Your-World)
Cost of sales (P/L) (Urban Drapes)
Elimination of intragroup sales
Cost of sales (P/L) (Furnit-Your-World) (23 000 x 20/120)
Inventory (SFP) (Urban Drapes)
Elimination of unrealised profit in closing inventory of
Urban Drapes Ltd
Deferred tax (SFP) (3 833 x 28%)
Income tax expense (P/L) (Furnit-Your-World)
Tax implication of unrealised profit in closing inventory of
Urban Drapes Ltd
Cr
R
89 000
89 000
3 833
3 833
1 073
1 073
Calculation of elimination of dividends
Dividend declared by Urban Drapes Ltd (given)
Dividend attributable to Furnit-Your-World Ltd (40 000 x 60%)
Dividend declared by Digital Decor Ltd (given)
Dividend attributable to Furnit-Your-World Ltd (44 000 x 25%)
40 000
24 000
44 000
11 000
[1]
[1]
[2]
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Pro forma journals (for completeness purposes only)
Dr
R
J1
J2
C3.
Other income (P/L) (40 000 x 60%)
Non-controlling interests (SFP/SCE)
Dividends paid (SCE)
Elimination of intragroup dividends (Urban Drapes)
Other income (P/L) (44 000 x 25%)
Investment in associate (SFP)
Elimination of intragroup dividends (Digital Decor)
Cr
R
24 000
16 000
40 000
11 000
11 000
Calculation of elimination of intragroup preference dividends
HP 10 B11
•
•
•
•
•
•
2ndF C
3
-9 000
-100 000
108 000
I/YR ⇒
(Clear All)
N
PMT
FV
PV
6,01%
Sharp EL 733A
Sharp EL 738
•
•
•
•
•
•
•
•
•
•
•
•
2ndF C.CE
3
-9 000
-100 000
108 000
COMP i ⇒
(Clear All)
n
PMT
FV
PV
6,01%
2ndF MODE
3
-9 000
-100 000
108 000
COMP I/Y ⇒
(Clear All)
N
PMT
FV
PV
6,01%
[1]
[1]
[1]
[1]
[4]
COMMENT
Furnit-Your-World Ltd issued compulsory redeemable preference shares amounting to
R100 000 at a premium of 8%. The present value is thus R108 000 (R100 000 x 1,08).
1 November 20.11
Capital
Interest
Payment
Closing
balance
Interest 31 March 20.12
(108 000 x 6,01% x 5/12)
Payment 31 October 20.12
Interest 31 March 20.13
Payment 31 October 20.13
Interest 31 March 20.14
Payment 31 October 20.14
108 000
110 705
105 491
108 132
102 831
105 406
2 705
3 786
2 642
3 698
2 575
3 605
(9 000)
(9 000)
(9 000)
110 705
105 491
108 132
102 831
105 406
100 011
[1]
The rounding difference of R11 is due to the rounding of the interest rate to two decimal points.
[5]
Pro forma journal (for completeness purposes only)
Dr
R
J1
Interest received (P/L)
Finance costs (P/L)
Elimination of intragroup preference dividends classified as
a liability
Cr
R
2 705
2 705
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C4.
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Calculation of unrealised profit in curtains (property, plant and equipment)
Sales price (given)
Gross profit / unrealised profit [54 000 x 15% (gross profit %)]
Cost price (54 000 - 8 100)
Decrease in deferred tax expense / increase in deferred tax asset
(8 100 x 28%)
54 000
8 100
45 900
[1]
[1]
2 268
[1]
Depreciation on unrealised profit [(8 100 / 6) x 9/12]
Increase in deferred tax expense / increase in deferred tax liability
(1 013 x 28%)
1 013
[1]
284
[1]
[5]
Pro forma journals (for completeness purposes only)
Cr
R
Dr
R
J1
J2
J3
J4
Revenue (P/L) (Urban Drapes)
Cost of sales (P/L) (Urban Drapes) (54 000 x 85%)
Property, plant and equipment (SFP) (54 000 x 15%)
Elimination of unrealised profit in closing PPE of
Furnit-Your-World Ltd
Deferred tax (SFP) (8 100 x 28%)
Income tax expense (P/L) (Urban Drapes)
Tax implication of unrealised profit in closing PPE of FurnitYour-World Ltd
Accumulated depreciation (SFP) (8 100/6 x 9/12)
Depreciation (P/L) (Urban Drapes)
Realisation of unrealised profit
Income tax expense (P/L) (Urban Drapes) (1 013 x 28%)
Deferred tax (SFP)
Tax implication of realisation of unrealised profit
54 000
45 900
8 100
2 268
2 268
1 013
1 013
284
284
COMMENT
Note that the curtains will form part of Urban Drapes Ltd’s inventory, as the company
sells curtains. However, in the records of Furnit-Your-World Ltd, the curtains will be
property, plant and equipment, as they will be used in the company’s office.
C5.
Calculation of unrealised profit on inventory
Inventory in the records of Digital Decor Ltd
Unrealised profit (130 000 x 25/125)
130 000
26 000
Furnit-Your-World Ltd has a 25% interest in the associate:
Revenue (130 000 x 25%)
Cost of sales (130 000 x 100/125 x 25%)
Unrealised profit (OR 26 000 x 25%)
Income tax expense (6 500 x 28%)
32 500
(26 000)
6 500
[1]
[1]
1 820
[1]
[3]
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Pro forma journals (for completeness purposes only)
Dr
R
J1
J2
Revenue (P/L) (130 000 x 25%)
Cost of sales (P/L) (130 000 x 100/125 x 25%)
Investment in associate (SFP) (130 000 x 25/125 x 25%)
Elimination of unrealised profit in closing inventories of
Digital Decor Ltd
Deferred tax (SFP) (6 500 x 28%)
Income tax expense (P/L)
Tax implication of unrealised profit in closing inventories of
Digital Decor Ltd
Cr
R
32 500
26 000
6 500
1 820
1 820
COMMENT
The investor sold inventory to the associate (downstream transaction). The investor thus
made the unrealised profit in P/L and the unrealised profit is included in the inventory of
the associate. The unrealised profit thus has to be eliminated against revenue and cost
of sales of the parent, as well as the investment in associate (SFP) account. The share
of profit of associate (P/L) is thus not affected. Should the associate sell to the investor,
then the unrealised profit will affect the share of profit of associate (P/L). Also note that
the total sales and cost of sales of R620 000 related to the intragroup sales for the year
are not eliminated when an associate is involved, as only unrealised profit is eliminated
(IAS 28.28).
C6.
Calculation of share of profit of associate
8 months
from
1 August
20.11
Profit before tax excluding profit on sale of equipment
[(10 203 570 + 32 000 - 8 721 000 - 571 000 - 58 200 - 3 500) x 8/12]
Other income - interest received on sale of machinery [C7]
Other expenses - loss on sale of machinery [C7]
Income tax expense (230 196 (year) - 80 320
(four months given on p 14))
Profit after tax
Share of profit of associate (441 537 x 25%)
587 913
3 943
(443)
[7]
[2]
[1]
(149 876)
441 537
110 384
[1]
[1]
[12]
OR
Profit before tax excluding profit on sale of equipment
Profit on sale of machinery not apportioned
Income tax expense (230 196 (year) – 80 320 (four months))
Profit after tax
Share of profit of associate (441 537 x 25%)
587 913
3 500
(149 876)
441 537
110 384
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COMMENT
The profit or loss on sale of equipment was recorded after the acquisition by
Furnit-Your-World Ltd. It must thus be subtracted when calculating the apportioned profit
for the eight months, as it has to be included in full, and not only apportioned for eight
months.
C7.
Calculation of sale of machinery
HP 10 B11
•
•
•
•
•
•
2ndF C
1 2ndF
93 500
0,5
9%
PV ⇒
(Clear all)
PMT (1 P/YR)
FV
N
I/YR
89 557
Sharp EL 733A
Sharp EL 738
• 2ndF C.CE (Clear all)
• 93 500
FV
• 0,5
n
• 2ndF MODE (Clear all)
• 93 500
FV
• 0,5
N
[1]
[1]
• 9%
i
• COMP PV ⇒ 89 557
• 9%
I/YR
• COMP PV ⇒ 89 557
[1]
[1]
Discounted proceeds
Carrying amount of machinery
Loss on sale of machinery
89 557
90 000
(443)
[1]
[5]
Undiscounted proceeds
Discounted proceeds
Interest received on sale of machinery
93 500
89 557
3 943
[1]
[1]
[2]
COMMENT
For this question, the present value of the proceeds must be calculated, as it will only
be settled in six months, which is considered to be a significant period that affects the
time value of money. If a question is silent in this regard, the default time to be
considered significant is 12 months and longer.
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LEARNING UNIT 4 - DISCLOSURE OF INTERESTS IN OTHER ENTITIES
INTRODUCTION
IFRS 12 deals with the disclosure requirements to enable users of financial statements
to evaluate its interest in other entities.
OBJECTIVES/OUTCOMES
At the end of this learning unit, you should be able to:
1.
Disclosures in the consolidated or group financial statements:
1.1
1.2
1.3
2.
Disclose significant judgements and assumptions that an entity made in
determining that it has control of another entity, joint control of an
arrangement or significant influence over another entity.
Disclose significant judgements and assumptions that an entity made in
determining the type of joint arrangement (i.e. joint operation or joint
venture).
Disclose an entity’s interests in subsidiaries, interests in joint arrangements
and associates and interests in unconsolidated structured entities.
Disclose the following for an interest in a subsidiary:
2.1 The interest that non-controlling interests have in the group’s activities and
cash flows.
2.2 The nature and extent of significant restrictions.
2.3 Nature of the risks associated with an entity’s interests in consolidated
structured entities.
2.4 Consequences of changes in a parent’s ownership interest in a subsidiary
that do not result in a loss of control.
2.5 Consequences of losing control of a subsidiary during the reporting period.
3.
Disclose the following for interests in joint arrangements and associates:
3.1
3.2
4.
Nature, extent and financial effects of an entity’s interests in joint
arrangements and associates.
Risks associated with an entity’s interests in joint ventures and associates.
Disclose the following for interests in unconsolidated structured entities:
4.1
4.2
Nature of interests.
Nature of risks.
PRESCRIBED STUDY MATERIAL
The following must be studied before you attempt the questions in this learning unit:
1.
IFRS 12 Disclosure of Interests in Other Entities.
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THE REST OF LEARNING UNIT 4 IS BASED ON THE ASSUMPTION THAT YOU
HAVE ALREADY STUDIED THE RELEVANT PRESCRIBED STUDY MATERIAL.
SECTION A - SAICA’S PRINCIPLES OF EXAMINATION LEVELS
The SAICA principles of examination levels provide guidance on how the standards (or topics
within a standard) will be examined.
The principles of examination levels for IFRS 12 are as follows:
Description
Objective
Scope
Significant judgements and
assumptions
Interests in subsidiaries
Interests in unconsolidated
subsidiaries
Interests in joint
arrangements
and associates
Interests in unconsolidated
structured entities
Defined terms
Application guidance
Paragraph
1
2–4
2(a)(iii)
5–6
6(b)(ii)
7–9
9A – 9B
10 – 11
12
13
14 – 17
18
Level
Core
Core
Excluded
Core
Excluded
Core
Excluded
Core
Core
Core
Core
Core
19
19A – 19G
Core
Excluded
20
Core
21 - 22
21A
23
24 – 25
25A
26 – 28
29
A
B1
B2 – B6
B7 – B9
B10 – B17
B18 – B20
B21 – B26
Core
Excluded
Core
Core
Excluded
Core
Core
Core
Core
Core
Core
Core
Core
Core
Notes
Meeting the objective
Investment entity
Investment entity
Investment entity status
The interest of NCI
Significant restrictions
Nature of the risks
Changes in ownership interest that do
not result in a loss of control
Losing control of a subsidiary
Investment entities
Nature, extent and financial effects
Investment entity
Risks associated with the interests
Investment entity
Nature of interests
Nature of risks
Aggregation
Interests in other entities
Summarised financial information
Commitments for joint ventures
Unconsolidated structured entities
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SECTION B – QUESTIONS ON DISCLOSURE OF INTERESTS IN OTHER
ENTITIES
QUESTION 4.1 (11 marks - 17 minutes)
Energise Ltd was formed in Johannesburg in 20.1 and its purpose is to sell pre-paid electricity, both
locally and internationally. Energise Ltd has acquired many interests in foreign entities and
concluded many contractual arrangements with foreign entities, due to the increasing demand for
pre-paid electricity in foreign countries.
Energise Ltd has a financial year end of 31 March. The following information is available relating to
Energise Ltd’s foreign interest:
Power LLC
On 1 April 20.4, Energise Ltd formed Power LLC, a company that is located and operated in Iran.
Energise Ltd did not acquire any of the share capital of Power LLC. A contractual arrangement was
entered into between Energise Ltd and the shareholders of Power LLC, stating that voting rights
relate to administrative tasks only and the relevant activities are directed by means of the contractual
arrangement.
Power LLC was formed in order to construct power plants in Iran. All the electricity generated will be
sold to Energise Ltd, which will sell and distribute it throughout Iran. The construction of power plants
is expected to continue until 20.24.
As a result of the current ongoing sanctions against Iran, Power LLC have been experiencing
difficulties in acquiring parts required in the construction of the power plants that has to be imported.
This resulted in a delay in the construction of several power plants. As Power LLC cannot sell the
unfinished power plants to Energise Ltd but is still incurring operating expenses, Power LLC has
almost depleted their funds.
The initial contractual arrangement between Energise Ltd and Power LLC did not make any
provision for financial support, as it was not deemed necessary at that stage. However, Energise Ltd
has noted that Power LLC requires drastic intervention. Energise Ltd provided a loan to Power LLC
amounting to R1,2 billion on 1 January 20.12. A portion of the loan is secured by the power plants
which amounted to R500 million. The remainder of the loan is unsecured. No repayments have yet
been arranged. The entire loan carries interest at 10% per annum.
Energise Ltd did not consolidate Power LLC in its consolidated financial statements for the year
ended 31 March 20.12. There are currently no indications that the sanctions against Iran will be
lifted.
You may assume that the terms of the contractual agreement did not meet the criteria for control in
accordance with IFRS 10, joint control in accordance with IFRS 11 or significant influence in
accordance with IAS 28.
REQUIRED
Prepare the unconsolidated structured entity note to the consolidated financial
statements of the Energise Ltd Group for the year ended 31 March 20.12.
Communication skills: presentation and layout
Marks
10
1
Please note:
•
•
•
Accounting policies are not required.
Comparative figures are not required.
Your answer must comply with International Financial Reporting Standards (IFRS).
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QUESTION 4.1 - Suggested solution
ENERGISE LTD GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
31 MARCH 20.12
1.
Unconsolidated structured entity
IFRS 12.26
IFRS 12.
B26(f)
IFRS 12.30
Energise Ltd is involved with an unconsolidated structured entity through
a contractual arrangement with the shareholders of Power LLC.
Energise Ltd does not own any of the share capital of Power LLC.
Energise Ltd entered into a contractual arrangement with the
shareholders of Power LLC, stating that voting rights relate to
administrative tasks only and the relevant activities are directed by
means of the contractual arrangement. Power LLC was set up to
construct power plants in Iran, which will generate electricity that will be
sold to Energise Ltd.
(3)
As a result of the current ongoing sanctions against Iran, Power LLC
have been experiencing difficulties in acquiring parts required in the
construction of the power plants that has to be imported. This resulted in
a delay in the construction of several power plants and in Power LLC's
funds being depleted.
(1)
Energise Ltd granted a loan of R1,2 billion to Power LLC as a result of
the delay. The loan provided to Power LLC has no fixed repayment terms
and carries interest at 10% per annum. The capital portion of the loan
was secured by Power LLC’s power plants to the value of R500 million.
(2)
IFRS 12.
B26(c)
Energise Ltd earned interest income (included in other income) from its
involvement with Power LLC during the financial year.
(1)
The following table summarises the carrying values recognised in the statement of
financial position and maximum exposure to loss from its involvement at 31 March 20.12
with the structured entity:
Description
Carrying amount
R’000
Maximum
exposure to loss
R’000
* 1 230 000
1 230 000
Long term loan to
Power LLC
* (1 200 + 30 interest)
Line item in the
statement of
financial position
Financial
investments
IFRS 12.29(a)
IFRS 12.29(c)
IFRS 12.29(b)
Communication skills: presentation and layout
(3)
(10)
(1)
EXAM TECHNIQUE
Please note that you do not have to show the references to the standard in your
suggested solution.
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QUESTION 4.2 (18 marks – 27 minutes)
Olympian Ltd was incorporated in 19.0 and provides training to a wide range of athletes intending
to compete in the Olympic Summer and Winter Games. Olympian Ltd acquired an interest in
Dive Ltd. Olympian Ltd has a 31 December financial year end. The following information is provided
for Dive Ltd:
At the start of the new millennium, Olympian Ltd noted that it cannot meet all the requirements of all
the athletes anymore, due to an increase in the number and variety of sports events. In 20.0, four
additional synchronised diving events were introduced, resulting in Olympian Ltd purchasing 40% of
the share capital and voting rights of Dive Ltd on 1 January 20.0. From this date Olympian Ltd had
control of Dive Ltd. All the diving training will transfer to Dive Ltd. Olympian Ltd concluded a
contractual arrangement with Dive Ltd, stipulating that Dive Ltd is prohibited from providing training
to athletes other than those of Olympian Ltd. According to the contractual arrangements,
Olympian Ltd will also receive an amount from Dive Ltd per athlete trained.
Dive Ltd has a financial year end of 28 February, due to the change in season from March, which
affects the type of swimming pools used. It is more practical for Dive Ltd to have a financial year end
of 29 February 20.12, as it coincides with all of the yearly maintenance contracts, the largest
expense of Dive Ltd. Dive Ltd is located and operates in Durban. The following trial balance of
Dive Ltd is presented as at 31 December 20.11, adjustments have been made to align with the
financial year end of Olympian Ltd and no additional adjustments are required:
R
Profit for the period 1 January 20.11 to 31 December 20.11
Gain on revaluation of land
Revaluation surplus - 1 January 20.11
Dividend paid on 31 December 20.11
Property, plant and equipment
Trade and other receivables
Cash and cash equivalents
Long-term loan
Deferred tax liability
Trade and other payables
(850 400)
(10 800)
(43 200)
100 000
1 200 000
550 000
300 000
(750 000)
(21 000)
(474 600)
The accumulated non-controlling interests of Dive Ltd in the consolidated financial statements of
Olympian Ltd amounted to R960 300 at 1 January 20.11.
Revenue amounting to R1 520 000 was recorded for the current financial year.
MJM
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REQUIRED
Marks
Prepare the investment in Dive Ltd note to the consolidated financial statements of
the Olympian Ltd Group for the year ended 31 December 20.11.
17
Please note:
•
Ignore the disclosure requirements in terms of IFRS 3.B64-.B67.
Communication skills: Presentation and layout
1
Please note:
•
•
•
Comparative amounts are not required.
Round off all amounts to the nearest Rand.
Your answer must comply with International Financial Reporting Standards (IFRS).
MJM
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QUESTION 4.2 – Suggested solution
OLYMPIAN LTD GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
31 DECEMBER 20.11
1.
Investment in Dive Ltd
Name of subsidiary:
Principal place of business:
Proportion of ownership interests and voting rights held by noncontrolling interests:
Profit allocated to non-controlling interests of the subsidiary during the
reporting period: (850 400 x 60%)
Accumulated non-controlling interests of the subsidiary at the end of
the reporting period:
[960 300 (given) + 510 240 + (10 800 x 60%) - (100 000 x 60%)]
Dividend paid to non-controlling interests: (100 000 x 60%)
Dive Ltd
Durban
(1)
(1)
60%
(1)
R510 240
(1)
R1 417 020
R60 000
(3)
(1)
A contractual arrangement stipulates that all diving training provided to Olympian Ltd's
athletes will transfer to Dive Ltd. Dive Ltd is prohibited from providing training to athletes
other than those of Olympian Ltd according to the contractual arrangement.
