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Accounting Standards A Comprehensive Question Book On Internatio-1
Accounting Standards A Comprehensive Question Book On Internatio-1
Accounting Standards
Standards
SIXTEENTH EDITION Accounting
Standards
SIXTEENTH EDITION
The sixteenth edition of Accounting Standards is intended for Financial Accounting II
students to the principles of the International Financial Reporting Standards A comprehensive question book on
(IFRS) and incorporates changes brought about by new and revised accounting International Financial Reporting Standards
standards. These revisions relate to the new hedge accounting section in IFRS 9
ESS E N
TI
and IFRS 15 on revenue.
AL
PR
AC
TICE
The accounting principles are illustrated through questions that gradually increase
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SIXTEENTH EDITION
OPPERMANN
BOOYSEN
VAN DER MERWE
Accounting Standards
A comprehensive question book on International Financial Reporting Standards
All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means,
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tected pre-existing material that may be comprised in it has been used with appropriate authority or has been
used in circumstances that make such use permissible under the law.
Contents
__________________________________________________________________
IN CHRONOLOGICAL ORDER
TITLE PAGE
FRW Conceptual framework for financial reporting 1
IAS 1 Presentation of financial statements 15
IAS 2 Inventories 39
IAS 7 Statement of cash flows 61
IAS 8 Accounting policies, changes in accounting estimates and 113
errors
IAS 10 Events after the reporting period 147
IAS 12 Income taxes 167
IAS 16 Property, plant and equipment 213
IAS 17 Leases 249
IAS 19 Employee benefits 291
IAS 20 Accounting for government grants and disclosure of 319
government assistance
IAS 21 The effects of changes in foreign exchange rates 337
IAS 23 Borrowing costs 363
IAS 24 Related party disclosures 387
IAS 27 Separate financial statements 393
IAS 28 Investments in associates 395
IAS 29 Financial reporting in hyperinflationary economies 417
IAS 32 Financial instruments: presentation 429
IAS 33 Earnings, headline earnings and dividend per share 431
IAS 34 Interim financial reporting 467
IAS 36 Impairment of assets 475
IAS 37 Provisions, contingent liabilities and contingent assets 499
IAS 38 Intangible assets 515
IAS 40 Investment property 537
IFRS 2 Share-based payment 555
IFRS 3 Business combinations 563
IFRS 5 Non-current assets held for sale and discontinued operations 565
IFRS 7 Financial instruments: disclosure 599
IFRS 8 Operating segments 601
IFRS 9 Financial instruments 621
IFRS 10 Consolidated financial statements and separate financial 651
statements
IFRS 11 Joint arrangements 663
IFRS 12 Disclosure of interests in other entities 683
IFRS 13 Fair value measurement 685
IFRS 15 Revenue from contracts with customers 687
Contents
__________________________________________________________________
GENERAL PAGE
FRW Conceptual framework for financial reporting 1
IFRS 13 Fair value measurement 685
DISCLOSURE
IAS 1 Presentation of financial statements 15
IAS 7 Statement of cash flows 61
IAS 8 Accounting policies, changes in accounting estimates and 113
errors
IAS 10 Events after the reporting period 147
IAS 20 Accounting for government grants and disclosure of 319
government assistance
IAS 24 Related party disclosures 387
IAS 32 Financial instruments: presentation 429
IAS 33 Earnings, headline earnings and dividend per share 431
IAS 34 Interim financial reporting 467
IFRS 7 Financial instruments: disclosure 599
IFRS 8 Operating segments 601
ASSETS
IAS 2 Inventories 39
IAS 12 Income taxes 167
IAS 16 Property, plant and equipment 213
IAS 17 Leases 249
IAS 19 Employee benefits 291
IAS 20 Accounting for government grants and disclosure of 319
government assistance
IAS 21 The effects of changes in foreign exchange rates 337
IAS 23 Borrowing costs 363
IAS 36 Impairment of assets 475
IAS 38 Intangible assets 515
IAS 40 Investment property 537
IFRS 5 Non-current assets held for sale and discontinued operations 565
IFRS 9 Financial instruments 621
LIABILITIES PAGE
IAS 12 Income taxes 167
IAS 17 Leases 249
IAS 19 Employee benefits 291
IAS 21 The effects of changes in foreign exchange rates 337
IAS 32 Financial instruments: presentation 429
IAS 37 Provisions, contingent liabilities and contingent assets 499
IFRS 2 Share-based payment 555
IFRS 9 Financial instruments 621
GROUPS
IAS 27 Separate financial statements 393
IAS 28 Investments in associates 395
IAS 29 Financial reporting in hyperinflationary economies 417
IFRS 3 Business combinations 563
IFRS 10 Consolidated financial statements and separate financial 651
statements
IFRS 11 Joint arrangements 663
IFRS 12 Disclosure of interests in other entities 683
R J J BARNARD
BCom (Hons) (Potch), CA(SA), Senior Lecturer, NWU
S F BOOYSEN
DCom (Acc) (Pret), CA(SA)
E DU TOIT
BCom (Law) (Pret), MCom (International Accounting), CA(SA),
Senior Lecturer, UJ
H P ERASMUS
BAcc (Hons) (UFS), MCom (NWU), CA(SA), Senior Lecturer, NWU
K R HEATHCOTE
BCom (Hons) (Acc) (RAU), MCom (International Accounting), CA(SA),
Senior Lecturer, UJ
J F JONCK
BCompt (Hons) (UNISA), CA(SA), Senior Lecturer, NWU
S LAMPRECHT
BCompt (UFS), MAcc (Stell), ACMA (London), CGMA, CA(SA),
Senior Lecturer, US
C MALAN
BAcc (Hons) (UFS), CA(SA), Senior Lecturer, UFS
D B MONG
BAcc (Hons) (UFS), CA(SA), Senior Lecturer, NWU
A MOSTERT
BCom (Hons) (Acc) (UNISA), CA(SA), Senior Lecturer, NWU
H R B OPPERMANN
BCom (Hons) (Acc) (Pret), CA(SA)
D P SCHUTTE
BCompt (Hons) (UNISA), MCom (International Taxation),
PhD (Accountancy), CA(SA), Associate Professor, NWU
A SMIT
BCom (Hons) (Acc) (Pret), CA(SA), Senior Lecturer, UP
H H SMITH
MAcc (Stell), Registered Auditor, CA(SA),
Professional Accountant (SA), Private practice
L C STEYN
MCom, CA(SA), Senior Lecturer, NWU
T TOMES
BCom (Hons) (Acc) (Pret), CA(SA), Senior Lecturer, UP
H VAN DYK
BAcc (Hons) (UFS), CA(SA), Senior Lecturer, NWU
L VAN STADEN
MCom (Accountancy), CA(SA), Senior Lecturer, NWU
Preface
__________________________________________________________________
We would like to extend a word of gratitude to the publishers for their willingness
to participate in this contribution to the accounting field.
The Authors
October 2014
SUMMARY
QUESTIONS
1
Conceptual framework for financial reporting
(Bear in mind that most, if not all, transactions will influence two elements in the financial
statements due to the nature of the double entry system. We are not looking at the obvious
leg but at the less obvious one, e.g. money borrowed to purchase goods will obviously be a
liability, but will the goods be an asset or an expense?).
1. Classify the item according to the criteria in the Framework 4.4 – 4.35 (i.e.
asset/liability/income/expense). Pay special attention to the definitions in the
Framework 4.4 and 4.25.
2. Take note of Framework 4.5 and decide in terms of Framework 4.37 – 4.43 as well as
Framework 4.44 – 4.53 whether the item should be recognised in the financial
statements, considering:
• Probability of future economic benefits; and
• Reliability of measurement.
QUESTION FRW.1
To provide financial information about the reporting entity that is useful to existing and
potential investors, lenders and other creditors in making decisions about providing
resources to the entity.
QUESTION FRW.2
Zet (Pty) Ltd has disclosed the model of motor cars driven by its directors in its financial
statements over the past few years. Explain with reference to the qualitative characteristics
of financial statements whether the information complies with the principle of usefulness.
2
Conceptual framework for financial reporting
Information in respect of the model of motor cars cannot enhance the usefulness of financial
statements. Although the information may be faithfully represented, comparable,
verifiable and understandable, it is not relevant because it will probably not influence
the economic decisions of existing and potential investors, lenders and other creditors.
Information is relevant if it has predictive value, confirmatory value or both. Disclosure of
the model of motor cars driven by directors has no predictive value and it does not confirm
any fact that is useful for decision-making.
QUESTION FRW.3
By only referring to the criteria of the Framework, explain why one should agree with the
auditors’ requirement that the valuation adjustment and expense should be reflected in the
financial statements.
On 30 September 20.8 the loss is already probable and has a value (the maximum loss)
which can be measured with reliability. Confirmation of the situation was obtained on
15 October 20.8. This confirmation improved the verifiability of this information. The
amount is also material and recognition of the expense is therefore relevant for decision-
making. Recognition of the expense will also be a faithful representation of the particular
economic phenomenon (i.e. the weakening in credit quality of the debtor).
Explanatory note:
The question requires that reference should only be made to the criteria of the Framework in
agreeing with the auditors’ requirement. It is therefore not necessary to take into account the
requirements and principles of IFRS 9, IFRS 7 and IAS 10.
QUESTION FRW.4
Section A
3
Conceptual framework for financial reporting
Required
Section B
Alfa Ltd has spent R4,5 million during the financial year ended 31 December 20.1 on the
development of a new motor vehicle. The first prototype has been rejected for safety and
aesthetical reasons. Further development work over a period of six months, at a cost of
about R1 million, will be needed before the motor vehicle can be marketed. An additional
six months and further marketing costs are needed before income will be earned from the
vehicle. The project is running 10% over budget at this stage and the additional costs
(R1 million) have not been budgeted for. It is nevertheless expected that all the development
costs will be recovered from profits earned over a period of five years.
Required
Referring only to the criteria of the Framework, fully justify how you will treat the
development costs amounting to R4,5 million in the financial statements of Alfa Ltd as at
31 December 20.1.
Section A
Without a framework, accounting standards will contradict one another and accounting
standards will be issued without a sound theoretical base.
4
Conceptual framework for financial reporting
Section B
Definition of an asset: A resource under the control of the entity, as a result of a past event,
from which future economic benefits are expected to flow to the entity.
The development costs comply with this definition. However, the future economic benefits
must be considered. It seems that a long period of time will pass before benefits will flow
from the costs. It is also not yet certain whether the prototype will be produced.
Recognition: An asset is recognised when it is probable that the future economic benefits
will flow to the entity and the asset has a cost/value that can be measured reliably.
The value of the development costs can be measured. The probability of future benefits is
not 100% certain, as already discussed under definition of an asset.
In this situation the development costs also meet this definition. Matching will result in the
expenditure being offset against income when it is earned (even though the matching
concept is not pertinently stated as a requirement in the Framework, it is a general concept
that explains the logic behind various principles in accounting standards).
Qualitative requirements:
Underlying assumption:
Other considerations:
5
Conceptual framework for financial reporting
Conclusion: Recognise the R4,5 million as an asset. The asset should be amortised as soon
as the motor vehicles are available for sale in the normal course of business, and the expense
should be matched against the income (revenue) to be earned from selling the motor
vehicles. The value of the asset (balance still to be amortised) should be reviewed regularly
(at least annually) and if it will not be recovered from future income, the amount should be
expensed immediately (there are already indications that the inflow of economic benefits is
not 100% certain).
Explanatory note:
The question requires that the development costs should be classified by only referring to
the criteria of the Framework, therefore no mention was made of the requirements of IAS 38
for the recognition of development costs as an asset.
QUESTION FRW.5
Puff-Puff Farming Entities are renowned for the high-quality tobacco they produce on their
farms. During the year ended 30 June 20.5 they planted tobacco on all available land at a
cost of R1,5 million. At the financial year end it appears from projections that they will reap
a record harvest which will yield a return of about R5 million. (This was calculated by
multiplying the expected crop size by the current price of tobacco.) A further four months
will elapse after the year end before the tobacco is ready for sale.
The managing director (MD) and the financial director (FD) have a difference of opinion
regarding the treatment of the planting costs of the tobacco. In the previous year the MD
insisted that the planting costs of the crop be treated as an asset. After the financial
statements had been issued, unexpected hail and rain resulted in the loss of a substantial part
of the crop and they were unable to recover their costs.
The FD now insists that the planting costs should be treated as an expense in the 20.5
financial year. The MD does not support this approach as he argues that it will not be
consistent with the previous year, and it will also result in two years' expenses being
recognised in 20.5 with no income. He suggests that the planting costs should be treated as
an asset once again. The crop is insured this year against rain and hail damage.
A well-known cigarette manufacturer, Lucky Pakkie Ltd, contracted with Puff-Puff Farming
Entities to buy half of the current harvest for R2,5 million. The MD wants to recognise this
income at 30 June 20.5 since the contract was finalised during June 20.5. Other than a
deposit of R500 000 that was paid on the contract date, no further amount will be received
until delivery of the tobacco.
Required
6
Conceptual framework for financial reporting
The tobacco crop has an input cost of R1,5 million, which is material and can be
reliably measured.
Treatment as an asset
Definition of an asset
• Under control of the entity: The crop is planted on the entity's land and is being
developed and maintained by the entity.
• The past event: The planting of the crop.
• Future economic benefits: When the crop is harvested and sold in four months’
time, future economic benefits are expected to flow to the entity. There is a
measure of uncertainty in that natural causes like hail or crop disease can result in
harvest failure.
• The market for tobacco might also crash before the crop is sold. The crop is
insured, which reduces the risk of crop failure, and there is already a sales
commitment for half of the crop for more than the total input cost, which reduces
the risk of a reduction in the market price of tobacco.
Recognition
Treatment as an expense
Definition: Decrease in economic benefits in the form of the outflow of an asset that
results in a decrease in equity.
In this case the amount to plant and maintain the crop must be paid and can be seen as
the outflow of an asset. If the cost (amount) can be measured with reliability (as in this
case), it can be recognised as an expense.
The matching concept requires that the income from the crop and the expense to plant
it should be matched and accounted for in the same period, therefore the cost of
planting the crop should not be treated as an expense in 20.5 unless no future
economic benefit is expected from this crop (even though the matching concept is not
pertinently stated as a requirement in the Framework, it is a general concept that
explains the logic behind various principles in accounting standards).
7
Conceptual framework for financial reporting
Conclusion
In the absence of evidence to the contrary, it can be assumed that the crop will result in
a return in excess of the input cost. The cost of planting the crop should therefore be
treated as an asset in the 20.5 financial statements. This will be consistent with the
previous year and result in comparability from year to year. Matching will also be
achieved when the income from the crop is set off against the cost thereof.
Explanatory note:
The question requires that the planting costs should be classified by only referring to
the criteria of the Framework, therefore no mention was made of the requirements of
IAS 41 for the recognising of planting costs as an asset.
Although the revenue from the contract can be measured with reliability, there is a
problem with the probability criterion. This revenue will not be realised before
delivery of the crop (i.e. after harvest). If the harvest fails for some reason, the amount
will not accrue at all and the deposit will have to be repaid. The amount of
R2,5 million will therefore only be recognised as revenue when the crop has been
harvested and delivered to Lucky Pakkie Ltd. The recognition of revenue is therefore
restricted to those items that can be measured reliably and which have a sufficient
degree of certainty. The fact that the crop is insured is of no concern as it will be
insured at cost and not at selling price, and the insurance proceeds will only accrue
once a specific event takes place.
The deposit received of R500 000 will have to be treated as a current liability and not
as revenue.
Explanatory note:
The question requires that the income should be classified by only referring to the
criteria of the Framework, therefore no mention was made of the requirements of
IFRS 15 for the recognition of revenue.
QUESTION FRW.6
Section A
The following questions must be answered by only referring to the accounting Framework:
Required
a. Define the term recognition in terms of financial reporting and clearly distinguish
between recognition and disclosure in your answer.
b. State the three fundamental recognition criteria that an item must meet in order for it to
be recognised in the financial statements.
8
Conceptual framework for financial reporting
Section B
Woodpecker Ltd bought a farm in the Witels Mountain area that is suitable for growing pine
trees. They paid R1 million for the farm and immediately started to develop the land. This
involved making roads to the various planting areas, dividing the farm into sections, and
creating fire and windbreaks. Holes were also dug and young trees planted and fertilised.
This was done at a cost of R100 000 per hectare.
After the trees had been planted they had to be watered and the weeds had to be controlled.
The trees also had to be pruned to ensure that they grew straight and tall. This was an
ongoing operation with costs being continually incurred.
After a period of about 10 years the trees should be ready for harvest and should yield a
return in excess of 20% per annum on the costs incurred to establish them.
During the financial year ended 31 December 20.4, Woodpecker Ltd developed 10 hectares
at a cost of R1 million and spent R300 000 on watering and maintaining the trees.
The accountant reflected the cost of R1,3 million as an expense in the statement of profit or
loss and other comprehensive income. The financial director, however, feels that there are
enough reasons to justify treating the R1,3 million as an asset in the statement of financial
position as at 31 December 20.4.
Required
Section A
b. Recognition criteria:
• It must meet the definition of one of the elements.
• It is probable that future economic benefits associated with the item will flow to or
from the entity (or has already flowed).
• The item has a cost or value that can be measured reliably.
9
Conceptual framework for financial reporting
Section B
Treatment as an asset
Definition of an asset
• The plantation is under the control of the company. It is on the company's land, and is
being developed and maintained by the company.
• The past event is the development of the plantation.
• Future economic benefits: When the trees are felled and the wood is sold, economic
benefits are expected to flow to the company. It can therefore be assumed that the
plantation has been developed (and the costs incurred) with probable future economic
benefits in mind.
Recognition
Treatment as an expense
In this case, the cost to develop and maintain the plantation must be paid and can be seen as
the outflow of an asset. If the cost can be measured with reliability (as in this case) it can be
recognised as an expense, therefore if no future economic benefit is expected from this
outflow, it must be recognised as an expense.
Conclusion
Although a long time will pass before the trees will produce any income, it is fair to assume
that they were planted with the intention of earning a return over and above the costs
incurred. There are, therefore, sufficient reasons for treating the expenditure as an asset and,
by applying the matching principle, to match the costs of developing and maintaining the
plantation against the revenue earned from the sale of the trees (even though the matching
concept is not pertinently stated as a requirement in the Framework, it is a general concept
that explains the logic behind various principles in accounting standards). At regular
intervals the recoverable amount of the plantation should be determined and if the costs
incurred are higher than the recoverable amount, the costs should be written down
(expensed) to the recoverable amount.
10
Conceptual framework for financial reporting
Explanatory note:
The question requires that the costs of development and maintenance should be classified by
only referring to the criteria of the Framework, therefore no mention was made of the
requirements of IAS 41 for the recognition of the costs of development and maintenance as
an asset.
QUESTION FRW.7
Zero Ltd incurred costs amounting to R15 million during its financial year ended
31 December 20.9. The costs relate to the modification of its existing software system to
make it compliant with its new operating system. The expenditure incurred will only enable
the software system to continue to perform as it did originally.
The financial director of Zero Ltd has, however, decided that in view of the amount
involved, the amount should be capitalised as an asset at 31 December 20.9.
Required
Discuss, by referring only to the requirements of the Framework, whether or not you agree
with the financial director’s decision. Assume that the amount is material.
Treatment as an expense
The cost of the modification must be paid and is seen as an outflow of an asset. The cost can
be measured reliably. No future economic benefit can be expected which had not already
existed before the modification, therefore the cost of R15 million must be recognised as an
expense according to the requirements of the Framework.
QUESTION FRW.8
Mr de Jager, a director of Jagter Manufacturers Ltd, questions the recognition and disclosure
of a finance lease entered into for machinery to the value of R3 million, which is used in the
company's manufacturing process.
Mr de Jager is of the opinion that it is unnecessary to capitalise the machinery and the
corresponding loan, and that too much information will be disclosed when doing so.
Required
Explain to Mr de Jager, by only referring to the requirements of the Framework, why the
finance lease should be capitalised and disclosed as such.
11
Conceptual framework for financial reporting
QUESTION FRW.9
Sepi Ltd has developed a unique soft drink. It is very healthy and yet tastes like the top-
selling unhealthy brands. Unfortunately the product does not sell very well. Sepi Ltd has
identified the following reasons for this:
• The product is not being correctly marketed.
• The marketing problem is attributed to the fact that the product does not have a
trademark.
Sepi Ltd therefore set about developing a trademark for this product. All indications are that
it will be called Sepi Sola.
In developing the trademark, Sepi Ltd incurred the following expenses up to 30 June 20.5:
Rand
From budgets prepared and experience so far it seems that Sepi Ltd will enjoy benefits from
the trademark for the next 10 years. Sepi Ltd is already experiencing an upswing in the
demand for its product.
Required
Explain, with reasons, how Sepi Ltd should treat the cost of developing the trademark in the
financial statements for the year ended 30 June 20.5 in terms of the requirements of the
Framework. Discuss all the possible alternatives.
QUESTION FRW.10
Renewal Ltd manufactures a special rejuvenating product with no side effects. It apparently
induces a feeling of youth and vitality when it is used. This product is manufactured on a
farm owned by the company situated in the Agter-Witsenberg valley. One of the main
ingredients used in the product is the water from a mountain stream which flows through the
farm. In terms of the water rights, Renewal Ltd may use the water but it must allow 50% to
flow through to farms in the lower valley.
Renewal Ltd needs further financing but is unable to borrow any more money from the bank
as its debt to equity ratio is too high (due to high outstanding loans and few assets). The
managing director thought it was a pity that one of the company's most important assets, the
mountain stream, was not reflected on the company's statement of financial position.
The financial director reacted to this by indicating that he is more than willing to place a
value on this asset and include it in the statement of financial position. He suggests that they
should assume that the mountain stream will be perennial and unpolluted for the next
10 years.
12
Conceptual framework for financial reporting
Renewal Ltd has annual sales of R15 million and, due to the low input cost (mainly
mountain water), has a high gross profit percentage. As Renewal Ltd is operating in an
environmentally sensitive area, management is concerned about achieving environmental
excellence.
Required
Provide a well-reasoned argument as to whether or not the mountain stream may be treated
as an asset in the financial statements of Renewal Ltd. Include in your argument any
reservations you might have in this regard. Use the Framework as a basis and also indicate
how the mountain stream could be valued.
QUESTION FRW.11
Xilo Ltd is dependent upon its software to process its purchase and sales transactions and
has a year end of 31 January.
On 15 January 20.5, Xilo Ltd approached a computer consultant to establish whether or not
its software was compliant with its own new open-source operating system. On
31 January 20.5, the consultant informed Xilo Ltd that the software was not compliant and
that Xilo Ltd would need to spend about R3 million to make it so.
The financial director of Xilo Ltd has decided to provide for the amount of R3 million in its
accounting records for the financial year ended 31 January 20.5. Xilo Ltd has not yet
appointed a contractor to do the modifications.
Required
Discuss the financial director’s decision to provide for the amount of R3 million in the
financial statements of Xilo Ltd for the year ended 31 January 20.5. Assume that the amount
is material. Justify your answer by referring only to the requirements of the Framework.
13
Conceptual framework for financial reporting
14
IAS 1 & SIC 29
Presentation of financial statements
__________________________________________________________________
SUMMARY
QUESTIONS
15
Presentation of financial statements
Explanatory example
XYZ GROUP
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.2
20.2 20.1
Rand Rand
ASSETS
Non-current assets x x
Property, plant and equipment x x
Goodwill x x
Other intangible assets x x
Investment in associates x x
Investment in equity instruments not held for trading x x
Current assets x x
Inventory x x
Trade receivables x x
Other current assets x x
Cash and cash equivalents x x
Total assets x x
16
Presentation of financial statements
XYZ GROUP
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.2
(Illustrating the classification of expenses by function)
20.2 20.1
Rand Rand
Revenue x x
Cost of sales (x) (x)
Gross profit x x
Other income x x
Distribution costs (x) (x)
Administrative expenses (x) (x)
Other expenses (x) (x)
Finance costs (x) (x)
Share of profit of associates x x
Profit before tax x x
Income tax expense (x) (x)
Profit for the year x x
Other comprehensive income
Items that will not be reclassified to profit or loss x x
Property revaluation x x
Gain on property revaluation x x
Tax expense (x) (x)
Investments in equity instruments not held for trading x x
Gains arising during the year x x
Tax expense (x) (x)
Cash flow hedges of transactions that will lead to
non-financial items x x
Gains arising during the year x x
Tax expense (x) (x)
17
Presentation of financial statements
20.2 20.1
Rand Rand
XYZ GROUP
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.2
(Illustrating the classification of expenses by nature)
20.2 20.1
Rand Rand
Revenue x x
Other income x x
Changes in inventories of finished goods and work
in progress (x) (x)
Work performed by the entity and capitalised x x
Raw material and consumables used (x) (x)
Employee benefit expense (x) (x)
Depreciation and amortisation expense (x) (x)
Impairment of property, plant and equipment (x) (x)
Other expenses (x) (x)
Finance costs (x) (x)
Share of profit of associates x x
Profit before tax x x
Income tax expense (x) (x)
Profit for the year x x
Other comprehensive income
Items that will not be reclassified to profit or loss x x
Property revaluation x x
Gain on property revaluation x x
Tax expense (x) (x)
Investments in equity instruments not held for trading x x
Gains arising during the year x x
Tax expense (x) (x)
Cash flow hedges of transactions that will lead to
non-financial items x x
Gains arising during the year x x
Tax expense (x) (x)
18
Presentation of financial statements
20.2 20.1
Rand Rand
XYZ GROUP
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.2
Non-
Reva- Trans- control-
Share luation lation Retained ling Total
capital surplus reserve earnings Total interest equity
Rand Rand Rand Rand Rand Rand Rand
Balance at
1 January 20.1 x x (x) x x x x
Changes in
accounting policy (x) (x) (x) (x)
Restated balance x x (x) x x x x
19
Presentation of financial statements
Non-
Reva- Trans- control-
Share luation lation Retained ling Total
capital surplus reserve earnings Total interest equity
Rand Rand Rand Rand Rand Rand Rand
Changes in equity
for 20.1
Total comprehen-
sive income for
the year x x x x x x
Profit or loss x x x x
Other comprehen-
sive income x x x x x
Dividends
(Rx per share) (x) (x) (x) (x)
Issue of share capital x x x
Transfer to retained
earnings (x) x
Balance at
31 December 20.1 x x (x) x x x x
Changes in equity
for 20.2
Total comprehen-
sive income for
the year x x x x x x
Profit or loss x x x x
Other comprehen-
sive income x x x x x
Dividends
(Rx per share) (x) (x) (x) (x)
Issue of share capital x x x
Balance at
31 December 20.2 x x (x) x x x x
Explain what the objectives of IAS 1 are and how the accounting standard aims to achieve
this.
The accounting standard prescribes the basis for the presentation of general purpose
financial statements. In so doing, it ensures that the entity’s own financial statements will be
comparable from year to year, and also with those of other entities.
To achieve this objective, the accounting standard sets out overall requirements for the
presentation of financial statements, guidelines for the structure of financial statements and
minimum content requirements.
20
Presentation of financial statements
According to IAS 1, what are the main components of these financial statements?
The accounting standard, IAS 1, requires each material class of similar items to be presented
separately in the financial statements. Items of dissimilar nature or function should be
presented separately unless they are immaterial.
Explain what is meant by the term ‘material’.
IAS 1 states in its definitions that an item is material if it could, individually or collectively,
influence the economic decisions of users taken on the basis of the financial statements. An
item may be material due to its size or nature. If a line item is not individually material, it is
aggregated with other items either on the face of the financial statements or in the notes. An
item that is not sufficiently material to warrant separate presentation on the face of the
statements may nevertheless be sufficiently material for it to be presented separately in the
notes.
Circumstances may arise where management of an entity is of the opinion that in complying
with an accounting standard, the financial statements of the entity will not fairly present the
financial position, financial performance and cash flows of that entity.
It will then be necessary to depart from the requirements of the accounting standard,
provided that the relevant regulatory framework requires, or otherwise does not prohibit,
such a departure.
Explain what the disclosure requirements in terms of IAS 1 would be in such circumstances.
21
Presentation of financial statements
• That management has concluded that the financial statements fairly present the entity’s
financial position, financial performance and cash flows;
• The fact that the financial statements comply in all material respects with the applicable
standards and interpretations, except for the departure in question;
• The title of the IFRS or interpretation from which the entity has departed; the nature of
the departure, including the reason why compliance with the IFRS or interpretation
would be misleading; the treatment required by the IFRS or interpretation and the
treatment adopted by management instead; and
• For each period presented, the financial impact of the departure on each item in the
financial statements that would have been reported in complying with the requirement.
c. Discuss the standards of IAS 1 regarding ‘offsetting’. Your discussion should cover
assets, liabilities, income and expenses, and give an example to illustrate each one.
a. Going concern basis: This is the assumption that an entity will continue to operate
into the foreseeable future (which covers a period of at least 12 months from the
reporting date). Management is required to assess the entity’s ability to meet this
criterion and unless management intends to liquidate the entity or to cease trading (or
has no realistic alternative but to do so), the financial statements should be prepared on
a going concern basis. When the financial statements are not prepared on a going
concern basis, this fact should be disclosed together with the basis used, and the reason
why the entity cannot be considered to be a going concern.
22
Presentation of financial statements
Accrual basis: Under the accrual basis of accounting, items are recognised as assets,
liabilities, equity, income and expenses (the elements of financial statements) when
they occur and not when cash is received or paid, and when they satisfy the definitions
and recognition criteria for those elements in the Framework. Accordingly, an entity
should prepare its financial statements, other than cash flow information, under the
accrual basis of accounting.
Where the presentation or classification of items in the financial statements has been
changed, IAS1.41 and .42 requires:
c. In terms of IAS1.32:
• Assets and liabilities, and income and expenses, cannot be offset against one
another unless an IFRS requires or permits it. The reporting of assets after
deduction of valuation allowances (for example in the case of inventory, an
allowance for obsolete inventory) is not seen as offsetting. A situation where
offsetting is however allowed is, for example, in terms of IAS 17 where the gross
investment in lease contracts and unearned finance income can be offset against
each other to disclose only the net amount. Similarly, expenditure related to a
provision that is reimbursed under a contractual arrangement with a third party
(for example a supplier’s warranty agreement), may be netted in profit or loss
against the related reimbursement.
The accounting standard, IAS 1, requires that certain information concerning the structure
and contents of financial statements be clearly identified and prominently displayed on the
face of the financial statements of an entity.
Each component of the financial statements should be clearly identified. In addition, the
following information should be displayed prominently according to IAS1.51:
23
Presentation of financial statements
• The name of the reporting entity or other means of identification, and any change in that
information from the preceding reporting date;
• Whether the financial statements presented relate to an individual entity or a group of
entities;
• The date of the end of the reporting period or the period covered by the set of financial
statements or notes;
• The presentation currency; and
• The level of precision of the amounts presented in the financial statements (e.g. R’000
or R’million).
A distinction is made in the accounting standard, IAS 1, between current and non-current
assets, and current and non-current liabilities.
According to IAS1.66:
A current asset is an asset which:
• is expected to be realised in, or is intended for sale or consumption in the entity’s
normal operating cycle;
• is held primarily for the purposes of being traded;
• is expected to be realised within 12 months after the reporting period; or
• is cash or a cash equivalent, unless it is restricted from being exchanged or used to settle
a liability for at least 12 months after the reporting period.
According to IAS1.69:
A current liability is a liability which:
• is expected to be settled in the entity’s normal operating cycle;
• is held primarily for the purpose of being traded;
• is due to be settled within 12 months after the reporting period; or
• the entity does not have an unconditional right to defer settlement of for at least 12
months after the reporting period.
All other assets and liabilities are to be classified as non-current assets or non-current
liabilities.
Explain whether the liability should be classified as current or non-current if this refinancing
agreement is completed after the reporting date and before the financial statements are
authorised for issue.
24
Presentation of financial statements
The refinancing of the liability occurs after year end and does not affect the entity’s liquidity
and solvency at the reporting date, therefore it is a non-adjusting event after the reporting
period, which should only be disclosed in a note. The liability would thus still be classified
as a current liability at year end.
The following balances were taken from the final trial balance of Mossie Ltd for the year
ended 31 December 20.5:
Rand
Revenue 600 000
Cost of sales 200 000
Other expenses (all tax deductible) 200 000
Gain on disposal of vehicle (taxable profit = R5 000) 5 000
Gain on disposal of land (not taxable) 40 000
Loss due to hail damage to inventories (tax deductible) 9 000
Impairment of goodwill (not tax deductible) 5 000
Loss from expropriation of land (not tax deductible) 15 000
Payment received from a supplier for breach of contract (not taxable) 4 000
Allowance for credit losses written back (taxable) 8 000
Investment (at cost) in liquidated subsidiary written off (not tax deductible) 12 000
Loss on long-term construction contract (tax deductible) 20 000
Income tax expense (1) 56 000
Additional information
1. Assume that all amounts are material for purposes of disclosure.
Rand
Operating lease expenses – Offices 20 000
Depreciation – Machinery 10 000
– Vehicles 15 000
– Equipment 15 000
Auditors’ remuneration for audit services 40 000
4. The land that has been expropriated had a cost price of R70 000.
Required
Prepare the statement of profit or loss and other comprehensive income and profit before tax
note of Mossie Ltd from the available information for the year ended 31 December 20.5 in
accordance with the requirements of International Financial Reporting Standards (IFRS).
Comparative amounts and notes in respect of accounting policy and tax are not required
(UNISA – adapted).
25
Presentation of financial statements
MOSSIE LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.5
Note Rand
MOSSIE LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.5
Profit before tax is stated after taking the following into account:
Rand
Expenses
Operating lease payments (1) 20 000
Depreciation (2) 40 000
26
Presentation of financial statements
Ape Ltd was incorporated on 1 January 20.1, and profit for the year ended
31 December 20.1 amounted to R90 000.
There were 100 000 ordinary shares in issue throughout the year and the issued non-
cumulative preference share capital has remained unchanged during the year. All shares
were issued on 1 January 20.1.
Ape Ltd had the following transactions, relating to dividends, for the year ended
31 December 20.1:
• Paid an interim ordinary dividend of R10 000 on 30 June 20.1.
• Paid an interim preference dividend of R15 000 on 30 June 20.1.
• The directors proposed a final ordinary dividend of R20 000 and a final preference
dividend of R15 000 on 31 December 20.1.
Required
Calculate and disclose dividends paid and dividend per share for Ape Ltd for the year ended
31 December 20.1 in accordance with the requirements of IAS 1.
APE LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.1
Retained
earnings
Rand
APE LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.1
A final ordinary dividend of R20 000 (R0,20 per share (2)) was proposed on
31 December 20.1.
27
Presentation of financial statements
Use the information provided in the previous question and consider the following additional
information:
The issued share capital of Ape Ltd remained unchanged during the year ended
31 December 20.2.
The dividends proposed by the directors on 31 December 20.1 were approved by the
shareholders at the annual general meeting held on 31 March 20.2. These dividends were
paid on 8 May 20.2.
Interim dividends of R15 000 each were paid to both classes of shareholders on
30 June 20.2.
On 31 December 20.2 the directors proposed a final ordinary dividend of R25 000 and a
final preference dividend of R15 000.
Required
Calculate and disclose dividends paid and dividend per share for Ape Ltd for the year ended
31 December 20.2 in accordance with the requirements of International Financial Reporting
Standards (IFRS).
APE LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.2
Retained
earnings
Rand
20.2 20.1
Rand Rand
28
Presentation of financial statements
APE LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.2
A final ordinary dividend of R25 000 (R0,25 per share (3)) was proposed on
31 December 20.2.
Roux Ltd had 700 000 ordinary shares in issue on 1 March 20.5. On 1 September 20.5,
Roux Ltd issued 500 000 ordinary shares for cash at R4,50 each. On 31 May 20.6, Roux Ltd
issued 750 000 ordinary shares in terms of a rights issue at fair value and then had a
capitalisation issue on 30 November 20.6 in terms of which one ordinary share was issued
for every 100 ordinary shares in issue on this date.
• 28 February 20.6
− An interim ordinary dividend was paid on 31 August 20.5 amounting to R350 000
to all shareholders registered as such on 15 August 20.5; and
− The directors proposed a final ordinary dividend on 28 February 20.6 amounting
to R420 000.
• 28 February 20.7
− The dividend of R420 000 proposed by the directors on 28 February 20.6 was
approved at the shareholders’ annual general meeting and was paid on
31 May 20.6;
− An interim ordinary dividend of R390 000 was paid on 31 August 20.6 to all
shareholders registered as such on 15 August 20.6; and
− The directors proposed a final ordinary dividend on 28 February 20.7 amounting
to R787 800.
Required
In accordance with the requirements of IAS 1, calculate and disclose dividends paid and
dividend per share of Roux Ltd for the year ended:
a. 28 February 20.6; and
b. 28 February 20.7.
29
Presentation of financial statements
a. 28 February 20.6
ROUX LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
28 FEBRUARY 20.6
Retained
earnings
Rand
Balance 1 March 20.5 x
Changes in equity for 20.6
Dividends paid (350 000)
Total comprehensive income for the year x
Balance 28 February 20.6 x
ROUX LTD
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.6
A final ordinary dividend of R420 000 (R0,35 per share (2)) was proposed on
28 February 20.6.
b. 28 February 20.7
ROUX LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
28 FEBRUARY 20.7
Retained
earnings
Rand
Balance 1 March 20.5 x
Changes in equity for 20.6
Dividends paid (350 000)
Total comprehensive income for the year x
Balance 28 February 20.6 x
Changes in equity for 20.7
Dividends paid (810 000)
Total comprehensive income for the year x
Balance 28 February 20.7 x
30
Presentation of financial statements
ROUX LTD
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.7
A final ordinary dividend of R787 800 (0,40 per share (1)) (20.6: R420 000 (R0,35 per
share)) was proposed on 28 February 20.7.
(1) Calculation of dividend per ordinary share as adjusted for the capitalisation issue:
Paid or Adjusted
proposed
Rand Rand
20.6
Interim
(R350 000/700 000 shares) 0,50
(R350 000/[700 000 + 700 000/100]) 0,50
Final
(R420 000/1 200 000 shares) 0,35
(R420 000/[1 200 000 + 1 200 000/100]) 0,35
20.7
Interim
(R390 000/1 950 000 shares) 0,20
(R390 000/[1 950 000 + 1 950 000/100]) 0,20
Final
(R787 800/1 969 500 shares) 0,40
(R787 800/1 969 500) 0,40
The financial director of the company is concerned about the accounting implications of two
contracts entered into during the current 20.1 financial year. He has asked you, the audit
partner, to write a detailed report in this regard.
− Industrial Ltd has the right to deliver a wastage removal service to the local
community for a 10-year period.
− Two Nissan 1600 vehicles, to the value of R150 000 each, must be acquired on
1 February 20.1. These vehicles will become the property of the local municipality
after the 10-year period has expired. If the vehicles travel more than 400 000 km
during the 10-year period, an amount of R50 000 must be paid to the municipality
for every 10 000 km travelled in excess of the 400 000 km.
31
Presentation of financial statements
− The removal service must be provided at a maximum charge of R120 per month to
residential owners and R200 per month to industrial owners. These maximum
amounts will be reviewed on 1 January 20.5.
− The municipality may not enter into a similar arrangement with any other party
before the 10-year period has elapsed.
− The arrangement is renewable after the 10-year period for a further two-year
period if Industrial Ltd so chooses.
2. Outsourcing of IT department
Required
Prepare the report as required by the financial director. Refer to the requirements of
International Financial Reporting Standards (IFRS) which may be applicable and list the
specific disclosure requirements applicable to service concession arrangements in your
report.
REPORT
Financial Director,
In exchange for the concession provider’s commitment, the concession operator has to
deliver these services for a specified period and, under specific terms and when
applicable, the concession operator must return at the end of the concession period
those rights received at the beginning of the concession period.
The common characteristic of the above is that the concession operator both receives a
right and incurs an obligation to provide public services.
The arrangement you concluded with the local municipality meets the above definition
as your entity both received a right and incurred a liability to deliver the wastage
removal service to the local community. This right and liability originates from the
contract.
32
Presentation of financial statements
Apart from the disclosure requirements in SIC 29, the requirements of IAS 16 must
also be adhered to in respect of the purchased vehicles. If this is an onerous contract,
IAS 37 is also applicable.
• A contract was entered into by Industrial Ltd and the local municipality
whereby Industrial Ltd will deliver a wastage removal service for a period of
10 years to the local community.
− Significant terms of the arrangement that may affect the amount, timing and
certainty of future cash flows:
• Two Nissan 1600 vehicles, to the value of R150 000 each, must be acquired
on 1 February 20.1. These vehicles will become the property of the local
municipality once the 10-year period has expired. If the vehicles travel more
than 400 000 km during the 10-year period, an amount of R50 000 must be
paid to the municipality for every 10 000 km travelled in excess of the
400 000 km.
Industrial Ltd has the right to deliver a wastage removal service for a 10-
year period. This right is associated with an equal but opposite liability to
deliver this service. The service must be provided at a maximum charge of
R120 per month to residential owners and R200 per month to industrial
owners. These maximum amounts will be reviewed on 1 January 20.5.
Two Nissan 1600 vehicles, to the value of R150 000 each, must be acquired
on 1 February 20.1.
• Renewal option:
The municipality may not enter into a similar arrangement with any other
party before the end of the concession term.
33
Presentation of financial statements
• Since the arrangement was entered into, no changes in the arrangement have
taken place.
2. Outsourcing of IT department
This is not a service concession arrangement as described in SIC 29, since SIC 29 is
not applicable to the outsourcing of internal services.
Audit partner
Ace Ltd entered into a refinancing agreement with the financial institution on
10 January 20.4 in terms of which the outstanding amount may be repaid in two annual
instalments of R127 800 each. The discretion in terms of the refinancing agreement vests in
the financial institution. Should Ace Ltd default, the outstanding amount is repayable on
demand.
Ace Ltd has a 31 December year end. The financial statements for the year ended
31 December 20.3 were authorised for issue on 25 February 20.4.
Required
Explain how the above-mentioned matter should be treated for accounting purposes in the
financial statements of Ace Ltd for the year ended 31 December 20.3 in accordance with the
requirements of IAS 1.
You are preparing the financial statements of Africa Media Ltd for the year ended
30 September 20.2. The company is a leading publisher of popular magazines and
publications that deal with music and related entertainment. An analytical review of the
general ledger accounts revealed the following:
34
Presentation of financial statements
1. Salary bonuses of R22 million, compared to an average of R5,8 million during the
previous few years, have been paid to employees. The financial manager explained that
a new incentive scheme was adopted in terms of which all employees share in the
benefits of increased sales figures.
4. A loss of R1,8 million is attributable to the loss suffered after an uninsured property was
destroyed by an earthquake.
5. During the current year the company was responsible for the formation of the Africa
Media Foundation with its main purpose being to donate funds to welfare organisations.
This foundation forms part of Africa Media Ltd's social investment programme. The
company contributed R3 million to the fund.
Required
Discuss how the above-mentioned matters will be accounted for and disclosed in the
statement of profit or loss and other comprehensive income of Africa Media Ltd according
to the requirements of International Financial Reporting Standards (IFRS).
Rand
During the year ended 30 June 20.6, the following movements in the entity’s equity
occurred:
Rand
The opening retained earnings should be credited with an amount of R37 500 as a result of
an accounting policy change during the year ended 30 June 20.6.
35
Presentation of financial statements
Required
a. Prepare the other comprehensive income section of the statement of profit or loss and
other comprehensive income of Arium Ltd for the year ended 30 June 20.6. Ignore
taxation.
b. Prepare the statement of changes in equity of Arium Ltd for the year ended 30 June
20.6. Ignore comparative amounts and taxation.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Babe Ltd was incorporated on 1 July 20.4 with an authorised ordinary share capital
comprising 2 000 000 ordinary shares. On incorporation, 1 000 000 of these shares were
issued.
The following information is presented to you for the financial year ended 30 June 20.6:
BABE LTD
EXTRACT FROM STATEMENT OF CHANGES IN EQUITY FOR THE
YEAR ENDED 30 JUNE 20.6
Retained
earnings
Rand
Additional information
1. A final ordinary dividend of R300 000 (20.5: R500 000) was proposed by the
directors on 30 June 20.6 for 20.6. This proposed dividend still has to be approved by
the shareholders at year end.
2. The dividend proposed by the directors on 30 June 20.5 was approved by the
shareholders of Babe Ltd on 10 August 20.5, whereafter the dividend was paid on
25 August 20.5.
Required
Calculate and disclose dividend per share of Babe Ltd for the year ended 30 June 20.6 in
accordance with the requirements of IAS 1.
36
Presentation of financial statements
Milo Ltd had 500 000 10% participating preference shares and 4 000 000 ordinary shares in
issue throughout the two financial years ended on 30 June 20.7 and 30 June 20.8.
The 10% participating preference shares have an additional right to earn dividend income of
one-tenth of the total dividend paid/proposed on the ordinary shareholders while Milo Ltd is
a going concern or on liquidation of Milo Ltd.
On 30 June 20.7 an ordinary dividend of R0,50 per share was proposed by the directors.
This dividend was approved by the shareholders at the annual general meeting held on
15 October 20.7.
During the financial year ended 30 June 20.8 an interim ordinary dividend and preference
dividend was paid on 31 December 20.7. The directors proposed a final ordinary dividend
on 30 June 20.8 of R1 million. Total dividends paid in cash during the year ended
30 June 20.8 amounted to R3 155 000.
Required
Calculate and disclose dividend per share of Milo Ltd for the year ended 30 June 20.8 in
accordance with the requirements of IAS 1.
• Hewitt Ltd re-acquired 100 000 of its own shares at R3,50 per share from
Clijsters Ltd, the parent of the Clijsters Group.
Required
Disclose the statement of changes in equity of Hewitt Ltd for the year ended 31 December
20.1 in compliance with the requirements of International Financial Reporting Standards
(IFRS). Ignore comparative amounts.
37
Presentation of financial statements
38
IAS 2
Inventories
__________________________________________________________________
QUESTIONS
IAS 2.10 Net realisable value of finished goods and raw materials
IAS 2.11 Inventory valuation and calculation of net realisable value of raw materials
IAS 2.12 Inventory valuation and profit calculation
IAS 2.13 Inventory valuation and disclosure
IAS 2.14 Allocation of production overheads and disclosure*
IAS 2.15 Inventory valuation, net realisable value and disclosure*
* These questions are not in the textbook, but are available in the electronic guide for
lecturers containing the suggested solutions for questions without answers.
39
Inventories
Bata Ltd manufactures takkies. The normal production capacity of the plant is 500 000 pairs
of takkies per annum. Owing to an increase in local demand, abnormally high production
volumes were reached for the financial year ended 31 December 20.2 with the manufacture
of 550 000 pairs of takkies.
There were 20 000 pairs of takkies on hand at 1 January 20.2, and 540 000 pairs of takkies
were sold during the year. No raw material inventory is maintained as purchases are
matched to production demand.
The following information is available for the year ended 31 December 20.2:
Rand
It is estimated that 60% of salaries and related contributions to pension fund, medical aid
fund and UIF are attributable to the management of the manufacturing activities. Wages
represent direct labour costs incurred in the production of takkies.
The estimated net realisable value exceeds the cost of the unsold inventory.
Required
Calculate the value of the closing inventory of Bata Ltd at 31 December 20.2 in compliance
with the requirements of International Financial Reporting Standards (IFRS).
40
Inventories
41
Inventories
According to IAS 2.13, in periods of abnormally high production the amount of fixed
production overheads allocated to each unit of production is reduced so that inventory is not
measured above cost, therefore the allocation of fixed production overheads was based on
actual production of 550 000 pairs of takkies and not on normal capacity of 500 000 pairs.
Rascall Ltd is a diversified entity whose reporting date is 31 December. The following
information, relating to inventory, is available:
Telebunken radios
On 31 December 20.3 the Minister of Finance announced the scrapping of import duties on
imported radios. According to the marketing director, this announcement will enable the
company to import a similar product at R380 per unit which could be sold at an estimated
selling price of R450 per unit.
Product ‘Blush’
Rascall Ltd concluded a contract with Group Six Ltd to deliver 10 000 units of product
Blush at a fixed price of R1 600 per unit. Delivery of the units took place evenly over the
negotiated delivery period. Rascall Ltd manufactured 12 000 units. The production cost per
unit of Blush is R1 000. The units produced in excess of the contract requirements (more
than 10 000) are sold at R800 per unit.
Selling price
per unit
Units Rand
42
Inventories
Product ‘Jax’
On 31 December 20.2, 2 000 units of Jax were on hand. The cost per unit of Jax is R3 000
and the selling price is R5 000. On 31 December 20.2 the marketing director informed the
board of directors that a competitor would introduce a similar product to the market on
1 January 20.3 at a selling price of R2 000 per unit. The board decided to reduce the selling
price of Jax to R2 000 per unit as from 1 January 20.3 in order to be able to compete in the
marketplace.
On 31 December 20.3 the competitor was liquidated and Rascall Ltd increased the selling
price of Jax to R5 000 per unit. On 31 December 20.3, 1 200 units of Jax were on hand.
Raw material Dol is used in the production of Kosp. Dol was originally purchased at R120
per unit but purchases of raw material are now made from a new foreign supplier, which
resulted in a reduction of the unit cost to R30. On 31 December 20.3, 20 000 units of Dol
were on hand (purchased at a unit cost of R120). The cost of production of a unit Kosp is
R1 000. The drop in cost price per unit of Dol (due to the new supplier) resulted in the
selling price of Kosp being reduced to R940 per unit. Three units of Dol are used to produce
one unit of Kosp.
Required
Rascall Ltd
43
Inventories
Unique Ltd entered into the following inventory transactions during April 20.6:
April
Unique Ltd uses a perpetual inventory system. On 30 April 20.6 it was determined that the
normal selling price of the units had dropped to R5,00 per unit because a competitor had
entered the market. Normal selling expenses amount to R1,00 per unit.
Required
a. Calculate the cost of sales in the statement of profit or loss and other comprehensive
income for April and the value of inventory on hand at 30 April 20.6 using each of the
following cost formulas:
i. FIFO (first-in, first-out); and
ii. Weighted average cost method.
b. Disclose the above information in the statement of profit or loss and other
comprehensive income of Unique Ltd for April 20.6 in compliance with the
requirements of International Financial Reporting Standards (IFRS).
44
Inventories
i. FIFO method
Rand
Closing inventory
Cost price (calc 2) 445,60
b. Disclosure
UNIQUE LTD
EXTRACT FROM THE STATEMENT OF PROFIT/LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE MONTH ENDED 30 APRIL 20.6
FIFO Weighted
average
Rand Rand
45
Inventories
Calculations
Action Ltd, which was incorporated on 1 January 20.3, manufactures product ‘Power’ for
the building industry. Action Ltd has a reporting date of 31 December.
46
Inventories
Year 20.5
Rand
Total 136 000
Insurance – factory plant and equipment 6 000
Selling expenses 18 000
Rent – factory 80 000
Depreciation – offices 10 000
Auditors’ remuneration 16 000
Insurance – delivery vehicles 6 000
• Fixed production overheads have increased annually at the same rate as variable costs.
Required
Calculate the value of inventory of Action Ltd for the reporting dates 31 December 20.3 to
20.5 in accordance with the requirements of International Financial Reporting Standards
(IFRS).
(1) 87 120/6 600 = 13,20; 77 000/7 000 = 11,00; 60 000/6 000 = 10,00
(2) (11,00 – 10,00)/10,00 × 100 = 10%; (13,20 – 11,00)/11,00 × 100 = 20%
47
Inventories
The following information has been extracted from the trial balance of Tech Ltd, a
manufacturer with a reporting date of 31 December 20.6:
Rand
Dr/(Cr)
Additional information
1. During the year there was an abnormal spillage of raw materials of R20 000.
2. Fixed production overheads are allocated at R2 per unit based on a normal capacity of
50 000 units. The actual production for 20.6 was 40 000 units.
48
Inventories
Stationery 10 000
Packaging materials 15 000
Required
Prepare the disclosure related to all matters of inventories in the financial statements of Tech
Ltd for the reporting date 31 December 20.6 in compliance with the requirements of
International Financial Reporting Standards (IFRS).
Disclosure
TECH LTD
EXTRACT FROM THE STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER 20.6
Note Rand
ASSETS
Current assets
Inventory 2 145 000
TECH LTD
EXTRACT FROM THE STATEMENT OF PROFIT OR LOSS AND
OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED
31 DECEMBER 20.6
Rand
49
Inventories
TECH LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.6
1. Accounting policy
1.1 Inventory
Inventory is valued at the lower of cost and net realisable value. Cost is assigned using
the first-in, first-out cost formula.
2. Inventory Rand
Calculations
50
Inventories
Dumela Ltd purchases computer equipment. Some of this equipment is sold to customers as
part of stand-alone computer installations, while the other computer equipment is installed
by Dumela Ltd in a specific manufacturing plant.
Dumela Ltd currently uses the same cost formulas to value its entire computer inventory.
Required
Discuss, in terms of IAS 2, whether it will be allowed to value the stand-alone computer
equipment differently from the computer equipment used in the manufacturing plant.
Paragraph 25 of IAS 2 requires that either one of two cost formulas (FIFO or weighted
average) may be used to value inventories which have a similar nature and use to an entity.
Paragraphs 25 and 26 of IAS 2 state that where items of inventory have a different nature or
use to the entity, different cost formulas may be justified. However, a difference in
geographical location of inventories is, by itself, not sufficient to justify the use of different
cost formulas.
Dumela Ltd, therefore, could apply one cost formula to the computer equipment sold as
stand-alone computer equipment to customers and another cost formula to the computer
equipment installed in the manufacturing plant. This treatment is allowed since the computer
equipment has a different use in each case.
The following information was extracted from the financial records of Zela Ltd for the
reporting date 31 December 20.2:
• Joint products
51
Inventories
The 15 000 kg of finished goods represents 5 000 kg of JP1 and 10 000 kg of JP2. The
net realisable value of both products is in excess of their cost.
At 31 December 20.2, there are 1 000 kg of JP1 and 2 000 kg of JP2 on hand.
• By-product
By-product YY can be sold for R3 per unit while Product Y can be sold for R30 per
unit.
At 31 December 20.2, there are 10 000 units of Product Y and 100 units of by-product
YY on hand.
Required
Calculate the value of the inventory items on hand as at 31 December 20.2 of Zela Ltd in
accordance with the requirements of International Financial Reporting Standards (IFRS).
By-product Rand
YY (1) 300
Babe Ltd began operations on 5 January 20.4. The following costs were incurred during the
year ended 31 December 20.4:
52
Inventories
Rand
The level of normal production was expected to be 100 000 units for the year ended
31 December 20.4, whereas the actual level of production was 80 000 units for this period.
Of the raw materials, 80% have been used in the manufacturing process during the year.
Work in progress represents 20% of the total manufacturing costs at 31 December 20.4.
As at 31 December 20.4, 60% of those goods that were finished were sold at cost plus a
10% mark-up.
At year end it was apparent that the entire balance of finished goods could be sold for
R400 000, the entire balance of work in progress could be sold for R220 000 (assuming that
the work in progress will be completed at a further cost of R50 000 and selling costs of
R5 000 will be incurred), and the entire inventory of raw materials could be sold ‘as is’ for
R26 000 (no further costs will be incurred).
Required
53
Inventories
Rand
Work in progress at 31 December 20.4
Closing inventory (4) 200 000
c. BABE LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.4
1. Accounting policies
1.1 Inventories
Inventory is measured at the lower of cost and net realisable value using the weighted
average cost formula.
2. Inventories 20.4
Rand
Pices Ltd has the sole right to distribute a certain product in Gauteng. The product is
purchased from the manufacturer and sold at a mark-up of 25% on the cost of the purchase
before any discounts are taken into account.
54
Inventories
Pices Ltd always pays the manufacturer 10 days after the receipt of the product, because
they are then entitled to a 5% settlement discount.
A large customer placed an order for products to the value of R100 000 (sales price) with
Pices Ltd. Pices Ltd purchased the products from the manufacturer and delivered them to
the customer.
Required
a. Prepare the journal entries for the purchase and sale transactions in the records of
Pices Ltd if the customer pays cash on the date of delivery and a cash discount of 10%
is given.
b. Prepare the journal entries for the sale transaction in the records of Pices Ltd if the
customer usually pays 10 days after the product is delivered to the customer and a
settlement discount of 10% is given.
Creditor 80 000
Bank (76 000)
Settlement discount allowance account (4 000)
(1) 100 000 × 100/125 = 80 000
80 000 × 95% = 76 000
Bank 90 000
Debtor (100 000)
Settlement discount allowance account 10 000
55
Inventories
Additional information
1. More competitors have entered the market resulting in the selling price being reduced
by R5 to R20. The R20 represents the average price at which finished goods can be
sold.
Required
Calculate the net realisable value per unit of inventory of Dolo Ltd in accordance with the
requirements of International Financial Reporting Standards (IFRS).
Daisy Ltd manufactures and sells a specific product. Purchases of raw materials are done
every Monday and amount to 15 000 tons per week. The supplier’s price for the raw
materials was R1 000 per ton for the first semester of 20.5, but it increased on 1 July 20.5 to
R1 500 per ton and then stayed constant until 1 February 20.6, after which the price
decreased to R1 300 per ton. Additional customs tax of R100 per ton and transport costs to
the company's factory of R200 per ton are also paid.
The following production information is available for the reporting date 31 December 20.5:
The finished goods are marketed at R2 400 per ton. Costs to sell amounted to R30 000 per
week and delivery costs to R70 per ton.
There was no inventory on hand at the beginning of the year, but at 31 December 20.5 there
were 50 000 tons of raw materials and 2 000 tons of finished goods on hand. It is expected
that the costs to sell and deliver as mentioned above will still be valid for 20.6.
56
Inventories
Required
Egoli Ltd has its head office in Gauteng and owns a factory in Mpumalanga. The company
manufactures a product known as ‘Gold star’ at the factory in Mpumalanga as there is
surplus unskilled labour available. The raw materials are transported to Mpumalanga from
Gauteng. A small quantity of the product is sold in Mpumalanga while the remainder is sent
to Gauteng for sale.
The following information was obtained from the factory's records on 31 December 20.6:
Rand
Dr/(Cr)
On 31 December 20.6 the following information was extracted from the accounting records
of Egoli Ltd:
Rand
Additional information
1. There were only finished units of ‘Gold star’ on hand at Egoli Ltd’s head office on
31 December 20.6. Only raw material inventory is on hand in Mpumalanga. There were
no inventory shortages, work in progress at the beginning or end of the year or opening
inventory of raw materials and finished goods.
57
Inventories
2. One unit of raw material is used to produce one unit of ‘Gold star’.
Required
a. Calculate the value of the closing inventory of Egoli Ltd at 31 December 20.6 in
compliance with the requirements of International Financial Reporting Standards
(IFRS).
b. Calculate the profit or loss before tax of Egoli Ltd for the year ended 31 December
20.6 in compliance with the requirements of International Financial Reporting
Standards (IFRS).
Bleshoender Ltd was incorporated on 15 December 20.0. The accountant has requested your
assistance with the calculation and disclosure of inventory in the financial statements for the
year ended 31 December 20.1.
The company manufactures and sells poultry feed. Three basic raw materials, namely bone
meal, maize meal and a growth stimulant, are mixed in a predetermined ratio and are
prepacked in 10 kg bags. No loss in kilograms occurs during the process.
Rand
Additional information
2. The normal capacity for the plant for the period under review is 850 bags.
3. The bone meal, maize meal, growth stimulants and finished products are valued on the
FIFO basis and the 10 kg bags on the weighted average basis.
4. During the year the bags of feed were sold at R100 per bag. Due to the drought and
the resulting shortage of maize, it is anticipated that the cost per bag, as well as the
selling price per bag, will increase by at least R20 per bag.
58
Inventories
5. During the inventory count on 31 December 20.1 it was discovered that the closing
inventory of growth stimulants had been damaged and is no longer suitable for the
manufacturing of feed. A local farmer undertook to buy the damaged growth stimulant
at R3,00 per kg. Bleshoender Ltd is responsible for the delivery costs which are
estimated to be R270 in total.
6. The current tax rate is 28%. Assume that all costs are tax deductible.
The accountant of Bleshoender Ltd has prepared the following schedule giving details of the
purchases:
PURCHASES OF INVENTORY
10 kg bags Rand
Required
a. Indicate how inventory and all matters relating to inventory must be disclosed in the
financial statements of Bleshoender Ltd for the year ended 31 December 20.1 so as to
comply with the requirements of International Financial Reporting Standards (IFRS).
59
Inventories
b. Assume Bleshoender Ltd has two branches, one in East London and another in
Nelspruit. At financial year end, each branch has unsold inventory on hand. The
inventory on hand at the East London branch is valued on the weighted average basis
while that at the Nelspruit branch is valued on the first-in, first-out basis.
60
IAS 7
Statement of cash flows
__________________________________________________________________
IAS 7.1 Statement of cash flows – revaluation of assets and share transactions
IAS 7.2 Consolidated statement of cash flows – indirect method
IAS 7.3 Consolidated statement of cash flows with purchase of subsidiary
IAS 7.4 Consolidated statement of cash flows with equity accounting
IAS 7.5 Statement of cash flows – sundry transactions
IAS 7.6 Statement of cash flows – financial instruments
QUESTIONS
* This question is not in the text book, but is available in the electronic guide for lecturers
containing the suggested solutions for questions without answers.
61
Statement of cash flows
You are provided with the following information in respect of Hagar Ltd:
HAGAR LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.5
62
Statement of cash flows
HAGAR LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.5
Note Rand
HAGAR LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.5
A B C D E
Rand Rand Rand Rand Rand
A = Share capital
B = Revaluation surplus
C = Mark-to-market reserve
D = Retained earnings
E = Total equity
63
Statement of cash flows
HAGAR LTD
EXTRACT FROM THE NOTES FOR THE YEAR ENDED
31 DECEMBER 20.5
Carrying amount at
1 January 20.5 150 000 50 000 50 000 250 000
Gross carrying amount / cost 150 000 80 000 75 000 305 000
Accumulated depreciation – (30 000) (25 000) (55 000)
Depreciation for the year – (38 000) (5 000) (43 000)
Revaluation 10 000 – – 10 000
Additions 105 000 163 000 – 268 000
Replacements – 20 000 – 20 000
Scrapping of assets – (5 000) – (5 000)
Carrying amount at
31 December 20.5 265 000 190 000 45 000 500 000
Gross carrying amount/cost 265 000 255 000 75 000 595 000
Accumulated depreciation – (65 000) (30 000) (95 000)
64
Statement of cash flows
Additional information
1. Included in trade and other payables is an amount of R2 000 (20.4: R2 000) being
dividends payable to shareholders. This is the outstanding amount in respect of
ordinary dividends.
2. The company purchased additional land and machinery during the year thereby
increasing the capacity of the company. A machine with a carrying amount of R5 000,
on which R3 000 depreciation has been written off, was scrapped during the year and
replaced by a similar machine at a cost of R20 000.
3. A patent to manufacture equipment for aircrafts was acquired on 30 December 20.5 and
therefore no amortisation was necessary.
4. Included in trade and other receivables is an amount of R4 000 (20.4: Rnil) related to
prepaid expenses.
5. A normal SA tax rate of 28% and a CGT rate of 14% are assumed.
Required
Prepare the statement of cash flows, using the direct method, of Hagar Ltd for the year
ended 31 December 20.5 in accordance with the requirements of International Financial
Reporting Standards (IFRS). Ignore comparative amounts.
HAGAR LTD
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED
31 DECEMBER 20.5
Note Rand
65
Statement of cash flows
Note Rand
HAGAR LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.5
1. Reconciliation of cash generated from operations and profit before tax (not
required by IAS 7)
Rand
66
Statement of cash flows
Cash and cash equivalents included in the statement of cash flows comprise the
following amounts in the statement of financial position:
Rand
Opening balance
Cash and cash equivalents 10 000
Bank overdraft (IAS 7.8) (10 000)
–
Closing balance
Cash and cash equivalents 5 000
Bank overdraft (IAS 7.8) (20 000)
(15 000)
Calculations
67
Statement of cash flows
68
Statement of cash flows
The following information is obtained from Strike It Rich Ltd at 31 December 20.14:
20.14 20.13
Rand Rand
ASSETS
Non-current assets 234 995 000 216 580 000
Property, plant and equipment 234 995 000 216 580 000
Current assets 112 870 000 89 444 000
Inventories 41 000 000 45 000 000
Trade and other receivables 38 020 000 28 000 000
Financial assets held at fair value through profit or
loss – held for trading 750 000 340 000
Cash and cash equivalents 33 100 000 16 104 000
Total assets 347 865 000 306 024 000
Total equity and liabilities 347 865 000 306 024 000
69
Statement of cash flows
70
Statement of cash flows
Additional information
1. Included in profit before tax is the profit made on the expropriation of land of a
subsidiary in which Strike It Rich Ltd has an 80% interest. This land had a cost
(carrying amount) of R100 000 at 1 January 20.14. The other investment in land was
made in order to expand future operations.
2. The carrying amount of motor vehicles sold during the year was R10 000 at
1 January 20.14.
3. The carrying amount of equipment sold during the year was R750 000. Plant and
equipment was only acquired to maintain present production capacity.
4. Other expenses consist of the following: Rand
20.14 20.13
Rand Rand
The tax bases are equal to the carrying amounts of the property, plant and equipment.
7. The income tax expense in the statement of profit or loss and other comprehensive
income consists of the following:
Rand
Required
Prepare the consolidated statement of cash flows, using the indirect method, of the Strike It
Rich Ltd Group as it would appear in the published consolidated financial statements at
31 December 20.14. Ignore comparative amounts. Your answer must comply with the
requirements of International Financial Reporting Standards (IFRS).
71
Statement of cash flows
Rand
Cash flows from operating activities 51 855 000
Profit before tax 65 075 000
Adjustments
Profit on expropriation of land (125 000)
Depreciation (7) 15 310 000
Loss on sale of equipment 50 000
Fair value adjustment – held for trading investment (100 000)
Dividends received (85 000)
Interest paid 310 000
Profit on sale of vehicle (5 000)
80 430 000
Decrease in inventories (1) 4 000 000
Increase in trade and other receivables (2) (10 020 000)
Decrease in trade and other payables (3) (5 265 000)
Cash generated from operations 69 145 000
Interest paid (310 000)
Dividends received 85 000
Income taxes paid (calc 4) (15 030 000)
Dividends paid (8) (1 725 000)
Purchases of financial assets held at fair value through profit
or loss (6) (310 000)
Cash flows from investing activities (33 645 000)
Purchase of property, plant and equipment (34 585 000)
Replacement of plant and equipment (calc 2) (4 485 000)
Additions to land and buildings (calc 1) (30 100 000)
Proceeds on sale of property, plant and equipment (4) 940 000
72
Statement of cash flows
Calculations
1. Land Rand
3. Vehicles Rand
73
Statement of cash flows
Dukki Ltd acquired 80% of the shares in Pompies Ltd for R420 000 on 31 March 20.5 when
Pompies Ltd's assets and liabilities, fairly valued, were as follows:
Rand
After the consolidated financial statements for the year ended 31 December 20.5 had been
prepared, you were approached to assist the company in preparing the consolidated
statement of cash flows.
74
Statement of cash flows
20.5 20.4
Rand Rand
Total equity and liabilities 456 292 000 357 380 000
Rand
75
Statement of cash flows
Rand
A B C D E
Rand Rand Rand Rand Rand
Balance at
1 Jan 20.5 50 000 000 4 250 000 124 340 000 – 177 590 000
Changes in
equity for 20.5
Total compre-
hensive
income for
the year – (4 250 000) 61 798 000 281 000 57 829 000
Profit for the year – – 61 798 000 281 000 62 079 000
Other compre-
hensive loss – (4 250 000) – – (4 250 000)
Non-controlling
interest at
acquisition – – – 86 000 86 000
Balance at
31 Dec 20.5 50 000 000 – 186 138 000 367 000 236 505 000
A = Share capital
B = Mark-to-market reserve
C = Retained earnings
D = Non-controlling interest
E = Total equity
Additional information
1. Included in trade and other payables is the current portion of long-term borrowings
20.5 20.4
Rand Rand
76
Statement of cash flows
3. Other expenses
20.5 20.4
Rand Rand
20.5 20.4
Rand Rand
8. The fair value of the share investment at fair value through other comprehensive
income decreased by R5 000 000 on 31 December 20.5.
20.5
Rand
Required
Prepare the consolidated statement of cash flows, using the direct method, of the Dukki Ltd
Group for the year ended 31 December 20.5 in accordance with the requirements of
International Financial Reporting Standards (IFRS). Ignore comparative amounts.
77
Statement of cash flows
Note Rand
1. Reconciliation of cash generated from operations and profit before tax (not
required by IAS 7)
Rand
78
Statement of cash flows
Calculations
2. Other assets A B
Rand Rand
79
Statement of cash flows
80
Statement of cash flows
Total equity and liabilities 298 953 000 323 803 000
81
Statement of cash flows
Rand
A B C D
Rand Rand Rand Rand
Balance at 1 July 20.4 45 000 000 75 308 000 6 503 000 126 811 000
Changes in equity for 20.5
Profit/total comprehensive
income for the year – 23 361 000 1 934 000 25 295 000
Dividends – (6 913 000) (232 000) (7 145 000)
Balance at 30 June 20.5 45 000 000 91 756 000 8 205 000 144 961 000
A = Share capital
B = Retained earnings
C = Non-controlling interest
D = Total equity
Additional information
82
Statement of cash flows
2. Property, plant and equipment consist only of plant and equipment. The proceeds on
disposal of plant and equipment amounted to R43 000. It is estimated that
R31 000 000 of the plant and equipment purchased was done so for the expansion of
operations.
3. Depreciation for the year amounted to R34 050 000 and the profit on sale of plant and
equipment was R11 000. Both amounts have been included in other expenses.
4. Interest paid for the year amounted to R11 000 and are included in other expenses.
5. The income tax expense in the consolidated statement of profit or loss and other
comprehensive income consists of the following:
20.5
Rand
Current tax 8 889 000
Deferred tax 1 896 000
6. Other income consists of interest received from the bank and debtors.
Required
Prepare the consolidated statement of cash flows, using the direct method, of the Rocval Ltd
Group for the year ended 30 June 20.5 in accordance with the requirements of International
Financial Reporting Standards (IFRS). Ignore comparative amounts.
Suggested solution IAS 7.4
Note Rand
Cash flows from operating activities 44 545 000
Cash receipts from customers (calc 4) 402 300 000
Cash paid to suppliers and employees (calc 5) (323 082 000)
Cash generated from operations 1 79 218 000
Dividends received 130 000
Interest received 134 000
Interest paid (11 000)
Income taxes paid (calc 2) (30 974 000)
Dividends paid (calc 3) (3 952 000)
83
Statement of cash flows
1. Reconciliation of cash generated from operations and profit before tax (not
required by IAS 7)
Rand
Calculations
84
Statement of cash flows
85
Statement of cash flows
MIRAGE LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.9
20.9 20.8
Rand Rand
ASSETS
Non-current assets 514 000 369 550
Property, plant and equipment 514 000 310 000
Deferred tax – 15 500
Investment in subsidiary at cost – 44 050
Current assets 474 660 309 400
Inventories 16 900 4 000
Trade and other receivables 386 000 175 000
Financial asset held at fair value through profit or loss –
Held for trading 16 400 39 400
Cash and cash equivalents 55 360 91 000
Total assets 988 660 678 950
86
Statement of cash flows
MIRAGE LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.9
Rand
MIRAGE LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.9
A B C D
Rand Rand Rand Rand
Additional information
1. Mirage Ltd makes deliveries on behalf of customers, and its property, plant and
equipment consists only of delivery vehicles.
2. No delivery vehicles were disposed of during the past year. The delivery vehicles that
were bought for replacement purposes were bought at the end of the current year in
terms of an instalment credit agreement. A deposit of R55 000 was paid in cash and
the remaining amount will be paid with interest over a period of 4 years.
3. Included in trade and other payables is the current portion of R50 460 (20.8: Rnil)
applicable to the instalment credit agreement.
87
Statement of cash flows
4. Debentures of R200 000 were redeemed at par and the remainder was converted into
ordinary share capital.
5. Cost of sales includes an amount of R68 000 in respect of depreciation on the delivery
vehicles.
6. Included in profit before tax are the following income and expenses:
Rand
7. The income tax expense in the statement of profit or loss and other comprehensive
income consists of the following:
Rand
Required
Prepare the statement of cash flows of Mirage Ltd, using the direct method, for the year
ended 31 December 20.9 in accordance with the requirements of International Financial
Reporting Standards (IFRS). Ignore comparative amounts.
MIRAGE LTD
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED
31 DECEMBER 20.9
Note Rand
88
Statement of cash flows
Note Rand
MIRAGE LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.9
1. Reconciliation of cash generated from operations and profit before tax (not
required by IAS 7)
Rand
• At the end of the current year, delivery vehicles to the value of R272 000 were
purchased in terms of an instalment credit agreement of which R217 000 was
financed.
• During the year, debentures to the value of R100 000 were converted at par into
ordinary share capital.
89
Statement of cash flows
Calculations
90
Statement of cash flows
Carrying amount
Opening balance (given) 310 000
Depreciation (given) (68 000)
Purchases 272 000
Closing balance (given) 514 000
Transaction 1
On 1 January 20.0 Alpha Ltd purchased 6 000 10% R200 debentures at R190 each.
Transaction costs amounted to R5 000. Interest is payable annually on 31 December. The
debentures are accounted for as financial assets at amortised cost and are redeemable at par
on 31 December 20.2.
Transaction 2
On 1 January 20.0 Alpha Ltd acquired 5 000 ordinary shares on the JSE Ltd for R50 000
with related transaction costs of R2 000. The fair value of the investment is R70 000 at
31 December 20.0. The shares are accounted for as financial assets at fair value through
other comprehensive income.
Transaction 3
On 2 January 20.0 Alpha Ltd purchased 40 all share index (ALSI) futures for speculative
purposes when the ALSI was 2 400. Transaction costs amounted to R1 000 and the margin
deposit was R50 000. Alpha Ltd sold the futures on 15 August 20.1. The mark-to-market
ALSI is 2 650 at 31 December 20.0 and 2 740 at 15 August 20.1. Each index point trades at
R10. The mark-to-market adjustment is settled on a daily basis. The futures are accounted
for as financial assets at fair value through profit or loss.
91
Statement of cash flows
Transaction 4
On 1 February 20.0 Alpha Ltd purchased 200 options to purchase shares in Beta Ltd for
R10 per option. Transaction costs amounted to R100. The options will mature on
30 April 20.1 and the exercise price to purchase the shares is R350 per share. The value of
an option was R30 on 30 April 20.1 and that of a share R380. At 31 December 20.0 the
value of an option was R18. The options were designated as the hedging instrument in a
cash flow hedge and you may assume that all hedging criteria in terms of IFRS 9.6.4.1 were
met.
Transaction 5
On 1 August 20.0 Alpha Ltd purchased inventories of $100 000 from a US supplier. The
inventory was shipped free on board (FOB) on the same day. On the same day Alpha Ltd
took out a three-month forward exchange contract (FEC). On 1 November 20.0 Alpha Ltd
took out a new three-month FEC. The creditor was settled on 31 January 20.1. The
following exchange rates apply:
Transaction 6
On 1 October 20.0 Alpha Ltd ordered inventory of $100 000 from a USA supplier. On the
same day Alpha Ltd took out a six-month FEC. The inventory was shipped FOB on
31 January 20.1 and the creditor was settled on 31 March 20.1. The following exchange
rates apply:
Spot rate Forward rate
1 October 20.0 $1 = R5,45 $1 = R6,00
31 December 20.0 $1 = R6,25 $1 = R6,50*
31 January 20.1 $1 = R6,10 $1 = R6,70**
31 March 20.1 $1 = R6,15
Required
Recommendation: Firstly perform the journal entries of complex transactions for all
years concerned to establish what the transactions’ impact on the
statement of cash flows will be.