Olympian Ltd receives an amount from Dive Ltd for every athlete trained. Due to these
conditions, Olympian Ltd is deemed to have control of Dive Ltd, even though it holds
only 40% of the voting rights of Dive Ltd.
(1)
Dive Ltd has a financial year end of 29 February. The reason for the different financial
year end is due to the change in season from March, which affects the type of swimming
pools used. It is more practical for Dive Ltd to have a financial year end of 29 February,
as it coincides with all of the yearly maintenance contracts, the largest expense for
Dive Ltd (IFRS12.11)
(1)
(1)
(1)
(1)
Summarised financial information of Dive Ltd for the year ended 31 December 20.11:
R
Current assets (330 000 + 550 000)
Non-current assets
Current liabilities
Non-current liabilities (750 000 + 21 000)
Revenue
Profit for the period
Total comprehensive income (850 400 + 10 800)
850 000
1 200 000
(474 600)
(771 000)
(1 520 000)
(850 400)
(861 200)
Total
Maximum
Communications skills: presentation and layout
(1)
(½)
(½)
(1)
(½)
(½)
(1)
(18)
(17)
(1)
COMMENT
All of the above information is disclosed in terms of IFRS 12.7(a), IFRS 12.9(b) and
IFRS 12.11 -12.
MJM
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SELF ASSESSMENT QUESTIONS AND SUGGESTED SOLUTIONS
Question
Question name
1
Rich DotCom Ltd
2
Source
Marks
Topics covered
Page
FAC4864
Test 1 of
2016
40
78
Chevy Ltd
FAC4864
Test 1 of
2017
40
3
Iphepha SA Ltd
FAC4864
Test 2 of
2017
40
4
Mouth Watering
Meats Ltd
FAC4864
Test 1 of
2018
40
5
Top Blinds Ltd
FAC4864
Test 1 of
2019
40
6
Oneity Ltd
SAICA 2019
(adapted)
40
7
Massmark Ltd
FAC4864
Test 1 of
2020
40
• Pro forma journal entries –
subsidiary
• Discussion on control (share
trust) (IFRS 10)
• Discussion on what forms part
of a business combination
(IFRS 3)
• Presentation of consolidated
statement of profit or loss and
other comprehensive income
• Discussion on a business
combination in the separate
accounting records (IFRS 3)
• Pro forma journal entries –
intragroup transactions
• Prepare
a
reconciliation
between the net asset value
and the carrying amount of a
joint venture (IFRS 12)
• Pro forma journal entries –
joint venture
• Calculation of the carrying
amount of an investment in an
associate
• Discussion on acquisitionrelated costs (IFRS 3 and IAS
28)
• Discussion on losses of an
associate (IAS 28)
• Pro forma journal entries –
subsidiary and associate
• Discussion
on
power
(IFRS 10)
• Discussion
on
control
(IFRS 10)
• Presentation of consolidated
statement of financial position
• Discussion on accounting of
customers list (IFRS 3)
• Discussion
on
power
(IFRS 10)
• Discussion on assets and
liabilities acquired – recognition
and
measurement
(IFRS 3)
• Discussion on assets and
liabilities acquired – recognition
and
measurement
(IFRS 3)
• Disclosure of investment in
associate note (IFRS 12)
86
96
106
115
125
134
MJM
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QUESTION 1
40 marks
YOU HAVE 15 MINUTES TO READ THIS QUESTION
Rich Dotcom Ltd operates in various industries and is listed on the Johannesburg Stock Exchange.
The company has several investments in other companies. You have recently been appointed as
the Financial Manager: Group Reporting and has received the following consolidated trial balance
of the group for the year ended 31 December 20.15 (you may assume that the amounts are correct,
except where otherwise indicated in the information below):
R
Debits
Intangible assets
Property, plant and equipment
Investment in RichDad Ltd
Financial assets
Inventory
Trade receivables
Cash and cash equivalents
Cost of sales
Other expenses
Income tax expense
Credits
Issued ordinary share capital
Rich Dotcom Ltd - 100 000 shares
RichDad Ltd - 10 000 shares
Retained earnings (1 January 20.15)
Rich Dotcom Ltd
RichDad Ltd
Long-term loan
Deferred tax
Trade payables
Revenue
Other income
400 000
2 000 000
500 000
300 000
250 000
165 000
654 000
1 350 000
655 000
256 000
6 530 000
750 000
150 000
1 600 000
480 000
485 000
365 000
2 250 000
450 000
6 530 000
Upon further inspection of the consolidated trial balance, you noticed that the only consolidation
procedures performed by the previous Financial Manager were the combining of the like items of
assets, liabilities, equity, income, expenses and cash flows of the parent with those of its only
subsidiary. You subsequently obtained the following information relating the investment in the
subsidiary:
Investment in RichDad Ltd
Rich Dotcom Ltd acquired a 75% controlling shareholding in RichDad Ltd on 1 July 20.11.
The acquisition of RichDad Ltd also met the definition of acquiring a business, as defined in IFRS 3
Business Combinations.
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The retained earnings amounted to R300 000 at that date. All the assets and liabilities of RichDad
Ltd were fairly valued at that date except for the following:
•
An office building with a carrying amount of R350 000 had a fair value of R500 000.
The remaining useful life and residual value remained unchanged at 20 years and Rnil
respectively at that date. RichDad Ltd sold its office building on 31 December 20.14 for an
amount of R300 000 to a property developer.
•
RichDad Ltd owns a registered trademark which was designed during 20.10 at a cost of
R200 000. The trademark was correctly recognised as an intangible asset by RichDad Ltd.
The original cost represents the fair value on 1 July 20.11. In order to manufacture the
trademarked product, RichDad Ltd also documented the required technical expertise used
which is unpatented. The fair value of the technical expertise was valued at R30 000 on
1 July 20.11.
The trademark and technical expertise are both expected to have an indefinite useful life.
The South African Revenue Service (SARS) does not allow any deductions against taxable
income in respect of the technical expertise.
RichDad Ltd was also in negotiation with new clients regarding potential contracts worth R300 000
at the acquisition date.
No additional assets, liabilities or contingent liabilities were identified at the acquisition date.
The current year’s profit after tax for RichDad Ltd was R300 000.
Intragroup transactions
RichDad Ltd sold three of its products to Rich Dotcom Ltd on 1 January 20.15. The total sales
amounted to R300 000. These products are classified as equipment as part of property, plant and
equipment by Rich Dotcom Ltd. The useful life and residual value of the equipment was five years
and Rnil respectively at that date. RichDad Ltd charges a gross profit percentage of 50% on cost
price.
Email from the Chief Executive Officer
On your second day in the new position, you received the following email:
Financial Manager: Group Reporting
From:
Sent:
To:
Subject:
Attachments:
Chief Executive Officer <ceo@richdotcom.co.za>
11 March 20.16 21:40
Financial Manager: Group Reporting
Share option plan
Trust deed.docx
Dear You
There are two issues that require your urgent attention:
Rich Dotcom Employee Share Trust
Before your appointment, the board of directors of Rich Dotcom Ltd took a decision to set up the
Rich Dotcom Employee Share Trust (RDEST) for the benefit of its employees. The employees of
Rich Dotcom Ltd are entitled to a share option plan as part of their remuneration.
MJM
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The RDEST has been set up to operate the share option plan for the employees and is not a longterm employee benefit plan.
Attached please find the trust deed for your perusal. The trust deed contains, inter alia, the following
provisions:
•
•
•
•
All the elected trustees of RDEST must be employees of Rich Dotcom Ltd;
Rich Dotcom Ltd will provide the funding to RDEST and guarantee its obligations in order to
operate the share option plan;
The trust will buy Rich Dotcom Ltd’s shares; and
The trust will hold the shares for the duration of the vesting period in accordance with the share
option plan.
Acquisition of SuperMom Ltd
Rich Dotcom Ltd is in the process of acquiring a controlling shareholding in SuperMom Ltd.
Their current Chief Executive Officer is a close friend of mine and she has brought the following to
my attention:
She was appointed six months ago by SuperMon Ltd on a three year contract. Included in her
contract is a provision that if SuperMom Ltd is acquired by Rich Dotcom Ltd within the period of
three years after her appointment, that she will be entitled to a once-off payment of R1 000 000 after
the successful completion of the acquisition.
Kind regards
CEO
Additional information
1.
Investments in subsidiaries are accounted for at cost in accordance with IAS 27.10(a).
2.
It is the accounting policy of Rich Dotcom Ltd to account for property, plant and equipment
using the cost model in accordance with IAS 16 Property, Plant and Equipment.
3.
The Rich Dotcom Ltd Group provides depreciation on property, plant and equipment items
using the straight-line method over the asset’s remaining useful life.
4.
There was no change in the issued ordinary share capital of any companies in the group since
1 July 20.11.
5.
You may assume that all income tax related entries have been correctly accounted for in the
separate accounting records of Rich Dotcom Ltd.
6.
Rich Dotcom Ltd has elected to measure the non-controlling interests of RichDad Ltd at its
proportionate share of the acquiree’s identifiable net assets at acquisition date.
7.
Assume a normal income tax rate of 28% and a Capital Gains Tax inclusion rate of 80%.
Ignore Value Added Tax (VAT) and Dividend Tax.
MJM
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REQUIRED
YOU HAVE 60 MINUTES TO ANSWER THIS QUESTION
Marks
(a)
(b)
(c)
Provide the pro forma journal entries for the Rich Dotcom Ltd Group for the year
ended 31 December 20.15. Journal entries relating to deferred taxation are also
required.
25
Communication skills: presentation and layout
1
Discuss, with reasons, whether Rich Dotcom Ltd controls the Rich Dotcom
Employee Share Trust.
9
Communication skills: logical flow and conclusion
1
Discuss, with reasons, how the payment to the Chief Executive Officer of
SuperMom Ltd will be treated at the acquisition date if Rich Dotcom Ltd
successfully completes the acquisition.
4
Please note:
•
•
•
Show all your calculations.
Round off all amounts to the nearest Rand.
Your answer must comply with International Financial Reporting Standards (IFRS).
MJM
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QUESTION 1 - Suggested solution
(a)
J1
J2
J3
J4
J5
J6
J7
J8
J9
Provide the pro forma journal entries for the Rich Dotcom Ltd Group for the year ended
31 December 20.15.
Share capital (SCE) (given)
Retained earnings (SCE) (given)
Intangible asset (SFP) (given)
Office building (SFP) (500 000 - 350 000)
Goodwill (SFP) (balancing)
Deferred tax (SFP) ((150 000 x 28%) + (30 000 x 28% x 80%))
Non-controlling interests (SCE/SFP) [C1]
Investment in RichDad Ltd (SFP) (given)
Elimination of at acquisition equity
Deferred tax (SFP) (26 250 x 28%)
Retained earnings (SCE) (balancing)
Accumulated depreciation (SFP) (150 000/20 x 3,5)
Depreciation on office building up to end of prior year
Deferred tax (SFP) (123 750 x 28%)
Retained earnings (SCE) (balancing)
Accumulated depreciation (SFP) [J2]
Office building (SFP) [J1]
Reversal of fair value adjustment on office building upon
disposal
Retained earnings (SCE)
((480 000 - 300 000 - 18 900 [J2] – 89 100 [J3]) x 25%)
Non-controlling interests (SFP/SCE)
Non-controlling interests' share of since acquisition reserves
Revenue (P/L) (given)
Cost of sales (P/L) (balancing) OR (300 000 x 100/150)
Equipment (SFP) (300 000 x 50/150) OR (balancing)
Elimination of unrealised profit on the sale of equipment
Deferred tax (SFP) (100 000 x 28%)
Income tax expense (P/L)
Tax implication of the depreciation on equipment
Accumulated depreciation (SFP) (100 000/5)
Depreciation (P/L)
Realisation of unrealised profit on sale of equipment
Income tax expense (P/L) (20 000 x 28%)
Deferred tax (SFP)
Tax implication of the depreciation on the equipment
Non-controlling interests (P/L) ((300 000 - 100 000 [J5] + 28
000 [J6] + 20 000 [J7] - 5 600 [J8]) x 25%)
Non-controlling interests (SFP/SCE)
Non-controlling interests' share of current year's profit
Dr
R
150 000
300 000
30 000
150 000
64 040
Cr
R
48 720
145 320
500 000
(1)
(1)
(1)
(2)
(1)
(1)
26 250
(1)
(1)
(2)
7 350
18 900
34 650
89 100
26 250
(1)
(1)
150 000
18 000
18 000
300 000
(3)
(1)
(1)
200 000
100 000
(2)
28 000
(1)
(1)
20 000
(1)
(1)
5 600
(1)
(1)
28 000
20 000
5 600
60 600
(3)
60 600
(1)
Total
Maximum
Communication skills: presentation and layout
(30)
(25)
(1)
EXAM TECHNIQUE
It is good exam technique to always provide journal narrations, even when it is not
explicitly required.
MJM
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CALCULATIONS
C1.
Analysis of owners’ equity of RichDad Ltd
Total
At acquisition
Share capital (given)
Retained earnings (given)
Intangible asset (technical expertise)
[30 000 x (1- (28% x 80%))]
Revaluation of office building
[(500 000 – 350 000) x 72%]
Equity represented by goodwill
(balancing)
Consideration and NCI
Since acquisition until beginning of
year
Retained earnings
(480 000 – 300 000 -108 000)
Current year
Profit for the year (300 000 -100 000
[J5] + 28 000 [J6] + 20 000 [J7] –
5 600 [J8])
Rich Dotcom Ltd
(75%)
At
Since
NCI
150 000
300 000
23 280
108 000
581 280
435 960
145 320
64 040
645 320
64 040
500 000
145 320
72 000
54 000
18 000
242 400
181 800
60 600
959 720
235 800
223 920
COMMENT
Deferred tax on intangible asset (technical expertise)
The tax base of an asset is any amount that would be deductible for tax against future
economic benefits. The question states that SARS does not allow any deductions
against taxable income in respect of the technical expertise. This will result in the tax
base being zero which will give rise to a temporary difference.
Deferred tax should thus be provided using the appropriate tax rate. The tax rate used
will be based on the manner of recovery of the carrying amount of the intangible asset.
In this question, the technical expertise has an indefinite useful life, it can thus only be
recovered through sale and the CGT rate is used.
Sale of office building
Upon the sale of the office building, the subsidiary has correctly accounted for the sale
in its separate records. However, remember that as a result of the IFRS 3 adjustment to
fair value (R150 000), there is still an amount recognised in the consolidated records for
the office building (the R150 000 less accumulated depreciation). This amount, including
the tax consequences, must therefore be eliminated (J3).
Intragroup transaction
The intragroup transaction was “upstream”, the subsidiary selling to the parent.
Therefore, any unrealised profit will also affect non-controlling interests which must be
adjusted accordingly.
MJM
84
(b)
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Discuss, with reasons, whether Rich Dotcom Ltd controls the Rich Dotcom Employee
Share Trust
Theory
An investor controls an investee when it is exposed, or has rights, to variable returns
from its involvement with the investee and has the ability to affect those returns through
its power over the investee [IFRS 10.6]
An investor has power over an investee when the investor has existing rights that give it
the current ability to direct the relevant activities, i.e. the activities that significantly affect
the investee’s returns [IFRS 10.10]
Consideration of the following factors may assist in determining whether an entity
controls an investee [IFRS 10.B3]:
Application
(a)
The purpose and design of the investee;
RDEST was established by Rich Dotcom Ltd to operate a share option plan for
the benefit of its employees and Rich Dotcom Ltd is therefore involved in the
decisions of RDEST.
(b)
(c)
What the relevant activities are and how decisions about those activities are made;
Rich Dotcom Ltd will provide the finances to RDEST to enable the trust to
purchase the shares and hold it till the vesting dates. The trustees who operate
the trust are all employees of RDEST.
(1)
(1)
Whether the rights of the investor give it the current ability to direct the relevant
activities;
An investor has power when it has the rights to appoint, reassign or remove
members of an investee’s key management personnel who have the ability to
direct the relevant activities (IFRS 10.B15(b)).
All the elected trustees of RDEST must be employees of Rich Dotcom Ltd and
Rich Dotcom Ltd can therefore appoint, reassign or remove trustees and therefore
have power over RDEST.
(1)
Rich Dotcom Ltd has no voting rights in RDEST and evidence of whether it has
the practical ability to direct the relevant activities unilaterally must be considered.
(1)
Sometimes there will be indications that the investor has a special relationship
with the investee, which suggests that the investor has more than a passive
interest in the investee (IFRS 10.B19).
Rich Dotcom Ltd will provide the finances to RDEST to enable the trust to
purchase the shares and will provide guarantees for its obligations. This indicates
more than just a passive relationship and that it therefore has the practical ability
to direct the relevant activities of RDEST.
(d)
Whether the investor is exposed, or has rights, to variable returns from its
involvement with the investee; and
RDEST is established to purchase the shares of Rich Dotcom Ltd and hold them
during the vesting period of the share option plan. The Rich Dotcom Ltd’s shares
that RDEST purchases and hold during the vesting period hedges
Rich Dotcom Ltd’s exposure to changes in its share price by limiting the variability
in the cost of the employee share scheme.
Therefore, Rich Dotcom Ltd limits the exposure to variability of returns from
RDEST indicating that it has power over the RDEST.
(1)
(1)
(1)
(1)
(1)
MJM
85
(e)
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Whether the investor has the ability to use its power over the investee to affect the
amount of the investor’s returns.
Rich Dotcom Ltd established RDEST to operate a share option plan for the benefit
of Rich Dotcom Ltd’s employees and therefore had the opportunity and incentive
to obtain rights that result in Rich Dotcom Ltd having the ability to direct the
relevant activities.
Conclusion
Rich Dotcom Ltd therefore controls RDEST as it is exposed, or has rights, to variable
returns from its involvement with the RDEST and has the ability to affect those returns
through its power over the RDEST.
Total
Maximum
Communication skills: logical flow and conclusion
(c)
(1)
(1)
(11)
(9)
(1)
Discuss, with reasons, how the payment to the Chief Executive Officer of
SuperMom Ltd will be treated at the acquisition date if Rich Dotcom Ltd successfully
completes the acquisition
Theory
The acquirer and the acquiree may have a pre-existing relationship or other arrangement
before negotiations for the business combination began, or they may enter into an
arrangement during the negotiations that is separate from the business combination.
The acquirer shall identify any amounts that are not part of what the acquirer and the
acquiree (or its former owners) exchanged in the business combination, ie amounts that
are not part of the exchange for the acquiree. [IFRS 3.51]
The acquirer should consider the reasons for the transaction, who initiated the
transaction and the timing of the transaction, which are neither mutually exclusive nor
individually conclusive, to determine whether a transaction is part of the exchange for
the acquiree or whether the transaction is separate from the business combination
[IFRS3.B50]
Application
The reasons for the transaction: SuperMom Ltd appointed their CEO on a three year
contract to obtain her services and included the provision for the once-off payment if
SuperMom Ltd is successfully acquired by another entity within that period.
(1)
Who initiated the transaction: SuperMom Ltd initiated the transaction by entering into a
contract with their CEO.
(1)
The timing of the transaction: The contract with the CEO was entered into before the
negotiations for the acquisition of SuperMom Ltd by Rich Dotcom Ltd began.
(1)
There is no evidence that the agreement was arranged primarily to provide benefits to
Rich Dotcom Ltd or the Rich Dotcom Ltd Group.
(1)
Conclusion
Therefore, the liability to pay R1 000 000 to the CEO is included in the application of the
acquisition method and a liability is recognised as part of the liabilities assumed by
Rich Dotcom Ltd on the acquisition date.