92
Statement of cash flows
Transaction 1 Rand
Dr/(Cr)
1 January 20.0
Investment – debentures (at amortised cost) (SFPos) (1) 1 145 000
Bank (1 145 000)
31 December 20.0
Investment – debentures (at amortised cost) (SFPos) 16 314
Bank (2) 120 000
Interest received (P or L) (3) (136 314)
31 December 20.1
Investment – debentures (at amortised cost) (SFPos) 18 256
Bank (2) 120 000
Interest received (P or L) (4) (138 256)
31 December 20.2
Investment – debentures (at amortised cost) (SFPos) 20 430
Bank (2) 120 000
Interest received (P or L) (5) (140 430)
• Interest received of R120 000 will be shown as a cash inflow, after a non-cash
adjustment of R18 256, as part of cash flows from operating activities or investing
activities as determined in 20.0.
93
Statement of cash flows
• Remember to adjust for the non-cash movement of R18 256 in the ‘Investment –
debentures’ account when this statement of financial position account is analysed for
purposes of identifying other cash movements in debentures.
• Interest received of R120 000 will be shown as a cash inflow, after a non-cash
adjustment of R20 430, as part of cash flows from operating activities or investing
activities as determined in 20.0.
• Remember to adjust for the non-cash movement of R20 430 in the ‘Investment –
debentures’ account when this statement of financial position account is analysed for
purposes of identifying other cash movements in debentures.
• Redemption of debentures will be shown in the cash flows from investing activities
section of the statement of cash flows to the value of R1 200 000 (cash inflow).
Transaction 2 Rand
Dr/(Cr)
1 January 20.0
Investment – shares (at fair value through OCI) (1) 52 000
Bank (52 000)
31 December 20.0
Investment – shares (at fair value through OCI) (2) 18 000
Mark-to-market reserve (OCI) (18 000)
• An investment in shares of R52 000 (cash outflow) will be shown as part of cash flows
from investing activities.
• The fair value adjustment of R18 000 will not affect the calculation of cash generated
from operations, as it is not included in net profit or loss for the year but is included in
other comprehensive income.
• Remember the non-cash movement of R18 000 in the ‘Investment – shares’ account
when this statement of financial position account is analysed for purposes of
identifying other cash movements in shares.
Transaction 3
Rand
Dr/(Cr)
2 January 20.0
Margin deposit (SFPos) 50 000
Transaction costs / Loss on futures (P or L) 1 000
Bank (51 000)
31 December 20.0
Bank (1) 100 000
Profit on futures (P or L) (100 000)
94
Statement of cash flows
Rand
Dr/(Cr)
15 August 20.1
Bank (2) 36 000
Profit on futures (P or L) (36 000)
Bank 50 000
Margin deposit (SFPos) (50 000)
Note: Cash flows on SAFEX take place on a daily basis – each day’s profit/(loss) on
the mark-to-market index is settled the next day. A debtor/creditor will therefore
be created at 31 December 20.0 (year end) for the amount payable on the next
day.
• The margin deposit of R50 000 will be shown as a cash outflow from operating
activities as part of changes in debtors in the ‘cash receipts from customers’ line item
(IAS 7.15).
• Since the net profit on futures of R99 000 (R100 000 – R1 000) is of a cash nature, no
adjustment for non-cash items is necessary to profit before tax for this item.
• The profit/(loss) on the last day’s trading for which a debtor/creditor has been created
(see the note above) shall be shown as a non-cash adjustment to profit before tax,
while the amount will also be included in the normal working capital adjustments.
• The repayment of the margin deposit of R50 000 must be shown as a cash inflow from
operating activities as part of changes in debtors in the ‘cash receipts from customers’
line item (IAS 7.15).
• Profit before tax is not adjusted for the non-cash items, since the total profit on futures
of R36 000 is of a cash nature.
Transaction 4
The question does not specify whether the options are exercised or not – both scenarios are
therefore illustrated.
31 December 20.0
Options (SFPos) (2) 1 500
Deferred hedging gain (OCI) (1 500)
95
Statement of cash flows
Rand
Dr/(Cr)
30 April 20.1
Options (SFPos) (3) 2 400
Deferred hedging gain (OCI) (2 400)
• An investment in options of R2 100 (cash outflow) will be shown as part of cash flows
from investing activities.
• Remember to adjust for the non-cash movement of R1 500 in the ‘Options’ account
when this statement of financial position account is analysed for purposes of
identifying other cash movements in options. Also remember that the deferred hedging
gain (OCI) is entirely of a non-cash nature and does not form part of net profit or loss
for the year.
• Remember to adjust for the non-cash movements of R2 400 and R6 000 in the
‘Options’ account when this statement of financial position account is analysed for
purposes of identifying other cash movements in options. Also remember that the
deferred hedging gain (OCI) is entirely of a non-cash nature.
• Adjust profit before tax for the following two non-cash items: hedging gain R3 900
and option write-off R6 000.
31 December 20.0
Options (SFPos) (7) 1 500
Deferred hedging gain (OCI) (1 500)
30 April 20.1
Options (SFPos) (8) 2 400
Deferred hedging gain (OCI) (2 400)
96
Statement of cash flows
Rand
Dr/(Cr)
• An investment in options of R2 100 (cash outflow) will be shown as a cash flow from
investing activities.
• Remember to adjust for the non-cash movement of R1 500 in the ‘Options’ account
(investment) when this statement of financial position account is analysed for purposes
of identifying other cash movements in options. Also remember that the deferred
hedging gain (OCI) is entirely of a non-cash nature and does not form part of net profit
or loss for the year.
Financial year ended 31 December 20.1
• Remember to adjust for the non-cash movements of R2 400 and R6 000 in the
‘Options’ account (investment) when this statement of financial position account is
analysed for purposes of identifying other cash movements in options.
• Remember to adjust for the non-cash movement of R6 000 in the ‘Investment – shares’
account when this statement of financial position account is analysed for purposes of
identifying other cash movements in this account.
• An investment in shares of R70 000 (cash outflow) will be shown as part of cash flows
from investing activities.
• Disclose the conversion of the options into an investment in shares in the notes to the
statement of cash flows as a non-cash investment activity.
97
Statement of cash flows
Transaction 5
Rand
Dr/(Cr)
1 August 20.0
Inventory (SFPos) (1) 468 000
Trade and other payables (SFPos) (468 000)
1 November 20.0
Bank (2) 45 000
Foreign exchange gain (P or L) (45 000)
31 December 20.0
Foreign exchange loss (P or L) (3) 157 000
Trade and other payables (SFPos) (157 000)
31 January 20.1
Trade and other payables (SFPos) (5) 15 000
Foreign exchange gain (P or L) (15 000)
98
Statement of cash flows
• Profit before tax will be adjusted for two non-cash items: foreign exchange gain of
R15 000 and a foreign exchange loss of R40 000.
• The net gain on the FEC of R10 000 [(6,10 – 6,00) × R100 000] will be reflected as
part of working capital movements and represents cash inflow.
• The total cash flow for the year is therefore R600 000 and will be included as part of
cash generated from operations.
Transaction 6
Rand
Dr/(Cr)
1 October 20.0
No entry
31 December 20.0
FEC asset (SFPos) (1) 50 000
Deferred hedging gain (OCI) (50 000)
31 January 20.1
FEC asset (SFPos) (2) 20 000
Deferred hedging gain (OCI) (20 000)
31 March 20.1
Foreign exchange loss (P or L) (8) 5 000
Trade and other payables (SFPos) (5 000)
Notes: In accordance with IFRS 9.6.5.11(d)(i) the deferred hedging gain balance in
equity will be removed from equity and set off against the cost of the underlying
asset (inventory).
As none of the inventory has been sold, the cost of sales for the year ended
31 December 20.1 is not affected.
99
Statement of cash flows
You are in charge of the audit of Lugdienste Ltd and are presented with the following:
LUGDIENSTE LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.2
100
Statement of cash flows
Total equity and liabilities 272 100 000 201 000 000
LUGDIENSTE LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.2
A B C D E
Rand Rand Rand Rand Rand
Balance at
1 Jan 20.2 58 600 000 10 000 000 860 000 250 000 69 710 000
Changes in equity
for 20.2
Profit/total
comprehensive
income
for the year – 2 236 000 1 720 000 24 226 000 28 182 000
Dividends – – – (6 000 000) (6 000 000)
Issue of share
capital 12 450 000 – – – 12 450 000
Balance at
31 Dec 20.2 71 050 000 12 236 000 2 580 000 18 476 000 104 342 000
A = Share capital
B = Revaluation surplus
C = Mark-to-market reserve
D = Retained earnings
E = Total equity
101
Statement of cash flows
During 20.2, 400 000 10% compulsory redeemable preference shares of R2 each were
redeemed at par in cash, partly from profits and partly by the issue of ordinary shares.
A third issue of ordinary shares also took place. The effective interest rate of the
preference shares in accordance with IFRS 9 is 10%.
3. During 20.2, equipment with a carrying amount of R3 200 000 was sold for
R3 650 000 and was replaced with new equipment. The new equipment was pur-
chased for cash.
Rand
The directors of Lugdienste Ltd designated the investment as a financial asset at fair
value through other comprehensive income together with shares held in an unlisted
investment in Jule (Pty) Ltd with a directors’ valuation of R12 000 at
31 December 20.2. This approximates the fair value of the investment. The original
cost price of the investment in Jule (Pty) Ltd was R9 000.
LUGDIENSTE LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.2
Rand
102
Statement of cash flows
Rand
Required
Prepare the statement of cash flows of Lugdienste Ltd, using the direct method, for the year
ended 31 December 20.2 so as to comply with the requirements of International Financial
Reporting Standards (IFRS). Ignore comparative amounts.
The following balances of Kudu Ltd at 31 December 20.2 and 20.3 are available:
20.3 20.2
Rand Rand
Dr/(Cr) Dr/(Cr)
103
Statement of cash flows
20.3 20.2
Rand Rand
Dr/(Cr) Dr/(Cr)
Accumulated depreciation
– machinery (20 250) (10 125)
– furniture (13 601) (13 200)
Inventories 245 625 281 690
Financial assets held at fair value through profit or loss
– held for trading investment 53 000 40 000
The following information was taken from the statement of profit or loss and other
comprehensive income and the statement of changes in equity:
20.3 20.2
Rand Rand
Additional information
4. Investment income receivable of R1 500 (20.2: R1 000) is included in trade and other
receivables.
Required
Prepare the statement of cash flows, using the indirect method, of Kudu Ltd for the year
ended 31 December 20.3 so as to comply with the requirements of International Financial
Reporting Standards (IFRS). Comparative amounts are not required.
104
Statement of cash flows
TACKLE LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.8
20.8 20.7
Rand Rand
ASSETS
Non-current assets 546 200 457 700
Property, plant and equipment 453 200 405 200
Investments in associates 93 000 52 500
Current assets 49 800 34 700
Inventories 16 000 15 800
Trade and other receivables 33 800 18 900
Total assets 596 000 492 400
105
Statement of cash flows
TACKLE LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.8
Rand
TACKLE LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.8
A B C D
Rand Rand Rand Rand
A = Share capital
B = Revaluation surplus
C = Retained earnings
D = Total equity
Additional information
1. Profit before tax is stated after taking the following into account:
Rand
2. During the year machinery and equipment were purchased for R12 500 to replace
machinery and equipment with a carrying amount of R2 500, which were sold.
106
Statement of cash flows
Required
Prepare the statement of cash flows, using the direct method, of Tackle Ltd for the year
ended 31 December 20.8 in accordance with the requirements of International Financial
Reporting Standards (IFRS). Comparative amounts are not required.
The consolidated trial balances of the Konsol Ltd Group at 31 December 20.2 and 20.3 are
available:
20.3 20.2
Credits Rand Rand
Debits
Property, plant and equipment at carrying amount 825 000 635 500
Goodwill at carrying amount 11 000 12 000
Share investment at fair value through other
comprehensive income 385 000 180 000
Inventories 440 000 800 000
Trade and other receivables 306 905 71 053
1 967 905 1 698 553
The abridged consolidated statement of profit or loss and other comprehensive income and
statement of changes in equity of the Konsol Ltd Group for the year ended 31 December
20.3 are as follows:
107
Statement of cash flows
Rand
Revenue 872 930
Cost of sales (600 000)
Gross profit 272 930
Other income 95 870
Other expenses (113 100)
Finance costs (14 830)
Profit before tax 240 870
Income tax expense (72 561)
Profit for the year 168 309
Other comprehensive income
Items that will not be reclassified to profit or loss
Property revaluation 126 000
Gain on property revaluation 180 000
Tax expense (54 000)
Share investment at fair value through other comprehensive income 12 750
Gains arising during the year 15 000
Tax expense (2 250)
Total comprehensive income for the year 307 059
Profit attributable to:
Owners of the parent 159 909
Non-controlling interest 8 400
168 309
Total comprehensive income attributable to:
Owners of the parent 298 659
Non-controlling interest 8 400
307 059
108
Statement of cash flows
A B C D E F G
Rand Rand Rand Rand Rand Rand Rand
A = Share capital
B = Revaluation surplus
C = Asset replacement reserve
D = Mark-to-market reserve
E = Retained earnings
F = Non-controlling interest
G = Total equity
Additional information
1. No property, plant and equipment were sold during the year. All the additions to
property, plant and equipment were in respect of delivery vehicles to enable the group
to be in the position to expand its operating activities.
2. After negotiations with the bank, the directors of Konsol Ltd managed to acquire an
increase in the long-term borrowings of R200 000.
Depreciation 87 100
Auditors’ remuneration 25 000
Impairment of goodwill 1 000
Required
Prepare the consolidated statement of cash flows, using the indirect method, of the Konsol
Ltd Group for the year ended 31 December 20.3 in accordance with the requirements of
International Financial Reporting Standards (IFRS). Comparative amounts are not required.
109
Statement of cash flows
The following consolidated information of the Buffelbed Ltd Group is presented to you:
20.3 20.2
Rand Rand
ASSETS
Non-current assets 136 750 138 400
Property, plant and equipment 135 000 138 400
Goodwill – Kalfie Ltd at carrying amount 1 750 –
Current assets 227 580 227 910
Inventories 40 200 40 660
Trade and other receivables 187 180 187 150
Cash and cash equivalents 200 100
Total assets 364 330 366 310
110
Statement of cash flows
A B C D E
Rand Rand Rand Rand Rand
A = Share capital
B = Revaluation surplus
C = Retained earnings
D = Non-controlling interest
E = Total equity
111
Statement of cash flows
Additional information
1. Buffelbed Ltd acquired an 80% holding in Kalfie Ltd on 1 July 20.3 to expand the
group's manufacturing capacity. The company's assets are fairly valued. This was the
only subsidiary purchased during the year and no subsidiaries were sold during the
year.
KALFIE LTD
STATEMENT OF FINANCIAL POSITION AS AT 1 JULY 20.3
Rand
ASSETS
Non-current assets
Property, plant and equipment 80 000
Current assets
Inventories 57 350
137 350
EQUITY AND LIABILITIES
Total equity
Share capital 40 000
Retained earnings 97 350
137 350
2. No property, plant and equipment were purchased by the group during the year.
3. The property, plant and equipment that were sold during the year, were sold at carrying
amount.
Rand
Required
Prepare the consolidated statement of cash flows, using the direct method, of the Buffelbed
Ltd Group for the year ended 31 December 20.3 in accordance with the requirements of
International Financial Reporting Standards (IFRS). Comparative amounts are not required.
112
IAS 8
Accounting policies, changes in accounting
estimates and errors
__________________________________________________________________
QUESTIONS
113
Accounting policies, changes in accounting estimates and errors
The following notes regarding accounting policy were prepared for inclusion in the financial
statements of a company:
1. Investment property
2. Revenue
3. Leased assets
4. Unlisted investments
The unlisted investments of the company represent long-term investments and are
carried at fair value.
Finance charges on instalment credit purchases of plant and equipment are written off
over the period of the agreement on a straight-line basis.
Required
Suggest improvements to the proposed accounting policy notes in the interest of good
disclosure and reporting practice according to the requirements of IAS 8. You are not
required to rewrite the notes.
1. Investment property
• Suggested improvements:
– Mention the fact that investment property consists of land and buildings held
to earn rental income or for capital appreciation, or both.
– Fair value gains or losses are recognised in profit or loss.
– The fair value is determined at reporting date by an independent sworn
appraiser based on market evidence of the most recent prices obtained in
arm’s-length transactions of similar properties in the same area.
2. Revenue
• Main suggested improvements:
– Mention that revenue is measured at the consideration the entity is expected
to be entitled to.
– The fact that VAT is excluded.
– The fact that revenue is recognised when control of the goods is transferred
to the buyer.
– Any other relevant principles in IFRS 15 applicable to the entity should be
mentioned.
114
Accounting policies, changes in accounting estimates and errors
3. Leased assets
• Suggested improvements:
– Indication of what is considered to be a finance lease (i.e. an agreement
which effectively transfers all risks and rewards of ownership of the asset(s)
from the lessor to the lessee).
– That the asset is capitalised at the lower of fair value or the present value of
the future minimum lease payments, and a corresponding liability is raised.
– The method which is used for recognition of lease finance costs over the
term of the lease agreement (effective interest method).
– Indication of methods and rates of depreciation applied to allocate the cost
of such assets (this could, however, be included under the property, plant
and equipment accounting policy note).
4. Unlisted investments
• Suggested improvement:
– Also indicate how gains/losses on fair value adjustments should be treated
(e.g. mark-to-market reserve).
• The straight-line write-off of finance costs is not related to the capital balance of
the outstanding liability and is therefore not in accordance with the matching
concept.
• Suggested improvement:
– The policy should state that finance charges are recognised according to the
effective interest method.
After the financial statements for 20.4 had been prepared, Vink Ltd changed its method of
depreciating machinery. The previous pattern of depreciation differed from the actual
pattern of economic benefits derived from the depreciable assets. As a result, the reducing
balance method at 20% p.a. will be applied in future instead of the straight-line method over
five years as in the past.
A summary of the machinery account at 30 June 20.3, the previous financial year end of the
company, is as follows:
Rand
No machinery has been purchased or disposed of during the year ended 30 June 20.4.
115
Accounting policies, changes in accounting estimates and errors
a. Calculate the following amounts resulting from the change in accounting estimate for
inclusion in the financial statements of Vink Ltd for the year ended 30 June 20.4:
• Depreciation for the current year.
• Depreciation for 20.5 and 20.6.
b. Journalise all necessary adjustments to account for the change in accounting estimate
in 20.4.
c. Assume the amounts involved in the change in accounting estimate to be material, and
disclose these in terms of the requirements of International Financial Reporting
Standards (IFRS). Accounting policy notes are not required.
a. Depreciation
Rand
Correcting journal entries is necessary as the depreciation for 20.4 was calculated by
applying the straight-line method instead of the reducing balance method. The
correcting journal is as follows:
Rand
Dr/(Cr)
116
Accounting policies, changes in accounting estimates and errors
c. Disclosure
VINK LTD
NOTES FOR THE YEAR ENDED 30 JUNE 20.4
Profit before tax is stated after taking into account the following:
Rand
Expenses:
Depreciation 80 000
(1) [(800 000 × 20%) (old method) – 80 000 (new method)] = 80 000 decrease
(2) Future depreciation (old method) 240 000 – future depreciation (new method)
320 000 = 80 000 increase
Records of the property, plant and equipment of Reier Ltd showed the following at
1 July 20.6:
Rand
In the past the company accounted for depreciation at 20% per annum using the reducing
balance method. However, at a meeting of the board of directors during 20.7 it was decided
that from the beginning of the year ending 30 June 20.7, machinery would be depreciated on
the straight-line method as it better reflects the economic benefits from the machinery. The
total useful life of the machinery had originally been estimated as seven years. (It may be
assumed that this estimate is still correct.) No depreciation charge has been accounted for in
the current year.
The South African Revenue Service allows a wear-and-tear allowance of 20% using the
reducing balance method. Tax rates for the past five years have remained unchanged at 28%.
The company will earn sufficient taxable income in future to justify the creation of a debit
balance on the deferred tax account should it be necessary.
Required
a. Calculate the following amounts for inclusion in the financial statements of Reier Ltd
for the year ended 30 June:
• Depreciation for the current year (20.7).
• Depreciation for 20.8 and 20.9.
117
Accounting policies, changes in accounting estimates and errors
b. Journalise all necessary adjustments to account for the change in accounting estimate
in 20.7.
c. Discuss the disclosure requirements relating to the above change in accounting
estimate so as to comply with the requirements of International Financial Reporting
Standards (IFRS).
Calculations
Carrying Tax Temporary Deferred Profit or
amount base difference tax loss
Rand Rand Rand Rand Rand
Reducing balance method –
old
Cost – 1 July 20.3 600 000 600 000
Depreciation 20.4 (1) (120 000) –
Wear-and-tear allowance (1) – (120 000)
30 June 20.4 480 000 480 000
Depreciation 20.5 (2) (96 000) –
Wear-and-tear allowance (2) – (96 000)
30 June 20.5 384 000 384 000
Depreciation 20.6 (3) (76 800) –
Wear-and-tear allowance (3) – (76 800)
30 June 20.6 307 200 307 200
a. Depreciation
Rand
b. Journal entries
Rand
Dr/(Cr)
20.7
Depreciation (P or L) 76 800
Accumulated depreciation – machinery (SFPos) (76 800)
118
Accounting policies, changes in accounting estimates and errors
Rand
Dr/(Cr)
c. Disclosure requirements
In terms of IAS 8.39 the nature (change in depreciation method) and amount (increase
in depreciation in current year of R15 360) of a change in an accounting estimate
should be disclosed, including the effect of the change on future periods (decrease in
depreciation in future periods of R15 360).
The following are the statements of comprehensive income of Aaskamp Ltd for the years
ended 31 December:
20.8 20.7
Rand Rand
Revenue 79 500 52 400
Cost of sales (39 000) (26 000)
Gross profit 40 500 26 400
Other expenses (500) (400)
Profit before tax 40 000 26 000
Income tax expense (current tax only) (12 000) (7 800)
Profit for the year 28 000 18 200
Other comprehensive income – –
Total comprehensive income for the year 28 000 18 200
Included in profit before tax for 20.8 is an amount of R7 500 (20.7 – R10 000), which
represents the profit before tax of a division of Aaskamp Ltd.
When Aaskamp Ltd’s tax calculations for 20.8 and 20.7 were prepared, the inexperienced
accountant did not take into account any temporary differences and non-taxable/non-
deductible differences relating to the division. However, after the statement of profit or loss
and other comprehensive income for 20.8 had been prepared, it came to light that the
taxable temporary differences of the division amounted to R17 000 (20.7 – R14 000) and
non-taxable items of the division amounted to R12 500 (20.7 – R14 000).
Apart from the above it was also established that temporary differences occurred for the first
time in 20.7.
119
Accounting policies, changes in accounting estimates and errors
The South African Revenue Service had already assessed the company on R26 000 for 20.7.
The company applied for a reassessment, which was granted. The tax rate for the past two
years has remained constant at 30%.
Aaskamp Ltd paid a dividend of R10 000 for 20.8 and for 20.7. The retained earnings on
1 January 20.7 amounted to R17 000.
Required
Prepare the statement of profit or loss and other comprehensive income and statement of
changes in equity (retained earnings only) of Aaskamp Ltd for the year ended
31 December 20.8 in accordance with the requirements of International Financial Reporting
Standards (IFRS). The only notes required are those concerning the rectification of the prior
period error and tax.
AASKAMP LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.8
AASKAMP LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.8
Note Retained
earnings
Rand
Balance at 1 January 20.7 17 000
Changes in equity for 20.7
Total comprehensive income for the year – restated 2 22 400
Profit for the year – restated 22 400
Other comprehensive income –
Dividends (10 000)
Balance at 31 December 20.7 – restated 29 400
Changes in equity for 20.8
Total comprehensive income for the year 31 750
Profit for the year 31 750
Other comprehensive income –
Dividends paid (10 000)
Balance at 31 December 20.8 51 150
120
Accounting policies, changes in accounting estimates and errors
AASKAMP LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.8
(1) (12 500 × 30%)/40 000 × 100 = 9; (14 000 × 30%)/26 000 × 100 = 16
(2) 8 250/40 000 × 100 = 21; 3 600/26 000 × 100 = 14
Calculations
121
Accounting policies, changes in accounting estimates and errors
Correction of error
Rand
122
Accounting policies, changes in accounting estimates and errors
The following are the abridged trial balances of Stressed Eric Ltd for the years ended
30 June 20.5 and 20.6:
20.6 20.5
Rand Rand
Dr/(Cr) Dr/(Cr)
After the trial balance had been prepared as at 30 June 20.6, the board of directors re-
estimated the residual value of machinery to be R7 000. The original residual value was
R10 000. No machinery has been purchased or disposed of since 20.4. The South African
Revenue Service allows a wear-and-tear deduction of 20% per annum, straight-line, not
allocated on a pro rata basis for parts of the year.
The electricity expense of R15 000 per the trial balance was paid during 20.6, and arose in
20.6 only after the auditors found an underpayment of electricity expense relating to 20.5.
Assume that the amount is material. The South African Revenue Service agreed to reopen
the 20.5 tax assessment.
20.6 20.5
The tax rate has remained unchanged at 30% for the past three years. Ignore capital gains
tax.
Required
Prepare the statement of profit or loss and other comprehensive income and statement of
changes in equity (retained earnings only) of Stressed Eric Ltd for the year ended
30 June 20.6 in accordance with the requirements of International Financial Reporting
Standards (IFRS). The only notes required are those relating to the change in accounting
estimate and the prior period error.
123
Accounting policies, changes in accounting estimates and errors
(1) 300 000 × 50% = 150 000; 200 000 × 50% = 100 000
124
Accounting policies, changes in accounting estimates and errors
Change in estimate
During the year the residual value was changed. This change in estimate resulted in an
increase in depreciation in the current year of R1 200 (1). The cumulative effect of this
change on future periods will be an increase in depreciation of R1 800 (2).
Electricity was underpaid during 20.5. The resulting outstanding electricity payment
was made during 20.6, after which the comparative amounts have been appropriately
restated. The effect of the adjustment on the 20.5 results is as follows:
20.5
Rand
Calculations
Rand
125
Accounting policies, changes in accounting estimates and errors
3. Other expenses
20.6 20.5
Rand Rand
Other expenses per trial balance (given) 80 000 50 000
Depreciation
Old residual value – 16 000
New residual value 17 200 –
Prior period error – 15 000
Other expenses 97 200 81 000
5. Deferred tax
CA TB TD DT P or L
Rand Rand Rand Rand Rand
Dr/(Cr) Dr/(Cr)
After correction
20.5 Machinery (7) 50 000 36 000 14 000 (4 200) 4 200
20.6 Machinery (8) 32 800 18 000 14 800 (4 440) 5 640
(7) 90 000 – (90 000 × 20% × 3) = 36 000
(8) 90 000 – (90 000 × 20% × 4) = 18 000
Before correction
20.5 Machinery 50 000 36 000 14 000 (4 200) 4 200
20.6 Machinery 34 000 18 000 16 000 (4 800) 6 000
Thus correction in movement in deferred tax (9) = 360 cr
(9) 6 000 – 5 640 = 360
126
Accounting policies, changes in accounting estimates and errors
CA = Carrying amount
TB = Tax base
TD = Temporary difference
DT = Deferred tax balance
P or L = Movement in profit or loss
• Other expenses
– R100 000 (20.7)
– R78 000 (20.6)
• Profit before tax for 20.7 amounted to R182 000 (20.6 – R62 000).
• Retained earnings at the end of 20.7 amounted to R76 700. No dividends have been
paid in the last few years.
• The tax rate has remained unchanged at 30% for the past four years. Taxable income
was the same as profit before tax for the past four years, except for a penalty of R2 000
which was paid to the local government in 20.7. The South African Revenue Service
did not allow this penalty as a deduction.
The purchase prices of inventories have recently been very volatile and after taking into
account the above information, the directors decided to change the basis for valuing
inventories from the first-in, first-out method (FIFO) to the weighted average cost method,
as it would result in more stable inventory values.
The South African Revenue Service will only accept the new inventory values from
31 December 20.7 onwards.
127
Accounting policies, changes in accounting estimates and errors
Required
a. Prepare the statement of profit or loss and other comprehensive income (with notes)
and statement of changes in equity (retained earnings only) of Galaxy Ltd for the year
ended 31 December 20.7 applying the new method of inventory valuation so as to
comply with the requirements of International Financial Reporting Standards (IFRS).
b. Prepare the statement of profit or loss and other comprehensive income, statement of
changes in equity (retained earnings only) and note on change in accounting policy if
the weighted average cost of inventory could not be determined at the end of 20.4 and
20.5.
c. Prepare the statement of profit or loss and other comprehensive income, statement of
changes in equity (retained earnings only) and note on change in accounting policy if
the weighted average cost of inventory could not be determined at the end of 20.6,
20.5 and 20.4.
a. GALAXY LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHEN-
SIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.7
(1) 34 800 + 303 000 – 51 000 = 286 800; 22 900 + 182 500 – 34 800 = 170 600
(2) 56 100 (calc 4) – 2 340 (calc 3) = 53 760; 18 600 (calc 4) + 1 320 (calc 3) = 19 920
GALAXY LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.7
Note Retained
earnings/
(accumulated
loss)
Rand
Balance at 1 January 20.6 (calc 5) (93 500)
Change in accounting policy 4 2 380
Restated balance (91 120)
Changes in equity for 20.6
Total comprehensive income for the year (restated) 4 46 480
Profit for the year 46 480
Other comprehensive income –
128
Accounting policies, changes in accounting estimates and errors
Note Retained
earnings/
(accumulated
loss)
Rand
GALAXY LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.7
1. Accounting policy
1.1 Inventories
Inventories are valued at the lower of cost and net realisable value on the weighted
average cost method.
1.3 Revenue
Revenue consists of net invoiced sales and is measured at the amount of consideration
the entity is expected to be entitled to, excluding VAT. Revenue is recognised when
control of the goods is transferred to the customer.
20.7 20.6
Rand Rand
129
Accounting policies, changes in accounting estimates and errors
During the year the company changed its accounting policy for the valuation of
inventories from the first-in, first-out method of valuation to the weighted average cost
method as it results in more stable inventory values given the recent volatile inventory
prices.
The change in policy has been accounted for retrospectively and the comparative
amounts have been appropriately restated. The effect of this change in accounting
policy is as follows:
Calculations
1. Inventories
130
Accounting policies, changes in accounting estimates and errors
(4) The closing inventory in 20.7 causes no temporary differences since the South
African Revenue Service has accepted the new valuation method.
5. Reconstruction of statement of changes in equity according to the ‘old’ method to
determine 20.6 and 20.5 figures
Retained
earnings/
(accumulated
loss)
Rand
Balance at 31 December 20.7 (given) 76 700
Profit/total comprehensive income for the year (calc 2) (126 800)
Balance at 31 December 20.6 (50 100)
Profit/total comprehensive income for the year (calc 2) (43 400)
Balance at 31 December 20.5 (93 500)
131
Accounting policies, changes in accounting estimates and errors
b. As new inventory values are not available for 20.4 and 20.5, it is impossible to
calculate the effect of the change in policy on 20.6 (opening inventory for 20.6 not
determinable). As a result, the change in accounting policy should be accounted for
retrospectively from 20.7 onwards, resulting in an adjustment to the opening balance
of retained earnings. Comparative amounts will not be restated.
GALAXY LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.7
20.7 20.6
Rand Rand
(1) 34 800 + 303 000 – 51 000 = 286 800; 19 500 + 182 500 – 27 000 = 175 000
(2) (177 200 + 2 000) × 30% = 53 760; 62 000 × 30% = 18 600
GALAXY LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31
DECEMBER 20.7
Notes Retained
earnings/
(accumulated
loss)
Rand
132
Accounting policies, changes in accounting estimates and errors
GALAXY LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.7
c. As new inventory values are not available for 20.4, 20.5 and 20.6, it is impossible to
calculate the cumulative effect of the change at the beginning of 20.7. As a result, the
new policy is applied prospectively from the earliest date practicable (which will be
the end of 20.7).
GALAXY LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.7
20.7 20.6
Rand Rand
Revenue 564 000 315 000
Cost of sales (1) (279 000) (175 000)
Gross profit 285 000 140 000
Other expenses (100 000) (78 000)
Profit before tax 185 000 62 000
Income tax expense (2) (56 100) (18 600)
Profit for the year 128 900 43 400
Other comprehensive income – –
Total comprehensive income for the year 128 900 43 400
133
Accounting policies, changes in accounting estimates and errors
GALAXY LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.7
Retained
earnings/
(accumulated
loss)
Rand
Balance at 1 January 20.6 (refer to part a) (93 500)
Changes in equity for 20.6
Total comprehensive income for the year 43 400
Profit for the year 43 400
Other comprehensive income –
Balance at 31 December 20.6 (50 100)
Changes in equity for 20.7
Total comprehensive income for the year 128 900
Profit for the year 128 900
Other comprehensive income –
Balance at 31 December 20.7 78 800
GALAXY LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.7
During the year the company changed its accounting policy for the valuation of
inventories from the first-in, first-out method of valuation to the weighted average cost
method as it will result in more stable inventory values in view of recent volatile
inventory prices.
The change in policy could not be accounted for retrospectively, as it was not possible
to determine the cumulative effect of the change at the beginning of 20.7, due to
deficient costing systems. As a result, the change in accounting policy was accounted
for prospectively by adjusting the closing inventory for 20.7. The effect of the change
in accounting policy is as follows:
20.7
Rand
Decrease in cost of sales 3 000
Increase in income tax expense (900)
Increase in profit for the year 2 100
134
Accounting policies, changes in accounting estimates and errors
Plant and machinery are not revalued annually, but are shown at historical cost.
• Depreciation is recognised on the straight-line method.
• The depreciation rate is 15% per annum.
• The useful life of the assets is revised annually. Depreciation rates are adjusted
where deemed necessary.
Inventories
Inventories consist of finished goods, raw materials, consumables and work in progress.
Inventories are valued at cost or net realisable value, whichever is the lower.
The historical cost of inventories includes all costs of bringing them to their current location
and condition.
Revenue
Revenue –
• includes the amount invoiced to customers;
• excludes VAT;
• excludes sales of associated companies.
135
Accounting policies, changes in accounting estimates and errors
Deferred tax
Deferred tax is calculated by applying the rate of tax to temporary differences which arise as
differences between the tax base of an asset or liability and its carrying amount in the
statement of financial position.
Required
Prepare the accounting policy notes (where applicable) dealing with the above-mentioned
matters in accordance with the requirements of IAS 8.
Required
a. Discuss how each transaction/decision should be accounted for.
b. Discuss the disclosure requirements of each transaction/decision in the statement of
profit or loss and other comprehensive income of Rata Ltd for the year ended
30 June 20.5 so as to comply with the requirements of International Financial
Reporting Standards (IFRS).
136
Accounting policies, changes in accounting estimates and errors
Additional information
1. The useful life of machinery was originally estimated to be five years from date of
purchase. Owing to technological changes, the remaining useful life as at
28 February 20.3 is estimated to be only two years. The change in useful life has yet to
be reflected in the trial balance.
2. The company tax rate is 28%, and the South African Revenue Service is prepared to
allow the additional wear and tear needed to write off the value of the machinery over
the remaining useful life. There are no other non-deductible/non-taxable items.
Required
Prepare the statement of profit or loss and other comprehensive income of Parfait Ltd for the
year ended 28 February 20.4 so as to comply with the requirements of International
Financial Reporting Standards (IFRS). Only the note on profit before tax is required.
The following is a list of items in the statement of profit or loss and other comprehensive
income of Gunter (Pty) Ltd for the year ended 30 June 20.2 and 20.1:
20.2 20.1
Rand Rand
During the current year, Gunter (Pty) Ltd converted from a CC to a company after your
client obtained a majority interest. As a result of the conversion the audit was moved from
the previous accounting officer to your firm of registered accountants and auditors.
During the course of the audit the following information regarding the previous and the
current year was obtained:
1. The revenue figures above include dividend income of R100 000 (20.1 – R50 000).
The gross profit percentage of the company has remained constant at 50% during the
last five years. Other expenses for 20.2 amounted to R1 910 000 (20.1 – R1 670 000)
before taking into account any adjustments relating to the details below.
2. Delivery vehicles purchased on 1 July 20.0 under an instalment sales agreement (ISA)
were recorded as follows:
137
Accounting policies, changes in accounting estimates and errors
3. Other information
4. Finance charges per the ISA are recognised on the effective interest method for
accounting and tax purposes. The following figures represent the capital outstanding in
respect of the ISA at 30 June of each year and should be accepted as correct:
Rand
Required
138
Accounting policies, changes in accounting estimates and errors
Critically evaluate the following comments made by Pistol Pete, the financial director of
Sampras Ltd, for the financial year ended 31 December 20.1 with reference to the
requirements of International Financial Reporting Standards (IFRS) and Interpretations of
IFRS:
• ‘We completed our plant last year after five years of construction. Fortunately we were
able to capitalise the borrowing costs incurred. The plant is used in the production of
our new product, a very durable tennis ball which is baked in the sun for two years. We
finance all our activities in a debt–equity ratio of 60% debt to 40% equity. The finance
charges relating to the tennis balls had a negative impact on this year’s profit or loss,
since the tennis balls manufactured during the first year still need one year’s ageing. No
products were sold during the current year.’
• ‘The board of directors decided to revalue the plant every second year at its net
replacement value. Since our other products are manufactured with outdated
machinery, we have decided not to revalue machinery.’
• ‘We have 1 000 of our tennis racquet units on hand at reporting date. The cost price of
the items is R1 000 and the net realisable value is R2 000. A decision was taken at the
previous management meeting to carry these items at net realisable value in the
statement of financial position.’
Extra Ltd is a specialised engineering company involved in various projects. During the year
the company decided to change the accounting policy for the valuation of inventory from
the first-in, first-out method to the weighted average method as a result of inventory price
fluctuations over the last few months and because the new method will result in more stable
inventory values. The company's financial year ends on 31 December.
The following is the abridged statement of profit or loss and other comprehensive income of
Extra Ltd for the year ended 31 December (before the change in inventory valuation was
taken into account):
20.8 20.7
Rand Rand
139
Accounting policies, changes in accounting estimates and errors
Additional information
1. The following information is relevant regarding the change in accounting policy i.r.o.
inventory:
Weighted average (new method) 110 000 140 000 120 000
First-in, first-out (old method) 90 000 130 000 130 000
The South African Revenue Service will only accept the new inventory valuation
method from 31 December 20.8.
A loss of R6 500 (net of insurance proceeds) resulting from flooding of one of the
plants due to severe rainstorms. The proceeds from the insurance claim amounted to
R13 500.
3. Revenue for 20.8 amounted to R800 000 and R650 000 for 20.7. The gross profit
percentage (before the change in accounting policy) is 50% (20.7 – 60%).
4. Included in profit for 20.7 is a gain of R15 000 relating to the sale of land. The profit
is of a capital nature.
5. Assume that, unless otherwise specified, all income and expenses are taxable and
deductible respectively. The tax rate was 30% for 20.8 and 35% for 20.7 and 20.6.
Ignore capital gains tax.
Rand
20.7 12 000
20.8 103 900
Required
Prepare the statement of profit or loss and other comprehensive income and statement of
changes in equity (retained earnings only) of Extra Ltd for the year ended 31 December 20.8
so as to comply with the requirements of International Financial Reporting Standards
(IFRS). Only the following notes should be provided:
• Profit before tax
• Income tax expense
• Change in accounting policy
140
Accounting policies, changes in accounting estimates and errors
The abridged pro forma statement of profit or loss and other comprehensive income of
Sabre Ltd for the year ended 30 June 20.8 is as follows:
20.8 20.7
Rand Rand
Additional information
The following issues have not yet been accounted for in the above statement of profit or
loss and other comprehensive income of Sabre Ltd:
1. On 30 June 20.8, after completing the pro forma financial statements, the board of
directors decided to change the accounting policy with respect to the inventory
valuation from the weighted average basis to the first-in, first-out (FIFO) basis as
inventory prices have recently increased significantly. Inventories are valued as
follows using both methods:
Weighted FIFO
average
(old method) (new method)
Rand Rand
2. The South African Revenue Service is prepared to accept the new valuation of closing
inventory as at 30 June 20.8 for tax purposes.
3. On 30 April 20.8 the company disposed of land realising a capital profit of R14 000.
This amount is not taxable.
141
Accounting policies, changes in accounting estimates and errors
5. A batch of sales invoices with a total value of R24 000 was not processed in 20.7 –
this is regarded as material. However, the cost of sales associated with these invoices
was taken into account. The South African Revenue Service re-opened the 20.7
assessment as a result of this error.
6. Dividends paid for the year ended 30 June 20.8 amounted to R30 000 (20.7: R30 000).
7. The ruling tax rate for the last three years was 30%. There are no other temporary or
non-taxable/non-deductible differences apart from those evident from the question.
You may ignore any other form of tax, including capital gains tax.
Rand
Required
Prepare the statement of profit or loss and other comprehensive income and statement of
changes in equity (retained earnings only) of Sabre Ltd for the year ended 30 June 20.8.
Notes to the statement of profit or loss and other comprehensive income and statement of
changes in equity are also required, excluding accounting policy notes. Your answer must
comply with the requirements of International Financial Reporting Standards (IFRS) in so
far the information allows you to do so. Assume that all amounts are material.
Krazy Krys Ltd is a public company listed on the JSE Ltd. Krazy Krys Ltd imports and sells
eccentric toys such as jumping castles for adults and miniature poker sets for children.
Krazy Krys Ltd leases its warehouse under an operating lease with the following terms:
All lease payments are payable monthly in arrears and include VAT at 14%.
142
Accounting policies, changes in accounting estimates and errors
You may assume an unchanged normal tax rate of 29%. No journal entries relating to
taxation have been processed by Krazy Krys Ltd. All lease instalments were paid timeously.
Required
a. Provide adjusting journal entries (you may ignore current tax implications) for the
financial year ended 31 December 20.0. You may not reverse or re-record any journal
entries that were posted by Krazy Krys Ltd.
b. Provide originating journal entries (you may ignore current tax implications) for the
financial year ended 31 December 20.1.
c. Disclose all relevant notes pertaining to the above-mentioned information for the
financial year ended 31 December 20.1 if it is assumed that the error in 20.0 was never
corrected during 20.0. You may ignore current tax implications. Your answer must
comply with the requirements of International Financial Reporting Standards (IFRS).
Traders Ltd is currently in the process of erecting various plants across the country to
manufacture its products. The costs incurred to erect the plants, which take a substantial
period of time to erect, are financed through loans.
In accordance with Traders Ltd’s accounting policy, borrowing costs on qualifying assets
have always been expensed as incurred. However, the auditors of Traders Ltd recently
informed management that IAS 23 Borrowing costs was revised during the year and that in
future all borrowing costs on qualifying assets must be capitalised against the asset.
The auditors informed management that the effective date of the revised standard is
1 January 20.9. The transitional provisions of the standard state that an entity must capitalise
borrowing costs on all qualifying assets for which the commencement date for capitalisation
is on or after the effective date of the standard.
However, the transitional provisions of the standard do provide that an entity may designate
any date before the standard’s effective date as its own effective date. If an entity designates
an earlier date, the borrowing costs on all qualifying assets for which the commencement
date for capitalisation is on or after the entity’s own effective date, must be capitalised.
The auditor explained that this means that in future only borrowing costs on new qualifying
assets will be capitalised and that no retrospective restatement will occur.
Management informed its auditors that borrowing costs on qualifying plant that will be
erected from 1 January 20.8 will be capitalised.
Details in respect of qualifying plant for the years ended 31 December 20.7 and 20.8 are as
follows:
143
Accounting policies, changes in accounting estimates and errors
Plant A Plant B
Plant is accounted for in accordance with the cost model and is depreciated straight-line
over the estimated useful life of five years, with no material residual value.
The South African Revenue Service allows pre-production interest as a once-off deduction
as soon as the asset is brought into use. Wear and tear is allowed over a period of three
years, not allocated on a pro-rata basis for parts of the year. Accept a tax rate of 28%.
Required
Prepare the note to the annual financial statements of Traders Ltd for the year ended
31 December 20.8 in accordance with IAS 8.
On 1 July 20.6 Adams Ltd received a grant of R1,5 million from the local government for
the purchase of machinery of R4,5 million, purchased on the same day.
The requirements of the grant stipulate that Adams Ltd must utilise the machinery in the
manufacturing of blankets for the Department of Social Services. From 1 July 20.6,
Adams Ltd must manufacture 5 000 blankets per month for the next five years. At the end of
the five years the machinery will no longer be usable.
A pro-rata amount of the grant must be repaid at the end of each year if the required annual
production is not delivered. This amount will be calculated based on the ratio of the number
of uncompleted blankets to the total number of blankets to be produced over the five-year
period.
Adams Ltd accounts for machinery on the cost model and it is depreciated in accordance
with the production unit method.
The South African Revenue Service allows machinery to be written off over three years and
you must assume that the government grant is taxable. The tax rate for the past few years has
remained unchanged at 28%. Assume that there will be sufficient future taxable income for
the recognition of any deferred tax assets.
Adams Ltd manufactured the following number of blankets for the respective years:
144
Accounting policies, changes in accounting estimates and errors
20.7 60 000
20.8 60 000
20.9 45 000
On 30 June 20.9 Adams Ltd repaid the required amount to the local government.
You can assume a profit before tax, after taking the above information into account, of
R1 million for each of the respective years.
Required
a. Disclose the matter above in the notes to the statement of profit or loss and other
comprehensive income of Adams Ltd for the year ended 30 June 20.9, in accordance
with the requirements of International Financial Reporting Standards (IFRS), if the
government grant is offset against the carrying amount of the asset. Comparative
amounts are not required.
b. Disclose the matter above in the notes to the statement of profit or loss and other
comprehensive income of Adams Ltd for the year ended 30 June 20.9, in accordance
with the requirements of International Financial Reporting Standards (IFRS), if the
government grant is recognised as deferred income. Comparative amounts are not
required.
145
Accounting policies, changes in accounting estimates and errors
146
IAS 10
Events after the reporting period
__________________________________________________________________
QUESTIONS
147
Events after the reporting period
The financial statements of Matthews Ltd for the year ended 31 December 20.1 were
presented to the board of directors for authorisation for issue on 30 March 20.2. You are the
accountant of the company. The following events have taken place since the reporting date:
1. During January 20.2 a bomb exploded at one of Matthews Ltd’s branches. Damage
amounted to R200 000, R80 000 of which was for damage to inventory. The
company's insurance policy does not cover such an occurrence and the claim was
repudiated by the insurance company. A contract was concluded with Regmaak Ltd on
1 March 20.2 to repair the damage to the building at a cost of R120 000. This will be
financed out of surplus cash funds.
2. Jolo Ltd, a customer of the company, was placed in liquidation by its creditors on
15 January 20.2. Jolo Ltd owes Matthews Ltd an amount of R40 000, which was
included in receivables at the reporting date. Jolo Ltd's liquidator notified all creditors
on 15 March 20.2 that the estimated liquidation dividend would be 20c in the rand.
3. A rights issue was made on 1 February 20.2 to finance the acquisition and furnishing
of office buildings. The full issue of R1 200 000 (at R12 per share) was taken up. The
directors concluded an ‘option to purchase’ in respect of office buildings during
October 20.1. The rights issue was approved by the directors on 15 November 20.1.
6. An invoice dated 27 December 20.1 for R60 000 was received from XYZ and included
in creditors on the reporting date. Inventories listed on the invoice were delivered on
4 January 20.2 and are included in the inventory figure at R60 000 on the reporting
date. A positive creditors' circularisation was carried out and XYZ positively
confirmed the amount outstanding at 31 December 20.1. However, the invoice from
XYZ contained a calculation error and the correct amount for the inventories should in
fact be R80 000.
Additional information
Purchase price and furnishing costs of office buildings (see point 3) are
estimated by the board of directors at R1 200 000
148
Events after the reporting period
Required
a. Identify each of the events after the reporting date as either adjusting or non-adjusting
events.
b. Briefly discuss the effect of the above-mentioned events on the financial statements as
at 31 December 20.1.
c. Provide an extract from the financial statements of Matthews Ltd as at 31 December
20.1, disclosing the results of the discussion in b. above so as to comply with the
requirements of International Financial Reporting Standards (IFRS).
Assume that all amounts are material and that the company is a going concern
notwithstanding the effect of the above-mentioned events on the financial statements.
b. Discussion
Although Matthews Ltd did not have insurance cover at the reporting date, the loss
should not be taken into account for the year ended 31 December 20.1 as no loss had
been incurred on that date. The bomb explosion at the branch is not indicative of
conditions that existed at the reporting date. Both the loss of inventory and damage to
buildings shall be disclosed by way of a note to the financial statements, as non-
disclosure of the events will affect the ability of users to make proper evaluations and
decisions, since the amounts involved are material.
c. Disclosure
MATTHEWS LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.1
During January 20.2 a bomb exploded at one of the branches of the company.
Inventory amounting to R80 000 was destroyed. Damage to buildings amounted
to R120 000. (Assume that the loss of inventory is allowable for tax purposes.)
A contract was concluded with Regmaak Ltd to repair the damage (see note 14)
to the buildings for R120 000. Surplus cash funds will be utilised to finance the
cost of the repairs.
149
Events after the reporting period
b. Discussion
The event indicates that an asset was impaired at the reporting date (see IAS 10.09(b).
The applicable loss is calculated by taking into account the estimated liquidation
dividend [thus R40 000 – (20% × R40 000)]. Adjustments to assets are required if
events which took place after the reporting date provide further evidence of conditions
that existed at the reporting date.
c. Disclosure
MATTHEWS LTD
STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER 20.1
Rand
ASSETS
Current assets
Trade receivables (xx xxx – 32 000) xx xxx
MATTHEWS LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHEN-
SIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.1
Rand
Revenue xx xxx
Other expenses (xx xxx + 32 000) (xx xxx)
Profit before tax (xx xxx – 32 000) xx xxx
Income tax expense (xx xxx – 8 960 (1)) (xx xxx)
Profit for the year (xx xxx – 23 040 (2)) xx xxx
Other comprehensive income –
Total comprehensive income for the year xx xxx
150
Events after the reporting period
b. Discussion
The price paid for the option, if any, should be capitalised as part of the purchase price
of the office buildings and does not influence the financial statements at
31 December 20.1.
However, in view of the importance of the matter (rights issue), a note will be included
to the financial statements in which the matter is explained to enable users to evaluate
the financial statements properly and to enable them to make informed decisions.
c. Disclosure
MATTHEWS LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.1
Authorised
1 000 000 ordinary shares issued at R1 each 1 000 000
Issued
600 000 ordinary shares issued at R1 each 600 000
A rights issue of 100 000 shares issued at R12 per share was made on
1 February 20.2. The issue was fully subscribed.
b. Discussion
As the available information is vague and the outcome and costs of the case cannot be
determined, only the existence and nature of the event must be disclosed as a
contingent liability. It may be assumed that the alleged infringement took place during
20.1 or earlier.
151
Events after the reporting period
c. Disclosure
MATTHEWS LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.1
b. Discussion
As a reduction in the market value of the listed investment took place after the
reporting date, assets and liabilities will not be adjusted. In terms of IFRS 9 Financial
instruments the company is obliged to account for such investments at market value.
c. Disclosure
MATTHEWS LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.1
b. Discussion
As both Matthews Ltd and XYZ accounted for the transaction in December, the
delivery date is not relevant. The error made by XYZ will not be to Matthews Ltd's
advantage from a legal point of view. XYZ will accordingly invoice Matthews Ltd for
the difference as soon as they discover the error. Whether Matthews Ltd points out the
error to XYZ or conceals it, the additional liability of R20 000 must be recognised in
the financial statements.
152
Events after the reporting period
As assets and liabilities must be adjusted for events occurring after the reporting date
which provide further evidence of conditions that existed at the reporting date, the
financial statements will have to be adjusted, thus both payables and closing inventory
will increase by R20 000. The net effect on profit before tax in the statement of profit
or loss and other comprehensive income is nil as there is an increase in both purchases
and closing inventory.
c. Disclosure
MATTHEWS LTD
STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER 20.1
Rand
ASSETS
Current assets
Inventories (xx xxx + 20 000) xx xxx
In each of the above-mentioned cases and in addition to the given disclosure, the date must
be disclosed when the financial statements were authorised for issue and who gave such
authorisation. If any party has the power to amend the financial statements after issue date,
this fact must also be disclosed.
The financial statements of Mossie Ltd for the year ended 31 December 20.3 were presented
to the board of directors for authorisation for issue on 20 March 20.4. You are the
accountant of the company. The following events occurred after the reporting date:
1. Owing to the current economic recession and to increased competition, the selling
price of Mossie Ltd's main product was considerably reduced on 15 February 20.4.
The lower selling price will cause a 15% decrease in gross profit in respect of the main
product. It is estimated that total comprehensive income for the year ended
31 December 20.4 will decrease by R500 000 before tax.
2. The board of directors decided to declare R20 000 additional ordinary dividends on
15 February 20.4. The dividends will be paid on 5 April 20.4.
3. Dik Daan, a debtor, sent a letter to all his creditors on 18 March 20.4 stating that he
was terminating business owing to financial difficulties. He suggested an offer of
compromise of 20c in the rand. A statement of assets and liabilities supported by an
auditors' certificate was attached. The amount owing by Dik Daan to Mossie Ltd
amounts to R20 000 and is included in receivables at the reporting date. (Assume that
the transactions were in the normal course of business.)
153
Events after the reporting period
4. During February 20.4 a fire broke out in a warehouse, and inventory amounting to
R60 000 was destroyed. Mossie Ltd was not insured. Assume that the loss resulting
from the fire damage will be deductible for tax purposes.
5. On 15 January 20.4 a customer sued Mossie Ltd for failing to meet specifications on
certain goods supplied. The case was taken to court and judgement has not yet been
passed. The attorneys of Mossie Ltd notified the financial director that the company
will probably lose the case and that costs and compensation (which are tax deductible)
will be approximately R100 000. The inventory was delivered during 20.3.
6. The research department of Mossie Ltd developed a product during November 20.3
which will make an exceptional contribution to profits in future.
Assume a normal tax rate of 28% and ignore all other taxes.
Required
Assume that all amounts are material and that the company is a going concern,
notwithstanding the effect of the above events on the financial statements.
b. Discussion
The information provided indicates lower profits in the forthcoming financial year. If
these are material this must be disclosed in the directors' report.
c. Disclosure
MOSSIE LTD
DIRECTORS' REPORT FOR THE YEAR ENDED
31 DECEMBER 20.3
The selling price of the company's main product was substantially reduced in 20.4 due
to the present economic recession and stronger competition. The reduced selling price
will result in an estimated decrease in the total comprehensive income for the year
ended 20.4 of R360 000 (R500 000 before tax).
154
Events after the reporting period
b. Discussion
IAS 10.12 stipulates that a dividend declared after the reporting date but before the
financial statements were authorised for issue will not be recognised as a liability at the
reporting date. IAS 1 requires such a declaration after the reporting date to be
disclosed in the notes to the financial statements.
c. Disclosure
MOSSIE LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.3
An additional dividend of R20 000 was declared on 15 February 20.4 and will be
paid on 5 April 20.4.
b. Discussion
The fact that Dik Daan notified his creditors in writing that he was experiencing
financial difficulties emphasises the fact that creditors should expect losses and
indicates a reduction in the value of an asset at the reporting date. This is confirmed by
the auditors' certificate, and legal action will not lead to increased recovery per rand. It
is therefore reasonable to take the estimated realisable value of the debt of Dik Daan
into account when calculating the realisable value of receivables, thus receivables and
profit before tax will decrease by R16 000 (R20 000 × 80c). The income tax expense
and the tax liability in the statement of financial position will decrease by R4 480
(R16 000 × 28%).
The financial statements will be adjusted and normal disclosure requirements will
apply. Depending on the materiality of the credit loss, it may be a separately
disclosable item in accordance with IAS 8.
c. Disclosure
MOSSIE LTD
STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER 20.3
Rand
ASSETS
Current assets
Trade receivables (xx xxx – 16 000) xx xxx
155
Events after the reporting period
MOSSIE LTD
STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED
31 DECEMBER 20.3
Rand
Revenue xx xxx
Other expenses (xx xxx + 16 000) (xx xxx)
Profit before tax (xx xxx – 16 000) xx xxx
Income tax expense (xx xxx – 4 480) (xx xxx)
Profit for the year (xx xxx – 11 520 (2)) xx xxx
Other comprehensive income –
Total comprehensive income for the year xx xxx
b. Discussion
Although Mossie Ltd was not insured at the reporting date, the loss should not be
taken into account for the period ended 31 December 20.3. The cause of the loss was
the fire, which only took place during February 20.4 and therefore does not provide
additional evidence of conditions that existed at the reporting date.
The loss of inventory must nevertheless be disclosed by way of a note to the financial
statements to enable users to make proper evaluations and decisions, since the amounts
involved are material.
c. Disclosure
MOSSIE LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.3
b. Discussion
A present obligation exists at the reporting date arising from a past obligating event,
the settlement of which is expected to result in an outflow of resources embodying
economic benefits, and a reliable estimate of the amount of the loss can be made. The
amount of the loss must be provided for as an expense in the statement of profit or loss
and other comprehensive income.
156
Events after the reporting period
Disclosure of the provision must be done according to the requirements of IAS 37.
c. Disclosure
MOSSIE LTD
STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER 20.3
Note Rand
EQUITY AND LIABILITIES
Total equity
Retained earnings (xx xxx – 72 000 (2)) xx xxx
Current liabilities
Short-term provisions (xx xxx + 100 000) 12 xx xxx
Trade and other payables xx xxx
South African Revenue Service (xx xxx – 28 000 (1)) xx xxx
MOSSIE LTD
STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED
31 DECEMBER 20.3
Rand
Revenue xx xxx
Other expenses (xx xxx + 100 000) (xx xxx)
Profit before tax (xx xxx – 100 000) xx xxx
Income tax expense (xx xxx – 28 000 (1)) (xx xxx)
Profit for the year (xx xxx – 72 000 (2)) xx xxx
Other comprehensive income –
Total comprehensive income for the year xx xxx
MOSSIE LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.3
The company is a defendant in a court case with a customer of which the result
will probably favour the customer. The probable indemnity claim will amount to
R100 000.
157
Events after the reporting period
6.a Identification: does not form part of events after the reporting date.
b. Discussion
Because no transaction has taken place, the development has no effect on the items at
the reporting date. No note is required. The directors shall, however, disclose the item
in the directors' report for the benefit of potential investors and current shareholders.
However, the directors may prefer not to mention this fact for strategic reasons.
c. Disclosure
No disclosure is required.
In each of the above-mentioned cases and in addition to the given disclosure, the date must
be disclosed when the financial statements were authorised for issue and who gave such
authorisation. If any party has the power to amend the financial statements after issue date,
this fact must also be disclosed.
Gimli Ltd's financial statements for the year ended 31 December 20.4 were presented to the
board of directors for authorisation for issue on 20 March 20.5. The following events took
place after the reporting date:
1. During the auditors’ execution of the debtors' circularisation on 2 January 20.5, it was
discovered that an error had been made on one of the invoices sent out. The sale
transaction was recorded as R870 000 but should have been only R780 000.
2. On 4 February 20.5 Gimli Ltd received notice from Fargon (Pty) Ltd that a dividend of
10 cents per ordinary share was declared and authorised by the annual general meeting
on 31 January 20.5 to shareholders registered on 31 December 20.4. Gimli Ltd has
owned 150 000 ordinary shares in Fargon (Pty) Ltd for the past three years,
representing 3% of its issued share capital.
3. On 25 February 20.5 a material design defect was discovered in one of the company's
new vehicles. Production of the vehicle had commenced on 1 October 20.4 and
considerable costs will have to be incurred to correct the defect. The following
estimates have been made:
Rand
Additional information
158
Events after the reporting period
2. Assume that all amounts are material and that the company is a going concern
notwithstanding the effect of the above events on the financial statements.
Required
Briefly discuss how the events in each of the above cases will affect the financial statements.
Prepare extracts from the financial statements of Gimli Ltd at 31 December 20.4 to disclose
the relevant items so as to comply with the requirements of International Financial
Reporting Standards (IFRS).
1. Discussion
This represents an event after the reporting date providing additional information
about the value of assets (receivables) at the reporting date. The error must be
corrected by adjusting the financial statements.
Disclosure
GIMLI LTD
STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER 20.4
Rand
ASSETS
Current assets
Trade receivables (xx xxx – 90 000 (1)) xx xxx
GIMLI LTD
STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED
31 DECEMBER 20.4
Rand
159
Events after the reporting period
2. Discussion
The declaration of dividends occurred after the reporting date. It is therefore not an
event that provides additional evidence of a condition that existed on the reporting
date, but rather one that arose after the reporting date. Financial statements must not be
adjusted. The matter must be disclosed in the note ‘Events after the reporting date’ if
the non-disclosure will affect the ability of the users of the financial statements to
make proper evaluations and decisions.
Disclosure
GIMLI LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.4
Fargon (Pty) Ltd declared a dividend of 10c per share on 31 January 20.5 to
shareholders registered on 31 December 20.4. Gimli Ltd is entitled to dividends
of R15 000, which will increase profit for the period for 20.5 by the same
amount.
3. Discussion
Unsold inventory on hand: IAS 2.30 requires that in determining the net realisable
value of inventory on hand, the most reliable evidence at the time the estimates are
made must be taken into account. These estimates take into consideration fluctuations
in price or costs directly relating to events that occurred after the end of the period to
the extent that such events confirm conditions existing at the reporting date. These
inventory items have an inherent defect, which means that they cannot be sold in their
present condition and this condition existed at the reporting date.
IAS 2 states further that the cost of inventories may not be recoverable if the estimated
costs of completion or the estimated costs to be incurred to make the sale have
increased. Clearly, additional costs will have to be incurred to make the unsold
inventory saleable, thus in determining the net realisable value of inventory, the selling
price will need to be reduced by the repair costs to be incurred in the next financial
year to make the unsold inventory saleable. This ‘reduced’ selling price will then be
compared to the cost price at which the inventory is presently valued in the statement
of financial position, and a write-down to net realisable value may be necessary at the
reporting date. The event may then be an adjusting event if the inventory on hand
needs to be written down to its net realisable value.
Units sold during the year under review: The financial statements must be adjusted for
the additional costs to be incurred to recall and repair these units (R45 000 +
R295 000). Thus a provision to repair inventory sold of R340 000 must be recognised
at the reporting date because a current obligation exists, and it is probable that an
outflow of economic benefits will occur to settle the obligation and the amount can be
reliably determined.
160
Events after the reporting period
Repair costs 20.5: the costs to repair inventory actually manufactured in 20.5 must not
be recognised in the financial statements for 20.4. Disclosure, however, must be made
by way of a note to the financial statements if the user’s ability to make proper
evaluations or decisions will be affected.
Disclosure
GIMLI LTD
STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER 20.4
Rand
ASSETS
Current assets
Inventories (xx xxx – any write down to NRV that may be needed) xx xxx
GIMLI LTD
STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED
31 DECEMBER 20.4
Note Rand
Profit before tax (xx xxx – 45 000 – 295 000 – any write-
down to NRV that may be needed) 4 xx xxx
Income tax expense (xx xxx – 95 200 (1)) (xx xxx)
Profit for the year (xx xxx – 244 800 (2)) xx xxx
Other comprehensive income –
Total comprehensive income for the year xx xxx
GIMLI LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.4
Profit before tax is stated after taking the following into account:
161
Events after the reporting period
The cost of rectification of a material design defect in 20.5 for goods manufactured in
20.5 (see note 4) will amount to R135 000.
In each of the above-mentioned cases and in addition to the given disclosure, the date
must be disclosed when the financial statements were authorised for issue and who
gave such authorisation. If any party has the power to amend the financial statements
after issue date, this fact must also be disclosed.
The financial statements of Penari Ltd are in the process of being finalised for the year
ended 31 March 20.2. Penari Ltd would like to present the financial statements for
authorisation for issue on 10 June 20.2. Uncertainty still exists on the following matters:
1. Penari Ltd determined during May 20.2 that a debtor, IOU Ltd, which owed an amount
of R20 000 to Penari Ltd at 31 March 20.2, is currently experiencing financial
difficulties and will probably not be able to settle its debt. After further investigation it
came to light that the problem had already existed for the past six months, but as
Penari Ltd was unaware of this, the company continued granting credit to IOU Ltd.
The result is that an amount of R35 000 was owed by IOU Ltd at 31 May 20.2.
2. Owing to a cloud burst during the first week in April 20.2, the basement level of
Penari Ltd's premises was flooded, resulting in the total destruction of the inventory
stored there. The cost of this inventory, amounting to R75 000, is included in the
inventories figure in the financial statements at 31 March 20.2. Penari Ltd was not
insured.
3. A claim amounting to R150 000 was instituted against Penari Ltd on 1 March 20.2
arising from the terms of a product guarantee given by Penari Ltd on its products. On
10 June 20.2 it is still not certain if the claim will be successful and the extent of the
costs are also uncertain.
4. Penari Ltd has a debtor, Dot Ltd, which owed the company R55 000 as at
31 March 20.2. During April 20.2 Dot Ltd's premises were destroyed by a fire,
including all the assets and the accounting records. Dot Ltd was not insured and it
appears that the company will not be able to settle any of its debts. At the time of the
fire the outstanding amount according to Penari Ltd's records was R64 000.
5. On 31 March 20.2 Penari Ltd had 800 ‘Item 4’ units on hand at a cost of R16 000.
During April 20.2 Penari Ltd determined that half of the ‘Item 4’ inventory items on
hand at 31 March 20.2 had a defect due to a manufacturing error resulting from a
problem encountered with Machine 1. The defective items can be sold for R5 each and
the costs to repair the machine will be R15 000.
Required
162
Events after the reporting period
b. Briefly discuss how the event will affect the financial statements for the year ended
31 March 20.2.
Give reasons for the answers in each of the above cases. It is not necessary to give the
disclosure concerning the date the financial statements were authorised for issue and who
gave the authorisation, as required by IAS 10. Your solution must comply with the
requirements of International Financial Reporting Standards (IFRS).
Park Developers Ltd concentrates on township development. During the past few years it
has been selling township property to the public and recognising revenue according to the
payment method (profits recognised as payments are received).
During the financial year ended 31 December 20.7, legal action was instituted against the
company for the return of payments made in connection with property sold in unproclaimed
townships. Court cases are pending. The company has rejected any liability for the amount
claimed. After year end, but before finalising the financial statements, a court order
instructed the company to repay an amount of R8,4 million to buyers. As a result of the
court order an amount of R4,2 million included in receivables, will not be collected.
The cost of sales of these stands was R1,5 million for land and R2,1 million for
development costs.
The company proposes to disclose the above matter in a note explaining that a contingent
liability exists for the possible repayment that may be required of amounts received for
stands in unproclaimed townships. The directors propose to refer to the court order and to
the effect that it will have on the statement of profit or loss and other comprehensive income
and statement of financial position, in the directors' report under the heading ‘Events after
the reporting date’.
Required
a. Briefly discuss the proposed treatment of the court order by the company in terms of
the requirements of International Financial Reporting Standards (IFRS).
b. Briefly describe what effect the court order will have on the statement of financial
position of the company as at 31 December 20.7. The company makes full provision
for development costs when the first stand is sold, but it has agreed to change the
balance at year end so that the provision for development costs only applies to stands
sold. Your solution must comply with the requirements of International Financial
Reporting Standards (IFRS).
Vespa Ltd is a listed company whose financial statements were authorised for issue on
2 October 20.7. The following note has been extracted from the financial statements of the
company for the year ended 30 June 20.7:
163
Events after the reporting period
VESPA LTD
NOTES FOR THE YEAR ENDED 30 JUNE 20.7
17.1 On 15 August 20.7 the shareholders approved a change of the company’s name to
Baby Equip Ltd. This name is more descriptive of the business of the group which has
expanded considerably during the past few years. The change does not indicate a
change in the ownership or management of the group. The board of directors is
confident that the new name will lead to a considerable improvement in the company's
business image.
Additional information
2. Assume that all amounts involved are material and that the company is a going
concern irrespective of the effect of the above-mentioned on the financial statements.
Required
Rand
It is not necessary to give the disclosure concerning the date the financial statements were
authorised for issue and who gave that authorisation, as required by IAS 10.
164
Events after the reporting period
After the reporting date but prior to the authorisation of the financial statements for
issue, the company received the news that, as a result of a bloodless coup d'etat, all
construction work has ceased. As a precautionary measure the American embassy in
that country advised foreigners to leave. Fly Construction Ltd's technical and
supervisory staffs were all evacuated.
2. During the current financial year under review, Play Galore Ltd completed a housing
development project consisting of 2 000 units for Blacksburgh Inc, an American
company engaged in a mining venture in Iceland.
Blacksburgh Inc indicated that it will take civil action in both the American and South
African courts claiming R20,0 million.
Play Galore Ltd's legal advisors are of the opinion that any case against the company to
be heard in the South African courts will fail, but are not able to express an opinion on
the outcome of the case if it is heard in America as they lack sufficient information on
the plaintiff's case.
On the date the directors authorised the financial statements for issue, no case had
been filed nor had legal proceedings commenced in either country.
Required
Discuss how Fly Construction Ltd and Play Galore Ltd must deal with the above matters in
their financial statements so as to comply with the requirements of International Financial
Reporting Standards (IFRS). Commence your answer with a brief analysis of all the facts
and issues involved.
1. The financial statements of Kheela Ltd for the year ended 31 December 20.2 are in the
process of being finalised. On 15 February 20.3 the directors decided to declare an
additional ordinary dividend of R30 000, which was authorised by the shareholders on
18 February 20.3. The ordinary dividend will be paid on 15 March 20.3 to all ordinary
shareholders registered on 31 December 20.2. On 3 March 20.3 the financial
statements were authorised for issue by the directors. There are no preference shares in
issue.
165
Events after the reporting period
Required
Disclose the above-mentioned information in the financial statements of Kheela Ltd for the
year ended 31 December 20.2 in accordance with the requirements of International
Financial Reporting Standards (IFRS).
2. On 28 February 20.3 the factory of Kheela Ltd was destroyed in a fire, which was
caused by a short circuit in the electricity supply to the factory. Kheela Ltd did not have
any insurance cover, and the directors therefore have no choice but to cease operations
and to liquidate the company.
Required
Discuss how Kheela Ltd shall deal with the above matter in its financial statements for the
year ended 31 December 20.2 in order to comply with the requirements of International
Financial Reporting Standards (IFRS).
166
IAS 12, SIC 25 & FRG 1
Income taxes
__________________________________________________________________
IAS 12.1 Temporary differences and other differences – calculations and FRG 1
IAS 12.2 Temporary differences – calculation and journals
IAS 12.3 Temporary differences – calculation and disclosure
IAS 12.4 Disclosure in financial statements and FRG 1
IAS 12.5 Deferred tax asset – calculations and disclosure
IAS 12.6 Calculations and disclosure – tax loss
IAS 12.7 Calculations and disclosure – tax loss and temporary differences
IAS 12.8 Calculations – tax loss
IAS 12.9 Calculations and disclosure – tax loss and capital gains tax
IAS 12.10 Calculation of a deferred tax liability
IAS 12.11 SIC 25
QUESTIONS
* These questions are not in the textbook, but are available in the electronic guide for
lecturers containing the suggested solutions for questions without answers.
167
Income taxes
The accountant of Uno Ltd prepared separate accounting profit and taxable income
calculations for the year ended 31 December 20.3:
Additional information
1. The cost of the original office building was R200 000 and the building is depreciated
at 5% per annum on the straight-line method. On 31 December 20.3, the carrying
amount was R150 000. No tax allowances are given on this building.
3. Assume that the residual value, useful life and depreciation method of all assets were
reviewed at each financial year end and that there were no changes.
5. There was no balance on the deferred tax liability account at 31 December 20.2.
Required
168
Income taxes
e. Assume that on 1 February 20.4 the Minister of Finance announces a change in the
corporate tax rate from 28% to 27% in the Budget Statement. The change is effective
for entities with a year of assessment ending on or after 1 March 20.5. No other
significant changes in the tax laws are announced in the Budget Statement.
Assume that the financial statements for 20.3 are approved for issue on
15 February 20.4.
Discuss, with reasons, what the effect of the reduction in the tax rate has on the
financial statements for the year ended 31 December 20.3.
Your solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
a. Reconciliation Rand
169
Income taxes
(1) The temporary difference arises from the initial recognition of the asset (carrying
amount = R200 000 and tax base = RNil). In terms of IAS 12.15 this temporary
difference is then exempt from deferred tax.
(2) Rental received in advance is deferred for accounting purposes but taxed on a
cash basis. The tax base of the rental received in advance is RNil (10 000 –
10 000).
Journal Rand
Dr/(Cr)
Deferred tax expense (P or L) 4 200
Deferred tax (SFPos) (4 200)
c. Income tax expense as calculated for the profit or loss section of the statement of
profit or loss and other comprehensive income
Rand
Current tax expense (refer a) 117 600
Deferred tax expense (refer b) 4 200
Total income tax expense 121 800
OR
Rand
170
Income taxes
Rand
Non-deductible expenditure
Donations (4) 5 600
Depreciation on office buildings (5) 2 800
Penalty (6) 1 400
Income tax expense 121 800
e. In terms of IAS 12.46, current tax assets and liabilities are measured at the amounts
that are expected to be paid to or recovered from the tax authorities, using rates that
have been enacted or substantially enacted at the reporting date.
In terms of IAS 12.47, deferred tax assets and liabilities are measured at tax rates that
are expected to apply to the period when the asset is realised or the liability is settled,
based on the tax rates that have been enacted or substantially enacted by the reporting
date.
In this question the change in tax rate can therefore be regarded as substantially
enacted from 1 February 20.4.
Owing to the fact that the change in the tax rate was not substantially enacted at the
31 December 20.3 year end, the deferred and current tax liabilities for the year ended
31 December 20.3 will still be based on 28%.
However, due to the fact that the substantive enactment (1 February 20.4) occurs prior
to the publication of the financial statements (15 February 20.4), this would constitute
a non-adjusting event after the reporting period and disclosure should be provided in a
note in terms of IAS 10. The note will stipulate that any deferred tax balance will
reduce in future as a result of the change in corporate tax rate from 28% to 27%.
171
Income taxes
The South African Revenue Service grants a wear-and-tear allowance on plant over four
years (25% per year) with no apportionment on a time basis.
Assume that the residual value, useful life and depreciation method of the plant were
reviewed at each financial year end and that there were no changes.
Required
Calculate and journalise the transfers to and from the deferred tax account for the years
ended 31 December 20.1 to 20.3.
Your solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
1. Calculations
CA TB TD DTL P or L
Rand Rand Rand Rand Rand
(Dr)/Cr Dr/(Cr)
20.0
Cumulative temporary
differences – –
20.1
New plant – 31 December (1) 160 000 150 000 10 000
Cumulative temporary
differences @ 40% (2) 10 000 4 000 4 000
20.2
Rate change 40% – 45% (3) 500 500
Adjusted opening balance 4 500
New plant – 31 December (4) 400 000 375 000 25 000
Old plant – 31 December (5) 120 000 100 000 20 000
Cumulative temporary
differences @ 45% (6) 45 000 20 250 15 750
20.3
Rate change 45% – 30% (7) (6 750) (6 750)
Adjusted opening balance 13 500
Plant – 31 December (8) 380 000 300 000 80 000
Cumulative temporary
differences @ 30% (9) 80 000 24 000 10 500
CA = Carrying amount
TB = Tax base
TD = Temporary difference
DTL = Deferred tax liability
P or L = Profit or loss (movement)
(1) 200 000 × 80% = 160 000; 200 000 × 75% = 150 000
(2) 4 000 (DTL 20.1) – 0 (DTL 20.0) = 4 000 movement
172
Income taxes
2. Journals
20.1 20.2 20.3
Rand Rand Rand
Dr/(Cr) Dr/(Cr) Dr/(Cr)
31 December
Deferred tax expense (P or L) 4 000 15 750 10 500
Deferred tax (SFPos) (4 000) (15 750) (10 500)
1 January
Deferred tax expense/(income) (P or L) – 500 (6 750)
Deferred tax (SFPos) – (500) 6 750
PART I
Manuf Ltd bought a manufacturing plant on 1 January 20.2 and put it into production
immediately. The cost price of the plant was R500 000 and its useful life is five years.