Total
Maximum
(1)
(5)
(4)
MJM
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QUESTION 2
40 marks
YOU HAVE 15 MINUTES TO READ THIS QUESTION
This question consists of two independent parts.
PART I
28 marks
Chevy Ltd (Chevy) is a South African company listed on the Johannesburg Stock Exchange.
Chevy specialises in the restoration and sale of classic motor vehicles. All the companies in the
Chevy Group have a February year end.
Chevy acquired 70% of the ordinary share capital of Apache Ltd (Apache) on 30 June 20.15 for a
cash consideration of R885 000. Apache’s retained earnings amounted to R1 085 000 on the date
of acquisition. The fair value of the non-controlling interests on that date amounted to R365 000.
Apache’s assets and liabilities were deemed to be fairly valued on the acquisition date and no
additional assets, liabilities or contingent liabilities were identified. From 30 June 20.15,
Chevy exercised control over Apache as per the definition of control in accordance with IFRS 10
Consolidated Financial Statements. The acquisition of Apache also met the definition of acquiring a
business, as defined in IFRS 3 Business Combinations.
Chevy acquired 65% of the ordinary share capital of Chevelle Ltd (Chevelle) on 30 April 20.16 for a
cash consideration of R1 060 000. The fair value of the non-controlling interests on that date
amounted to R570 000. The acquisition of Chevelle resulted in the recognition of goodwill in the
consolidated financial statements of Chevy. From 30 April 20.16, Apache exercised control over
Chevelle as per the definition of control in accordance with IFRS 10 Consolidated Financial
Statements. The acquisition of Chevelle also met the definition of acquiring a business, as defined
in IFRS 3 Business Combinations.
Chevelle’s assets and liabilities were deemed to be fairly valued on 30 April 20.16, with the exception
of the following:
•
Equipment was revalued with R134 000 more than the carrying amount. The remaining useful
life of the equipment on 30 April 20.16 was three years. The equipment is used in the
production of income.
No additional assets, liabilities or contingent liabilities were identified on 30 April 20.16.
The following intragroup transactions took place within the group during the year ended
28 February 20.17:
•
From 30 June 20.15 Apache has been selling inventory to Chevy at cost price plus 20%.
Included in the closing inventory of Chevy on 28 February 20.17 was inventory amounting to
R132 500 (20.16: R87 400) that was purchased from Apache.
•
During the 20.17 financial year, sales from Apache to Chevy amounted to R335 200.
•
Apache acquired land to the value of R700 000 on 1 August 20.16 for investment purposes.
The land is currently used by Chevy as a scrap yard. Based on the valuation performed on
28 February 20.17 the investment property’s value increased with R100 000.
MJM
87
•
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Chevy sold office furniture to Chevelle on 1 November 20.16 for R14 000. The original cost
price of the furniture was R15 700. The furniture was originally purchased on
1 September 20.15 and had a useful life of five years on that date.
The separate trial balances of the various companies as at 28 February 20.17 are as follows:
Ordinary share capital (100 000 ordinary shares each)
Retained earnings (1 March 20.16)
Revaluation surplus
Gain on property valuation (other comprehensive
income)
Deferred tax
Trade and other payables
Profit before tax
Land
Investment property
Equipment (carrying amount)
Office furniture (carrying amount)
Investment in Apache
Investment in Chevelle
Inventory
Trade and other receivables
Cash and cash equivalents
Income tax expense
Dividends paid (paid on 28 February 20.17)
Chevy
Ltd
R
(100 000)
(7 522 300)
(200 000)
Apache
Ltd
R
(100 000)
(2 172 000)
-
Chevelle
Ltd
R
(100 000)
(1 273 820)
-
(54 320)
(276 800)
(110 000)
(2 561 822)
4 000 400
1 400 000
967 360
885 000
1 060 000
801 982
450 000
400 500
760 000
100 000
(138 400)
(88 000)
(1 152 200)
800 000
264 000
22 000
786 800
260 000
1 137 800
320 000
60 000
(20 000)
(66 000)
(793 600)
694 420
31 000
630 000
320 000
290 000
238 000
50 000
Additional information
1.
The Chevy Group apply the following accounting policies:
•
•
•
•
•
Equipment and office furniture are accounted for according to the cost model in
accordance with IAS 16 Property, Plant and Equipment.
Land is accounted for according to the revaluation model in accordance with IAS 16
Property, Plant and Equipment.
Depreciation on equipment and furniture items are provided on the straight-line method
over the asset’s remaining useful life.
Investment property is accounted for according to the fair value model in accordance
with IAS 40 Investment Property.
Non-controlling interests are measured at fair value at the acquisition date, for all
acquisitions.
2.
It is the accounting policy of Chevy and Apache to account for investments in subsidiaries at
cost in accordance with IAS 27.10(a) in its separate financial statements.
3.
Chevelle’s income and expenses accrued evenly throughout the financial year.
4.
Assume a normal income tax rate of 28% and a Capital Gains Tax inclusion rate of 80%.
Ignore Value Added Tax (VAT) and Dividend Tax.
5.
There were no changes in the issued ordinary share capital of any of the companies in the
group.
MJM
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PART II
12 marks
Potato Ltd is a Johannesburg Stock Exchange listed company that grows and distributes vegetables.
On 1 January 20.17 Potato Ltd acquired the tomato division of ZZ4 Ltd. The main reason for this
acquisition was so that Potato Ltd could get access to a supply contract between the tomato division
and Veg & Fruit Ltd, a national greengrocer. The purchase consideration consisted of an immediate
cash payment of R260 000 and an additional cash payment of R150 000 payable on 1 January
20.18. The tomato division constitutes a business and Potato Ltd obtained control over the business
from 1 January 20.17 in terms of IFRS 10 Consolidated Financial Statements.
The assets and liabilities of the tomato division on the acquisition date were as follows:
Assets
Liabilities
Carrying amount
Dr/(Cr)
R
Fair value
Dr/(Cr)
R
380 000
(110 000)
400 000
(130 000)
The supply contract between the tomato division and Veg & Fruit Ltd had a fair value of R80 000 on
1 January 20.17 and the contract will expire on 1 March 20.19. The tomato division did not recognise
an asset in its accounting records in respect of the contract.
Additional information
1.
Assume a market related pre-tax interest rate of 12% per annum, compounded annually.
2.
Assume a normal income tax rate of 28% and a Capital Gains Tax inclusion rate of 80%.
Ignore Value Added Tax (VAT) and Dividend Tax.
MJM
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REQUIRED
YOU HAVE 60 MINUTES TO ANSWER THIS QUESTION
Marks
PART I
Prepare the consolidated statement of profit or loss and other comprehensive income of
the Chevy Ltd Group for the year ended 28 February 20.17, starting with the profit before
tax. Other comprehensive income should be presented net of tax.
27
Communication skills: presentation and layout
1
Discuss, with reference to amounts, how the purchase transaction of the tomato division
should be accounted for on 1 January 20.17 in the separate accounting records of
Potato Ltd.
12
PART II
Please note:
•
•
•
•
•
Round off all amounts to the nearest Rand.
Show all your calculations.
Comparative figures are not required.
Notes to the consolidated statement of profit or loss and other comprehensive
income are not required.
Your answer must comply with International Financial Reporting Standards (IFRS).
MJM
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QUESTION 2 - Suggested solution
PART I
CHEVY LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 28 FEBRUARY 20.17
R
Profit before tax [C1]
Income tax expense [C6]
PROFIT FOR THE YEAR
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Gains on property (54 320 + (100 000 – (100 000 x 28% x 80%)))
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
4 154 325
(1 242 905)
2 911 420
(14)
(6)
131 920
3 043 340
(1)
2 533 994
377 426
2 911 420
(1)
(6)
2 642 634
Non-controlling interests [377 426 (above) + (77 600 x 30%)]
400 706
3 043 340
Total
Maximum
Communication skills: presentation and layout
(1)
(2)
Profit attributable to:
Owners of the parent (balancing)
Non-controlling interests (244 756 [C7] + 152 670 [C7])
Total comprehensive income attributable to:
Owners of the parent (balancing)
(31)
(27)
(1)
COMMENT
As the solution starts with profit before tax, adjustments affecting only the statement of
profit or loss and other comprehensive income are not required. An example is the
elimination of the intragroup sales between Apache and Chevy amounting to R335 200.
The pro forma journal entry required is debit revenue (P/L) and credit cost of sales (P/L)
of R335 200. However, the net effect on profit before tax is zero and this adjustment is
therefore not required in [C1].
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CALCULATIONS
C1.
Profit before tax
Chevy Ltd
Apache Ltd
Chevelle Ltd (793 600 x 10/12)
Realisation of unrealised intragroup profit for 20.16 [C2]
or (20/120 x 87 400)
Elimination of unrealised intragroup profit for 20.17 [C3]
or (20/120 x 132 500)
Depreciation on revalued equipment [C4] or (134 000/3 x 10/12)
Elimination of intragroup gain on disposal of office furniture [C5]
or (14 000 – (15 700 – (15 700/60 x 14)))
Elimination of intragroup depreciation on office furniture [C5]
or (1 963/46 x 4)
Elimination of intragroup dividends received from Apache Ltd
(60 000 x 70%)
Elimination of intragroup dividends received from Chevelle Ltd
(50 000 x 65%)
Fair value adjustment on investment property
2 561 822
1 152 200
661 333
[1]
[1]
[1]
14 567
[2]
(22 083)
(37 222)
[2]
[1]
(1 963)
[2]
171
[1]
(42 000)
[1]
(32 500)
(100 000)
4 154 325
[1]
[1]
[14]
COMMENT
The land will be recognised as investment property in the separate financial statements
of Apache Ltd, as it was acquired for investment purposes. The fair value adjustment
and the deferred tax adjustment was thus recognised in profit or loss in Apache’s
separate financial statements.
Since the land is rented by Chevy (the parent), it now becomes owner-occupied
property, plant and equipment in the consolidated financial statements (IAS 40.15). The
fair value adjustment of R100 000 and deferred tax adjustment of R22 400 (refer to C6)
recognised in profit or loss by Apache must thus be reversed in the consolidated
financial statements.
It is the group’s accounting policy to measure land in accordance with the revaluation
model. The increase in fair value of R100 000 must thus be recognised in the
consolidated financial statements in other comprehensive income, net of deferred tax
(refer to C8).
C2.
C3.
Unrealised profit in inventory – 20.16
Inventory - opening balance 1 March 20.16
87 400
Unrealised profit (20/120 x 87 400)
Deferred tax expense (14 567 x 28%)
Adjustment for 20.17
14 567
(4 079)
10 488
Unrealised profit in inventory – 20.17
Inventory - closing balance 28 February 20.17
Unrealised profit (20/120 x 132 500)
Deferred tax expense (22 083 x 28%)
Adjustment for 20.17
132 500
22 083
(6 183)
15 900
MJM
92
C4.
C5.
Depreciation on revalued equipment
Remaining useful life
Revaluation at acquisition date
3
134 000
Additional depreciation for 20.17 (134 000/3 x 10/12)
Deferred tax expense (37 222 x 28%)
Adjustment for 20.17
37 222
(10 422)
26 800
Intragroup gain on disposal of office furniture and depreciation
Cost price
Accumulated depreciation up to 1 November 20.16 (15 700/60 x 14)
Carrying amount on 1 November 20.16
Selling price
Unrealised profit on disposal of furniture
Deferred tax on gain (1 963 x 28%)
Depreciation on furniture (1 963/(60 – 14) x 4)
Deferred tax (171 x 28%)
C6.
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15 700
(3 663)
12 037
(14 000)
(1 963)
550
(171)
48
Income tax expense
Chevy Ltd
Apache Ltd
Chevelle Ltd (238 000 x 10/12)
Tax implication of intragroup profit for 20.16 [C2] or (14 567 x 28%)
Tax implication of intragroup profit for 20.17 [C3] or (22 083 x 28%)
Tax implication of additional depreciation [C4] or (37 222 x 28%)
Tax implication of gain on disposal of furniture [C5] or (1 963 x 28%)
Tax implication of depreciation on furniture sold [C5] or (171 x 28%)
Tax implication of fair value adjustment on investment property
(760 000)
(320 000)
(198 333)
(4 079)
6 183
10 422
550
(48)
22 400
(1 242 905)
[1]
[1]
[1]
[1]
[1]
[1]
[6]
C7.
Non-controlling interests
Apache Ltd
Profit before tax
Income tax expense
Profit after tax
After tax effect of realisation of intragroup profit 20.16 [C2]
After tax effect of elimination of intragroup profit 20.17 [C3]
After tax effect of fair value adjustment on investment property
(100 000 – (100 000 x 28% x 80%))
Profit or loss attributable to non-controlling interests (749 188 x 30%)
Chevelle Ltd
Profit before tax
Income tax expense
Profit for full year
Profit for 10 months (555 600 x 10/12)
After tax effect of additional depreciation [C4]
Profit or loss attributable to non-controlling interests (436 200 x 35%)
1 152 200
(320 000)
832 200
10 488
(15 900)
[½]
[½]
(77 600)
749 188
[1]
224 756
[½]
793 600
(238 000)
555 600
463 000
(26 800)
436 200
[½]
[½]
152 670
[½]
[6]
[½]
[½]
[½]
[½]
MJM
93
C8.
Analysis of owners' equity of Apache Ltd (for completeness)
Total
At acquisition
Share capital
Retained earnings
Chevy Ltd 70%
At
Since
NCI
100 000
1 085 000
1 185 000
829 500
355 500
Equity represented by goodwill
(balancing)
Consideration and NCI
65 000
1 250 000
55 500
885 000
9 500
365 000
Since acquisition
Beginning of the year
Retained earnings
(2 172 000 – 1 085 000 – 10 488)
1 076 512
753 558
322 954
749 188
524 432
224 756
77 600
(60 000)
3 093 300
54 320
(42 000)
1 290 310
23 280
(18 000)
917 990
Current year
Profit for the year [C7]
Other comprehensive income:
Revaluation
(100 000 – (100 000 x 28% x
80%))
Dividends
C9.
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Analysis of owners' equity of Chevelle Ltd (for completeness)
Total
At acquisition
Share capital
Retained earnings
Profit for 2 months
(463 000 [C7] x 2/12)
Revaluation of equipment
Deferred tax
Equity represented by goodwill
(balancing)
Consideration and NCI
Current year
Profit for the year [C7]
Dividends
Chevy Ltd 65%
At
Since
NCI
100 000
1 273 820
92 600
134 000
(37 520)
1 562 900
1 015 885
547 015
67 100
1 630 000
44 115
1 060 000
22 985
570 000
436 200
(50 000)
2 016 200
283 530
(32 500)
251 030
152 670
(17 500)
705 170
MJM
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PART II
Discuss how the purchase transaction of the tomato division should be accounted for
According to IFRS 3.3 an entity shall determine whether a transaction or other event is a
business combination by applying the definition in IFRS 3, which requires that the asset
acquired, and liabilities assumed constitute a business.
The tomato division constitutes a business.
(1)
A business combination is defined in IFRS 3 as a transaction or other event in which an
acquirer obtains control of one or more businesses (Appendix A).
On 1 January 20.17 Potato Ltd acquired the tomato division (business) and obtained control
thereof.
(1)
Therefore, the principles of IFRS 3 will be applied in accounting for the purchase transaction
of the tomato division on 1 January 20.17 as the transaction meets the definition of a business
combination.
(1)
According to IFRS 3.4 an entity shall account for each business combination by applying the
acquisition method.
Applying the acquisition method requires:
(a) identifying the acquirer;
(b) determining the acquisition date;
(c) recognising and measuring the identifiable assets acquired, the liabilities assumed and
any non-controlling interest in the acquiree; and
(d) recognising and measuring goodwill or a gain from a bargain purchase.
Application of acquisition method
Potato Ltd will apply the acquisition method to account for the transaction.
(1)
The acquirer will be Potato Ltd, and the acquisition date will be 1 January 20.17.
(1)
The acquirer shall recognise identifiable assets acquired and the liabilities assumed if they
meet the definitions of assets and liabilities in the Framework. The identifiable assets
acquired, and the liabilities assumed will be measured at their acquisition-date fair values.
Therefore, the previously recognised assets will be recognised at the fair value of R400 000
and the liabilities at the fair value of R130 000.
(1)
No deferred tax will be recognised on the recognition of the previous assets and liabilities as
the SARS will deem the tax base on initial recognition to be the same as the fair value of the
assets and liabilities acquired.
(1)
The acquirer’s application of the recognition principle and conditions may result in recognising
some assets and liabilities that the acquiree had not previously recognised as assets and
liabilities in its financial statements (IFRS 3.13).
An intangible asset is identifiable if it meets either the separability criterion or the contractuallegal criterion (IFRS 3.B31).
MJM
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As the supply contract is a contract, it will be considered identifiable and should be recognised
on acquisition date at fair value being R80 000 as it meets the contractual-legal criterion.
(1)
A deferred tax liability will be created at 28% of R80 000 (R22 400). The reason being that the
supply contract was not acquired by means of a purchase transaction. The SARS will not
recognise the supply contract and thus the base cost will be equal to Rnil.
(1)
The consideration transferred in a business combination shall be measured at fair value (IFRS
3.37)
The consideration consists of a cash payment of R260 000 and a deferred payment of
R150 000. The deferred payment (current liability) will be discounted to a present value.
Therefore the consideration will amount to R260 000 + R133 929 (R150 000/1, 12 =
R393 929).
(2)
The last step is to recognise goodwill or a gain on bargain purchase. Goodwill is calculated
as the excess of the consideration transferred over the net of the acquisition-date amounts of
the identifiable assets acquired and the liabilities assumed.
(1)
The goodwill recognised for the business combination of the tomato division will be R66 329.
The amount is calculated as follows:
(1)
R
Consideration transferred:
- Cash
- Deferred payment
Minus net identifiable assets acquired
- Previous assets
- Supply contract
- Deferred tax on supply contract
- Previous liabilities
Goodwill
260 000
133 929
393 929
327 600
400 000
80 000
(22 400)
(130 000)
66 329
Total
Maximum
(13)
(12)
MJM
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QUESTION 3
40 marks
YOU HAVE 15 MINUTES TO READ THIS QUESTION
Iphepha SA Ltd is a company listed on the Johannesburg Stock Exchange with a February year
end. Iphepha SA Ltd owns several paper mills across South Africa. These paper mills manufacture
paper from wood pulp and other specialised ingredients. Iphepha SA Ltd has various investments
in subsidiaries as well as another investment that they acquired in the previous financial year.
Imithi Ltd
On 1 September 20.15, Iphepha SA Ltd acquired 30 000 ordinary shares in Imithi Ltd for a cash
consideration of R80 000 as well as the transfer of machinery. At the date of acquisition, the
machinery transferred to Imithi Ltd had a carrying amount of R22 500, a fair value of R30 000 and a
remaining useful life of four years. You may assume that this transfer has commercial substance.
From 1 September 20.15, Iphepha SA Ltd has been exercising significant influence over the
financial and operating policy decisions of Imithi Ltd.
The equity of Imithi Ltd consisted of the following at the acquisition date:
R
Ordinary share capital (100 000 shares)
Retained earnings
100 000
275 200
375 200
All the assets and liabilities of Imithi Ltd were deemed to be fairly valued at the acquisition date and
no additional assets or liabilities were identified.
Iphepha SA Ltd has been purchasing wood pulp from Imithi Ltd since 1 September 20.15 at a markup of 20% on cost. Iphepha SA Ltd uses this wood pulp in the paper manufacturing process.