Manuf Ltd decided to depreciate it over five years using the straight-line method, with no
residual value.
For tax purposes the South African Revenue Service allowed wear and tear on the following
basis:
On 31 December 20.5 Manuf Ltd sold the plant for R100 000.
The profit before tax for 20.4 was R120 000 and for 20.5 was R150 000. The tax rate was
constant at 30% for the years 20.2 to 20.5.
Assume that the residual value, useful life and depreciation method of the manufacturing
plant were reviewed at each financial year end and that there were no changes.
Assume that for the year ended 31 December 20.4, provisional tax amounting to R30 000
was paid to SARS and for the year ended 31 December 20.5, R100 000.
173
Income taxes
Required
a. Calculate the temporary differences and deferred tax asset/liability for the years 20.2 to
20.5, clearly indicating the debits and credits on the deferred tax asset/liability account
in the statement of financial position.
b. Calculate the taxable income and current tax expense for 20.4 and 20.5.
c. Disclose the relevant information in the annual financial statements of Manuf Ltd for
the year ended 31 December 20.5 in accordance with the requirements of International
Financial Reporting Standards (IFRS).
PART II
Engine Ltd bought machinery to the value of R250 000 on 1 January 20.6 and put it into
production immediately. The machinery was depreciated over five years using the straight-
line method to the residual value of R50 000. The South African Revenue Service allows
wear and tear on this machinery at 20% per annum on the straight-line method.
Engine Ltd sold the machinery on 31 December 20.7 for R270 000.
The profit before tax for 20.6 was R100 000 and for 20.7, R120 000. The tax rate was 40%
in 20.6 and decreased to 30% in 20.7.
Assume that the residual value, useful life and depreciation method of the manufacturing
plant were reviewed at each financial year end and that there were no changes.
Required
a. Calculate the temporary differences and deferred tax asset/liability for the years 20.6
and 20.7, clearly indicating the debits and credits on the deferred tax asset/liability
account in the statement of financial position.
b. Calculate the taxable income and income tax expense for 20.6 and 20.7.
c. Disclose the relevant information in the annual financial statements of Engine Ltd for
the year ended 31 December 20.7, in accordance with the requirements of International
Financial Reporting Standards (IFRS).
PART I
31 Dec 20.2 400 000 250 000 150 000 45 000 45 000
31 Dec 20.3 (1) 300 000 100 000 200 000 60 000 15 000
31 Dec 20.4 (2) 200 000 – 200 000 60 000 –
31 Dec 20.5 (3) – – – – (60 000)
CA = Carrying amount
TB = Tax base
TD = Temporary difference
174
Income taxes
(1) 100 000 selling price – 100 000 carrying amount = RNil
(2) 100 000 selling price – 0 tax base = 100 000
c. Disclosure
MANUF LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.5
MANUF LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.5
175
Income taxes
MANUF LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.5
Note: A tax rate reconciliation is not required, due to the fact that the average effective
tax rate and the statutory tax rate are the same.
PART II
a. Deferred tax CA TB TD DTL P or L
Rand Rand Rand Rand Rand
(Dr)/Cr Dr/(Cr)
31 Dec 20.6 (1) 210 000 200 000 10 000 4 000 4 000
20.7 Rate change
40% – 30% (2) (1 000) (1 000)
3 000
31 Dec 20.7 – – – – (3 000)
(1) 250 000 – ((250 000 – 50 000) × 20%) = 210 000; 250 000 – (250 000 × 20%)
= 200 000
(2) ((40 – 30)/40) × 4 000 = 1 000
CA = Carrying amount
TB = Tax base
TD = Temporary difference
DTL = Deferred tax liability
P or L = Profit or loss (movement)
176
Income taxes
20.7 20.6
Rand Rand
c. Disclosure
ENGINE LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.7
ENGINE LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.7
ENGINE LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.7
177
Income taxes
The authorities reduced the tax rate during the current year to 30% (20.6: 40%).
OR
20.7 20.6
Rand Rand
The authorities reduced the tax rate during the current year to 30% (20.6: 40%).
178
Income taxes
The financial year of Mom Ltd, a manufacturer, ends on 28 February. The following
information for the year ended 28 February 20.2 is available:
Rand
Additional information
1. Issued share capital – 1 000 000 ordinary shares issued at 50c each (listed on the
JSE Ltd).
2. The deferred tax liability on 1 March 20.1 was R35 000 and originated from temporary
differences on the plant. The tax rate for 20.2 is 30% (20.1: 35%).
3. Assume that the residual value, useful life and depreciation method of the plant were
reviewed at each financial year end and that there were no changes. Depreciation is
provided using the reducing balance method.
4. Assume that for the year ended 28 February 20.2, provisional tax amounting to
R60 000 was paid.
Required
a. Prepare an extract from the statement of profit or loss and other comprehensive income
for the year ended 28 February 20.2 and an extract from the statement of financial
position as at that date of Mom Ltd in accordance with the requirements of
International Financial Reporting Standards (IFRS). Comparative amounts and
disclosure of earnings and dividend per share are not required. The extract must be as
complete as the given information will allow.
b. Assume that on 15 February 20.2, the Minister of Finance in the Budget Statement
announces a change in the corporate tax rate from 30% to 28%. This change is effective
for entities with a year of assessment ending on or after 1 May 20.2. No other
significant changes in tax laws are expected.
Discuss and state at which tax rates the current tax and deferred tax balances will be
measured in the following circumstances:
179
Income taxes
a. Disclosure
MOM LTD
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.2
Note Rand
ASSETS
Non-current assets
Property, plant and equipment 4 344 000
MOM LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 28 FEBRUARY 20.2
Note Rand
Profit before tax 5 214 000
Income tax expense 6 (59 200)
Profit for the year 154 800
Other comprehensive income –
Total comprehensive income for the year 154 800
MOM LTD
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.2
1. Accounting policies
The financial statements are prepared on the historical cost basis and comply with the
requirements of International Financial Reporting Standards (IFRS). They incorporate
the following principal accounting policies which are consistent with those of the
previous year, unless otherwise stated:
Deferred tax is provided for on all temporary differences, according to the reporting
date liability method.
180
Income taxes
Depreciation on plant is provided for on the reducing balance method over the
expected useful life of assets.
3. Deferred tax
Rand
Analysis of temporary differences
Accelerated wear-and-tear allowances for tax purposes – plant 28 800
Plant
Rand
Cost xxx
Accumulated depreciation xxx
Carrying amount beginning of year 350 000
Additions 80 000
Depreciation (86 000)
Carrying amount end of year 344 000
Cost xxx
Accumulated depreciation xxx
Profit before tax is stated after taking the following, inter alia, into account:
Expenses Rand
Depreciation 86 000
The authorities reduced the tax rate during the current year to 30%.
181
Income taxes
OR
Rand
Accounting profit before tax 214 000
The authorities reduced the tax rate during the current year to 30%.
(1) 214 000 × 30% = 64 200
(2) Calc b
Calculations
a. Taxable income
20.2
Rand
Profit before tax (1) 214 000
Depreciation for accounting purposes 86 000
Wear-and-tear allowance for tax purposes (82 000)
Taxable income 218 000
b. Deferred tax
CA TB TD DTL P or L
Rand Rand Rand Rand Rand
(Dr)/Cr Dr/(Cr)
28 Feb 20.1 Plant 350 000 250 000 100 000 35 000
1 Mar 20.1 Rate change
35% – 30% (1) (5 000) (5 000)
Adjusted balance 30 000
28 Feb 20.2 Plant (2) 344 000 248 000 96 000 28 800 (1 200)
CA = Carrying amount
TB = Tax base
TD = Temporary differences
DTL = Deferred tax liability
P or L = Profit or loss (movement)
182
Income taxes
PART B
b.1 Current tax – 30%
Deferred tax – 30%
Discussion
In terms of IAS 12.46, current tax assets and liabilities are measured at the amounts that are
expected to be paid to or recovered from the tax authorities, using rates that have been
enacted or substantially enacted at the reporting date.
In terms of IAS 12.47, deferred tax assets and liabilities are measured at tax rates that are
expected to apply to the period when the asset is realised or the liability is settled, based on
the tax rates that have been enacted or substantially enacted by the reporting date.
In terms of FRG 1, changes in tax rates should be regarded as substantially enacted from the
time they are announced in terms of the Minister of Finance’s budget speech, provided that
the change in tax rates is not inextricably linked to other changes in the tax laws.
In this question the changes in tax rate can therefore be regarded as substantially enacted
from 15 February 20.2.
For financial years ending before 15 February 20.2, the tax rate applicable when calculating
current tax and deferred tax will be 30%.
For financial years ending on or after 15 February 20.2 and before 1 May 20.2, current tax
will be calculated at 30% where as deferred tax will be calculated at 28%.
For financial years ending on or after 1 May 20.2, current tax and deferred tax will be
calculated at 28%.
PART I
Ben Ltd made a profit before tax of R314 700 for the year ended 31 December 20.5. The
accountant is busy with the tax calculation and has established the following:
• There is a net deductible temporary difference of R68 000 for the year (movement),
consisting of the following:
Rand
183
Income taxes
• Ben Ltd received dividends of R188 000 which have been included in the above-
mentioned profit before tax.
• Expenses of R5 300 are not deductible for tax purposes.
• The balance of the deferred tax account on 31 December 20.4 is a credit of R6 000.
• Assume a tax rate of 30%.
Required
Show how income taxes will be presented in the statement of profit or loss and other
comprehensive income (profit or loss section) and prepare accompanying notes of Ben Ltd
for the year ended 31 December 20.5, in accordance with the requirements of International
Financial Reporting Standards (IFRS), if:
a. Ben Ltd is certain that there is assurance beyond a reasonable doubt that there will be
sufficient taxable profit in the future to realise the tax benefit.
b. Ben Ltd is not certain that there is assurance beyond a reasonable doubt that there will
be sufficient taxable profit in the future to realise the tax benefit.
PART II
Ben Ltd prepared the following tax calculation for the year ended 31 December 20.6:
Rand
Refer to Part I b. of this question for the amounts of the previous year and assume that the
tax rate is still 30%.
Required
Show how income taxes will be presented in the statement of profit or loss and other
comprehensive income (profit or loss section) and prepare accompanying notes of Ben Ltd
for the year ended 31 December 20.6, in accordance with the requirements of International
Financial Reporting Standards (IFRS). Comparative amounts are not required.
184
Income taxes
PART I
Calculations
Taxable income
Rand
Accounting profit 314 700
Dividends received (188 000)
Non-deductible expenditure 5 300
Taxable profit before taking temporary differences into account 132 000
Deductible temporary differences 68 000
Taxable income 200 000
Disclosure
BEN LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.5
a b
Note Rand Rand
Profit before tax 314 700 314 700
Income tax expense 3 (39 600) (54 000)
Profit for the year 275 100 260 700
Other comprehensive income – –
Total comprehensive income for the year 275 100 260 700
BEN LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.5
185
Income taxes
OR a b
Rand Rand
(1) Amount per statement of profit or loss and other comprehensive income
(2) 314 700 × 30% = 94 410
(3) 188 000 × 30% = 56 400
(4) 5 300 × 30% = 1 590
(5) 68 000 – 20 000 = 48 000 × 30% = 14 400
PART II
Calculations
186
Income taxes
Disclosure
BEN LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.6
Note Rand
BEN LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.6
OR
Rand
187
Income taxes
Difir Ltd has the following property, plant and equipment on 31 December 20.4:
Buildings, comprising the office buildings of the company, are depreciated on the straight-
line method over 25 years.
The office buildings comply with the definition of commercial buildings in terms of the
Income Tax Act and the buildings therefore qualifies i.t.o. section 13quin for a 5% tax
allowance per year.
Difir Ltd had an assessed loss on 31 December 20.4 of R175 000. The tax rate for 20.4 was
35%, and for 20.5 and 20.6 it was 30%.
Accounting profit before tax was R300 000 for the 20.5 financial year and R400 000 for
20.6. Difir Ltd received dividends of R80 000 (included in the profit) and paid dividends of
R60 000 during 20.5. During 20.6 dividends of R100 000 were received and no dividends
were paid.
There are no other items causing temporary or other differences except those arising from
the information given.
Assume that the residual value, useful life and depreciation method of all assets were
reviewed at each financial year end and that there were no changes.
Required
Prepare an extract from the statement of profit or loss and other comprehensive income of
Difir Ltd for the year ended 31 December 20.6 and an extract from the statement of financial
position as at that date. Also prepare the notes for income tax that will accompany the
financial statements of Difir Ltd for the year ended 31 December 20.6. Your answer must be
in accordance with the requirements of International Financial Reporting Standards (IFRS).
Accounting policy notes are not required.
188
Income taxes
Calculations
2. Deferred tax
CA TB TD DTL P or L
Rand Rand Rand Rand Rand
(Dr)/Cr Dr/(Cr)
31 December 20.4
Machinery (1) 720 000 450 000 270 000 94 500
Office buildings (2) 1 200 000 1 125 000 75 000 26 250
Land 500 000 – 500 000 exempt
Unutilised tax loss – (175 000) (175 000) (61 250)
59 500
1 January 20.5
Rate change
(35% – 30%) (3) (8 500) (8 500)
Adjusted balance 51 000
31 December 20.5 117 000 66 000
Machinery (4) 540 000 180 000 360 000 108 000
Office buildings (5) 1 140 000 1 050 000 90 000 27 000
Land 500 000 – 500 000 exempt
Unutilised tax loss – (60 000) (60 000) (18 000)
189
Income taxes
CA = Carrying amount
TB = Tax base
TD = Temporary difference
DTL = Deferred tax liability
P or L = Profit or loss (movement)
Disclosure
DIFIR LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.6
20.6 20.5
Note Rand Rand
EQUITY AND LIABILITIES
Non-current liabilities
Deferred tax 2 139 500 117 000
Current liabilities
South African Revenue Service 67 500
DIFIR LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.6
20.6 20.5
Note Rand Rand
Profit before tax 400 000 300 000
Income tax expense 3 (90 000) (57 500)
Profit for the year 310 000 242 500
Other comprehensive income – –
Total comprehensive income for the year 310 000 242 500
DIFIR LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.6
2. Deferred tax
20.6 20.5
Rand Rand
Analysis of temporary differences
Accelerated wear-and-tear allowances for tax purposes
(1) (2) 139 500 135 000
Unutilised tax loss (3) – (18 000)
139 500 117 000
190
Income taxes
OR
20.6 20.5
Rand Rand
(1) Amount per statement of profit or loss and other comprehensive income
(2) 400 000 × 30% = 120 000; 300 000 × 30% = 90 000
(3) 100 000 × 30% = 30 000; 80 000 × 30% = 24 000
(4) Amount per income tax expense note
Rand
191
Income taxes
The plant and equipment had a cost price of R1 000 000 and is written off on the straight-
line method over 10 years. The tax base on 1 January 20.3 was RNil.
On 1 July 20.3, new plant and equipment with a cost price of R10 000 000 were available
for use as intended by management. This plant will also be depreciated on the same basis as
the original plant. The South African Revenue Service will allow a wear-and-tear allowance
at 20% per annum on cost, regardless of how long the plant was in use for any specific year.
The original plant and equipment were withdrawn from production on 30 September 20.3
and sold for R350 000.
For the tax year ended 31 December 20.2, Supa Ltd had an assessed loss of R250 000. The
tax rate for 20.2 and 20.3 was 35% and for 20.4 it is 30%.
Assume that the residual value, useful life and depreciation method of all plant and
equipment were reviewed at each financial year end and that there were no changes.
20.4 20.3
Rand Rand
(None of the above information has been taken into account in determining the profit before
tax and depreciation.)
There are no other temporary differences other than those apparent from the information
provided.
The credit balance on deferred tax on 31 December 20.1 amounted to R17 500.
For the year ended 31 December 20.4, provisional tax amounting to R200 000 was paid. No
provisional tax was paid for the year ended 31 December 20.3.
Required
Prepare extracts of the statement of financial position and the statement of profit or loss and
other comprehensive income, as well as all the relevant tax notes to accompany the financial
statements of Supa Ltd for the financial year ended 31 December 20.4, in accordance with
the requirements of International Financial Reporting Standards (IFRS).
192
Income taxes
Calculations
193
Income taxes
CA = Carrying amount
TB = Tax base
TD = Temporary differences
DTL = Deferred tax liability
P or L = Profit or loss (movement)
(1) 10 000 000 – 500 000 = 9 500 000; 10 000 000 – 2 000 000 = 8 000 000
(2) [(35 – 30)/35] × 367 500 = 52 500
(3) 9 500 000 – 1 000 000 = 8 500 000; 8 000 000 – 2 000 000 = 6 000 000
Disclosure
SUPA LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.4
20.4 20.3
Note Rand Rand
EQUITY AND LIABILITIES
Non-current liabilities
Deferred tax 2 750 000 367 500
Current liabilities
Tax owing (1) 88 000
SUPA LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.4
20.4 20.3
Note Rand Rand
SUPA LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.4
2. Deferred tax
20.4 20.3
Rand Rand
Analysis of temporary differences
194
Income taxes
The authorities reduced the applicable tax rate during the current year to 30% (20.3:
35%).
OR
20.4 20.3
Rand Rand
Tax at applicable (statutory) rate of 30% (20.3: 35%) 750 000 367 500
Tax effect of income not taxable
Dividends received (5) (30 000) (17 500)
Tax effect of expenses not deductible for tax
purposes
Fines (6) 3 000 –
Rate change (52 500) –
Income tax expense 670 500 350 000
The authorities reduced the applicable tax rate during the current year to 30% (20.3:
35%).
195
Income taxes
A company provides for deferred tax, and the tax rate for 20.1 and 20.2 was 30%.
According to the company's statement of financial position, the net deferred tax liability at
the end of 20.1 was R5 250. This was after taking into account the effect of any tax loss at
the end of 20.1.
Situation I II III IV V
20.2 Rand Rand Rand Rand Rand
Profit/(loss)
per financial statements 24 000 6 000 22 000 40 000 (15 000)
(Taxable)/deductible
temporary differences (8 000) 4 000 (9 000) (17 500) (8 750)
(Income not taxable)/expenses
not tax deductible (6 000) (30 000) (8 000) 10 000 10 000
Taxable profit/(tax loss)
for the year 10 000 (20 000) 5 000 32 500 (13 750)
Tax loss end of 20.1 – (2 000) (13 000) (21 250) (7 500)
Tax loss end of 20.2 (22 000) (8 000) (21 250)
Taxable profit for 20.2 10 000 11 250
Required
a. Show the deferred tax income or expense for 20.2 for each of the above situations as
well as the deferred tax asset or liability. Assume that the tax loss in the previous year
was debited against the deferred tax account and that there is certainty beyond any
reasonable doubt that there will be sufficient taxable profit in future (all calculations to
be done to the nearest rand).
b. Explain how the answer in situation II would have been different had there been no
certainty at the end of 20.2 about future taxable profit.
Your solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
Situation I II III IV V
Rand Rand Rand Rand Rand
Net opening deferred tax liability 5 250 5 250 5 250 5 250 5 250
Net closing deferred tax liability/
(asset) 7 650 (1 950) 9 450 16 875 3 750
Deferred tax liability i.r.o.
temporary differences (1) 7 650 4 650 11 850 16 875 10 125
Deferred tax asset for tax loss
at year-end @ 30% – (6 600) (2 400) – (6 375)
Deferred tax (income)/expense (2) 2 400 (7 200) 4 200 11 625 (1 500)
196
Income taxes
b. The company will have to decide in terms of IAS 12.33–.35 whether to recognise a
deferred tax asset or not. If there is no certainty about future taxable profits, no
deferred tax asset (debit balance) will be recognised.
Situation I II III IV V
Rand Rand Rand Rand Rand
Net opening deferred tax liability 5 250 5 250 5 250 5 250 5 250
Net closing deferred tax liability 7 650 – 9 450 16 875 3 750
Deferred tax liability due to
temporary differences 7 650 4 650 11 850 16 875 10 125
Deferred tax asset for tax loss (3) – (4 650) (2 400) – (6 375)
Deferred tax (income)/expense 2 400 (5 250) 4 200 11 625 (1 500)
(3) For case II there is a debit of R1 950 (6 600 (refer a.) – 4 650) unrecognised
against deferred tax, as the creation of a debit balance is not allowed.
Note: South African tax law is such that tax losses (in the case of a going
concern) can be set off against future taxable income arising from the
subsequent reversal of credit balances on deferred tax.
197
Income taxes
Profit before tax (before taking into account depreciation and profit on sale of asset) and
taxable profit (before taking into account wear-and-tear allowances and recoupment) are as
follows:
• R200 000 for 20.1
• R100 000 for 20.2
• R350 000 for 20.3
Depreciation is provided for on the straight-line method over eight years.
Assume that the residual value, useful life and depreciation method of all machinery were
reviewed at each financial year end and that there were no changes.
For the year ended 31 December 20.3, provisional tax amounting to R150 000 was paid. No
provisional tax was paid for the year ended 31 December 20.2
Required
a. Calculate the transfers to and from the deferred tax account for the years 20.1 to 20.3.
All calculations are to be done to the nearest rand.
b. Show how the relevant items will be disclosed in the statement of profit or loss and
other comprehensive income for the year ended 31 December 20.3 and in the statement
of financial position as at that date, in accordance with the requirements of
International Financial Reporting Standards (IFRS). Give only the tax note(s) that will
accompany the profit or loss section of the statement of profit or loss and other
comprehensive income.
c. Assume that 50% of all capital gains are taxable, and disclose the income tax expense
note for the year ended 31 December 20.3. Comparative amounts are not required.
Calculations
1. Machinery
20.3 20.2 20.1
Carrying amount Rand Rand Rand
Cost price – opening balance 660 000 500 000 500 000
Purchase of assets – 160 000 –
Realisation of assets (220 000) – –
Cost price – end of year 440 000 660 000 500 000
Accumulated depreciation (267 500) (322 500) (250 000)
Opening balance 322 500 250 000 187 500
Depreciation (1) 68 750 72 500 62 500
Realisation (2) (123 750) – –
Carrying amount – end of year 172 500 337 500 250 000
198
Income taxes
2. Deferred tax
Carrying Tax Temporary
amount base difference
Rand Rand Rand
20.1 Machinery 250 000 128 000 122 000
Deferred tax balance on 31 Dec 20.1
(taxable temporary differences):
40% × 122 000 48 800
20.3 20.2
Rand Rand
Profit before depreciation and profit on sale 350 000 100 000
Depreciation (calc 1) (68 750) (72 500)
Profit on sale (1) 133 750 –
415 000 27 500
(1) 230 000 – (220 000 – 123 750) = 133 750
199
Income taxes
b. Disclosure
COMPANY NAME
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.3
20.3 20.2
Rand Rand
ASSETS
Non-current assets
Property, plant and equipment 172 500 337 500
EQUITY AND LIABILITIES
Non-current liabilities
Deferred tax 33 134 59 800
Current liabilities
Tax owing (1) 83 026 –
(1) 233 026 (calc 4) – 150 000 (given) = 83 026
200
Income taxes
COMPANY NAME
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.3
COMPANY NAME
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.3
The authorities increased the standard tax rate during the current year to 48%
(20.2: 40%).
OR
20.3 20.2
Rand Rand
201
Income taxes
The authorities increased the applicable tax rate during the current year to 48%
(20.2: 40%).
COMPANY NAME
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.3
The authorities increased the applicable tax rate during the current year to 48% (20.2:
40%).
202
Income taxes
OR
Rand
Accounting profit before tax 415 000
Tax at applicable (statutory) tax rate 199 200
50% of capital profit on sale of machine (1) (2 400)
Increase in tax rate 11 960
Income tax expense 208 760
The authorities increased the applicable tax rate during the current year to 48%
(20.2: 40%).
The directors of Fairness Ltd approached you as their auditor for advice on the application
of IAS 12.
The intention is to use the asset in the production of income for at least five years.
Assume that the residual value, useful life and depreciation method of the asset were
reviewed at each financial year end and that there were no changes.
Required
a. The directors want to know what the deferred tax asset or liability will be in the
following circumstances:
1. Given the above information.
2. The cumulative wear-and-tear allowances for tax purposes are RNil as the South
African Revenue Service does not grant any allowances on this asset.
3. The company wants to sell the asset without further use.
b. The directors subsequently revalued the asset to net replacement cost of R1 200. No
equivalent adjustment is made for tax purposes. Given the above information, the
directors want to know what the deferred tax asset or liability will be in the following
circumstances:
1. Sale proceeds in excess of cost will not be taxable and the company expects to
recover the carrying amount of the asset through use.
2. Sale proceeds in excess of cost will not be taxable and the company expects to
recover the carrying amount by selling the asset immediately.
3. 50% of capital gains are taxable and the company expects to recover the carrying
amount of the asset through use.
4. 50% of capital gains are taxable and the company expects to recover the carrying
amount by selling the asset immediately.
203
Income taxes
b2. If a decision has already been taken to sell the asset at the time of revaluation, deferred
tax is only provided for on the revaluation surplus up to cost price. The total surplus is
R400 (1 200 – 800) but only R200 (1 000 – 800) will be taxable. The existing deferred
tax liability on this asset will reverse on sale of the asset.
b4. The proceeds on sale in excess of the cost, R200 (R1 200 – R1 000), will be taxed at
effectively 15% (50% × 30%). The cumulative wear-and-tear allowances for tax
purposes of R350 will be included in the taxable profit and taxed at 30%.
Eleccom is an electricity supplier that has never paid income tax before. During the last
month of the financial year ending 30 June 20.2, it was announced by government that all
electricity suppliers will be subject to income tax at the company income tax rate of 30% as
from 1 July 20.2.
204
Income taxes
2. Amounts included in profit before tax with related income tax figures:
Accounting Tax
Rand Rand
Dividends received 100 000 –
Depreciation
Buildings 200 000 300 000
Machinery and equipment 250 000 500 000
3. Relevant statement of financial position figures, with tax values by the South African
Revenue Service as per a directive:
Required
a. Discuss conceptually how an entity will account for the tax consequences of a change
in tax status using only the information in the above scenario. Do not provide amounts
in your discussion.
b. Provide the journal entry necessary to effect the change in tax status in the books of
Eleccom.
a. Discussion
i. A change in the tax status of an entity or its shareholders does not give rise to
increases or decreases in amounts recognised in equity.
ii. The current and deferred tax consequences of a change in tax status shall be included
in profit or loss for the year, unless those consequences relate to transactions and
events that result, in the same or a different year, in a credit or charge to the
recognised amount of equity.
iii. Those tax consequences that relate to changes in the recognised amount of equity, in
the same or a different year (not included in profit or loss), shall be charged or
credited to equity.
205
Income taxes
Calculations
CA = Carrying amount
TB = Tax base
TD = Temporary differences
DTL = Deferred tax liability
Mickey Ltd is a manufacturing company. The following information is available for the year
ended 31 December 20.9:
Additional information
1. The accounting profit before tax for the year ended 31 December 20.9 amounted to
R178 000 after taking into account the above-mentioned items per the trial balance.
2. The South African Revenue Service allows a building allowance of R37 500 on the
factory buildings and a wear-and-tear allowance of R50 000 on the machinery. There
is no deduction in respect of the office buildings. The tax base of the factory buildings
on 31 December 20.9 is R75 000 and the tax base of the machinery on
31 December 20.9 is R11 250.
206
Income taxes
3. The cost of the lease is the equalised amount in respect of a 10-year contract which
commenced on 1 January 20.9. The conditions of the contract are as follows:
Rand
The South African Revenue Service allows the lease premium as a deduction over the
lease period (straight-line) and the instalments are deductible once they are paid.
5. A list of the debtors included in the allowance for credit losses was submitted to the
South African Revenue Service and 25% of the list will be allowed as a deduction.
6. A vehicle was sold on 1 January 20.9 for R32 000. On the date of sale, the carrying
amount of the vehicle was R15 000. Originally the vehicle cost R25 000. The tax base
of the vehicle on the same date was R10 000.
7. Assume that the residual value, useful life and depreciation method of all assets were
reviewed at each financial year-end and that there were no changes.
8. On 31 December 20.8, the deferred tax account had a credit balance of R9 100.
9. The tax rate was 28% for the past two years. There are no other temporary differences
other than those which are apparent from the given information.
Required
207
Income taxes
Owing to technological changes in the manufacturing process and a small change in its
products, Chemisycs Ltd decided to replace its plant, which is less than two years old, with a
more modern plant.
Tax base
on 31 December 20.2 270 000
on 30 June 20.3 180 000
Additional information
1. Depreciation is written off on the old plant at 15% per annum on the straight-line
method. Wear and tear was allowed on this plant on a 40/20/20/20 basis in terms of
section 12C.
2. On 30 June 20.3, the old plant was withdrawn from the production process and was
sold for R461 000. On 1 July 20.3, the new plant with a cost price of R800 000 was
brought into use (also the day it was available for use).
3. The directors decided to depreciate the newly acquired plant over four years on the
straight-line method.
4. The South African Revenue Service will allow wear and tear on the new plant on a
40/20/20/20 basis in terms of section 12C. This allowance is not apportioned on a pro
rata basis for periods shorter than a year.
6. The company had a profit of R1 000 000 for the year ended 31 December 20.3 before
taking the above into account.
7. The residual value, useful life and depreciation method of the newly acquired plant
were reviewed at 31 December 20.3, but there were no changes.
8. The tax rate for 20.2 was 30% and for 20.3 it is 29%.
9. There are no other temporary differences other than those mentioned above.
Required
a. Calculate the current tax expense of Chemisycs Ltd for the year ended
31 December 20.3.
b. Calculate the amount which will be transferred to/from the deferred tax account for the
year ended 31 December 20.3.
208
Income taxes
c. Prepare the relevant tax notes that will accompany the profit or loss section of the
statement of profit or loss and other comprehensive income and the statement of
financial position of Chemisycs Ltd for the year ended 31 December 20.3, in
accordance with the requirements of International Financial Reporting Standards
(IFRS). Ignore comparative amounts and deem all amounts to be material.
d. Assume that 50% of all capital gains are taxable, and prepare the income tax expense
note that will accompany the statement of profit or loss and other comprehensive
income for the year ended 31 December 20.3.
Toktokkie Ltd was incorporated on 1 July 20.4. The accounting profit before tax for the year
ended 30 June 20.6 amounted to R220 000 and the accounting loss before tax for the year
ended 30 June 20.5 amounted to R40 000.
The following items were taken into account in the calculation of accounting profit/loss
before tax:
20.6 20.5
Rand Rand
Depreciation
Office buildings 5 000 5 000
Plant and machinery 15 000 15 000
Dividends received 20 000 –
Additional information
1. During June 20.6, rental amounting to R12 000 was received in respect of July 20.6.
The rental is taxable in the tax year ended 30 June 20.6.
2. The assessment for the 20.5 tax year showed an assessed loss of R80 000. This agreed
with the records of the company.
3. The company operates in a risky industrial sector and at this early date of the
company’s existence there is no certainty of future taxable income against which tax
losses can be utilised.
4. For the 20.5 tax year, temporary differences consisted of taxable temporary differences
on the plant amounting to R45 000, before taking into account the assessed loss. The
cost price of the plant was R150 000 on 1 July 20.4 and depreciation amounting to
R15 000 was recognised for 20.5. The South African Revenue Service grants a wear-
and-tear allowance in terms of section 12C on a 40/20/20/20 basis.
5. The carrying amount of the office building amounted to R270 000 on 30 June 20.5.
6. The tax rate for both years is 29%. There are no other temporary differences or non-
taxable/non-deductible differences except for those apparent from the given
information.
7. Assume that the residual value, useful life and depreciation method of all assets were
reviewed at each financial year end and that there were no changes.
209
Income taxes
8. The office building does not qualify for any tax allowances as it was not new and
unused when purchased.
9. No provisional tax has been paid in either 20.5 or 20.6.
Required
a. Calculate the major components of the income tax expense for 20.5 and 20.6.
b. Present income taxes in the profit or loss section of the statement of profit or loss and
other comprehensive income for the year ended 30 June 20.6 and in the statement of
financial position as at that date, in accordance with the requirements of International
Financial Reporting Standards (IFRS). (Only notes relating to income taxes must be
provided). Comparative amounts are not required.
c. Assume exactly the same information as for part b, except that the profit before tax for
the year ended 30 June 20.6 amounted to R90 000. Prepare only the notes relating to
income taxes that will accompany the financial statements of Toktokkie Ltd for the
year ended 30 June 20.6 in accordance with the requirements of International Financial
Reporting Standards (IFRS). (The accounting policy note is not required).
The following information regarding the listed companies mentioned below for the year
ended 31 December 20.4 is available:
Additional information
1. The profit on sale of buildings resulted from the sale of buildings on 1 January 20.4.
Current tax payable thereon amounts to R5 000. The cost and value of land are RNil.
The tax base and carrying amount of the buildings amounted to R85 000 on
31 December 20.3.
210
Income taxes
4. The companies are deemed to be going concerns and there is reasonable assurance that
sufficient future taxable profit will be earned to utilise the deferred tax assets, as tax
planning opportunities are available that will create taxable profits in future.
5. Except for Aura Ltd and Duka Ltd, no other company had temporary differences at
31 December 20.3. Both Aura Ltd and Duka Ltd's temporary differences resulted only
from the assessed losses.
Required
Prepare an extract of the statements of profit or loss and other comprehensive income of the
above companies, as well as the tax notes that will accompany the financial statements for
the year ended 31 December 20.4. Your answer must comply with the requirements of
International Financial Reporting Standards (IFRS). Accounting policy notes and
comparative amounts are not required.
The accountant of Taksi Ltd prepared the following tax calculation for the year ended
31 December 20.3:
Additional information
1. The deferred tax balance at 31 December 20.2 amounts to R13 800 after taking into
account the effect of the R10 000 calculated tax loss for 20.2. (Refer point 6 below.)
2. After the above tax calculation was performed, the tax assessment for 20.2 was
received. The assessment showed a taxable profit of R2 000. The difference between
the tax provision for 20.2 and the actual assessment resulted from departmental policy
applied by the South African Revenue Service in respect of differences other than
temporary differences. This was accepted by Taksi Ltd after enquiries had been made.
3. Included in profit before tax is a gain of R50 000 attributable to the sale of vacant land
on 1 January 20.3, which was accounted for as an investment property using the cost
model. The original cost of the vacant land was R800 000 and the land was sold for
R850 000.
211
Income taxes
5. The carrying amount and tax base of the depreciable property, plant and equipment of
Taksi Ltd amounted to R1 000 000 and R944 000 respectively on 31 December 20.2.
6. The tax rate for 20.2 was 30% and for 20.3 it is 29%. Ignore capital gains tax.
7. Assume that the residual value, useful life and depreciation method of all assets were
reviewed at each financial year-end and that there were no changes.
Required
Prepare the profit or loss section of the statement of profit or loss and other comprehensive
income of Taksi Ltd for the year ended 31 December 20.3 and disclose the income tax
expense note thereto so as to comply with the requirements of International Financial
Reporting Standards (IFRS). Ignore comparative amounts.
212
IAS 16 & IFRIC 1
Property, plant and equipment
__________________________________________________________________
QUESTIONS
IAS 16.14 Re-assessment of depreciation methods, useful life and residual value
IAS 16.15 Re-assessment of residual value to greater than carrying amount
IAS 16.16 Accounting for components, derecognition and subsequent expenditure
IAS 16.17 Accounting and disclosure – various asset classes
IAS 16.18 Various matters regarding revaluations
IAS 16.19 Decrease in replacement cost and change in useful life*
IAS 16.20 Date of revaluation and residual values*
IAS 16.21 Revaluations of land and capital gains tax*
IAS 16.22 Plant with related long-term liability (IFRIC 1)*
* These questions are not in the textbook, but are available in the electronic guide for
lecturers containing the suggested solutions for questions without answers.
213
Property, plant and equipment
Sandton Ltd purchased a machine on 1 January 20.3. The following details are applicable:
Note Rand
Additional information
1. The purchase price of R100 000 is only payable on 31 December 20.3. The supplier of
the machine does not usually allow credit for the purchase of similar machines.
3. The costs of testing comprise costs incurred to produce samples while testing whether
the machine is functioning properly. Samples were sold at net proceeds of R500.
4. The pre-production costs were necessary to bring the machine to the condition
necessary to be able to operate in the manner intended by management.
5. The initial operating losses are attributable to the initial production of small quantities.
6. The asset was ready for use on 3 January 20.3 and immediately put to use.
7. The current interest rate is 14% per annum and the company does not follow a policy
of capitalising borrowing costs.
8. The machine will be depreciated using the straight-line method over eight years,
taking into account a residual value of R7 000.
9. Assume that a liability exists to dismantle and remove the machine at the end of its
useful life at a cost of R3 500 (discounted present value equals R1 700).
Required
214
Property, plant and equipment
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Rand
(1) 100 000 × 1/1,14 = 87 719 (refer to IAS 16.23) or with a financial calculator:
FV = 100 000; n = 1; i = 14; calculate PV = 87 719
(2) 5 000 – 500 = 4 500 [refer to IAS 16.17(e)]
(3) Refer to IAS 16.16(b)
(4) Refer to IAS 16.20(b)
(5) Refer to IAS 16.16(c)
b. Carrying amount
Rand
Soapy Ltd manufactures soap products. During the year the company acquired four items of
property, plant and equipment by means of exchange transactions. You can assume that the
requirements of IFRS 5 were not met until the date of the exchange and that the assets given
up were never classified as ‘held for sale’.
Machine X102
This machine, with a fair value of R15 200, was acquired on 31 July 20.4 for the exchange
of a vehicle. The fair value of the vehicle was R15 000. The vehicle had a cost of R32 000
and accumulated depreciation of R18 000 at the time of the exchange transaction. The fair
value of both these assets was clearly evident, as there is an active second-hand market for
them. Installation costs amounted to R1 000.
215
Property, plant and equipment
Machine RX23
This machine was acquired on 31 October 20.4 for the exchange of a similar machine with a
fair value of R26 000. The machine given up had a cost of R40 000 and accumulated
depreciation of R20 000 at the time of the exchange transaction. The machine received was
used in a similar business of soap manufacturing and will be used for the same purpose as
the machine given up. The only reason for the exchange transaction is that the factory
manager prefers the colour of the machine received.
Machine ZZ
This machine was acquired on 1 December 20.4 for the exchange of machine ZA.
Machine ZA had a carrying amount of R19 000 (cost of R30 000 and accumulated
depreciation of R11 000) at the time of the exchange transaction. The fair value of neither
machine is reliably measurable.
Delivery vehicle
A delivery vehicle was acquired on 31 December 20.4 for the exchange of specialised
equipment. The fair value of the delivery vehicle is R35 000 and there is an active second-
hand market for delivery vehicles. The carrying amount of the specialised equipment given
up was R28 000 (cost of R39 000 and accumulated depreciation of R11 000). There is no
active second-hand market for this specialised equipment. However, the financial accountant
used valuation techniques to estimate the fair value of the equipment at R33 000.
Required
Show the journal entries at the date of the exchange transactions to comply with the
requirements of International Financial Reporting Standards (IFRS).
Journals
Rand
Dr/(Cr)
31 July 20.4 (X102)
216
Property, plant and equipment
Rand
Dr/(Cr)
1 December 20.4 (ZZ)
(1) In terms of IAS 16.6, the cost of an asset can be the fair value of the asset given up.
IAS 16.24 requires that the cost of an asset acquired in an exchange transaction is
measured at fair value, but does not indicate whether the fair value of the asset
acquired or given up should be used. However, the Standard often refers (paragraphs
24 and 26) to the fair value of the asset given up and accordingly this is used. When
taking the definition of 'fair value' into account, the fair value of the asset given up
would not differ materially from the fair value of the asset acquired.
(2) This exchange transaction lacks commercial substance as described in IAS 16.24. The
transaction does not meet the requirements of commercial substance as listed in
IAS 16.25. The cost of the machine received is then measured at the carrying amount
of the machine given up.
(3) As the fair value of neither the asset received nor the asset given up is reliably
measurable, the cost of the machine received is measured at the carrying amount of the
machine given up in accordance with IAS 16.24.
(4) As the fair value of the delivery vehicle is more clearly evident, the cost of the
delivery vehicle is measured at its own (asset received) fair value in accordance with
IAS 16.26.
Wood Ltd commenced in 20.4 with the manufacturing of wood products at a new plant. The
plant was purchased on 1 January 20.4 for R700 000. During January 20.4, some equipment
was installed and other equipment was modified. Installation and modification costs
incurred amounted to R130 000. For security reasons a fence was erected at the plant at a
cost of R20 000. The plant was ready for use on 1 February 20.4. An opening function was
held in the plant on 15 February 20.4 at a cost of R50 000 in order to entertain customers
and to introduce the new products to be manufactured at this plant. Production only
commenced on 1 March 20.4.
The plant has a useful life of 10 years and the residual value was estimated at R200 000.
Expected scrapping costs amount to R140 000 (discounted present value of scrapping costs
equals R100 000). Assume that the provision for the scrapping costs will be raised in
accordance with IAS 37.
At the end of August 20.4 heavy rain caused severe damage to the houses of the employees
in the region. Management granted special leave to all the employees of the plant to attend
to the repair of their houses. The plant stood idle during September 20.4.
217
Property, plant and equipment
Required
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
a. Cost Rand
c. Depreciation Rand
(1) 750 000/10 × 11/12 = 68 750 (refer to IAS 16.55). Depreciation of an asset
begins when it is available for use (1 February 20.4). Depreciation does not
cease when the asset becomes idle (September 20.4).
218
Property, plant and equipment
The register of property, plant and equipment of Dijkman (Pty) Ltd is presented to you. As
the accountant you are required to prepare all the entries and calculations, and satisfy all
disclosure requirements, regarding property, plant and equipment in the financial statements
of the company for the financial year ended 30 June 20.5.
A summary of the register of property, plant and equipment at 1 July 20.4 is as follows:
Rand
Furniture
Cost 22 000
Accumulated depreciation 8 000
Motor vehicles
Cost 60 000
Accumulated depreciation 31 000
Machinery
Cost 96 000
Machine A 15 000
Machine B 63 000
Machine C 18 000
Accumulated depreciation 10 000
Machine A 7 000
Machine B –
Machine C 3 000
Land
Cost 150 000
Additional information
2. On 31 December 20.4 a delivery vehicle with an original cost of R18 000 was sold for
R7 500 and this amount was credited to the motor vehicle account. On 1 July 20.4 the
accumulated depreciation of the vehicle amounted to R11 000. Assume that the
requirements of IFRS 5 were not met until the date of the sale and that the asset was
never classified as ‘held for sale’.
3. Machine B was obtained and put into operation on 30 June 20.4, and is held in terms
of a finance lease agreement.
4. Land consists of stand no. 65, Industria, and was purchased in 20.0. The board of
directors estimated the current market value of the property to be R200 000 at
30 June 20.5. The land is not classified as an investment property.
219
Property, plant and equipment
5. The current market value of the other assets does not differ materially from their
carrying amounts.
6. No other transactions relating to property, plant and equipment took place during the
year.
Required
a. Prepare all the journal entries necessary for the financial year ended 30 June 20.5
regarding property, plant and equipment in compliance with requirements of
International Financial Reporting Standards (IFRS).
b. Disclose the property, plant and equipment in the statement of financial position and
accompanying notes (including profit before tax) of Dijkman (Pty) Ltd for the year
ended 30 June 20.5 so as to comply with the requirements of International Financial
Reporting Standards (IFRS). Ignore comparative amounts. Ignore the note on the
preparation of the financial statements and compliance with International Financial
Reporting Standards (IFRS). Ignore the disclosure requirements of IFRS 5.
220
Property, plant and equipment
b. Disclosure
1. Accounting policy
1.1 Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation, except
for land which is not depreciated, and which is carried at cost. The remaining assets
are depreciated according to the following rates and methods:
• Furniture at 10% according to the straight-line method.
• Motor vehicles at 20% according to the straight-line method.
• Machinery at 20% according to the diminishing balance method.
Rates are considered appropriate to reduce carrying amounts of the assets to estimated
residual values over their expected useful lives.
D E Total
Rand Rand Rand
Carrying amount at 1 July 20.4: 63 000 23 000 279 000
Cost 63 000 33 000 328 000
Accumulated depreciation – (10 000) (49 000)
Movement during the year:
Depreciation (12 600) (4 600) (29 600)
Disposal – – (5 200)
Carrying amount at 30 June 20.5: 50 400 18 400 244 200
Cost 63 000 33 000 310 000
Accumulated depreciation (1) (12 600) (14 600) (65 800)
221
Property, plant and equipment
A= Land
B= Furniture
C= Motor vehicles
D= Machinery – finance lease
E= Machinery – other
On 30 June 20.5 the fair value (2) of the land was estimated at R200 000.
Profit before tax is stated after taking the following into account:
Rand
Income
Gain on disposal of motor vehicle 2 300
Proceeds (1) 7 500
Carrying amount of vehicle sold (5 200)
*IAS 16 does not require depreciation to be split into the separate classes of assets.
Furthermore, IAS 16 does not require separate disclosure of amounts capitalised as
part of the cost of other assets (e.g. depreciation on machinery that can be part of the
cost of inventory). Refer to IAS 16.75(a).
Gaba Ltd is a company which presses motor vehicle bodies. During the year crane A was
withdrawn from production and used to establish an additional production line X.
Rand
This production line was completed on 1 January 20.5 and immediately put into operation.
As the accountant of Gaba Ltd, you found that, during the financial year ended 28 February
20.5, crane A had been used for six months of the year to establish production line X. No
depreciation has as yet been capitalised to the cost of this production line.
222
Property, plant and equipment
Depreciation on machinery is provided for at 20% per annum on the straight-line method.
The following balances appeared in the financial records of Gaba Ltd at 28 February 20.5:
Rand
Machinery, at cost ?
Production line X ?
Crane A 80 000
Other machinery 420 000
Depreciation for the year
Furniture and equipment 20 000
Motor vehicles 42 000
Machinery ?
Required
Direct costs (refer to IAS 16.16(b) and IAS 16.17(a)) 750 000
Depreciation on crane A capitalised (1) 8 000
Total cost of production line 758 000
b. Disclosure
GABA LTD
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.5
Profit before tax is shown after taking into account the following:
Rand
Expenses
Depreciation* 179 267
* IAS 16 does not require separate disclosure of the amount capitalised (refer to
IAS 16.75(a)).
223
Property, plant and equipment
Calculations
Budweizer Ltd purchased machinery for its brewery in January 20.0 at a cost of R696 000.
At the time it was estimated that the machinery had a useful life of 10 years and a residual
value of R16 000.
Depreciation has been provided for, for the past seven years, using the straight-line method.
At each of the previous year ends the useful life and residual value were reviewed, and
management found that the initial estimates were still applicable. In 20.7, a re-evaluation
showed that the machinery actually had a total useful life of 15 years with a residual value of
R12 000.
Required
a. Calculate and prepare the journal entries to account for depreciation for the year ended
31 December 20.7. Assume that Budweizer Ltd uses the reallocation method to
account for changes in estimates.
b. Discuss the disclosure requirements.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
224
Property, plant and equipment
b. Discussion
The re-evaluation of the useful life and residual value represents a change in estimate
and therefore the nature, amount and cumulative effect on future periods shall be
shown in terms of IAS 8.39 as it is material. The amount of the change will be the
difference between depreciation based on the previous estimate of useful life and
residual value (R68 000) and the depreciation based on the new estimate (R26 000); in
other words, a decrease in depreciation and an increase in profit of R42 000. It would
also result in a cumulative increase in depreciation in future periods of R46 000 (2).
Rand
(2) Depreciable amount end 20.7 using ‘old’ estimates (3) 136 000
Depreciable amount end 20.7 using ‘new’ estimates (3) 182 000
Increase in future depreciation 46 000
(3) (696 000 – 16 000) / 10 × 2 = 136 000; (220 000 – 12 000) / 8 × 7 = 182 000
The information contained in the register of property, plant and equipment of Compal Ltd in
respect of machinery for the year ended 31 December 20.8 is as follows:
Additional information
1. The company provides for depreciation on machinery at 20% per year on the
diminishing balance method.
2. The company incurred the following expenditure in connection with assets for the year
ended 31 December 20.8:
225
Property, plant and equipment
• Machine 2 – this machine was overhauled and serviced during January 20.8.
Compal Ltd did not initially account for the major overhaul costs as a separate
component of the asset. The machine originally had an output of 310 000 units
per annum and this has reduced to 270 000 units per annum over time. The output
has increased to 300 000 units per annum as a result of the overhaul. The costs
incurred for the overhaul amounted to R66 000.
3. The effect of the expenditure has not been accounted for in the register of property,
plant and equipment. No further transactions relating to property, plant and equipment
have taken place during the current year.
Required
Discuss how this expenditure should be accounted for in the financial statements of
Compal Ltd for the year ended 31 December 20.8 so as to comply with the requirements of
International Financial Reporting Standards (IFRS).
Machine 1:
The cost of an item of property, plant and equipment shall be recognised as an asset if, and
only if:
• it is probable that future economic benefits associated with the item will flow to the
entity; and
• the cost of the item can be measured reliably (refer to IAS 16.7).
Compal Ltd shall evaluate under this recognition principle all its property, plant and
equipment costs at the time they are incurred. These costs include costs incurred initially to
acquire or construct an item of property, plant and equipment and costs incurred
subsequently to add to, replace parts of, or service it (i.e. the cost of the modification).
Under the recognition principle in IAS 16.7, Compal Ltd recognises the modification costs
of the item in the carrying amount of an item of property, plant and equipment when the cost
is incurred and the recognition criteria are met. It would seem from the increased capacity
that the recognition criteria have been met.
The carrying amount of any parts that are replaced is derecognised in accordance with the
derecognition requirements of IAS 16.
If, under the recognition principle in IAS 16.7, Compal Ltd recognises in the carrying
amount of an item of property, plant and equipment the cost of a replacement for part of the
item, then it derecognises the carrying amount of the replaced part regardless of whether the
replaced part had been depreciated separately.
If it is not practicable for Compal Ltd to determine the carrying amount of the replaced part,
it may use the cost of the replacement as an indication of what the cost of the replaced part
was at the time it was acquired or constructed.
226
Property, plant and equipment
Compal Ltd shall therefore capitalise the modification costs to property, plant and
equipment and shall derecognise the carrying amount of any parts replaced during the
modification.
Machine 2:
The cost of an item of property, plant and equipment shall be recognised as an asset if, and
only if:
• it is probable that future economic benefits associated with the item will flow to the
entity; and
• the cost of the item can be measured reliably (refer to IAS 16.7).
Compal Ltd will evaluate under this recognition principle all the costs of its property, plant
and equipment costs at the time they are incurred. These costs include costs incurred
initially to acquire or construct an item of property, plant and equipment, and costs incurred
subsequently to add to, replace part of or service it (i.e. the cost of the major overhaul).
It would seem from the increased capacity, if compared to capacity before the overhaul, that
the recognition criteria are met. All relevant factors will, however, be considered. The fact
that the output is still below the original output would not influence the recognition
provided that the recognition criteria are met.
Any remaining carrying amount of the cost of the previous overhaul (as distinct from
physical parts) is derecognised. This occurs regardless of whether the cost of the previous
overhaul was identified in the transaction in which the item was acquired or constructed. If
necessary, the estimated cost of a future similar overhaul may be used as an indication of
what the cost of the existing overhaul component was when the item was acquired or
constructed.
Thus, the fact that the overhaul was not initially treated as a separate component would not
influence the recognition.
IAS 16 requires each part of an item of property, plant and equipment with a cost that is
significant in relation to the total cost of the item to be depreciated separately. The overhaul
costs might therefore be treated as a separate component from now on.
Compal Ltd shall therefore capitalise the overhaul costs to property, plant and equipment
and shall derecognise any carrying amount of any previous overhaul component. Any
carrying amount of parts replaced during the overhaul shall also be derecognised.
227
Property, plant and equipment
On 1 January 20.1, Hopper Ltd bought an aeroplane with a useful life of 20 years for
R850 000. As this aeroplane had to be inspected and overhauled every three years at a cost
of approximately R150 000 per inspection, it was decided at date of acquisition to identify
and depreciate these expected costs as a separate component. On 31 December 20.3 the
plane was inspected and overhauled for the first time at a cost of R152 000.
Required
Disclose the above information in the notes of Hopper Ltd for the year ended
31 December 20.4 so as to comply with the requirements of International Financial
Reporting Standards (IFRS). Ignore accounting policy notes and all tax implications.
HOPPER LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.4
(1) [(850 000 – 150 000) × 2/20] + (150 000 × 2/3) = 170 000
(2) (850 000 – 150 000)/20 + (150 000/3) = 85 000 and
(700 000/20) + (152 000/3) = 85 667
(3) 850 000 – 150 000 + 152 000 = 852 000
(4) 170 000 + 85 000 – 150 000 = 105 000 and
105 000 + 85 667 = 190 667
Expenses
Depreciation (1) 85 667 85 000
228
Property, plant and equipment
Green Ltd is a manufacturing company and is manufacturing rugby balls for Bok Ltd.
Green Ltd uses machine Super 00, purchased on 1 January 20.1 for R1 million, for the
manufacturing of the rugby balls.
Machine Super 00 comprises of three components. Details of the components are as follows:
The components can function independently, but are used as a unit. Components are
independently replaced at the end of their useful life.
On 30 September 20.2, part 22 of component Super 2 broke down unexpectedly. The part
was replaced at a cost of R110 000. Management estimated that the original cost of part 22
was R100 000.
On 31 December 20.2, at the end of its useful life, component Super 3 was replaced at a cost
of R210 000.
Costs of day-to-day servicing of the machine amounted to R45 000 during 20.2
(20.1: R42 000).
During 20.2 the useful life and residual value of the components were reassessed and they
were considered not to have changed.
Required
Prepare the journal entries necessary to account for all aspects of property, plant and
equipment for the years ended 31 December 20.1 and 20.2. (Journal entries must be
provided for each component.) Your solution must comply with the requirements of
International Financial Reporting Standards (IFRS).
1 January 20.1
Property, plant and equipment – cost 500 000 300 000 200 000 1 000 000
Bank (500 000) (300 000) (200 000) (1 000 000)
Purchase of machine Super 00
229
Property, plant and equipment
Components Total
Super 1 Super 2 Super 3
Rand Rand Rand Rand
Dr/(Cr) Dr/(Cr) Dr/(Cr) Dr/(Cr)
31 December 20.1
Depreciation (P or L) (1) (2) (3) 92 000 75 000 100 000 267 000
Accumulated depreciation – plant &
equipment (92 000) (75 000) (100 000) (267 000)
Depreciation for the year
30 September 20.2
Depreciation (P or L) (4) 18 750 18 750
Accumulated depreciation – plant &
equipment (18 750) (18 750)
Depreciation of part 22
31 December 20.2
Depreciation (P or L) (7) 92 000 62 222 100 000 254 222
Accumulated depreciation – plant &
equipment (92 000) (62 222) (100 000) (254 222)
Depreciation for the year
230
Property, plant and equipment
Notes:
1. The components should be split in the register of property, plant and equipment in
order to calculate the relevant amounts in the journals. In this question, separate
journal entries were used just to illustrate the principle. Although depreciation is
separately calculated for each component, the whole machine will be combined with
other machinery and be presented as one class of assets.
2. The new part will also be replaced with the rest of component Super 2 at the end of its
useful life of four years. Only 27 months remain and depreciation is calculated over
the remaining useful life. The total depreciation of component Super 2 for 20.2
amounted to R80 972 (8).
Bolton Ltd manufactures and markets product Z. Several machines are used to produce the
components of product Z. During 20.2 the directors decided that, due to the substantial
increase in gross replacement costs, machinery will be shown at net replacement cost. The
replacement cost will be determined annually by an independent sworn appraiser with
reference to observable prices in an active market. The following information is available:
Machinery S T O P
Rand Rand Rand Rand
Additional information
1. Depreciation is provided for according to the straight-line method, and residual values
are RNil.
3. Temporary differences are the result of differences between the carrying amounts and
the tax bases of machinery. The tax rate was 28% for 20.1 and 20.2.
4. Transfers are made annually from the revaluation surplus to retained earnings,
representing the realised portion of the revaluation.
231
Property, plant and equipment
5. On revaluation, accumulated depreciation is set off against the gross carrying amounts.
6. The profit for the year, after taking into account the information above, is R450 000
and the balance of retained earnings on 31 December 20.1 is R760 000.
Required
a. Prepare the following notes of Bolton Ltd for the year ended 31 December 20.2 in
accordance with the requirements of International Financial Reporting Standards
(IFRS):
• Accounting policy for property, plant and equipment
• Property, plant and equipment
• Deferred tax asset/liability
• Profit before tax
b. Prepare the statement of profit or loss and other comprehensive income of Bolton Ltd
for the year ended 31 December 20.2 in accordance with the requirements of
International Financial Reporting Standards (IFRS).
c. Prepare the statement of changes in equity of Bolton Ltd for the year ended
31 December 20.2 in accordance with the requirements of International Financial
Reporting Standards (IFRS).
Comparative amounts are not required. Ignore the note on the preparation of the financial
statements and compliance with the requirements of International Financial Reporting
Standards (IFRS).
a. BOLTON LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.2
1. Accounting policy
Note: This change in accounting policy shall, in terms of IAS 8.17, only be treated
as a revaluation in accordance with IAS 16 and the normal requirements for
the change in accounting policy of IAS 8 are thus not applicable.
232
Property, plant and equipment
Machinery Rand
Cost 272 500
Accumulated depreciation (120 000)
Carrying amount at 31 December 20.1 152 500
Revaluation (calc 1) 64 750
Depreciation (calc 2) (67 750)
Carrying amount at 31 December 20.2 149 500
Revalued cost (gross carrying amount) 217 250
Accumulated depreciation (67 750)
Rand
Carrying amount if carried at cost model (1) 105 000
3. Deferred tax
Rand
Accelerated wear and tear for tax purposes (1) 8 400
Revaluation after deduction of related depreciation (2) 12 460
20 860
Profit before tax is stated after taking the following into account:
Rand
Expenses
Depreciation (calc 2) 67 750
b. BOLTON LTD
STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED
31 DECEMBER 20.2
Rand
Profit for the year 450 000
Other comprehensive income
Items that will not be reclassified to profit or loss
Machinery revaluation 46 620
Gain on revaluation of machinery 64 750
Tax expense (18 130)
Total comprehensive income for the year 496 620
233
Property, plant and equipment
c. BOLTON LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.2
(1) [67 750 (calc 2) – 47 500 (calc 2)] × 72% = 14 580 or (16 200 (calc 1)/3) +
(4 320 (calc 1)/3) + (7 200 (calc 1)/5) + (18 900 (calc 1)/3) = 14 580
Calculations
1. Net replacement cost at 1 January 20.2 and revaluation surplus
A B C D E
Rand Rand Rand Rand Rand
Machine S (1) 67 500 45 000 22 500 16 200 6 300
Machine T (2) 36 000 30 000 6 000 4 320 1 680
Machine O (3) 35 000 25 000 10 000 7 200 2 800
Machine P (4) 78 750 52 500 26 250 18 900 7 350
217 250 152 500 64 750 46 620 18 130
2. Depreciation A B
Rand Rand
Machine S (1) 22 500 15 000
Machine T (2) 12 000 10 000
Machine O (3) 7 000 5 000
Machine P (4) 26 250 17 500
67 750 47 500
234
Property, plant and equipment
A = On revaluation
B = On carrying amount (cost)
Machinery CA TB TD DTL
Rand Rand Rand Rand
(Dr)/Cr
CA = Carrying amount
TB = Tax base
TD = Temporary difference
DTL = Deferred tax liability
On 1 January 20.0, Charlie Ltd purchased plant at a cost of R120 000. The estimated useful
life of the plant was 10 years with no residual value. Assume that it is company policy to
revalue plant annually, to carry the plant at net replacement cost, and to realise revaluation
surpluses while the relevant assets are used.
The gross replacement cost at 31 December 20.0 amounted to R130 000. It increases
annually on 31 December by R10 000. Plant is revalued annually by an independent sworn
appraiser on a gross replacement cost basis, with reference to observable prices in an active
market. Depreciation for each year is based on the gross replacement cost at the end of that
specific year. Assume that the residual value and useful life of the plant did not change over
the years.
Assume a tax rate of 29%. A 12% wear-and-tear allowance per annum on the straight-line
method is granted by the South African Revenue Service.
Required
a. Calculate the annual depreciation and carrying amounts based on replacement costs for
the years 20.0 to 20.3.
b. Calculate the current tax payable for 20.0 to 20.3 (assume a profit before depreciation
of R80 000 per annum).
c. Calculate the deferred tax asset/liability for 20.0 to 20.3. Assume that Charlie Ltd has
no intention to recover the carrying amount of the plant through sale.
d. Calculate profit after tax for 20.0 to 20.3.
e. Journalise depreciation, revaluation of plant, deferred tax and transfers to reserves
from 20.0 to 20.3 using both methods (IAS 16.35) to account for accumulated
depreciation. Journal narrations are not required.
235
Property, plant and equipment
f. Prepare the note regarding property, plant and equipment for 20.0 to 20.3 using both
methods (IAS 16.35) to account for accumulated depreciation.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
* These amounts do not appear in the statements, but are provided so that the net
replacement cost can be calculated.
13 000 × 1 = 13 000
14 000 × 2 = 28 000
15 000 × 3 = 45 000
16 000 × 4 = 64 000
Historical carrying amounts (108 000) (96 000) (84 000) (72 000)
Revaluation carrying amounts 117 000 112 000 105 000 96 000
Revaluation surplus 9 000 16 000 21 000 24 000
Less deferred tax (29%) (2 610) (4 640) (6 090) (6 960)
Revaluation surplus balance 6 390 11 360 14 910 17 040
236
Property, plant and equipment
OR
20.0 20.1 20.2 20.3
Rand Rand Rand Rand
Opening balance – 6 390 11 360 14 910
Revaluation for the year 10 000 9 000 8 000 7 000
Deferred tax (29%) (2 900) (2 610) (2 320) (2 030)
Transfer to retained earnings (710) (1 420) (2 130) (2 840)
Revaluation surplus balance 6 390 11 360 14 910 17 040
CA = Carrying amount
TB = Tax base
TD = Temporary difference
DTL = Deferred tax liability
P or L = Profit or loss (movement)
237
Property, plant and equipment
e. Journals
Method 2: To set off accumulated depreciation against the gross carrying amount
(IAS 16.35(b))
238
Property, plant and equipment
(1) 130 000 – 126 000 = 4 000; 126 000 – 120 000 = 6 000; 120 000 – 112 000 = 8 000
(2) (13 000 – 12 000) × 71% = 710; (14 000 – 12 000) × 71% = 1 420;
(15 000 – 12 000) × 71% = 2 130; (16 000 – 12 000) × 71% = 2 840
Note:
1. The revaluation surplus may be transferred directly to retained earnings in so far as it is
realised by means of the depreciation charge or it may be transferred in total on
disposal of the asset. Management of each company has to decide on its own
accounting practice in this regard.
f. Method 1
Carrying amount at
beginning of year – 117 000 112 000 105 000
Revalued cost – 130 000 140 000 150 000
Accumulated depreciation – (13 000) (28 000) (45 000)
Movements for the year:
Additions 120 000 – – –
Revaluation 10 000 9 000 8 000 7 000
Depreciation (part a.) (13 000) (14 000) (15 000) (16 000)
239
Property, plant and equipment
Method 2
To set off accumulated depreciation against the gross carrying amount – IAS 16.35(b).
Zozo Ltd owns land with a cost of R800 000. This land was carried at cost in the financial
statements of previous years. The directors are, however, of the opinion that the statement of
financial position will reflect more relevant information if the land is revalued, and therefore
decided that this will be done from the current financial year onwards. An independent
sworn appraiser determined that the market value of the land amounted to R1 000 000 on
1 January 20.5. Assume a tax rate of 30%.
240
Property, plant and equipment
Required
a. Discuss whether or not deferred tax must be raised on the revaluation surplus of
R200 000, if capital gains are not taxed.
b. Discuss whether or not deferred tax must be raised on the revaluation surplus of
R200 000, if 66.6% of capital gains are taxed.
Note: If you conclude that deferred tax must be raised in any of the scenarios above,
also address the amount and accounting treatment thereof. Your solution must
comply with the requirements of International Financial Reporting Standards
(IFRS).
b. Similar to scenario a., it is necessary to determine what the tax consequences will be if
the land is sold. If it is assumed that the land was purchased subsequent to
1 October 2001 (when capital gains tax was introduced) the total revaluation surplus of
R200 000 will be regarded as a taxable capital gain if the land was sold on
1 January 20.5 for R1 000 000. Only 66.6% of this capital gain will, however, be
included in taxable income, as only 66.6% of the capital gain will be taxed. The
potential current tax thus amounts to R200 000 × 66.6% × 30% = R40 000, but this tax
will only become payable once the land is actually sold. For accounting purposes this
amount is, however, immediately raised as deferred tax in order to match the tax
consequence with the revaluation gain in the current year. The deferred tax account
will be credited with R40 000, while the revaluation surplus (through other
comprehensive income) will be debited with the same amount. Note that the deferred
tax follows the gain, and therefore goes to other comprehensive income and not
through profit or loss.
Note: Even though the deferred tax on the revaluation is based on the tax consequences
as if the land was to be sold, the land is not ‘held for sale’ and thus IFRS 5 is not
applicable.
Clever Ltd decided to revalue its specialised item of plant on 31 December 20.3. Details of
the plant on 31 December 20.3 were as follows:
Rand
241
Property, plant and equipment
The net replacement cost of the plant was determined to be R130 000 with a residual value
of R110 000 on 31 December 20.3. The plant will be used for another two years before
being sold at the expected residual value. The tax rate is 30%, and 66.6% of capital gains is
taxable.
Required
Calculate the revaluation surplus and the balance of deferred tax at 31 December 20.3. Your
answer must comply with the requirements of International Financial Reporting Standards
(IFRS).
The revaluation surplus is R43 002 (1) and the balance of deferred tax is R25 998.
Calculations
A B C D E
Rand Rand Rand Rand Rand
Carrying amount
31 December 20.3 70 000 70 000 40 000 30 000 9 000
Revaluation (1) (2) 60 000 – – 60 000 16 998
Balance after revaluation (3) 130 000 70 000 40 000 90 000 25 998
242
Property, plant and equipment
The following is included in the property, plant and equipment of All Africa Ltd:
Printing equipment with an estimated useful life of 6 years and no residual value was
purchased at a cost of R300 000 in January 20.6. At the first three year ends, the useful life,
pattern of use and residual values of the equipment were reviewed, and management found
that the initial estimates were still applicable.
Case 1
The equipment was written off in the first three years for financial reporting purposes using
the sum of the digits method. In 20.9 the company decided to change the method for
providing for depreciation to the straight-line method. The useful life of the equipment is
estimated as originally envisaged.
Case 2
The equipment was depreciated for the first three years using the straight-line method. In
20.9 the company estimated that the remaining useful life will be two years with a residual
value of R20 000.
Required
For both cases, calculate the effect of the change, and disclose the note on profit before tax
of All Africa Ltd for the year ended 31 December 20.9 so as to comply with the
requirements of International Financial Reporting Standards (IFRS). Assume that
All Africa Ltd uses the reallocation method to account for changes in estimates.
On 1 January 20.1, Ship Ltd acquired an oil tanker at a cost of R10 million. The company
initially decided to replace the oil tanker once it became 10 years old and depreciated it on
the straight-line method over the useful life to its residual value.
Details of the oil tanker’s estimated useful life at the beginning of each year and its expected
residual value are as follows:
Required
a. Calculate the depreciation for the years ending 31 December 20.1 to 20.4 and the
carrying amount of the oil tanker at each year end.
243
Property, plant and equipment
b. Prepare the note on profit before tax of Ship Ltd for the year ended 31 December 20.2
so as to comply with the requirements of International Financial Reporting Standards
(IFRS).
Furnace
Beta Ltd operates a furnace, purchased on 1 January 20.1 at a cost R18 million. Included in
this amount was R4 million in respect of the lining of the furnace. The expected useful life
of the furnace is 20 years and it is expected to produce products constantly over this time. At
no stage will it have any residual value. Relining of the furnace is expected to be required
every five years and consequently the lining was replaced on 1 January 20.6 at a cost of
R4,5 million.
Aircraft
On 1 January 20.5, Beta Ltd purchased a small aircraft at a cost of R1,85 million in order to
undertake business trips. The useful life of the aircraft is 15 years. However, the useful life
of the aircraft’s seats (cost R300 000) and the galley (cost R250 000) is only five years. The
residual value of the galley is estimated at R20 000. No other component will have a
residual value. Depreciation is calculated on the straight-line basis over the expected useful
life.
Major inspections of the aircraft shall be performed after every 500 hours of flight at an
expected cost of R150 000 per inspection.
At 31 December 20.5, 300 hours of flight had been undertaken. By 30 June 20.6, 500 hours
of flight would have been undertaken, but for practical reasons management decided to
perform the inspection on 1 June 20.6 after 450 hours of flight at a cost of R145 000. At
31 December 20.6 another 200 hours of flight had been undertaken since the inspection on
1 June 20.6.
On 31 August 20.6, bad weather caused the aircraft to be damaged during landing. The left
wing was replaced at a cost of R220 000. The wing was initially not treated as a separate
component and the cost thereof was not specified separately when the aircraft was acquired.
Management estimated the initial cost of the wing to be R200 000.
Additional information
Day-to-day servicing (cost of material and labour) of the furnace and the aircraft for the
years ended 31 December was as follows:
20.6 20.5
Rand Rand
Required
Prepare the note on property, plant and equipment of Beta Ltd for the year ended
31 December 20.6 (with comparative amounts) so as to comply with the requirements of
International Financial Reporting Standards (IFRS).
244
Property, plant and equipment
The following balances are taken from the financial statements of Arend Ltd for the year
ended 31 December 20.3:
Additional information
The catering equipment held under lease agreement has a useful life which differs from
that of the purchased equipment, and a different depreciation method is therefore used.
2. The catering equipment held under lease agreement was obtained on 1 January 20.0
and the lease agreement covers the period from date of acquisition to
31 December 20.8.
3. Catering equipment (not leased) was sold on 1 July 20.4 for R2 000. The cost and
accumulated depreciation at 31 December 20.3 was R10 000 and R6 000 respectively.
4. On 31 December 20.4, certain items of the hotel furniture were withdrawn from use
and are standing idle. However, they have been kept as management is uncertain of
their future use. The cost and accumulated depreciation at 31 December 20.3 was
R80 000 and R50 000 respectively.
5. The proceeds from the sale of vehicles on 1 October 20.4 was R3 000. The cost and
accumulated depreciation at 31 December 20.3 was R6 000 and R4 000 respectively.
6. The land component of land and hotel buildings represents 22% of the total cost. The
land and hotel buildings are situated on the farm Keurboomsriver and comprise a hotel,
outbuildings and land, measuring 11,143 hectares in the district of Plettenberg Bay.
The land and hotel buildings were purchased some time ago.
245
Property, plant and equipment
7. The following assets were purchased for cash during the year:
• Microwave oven – 1 April 20.4 = R25 000
• Word processor – 1 July 20.4 = R30 000
• Dishwasher – 1 September 20.4 = R12 000
• Delivery vehicle – 1 October 20.4 = R22 000
8. There were no further transactions involving property, plant and equipment during the
year under review. Assume that all purchases and sales were for cash. Assume that the
requirements of IFRS 5 were not met until the date of the sale and that the assets were
never classified as ‘held for sale’.
Required
a. Journalise all relevant transactions (including cash transactions) for the year ended
31 December 20.4. Ignore taxation.
b. Disclose all property, plant and equipment and relevant items in the financial
statements of Arend Ltd for the year ended 31 December 20.4 so as to comply with the
requirements of International Financial Reporting Standards (IFRS). Comparative
amounts are not required. Ignore the note on the preparation of the financial statements
and compliance with International Financial Reporting Standards (IFRS). Ignore the
disclosure requirements of IFRS 5.
The following information relates to plant of Eagle Ltd, a listed company which
manufactures and markets a number of products. Manufacturing is carried out in two
different plants and the useful life of each of the plants is different. The plants will be valued
annually from 20.5 at replacement cost by an independent sworn appraiser with reference to
observable prices in an active market.
The tax rate was 30% for 20.4 and 20.5. Ignore capital gains tax.
The revaluation surplus realises in line with the use of the asset. The decrease in the
replacement cost of Sapphire is permanent.
The profit for the year after taking the above information into account is R300 000 and the
balance of retained earnings on 1 January 20.5 is R275 000.
246
Property, plant and equipment
Required
a. Journalise all transactions relating to plant for the year ended 31 December 20.5.
(Account for each plant separately.) Journal narrations are not required.
b. Prepare the statement of profit or loss and other comprehensive income of Eagle Ltd
for the year ended 31 December 20.5 in accordance with the requirements of
International Financial Reporting Standards (IFRS).
c. Prepare the statement of changes in equity of Eagle Ltd for the year ended
31 December 20.5 so as to comply with the requirements of International Financial
Reporting Standards (IFRS).
d. Prepare the following notes of Eagle Ltd for the year ended 31 December 20.5 so as to
comply with the requirements of International Financial Reporting Standards (IFRS):
• Property, plant and equipment.
• Profit before tax.
247
Property, plant and equipment
248
IAS 17, SIC 15, SIC 27 &
IFRIC 4
Leases
__________________________________________________________________
IAS 17.1 Operating lease – equalisation of lease payments, journal entries, Circular
12/06 (lessee)
IAS 17.2 Operating lease – disclosure, journal entries (lessee)
IAS 17.3 Finance lease – interest rate implicit in lease, journal entries, disclosure
(lessee)
IAS 17.4 Finance lease – calculation of instalment (lessee and lessor)
IAS 17.5 Sale and leaseback – operating and finance lease, calculations (lessee)
IAS 17.6 Sale and leaseback – finance lease, journal entries, disclosure (lessee)
IAS 17.7 Finance lease – calculation of amount used for initial recognition of asset and
liability using interest rate implicit in lease or incremental borrowing rate of
lessee (lessee)
IAS 17.8 Finance lease – journal entries (lessor)
IAS 17.9 Finance lease – manufacturer, disclosure (lessor)
IAS 17.10 Operating lease – disclosure (lessor)
IAS 17.11 Operating lease – incentives (SIC 15); calculations; journal entries; disclosure
(lessor and lessee)
IAS 17.12 Leases – application of SIC 27; theory
IAS 17.13 Leases – application of IFRIC 4; theory
QUESTIONS
249
Leases
A toy manufacturer leased a machine on 1 January 20.0 for a period of five years. The
expected useful life of the machine is 11 years. The lease instalments are R400 per month
for the first two years and R300 per month thereafter. The lessee has the option at the end of
the lease term of extending the lease period for a further three years at R10 per month.
The tax rate is 28% for the full term of the lease. You may assume that the option will be
exercised. You may also assume that the lease is an operating lease. The financial year end
is 31 December.
Required
a. Explain, with reasons, how the lease payments under an operating lease must be
recognised as an expense. Your discussion must include a discussion of the
requirements of IAS 17 and Circular 12/06.
b. Journalise the operating lease transactions (cash transactions included) over the full
operating lease period. Journal narrations are not required. Your answer must comply
with the requirements of International Financial Reporting Standards (IFRS). (UP –
adapted)
a. According to paragraph 33 of IAS 17, the lease instalments under an operating lease
must be recognised as an expense on a straight-line basis over the lease term unless
another systematic basis is more representative of the time pattern of the benefits from
use of the asset. This means that the fixed lease instalments over the term of the
operating lease must be aggregated and divided by the lease term to arrive at a
monthly/annual lease expense amount. The effect of this is that the profit or loss in
each reporting period will have an equal impact of the operating lease expense with a
possible prepaid/accrued amount arising in the statement of financial position.