The following information relates to these sale transactions:
Included in Iphepha SA Ltd’s inventory on hand in
respect of inventory purchased from Imithi Ltd
Sales from Imithi Ltd to Iphepha SA Ltd
Year ended
28 February 20.17
R
Year ended
29 February 20.16
R
85 000
38 500
280 000
130 000
MJM
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RecycleLab Ltd
On 1 March 20.16, Iphepa SA Ltd acquired a 60% controlling interest in RecycleLab Ltd for a cash
consideration. The acquisition of RecycleLab Ltd also met the definition of acquiring a business, as
defined in IFRS 3 Business Combinations. RecycleLab Ltd is a company that buys wood waste from
timber companies, recycles it and sells it to furniture manufacturing companies. At the acquisition
date, the fairly valued equity of RecycleLab Ltd consisted of ordinary share capital and retained
earnings. You may assume that goodwill arose with the acquisition. All the assets and liabilities of
RecycleLab Ltd were deemed to be fairly valued at the acquisition date and no additional assets,
liabilities or contingent liabilities were identified.
On 1 April 20.16, Iphepa SA Ltd entered into a joint arrangement with three other companies and
acquired a 25% interest in the ordinary share capital of FineWoods Ltd for a cash consideration.
Iphepa SA Ltd exercises joint control over the relevant activities of FineWoods Ltd in terms of the
joint arrangement. FineWoods Ltd was correctly classified as a joint venture in accordance with
IFRS 11 Joint Arrangements and is material to the group. You may assume that no goodwill or
excess arose with this acquisition.
All the assets and liabilities of FineWoods Ltd were deemed to be fairly valued at the acquisition
date with the exception of equipment. On 1 April 20.16 the equipment of FineWoods Ltd had a
carrying amount and fair value of R70 000 and R85 000 respectively. This equipment had a
remaining useful life of four years on 1 April 20.16 and is depreciated on the straight-line method.
No additional assets or liabilities were identified at the acquisition date.
On 1 August 20.16, Iphepa SA Ltd sold equipment with a carrying amount of R120 800 to
FineWoods Ltd for R140 000. The equipment is still included in the equipment of FineWoods Ltd on
28 February 20.17. This equipment had a remaining useful life of three years on 1 August 20.16 and
is depreciated on the straight-line method.
The separate trial balances of the various companies as at 28 February 20.17 are as follows:
Property, plant and equipment
Trade receivables
Inventory
Cash and cash equivalents
Ordinary dividends
(paid on 28 February 20.17)
Ordinary share capital
- 100 000 shares
- 150 000 shares
- 150 000 shares
- 50 000 shares
7% Preference share capital
Retained earnings (1 March 20.16)
Trade payables
Long-term liabilities
Loan from Iphepha SA Ltd
Profit for the year
Imithi
Ltd
RecycleLab
Ltd
FineWoods
Ltd
Dr/(Cr)
R
Dr/(Cr)
R
Dr/(Cr)
R
510 435
158 750
101 770
20 500
398 740
87 750
77 640
10 220
755 630
220 150
120 900
35 700
50 000
20 000
25 000
(100 000)
(350 410)
(130 005)
(105 220)
(25 000)
(130 820)
-
(150 000)
(180 000)
(74 610)
(98 890)
(90 850)
-
(150 000)
(240 000)
(270 350)
(200 810)
(190 500)
(105 720)
-
MJM
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Additional information
1.
It is the accounting policy of all the companies in the Iphepha SA Ltd Group to account for
investments in subsidiaries, investments in associates and investments in joint ventures at
cost in accordance with IAS 27.10(a) in their separate financial statements.
2.
The non-redeemable preference shares of FineWoods Ltd are cumulative and are correctly
classified as an equity instrument in accordance with IAS 32 Financial Instruments:
Presentation. FineWoods Ltd paid preference dividends up until 29 February 20.16.
Iphepa SA Ltd does not have an interest in the preference share capital of FineWoods Ltd.
3.
Profits for all the companies accrued evenly throughout the year.
4.
There were no changes in the issued ordinary or preference share capital of any of the
companies in the group.
5.
The loan to Imithi Ltd amounting to R25 000 was granted by Iphepha SA Ltd on
1 February 20.16. There are no indications that the loan to Imithi Ltd will be repaid in the
foreseeable future.
6.
The net asset value of FineWoods Ltd on 28 February 20.17 amounted to R741 070.
7.
It is the accounting policy of all the companies in the Iphepha SA Ltd Group to account for
property, plant and equipment in accordance with the cost model in terms of IAS 16 Property,
Plant and Equipment.
8.
Iphepa SA Ltd elected to measure non-controlling interests at the proportionate share of the
acquiree’s net identifiable assets at the acquisition date for all acquisitions.
9.
Assume a normal income tax rate of 28% and a Capital Gains Tax inclusion rate of 80%.
Ignore Value Added Tax (VAT) and Dividend Tax.
MJM
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REQUIRED
YOU NOW HAVE 60 MINUTES TO ANSWER THIS QUESTION
Marks
Provide the pro forma journal entries to account for the intragroup sale transaction
of inventory between Iphepha SA Ltd and Imithi Ltd in the consolidated financial
statements of the Iphepha SA Ltd Group for the year ended 28 February 20.17.
Journals relating to deferred taxation and journal narrations are required.
7
Communication skills: presentation and layout
1
(b)
Prepare a reconciliation between the net asset value of FineWoods Ltd and the
carrying amount of the investment in FineWoods Ltd in the consolidated financial
statements of the Iphepha SA Ltd Group for the year ended 28 February 20.17.
6
(c)
Provide the pro forma journal entries to account for the investment in
FineWoods Ltd
in
the
consolidated
financial
statements
of
the
Iphepha SA Ltd Group for the year ended 28 February 20.17. Journals relating to
deferred taxation are also required.
11
(d)
Calculate the carrying amount of the investment in Imithi Ltd that should be
disclosed in the consolidated statement of financial position of the
Iphepha SA Ltd Group as at 28 February 20.17.
6
(e)
Discuss, with reasons, the difference in the accounting treatment of acquisitionrelated costs between investments in associates and investments in subsidiaries.
2
(f)
Assume that Imithi Ltd made a loss amounting to R465 500 for the previous year
ended 29 February 20.16.
6
(a)
Discuss, with reasons and reference to calculations, how this loss of Imithi Ltd
would have been treated in the consolidated financial statements of the
Iphepha SA Ltd Group for the previous year ended 29 February 20.16.
Communication skills: logical flow and conclusion
1
Please note:
•
•
•
Round off all amounts to the nearest Rand.
Comparative figures are not required.
Your answer must comply with International Financial Reporting Standards (IFRS).
MJM
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QUESTION 3 - Suggested solution
(a)
Pro forma journals for the intragroup sale of inventory
Dr
R
J1
J2
J3
J4
(b)
Retained earnings (SCE) (38 500 x 30% x 20/120)
Share of profit of associate (P/L)
Elimination of unrealised profit in opening inventory of
Iphepha SA Ltd
Share of profit of associate (P/L) (1 925 x 28%)
Retained earnings (SCE)
Tax implication of unrealised profit in opening inventory
Share of profit of associate (P/L) (85 000 x 30% x 20/120)
Inventory (SFP)
Elimination of unrealised profit in closing inventory of
Iphepha SA Ltd
Deferred tax (SFP) (4 250 x 28%)
Share of profit of associate (P/L)
Tax implication of unrealised profit in closing inventory
Cr
R
1 925
1 925
(2)
(1)
539
(1)
(1)
4 250
(2)
(1)
1 190
(1)
(1)
Total
Maximum
Communication skills: presentation and layout (narrations)
(10)
(7)
(1)
539
4 250
1 190
Reconciliation between the net asset value of FineWoods Ltd to the investment in
FineWoods Ltd in the financial statements of the Iphepha SA Ltd Group [IFRS 12.B14(b)]
Dr/(Cr)
R
Net assets of joint venture (741 070 (given) – 240 000 (preference
shares))
25% interest in net asset value of joint venture (501 070 x 25%)
Unrealised profit on intragroup sales [(140 000 – 120 800) x 25%]
Realisation of unrealised profit (4 800/3 x 7/12)
Fair value adjustment on equipment at acquisition
[(85 000 – 70 000) x 72% x 25%]
Depreciation on fair value adjustment at acquisition (2 700/4 x 11/12)
Preference dividends in arrears (240 000 x 7% x 25%)
Carrying amount of investment in FineWoods Ltd on 28 February 20.17
501 070
(1)
125 268
(4 800)
933
(1)
(1)
(1)
2 700
(619)
(4 200)
119 282
Total
Maximum
(3)
(1)
(1)
(9)
(6)
OR
MJM
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Dr/(Cr)
R
Net assets of joint venture (given)
Reconciling items:
Unrealised profit on intragroup sales (140 000 – 120 800)
Realisation of unrealised profit (19 200/3 x 7/12)
Fair value adjustment on equipment at acquisition
[(85 000 – 70 000) x 72%]
Depreciation on fair value adjustment at acquisition (10 800/4 x 11/12)
Preference dividends in arrears (240 000 x 7%)
Preference share capital (0% interest)
741 070
(1)
(19 200)
3 733
(1)
(1)
10 800
(2 475)
(16 800)
(240 000)
477 128
(2)
(1)
(1)
(1)
119 282
(1)
119 282
Total
Maximum
(9)
(6)
25% interest in net asset value of joint venture (477 128 x 25%)
Carrying amount of investment in FineWoods Ltd on 28 February 20.17
(c)
Pro forma journals for investment in FineWoods Ltd in group financial statements of
the Iphepha SA Ltd Group
Dr
R
J1
J2
J3
J4
J5
Investment in FineWoods Ltd (SFP)
Other income (P/L) [C4]
Share of profit of joint venture (P/L) [C4]
Equity account joint venture
Other income (P/L) [(140 000 - 120 800) x 25%]
Investment in joint venture (SFP)
Elimination of unrealised profit
Deferred tax (SFP) (4 800 x 28%)
Income tax expense (P/L)
Tax implication on elimination of unrealised profit
Investment in joint venture (SFP) (4 800/3 x 7/12)
Depreciation (P/L)
Realisation of unrealised profit
Income tax expense (P/L) (933 x 28%)
Deferred tax (SFP)
Tax implication on realisation of unrealised profits
Cr
R
13 509
6 250
19 759
4 800
(1)
(1)
(3)
(2)
4 800
1 344
1 344
(1)
(1)
933
(2)
(1)
261
(1)
(1)
Total
Maximum
(14)
(11)
933
261
MJM
102
FAC4864/102
NFA4864/102
ZFA4864/102
COMMENT
The elimination of the unrealised profit on the intragroup sale of inventory is an
adjustment in accordance with IAS 28 while applying the equity method in the group
financial statements. It is therefore important to note that these elimination journals are
therefore not recorded in the separate accounting records of either the investor or the
associate.
By eliminating the unrealised profit on inventory, the carrying amount of the investment
in associate is reduced. However, the tax base of the investment in associate in the
group financial statements will stay the same (the original cost paid by the investor which
will be used for CGT purposes). This difference between the carrying amount and the
tax base gives rise to deferred tax which is recognised in the group financial statements
in the deferred tax line-item.
If the associate is the seller, the carrying amount of inventory in the group is adjusted
with the unrealised profit. As the tax base stays the same, the elimination gives rise to
a temporary difference which is recognised in the group financial statements in the
deferred tax line-item.
(d)
Carrying amount of investment in Imithi Ltd to be disclosed in the consolidated
statement of financial position of the Iphepha SA Ltd Group as at 28 February 20.17
Dr/(Cr)
R
Cost of investment (80 000 (cash) + 30 000 (machinery))
Excess at acquisition [(375 200 x 30%) – 110 000]
110 000
2 560
(1)
(1)
46 809
(1)
(1)
(1)
(1)
(1 969)
(2)
563
(1)
157 963
Total
Maximum
(10)
(6)
Subsidiaries
The acquirer shall account for acquisition-related costs as expenses in the periods in
which the costs are incurred and the services are received [IFRS 3.53]. The
acquisition-related costs will thus not form part of the cost of the investment.
(1)
Equity accounting of Imithi Ltd (156 030 x 30%)
Share of retained earnings (350 410 – 275 200)
Profit for the year (given)
Elimination of intragroup dividends (given)
Unrealised profit on intragroup transfer of machinery – to
beginning of year [[(30 000 - 22 500) x 30%] - (2 250/4 x
6/12)]
Realisation of unrealised profit – current year (2 250/4)
Carrying amount of investment in Imithi Ltd on
28 February 20.17
(e)
156 030
75 210
130 820
(50 000)
Different treatment of acquisition-related costs
Associates
The cost for an associate includes the purchase price and other costs directly
attributable to the acquisition or issue of the asset such as professional fees for legal
services, transfer taxes and other transaction costs [IAS 28.10 (E1 footnote)]. The
acquisition-related costs will thus form part of the cost of the investment.
(1)
(2)
MJM
103
(f)
FAC4864/102
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ZFA4864/102
Discussion regarding loss of associate
If an entity’s share of losses of an associate or a joint venture equals or exceeds its
interest in the associate or joint venture, the entity discontinues recognising its share
of further losses [IAS 28.38].
The interest in an associate or a joint venture is the carrying amount of the investment
in the associate or joint venture determined using the equity method together with any
long-term interests that, in substance, form part of the entity’s net investment in the
associate or joint venture [IAS 28.38].
An item for which settlement is neither planned nor likely to occur in the foreseeable
future is, in substance, an extension of the entity’s investment in associate or joint
venture [IAS 28.38].
As there are no indications that the loan from Iphepha SA Ltd to Imithi Ltd will be repaid
in the foreseeable future, the loan forms part of the net investment in the associate.
(1)
The interest in the associate thus amounts to R135 591 (R110 000 + R25 000 + R2 560
– R1 969).
(2)
The loss of Imithi Ltd attributable to Iphepha SA Ltd amounts to R69 825 (R465 500 x
6/12 x 30%). This loss is limited to the interest in Imithi Ltd of R135 591. The loss of
R69 825 is less than the interest in Imithi Ltd and therefore the total loss of R69 825
will be recognised.
(2)
Losses recognised using the equity method in excess of the entity’s investment in
ordinary shares are applied to the other components of the entity’s interest in an
associate or a joint venture in the reverse order of their seniority (i.e. priority in
liquidation) [IAS 28.38].
The total loss of R69 825 will be applied to the investment in the ordinary shares.
(1)
(6)
(1)
Communication skills: logical flow and layout
CALCULATIONS
C1.
Analysis of owners’ equity of RecycleLab Ltd
Total
At acquisition
Share capital
Retained earnings
Equity represented by goodwill
Consideration and NCI
Current year
Profit for the year
Dividends paid
150 000
180 000
330 000
2 000
332 000
90 850
(20 000)
402 850
Iphepha SA Ltd
(60%)
At
Since
198 000
2 000
200 000
NCI
132 000
132 000
54 510
(12 000)
42 510
36 340
(8 000)
160 340
MJM
104
FAC4864/102
NFA4864/102
ZFA4864/102
C2. Pro forma journals for investment in RecycleLab Ltd in consolidated financial
statements of the Iphepha SA Ltd Group (for completeness purposes only)
Cr
R
Dr
R
J1
J2
J3
C3.
Ordinary share capital (SCE)
Retained earnings (SCE)
Goodwill (SFP)
Investment in RecycleLab Ltd (SFP)
Non-controlling interests (SFP/SCE) [C1]
Elimination of at acquisition equity
Non-controlling interests (P/L) [C1]
Non-controlling interests (SFP)
Recognition of NCI’s interest in profit for the year
Other income (P/L) [C1]
Non-controlling interests (SFP/SCE)
Dividends paid (SCE)
Elimination of intragroup dividends
150 000
180 000
2 000
200 000
132 000
36 340
36 340
12 000
8 000
20 000
Total profit of joint venture (FineWoods Ltd)
Profit from 1/4/20.16 – 28/2/20.17 (105 720 x 11/12)
Preference dividend (240 000 x 7% x 11/12)
Elimination of intragroup dividends (given)
(96 910)
15 400
25 000
(56 510)
[1]
[1]
[1]
Equity account FineWoods Ltd (56 510 x 25%)
Depreciation on fair value adjustment at acquisition (from part (b))
Unrealised profit on intragroup sales [4 800 (from part (b)) x 72%]
Realisation of unrealised profit [933 (from part (b)) x 72%]
(14 128)
619
3 456
(672)
(10 725)
[1]
[1]
[1]
[1]
[7]
C4.
Analysis of owners’ equity of FineWoods Ltd (ordinary share capital)
Total
At acquisition
Ordinary share capital
Retained earnings
Profit (1/3/20.16 – 1/4/20.16) (105 720 x 1/12)
Preference dividends in arrears (240 000 x 7% x 1/12)
Equipment [(85 000 – 70 000) x 72%]
150 000
270 350
8 810
(1 400)
10 800
438 560
Goodwill/Excess (given)
Consideration
Current year
Profit (1/4/20.16 – 28/2/20.17) (105 720 x 11/12)
Depreciation on equipment (10 800/4 x 11/12)
Preference dividends (240 000 x 7% x 11/12)
Total current year profit
Dividends paid
Iphepha SA Ltd
(25%)
At
Since
109 640
109 640
96 910
(2 475)
(15 400)
79 035
19 759
(25 000)
492 595
(6 250)
13 509
MJM
105
FAC4864/102
NFA4864/102
ZFA4864/102
C5. Analysis of owners’ equity of Imithi Ltd
Total
At acquisition
Share capital
Retained earnings
100 000
275 200
375 200
Excess
Consideration (80 000 + 30 000)
Since acquisition
Retained earnings (350 410 – 275 200)
Current year
Profit of Imithi Ltd
Dividends paid
Iphepha SA Ltd
(30%)
At
Since
112 560
(2 560)
110 000
75 210
22 563
130 820
(50 000)
531 230
39 246
(15 000)
46 809
MJM
106
FAC4864/102
NFA4864/102
ZFA4864/102
QUESTION 4
40 marks
YOU HAVE 15 MINUTES TO READ THIS QUESTION
This question consists of two independent parts.
PART I
30 marks
Mouth Watering Meats Ltd is a South African company that specialises in the processing and
packaging of a variety of meat products. The company is listed on the Johannesburg Stock
Exchange.
One of Mouth Watering Meats Ltd’s key suppliers filed for liquidation in 20.16 and as a result, the
management of Mouth Watering Meats Ltd agreed to acquire strategic shareholdings in certain of
its other key suppliers. These shareholdings will ensure stability and sustainability in the company’s
procurement process.
The details of these acquisitions are listed below:
Boasting Beef Ltd
Mouth Watering Meats Ltd acquired 45 000 ordinary shares in Boasting Beef Ltd on 1 May 20.17 for
a share consideration of 10 000 ordinary shares and a cash consideration of R200 000.
Boasting Beef Ltd is also listed on the Johannesburg Stock Exchange and its main business is the
sourcing and distribution of beef to an extensive retail client base. Mouth Watering Meats Ltd
exercises significant influence over the financial and operating policy decisions of Boasting Beef Ltd
from the acquisition date.
The equity of Boasting Beef Ltd consisted of the following on 1 March 20.17:
R
Ordinary share capital (100 000 shares)
Retained earnings
100 000
552 800
652 800
The equity of Boasting Beef Ltd consisted only of ordinary share capital and retained earnings at the
acquisition date. All the assets and liabilities of Boasting Beef Ltd were deemed to be fairly valued
at the acquisition date, except for the company’s warehouses which had a carrying amount of
R590 000 and a fair value of R750 000 on 1 May 20.17. The warehouses had a remaining useful
life of six years at the acquisition date. The aforementioned warehouses have been correctly
classified as owner-occupied property by Boasting Beef Ltd.
On 1 September 20.17, Mouth Watering Meats Ltd sold one of its machines used in its meat
packaging process, to Boasting Beef Ltd for R145 000. The carrying amount of this machine was
R120 000 and its remaining useful life was 4 years at the date of sale. This machine have been used
in the beef packaging process of Boasting Beef Ltd from 1 September 20.17.
Boasting Beef Ltd paid a management fee of R50 000 to Mouth Watering Meats Ltd during the
20.18 financial year.