Circular 12/06 confirms this accounting treatment and makes it clear that the
accounting for operating lease expenses on a cash flow basis is unacceptable. The cash
flow basis is not considered to be another systematic basis representative of the time
pattern of the benefits from use of the asset. The time pattern of the benefits is not
affected by any factors other than the physical usage of the asset.
b. Journal entries
250
Leases
Prepaid operating lease expenses (4) (5) (6) 2 205 1 005 (2 475)
Operating lease expenses (2 205) (1 005) 2 475
* See calculation 1
Proof of accuracy
Calculations
251
Leases
Jasa Ltd, a handbag manufacturer, has various items of property, plant and equipment held
under non-cancellable operating lease agreements. The financial year end is 28 February.
1. Nef Bank
2. Stan Bank
On termination of the lease agreement the company made a cash offer of R10 000 (fair
value) for the office equipment. The offer was accepted.
252
Leases
Additional information
Depreciation is written off on property, plant and equipment according to the straight-line
method using the following rates:
• Vehicles – 20%
• Office equipment – 20%
Ignore current and deferred tax as well as VAT. Assume all amounts are material.
Required
a. Journalise all relevant transactions (cash transactions included) for the year ended
28 February 20.4 in compliance with the requirements of International Financial
Reporting Standards (IFRS).
b. Prepare the disclosure required, in terms of the requirements of International Financial
Reporting Standards (IFRS), for the year ended 28 February 20.4. Comparative
amounts are not required.
a. Journal entries
Rand
Dr/(Cr)
Nef Bank
Stan Bank
253
Leases
Calculations
b. Disclosure
JASA LTD
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.4
1. Accounting policy
Property, plant and equipment are shown at cost. Depreciation is written off over the
expected useful lives of the assets on the straight-line method.
Equipment
Cost 10 000
Accumulated depreciation (333)
Carrying amount 9 667
Profit before tax is stated after taking the following into account:
254
Leases
The following details relate to a machine acquired by Bewer Ltd in terms of a finance lease
agreement:
The machine was available for use and put into use on 1 July 20.1. Depreciation is written
off at 20% per annum on cost. Profit before tax, before taking the effect of the finance lease
into account, is R150 000 for each year of the agreement.
Ownership passes to Bewer Ltd at the end of the finance lease agreement.
Assume a tax rate of 28%. The company's financial year ends on 30 June.
Required
255
Leases
Alternative
Make use of the AMRT function (or similar function) on the financial calculator to calculate
the capital (principal) and interest components of each relevant instalment, or for a number
of instalments combined, based on the inputs in part a.
Different procedures are used for different financial calculators and therefore the procedure
is not illustrated here. Your lecturer will be able to help you with this.
c. Journal entries
Year 3 2 1
Rand Rand Rand
Dr/(Cr) Dr/(Cr) Dr/(Cr)
256
Leases
Year 3 2 1
Rand Rand Rand
Dr/(Cr) Dr/(Cr) Dr/(Cr)
Current tax
257
Leases
e. Disclosure
BEWER LTD
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE
20.4 20.3 20.2
Rand Rand Rand
ASSETS
Non-current assets
Property, plant and equipment 60 000 90 000 120 000
BEWER LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 30 JUNE
Puntkop Ltd concluded a finance lease agreement for the purchase of certain production
machinery on 1 July 20.1. The following information is available:
• Contract date – 1 July 20.1.
• Cash price – R120 000, which is the same as its fair value.
• The interest rate implicit in the lease is 22,7759%.
• Lease period – two years.
• Instalments are payable half-yearly in arrears as from 31 December 20.1.
• There are no guaranteed or unguaranteed residual values.
• No initial direct costs have been incurred by the lessee and the lessor.
258
Leases
Required
Half-yearly instalment
The following information relates to various scenarios for buildings sold in terms of a sale
and leaseback agreement:
Scenario A B C D E
Rand Rand Rand Rand Rand
Required
Complete the following table using the above information, assuming that the lease is an
operating lease. Your answer must comply with the requirements of International Financial
Reporting Standards (IFRS).
Scenario A B C D E
Rand Rand Rand Rand Rand
259
Leases
Scenario A B C D E
Rand Rand Rand Rand Rand
Rand
Dr/(Cr)
Additional information
1. On 1 April 20.2 the company obtained cash funds by entering into a sale and leaseback
agreement.
The machine relating to this transaction was originally purchased on 2 December 20.1
and had an economic life of five years with no residual value. It was included in the
trial balance at 1 April 20.2 at the following amounts:
Rand
Cost 34 000
Accumulated depreciation 1 800
This machine had a fair value of R33 000 at 1 April 20.2 and was sold for this amount
and leased back on the following terms:
260
Leases
On expiry of the lease the machine will once again become the property of the
company.
The interest rate implicit in the lease is 9,9% p.a. There are no guaranteed or
unguaranteed residual values, and no initial direct costs have been incurred by the
lessee or the lessor.
2. The company depreciates machinery at 20% per annum according to the straight-line
method. No purchases took place during the year.
Required
a. Prepare the journal entries (cash transactions included) to account for the sale and
leaseback agreement for the year ended 31 March 20.3. Journal narrations are not
required and your answer must comply with the requirements of International
Financial Reporting Standards (IFRS).
b. Prepare the property, plant and equipment note for the year ended 31 March 20.3 in
accordance with the requirements of International Financial Reporting Standards
(IFRS). Comparative amounts are not required.
Since the property reverts back to the company (lessee) at the end of the lease period,
it is considered to be a finance lease.
261
Leases
Calculations
b. TOPPER LTD
NOTES FOR THE YEAR ENDED 31 MARCH 20.3
* IAS 17 does not require that these amounts be disclosed as separate line items.
Alternatively, a single amount of R33 000 could be shown as ‘Additions’.
262
Leases
You are presented with the following information in respect of a finance lease agreement:
Required
a. Calculate the amount at which the asset and related liability will initially be recognised
in the books of the lessee.
b. Prepare the amortisation table (redemption table) for the lessee in accordance with a.
c. Assume that the lessee did not have enough information about the unguaranteed
residual value and could not calculate the interest rate implicit in the lease. Its own
incremental borrowing rate is 13,5% per year. Calculate the amount at which the asset
and related liability will initially be recognised in the books of the lessee.
d. Prepare the amortisation table (redemption table) for the lessee in accordance with c.
a. Asset and liability recognised in books of lessee using interest rate implicit in the
lease
Lower of:
– fair value = R125 000 (given)
– present value of minimum lease payments discounted at interest rate implicit in the
lease: R121 862 (calcs 1 and 2)
Therefore, the asset and liability will be recognised initially at R121 862.
PV = 125 000
PMT = – 30 000
FV = – 55 000 (50 000 + 5 000)
N = 4
Therefore I = 12,341% per year
Note: Even though the lessee does not capitalise the unguaranteed residual
value as part of the asset and related liability, it must still be taken into
account in calculating the interest rate.
263
Leases
2. Now the lessee’s minimum lease payments (excluding the unguaranteed residual
value) must be discounted at 12,341% to determine the present value.
PMT = – 30 000
FV = – 50 000 (guaranteed residual value only)
N = 4
I = 12,341 (calc 1)
Therefore PV = 121 862
121 862
Year 1 30 000 14 961 15 039 106 901
Year 2 30 000 16 807 13 193 90 093
Year 3 30 000 18 882 11 118 71 212
Year 4 30 000 21 212 8 788 50 000
c. Asset and liability recognised in books of lessee using incremental borrowing rate
PMT = – 30 000
FV = – 50 000 (guaranteed residual value only)
N = 4
I = 13,5%
Therefore PV = 118 444
Lower of:
– fair value = R125 000 (given)
– present value of minimum lease payments discounted at incremental borrowing
rate: R118 444
Therefore the asset and liability will be recognised initially at R118 444.
118 441
Year 1 30 000 14 010 15 990 104 431
Year 2 30 000 15 898 14 102 88 533
Year 3 30 000 18 048 11 952 70 485
Year 4 30 000 20 485 9 515 50 000
The following information was extracted from the records of Ben Ltd for the year ended
31 December 20.1:
264
Leases
Tax information:
• Wear-and-tear allowance (straight-line) – 33,33%
• Tax rate (20.1 – 20.3) – 30%
Ben Ltd uses the net investment method to recognise finance income. The interest rate
implicit in the lease is 16,2744% per year.
The lessee obtains ownership of the machine at the end of the lease term.
The fair value of the machine on 2 January 20.1 was R180 000.
Required
a. Calculate the following amounts for disclosure in the financial statements of Ben Ltd
for the years ended 31 December 20.1 to 20.3 for the lease agreement with Raka Ltd in
accordance with the requirements of International Financial Reporting Standards
(IFRS):
1. Current and deferred tax expense/income
2. Deferred tax asset/liability
3. Finance income
4. Unearned finance income
5. Gross investment
Note: All amounts must be rounded off to the nearest rand. Financial statements and
notes are not required.
b. Prepare the journal entries for all transactions (including cash transactions) to account
for the above agreement in accordance with the requirements of International Financial
Reporting Standards (IFRS). Journal narrations are not required.
265
Leases
Calculations
Lower of:
– Fair value of R180 000 (given)
– PV of future minimum lease payments
FV = 6 000
N = 3
PMT = 78 800
I = 16,2744
Therefore PV = 180 000
Gross investment before instalment paid (1) 242 400 163 600 84 800
Less: Instalment 78 800 78 800 84 800
Gross investment after instalment paid 163 600 84 800 Nil
Less: Unearned finance income 33 106 11 869 Nil
Unearned finance income:
beginning (2) 62 400 33 106 11 869
Finance income earned (2) (29 294) (21 237) 11 869
Net investment 130 494 72 931 Nil
4. Deferred tax
20.1 20.2 20.3
Tax base – machine Rand Rand Rand
266
Leases
b. Journal entries
267
Leases
Charlie Ltd is a manufacturer and trader of industrial machinery. During 20.5 the company
leased a machine (cost R310 000) to Delta Ltd for a period of five years. Charlie Ltd
invoices similar machines at a profit of 20% on selling price. Assume that the fair value of
the machinery is the same as the selling price.
The lease agreement with Delta Ltd includes the following provisions:
• Instalments amount to R105 000 per annum.
• Instalments are payable in advance on 1 July of each year.
• The machine will be used in a manufacturing process.
• The date of commencement of the lease term is 1 July 20.5.
• The interest rate implicit in the lease is 17,9921% per annum.
• There are no guaranteed or unguaranteed residual values.
• No initial direct costs have been incurred by the lessee or the lessor.
Additional information
1. Wear-and tear-allowances are 20% per annum and are calculated according to the
straight-line method.
2. The following items appeared in the trial balance of Charlie Ltd before taking the
agreement with Delta Ltd into account:
20.6 20.5
Rand Rand
Dr/(Cr) Dr/(Cr)
3. The lease agreement with Delta Ltd is the first and only agreement concluded by
Charlie Ltd for the financial year ended 31 December 20.5. The company has decided
to make greater use of this kind of financing for sales in the future.
4. Charlie Ltd recognises finance income in accordance with the net investment method.
5. The tax rate for 20.5 and 20.6 was 30%. Ignore VAT.
Required
Using only the information provided above, prepare the applicable extracts from the
statement of profit or loss and other comprehensive income and statement of financial
position of Charlie Ltd for the years ended 31 December 20.5 and 20.6. Prepare only those
notes which refer to the lease agreement. All the disclosure must comply with the
requirements of International Financial Reporting Standards (IFRS).
268
Leases
Calculations
Lower of:
– fair value = R387 500 (R310 000 × 100/80)
– present value of future minimum lease instalments
Thus the fair value is the same as the PV of R387 500 and sales revenue will be
recognised at R387 500.
269
Leases
20.6 20.5
Rand Rand
Note: For manufacturers/traders, SARS will tax the lessor in year 1 of the lease
agreement (20.5) on the difference between the recoupment amount (the
market value = cash selling price) and the cost of sales amount (cash cost to
lessor) of the asset that was inventory but which now becomes a capital asset
that is leased out (on which a wear-and-tear allowance is calculated).
20.6 20.5
Rand Rand
270
Leases
(1) 175 000 balance per trial balance + movement per trial balance 50 000 = 225 000
(2) Given
(3) 282 500 + 25 414 = 307 914 (refer note 2)
(4) 387 500 × 20% × 4,5 years remaining for wear-and-tear allowance = 348 750 or
387 500 – 38 750 wear-and-tear allowance = 348 750
(5) 228 328 + 20 541 = 248 869 (refer note 2)
(6) 387 500 × 20% × 3,5 years remaining for wear-and-tear allowance = 271 250 or
387 500 – (38 750 + 77 500) wear-and-tear allowance = 271 250 or
348 750 (tax base 20.5) – 77 500 (wear-and-tear allowance 20.6) = 271 250
Disclosure
CHARLIE LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.6
CHARLIE LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.6
271
Leases
CHARLIE LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.6
Share Retained Total
capital earnings
Rand Rand Rand
CHARLIE LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.6
1. Accounting policy
Reconciliation between the gross investment in the finance lease debtor and the
present value of the minimum lease payments receivable:
272
Leases
20.6 20.5
Rand Rand
Represented by:
Non-cash finance income earned (included in trade
receivables) (6) (7) 20 541 25 414
Present value of minimum lease instalments 228 328 282 500
Not later than one year (8) (10) 63 919 54 172
Later than one year but not later than five years (9) (11) 164 409 228 328
Later than five years – –
273
Leases
4. Deferred tax
20.6 20.5
Rand Rand
Analysis of temporary differences
Finance leases (6 714) (12 250)
Others (no details provided) 145 000 175 000
138 286 162 750
Required
Disclose the operating lease in the financial statements of Kamstra Leasing Ltd for the years
ended 31 December 20.1 to 20.5 so as to comply with the requirements of International
Financial Reporting Standards (IFRS).
Calculations
20% × 500 000 100 000 100 000 100 000 100 000 100 000
Lease instalments 180 000 180 000 180 000 180 000 180 000
Depreciation (100 000) (100 000) (100 000) (100 000) (100 000)
Profit before tax 80 000 80 000 80 000 80 000 80 000
Lease instalments 180 000 180 000 180 000 180 000 180 000
Wear-and-tear allowance –
machine (1) (125 000) (125 000) (125 000) (125 000) -
Taxable profit 55 000 55 000 55 000 55 000 180 000
Tax rate 30% 30% 30% 30% 30%
Current tax expense (16 500) (16 500) (16 500) (16 500) (54 000)
274
Leases
Cost/carrying amount 500 000 400 000 300 000 200 000 100 000
Depreciation (100 000) (100 000) (100 000) (100 000) (100 000)
Carrying amount 400 000 300 000 200 000 100 000 –
Cost/tax base 500 000 375 000 250 000 125 000 –
Wear-and-tear allowance (125 000) (125 000) (125 000) (125 000) –
Tax base 375 000 250 000 125 000 – –
Closing deferred tax liability (7 500) (15 000) (22 500) (30 000) –
Opening deferred tax liability – (7 500) (15 000) (22 500) (30 000)
Deferred tax expense/(income) 7 500 7 500 7 500 7 500 (30 000)
Disclosure
275
Leases
1. Accounting policies
Property, plant and equipment are carried at cost less accumulated depreciation.
Machinery is depreciated at 20% per annum according to the straight-line method.
Major components
of tax expense:
Current tax
expense – current 16 500 16 500 16 500 16 500 54 000
Deferred tax
expense – current 7 500 7 500 7 500 7 500 (30 000)
24 000 24 000 24 000 24 000 24 000
Note: A tax rate reconciliation is not required as the effective rate is equal to the
applicable (statutory) rate.
276
Leases
4. Operating lease
– Within one year 180 000 180 000 180 000 180 000 –
– One to five years 540 000 360 000 180 000 – –
720 000 540 000 360 000 180 000 –
On 1 July 20.5, Vision Ltd entered into an operating lease agreement with Euro Ltd for a
factory building for a four-year period. The annual lease instalment is R150 000 for the first
two years and R120 000 for the last two years. Vision Ltd agreed to pay the relocation costs
of Euro Ltd as an incentive to Euro Ltd for entering into the lease. The relocation costs
amounted to R50 000.
Required
a. Prepare the journal entries (cash transactions included) to account for the operating
lease agreement in the books of both Vision Ltd and Euro Ltd for the financial year
ended 30 June 20.6. Your answer must comply with the requirements of International
Financial Reporting Standards (IFRS). Journal narrations are not required.
b. Disclose the operating lease in the ‘Profit before tax’ note for both Vision Ltd and
Euro Ltd for the year ended 30 June 20.6 in accordance with the requirements of
International Financial Reporting Standards (IFRS). Assume that all amounts are
material.
Calculations
277
Leases
a. Journal entries
Rand
Dr/(Cr)
VISION LTD (Lessor)
b. Disclosure
VISION LTD
NOTES FOR THE YEAR ENDED 30 JUNE 20.6
Rand
Profit before tax is stated after the following items have been taken
into account:
Income
Operating lease income 122 500
– Minimum operating lease instalment 135 000
– Operating lease incentive cost amortised (12 500)
278
Leases
EURO LTD
NOTES FOR THE YEAR ENDED 30 JUNE 20.6
Rand
Profit before tax is stated after the following items have been taken
into account:
Expenses
Operating lease expense 122 500
– Minimum operating lease instalment 135 000
– Operating lease incentive amortised (12 500)
Scampy Ltd entered into an agreement with Mistry Ltd in terms of which Scampy Ltd would
lease plant to Mistry Ltd. The lease agreement is for a period of 15 years, which is the entire
economic life of the plant.
On the same date, Scampy Ltd entered into another lease agreement with Mistry Ltd to lease
this plant back. The terms and conditions of this lease agreement are the same as those of the
original lease agreement.
In terms of these two lease agreements, Scampy Ltd and Mistry Ltd have a legally
enforceable right to set off the amounts owing to one another and they also have an
intention to settle these amounts on a net basis.
Required
Discuss, with reasons, whether these lease agreements should be accounted for in terms of
IAS 17.
Scampy Ltd and Mistry Ltd, which are unrelated parties, have entered into a series of
structured arrangements with the legal form of leases. However, Scampy Ltd is leasing plant
to Mistry Ltd and then Scampy Ltd is leasing the same plant back from Mistry Ltd.
SIC 27 discusses the issue of evaluating the substance of transactions involving the legal
form of a lease to determine whether or not such an arrangement should be accounted for in
terms of IAS 17.
IAS 17 applies when the substance of an arrangement includes the conveyance of a right to
use an asset for an agreed period of time in return for a payment or a series of payments. In
terms of SIC 27.5(a), an indicator that may demonstrate that an arrangement may not, in
substance, involve a lease under IAS 17 is that an entity retains all the risks and rewards
incidental to ownership of an underlying asset and enjoys substantially the same rights to its
use as before the arrangement.
279
Leases
The terms and conditions and period of each of the leases entered into between Scampy Ltd
and Mistry Ltd are the same. Scampy Ltd has effectively retained the risks and rewards
incidental to ownership of the plant and therefore the entity enjoys substantially the same
rights to use of the plant it had before the arrangements were entered into. Also, since the
amounts owing by each of the parties are offset against one another, there is no retained
credit risk.
The substance of the arrangement is that no transaction has occurred. IAS 17 would
therefore not be applied to the arrangements.
IFRIC 4 considers arrangements that do not take the legal form of a lease, but which in
substance may convey a right to use an asset in return for a payment or a series of payments
for an agreed period of time.
Required
List the two criteria that, if present in an arrangement that does not take the legal form of a
lease, would cause the arrangement to contain a lease transaction in substance.
If both criteria are met, the arrangement contains a lease (also referred to as an ‘embedded
lease’) that must be accounted for in terms of IAS 17.
For each of the cases below, explain whether the lease is a finance or an operating lease, and
explain how the lease transaction will be treated in the financial statements of Grootbou CC
and Sitso Ltd so as to comply with the requirements of International Financial Reporting
Standards (IFRS):
1. Grootbou CC erects office buildings on a contract basis. For this purpose, Grootbou
CC concluded a contract for five years to lease a crane. At the end of the lease
contract, Grootbou CC will purchase the crane at a nominal amount. The useful life
and the economic life of the crane are both six years.
2. Grootbou CC has fallen behind on its contract schedule. To catch up the lost time,
Grootbou CC concluded a second contract (with another firm) for the lease of another
crane. The contract period is one year. The lessor is liable for all maintenance work on
the crane, and on expiry of the contract retains ownership of the crane.
3. Sitso Ltd manufactures steel products. It requires a special welding machine (2XII) for
the completion of a contract. Sitso Ltd concluded a lease contract for the lease of a
2XII for nine months.
280
Leases
Sitso Ltd also tendered for another contract which will require the exclusive use of a
2XII. If this contract is awarded to Sitso Ltd, the 2XII will be needed for a further
period of five years. Taking into account these circumstances, an option clause was
written into the original contract for the lease of the 2XII for a further five years,
whereafter the 2XII will be acquired for a nominal amount.
If Sitso Ltd does not need the 2XII after the expiry of the first contract (nine-month
period), the machine may be returned to the lessor if it is in a good condition.
If the renewal option is exercised, the lessee will be responsible for repairs and
maintenance of the 2XII, but until then these are the responsibility of the lessor.
It is still uncertain if the second production contract will be awarded to Sitso Ltd.
On 1 July 20.5, the close corporation entered into a non-cancellable operating lease for
24 months in respect of a road grader, which will be used for building the road. The cost
price of the road grader amounts to R500 000.
Since Van Damme Construction CC will only receive progress payments at a later stage, the
lease payments were structured as follows:
Rand
The tax rate is 29%. Assume that the credit balance on the deferred tax account (excluding
the above transaction) is due to temporary differences (on capital assets) of R80 000 at
31 December 20.5 and R70 000 at 31 December 20.6.
Ignore current tax. The CC elected to comply with the requirements of International
Financial Reporting Standards (IFRS).
Required
a. Prepare the journal entries (including cash transactions) resulting from the above
transactions for the years ended 31 December 20.5 and 20.6 for both options 1 and 2
as indicated below. Your answer must be in compliance with the requirements of
International Financial Reporting Standards (IFRS).
b. Prepare the required disclosure in accordance with IAS 17 for the year ended 31
December 20.6. Also provide the disclosure of deferred tax on the face of the
statement of financial position. This is required for both Options 1 and 2.
281
Leases
Option 1: Assume that the single payment of R6 000 is deductible for tax purposes
when the payment is made.
Option 2: Assume that the single payment of R6 000 is deductible for tax purposes in
equal annual amounts over the lease term.
Road Runner (Pty) Ltd sells and fits tyres and exhaust systems for vehicles.
• Road Runner (Pty) Ltd entered into a lease agreement for the acquisition of a new
hydraulic jack for installation in the workshop.
• The effective date of the agreement is 31 March 20.2.
• The hydraulic jack was put into use on 31 March 20.2.
• The selling price of the jack was R250 000. This is also its fair value on 31 March 20.2.
• The lease period is four years.
• The instalments amount to R21 455 per quarter, payable in arrears.
• The interest rate implicit in the lease agreement is 16% per annum.
• There are no guaranteed or unguaranteed residual values.
• No initial direct costs have been incurred by the lessee or the lessor.
• Road Runner (Pty) Ltd depreciates workshop equipment at 20% per annum using the
straight-line method.
• Road Runner (Pty) Ltd will acquire ownership of the hydraulic jack at the end of the
lease term.
• The South African Revenue Service allows wear and tear at 20% per annum using the
straight-line method for similar types of equipment.
• The tax rate is 30%. Ignore current tax.
• Assume that the entity will have sufficient future taxable profits to justify the
recognition of a deferred tax asset.
• The company's financial year end is 31 December.
Required
a. Calculate the deferred tax that must be provided for 20.2 and 20.3 in respect of the
lease agreement in accordance with the requirements of International Financial
Reporting Standards (IFRS).
b. Journalise all relevant transactions (including cash transactions) for the financial years
ended 31 December 20.2 and 31 December 20.3 in order to comply with the
requirements of International Financial Reporting Standards (IFRS).
c. Disclose all relevant items in the financial statements of Road Runner (Pty) Ltd for the
years ended 31 December 20.2 and 31 December 20.3 so as to comply with the
requirements of International Financial Reporting Standards (IFRS). Notes are
required.
In order to repay anxious creditors, Drastic Ltd decided to sell its existing building. As it
wished to continue using the premises, it negotiated a five-year lease with the purchaser of
the property. Drastic Ltd did not wish to enter into a longer lease agreement as its future
plans were uncertain.
282
Leases
Details relating to the building and the non-cancellable lease agreement are:
Rand
* The lease payments were calculated to give the purchaser a fair return on the cash paid
for the building.
Required
a. Prepare the journal entries, including cash transactions, relating to the sale and
leaseback of the building for the financial year ending 31 December 20.5 in order to
comply with the requirements of International Financial Reporting Standards (IFRS).
b. Prepare the disclosure in the financial statements of Drastic Ltd for the financial year
ended 31 December 20.5 for all items arising from the above information so as to
comply with the requirements of International Financial Reporting Standards (IFRS).
Accounting policy notes are not required.
Cashstrap Ltd is a manufacturer facing cash flow difficulties. It has one major asset, a
manufacturing plant, which the directors have decided to sell and then lease back in terms of
a finance lease agreement, to enable them to continue using the plant.
The finance company paid Cashstrap Ltd R600 000 for its plant on 1 March 20.7 (the
commencement date of the lease).
283
Leases
There are no guaranteed or unguaranteed residual values and no initial direct costs have
been incurred by the lessee or the lessor.
Required
a. Prepare all the journal entries (including cash transactions) relating to the sale and
subsequent leaseback of the plant for the financial year ended 28 February 20.8
ensuring compliance with the requirements of International Financial Reporting
Standards (IFRS).
b. Provide the disclosure relating to the sale and leaseback in the financial statements of
Cashstrap Ltd for the financial year ended 28 February 20.8 so as to comply with the
requirements of International Financial Reporting Standards (IFRS). The only
accounting policy note required is that relating to leases.
There are no guaranteed or unguaranteed residual values, and no initial direct costs have
been incurred by the lessee or the lessor.
The prime interest rate was 18% on the date that the lease was entered into, but decreased to
16% on 1 January 20.7. Finance charges are recognised on the effective interest method.
The machine is depreciated at 20% per annum using the straight-line method. Assume a tax
rate of 30% and that there are no temporary differences other than those resulting from the
above information, and that it would be appropriate to create a debit balance on the deferred
tax account if necessary.
Required
Disclose the effects of this lease agreement in the financial statements of Robberg Ltd for
the financial year ended 31 December 20.7 so as to comply with the requirements of
International Financial Reporting Standards (IFRS). Accounting policy notes are not
required.
284
Leases
Luxor Ltd entered into an instalment sales agreement on 1 January 20.6 to acquire a
manufacturing machine. The contract stipulates the following:
None of the parties to this agreement has incurred any initial direct costs.
The fair value of the machine on 1 January 20.6 is the same as its cash purchase price
excluding VAT.
The company provides for depreciation at 25% per annum using the reducing balance
method and is registered for VAT purposes. VAT is claimed immediately and finance costs
on instalment sales agreements are recognised using the effective interest method.
Tax is calculated at 30% per annum. Wear-and-tear allowances are calculated at 20% per
annum using the straight-line method. There are no other temporary differences. Assume
that the company will have sufficient taxable profits for the recognition of any deferred tax
assets.
Required
a. Prepare all the journal entries applicable to the above transactions (including cash
transactions) for Luxor Ltd for the two years ended 31 December 20.6 and 20.7 in
order to comply with the requirements of International Financial Reporting Standards
(IFRS).
b. Disclose all relevant information applicable to the above transactions in the financial
statements for the year ended 31 December 20.7 so as to comply with the requirements
of International Financial Reporting Standards (IFRS). No accounting policy or tax
notes are required.
DKW Ltd manufactures and distributes manufacturing machinery for use in the motor
industry and uses the perpetual inventory system. During 20.3, equipment was leased to
Ossewa Ltd. The details are as follows:
285
Leases
In terms of the contract, the interest rate and therefore the instalments are linked to the prime
interest rate. At commencement of the contract, prime was 20% per year. On 1 July 20.6 the
prime rate decreased to 17% per year.
Required
Prepare the journal entries (cash transactions included) in the books of DKW Ltd for this
lease agreement for the years ended 31 December 20.3 to 31 December 20.8 in compliance
with the requirements of International Financial Reporting Standards (IFRS).
The useful life of the front-end loader is estimated to be five years and depreciation is
provided for by using the straight-line method without taking into account any residual
values. Assume that the South African Revenue Service allows wear and tear on the cost
price of this type of leased machinery at 20% per annum on the straight-line method
(without taking into account any residual values).
Bamco CC is responsible for the maintenance and insurance of the front-end loader.
Bamco CC incurred initial direct costs of R5 000 in respect of this agreement. No initial
direct costs were incurred by Jonkershoek Investments Ltd.
The tax rate has remained constant at 30%. Assume that Jonkershoek Investments Ltd has
had no transactions other than those related to this lease agreement with Bamco CC.
Required
286
Leases
Abu Ltd, a manufacturer of machinery, sold a machine under an instalment sales agreement
to Edfu Ltd on 1 January 20.6. The provisions of the agreement are as follows:
Depreciation on machinery is provided for at 20% per annum on the straight-line method.
Inventories are accounted for using a perpetual inventory system.
Required
a. Prepare the journal entries, other than for current tax, for Abu Ltd for the two years
ended 31 December 20.6 and 20.7 (include all cash transactions). Journal narrations
are not required. You answer must comply with the requirements of International
Financial Reporting Standards (IFRS).
b. Disclose the information regarding this transaction in the financial statements of
Abu Ltd for the year ended 31 December 20.7 so as to comply with the requirements
of International Financial Reporting Standards (IFRS). Provide only the following
note:
• Net investment in instalment sales agreement (debtors).
Giza Ltd sells or leases manufacturing machinery under lease agreements, depending on the
customer's needs. On 1 January 20.4 the following lease agreement was concluded with
Esua Ltd:
Additional information
1. Giza Ltd's cost price for the applicable machine was R60 000.
2. A market-related interest rate for the specific transaction would be 20% per annum.
287
Leases
3. The loss of finance income is recovered by an increase in gross profit on the sale.
4. Wear and tear is allowed at 20% per annum on the straight-line method (assume for
purposes of this question that the wear and tear is based on the selling price for
accounting purposes).
7. Assume that there are sufficient future taxable profits to enable the recognition of any
deferred tax assets.
Required
a. Prepare the journal entries (including cash transactions) for the two years ended
31 December 20.4 and 20.5 for Giza Ltd. Journal narrations are not required. Your
answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
b. Disclose all relevant information regarding this transaction for Giza Ltd for the year
ended 31 December 20.5 so as to comply with the requirements of International
Financial Reporting Standards (IFRS).
San Ltd entered into an operating lease agreement with Lam Ltd on 1 January 20.4 in terms
of which San Ltd agreed to lease an office building to Lam Ltd for a five-year period. As an
incentive to get Lam Ltd to enter into the operating lease agreement, San Ltd agreed that the
first year would be rent free and the following four years’ rental would be R250 000 per
year.
Required
a. Prepare the journal entries (cash transactions included) to account for the operating
lease agreement in the books of both the lessor and lessee for the financial years ended
31 December 20.4 and 20.5. Your answer must comply with the requirements of
International Financial Reporting Standards (IFRS). Journal narrations are not
required.
b. Disclose the operating lease in the ‘Profit before tax’ note in the financial statements
of both the lessor and the lessee for the year ended 31 December 20.5 in accordance
with the requirements of International Financial Reporting Standards (IFRS). Assume
that all amounts are material.
Penny Ltd entered into the following arrangement with Cents Ltd in respect of certain
machinery it owned and used in its process of manufacture:
288
Leases
• Penny Ltd will lease this machinery to Cents Ltd at an annual rental of R100 000 for
eight years.
• Cents Ltd will then lease this same machinery back to Penny Ltd at an annual rental of
R80 000 for five years in terms of a sublease agreement.
• At the end of the sublease term, Penny Ltd has the right to buy back the rights of Cents
Ltd under a purchase option. If Penny Ltd fails to exercise this purchase option, Cents
Ltd may require Penny Ltd to provide it with a minimum return on its investment in
the head lease.
• The annual rental of R100 000 in respect of the head lease is payable in full in advance
on inception of the lease agreement. The total amount of R800 000 (R100 000 ×
8 years) must be deposited in a risk-free investment account and may only be used by
Penny Ltd to make the sublease payments to Cents Ltd.
Cents Ltd has calculated its current taxable income before the arrangement to be
R1,5 million.
Penny Ltd currently has an assessed loss of R2,5 million before the arrangement while its
future taxable income, as a result of more profitable business activities, will amount to at
least R50 000 for the next five years.
Required
Discuss, with reasons, whether the above arrangement can be accounted for as a lease in
terms of SIC 27.
The most recent financial reporting period of Incredible (Pty) Ltd ended on 30 June 20.8.
Incredible (Pty) Ltd has decided, during the 20.7 financial year already, to start a new
product line of environmentally friendly motor vehicles. The directors have identified a gap
in the market due to the sudden consciousness by the public of the environmental problems
arising from global warming. These motor vehicles boast a built-in solar panel on the roof
and make use of hybrid petrol/solar power engines. The engines also have a special
component that limits the emission of harmful gases.
Incredible (Pty) Ltd has already acquired the patents to manufacture these motor vehicles.
Incredible (Pty) Ltd does however not have the necessary capacity and intellectual capital to
manufacture these motor vehicles by itself. Another company, Fabulous Ltd, has however
been involved in the industry of environmentally friendly motor vehicles for many years.
The directors of Incredible (Pty) Ltd approached Fabulous Ltd regarding their plans to start
the new product line and, after months of negotiations, Incredible (Pty) Ltd entered into an
agreement with Fabulous Ltd with the following terms:
• The agreement date is 1 May 20.8 and runs for a period of 8 years.
• Fabulous Ltd will specifically erect a new production plant on Incredible (Pty) Ltd’s
premises. The production plant is owned by Fabulous Ltd.
289
Leases
The monthly charge that Incredible (Pty) Ltd has to pay to Fabulous Ltd amounts to
R800 000, consisting of R650 000 relating to the output of the production plant (excluding
other input costs like materials and labour that are incurred by Incredible (Pty) Ltd), as well
as R150 000 for management fees.
Incredible (Pty) Ltd has to pay the R800 000 every month, regardless of the quantity of
output produced from the plant. The fair value of the plant is estimated at R28 million. The
plant is expected to be usable for a period of 22 years and Fabulous Ltd intends to make it
available to other companies or for its own use after the 8 year period of the agreement has
lapsed.
Required
Discuss the correct recognition and measurement of the agreement with Fabulous Ltd in the
records of Incredible (Pty) Ltd for the year ended 30 June 20.8.
290
IAS 19
Employee benefits
__________________________________________________________________
QUESTIONS
Note: The questions in this chapter do not address asset ceilings on defined benefit
plans.
291
Employee benefits
All the employees of Oklahoma Ltd are members of the Oklahoma Pension Fund, a defined
benefit plan.
Required
OKLAHOMA LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.1
1. Accounting policy
Post-employment benefits
The defined benefit obligation, the related current service cost and, where applicable,
past service cost are determined by using the projected unit credit method. Actuarial
valuations are conducted each year (IAS 19.67).
The net defined benefit liability/(asset) is the deficit (or surplus), adjusted for any
effect of limiting a net defined benefit asset to the asset ceiling. The deficit or surplus
is:
• the present value of the defined benefit obligation; less
• the fair value of the plan assets (if any) (IAS 19.8).
Past service costs are recognised immediately in profit or loss. Actuarial gains and
losses are recognised in other comprehensive income as remeasurements of the net
defined benefit liability/(asset).
The following is an extract from the trial balance of Florida Ltd for the year ended
31 December 20.1:
Note Rand
Additional information
1. Owing to cash flow problems experienced during December 20.0, Florida Ltd only
paid the December 20.0 salaries amounting to R95 000 in January 20.1.
292
Employee benefits
2. Each employee is entitled to 18 working days’ paid vacation leave per year. Five days
may be carried forward to the following year, after which it lapses without payment.
Thirteen days may not be carried forward and are paid out if not used in the current
year.
During the year, R35 000 was paid out in respect of current year’s vacation leave that
was not used. It is expected that four of the unused five days’ leave will be taken in the
following year, amounting to an additional R28 000.
3. During December 20.1 the services of four part-time employees were terminated
before the normal retirement date. The company drafted a detailed formal plan
according to which an amount of R50 000 would be paid to each of
the employees during February 20.2. The plan details were announced before year end
and thereby created a valid expectation for those affected that the amounts would be
paid.
4. Florida Ltd has a bonus policy which provides for a bonus of 8% of profit for the year,
payable to the employees during February of the following calendar year. The profit
for the year ended 31 December 20.1, after the bonus payment of 8% and all other
provisions, amounts to R966 000.
Required
Disclose the ‘profit before tax’ note to the financial statements of Florida Ltd for the year
ended 31 December 20.1 in accordance with the requirements of International Financial
Reporting Standards (IFRS).
FLORIDA LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.1
20.1
Rand
Profit before tax is stated after taking the following into account:
Employee benefits expense 1 867 000
Short-term employee benefits (1) 1 667 000
Termination benefits (5) 200 000
(1) 1 520 000 (2) + 63 000 (3) + 84 000 (4) = 1 667 000
(2) 1 615 000 – 95 000 = 1 520 000
(3) 35 000 + 28 000 = 63 000
(4) 966 000/92% × 8% = 84 000
(5) 50 000 × 4 = 200 000 (IAS 19.165)
293
Employee benefits
All the employees of Atlanta Ltd belong to a funded provident fund (the Atlanta Provident
Fund), which is classified as a defined contribution plan.
20.1 20.0
Rand Rand
Atlanta Ltd and all employees each contribute 7,5% of gross salaries to the provident fund.