MJM
107
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NFA4864/102
ZFA4864/102
As part of the year end audit procedures performed by the external auditors of Boasting Beef Ltd, it
was identified that financial assets acquired by the company on 22 June 20.17 for an amount of
R300 000, had a fair value of R370 000 on 28 February 20.18. This fair value adjustment has not
yet been recognised in the separate accounting records of Boasting Beef Ltd.
Boasting Beef Ltd’s profit for the year ended 28 February 20.18 amounted to R551 700.
Cheeky Chickens Ltd
Mouth Watering Meats Ltd is the controlling shareholder of Cheeky Chickens Ltd, a company that
specialises in the production of chicken livestock. This controlling interest was acquired on
1 January 20.17 when Mouth Watering Meats Ltd acquired 65% of the ordinary share capital of
Cheeky Chickens Ltd for a cash consideration of R810 000. At the acquisition date, the fairly valued
equity of Cheeky Chickens Ltd consisted only of ordinary share capital and retained earnings which
amounted to R225 000 and R927 800 respectively.
On 1 January 20.17, Cheeky Chickens Ltd had a non-cancellable order backlog for 60 ton chicken
feed. Chicken feed is sold at R6 000 per ton at a profit mark-up of 20% on cost. This order backlog
will be cleared in 2 months’ time (30 ton per month).
All the assets and liabilities of Cheeky Chickens Ltd were deemed to be fairly valued and no
additional assets, liabilities or contingent liabilities were identified at the acquisition date.
From 12 June 20.17, Cheeky Chickens Ltd has been selling chicken feed to Boasting Beef Ltd on a
monthly basis at a profit mark-up of 40% on cost. Boasting Beef Ltd then uses the purchased
chicken feed to supplement its feed to newly born calves. Cheeky Chickens Ltd’s total sales to
Boasting Beef Ltd for the 20.18 financial year amounted to R458 000. A total inventory value of
R94 000 was still on hand in the records of Boasting Beef Ltd at 28 February 20.18.
Cheeky Chickens Ltd’s profit for the current financial year amounted to R430 900 (20.17: R371 900).
Additional information
1.
All the companies in the Mouth Watering Meats Ltd Group have a 28 February year end.
2.
The quoted closing share price for the ordinary shares of Mouth Watering Meats Ltd was
R12,20 per share on 1 May 20.17.
3.
It is the accounting policy of Mouth Watering Meats Ltd to account for investments in
subsidiaries and investments in associates at cost in accordance with IAS 27.10(a) in its
separate financial statements.
4.
It is the accounting policy of all the companies in the Mouth Watering Meats Ltd Group to
account for all other investments in financial assets in accordance with IFRS 9 Financial
Instruments. All the companies in the Mouth Watering Meats Ltd Group irrevocably elected to
present subsequent changes in the fair value of these investments in other comprehensive
income in a mark-to-market reserve.
5.
Assume that the profits of each of the companies in the Mouth Watering Meats Ltd Group
accrued evenly throughout the respective years.
6.
An appropriate pre-tax discount rate is 9% per annum, compounded monthly.
MJM
108
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7.
There were no changes in the issued ordinary share capital of any of the companies in the
group during the past two years.
8.
It is the accounting policy of all the companies in the Mouth Watering Meats Ltd Group to
account for property, plant and equipment in accordance with the cost model in terms of IAS 16
Property, Plant and Equipment and to provide depreciation by applying the straight-line
method.
9.
Mouth Watering Meats Ltd elected to measure non-controlling interests at the proportionate
share of the acquiree’s net identifiable assets at the acquisition date for all acquisitions.
10.
Assume an income tax rate of 28% and a Capital Gains Tax inclusion rate of 80%.
Ignore Value Added Tax (VAT) and Dividend Tax.
11.
The acquisition of the subsidiary also met the definition of acquiring a business, as defined in
IFRS 3 Business Combinations.
PART II
10 marks
Edcor Ltd is a company listed on the Johannesburg Stock Exchange in the retail sector. Edcor Ltd
intends to increase its market capitalisation and is in the process of acquiring a few companies that
will help increase profits, which will increase share price and therefore increase its market
capitalisation.
Esquare Ltd
Esquare Ltd is a small retail company started by three enterprising recently qualified students.
The company’s business processes are expertly managed and therefore show great potential for
scalability.
Edcor Ltd is a party to a forward contract to acquire the majority of the shares in Esquare Ltd.
One share equals one voting right. The forward contract's settlement date is in 25 days. Esquare
Ltd has annual shareholder meetings at which decisions are made to direct the relevant activities.
The next scheduled shareholders’ meeting is in nine months. However, shareholders that
individually or collectively hold at least 10% of the voting rights can call a special meeting to change
the existing policies over the relevant activities, but a requirement to give notice to the other
shareholders means that such a meeting cannot be held for at least 30 days. Policies over the
relevant activities can be changed only at special or scheduled shareholders' meetings.
OneShop Ltd
Edcor Ltd intends to acquire a 55% interest in OneShop Ltd. Edcor Ltd will have the right to restrict
OneShop Ltd from undertaking activities that could significantly change the credit risk of
OneShop Ltd to the detriment of Edcor Ltd. Another entity, Dido Ltd, will have existing rights that will
provide them with the right to direct the relevant activities of OneShop Ltd.
All the companies have a 28 February year end.
MJM
109
FAC4864/102
NFA4864/102
ZFA4864/102
REQUIRED
YOU NOW HAVE 60 MINUTES TO ANSWER THIS QUESTION
Marks
PART I
Provide
the
pro
forma
consolidation
journal
entries
of
the
Mouth Watering Meats Ltd Group for the year ended 28 February 20.18. Journal entries
relating to deferred taxation are also required.
29
Communication skills: presentation and layout
1
Please note:
•
•
•
•
•
The at acquisition elimination journal is not required.
Round off all amounts to the nearest Rand.
Journal narrations are required.
Show all your calculations.
Your answer must comply with International Financial Reporting Standards (IFRS).
PART II
(a)
(b)
Discuss, with reasons, whether Edcor Ltd has power over Esquare Ltd.
Discuss, with reasons, whether Edcor Ltd will have control over OneShop Ltd.
Communication skills: logical flow and conclusion
5
4
1
Please note:
•
Your answer must comply with International Financial Reporting Standards (IFRS).
MJM
110
FAC4864/102
NFA4864/102
ZFA4864/102
QUESTION 4 - Suggested solution
PART I
Pro forma consolidation journal entries for the year ended 28 February 20.18
BOASTING BEEF LTD
Dr
R
J1
J2
J3
J4
J5
J6
Investment in associate (SFP) [C1]
Share of profit of associate (P/L)
Recognition of excess at acquisition
Investment in associate (SFP)
Share of profit of associate (P/L) [C1]
Share of other comprehensive income of associate (OCI)
(((370 000 – 300 000) x (1 – (28% x 80%))) x 45)
Recognition of share of profit and share of OCI of associate for
the year
Other income (profit on sale of machinery) (P/L)
((145 000 – 120 000) x 45%)
Investment in associate (SFP)
Elimination of unrealised profit in machinery
Deferred tax (SFP) (11 250 x 28%)
Income tax expense (P/L)
Tax effect of elimination of unrealised profit in machinery
Investment in associate (SFP) (11 250 / 4 x 6/12)
Cost of sales (P/L)
Realisation of intragroup profit on machinery
Income tax expense (P/L) (1 406 x 28%)
Deferred tax (SFP)
Tax effect of realisation of intragroup profit on machinery
Cr
R
64 978
64 978
(5)
(1)
199 688
(2)
24 444
(2)
11 250
(2)
(1)
3 150
(1)
(1)
1 406
(2)
(1)
224 132
11 250
3 150
1 406
394
(1)
394
CHEEKY CHICKENS LTD
J7
J8
J9
J10
J11
Retained earnings (SCE)
Deferred tax (SFP) (59 332 x 28%)
Accumulated amortisation (SFP) (59 332 [C3] x 2/2)
Amortisation on intangible asset (order backlog) for previous
year
Retained earnings (SCE)
[[(371 900 x 2/12) – 42 719 (J7)] x 35%]
Non-controlling interests (SFP)
Non-controlling interests’ share of since acquisition reserves
Revenue (P/L) (94 000 x 45%)
Cost of sales (P/L) (94 000 x 100/140 x 45%)
Investment in associate (SFP) (balancing)
Elimination of unrealised profit in closing inventories of
Boasting Beef Ltd
Deferred tax (SFP) [(42 300 – 30 214) x 28%]
Income tax expense (P/L)
Tax effect of elimination of unrealised profit in closing
inventories
Non-controlling interests (P/L) [C2]
Non-controlling interests (SFP)
Non-controlling interests’ share of current year profit
42 719
16 613
59 332
(1)
(1)
(3)
6 743
(2)
(1)
30 214
12 086
(1)
(1)
(1)
3 384
(1)
(1)
147 769
(2)
(1)
6 743
42 300
3 384
147 769
Total (36)
Maximum (29)
Communication skills: presentation and layout (1)
MJM
111
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NFA4864/102
ZFA4864/102
COMMENT
You will notice that the NCI is shown for Cheeky Chickens Ltd, but it is not shown for
Boasting Beef Ltd. This is because the investment in Boasting Beef Ltd is an investment
in associate and the investment in Cheeky Chickens Ltd an investment in subsidiary.
Remember that the starting point for a consolidation is 100% the trial balance of the
parent plus 100% the trial balance of the subsidiary (Cheeky Chickens Ltd). If the
subsidiary is not wholly owned, then the parent will still add 100% but allocate the noncontrolling interests their share through three line-items namely NCI (P/L), NCI (OCI)
and NCI (SCE/SFP).
However, for an associate, the starting point is only the trial balance of the parent.
The equity method is then applied to recognise the investor’s share of the P/L and OCI
using three line-items namely Share of P/L of associate, share of OCI of associate and
Investment in associate (SFP).
There is therefore no NCI to recognise for an investment in associate.
EXAM TECHNIQUE
Students must remember to classify their journals (i.e. SFP, OCI, SCE, SFP, P/L) in
order to earn the available marks.
The at acquisition elimination journal was not required. Students must read carefully to
ensure they don’t waste valuable time by providing information that was not required.
PART II
(a)
Discuss whether Edcor Ltd has power over Esquare Ltd
Definition of power
An investor has power over an investee when the investor has existing rights that give it the
current ability to direct the relevant activities, i.e. the activities that significantly affect the
investee’s returns (IFRS 10.10).
OR
To have power over an investee, an investor must have existing rights that gives it the current
ability to direct relevant activities. For the purpose of assessing power, only substantive rights
and rights that are not protective shall be considered (IFRS 10.B9).
Existing rights
For a right to be substantive, the holder must have the practical ability to exercise that right
(IFRS 10.B22).
When assessing control, an investor considers its potential voting rights as well as potential
voting rights held by other parties to determine whether it has power (IFRS 10.B47).
The fact that it takes 25 days before Edcor Ltd can exercise its voting rights does not stop
Edcor Ltd from having the current ability to direct the relevant activities from the moment
Edcor Ltd acquires the forward contract.
(1)
(1)
MJM
112
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NFA4864/102
ZFA4864/102
Edcor Ltd's forward contract is a substantive right that gives them the current ability to direct
the relevant activities because a special meeting cannot be held for at least 30 days, but
Edcor Ltd can settle the forward contract in 25 days.
(1)
The existing shareholders are unable to change the existing policies over the relevant
activities because a special meeting cannot be held for at least 30 days, at which point the
forward contract will have been settled.
(1)
Conclusion
An investor that holds more than half of the voting rights of an investee has power unless
another entity has existing rights that provide that entity with the right to direct the relevant
activities (IFRS 10.B35 -. B37).
Edcor Ltd will have the majority shares and one share equals one voting right.
(1)
Edcor Ltd has power over Esquare Ltd because it holds substantive potential voting rights
that give them the current ability to direct the relevant activities.
Total
Maximum
(1)
(6)
(5)
(b)
Discuss whether Edcor Ltd will have control over OneShop Ltd
Definition of control
An investor controls an investee when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over
the investee (IFRS 10.6).
Existing rights
For an investor that holds more than half of the voting rights of an investee, to have power over
an investee, the investor's voting rights must be substantive (IFRS 10.B36).
Edcor Ltd will hold 55% of OneShop Ltd and thus have a majority of the voting rights, but
Edcor Ltd's voting rights are not substantive.
(1)
(1)
However, an investor that holds only protective rights does not have power over an investee,
and consequently does not control the investee (IFRS 10.14).
Protective rights relate to fundamental changes to the activities of an investee (IFRS 10.B26).
Protective rights are designed to protect the interests of their holder without giving that party
power over the investee to which those rights relate (IFRS 10.B27).
Conclusion
Edcor Ltd only has rights that restrict OneShop Ltd from undertaking activities that could change
the credit risk of OneShop Ltd to the detriment (disadvantage) of Edcor Ltd. Although Edcor Ltd
will hold the majority of the voting rights, they will only hold protective rights and thus do not
have control over OneShop Ltd.
Total
Maximum
Communication skills: logical flow and conclusion
(1)
(2)
(5)
(4)
(1)
MJM
113
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ZFA4864/102
CALCULATIONS
C1.
Analysis of owners’ equity of Boasting Beef Ltd
Total
At acquisition – 1 May 20.17
Share capital
Retained earnings (1 March 20.17)
Profit up to acquisition date (2 months)
(551 700 x 2/12)
Revaluation surplus (750 000 – 590 000)
Deferred tax (160 000 x 28%)
[1]
100 000
552 800
91 950
160 000
(44 800)
859 950 386 978
(64 978)
322 000
[1]
[1]
[1]
459 750
[1]
(16 000)
443 750
199 688
[1]
[2]
54 320
1 358 020
24 444
224 132
Excess
Consideration [R200 000 + (10 000 x 12,20)]
Since acquisition - current year
Profit since acquisition (10 months)
(551 700 x 10/12)
Additional depreciation of revaluation
[((160 000 – 44 800) / 6) x 10/12]
Total current year profit
Current year OCI: Mark-to-market reserve
[(370 000 – 300 000) x (1 – (28% x 80%))]
C2.
Mouth Watering
Meats Ltd
45%
At
Since
[1]
[5]
Analysis of owners’ equity of Cheeky Chickens Ltd
Total
At acquisition – 1 January 20.17
Share capital
Retained earnings
Intangible asset (order backlog)
(59 332 [C3] x 72%)
Goodwill
Consideration and NCI
Mouth Watering
Meats Ltd
65%
At
Since
NCI
35%
225 000
927 800
42 719
1 195 519
32 913
1 228 432
777 087
32 913
810 000
418 432
418 432
Since acquisition
Retained earnings (371 900 x 2/12)
Amortisation (42 719 x 2/2)
Total retained earnings
61 983
(42 719)
19 264
12 522
6 742
Current year
Profit for the year (430 900 – 42 300
(J9) + 30 214 (J9) + 3 384 (J10))
422 198
274 429
147 769
1 669 894
286 951
572 943
[2]
MJM
114
C3.
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Order backlog at acquisition
HP 10BII
1. 2nd F C (Clear All)
2. 12 2nd F PMT
3. 6 000 x 20/120 x 30 PMT
4. 9 I/YR
5. 2 N
6. PV = 59 332
SHARP EL-733A
1. 2nd FC (Clear All)
2. 3. 6 000 x 20/120 x 30 PMT
4. 9/12 i
5. 2 n
6. 0 FV
7. Comp PV = 59 332
SHARP EL-738
1. 2ndF MODE (Clear All)
2. 3. 6 000 x 20/120 x 30 PMT
4. 9/12 I/Y
5. 2 N
6. 0 FV
7. Comp PV = 59 332
[1]
[1]
[1]
[3]
COMMENT
Order backlog
The acquiree had an order backlog that, in accordance with IFRS 3.IE25, meets the
contractual-legal criterion even if the purchase or sales orders can be cancelled.
The order backlog therefore had to be recognised as an intangible asset.
MJM
115
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QUESTION 5
40 marks
YOU HAVE 15 MINUTES TO READ THIS QUESTION
Top Blinds Ltd is a company that specialises in the manufacturing and installation of blinds and
security shutters. Top Blinds Ltd is listed on the Johannesburg Stock Exchange and has a
31 December year end.
On 1 March 20.18, Top Blinds Ltd acquired a 55% controlling interest in Bamboo Ltd. Bamboo Ltd
supplies eco-friendly and sustainable products to manufacture bamboo blinds.
Top Blinds Ltd will be settling the purchase price at the dates as specified below:
On 1 March 20.18
On
28 February 20.20
• R750 000 in cash.
• Issue of 25 000 ordinary shares in Top Blinds Ltd to the shareholders of
Bamboo Ltd.
• Issue of 70 000 mandatory redeemable, 8% cumulative R2 preference
shares in Top Blinds Ltd. The preference shares are redeemable three
years after the acquisition date, at a premium of 5% on the face value.
• Financial assets owned by Top Blinds Ltd, with a carrying amount of
R350 000 and a fair value of R420 000, transferred to the shareholders
of Bamboo Ltd.
• Included in the R750 000 cash payment is R18 500 share issue costs
related to the 25 000 issued ordinary shares and R22 300 acquisitionrelated costs in respect of valuations and lawyers’ fees. Top Blinds Ltd
expensed these amounts in its separate financial statements.
• R300 000 cash depending on the following:
• The profit before tax of Bamboo Ltd for the year ended
28 February 20.20 increases by at least 5%. The fair value of this
obligation was deemed to be R165 000 on 1 March 20.18 and
R185 000 on 31 December 20.18.
All the assets and liabilities of Bamboo Ltd were deemed to be fairly valued at the acquisition date
with the exception of the following:
•
•
•
Inventory was overvalued with R72 000. At 31 December 20.18, 70% of the inventory was
sold to unrelated third parties.
Bamboo Ltd has a unique customer list that consists of detailed information about customers.
The customer list’s terms of confidentiality prohibits Bamboo Ltd from selling this list. The fair
value of the customer list on 1 March 20.18 amounted to R330 000. The customer list has an
indefinite useful life.
Bamboo Ltd manufactures bamboo blinds that have a unique shape. Before the date of
acquisition, Bamboo Ltd incurred development costs of R220 000 concerning the development
of a trade dress (unique colour, shape and package design) for these blinds. Bamboo Ltd
expensed these development costs when incurred. The registration of the trade dress was not
finalised at the date of acquisition and the fair value was therefore estimated as R245 000 on
1 March 20.18. On 1 March 20.18, it is expected that this trade dress will have a useful life of
five years. The trade dress was registered on 31 May 20.18. Bamboo Ltd obtained the official
valuation report on this day which indicated that the fair value of the trade dress amounted to
R280 000.
MJM
116
•
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On 1 March 2018, a liability with a fair value of R195 000 was correctly recognised in the
consolidated financial statements of the Top Blinds Ltd Group in accordance with IFRS 3.
This liability relates to a legal claim instituted against Bamboo Ltd. The previous shareholders
agreed to reimburse Top Blinds Ltd for 45% of the damages payable if the legal claim against
Bamboo Ltd is successful. The claim will not be deductible for taxation purposes should it be
successful. The fair value of the contingent liability remained unchanged at year end.
No additional assets, liabilities or contingent liabilities were identified at the acquisition date.
Bamboo Ltd revalued their investments in equity instruments on 28 February 20.18. This was the
only revaluation on investments in equity instruments that Bamboo Ltd performed during the current
financial year.
Since the date of acquisition, Top Blinds Ltd has been selling inventory to Bamboo Ltd at a profit of
20% on cost. Inventory purchased from Top Blinds Ltd, still on hand at year end amounted to
R185 700. Total sales from Top Blinds Ltd to Bamboo Ltd for the current financial year amounted to
R320 000. Included in the separate records of both Top Blinds Ltd and Bamboo Ltd on
31 December 20.18 is an amount of R77 800 that Bamboo Ltd still owes Top Blinds Ltd for inventory
purchased on 31 December 20.18.
On 1 August 20.18, Top Blinds Ltd sold equipment with a carrying amount of R110 500 to
Bamboo Ltd for R150 000. The equipment had a remaining useful life of three years on that date.
Safe Shutters Ltd
Safe Shutters Ltd is a well-established company that manufactures quality security shutters.
On 1 July 20.17, Top Blinds Ltd acquired a 30% interest in Safe Shutters Ltd for a cash consideration
of R200 000 as well as the transfer of equipment. The equipment transferred to Safe Shutters Ltd
at the date of acquisition had a carrying amount of R90 000 and a fair value of R115 000 on
1 July 20.17. This equipment had a remaining useful life of three years on 1 July 20.17. In addition
to the cash payment of R200 000, Top Blinds Ltd also paid lawyers’ fees of R10 000 on 1 July 20.17.
From 1 July 20.17, Top Blinds Ltd exercised significant influence over the financial and operating
policy decisions of Safe Shutters Ltd. Safe Shutters Ltd’s equity consisted of the following on
1 July 2017:
R
Ordinary share capital (100 000 shares)
Retained earnings
Revaluation surplus
100 000
783 160
250 400
1 133 560
All the assets and liabilities of Safe Shutters Ltd were deemed to be fairly valued at the acquisition
date and no additional assets or liabilities were identified.
During the current financial year, Safe Shutters Ltd sold inventory to Top Blinds Ltd at a gross profit
percentage of 25%. Included in Top Blinds Ltd’s inventory on hand on 31 December 20.18 is
inventory amounting to R130 000 in respect of purchases from Safe Shutters Ltd.
MJM
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ABC Logistics Ltd
Top Blinds Ltd is in the process of incorporating a new company, ABC Logistics Ltd. In accordance
with its proposed Memorandum of Incorporation, ABC Logistics Ltd’s agreed purpose will be to
perform administrative and operational activities necessary to run a delivery scheme for
Top Blinds Ltd. In accordance with this scheme, 100 employees who had been employed by
Top Blinds Ltd, will become shareholders and employees of ABC Logistics Ltd. Top Blinds Ltd plans
to acquire 40% of the ordinary share capital and voting rights of ABC Logistics Ltd. The remaining
60% of the ordinary share capital will be allocated equally between the 100 employees. Each
ordinary share confers one voting right to the shareholder. The 100 employees have an agreement
to vote in unison.
The relevant activities of ABC Logistics Ltd will include the following:
•
•
•
Arranging financing in order to purchase 50 delivery vehicles to be used;
Purchase of the delivery vehicles to be used by the employees; and
Insurance for and maintenance of the delivery vehicles.
As per the Memorandum of Incorporation of ABC Logistics Ltd, the Managing Director can make all
decisions relating to the operations of the company (including those relating to the activities
described above), except for the selection of insurance and maintenance companies that should be
used by ABC Logistics Ltd. Top Blinds Ltd will have the right to select the insurance and
maintenance companies which ABC Logistics Ltd should use.
Mr J Jonas, one of the employees, was elected Managing Director by a majority vote by the other
employees.
Other financial information
The following is an extract from the separate trial balances of the different companies as at
31 December 20.18:
Top Blinds
Bamboo
Safe Shutters
Ltd
Ltd
Ltd
R
R
R
Dr/(Cr)
Dr/(Cr)
Dr/(Cr)
Ordinary share capital
Preference share capital
Retained earnings (1 January 20.18)
Mark-to-market reserve (1 January 20.18)
Revaluation surplus (1 January 20.18)
Property, plant and equipment
Investments in equity instruments
Inventory
Cash and cash equivalents
Trade receivables
Trade payables
Long-term borrowings
Deferred tax
Profit after tax for the year
Fair value adjustments on investments in equity
instruments
Gain on revaluation of land
Dividends paid on 31 December 20.18
(631 500)
(252 500)
(2 842 900)
(589 420)
(384 100)
3 000 580
672 950
944 550
286 340
899 450
(746 020)
(684 651)
(87 530)
(1 800 710)
(200 000)
(2 397 746)
(333 060)
2 391 790
765 800
880 600
158 530
410 285
(389 650)
(100 540)
(120 485)
(1 234 824)
(100 000)
(940 610)
(250 400)
1 219 810
645 700
80 690
280 440
(200 900)
(133 130)
(50 800)
(445 800)
(240 600)
(170 000)
500 000
(150 700)
320 000
(280 000)
175 000
MJM
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Additional information
1.
It is the accounting policy of Top Blinds Ltd to account for investments in subsidiaries and
investments in associates at cost in accordance with IAS 27.10(a) in its separate financial
statements.
2.
It is the accounting policy of all the companies in the Top Blinds Ltd Group to account for all
other investments in equity instruments in accordance with IFRS 9 Financial Instruments.
All the companies in the Top Blinds Ltd Group irrevocably elected to present subsequent
changes in the fair value of these investments in other comprehensive income in a mark-tomarket reserve.
3.
All the companies in the Top Blinds Ltd Group have a 31 December year end.
4.
The fair value of the ordinary shares of Top Blinds Ltd was R22 per share on 1 March 20.18.
5.
Assume that the profits of all the companies in the Top Blinds Ltd Group accrued evenly
throughout the respective years.
6.
An appropriate pre-tax discount rate is 9% per annum, compounded annually.
7.
You can correctly assume that a consolidated deferred tax liability was recognised in the
consolidated financial statements of the Top Blinds Ltd Group for the year ended
31 December 20.18.
8.
There were no changes in the issued ordinary share capital of Bamboo Ltd or
Safe Shutters Ltd.
9.
It is the accounting policy of all the companies in the Top Blinds Ltd Group to account for plant
and equipment according to the cost model and land according to the revaluation model in
terms of IAS 16 Property, Plant and Equipment.
10.
Top Blinds Ltd elected to measure non-controlling interests at the proportionate share of the
acquiree’s net identifiable assets at the acquisition date for all acquisitions.
11.
Assume an income tax rate of 28% and a Capital Gains Tax inclusion rate of 80%. Ignore
Value Added Tax (VAT) and Dividend Tax.
12.
The acquisitions of the subsidiaries also met the definition of acquiring a business, as defined
in IFRS 3 Business Combinations.
MJM
119
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ZFA4864/102
REQUIRED
YOU NOW HAVE 60 MINUTES TO ANSWER THIS QUESTION
Marks
Prepare only the assets section of the consolidated statement of financial position
of the Top Blinds Ltd Group as at 31 December 20.18.
29
Communication skills: presentation and layout
1
(b)
Discuss, with reasons, how the customer list of Bamboo Ltd should be accounted
for in the consolidated financial statements of the Top Blinds Ltd Group.
3
(c)
Discuss, with reasons, whether Top Blinds Ltd will have power over
ABC Logistics Ltd.
6
Communication skills: logical flow and conclusion
1
(a)
Please note:
•
•
•
Round off all amounts to the nearest Rand.
Show all your calculations.
Your answer must comply with International Financial Reporting Standards (IFRS).
MJM
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QUESTION 5 - Suggested solution
(a)
Prepare only the asset section of the consolidated statement of financial position
TOP BLINDS LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.18
R
ASSETS
Non-current assets
Property, plant and equipment [C1]
Investments in equity instruments (672 950 + 765 800)
Intangible assets [C2]
Investment in associate [C3]
Goodwill [C4]
5 358 356
1 438 750
233 333
548 793
154 660
7 733 892
(3)
(1)
(2)
(10)
(15)
1 231 935
1 762 850
444 870
87 750
3 527 405
11 261 297
Total
Maximum
Communication skills: presentation and layout
(1)
(3)
Current assets
Trade receivables [C7]
Inventory [C8]
Cash and cash equivalents (286 340 + 158 530)
Indemnification asset (195 000 x 45%)
Total assets
(1)
(36)
(29)
(1)
EXAM TECHNIQUE
It is important to remember to transfer the answer you get in the calculations to your
solution. Marks were not allocated in this question to students who calculated goodwill
but did not reflect it in the solution. Furthermore, only the asset section was required
therefore do not waste time completing other sections.
(b)
Discuss, with reasons, how the customer list of Bamboo Ltd should be accounted for
in the consolidated financial statements of the Top Blinds Ltd Group
Customer lists
Top Blinds Ltd shall recognise, separately from goodwill, the identifiable intangible assets
acquired in a business combination (IFRS 3.B31).
(1)
Top Blinds Ltd has a unique customer list and as customer lists are frequently licensed, it meets
the separability criterion. It is also standard practice in the industry to license customer lists.
(1)
The customer list of Bamboo Ltd’s terms of confidentiality prohibits Bamboo Ltd from selling
this list. This customer list would thus not meet the separability criterion, as the list cannot be
sold (IFRS 3.B33).
Top Blinds Ltd will thus not account for this list in its consolidated financial statements, as it is
not identifiable and does not meet the separability or contractual-legal criterion.
Total
Maximum
(1)
(1)
(4)
(3)
MJM
121
(c)
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Discuss, with reasons, whether Top Blinds Ltd will have power over ABC Logistics Ltd
Power over the investee
Top Blinds Ltd will have power over ABC Logistics Ltd when they have existing rights that give
them the current ability to direct the relevant activities, i.e. the activities that significantly affect
ABC Logistics Ltd’ returns.
Relevant activities
ABC Logistics Ltd will be incorporated with the ability to conduct the following relevant
activities:
•
Arranging financing to fund the purchase of operating assets
•
Acquisition of operating assets to be used by the employees
•
Insurance for and maintenance of the operating assets
(1)
(1)
Existing rights
Although Top Blinds Ltd has voting rights, it does not possess a majority of voting rights as
they plan to only acquire 40% of the ordinary share capital and voting rights. Top Blinds Ltd
can however have power even if it holds less than a majority of the voting rights.
(1)
As per the Memorandum of Incorporation of ABC Logistics Ltd, Mr J Jonas, the Managing
Director, can make all decisions relating to the operations of the company except for the
selection of insurance and maintenance companies that should be used by ABC Logistics Ltd,
which resides with Top Blinds Ltd.
(1)
The design of ABC Logistics Ltd therefore confers the significant decision-making rights over
the majority of relevant activities to the managing director and not to Top Blinds Ltd. The
managing director is appointed by the employees and not by Top Blinds Ltd.
(1)
The rights held by Top Blinds Ltd in respect of insurance and maintenance service providers
is not seen as key in comparison to the other relevant activities and appears to be a protective
right in order to ensure that the operating assets of ABC Logistics Ltd are properly maintained.
(1)
Conclusion
Top Blinds Ltd will not have power over ABC Logistics Ltd as they will not have existing rights
to direct the relevant activities of ABC Logistics Ltd.
Total
Maximum
Communication skills: logical flow and conclusion
(1)
(7)
(6)
(1)
CALCULATIONS
C1.
Property, plant and equipment
Top Blinds Ltd plus Bamboo Ltd (3 000 580 + 2 391 790)
Unrealised profit in closing equipment of Bamboo Ltd
(150 000 – 110 500)
Realisation of unrealised profit in equipment (39 500/3 x 5/12)
5 392 370
[1]
(39 500)
5 486
5 358 356
[1]
[1]
[3]
C2.
Intangible assets
Trade dress (IFRS 3 recognition at acquisition of Bamboo Ltd)
Customer list (cannot be sold) (see part (b))
Amortisation of trade dress (280 000/5 x 10/12)
280 000
(46 667)
233 333
[1]
[1]
[2]
MJM
122
C3.
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Investment in associate (Safe Shutters Ltd)
Cost of investment (200 000 + 10 000 (IAS 28.10 E2) + 115 000)
Excess at acquisition ((1 133 560 x 30%) – 325 000)
Recognition of opening equity [(940 610 – 783 160) x 30%]
Equity accounting in current year
Share of profit or loss of associate (445 800 x 30%)
Share of OCI of associate (280 000 x 30%)
Dividend received (175 000 x 30%)
Unrealised profit included in opening equipment of Safe Shutters Ltd
((115 000 – 90 000) x 30% = 7 500 - (7 500/3 x 6/12))
Realisation of unrealised profit in current year (7 500/3)
325 000
15 068
[1]
[1]
47 235
[1]
165 240
133 740
84 000
(52 500)
[2]
(6 250)
2 500
548 793
[2]
[1]
[10]
C4.
Goodwill
Acquisition of Bamboo Ltd
Share capital
Retained earnings (1 January 20.18)
Profit (1/1/20.18 – 1/3/20.18) (1 234 824 x 2/12)
Mark-to-market reserve (1 January 20.18)
Mark-to-market reserve (OCI)
Inventory (72 000 x 72%)
Intangible asset (trade dress) (280 000 x 72%)
Contingent liability
Indemnification asset (195 000 x 45%)
Identifiable net assets
Non-controlling interests (3 329 820 x 45%)
Consideration transferred [C5]
200 000
2 397 746
205 804
333 060
150 700
(51 840)
201 600
(195 000)
87 750
3 329 820
(1 498 419)
(1 986 061)
(154 660)
[1]
[1]
[1]
[1]
[1]
[1]
[1]
[8]
[15]
C5.
Consideration transferred for the acquisition of Bamboo Ltd
Cash payment
Issue of ordinary shares (25 000 x R22)
Share issue costs
Acquisition-related costs (IFRS 3.53)
Issue of preference shares [C6]
IFRS 9 investment at fair value
Contingent consideration
750 000
550 000
(18 500)
(22 300)
141 861
420 000
165 000
1 986 061
[1]
[1]
[1]
[1]
[2]
[1]
[1]
[8]
MJM
123
C6.
Issue of preference shares as consideration
HP 10BII
1. 2nd F C (Clear All)
2. 1 2nd F PMT
3. 70 000 x 2 x 8% PMT
4. 9 I/YR
5. 3 N
6. 70 000 x 2 x 1,05 FV
7. PV = 141 861
C7.
FAC4864/102
NFA4864/102
ZFA4864/102
SHARP EL-733A
1. 2nd FC (Clear All)
2. 3. 70 000 x 2 x 8% PMT
4. 9 i
5. 3 n
6. 70 000 x 2 x 1,05 FV
7. Comp PV = 141 861
SHARP EL-738
1. 2ndF MODE (Clear All)
2. 3. 70 000 x 2 x 8% PMT
4. 9 I/Y
5. 3 N
6. 70 000 x 2 x 1,05 FV
7. Comp PV = 141 861
Total
Maximum
[1]
[1]
[1]
[1]
[3]
[2]
Trade receivables
Top Blinds Ltd plus Bamboo Ltd (899 450 + 410 285)
Elimination of intragroup trade receivables
1 309 735
(77 800)
1 231 935
[1]
C8.
Inventory
Top Blinds Ltd plus Bamboo Ltd (944 550 + 880 600)
IFRS 3 adjustment (acquisition of Bamboo Ltd)
70% of inventory above sold at year end (72 000 x 70%)
Unrealised profit in closing inventory of Bamboo Ltd (Top Blinds Ltd sold
to Bamboo Ltd) (185 700 x 20/120)
Unrealised profit in closing inventory of Top Blinds Ltd (Safe Shutters Ltd
sold to Top Blinds Ltd) (130 000 x 25% x 30%)
1 825 150
(72 000)
50 400
[1]
(30 950)
[1]
(9 750)
[1]
1 762 850
[3]
MJM
124
C9.
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Analysis of owners’ equity of Bamboo Ltd (for completeness)
Total
At acquisition (1 March 20.18)
Share capital
Retained earnings
Mark-to-market reserve
Profit for 2 months (1 234 824 x 2/12)
Mark-to-market reserve (OCI)
Inventory (72 000 x 72%)
Intangible asset (trade dress)
(245 000 x 72%)
Contingent liability
Indemnification asset (195 000 x
45%)
Goodwill
Consideration [C5] and NCI
Measurement period adjustment:
Intangible asset (trade dress)
[(280 000 x 72%) – 176 400]
Adjusted net assets
(3 304 620 + 25 200)
Adjusted goodwill
Consideration [C5] and NCI
Top Blinds Ltd: 55%
At
Since
NCI
200 000
2 397 746
333 060
205 804
150 700
(51 840)
176 400
(195 000)
87 750
3 304 620
168 520
3 473 140
1 817 541
168 520
1 986 061
1 487 079
1 487 079
1 831 401
154 660
1 986 061
1 498 419
1 498 419
25 200
3 329 820
154 660
3 484 480
Current year
Profit (1 234 824 x 10/12)
Amortisation (280 000/5 x 10/12)
Tax (46 667 x 28%)
Inventory sold (51 840 x 70%)
Total current year profit
1 029 020
(46 667)
13 067
36 288
1 031 708
567 439
464 269
Dividend
(320 000)
4 196 188
(176 000)
391 439
(144 000)
1 818 688
MJM
125
QUESTION 6
FAC4864/102
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ZFA4864/102
40 marks
YOU HAVE 15 MINUTES TO READ THIS QUESTION
Oneity Ltd (Oneity) is a South African based retail holding company listed on the
Johannesburg Stock Exchange (JSE). The Oneity group has an extensive global footprint
comprising 400 stores in 10 countries and specialises in retail sectors such as household
appliances, furniture and fashion apparel.
Key information pertaining to all companies within the Oneity group:
•
•
•
TheOneity group prepares its financial statements in accordance with International Financial
Reporting Standards (IFRSs).
The Oneity group early adopted IFRS 16 Leases for the financial year ended
28 February 20.19.
All companies have a 28 February year end.
Acquisition of assets and liabilities of UB Appliances
On 8 November 20.17 the Oneity Board unanimously decided to propose a take-over of
UB Appliances (UBA), South Africa’s biggest appliance retailer. This would further diversify the
Oneity product offerings and leverage off several synergies that could be derived from Oneity’s wellestablished supply chain. Oneity and UBA entered into a sale of business agreement on
19 December 20.17.
Ownership of UBA was made up as follows prior to this take-over:
Shareholders
VestBid Ltd is a private equity firm with a diversified investment portfolio
Mr Lace (COO of UBA) and Mr Trainer (CEO of Oneity), each held a 35%
equity interest in UBA
Shareholding
30%
70%
100%
Accounting for the acquisition of the assets and liabilities of UBA
The purchase agreement stipulated that specified assets and liabilities of UBA were to be
transferred to Oneity on 1 March 20.18. Oneity therefore obtained control, as defined in IFRS 10
Consolidated Financial Statements, over these assets and liabilities on this date. The take-over also
met the definition of acquiring a business, as defined in IFRS 3 Business Combinations.
The financial accountant of Oneity, on instruction of Mr Trainer, processed journal entry
JNL: NR 458 for 20.19 to account for the acquisition of the specified assets and liabilities of UBA.
MJM
126
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JNL:NR-458
Notes
Account description
Property, plant and equipment
Investment property
Intangible assets: Goodwill
Non-current assets held for sale
Inventory
Bank and cash (R14 800 000 – R325 000 –
R900 000 – R5 500 000)
Right-of-use asset
Intangible assets: Workforce (R3 500 000 +
R5 500 000)
Share issue costs
Intangible assets: Legal fees incurred
Gain on bargain purchase (balancing figure)
Lease liability
Share capital (300 000 x R253
(25 300 cents))
Provision: Earn-out bonus
Provision: Contingent payment
Provision: Claim from customer
Acquisition of UBA
Dr
Cr
Financial
statement
SFP
SFP
SFP
SFP
SFP
1
2
3
4
5
R’000
10 000
6 550
4 500
7 500
29 700
SFP
SFP
6; 8; 9; 12
7
8 075
1 650
SFP
P/L
SFP
P/L
SFP
8
9
12
9 000
900
325
9 160
7
1 760
SCE
SFP
SFP
SFP
9
10
11
13
75 900
3 100
5 000
1 600
87 360*
87 360*
R’000
* The casting of the journal entry is correct.
1.
UBA’s property, plant and equipment consist of several buildings and equipment and a piece
of owner-occupied land. All of these assets were considered to be fairly valued in terms of
IFRS 3 at the acquisition date, except for the owner-occupied land. This land is currently held
for industrial use as a site for one of UBA’s factories. Similar sites have recently been
developed into office buildings. On the acquisition date the land in question had no restrictions
to prevent it from being developed into office buildings. The fair value of all UBA’s property,
plant and equipment amounted to R10 million (if the site were held for industrial use) and
R12 million (if the site were developed into office buildings) on the acquisition date.
2.
The investment property is an office building which was subject to a market-related lease
agreement between Oneity and UBA. The lease came to an end on 28 February 20.18.
Oneity leased the building from UBA for office space and will continue to use it for this
purpose. The carrying amount of this building in the separate financial statements of UBA on
the acquisition date did not materially differ from its fair value.
3.
The goodwill recognised is a result of a previous business combination between UBA and
an unrelated third party a number of years ago. The goodwill has never been impaired.
4.
The non-current assets held for sale consist of a factory building that was correctly classified
as a non-current asset held for sale in terms of IFRS 5 Non-current Assets Held for Sale
and Discontinued Operations. The estimated costs to sell are R250 000 and the fair value
of the factory building was R7 500 000 on the acquisition date. Oneity intends to sell the
building within 12 months.
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5.
The inventory balance is correctly reflected at the lower of cost and net realisable value in
accordance with IAS 2 Inventories and this value approximates the fair value of the inventory
on the acquisition date.
6.
The bank and cash of UBA at the acquisition date was R14 800 000 (favourable balance).
7.
The right-of-use asset and corresponding lease liability are a result of a lease agreement
between UBA and an unrelated third party and the amounts reflected are based on the original
contract. Per the lease agreement, UBA leases a number of specialised machines that are
used in the supply chain process. The lease agreement does not qualify for the recognition
exceptions stipulated in IFRS 16 par. 5. On the acquisition date, the remaining lease term
amounted to four years and the correctly calculated present value of the remaining lease
payments, as if this lease were a new lease on the acquisition date, amounted to R1 850 000.
UBA’s lease payments are higher than what market participants are currently paying. On the
acquisition date, the fair value of this ‘off-market’ component amounted to R292 000.
8.
The purchase agreement stipulates that UBA’s key personnel and executives (an assembled
workforce) would be employed by Oneity subsequent to the take-over. Mr Trainer valued this
workforce at R3 500 000 on the acquisition date. Oneity was required to pay retrenchment
packages of R5 500 000 in cash on 1 March 20.18 to the employees not employed by Oneity
after the take-over.
9.
The purchase consideration was settled by Oneity with an immediate cash payment of
R32 400 000 to UBA on 1 March 20.18. In addition Oneity issued 300 000 ordinary shares
on 8 March 20.18. Oneity incurred share issue costs amounting to R900 000 on the issue
date. Oneity’s share price was as follows on the relevant dates:
Date
1 March 2018
8 March 2018
Quoted on the JSE
25 200 cents per share
25 300 cents per share
10.
An earn-out bonus of R3 500 000 will be payable to Mr Lace on 28 February 20.21 if he
remains in the employ of Oneity until that date. If he resigns before that date, the bonus will be
forfeited. The fair value of the earn-out bonus was reliably determined to be R3 100 000
on the acquisition date.
11.
Cash payments of R2 500 000 each are payable to Messrs Lace and Trainer, in the event
of Oneity’s price-earnings multiple (PE ratio) exceeding 18 by 28 February 20.21. The fair
value of these further payments was reliably determined as being R4 600 000 in total on the
acquisition date.
12.
Oneity incurred legal fees amounting to R325 000 in drafting the purchase agreement, which
was paid in cash on the acquisition date.
13.
On the acquisition date, the following facts were identified from the draft separate financial
statements of UBA for 20.18:
•
UBA expensed an amount of R1 900 000 incurred with the development and registration
of a patent for a specific appliance developed and manufactured by the company during
20.18 as it did not meet the requirements for recognition as an intangible asset per
IAS 38 Intangible Assets. Oneity’s management decided not to continue using the
patent. A fair value could reliably be placed on the patent and amounted to R1 200 000
on the acquisition date.
MJM
128
•
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An amount of R1 800 000 was correctly disclosed as a contingent liability in terms of
IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The contingent liability
is a result of a claim from a customer who was allegedly injured using an UBA appliance.
The classification as a contingent liability was based on the fact that only a possible
obligation, as defined in terms of IAS 37 par.10, existed at the end of 20.18. This
conclusion was still applicable and correct at the acquisition date as none of the
circumstances which resulted in the conclusion had changed. The fair value of this
contingent liability was reliably determined to amount to R1 600 000 on the acquisition
date.
Additional information
•
•
•
•
All items of property, plant and equipment are accounted for on the cost model in terms of
IAS 16 Property, Plant and Equipment.
All intangible assets are accounted for on the cost model in terms of IAS 38.
All items of investment property are accounted for on the fair value model in terms of IAS 40
Investment Property.
Assume a normal income tax rate at 28% and a Capital Gains Tax inclusion rate of 80%.
Ignore Value Added Tax (VAT) and Dividend Tax.
(SAICA – adapted)
COMMENT
This question is an opportunity to analyse and illustrate an understanding and insight
into IFRS 3. You should be able to formulate your concerns about the given information
and provide adequate responses supported by reasons in line with IFRS.
MJM
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REQUIRED
YOU NOW HAVE 60 MINUTES TO ANSWER THIS QUESTION
Marks
Discuss any concerns relating to the recognition and measurement of the various
elements that you have regarding the accounting entry (JNL: NR-458).
39
Provide reasons to support your concerns as well as recommendations on how to
correctly account for the matter.
Communication skills: clarity of expression; appropriate style
1
Please note:
•
•
•
•
•
•
•
•
Round off all amounts to the nearest Rand.
Ignore taxation.
You are not required to refer to the Conceptual Framwork.
You are not required to re-calculatie the goodwill or gaim from bargain purchase
You are not required to provide any correcting journal entries..
Discussions regarding disclosure are not required.
Support your discussion with calculations where appropriate.
Your answer must comply with International Financial Reporting Standards (IFRS).
MJM
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QUESTION 6 – Suggested solution
Discuss any concerns relating to the recognition and measurement of the various
elements that you have regarding the accounting entry (JNL: NR-458).
Provide reasons to support your concerns as well as recommendations on how to
correctly account for the matter.
1
2.
3.
4.
Property, plant and equipment
The property, plant and equipment was measured at the incorrect fair value because,
in terms of IFRS 13.27, the fair value of a non-financial asset takes into account the
market participants’ ability to generate economic benefits by using the asset in its highest
and best use or by selling it to another market participant that would use the asset in its
highest and best use.
(1)
As there are no restrictions in developing the land for a site of office buildings, this
would be its highest and best use.
(1)
The property, plant and equipment should therefore be measured at the fair value
of R12 000 000 on acquisition date and not R10 000 000.
(1)
Investment property
The recognition of the office building as investment property is incorrect because, in
terms of IFRS 3.15, at the acquisition date the acquirer should classify or designate the
identifiable assets acquired and the liabilities assumed as necessary to apply other
IFRSs.
(1)
Since the building will be used by Oneity for office space (administrative purposes),
it becomes owner-occupied in terms of IAS 40.5.
(1)
The building should therefore be recognised as property, plant and equipment in terms
of IAS 16 on acquisition date and should not be recognised as investment property in
terms of IAS 40.
(1)
Goodwill recognised as an intangible asset
The goodwill was incorrectly recognised as an intangible asset on acquisition date
because, in terms of IFRS 3.10, only identifiable assets acquired should be recognised
separately from goodwill on the acquisition date.
(1)
The goodwill is not identifiable since it is not separable, nor does it arise from
contractual or other legal rights.
(1)
The goodwill should therefore not be recognised as an intangible asset on acquisition
date but should rather be subsumed into the goodwill recognised as a result of the
business combination.
(1)
Non-current assets held for sale
The non-current assets held for sale were incorrectly measured at fair value on the
acquisition date because, in terms of IFRS 3.31, the acquirer should measure noncurrent assets held for sale at fair value less costs to sell, as determined in terms of
IFRS 5.
(1)
MJM
131
5.
6.
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The non-current assets held for sale should therefore be measured at fair value less costs
to sell of R7 250 000 [R7 500 000 – R250 000] on acquisition date and not the fair value
of R7 500 000.
(1)
Right-of-use asset and lease liability
The right-of-use asset and lease liability were measured at the incorrect amounts
because, in terms of IFRS 3.28B, the acquirer should measure the lease liability at the
present value of the remaining lease payments as if the lease was a new lease at the
acquisition date. Furthermore, the right-of-use asset should be measured at the same
amount as the lease liability, adjusted to reflect favourable or unfavourable terms of the
lease when compared to market terms.
(1)
The lease liability should therefore be measured at R1 850 000 on acquisition date and
not R1 760 000.
(1)
As UBA’s lease payments are more than what market participants are currently paying,
the ‘off-market’ component of R292 000 is unfavourable.
(1)
The right-of-use asset should therefore be measured at R1 558 000 (R1 850 000 –
R292 000) on acquisition date and not R1 650 000.
(1)
Workforce recognised as an intangible asset
The workforce was incorrectly recognised as an intangible asset separately from goodwill
on the acquisition date because, in terms of IFRS 3.B37, an assembled workforce is not
an identifiable asset at the acquisition date / in terms of IAS 38.15, an entity has
insufficient control over the expected future economic benefits arising from a team of
skilled staff to meet the definition of an intangible asset.
(1)
The assembled workforce should therefore not be recognised as an intangible asset
separately from goodwill on the acquisition date but should rather be subsumed
into goodwill recognised as a result of the business combination on acquisition date.
(1)
7.
8.
Retrenchment packages recognised as an intangible asset
The retrenchment packages were incorrectly recognised as an intangible asset
separately from goodwill on the acquisition date because, in terms of IFRS 3.51, amounts
that are not part of the exchange for the acquiree shall be accounted for as separate
transactions / the retrenchment packages were not primarily paid for the benefit of the
acquiree (or its former owners) and should therefore not form part of the business
combination.
(1)
The amount paid should therefore be recognised as an expense in profit or loss when it
is incurred and should not be recognised as an intangible asset on acquisition date.
(1)
Immediate cash payment
The immediate cash payment was not included as part of the consideration paid, although
IFRS 3.37 requires the consideration transferred in a business combination to be
measured at fair value, which includes the fair value of assets such as cash transferred by
the acquirer.
(1)
The immediate cash payment should therefore be recognised at fair value of
R32 400 000 as part of the consideration transferred and credited to bank.
(1)
MJM
132
9.
10.
11.
12.
13.
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Issue of ordinary shares: Acquisition date
The incorrect price was used to measure the ordinary shares issued as part of
the consideration transferred because, in terms of IFRS 3.37, the acquirer should
measure the consideration transferred at the acquisition date fair value – this includes
equity instruments issued by the acquirer.
(1)
The issue of the share capital should therefore be measured at R252 (25 200 cents)
per share (that is, the unadjusted quoted price on the JSE) on the acquisition date and not
R253 (25 300 cents) per share / The issue of the share capital should therefore be
measured at R75 600 000 (300 000 x R252) and not R75 900 000. This is because
control in terms of IFRS 10, was obtained on 1 March 20.18, irrespective of the fact
that Oneity issued the shares on 8 March 20.18.
(1)
Issue of ordinary shares: Share issue costs
The share issue costs have incorrectly been expensed because, in terms of IFRS 3,
transaction costs should be accounted for in terms of other IFRSs and in terms of
IAS 32.35, transaction costs on the issue of the shares should be debited to the share
capital (that is, accounted for as a deduction from equity).
(1)
The share issue costs of R900 000 should therefore be recognised directly in equity
(debited to share capital) and should not be expensed in profit or loss.
(1)
Earn out bonus
The earn-out bonus was incorrectly included as part of the consideration transferred
because, in terms of IFRS 3.B55(a), when contingent payments to employees or selling
shareholders are automatically forfeited if employment terminates, this payment is
remuneration for post-combination services.
(1)
Since the earn-out bonus is dependent on Mr Lace still being in the employ of Oneity
on 28 February 20.21, the earn-out bonus should be recognised as a separate expense
as the services are being rendered by Mr Lace and should not be recognised as a
provision on acquisition date.
(1)
Further cash payment (contingent payment)
The further cash payment (contingent payment) of R5 000 000 (R2 500 000 to each of
Mr Lace and Mr Trainer) was measured at the incorrect amount because, in terms of
IFRS 3.37, the consideration transferred in a business combination should be measured
at fair value.
(1)
The additional payment should therefore be measured at its fair value of R4 600 000
on acquisition date and not an amount of R5 000 000.
(1)
Legal fees incurred
The legal fees incurred by Oneity in drafting the purchase agreement was incorrectly
recognised as an intangible asset on acquisition date because, in terms of IFRS 3.53,
acquisition-related costs incurred to effect the business combination should be
recognised as an expense in the period it is incurred.
(1)
The legal fees should therefore be recognised as an expense in profit or loss when it
is incurred and should not be recognised as an intangible asset on acquisition date.
(1)
MJM
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14.
15.
16.
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Registered patent expensed in previous years
The registered patent was incorrectly not recognised as an identifiable asset separately
from goodwill on the acquisition date because, in terms of IFRS 3.10 / IFRS 3.B31, all
identifiable intangible assets acquired on the acquisition date should be recognised
separately from goodwill on the acquisition date.
(1)
The patent is identifiable since it is registered, that is, it arises from a contractual right.
(1)
The fact that Oneity does not intend to use the patent going forward is irrelevant. The fair
value is determined on what market participants are willing to pay to transfer the asset
(IFRS 13.9).
(1)
The patent should therefore be recognised as a separate intangible asset on the
acquisition date at its fair value of R1 200 000.
(1)
Contingent liability recognised
The contingent liability in connection with the claim from the customer was incorrectly
recognised separately from goodwill on the acquisition date because, in terms of
IFRS 3.23, the acquirer should only recognise contingent liabilities assumed in a business
combination separately from goodwill on the acquisition date if it is a present obligation
that arises from past events and its fair value can be determined reliably.
(1)
Although the fair value of the contingent liability could be determined reliably at
R1 600 000, no present obligation existed at the acquisition date and the contingent
liability should therefore not be recognised as a provision on acquisition date.
(1)
Gain from a bargain purchase recognised
The recognition of a gain from a bargain purchase as a debit entry is incorrect because,
in terms of IFRS 3.32, the acquirer shall only recognise a gain from a bargain purchase
if the consideration transferred is less than the fairly valued net identifiable assets at the
acquisition date.
(1)
Based on the entry provided, goodwill should have been recognised and not a gain from
a bargain purchase.
(1)
The amount is also incorrect as a result of the errors and concerns noted above.
(1)
Total (42)
Maximum (39)
Communication skills: clarity of expression; appropriate style
(1)
EXAM TECHNIQUE
The recalculation of goodwill or gain on bargain purchase and correction journal entries
where not required. Do not provide the solution that was not required. Providing a theory
reference without application and highlighting concerns without supporting reasons
does not earn marks.
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QUESTION 7
40 marks
YOU HAVE 15 MINUTES TO READ THIS QUESTION
Massmark Ltd is a South African-based globally competitive regional management group that is
listed on the Johannesburg Stock Exchange. Massmark Ltd invested in a portfolio of diversified,
complementary, focused wholesale and retail businesses. Massmark Ltd is the second-largest
distributor of consumer goods in Africa, the leading retailer of general merchandise, liquor and home
improvement equipment and supplies, and the leading wholesaler of basic foods.
The financial year end of the Massmark Ltd Group and all the companies in the group is
31 December.
DionLink Ltd
On 1 August 20.19 Massmar Ltd acquired a 60% interest in the ordinary share capital of
DionLink Ltd, a retailer of electronics and appliances. As a result of this acquisition, Massmark Ltd
obtained control over DionLink Ltd as from 1 August 20.19 as defined in IFRS 10 Consolidated
Financial Statements.
Ojewa Keng, the group accountant, has prepared the analysis of equity of DionLink Ltd at the
acquisition date in preparation for the consolidation procedures for the year ended
31 December 20.19. You may assume that all amounts are correct, except as stated otherwise.
Analysis of owners' equity of DionLink Ltd at acquisition date
At acquisition
Net asset value as at 1 August 20.19
Inventory
Deferred tax adjustment
Land fair value adjustment
Deferred tax adjustment
Equity represented by goodwill
Consideration and NCI
Measurement period adjustments
Net asset value (above)
Land adjustment
Deferred tax adjustment
Net asset value – measurement period
Equity represented by goodwill
Consideration and NCI
60%
At
R
40%
NCI
R
Notes
Total
R
1
2
2
3
3
1 209 500
95 000
(26 600)
23 000
(5 152)
1 295 748
9 169
1 304 917
725 700
57 000
(15 960)
13 800
(3 091)
777 449
98 801
876 250
483 800
38 000
(10 640)
9 200
(2 061)
518 299
(89 632)
428 667
1 295 748
27 000
(6 048)
1 316 700
(97 783)
1 218 917
777 449
16 200
(3 629)
790 020
230
790 250
518 299
10 800
(2 419)
526 680
(98 013)
428 667
4; 4.7
3
3
4
All the assets and liabilities of DionLink Ltd were deemed to be fairly valued, except where advised
otherwise in the notes below. Furthermore, no additional assets, liabilities or contingent liabilities
were identified on the acquisition date, except as provided for in the notes below.
MJM
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Notes
1.
Ojewa Keng calculated the net asset value of DionLink Ltd as at 1 August 20.19 as follows:
Ordinary share capital (10 000 issued ordinary shares)
Retained earnings
Revaluation surplus
Preference share capital
2.
Sub notes
R
1.1
1.2
800 000
220 000
62 000
127 500
1 209 500
1.3
1.1
There were no changes to the ordinary share capital of DionLink Ltd for the year ended
31 December 20.19.
1.2
The balance of the retained earnings amounting to R220 000 was as reported in the
interim financial statements of DionLink Ltd for the interim period ended 30 June 20.19.
The retained earnings balance was correctly calculated in the interim financial
statements. Due to the negative impact of the international trade war on the sale of
electronic consumer goods, DionLink Ltd had a loss of R38 000 for the period
1 July 20.19 to 31 December 20.19. DionLink Ltd declared an interim dividend of
R27 000 on 25 July 20.19. The interim dividend was paid on 15 August 20.19.
1.3
The equity of DionLink Ltd as at 1 August 20.19 consisted of 11% 1 500 issued
preference shares at a nominal value of R85 per share. The preference shares give their
holders a right to a preferential dividend in priority to the payment of any dividend to the
holders of ordinary shares. The preference shareholders are only entitled to receive a
repayment of the nominal value of the preference share upon liquidation of DionLink Ltd
and do not have any further rights on liquidation. Preference shareholders do not have
any voting rights. The fair value of the preference shares amounted to R105 per share
on 1 August 20.19.
Included in the inventory balance of DionLink Ltd as at 1 August 20.19 was a net realisable
value of R95 000 relating to mobile devices manufactured by a well-known international
manufacturer and distributor of mobile devices, Heiwau. The ongoing international trade war
raised an expectation that there would be a trade ban on the trade of an Andrios operating
system that are used by the Heiwau mobile devices with effect from 31 December 20.19, thus
rendering the mobile devices obsolete. As a result, Massmark Ltd could not reliably determine
the fair value of this inventory as at 1 August 20.19.
On 15 January 2020 an independent market expert reliably measured the fair value of the
Heiwau mobile devices as at 1 August 20.19 at R58 634. DionLink Ltd did not remeasure the
inventory in its separate financial statements.
3.
The property, plant and equipment balance of DionLink Ltd reflected in the interim financial
statements for the interim period ended 30 June 20.19 included land with a carrying amount
of R150 000. The fair value of this land was R173 000 as at 1 August 20.19 and DionLink Ltd
remeasured the land in its separate financial statements on that date.
On 15 November 20.19, DionLink Ltd entered into discussions with an unrelated third-party
entity for the disposal of the land. An agreement was reached on 1 December 20.19 to dispose
of the land to the unrelated third-party entity for a fair valued consideration of R200 000.
MJM
136
4.
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The consideration and costs relating to the acquisition of the investment in DionLink Ltd were
calculated as follows by Ojewa Keng:
Sub
notes
R
Cash amount paid on 1 August 20.19
Debentures
Carrying amount of office furniture transferred
Issue of shares
Contingent consideration asset
Fair value of the preference shares at acquisition (1 500 x 105)
Payment to the CEO
4.1
4.2
4.3
4.4
4.5
1.4
4.6
300 000
131 750
65 000
200 000
(43 000)
157 500
65 000
876 250
Measurement period adjustment
Contingent consideration (64 000 – 43 000)
Payment to CEO (resigned 15 December 20.19)
Total consideration transferred
4.5
4.6
(21 000)
(65 000)
790 250
4.1
A cash payment of R300 000 was made on 1 August 20.19 to the transacting attorneys.
Massmark Ltd appointed KPG Services Ltd, a company that specialises in business
combinations to assist with the structuring of the arrangement. The costs related to the
services provided by KPG Services Ltd amounted to R25 400 and were included in the
cash payment made to the transacting attorneys.
4.2
On 1 August 20.19, Massmark Ltd issued 1 550 R85 debentures. The interest on the
debentures is payable annually in arears at a nominal interest rate of 8,25% per annum.
A fair discount rate on similar debentures amount to 10,75% per annum on the date of
issue. The debentures will be settled in cash on 30 July 2024.
4.3
Massmark Ltd transferred office furniture with a carrying amount of R65 000 and a fair
value of R85 000 to DionLink Ltd to be used in the office of the Chief Executive Officer
(CEO) on 1 August 20.19. The office furniture was correctly recorded in the asset register
of DionLink Ltd on 1 August 20.19.
4.4
Massmark Ltd issued 800 of its ordinary shares to the shareholders of DionLink Ltd on
1 August 20.19 when the share price of each share was R250. The ordinary shares were
registered on 11 August 20.19 when the shares were valued at R275 each.
Massmark Ltd incurred share issue costs amounting to R22 390 with regards to the
issue of the 800 ordinary shares. The share issue costs of R22 390 were included in the
cash payment made to the transacting attorneys on 1 August 20.19.
4.5
DionLink Ltd has committed to refund Massmark Ltd R64 000 on 31 Decembe 20.19
should the operating profit for the four months ending 30 November 20.19 not increase
by 11%. The fair value of this consideration amounted to R43 000 on 1 August 20.19
taking into account all possible outcomes. During the four months ended
30 November 20.19, there was a lot of uncertainty in the worldwide economic
environment particularly with regards to the electronic consumer goods, thus the
operating profit only increased by 7,5%.
MJM
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4.6
On 1 August 20.19, Massmark Ltd entered into an agreement with Dion Linker, CEO,
founder and majority shareholder of DionLink Ltd. Massmark Ltd views Dion Linker as
key to the value of DionLink Ltd. The agreement sought to incentivise Dion Linker to
remain with DionLink Ltd after the acquisition by Massmark Ltd for at least six months.
Massmark Ltd paid Dion Linker R65 000 on 1 August 20.19 in line with this agreement,
further agreeing that Dion Linker does not have to repay this amount should he resign
at any time after 1 August 20.19. Dion Linker resigned as CEO of DionLink Ltd on
15 December 20.19 with immediate effect. Ojewa Keng accounted for this as a
measurement period adjustment.
4.7
The fair value of non-controlling interests of the ordinary share capital amounted to
R428 667 as at 1 August 20.19.
Marko Ltd
Marko Ltd is an upcoming retail store that offers consumer foods, latest electronics, houseware,
outdoor equipment and liquor in its stores in Johannesburg, Bloemfontein and Durban, with its head
office of Marko Ltd in Johannesburg.
The extract of the preliminary trial balance of Marko Ltd as at 31 December 20.19 contained the
following balances, which may be accepted as correct, except where stated otherwise.
Dr/(Cr)
R
Non-current assets
Current assets
Ordinary share capital (100 000 shares)
Retained earnings (1 January 20.19)
Revaluation surplus
Profit after tax for the year
Revenue
Non-current liabilities
Current liabilities
782 767
584 410
(200 000)
(126 874)
(77 600)
(106 382)
(575 541)
(511 915)
(344 406)
Massmark Ltd acquired 25 000 ordinary shares in Marko Ltd on 1 August 20.19 and exercised
significant influence over the operating and financial policy decisions of Marko Ltd from that date.
The purchase consideration amounted to R120 000. You may assume that an excess arose on the
acquisition of Marko Ltd.
All the assets and liabilities of Marko Ltd were deemed to be fairly valued on the date of acquisition
except for land and trade receivables which was undervalued by R81 500 and R57 500 respectively.
No additional assets or liabilities were identified at the acquisition date. The trade receivables were
still outstanding at year end.
An independent sworn appraiser valued the land upwards by R100 000 on 31 December 20.19.
Marko Ltd accounted for this revaluation in its separate financial statements for the year ended
31 December 20.19.
The fair value of the shares of Marko Ltd amounted to R7,45 per share on 31 December 20.19.
The investment in Marko Ltd is material to Massmark Ltd. No dividends were declared by Marko Ltd
during the current financial year.
MJM
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Additional information
1.
Income and expenses accrued evenly throughout the 20.19 financial year.
2.
It is the accounting policy of Massmark Ltd to account for investments in subsidiaries and
investments in associates at cost in its separate financial statements.
3.
Massmark Ltd elected to measure non-controlling interests at fair value on acquisition date for
all acquisitions.
4.
Assume a normal income tax rate of 28% and a Capital Gains Tax inclusion rate of 80%.
Ignore the effects of Dividend Tax and Value Added Tax (VAT).
MJM
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REQUIRED
YOU NOW HAVE 60 MINUTES TO ANSWER THIS QUESTION
Marks
(a)
Discuss all considerations relating to the recognition and measurement of the
various elements of the acquisition of DionLink Ltd in the preparation of the
consolidated financial statements of the Massmark Ltd Group for the year ended
31 December 20.19.
26
Communication skills: clarity of expression
1
Please note:
•
You are required to provide reasons to support your cconsiderations as well
as recommendations on how to correctly account for the matter.
•
You are only required to discuss the acquisition method and measurement
period adjustments.
•
Show all calculations.
•
You are not required to refer to the Conceptual Framework.
•
You are not required to re-calculate goodwill or gain from a bargain purchase.
•
You are not required to discuss subsequent measurement.
(b)
Prepare the investment in associate note to the consolidated financial statements
of the Massmark Ltd Group for the year ended 31 December 20.19.
12
Communication skills: presentation and layout
1
Please note:
•
•
•
Round off all amounts to the nearest Rand.
Show all your calculations.
Your answer must comply with International Financial Reporting Standards (IFRS).
MJM
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QUESTION 7 - Suggested solution
(a)
1.
2.
Discuss all considerations relating to the recognition and measurement of the various
elements of the acquisition of DionLink Ltd in the preparation of the consolidated
financial statements of the Massmark Ltd Group for the year ended 31 December 20.19.
General
On 1 August 20.19 Massmark Ltd acquired 60% of the ordinary shares of DionLink Ltd
and obtained control thereof.
(1)
The principles of IFRS 3 will be applied in accounting for the purchase transaction of
DionLink Ltd on 1 August 20.19 as the transaction meets the definition of a business
combination.
(1)
Massmark Ltd will apply the acquisition method at the acquisition date on
1 August 20.19 as detailed in the paragraphs below.
(1)
Massmark Ltd should recognise and measure all identifiable assets acquired and the
liabilities assumed in the business combination at their acquisition date fair values.
(1)
Net asset value as at 1 August 20.19
The ordinary share capital was adequately valued at R800 000 on the acquisition date
for the 10 000 issued ordinary shares.
(1)
The retained earnings balance was incorrectly included at R220 000 as this was the
balance as at 30 June 20.19.
(1)
The loss for the period 1 July 20.19 to 31 July 20.19 must be accounted for in the
balance of retained earnings. The loss for the period is R38 000 x 1/6 = R6 333.
(1)
The preference shares give their holders a right to a preferential dividend in priority to
the payment of any dividend to the holders of ordinary shares. Therefore, the preference
dividend should also be taken into account when calculating the retained earnings as
at 1 August 20.19. The accrual amount that should be deducted from retained earnings
is R1 169 [(1 500 x 85) x 11% x 1/12]
(1)
DionLink Ltd declared an interim dividend of R27 000 on 25 July 20.19, this amount
should be deducted from retained earnings to calculate the retained earnings as at
1 August 20.19. The correct retained earnings balance should be R185 498 [C1] as at
the acquisition date.
The revaluation surplus was correctly included in the net asset value as at
1 August 20.19 as R62 000.
(1)
(1)
COMMENT
It is important to note the date at which the retained earnings balance was given (i.e
30 June 2019) and therefore does not include the profit/loss for July. The loss for July
needs to be included in the retained earnings balance to attain the correct retained
earnings balance at acquisition date.
To do this correctly you should note that the loss given is for 6 months. You should then
calculate the portion of 1 month of the 6 months and not 12 months.
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Preference share capital
The share capital of DionLink Ltd consists of two classes of shares being ordinary shares
and preference shares.
(1)
The total owner's equity must be allocated between the different classes of capital in
accordance with the particular rights attached to each in order to:
(1)
•
identify the equity of the subsidiary attributable to the total investment of the parent;
and
•
determine the total interest of the non-controlling interests (where applicable).
The preference share capital of R127 500 (1 500 x 85) should not be included in the
calculation of the goodwill or gain on bargain purchase of DionLink Ltd as at
1 August 20.19 but should be analysed in a separate calculation in line with the particular
rights attached to it.
(1)
Massmark Ltd did not acquire any preference shares as at 1 August 20.19, thus the
allocation of 60% to Massmark Ltd and 40% to NCI in the calculation performed is
incorrect. The preference share capital should be measured at fair value of R157 500
and be allocated to NCI only.
(1)
4.
Inventory
The calculation of goodwill or gain on bargain purchase of DionLink Ltd as at
1 August 20.19 will not reflect any adjustment to inventory as it is already measured at
fairvalue i.e. net realisable value in DionLink Ltd’s financials.
(1)
On 15 January 2020, the fair value of the Heiwau mobile devices was reliably calculated
to have been R58 634 as at 1 August 20.19. This qualifies as a measurement period
adjustment as the fair value of the inventory was reliably determined by an independent
valuator. Furthermore, the period within which the fair value was confirmed was in less
than 12 months, which was four months after acquisition date.
(1)
The measurement period adjustment of fair value of inventory that will have an impact on
the calculation of goodwill or gain on bargain purchase is calculated as an overvaluation
of the carrying amount of inventory as at 1 August 20.19 of R36 366 (R95 000 –
R58 634), with a deferred tax consequence of R10 182 (R36 366 x 28%).
(1)
COMMENT
Please note that since the information indicates that the inventory had already been
measured at net realisable value in DionLink’s separate financial statements, the
inventory adjustment of R95 000 is not needed and results in a double counting.
Remember that a measurement period adjustment is an adjustment of an item within
the measurement period (12 months since acquisition date) of which the value at
acquisition could not be attained at that date. When the value for the relevant item can
be determined later on for the acquisition date, it is considered as an adjustment to at
acquisition equity and consequently goodwill only if it falls within the measurement
period of 12 months since acquisition date.
Therefore, the inventory at the fair value of R58 634 is a measurement period
adjustment.
5.
Land
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The adjustment to the fair value of land at acquisition date of R23 000 and the related
deferred tax consequence was incorrectly included in the calculation of the fair value of
the net asset of DionLink Ltd as at 1 August 20.19 as the fair value was already adjusted
in the separate financial statements of DionLink Ltd as at that date.
(1)
An adjustment of R27 000 on the land, together with the related deferred tax
consequence, were incorrectly included as a measurement period adjustment. This
is because at acquisition date, there was no uncertainty with regards to the fair
value of the land. The disposal of the land was only considered after the acquisition date
(on 15 November 20.19) and should therefore not be included as a measurement period
adjustment.
(1)
6.
Acquisition related costs and share issue costs
Acquisition related costs should be expensed in profit or loss in the consolidated financial
statements of the acquirer in accordance with IFRS 3.53, thus the R25 400 must be
deducted from the cash payment made to the transacting attorneys in the calculation of
the consideration transferred for the acquisition of DionLink Ltd (IAS 32; IFRS 9).
(1)
Share issue costs of R22 390 relating to the issue of 800 ordinary shares of Massmark Ltd
are not acquisition-related costs as defined in terms of IFRS 3. The share issue costs
must be accounted for as a deduction from equity in terms of IAS 32.35 in the separate
and consolidated financial statements of Massmark Ltd.
(1)
COMMENT
Transaction costs should be carefully analysed as the accounting treatment for
transaction costs are not all the same.
Note that the parent will measure its investments in subsidiaries at cost in accordance
with IAS 27.10(a) in its separate financial statements. Acquisition-related costs in the
separate financial statements of the parent should thus also be expensed. Students
should read carefully how the parent treated the transaction costs in its separate
financial statements.
7.
Debentures
The debentures were incorrectly calculated at R131 750.
(1)
The fair value of the debentures that should be included in the consideration paid is the
present value of the debentures for a cash settlement on 30 July 20.24, calculated as
follows:
(1)
2ndF Mode
N
PMT
FV
I
COMP PV
8.
Clear All
5
10 869 (131 750 x 8,25%)
131 750
10,75%
119 500
Max
(1)
(1)
(1)
(1)
(2)
Office furniture
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The transfer of the office furniture was correctly recorded at the carrying amount in the
calculation of the consideration transferred as the office furniture will be used within the
group. Massmark Ltd thus retains control of the office furniture.
(1)
9.
10.
11.
12.
13.
Issue of 800 shares of Massmark Ltd
The consideration for the shares issued was correctly calculated using the acquisition
date fair value R250 per share as at 1 August 20.19 in terms of IFRS 3.37. Control in
terms of IFRS 10 was obtained on 1 August 20.19 irrespective of the fact that the issued
shares were registered on 11 August 20.19.
Contingent consideration
As part of the acquisition of DionLink Ltd, DionLink Ltd has committed to repay
Massmark Ltd R64 000 on 31 December 20.19 should the operating profit for the four
months ending 30 November 20.19 not increase by 11%. The contingent asset was
therefore correctly recognised as part of the consideration transferred at the acquisition
date fair value of R43 000 in terms of IFRS 3.39.
The fair value of the contingent asset takes into account all possible outcomes with
regards to the commitment. The contingent asset will subsequently be measured at fair
value, with the gains or losses recognised in profit or loss. Therefore, the adjustment to
the fair value of the contingent asset as a measurement period adjustment was
incorrect.
(1)
(1)
(1)
Non-controlling interests
The fair value of the preference shares at acquisition amounting to R157 500 should
not be included in the consideration transferred relating to the acquisition of the issued
ordinary shares of the DionLink Ltd. The full balance forms part of NCI.
(1)
Non-controlling interests
Massmark Ltd elected to measure non-controlling interests at fair value on acquisition
date for all acquisitions. The non-controlling interests on the issued ordinary shares was
correctly valued at fair value at acquisition date.
(1)
Consideration paid to the CEO of DionLink Ltd
The amount paid to Dion Linker is correctly included as consideration transferred for
the acquisition of DionLink Ltd, as in terms of IFRS 3.B55(a), when the contingent
payments are not affected by employment termination, it is an indication that the
contingent payments are additional consideration rather than remuneration.
(1)
As a result, when Dion Linker resigned from DionLinks Ltd with immediate effect from
15 December 20.19, it was incorrect for Ojewa Keng to process a measurement period
adjustment of R65 000, as this amount is considered to be part of the consideration
transferred.
(1)
Total (33)
Maximum (26)
Communication: clarity of expression
(1)
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COMMENT
Please note that you should read the information in the question carefully. The question
specifically states that Massmark did obtain control over DionLink, therefore a
discussion regarding control in terms of IFRS 10 should not be given.
Remember that a discussion regarding the accounting for the acquisition in terms of
IFRS 3 was required and not a discussion of consolidation procedures after acquisition
date.
Since a discussion/consideration are required, do not merely show the calculations and
amounts for the net asset value on 1 August 20.19 but rather give the relevant
discussion surrounding these calculations in terms of IFRS 3.
EXAM TECHNIQUE
Remember to discuss items that are correct as well to earn the easy marks and not just
the incorrect items, unless the required states that you specifically should not.
CALCULATIONS
C1.
Retained earnings
Opening balance
Loss for period (38 000 x 1/6)
Dividends declared
Preference dividend accrual [(1 500 x 85) x 11% x 1/12]
C2.
220 000
(6 333)
(27 000)
(1 169)
185 498
Analysis of equity of DionLink Ltd (for completeness)
Total
At acquisition
Share capital
Retained earnings [C2]
Revaluation surplus
Equity represented by goodwill
Consideration and NCI (C3)
Measurement period adjustment
Net asset value
Inventory [(95 000 – 58 634) x 72%]
Equity represented by goodwill
Consideration and NCI
At
60%
NCI
40%
800 000
185 498
62 000
1 047 498
39 879
1 087 377
628 499
30 211
658 710
418 999
9 668
428 667
1 047 498
(26 183)
1 021 315
50 352
1 071 667
628 499
(15 710)
612 789
30 211
658 710
418 999
(10 473)
408 526
20 141
428 667
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C3.
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Consideration transferred (for completeness)
Cash amount paid
Costs directly related to issue of shares
Debentures
Carrying amount of vehicle transferred
Cost related to KPG Services (Pty) Ltd
Issue of shares
Contingent consideration asset
Payment to the CEO
C4.
300 000
(22 390)
119 500
65 000
(25 400)
200 000
(43 000)
65 000
658 710
Analysis of preference share capital of DionLink Ltd at acquisition (for completeness)
Total
R
At acquisition
Share capital
Preference dividend accrual
Equity represented by goodwill
Consideration and NCI
127 500
1 169
128 669
28 831
157 500
At
NCI
100%
127 500
1 169
128 669
28 831
157 500
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146
(b)
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Prepare the investment in associate note to the consolidated financial statements of
the Massmark Ltd Group for the year ended 31 December 20.19.
MASSMARK LTD GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
31 DECEMBER 20.19
1.
Investment in associate
Massmark Ltd owns a 25% interest in the wholesale and retail company, Marko Ltd.
Marko Ltd is incorporated in South Africa where it conducts its principal business.
The associate is measured using the equity method.
(2)
Summarised financial information of associate for the year ended
31 December 20.19:
R
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Revenue
Profit for the year
Other comprehensive income for the year
Total comprehensive income (106 382 + 77 600)
782 767
584 410
(511 915)
(344 406)
(575 541)
(106 382)
(77 600)
(183 982)
Reconciliation of the summarised information
Net asset value (782 767 + 584 410 – 511 915 – 344 406) or
(200 000 + 126 874 + 106 382 + 71 600)
Fair value adjustments – Trade receivables (57 500 x 72%)
Net asset of associate
510 856
41 400
552 256
25% interest in net assets of associate
Carrying amount of investment in associate at 31 December 20.19
138 064
138 064
No dividends were declared during the year.
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
Fair value of investment in associate
The fair value of the investment in the associate is
R186 250 (R7,45 x 25 000)
(1)
Total (13)
Maximum (12)
Communication skills: presentation and layout (1)
EXAM TECHNIQUE
Please read the required carefully. The investment in associate note was asked and
NOT the investment in subsidiary note.
Remember to state that no dividends were declared during the year.
MJM