Required
Disclose the information in the notes in the financial statements of Atlanta Ltd for the year
ended 31 December 20.1 in accordance with the requirements of International Financial
Reporting Standards (IFRS).
ATLANTA LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.1
1. Accounting policy
294
Employee benefits
Benjamin Ltd has 10 employees, all earning a gross salary of R20 000 per month. All the
employees belong to a funded provident fund (defined contribution plan) and contribute
7,5% of their gross salary to it. Benjamin Ltd contributes the same amount to the fund. An
employee’s salary slip is as follows:
The net salaries are paid at the end of each month, while the deductions and contributions
are paid at the beginning of the following month. In addition to the entity’s contributions to
the provident fund, Benjamin Ltd also incurs other sundry statutory costs of R1 000 per
employee per month.
Each employee is entitled to 20 working days’ paid vacation leave per year. A maximum of
five days may be carried forward to the following year, after which it lapses with payment.
At 31 December 20.8, each employee had four days unused leave and the directors expect
that all four days will be taken as leave during the next financial year. All salary costs are
expected to increase by 10% in the next financial year.
Although Benjamin Ltd is not contractually obliged to pay any bonuses to the employees,
the directors decided to give each one a bonus of R5 000 based on their employment during
the current year. The directors sent an internal memo to this effect to all employees during
the last week of December 20.8. The bonuses will be paid in the second week of
January 20.9.
The tax rate is 28%. Assume that all salary costs paid in cash by Benjamin Ltd are
deductible for tax purposes when the cash is paid. Assume that there are 20 working days
per month.
Required
a. Calculate the total monthly cost to the company (excluding bonuses) per employee of
Benjamin Ltd.
b. Prepare the journal entries (including cash payments and deferred tax, but not current
tax) for December 20.8 to account for all employee benefits of Benjamin Ltd.
c. Prepare the journal entries for January 20.9 to account for all the payments made in
respect of the employee deductions and the entity’s contributions.
d. Calculate the total expense for employee benefits of Benjamin Ltd for the year ended
31 December 20.8.
e. Indicate what the amount of the leave pay accrual in part b would have been if it was
expected that the four unused leave days as at 31 December 20.8 would be paid out in
cash during December 20.9 (i.e. the employer’s contributions and other costs would
normally not be made).
295
Employee benefits
December 20.8
Short-term employee benefits: gross salaries (P or L) (1) 200 000
SARS: PAYE payable (SFPos) (2) (40 000)
Provident fund: employee’s contribution payable (SFPos) (3) (15 000)
Other payables: employee’s deductions payable (SFPos) (4) (4 000)
Bank (net salaries) (5) (141 000)
Recording of monthly gross salaries
296
Employee benefits
(7) 10 × 4 × (22 500 × 1.1) (part a.)/20 working days per month = 49 500
The leave pay accrual is based on the total cost to the company as the employer will
still need to make its contributions while the employee is on leave. The measurement
of the leave pay accrual also needs to reflect the increased salary as the amount that
the entity will pay to settle the leave in future periods will be based on the increased
salary.
(8) 49 500 × 28% = 13 860. The carrying amount of the leave pay accrual is R49 500 and
the tax base is RNil.
(9) 10 × 5 000 = 50 000
(10) 50 000 × 28% = 14 000. The carrying amount of the bonuses payable is R50 000 and
the tax base is RNil.
c. Journal entries
Dr/(Cr)
Rand
January 20.9
The measurement of the leave pay accrual will still reflect the increased salary as the
amount that the entity will pay to settle the leave in future periods will be based on the
increased salary. However, the leave pay accrual is now based on the basic gross salary
per employee only (rather than on the cost to company) as the employer will probably
not need to make contributions to the provident fund and incur the other costs
(depending on the specific leave terms agreed with employees).
297
Employee benefits
Leave pay accrual to be paid in cash: 10 × 4 × (20 000 × 1.1) / 20 working days per
month = 44 000
All the employees of Colorado Ltd are members of a funded pension fund (the Colorado
Pension Fund), which is classified as a defined benefit plan. The fund is governed by the
South African Pension Fund Act, 1956 (as amended).
On 1 January 20.0, Colorado Ltd made amendments to the pension fund to increase certain
benefits. The past service costs resulting from the increased benefits amounted to R60 000.
Additional information
An actuary, who is of the opinion that the plan is in a sound financial position, performed
the relevant valuations on 31 December 20.1. The actuarial valuations will be performed
again on 31 December 20.2.
Required
298
Employee benefits
c. Disclose the following notes which should appear in the financial statements of
Colorado Ltd for the year ended 31 December 20.1 in accordance with the
requirements of International Financial Reporting Standards (IFRS):
• Profit before tax
• Post-employment benefits
• Characteristics of defined benefit plan
(1) 1 700 000 × 13,5% = 229 500; 1 600 000 × 14% = 224 000
(2) 1 600 000 × 13.5% = 216 000; 1 550 000 × 14% = 217 000
299
Employee benefits
b. COLORADO LTD
STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED
31 DECEMBER 20.1
20.1 20.0
Rand Rand
…
Other comprehensive income
Items that will not be reclassified to profit or loss
Remeasurement of the net defined benefit liability 83 500 47 000
…
Total other comprehensive income 83 500 47 000
Attributable to*:
Owners of the parent 83 500 47 000
Non-controlling interest – –
83 500 47 000
c. COLORADO LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.1
2. Post-employment benefits
20.1 20.0
Rand Rand
2.1 Net defined benefit liability
Present value of the defined benefit obligation 1 850 000 1 700 000
Fair value of the plan assets (1 820 000) (1 600 000)
Net defined benefit liability (IAS 19.63 & .140) 30 000 100 000
300
Employee benefits
2.2 Reconciliation from the opening balance to closing balance of the net defined
benefit liability (IAS 19.140)
20.1 20.0
Rand Rand
Opening balance of net defined benefit liability (1) 100 000 50 000
Defined benefit cost (through profit or loss) 323 500 347 000
Contributions paid into the fund (310 000) (250 000)
Remeasurement of the net defined benefit liability
(through OCI) (83 500) (47 000)
Closing balance of net defined benefit liability 30 000 100 000
2.3 Reconciliation from the opening to closing balances of the present value of
defined benefit obligation (IAS 19.140)
20.1 20.0
Rand Rand
Present value of defined benefit obligation at 1 January 1 700 000 1 600 000
Current service costs 310 000 280 000
Past service costs – 60 000
Interest expense 229 500 224 000
Benefits paid (360 000) (400 000)
Actuarial gain (29 500) (64 000)
Present value of defined benefit obligation at
31 December 1 850 000 1 700 000
2.4 Reconciliation from the opening to closing balances of the fair value of plan
assets (IAS 19.140)
20.1 20.0
Rand Rand
The Colorado Pension Fund, which is governed by the South African Pension Fund
Act, 1956 (as amended), is a final salary defined benefit plan for employees, to which
no minimum funding requirements relate. All the employees are members of the
pension fund. Trustees of the Colorado Pension Fund govern the plan.
301
Employee benefits
20.1 20.0
Rand % Rand %
Risks relating to these assets could include property market risk, as the most
significant portion of assets consists of land and buildings. These assets run the risk of
devaluation due to market changes. Being situated in the Johannesburg CBD could
pose further risks (for example devaluation or direct damage due to
riots/protests/vandalism in the proximity of the buildings). The fair value of artwork is
dependent on fashion and personal tastes and therefore market risk relating to artwork
also prevails (IAS 19.139b).
Actuarial valuations are performed annually. The most recent actuarial valuation was
performed on 31 December 20.1, while the next valuation will be performed on
31 December 20.2. The actuary is of the opinion that the plan is in a sound financial
position.
20.1 20.0
% %
All employees of Christopher Ltd qualify for long-service leave in terms of the current
personnel policy. Every employee is therefore entitled to long-term compensated absences
that relate to the number of years in service.
20.1 20.0
Discount rate – beginning of year 13% 12,5%
Current service costs 170 000 160 000
Benefits paid out by the fund 193 000 214 000
Contributions paid by Christopher Ltd into the fund 110 000 96 000
Fair value of plan assets – beginning of year 1 400 000 1 260 000
Present value of obligation – beginning of year 1 500 000 1 200 000
Present value of increased benefits on 1 January 20.0
(past service costs) – 30 000
302
Employee benefits
Actuarial valuations of the Christopher long-service leave fund are performed annually. The
most recent valuation was performed on 31 December 20.1. The present value of the
obligation amounted to R1 600 000 on that date and the fair value of the plan assets
amounted to R1 490 000. The actuary is of the opinion that the fund is in a sound financial
position.
Christopher Ltd’s profit before tax for the year ended 31 December 20.1, before taking into
account any of the above-mentioned expenses, amounts to R2 400 000 (20.0: R1 900 000).
Assume a tax rate of 28%. The company will be profitable and taxable in the foreseeable
future.
Required
Disclose the information that should appear in the financial statements of Christopher Ltd
for the year ended 31 December 20.1 in accordance with the requirements of International
Financial Reporting Standards (IFRS).
CHRISTOPHER LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.1
20.1 20.0
Note Rand Rand
ASSETS
Non-current assets
Deferred tax (calc 4) 4 30 800 28 000
(1) No further disclosures in the notes are required for ‘other long-term employee benefits’
(IAS 19.158).
CHRISTOPHER LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.1
1. Accounting policy
The financial statements are prepared on the historical cost basis in accordance with
the requirements of International Financial Reporting Standards (IFRS). The following
are the principal accounting policies.
303
Employee benefits
Deferred tax is provided for on all temporary differences in accordance with the
reporting date balance liability method.
(1) No further disclosure regarding the make-up of this amount is required for ‘other long-
term employee benefits’ (IAS 19.158).
4. Deferred tax
20.1 20.0
Rand Rand
Long-service leave compensation liability (calc 4) 30 800 28 000
A deferred tax asset has been provided because it is expected that the company will
carry on generating taxable profit in the foreseeable future, against which deductible
temporary differences can be set off.
Calculations
1. Actuarial gains/losses
20.1 20.0
On the plan assets Rand Rand
304
Employee benefits
305
Employee benefits
Georgia Ltd provided the following information with regards to the pension fund of the
company for the year ended 31 December 20.1:
Rand
Present value of defined benefit obligation
– 1 January 20.1 3 120 000
– 31 December 20.1 3 440 000
Fair value of plan assets
– 1 January 20.1 3 060 000
– 31 December 20.1 3 380 000
Current service costs 316 000
Benefits paid out of the fund 405 000
Contributions paid into the fund 322 000
Required
Disclose the following notes which should appear in the financial statements of Georgia Ltd
for the year ended 31 December 20.1 in accordance with the requirements of International
Financial Reporting Standards (IFRS):
• Profit before tax
• Post-employment benefits
Notes regarding accounting policy, characteristics of the defined benefit plan and
comparative amounts are not required.
a. GEORGIA LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.1
(1) (3 120 000 × 11% = 343 200) – (3 060 000 × 11% = 336 600) = 6 600
2. Post-employment benefits
306
Employee benefits
2.2 Reconciliation from the opening balance to closing balance of the net defined
benefit liability (IAS 19.140)
20.1
Rand
2.3 Reconciliation of opening and closing balances of present value of defined benefit
obligation (IAS 19.140)
20.1
Rand
2.4 Reconciliation of opening and closing balances of fair value of plan assets
(IAS 19.140)
20.1
Rand
Connecticut Ltd grants paid annual leave to all employees, who are entitled to 24 days leave
per year which accrues to them evenly throughout the year. Eight of these leave days can be
accumulated and carried forward to the next year. If an employee has more than eight
unused leave days left at the end of the financial year, the extra days are paid out in cash. All
such cash payments take place in December.
Connecticut Ltd’s total labour force consists of 40 employees. During the year, 5% of
employees did not use their leave benefits at all, 70% used 10 days, 15% used 15 days and
5% used 20 days. Further, one employee took 36 days’ leave while another took 28 days.
These two employees both had enough accumulated leave from prior years to be able to take
this leave. Leave taken is firstly accounted for against the current year’s entitlement and
then against accumulated entitlements that arose in the past.
307
Employee benefits
The leave pay accrual is created proportionately in relation to the average daily salary per
employee expected to be paid as a result of the unused entitlement. Salary increases are
effective from 1 January of every year and amounts to a constant 7% per year.
On 31 December 20.0 the accumulated number of leave days amounted to 176 and the
average annual salary per employee amounted to R120 000 (before the 20.1 increases
became effective).
All accumulated leave is payable in full in cash if an employee were to terminate his service.
The daily cost of leave taken is equal to the daily average salary per employee (rounded off
to the nearest rand).
Assume that all employees take their leave during July every year, when it is a fairly quiet
period from a business perspective.
Assume that all transactions take place at the end of the month.
Required
Your solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
a. In terms of IAS 19.16 an entity shall measure the expected cost of accumulating
compensated absences as the additional amount the entity expects to pay as a result of
the unused entitlement. This implies that the measurement of the leave pay accrual
needs to reflect the increased salaries.
b.
Rand
Dr/(Cr)
January 20.1
Leave compensation (P or L) (2) 28 560
Leave pay accrual (SFPos) (28 560)
February 20.1
Leave compensation (P or L) (2) 28 560
Leave pay accrual (SFPos) (28 560)
March 20.1
Leave compensation (P or L) (2) 28 560
Leave pay accrual (SFPos) (28 560)
308
Employee benefits
Rand
Dr/(Cr)
April 20.1
Leave compensation (P or L) (2) 28 560
Leave pay accrual (SFPos) (28 560)
May 20.1
Leave compensation (P or L) (2) 28 560
Leave pay accrual (SFPos) (28 560)
June 20.1
Leave compensation (P or L) (2) 28 560
Leave pay accrual (SFPos) (28 560)
July 20.1
Leave compensation (P or L) (2) 28 560
Leave pay accrual (SFPos) (28 560)
August 20.1
Leave compensation (P or L) (2) 28 560
Leave pay accrual (SFPos) (28 560)
September 20.1
Leave compensation (P or L) (2) 28 560
Leave pay accrual (SFPos) (28 560)
October 20.1
Leave compensation (P or L) (2) 28 560
Leave pay accrual (SFPos) (28 560)
November 20.1
Leave compensation(P or L) (2) 28 560
Leave pay accrual (SFPos) (28 560)
December 20.1
Leave compensation(P or L) (2) 28 560
Leave pay accrual (SFPos) (28 560)
309
Employee benefits
(4) 5% × 40 × 0 = 0
70% × 40 × 10 = 280
15% × 40 × 15 = 90
5% × 40 × 20 = 40
2,5% (3) × 40 × 28 = 28
2,5% (3) × 40 × 36 = 36
474 days × 357 (1) = 169 218 – leave taken
(5) 5% × 40 × (24 – 0 – 8) = 32
70% × 40 × (24 – 10 – 8) = 168
15% × 40 × (24 – 15 – 8) = 6
5% × 40 × (24 – 20 – 4) = 0 }None that has to be paid
2,5% (3) × 40 × (24 – 24) = 0
2,5% (3) × 40 × (24 – 24) = 0
206 days × 357(1) = 73 542 – leave paid
(6) 176 + (2 × 12 × 40) – 474 – 206 = 456 days unused leave – 31 December 20.1
(7) Leave pay accrual 31 December 20.1: 456 (6) × (128 400 (a) × 1,07)/360 = 174 192
(8) Total leave pay accrual created 20.1: (2) × 12 = 342 720
(9) Total leave payment/utilisation 20.1: 169 218 (4) + 73 542 (5) = 242 760
(10) Adjustment to leave pay accrual:
Leave pay accrual 31 December 20.0 (from a.) 62 832
Leave pay accrual created (8) 342 720
Leave pay accrual utilised (9) (242 760)
Leave pay accrual 31 December 20.1 (174 192)
11 400
Proof: During the year the leave pay accrual was based on R357 per day. Thus the
balance was 456 days × R357 = R162 792. However, the leave pay accrual is now to
be based on the expected increased salary cost of R382 per day. Thus the balance
should be 456 days × R382 = R174 192. The adjustment is: 174 192 – 162 792 =
11 400.
All the employees of Utah Ltd are members of the Utah Pension Fund, a defined benefit
plan. The following information relates to the Pension Fund:
20.6 20.5
Rand Rand
On 1 January 20.5 the present value of the obligation amounted to R4 110 000 and the fair
value of the plan assets to R3 970 000. On 31 December 20.6, benefits amounting to
R319 700 (20.5: R300 670) were paid. Assume that all transactions occur at year end.
310
Employee benefits
During January 20.5 certain benefits were increased and the necessary amendments were
made to the Utah Pension Fund. These amendments resulted in past service costs amounting
to R360 000.
Actuarial valuations of the Utah Pension Fund are made annually using the projected unit
credit method. On 31 December 20.4 cumulative actuarial gains amounting to R88 400
(before tax) had been included in retained earnings.
Utah Ltd’s profit for the year, after taking into account all of the above-mentioned
information, amounts to R9 300 000 for the year ended 31 December 20.6 (20.5:
R8 550 000). Assume a tax rate of 28%.
Required
a. Disclose the following notes that should appear in the financial statements of Utah Ltd
for the year ended 31 December 20.6:
• Profit before tax
• Post-employment benefits
Notes regarding accounting policy and characteristics of the defined benefit plan are
not required.
b. Calculate deferred tax relating to the defined benefit plan and provide the journal
entries for the deferred tax for the year ended 31 December 20.6 and 20.5.
c. Prepare the statement of profit or loss and other comprehensive income and the
statement of changes in equity for the year ended 31 December 20.6.
Your answer should comply with the requirements of International Financial Reporting
Standards (IFRS).
a. UTAH LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.6
(1) 20.5: Current service cost 316 000 + past service cost 360 000 = 676 000
(2) 20.5: (4 110 000 × 11% = 452 100) – (3 970 000 × 11% = 436 700) = 15 400
20.6: (4 990 000 × 10.7% = 533 930) – (4 590 000 × 10.7% = 491 130) = 42 800
2. Post-employment benefits
20.6 20.5
Rand Rand
2.1 Net defined benefit liability
Present value of the defined benefit obligation 5 540 000 4 990 000
Fair value of the plan assets (5 010 000) (4 590 000)
530 000 400 000
311
Employee benefits
2.2 Reconciliation from the opening balance to closing balance of the net defined
benefit liability (IAS 19.140)
20.6 20.5
Rand Rand
Opening balance of net defined benefit liability (3) 400 000 140 000
Defined benefit cost (through profit or loss) 383 800 691 400
Contributions paid into the fund (387 000) (372 000)
Remeasurement of the net defined benefit liability
(through OCI) (4) 133 200 (59 400)
Closing balance of net defined benefit liability 530 000 400 000
2.3 Reconciliation of opening and closing balances of present value of defined benefit
obligation (IAS 19.140)
20.6 20.5
Rand Rand
2.4 Reconciliation of opening and closing balances of fair value of plan assets
(IAS 19.140)
20.6 20.5
Rand Rand
312
Employee benefits
Journal entries
Dr/(Cr)
Rand
20.5
Deferred tax asset (SFPos) 72 800
Tax expense (OCI) 16 632
Income tax expense (P or L) (89 432)
20.6
Deferred tax asset (SFPos) 36 400
Income tax expense (P or L) 896
Tax expense (OCI) (37 296)
c. UTAH LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHEN-
SIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.6
20.6 20.5
Rand Rand
Profit for the year 9 300 000 8 550 000
Other comprehensive income
Items that will not be reclassified to profit or loss (95 904) 42 768
Actuarial gains/(losses) on defined benefit plans (4) (133 200) 59 400
Tax expense (see b.) 37 296 (16 632)
Total comprehensive income for the year 9 204 096 8 592 768
313
Employee benefits
UTAH LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.6
Retained
earnings
Rand
Nevada Ltd has a labour force which consists mainly of trainees. The expected service term
of employees is therefore limited to the training period, which ranges from two to five years,
after which staff members normally resign to take up more permanent employment
elsewhere. Owing to the temporary nature of their labour force, Nevada Ltd has adopted a
policy whereby employees contribute to an independent defined contribution plan, the
Nevada Provident Fund. Nevada Ltd’s contribution is 14% of gross pensionable
remuneration. Gross remuneration to employees for the year ended 31 December 20.1
amounted to R22 680 000. Payments made to the contribution plan amounted to R2 853 900
of which R200 000 relates to 20.0. All employees are members of the fund.
Required
Disclose the information that should appear in the statement of financial position and notes
of Nevada Ltd for the year ended 31 December 20.1 in accordance with the requirements of
International Financial Reporting Standards (IFRS). Ignore comparative amounts and any
tax implications.
The following information relates to Iowa Ltd’s employee benefits for the year ended
31 December 20.1:
1. Salaries and bonuses (a 13th cheque) paid, amounted to R5 500 000. The R5 500 000
included an amount of R40 000 outstanding at 31 December 20.0.
2. Contributions to the Iowa Provident Fund amounted to 8% of the annual salaries and
bonuses.
3. Employees are obliged to take their 28 days’ vacation leave during each year. Seven
days may be paid out if not used in the current year. The company expects, based on
past experience which is expected to continue, that an average of three days will be
paid out during January of the next year. The vacation leave accrual will be based on
360 working days and on salaries, including bonuses.
314
Employee benefits
4. Iowa Ltd has a five-year contract with a bus company entailing the rental of a bus
which is used daily to transport employees between terminals and the factory. The
initial rental charge amounted to R5 000 per month, paid in advance, escalating
annually with an inflation increase. Over the past few years the inflation rate was 10%
each year. The contract was concluded on 1 July 19.8. The instalment for January 20.2
was paid on 30 December 20.1.
5. Each employee is entitled to 30 days’ sick leave per annum. Sick leave can be
accumulated for one year. At the end of the second year, sick leave (for years one and
two) lapses with payment and the cycle starts again the following year. The current
sick leave cycle ended on 31 December 20.1. Sick leave payments are made annually
on 31 December.
Past experience indicated that employees earning 70% of the total salaries (excluding
bonuses, paid vacation leave, contributions to the provident fund and bus rental) use
five days, 20% use 16 days and 10% use 35 days. Sick leave is firstly taken from the
previous year’s balance brought forward, and thereafter from the current year’s
entitlement. All sick leave shortages are offset against annual vacation leave. Assume
that there have been no resignations and appointments during 20.0 and 20.1. The total
value of sick leave (salary on which the sick leave accrual was based) for the year
ended 31 December 20.0 amounted to R380 000 per month. The value of the sick
leave is based on salaries only (excluding bonuses, paid vacation leave, contributions
to the provident fund and bus rental). Salaries increased in 20.1, after the financial
statements of 20.0 were approved.
Required
Disclose the profit before tax note in the financial statements of Iowa Ltd for the year ended
31 December 20.1 in accordance with the requirements of International Financial Reporting
Standards (IFRS). Comparative amounts are not required.
All employees of Mississippi Ltd are entitled to disability leave. These long-term employee
benefits are split between permanent and temporary disability. Permanent disability benefits
are paid from the date of disability to the date of retirement, and are based on 105% of the
final annual salaries. Temporary disability benefits are paid from the date
of temporary disability to the date when the service is resumed and are based on 98% of the
final annual salaries. No normal salary will be payable for the period of disability. Salaries
will probably increase with 8% (compound) on 1 January each year.
315
Employee benefits
Assume that disability starts at the beginning of the year. Assume all payments are made at
the end of the year. The profit before tax of Mississippi Ltd, before taking into account the
above-mentioned expenses, amounted to R1 769 602 for the year ended 31 December 20.1
(20.0: R1 470 000). Assume a tax rate of 28%. The company will be profitable in the
foreseeable future.
Required
Disclose the above information in the statement of financial position and notes of
Mississippi Ltd for the year ended 31 December 20.1 in accordance with the requirements of
International Financial Reporting Standards (IFRS).
Care for all (Pty) Ltd is an entity that specialises in the manufacturing of heavy machinery
for use in the mining industry. The company’s employees are made up of mostly qualified
engineers and two chartered accountants. Due to the dangerous nature of the work they do,
Care for all (Pty) Ltd makes sure that they take good care of their employees. They have a
policy that all of their engineers must earn at least R500 000 per annum and that their
accountants must earn a minimum of R499 999 per annum.
In living up to their spirit of caring for their employees they have set up a pension fund to
ensure that their employees are well taken care of after employment with the entity. This
fund is administered by EDR Consultants. EDR specialises in the administration of pension
funds. EDR employs its own actuaries in this regard. Every year Care for all (Pty) Ltd
receives a report from EDR to use in accounting for this fund.
Rand
Dr/(Cr)
The report from EDR for the year ended 31 December 20.1 contained a formal report and an
explanation of the amounts contained in the report in the form of an email. The accountant
of Care for all (Pty) Ltd presented you with the email of the explanations of the amounts and
told you that the original formal EDR report could not be located. The email read as follows:
316
Employee benefits
To: [email protected]
From: [email protected]
Date: 09 February 20.2, 09h00
Subject: RE: Explanation of amounts for 20.1
Explanations as requested
Plan Assets:
R3 100 of the balance represents all the amounts that were received from Care for all (Pty)
Ltd during the year as payments towards the fund. We are also pleased to inform you that
you have earned R3 000 as interest income during the year. We have paid out an amount of
R4 200 to the relevant people who retired during the year and finally the remeasurements
to fair value during the year resulted in a loss of R1 200.
The increase during the year in the defined benefit obligation due to services in the current
year amounts to R4 500. During the year there was also an increase in the pensionable
benefits from 2% to 3% of the final salary for each year of service. This change was
applicable to all years for which employees had rendered services to the company
including the prior years. The change resulted in an increase of R2 300 relating to the prior
years. Information on this change was forwarded to us by your CEO. The interest cost for
the year amounted to R2 000. Our actuaries changed some of their assumptions and this
led to a gain of R2 600.
Kind regards,
EDR Consulting
Required
a. Based on the information above, prepare the journal entries to record the movement in
the net defined benefit liability of Care for all (Pty) Ltd’s pension fund for the year
ended 31 December 20.1.
b. Prepare a detailed reconciliation of the defined benefit obligation for the year ended
31 December 20.1. The reconciliation should only pertain to the obligation, and not the
net liability or the plan assets.
Your solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
(UJ – adapted)
317
Employee benefits
318
IAS 20 & SIC 10
Accounting for government grants and
disclosure of government assistance
__________________________________________________________________
QUESTIONS
319
Accounting for government grants and disclosure of government assistance
Housing Ltd erected a number of houses for its employees at a cost of R1 000 000, which
was settled on 1 January 20.0 in cash. These buildings, which have a useful life of 10 years,
were completed and put into use on 1 January 20.0.
Housing Ltd received a government grant of R100 000 on 1 January 20.0, since the national
government regards it as a priority to provide houses for all its citizens.
Assume a profit before tax prior to the above transactions of R500 000.
Ignore tax.
Required
a. Prepare the journal entries (cash transactions included) for the year ended
31 December 20.0 in respect of the above transactions if it is assumed that the
government grant is presented in the statement of financial position as deferred
income.
b. Prepare the journal entries (cash transactions included) for the year ended
31 December 20.0 in respect of the above transactions if it is assumed that the
government grant is presented in the statement of financial position by deducting the
government grant from the carrying amount of the asset.
Your solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
31 December 20.0
Depreciation 100 000
Accumulated depreciation on buildings (100 000)
320
Accounting for government grants and disclosure of government assistance
Rand
Dr/(Cr)
31 December 20.0
Depreciation (1) 90 000
Accumulated depreciation on buildings (90 000)
Builders Ltd erected a number of houses at a cost of R4 000 000, which was settled on
1 January 20.0 in cash. These buildings, which have a useful life of 10 years, were
completed and put into use on 1 January 20.0.
Builders Ltd received a government grant of R1 000 000 on 1 January 20.0, since it is
important for the national government to provide houses for all citizens.
Assume that this government grant complies with the definition of gross income and is fully
taxable when received. An income tax allowance of 10% per annum on the straight-line
method is allowed on the total cost of all houses.
Assume a profit before tax prior to accounting for the above transactions of R1,5 million.
Assume that there will be sufficient other future taxable income and that deferred tax assets
can be recognised.
Required
a. Prepare the journal entries (cash transactions included) for the year ended
31 December 20.0 in respect of the above transactions if it is assumed that the
government grant is presented in the statement of financial position as deferred
income.
b. Prepare the journal entries (cash transactions included) for the year ended
31 December 20.0 in respect of the above transactions if it is assumed that the
government grant is presented in the statement of financial position by deducting the
government grant from the carrying amount of the asset.
Your solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
321
Accounting for government grants and disclosure of government assistance
Rand
Dr/(Cr)
31 December 20.0
Depreciation (1) 400 000
Accumulated depreciation on buildings (400 000)
Calculations
Rand
31 December 19.9 – – – –
31 December 20.0
Deferred income (1) (2) (900 000) – (900 000) 252 000 Asset
Buildings (3) (4) 3 600 000 3 600 000 – –
252 000 Asset
322
Accounting for government grants and disclosure of government assistance
The deferred income is a negative asset. In terms of IAS 12.8, deferred income is deemed to
be revenue received in advance for the purpose of calculating deferred tax. The tax base of
revenue received in advance is its carrying amount less any amount of the revenue that will
not be taxable in future. The deferred income is not taxable in future, because the
government grant received has already been fully taxed during the year of assessment ended
31 December 20.0.
Thus the movement in deferred tax allocated to profit or loss for the year ended
31 December 20.0 is R252 000 (movement from RNil to R252 000) as a credit amount.
Tax base on 31 December 20.0 = 900 000 – 900 000 (not taxable in future, because already
taxed in the year of assessment ended 31 December 20.0) = RNil.
31 December 20.0
Depreciation (1) 300 000
Accumulated depreciation on buildings (300 000)
Calculations
323
Accounting for government grants and disclosure of government assistance
31 December 19.9 – – – –
31 December 20.0
Buildings (1) (2) 2 700 000 3 600 000 (900 000) 252 000 Asset
Buildings 3 600 000 3 600 000 – –
Government grant (900 000) – (900 000) 252 000 Asset
Thus movement in deferred tax in profit or loss for the year ended 31 December 20.0 is
R252 000 (movement from RNil to R252 000) as a credit amount.
Distributors Ltd provides medical services in remote areas in KwaZulu-Natal. They receive
a government grant every year in respect of these medical services provided in that specific
year, since the government wishes to provide medical services to all residents of South
Africa.
Distributors Ltd spent R500 000 in respect of the provision of medical services in remote
areas in KwaZulu-Natal during the year ended 31 December 20.1.
Distributors Ltd collected R10 000 during the year from the inhabitants of the remote areas
in KwaZulu-Natal and received a R400 000 grant on 1 January 20.1 from the provincial
government in that province.
Assume a tax rate of 28%. Distributors Ltd has no other income or expenses. Assume also
that there will be sufficient other taxable income in future periods and that deferred tax
assets can be recognised. The grants received from the government are taxable when
received.
Required
a. Prepare the journal entries (cash transactions included) for the year ended
31 December 20.1 in respect of the above transactions if it is assumed that the
government grant is presented as other income in the statement of profit or loss and
other comprehensive income.
b. Prepare the journal entries (cash transactions included) for the year ended
31 December 20.1 in respect of the above transactions if it is assumed that the
government grant is deducted from the related expense, in the statement of profit or
loss and other comprehensive income.
Your solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
324
Accounting for government grants and disclosure of government assistance
Bank 10 000
Income from provision of medical services (P or L) (10 000)
(1) 500 000 – 400 000 – 10 000 = 90 000 unused tax loss
(2) 90 000 × 28% = 25 200
Bank 10 000
Income from provision of medical services (P or L) (10 000)
(1) 500 000 – 400 000 – 10 000 = 90 000 unused tax loss
(2) 90 000 × 28% = 25 200
Helping Hand Ltd decided to participate in the national government’s drive towards the
alleviation of unemployment in the rural areas. The government agreed to subsidise
15 employees’ total cost of employment for a four-year period.
Helping Hand Ltd employed 15 employees on 1 January 20.4 at a total annual cost of
R450 000. It is expected that their total remuneration cost shall increase at 7,5% per year.
A grant, received from the national government on 1 January 20.4 for the four year period,
amounted to R2 million.
Assume a tax rate of 28%. The grant is taxable in full when received in cash. Assume a
profit before tax, before the above information has been accounted for, of R750 000 for each
of the four years. There are no temporary differences other than any arising from the
information provided. Assume that there will be sufficient future taxable income and that
deferred tax assets can be recognised.
325
Accounting for government grants and disclosure of government assistance
Required
Prepare the journal entries (cash transactions included) for each of the four years ended
31 December 20.7 to account for the above information in accordance with the requirements
of International Financial Reporting Standards (IFRS) assuming that the government grant is
deducted from the related expense in the statement of profit or loss and other comprehensive
income.
Journal entries:
20.4 20.5 20.6 20.7
Rand Rand Rand Rand
Dr/(Cr) Dr/(Cr) Dr/(Cr) Dr/(Cr)
Salaries (P or L) (calc 1) 450 000 483 750 520 031 559 034
Bank (450 000) (483 750) (520 031) (559 034)
Deferred income (SFPos) 447 135 480 670 516 720 555 475
Salaries (P or L) (calc 2) (447 135) (480 670) (516 720) (555 475)
Deferred tax (SFPos) (calc 4) 434 802 (134 587) (144 682) (155 533)
Deferred tax expense (P or L) (434 802) 134 587 144 682 155 533
Calculations
31 December 20.4 2 000 000 × 450 000/2 012 815 447 135
31 December 20.5 2 000 000 × 483 750/2 012 815 480 670
31 December 20.6 2 000 000 × 520 031/2 012 815 516 720
31 December 20.7 2 000 000 × 559 034/2 012 815 555 475
2 000 000
326
Accounting for government grants and disclosure of government assistance
Profit before tax (given) 750 000 750 000 750 000 750 000
Staff costs (calc 1) (450 000) (483 750) (520 031) (559 034)
Grant amortised (calc 2) 447 135 480 670 516 720 555 475
Accounting profit
before tax 747 135 746 920 746 689 746 441
Temporary differences 1 552 865 (480 670) (516 720) (555 475)
Grant amortised (447 135) (480 670) (516 720) (555 475)
Grant received in cash 2 000 000 – – –
Taxable income 2 300 000 266 250 229 969 190 966
Current tax at 28% 644 000 74 550 64 391 53 470
CA TB TD DT P or L
(28%)
Rand Rand Rand Rand Rand
Dr/(Cr) (Dr)/Cr
31 December 20.3
Deferred income – – – – –
31 December 20.4
Deferred income (1) 1 552 865 – 1 552 865 434 802 434 802
31 December 20.5
Deferred income (2) 1 072 195 – 1 072 195 300 215 (134 587)
31 December 20.6
Deferred income (3) 555 475 – 555 475 155 533 (144 682)
31 December 20.7
Deferred income (4) – – – – (155 533)
CA = Carrying amount
TB = Tax base
TD = Temporary difference
DT = Deferred tax (SFPos)
P or L = Profit or loss (movement)
327
Accounting for government grants and disclosure of government assistance
House Ltd erected a number of buildings at a cost of R800 000, which was settled on
1 January 20.0 in cash. These buildings have a useful life of 10 years and were completed
and put into use on 1 January 20.0.
House Ltd received a government grant of R180 000 on 1 January 20.0, since it is important
for the national government to provide houses for all of its citizens.
However, on 1 January 20.2 the national government ruled that R40 000 of the government
grant received on 1 January 20.0 must be paid back immediately since House Ltd did not
meet all the conditions attached to the government grant.
Assume a profit before tax prior to the above transactions of R500 000 for the years ended
31 December 20.0 to 31 December 20.2.
Ignore tax.
Required
a. Prepare the journal entries (cash transactions included) for the years ended
31 December 20.0 to 31 December 20.2 in respect of the above transactions if it is
assumed that the government grant is presented as deferred income in the statement of
financial position.
b. Prepare the journal entries (cash transactions included) for the years ended
31 December 20.0 to 31 December 20.2 in respect of the above transactions if it is
assumed that the government grant is presented in the statement of financial position
by deducting the government grant from the carrying amount of the asset.
Your solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
31 December 20.0
Depreciation (1) 80 000
Accumulated depreciation (80 000)
31 December 20.1
Depreciation (1) 80 000
Accumulated depreciation (80 000)
328
Accounting for government grants and disclosure of government assistance
Rand
Dr/(Cr)
1 January 20.2
Deferred income (SFPos) 40 000
Bank (40 000)
31 December 20.2
Depreciation (1) 80 000
Accumulated depreciation (80 000)
31 December 20.0
Depreciation (6) 62 000
Accumulated depreciation (62 000)
31 December 20.1
Depreciation (6) 62 000
Accumulated depreciation (62 000)
1 January 20.2
Buildings – cost 40 000
Bank (40 000)
31 December 20.2
Depreciation (8) 66 000
Accumulated depreciation (66 000)
329
Accounting for government grants and disclosure of government assistance
Dental Ltd provides dental services in the rural areas of Limpopo. They receive a
government grant every year in respect of these dental services since the government wishes
to provide dental services to all residents of South Africa.
Dental Ltd spent R500 000 in respect of the provision of dental services in Limpopo’s rural
areas for the year ended 31 December 20.1.
Dental Ltd collected R15 000 during the year from the inhabitants of the rural areas in
Limpopo.
Dental Ltd received R400 000 in cash on 1 January 20.1 from the provincial government in
Limpopo to encourage them to continue with the provision of the dental services in the rural
areas of Limpopo.
On 31 December 20.1, the provincial government stipulated that R250 000 of the
government grant received on 1 January 20.1 must be paid back to them by 15 January 20.2,
since Dental Ltd did not meet all the conditions attached to the government grant. No
repayment had yet been made on 31 December 20.1.
Ignore tax.
Required
a. Prepare the journal entries (cash transactions included) for the year ended
31 December 20.1 in respect of the above transactions if it is assumed that the
government grant is presented as other income in the statement of profit or loss and
other comprehensive income.
b. Prepare the journal entries (cash transactions included) for the year ended
31 December 20.1 in respect of the above transactions if it is assumed that the
government grant is deducted from the related expense in the statement of profit or
loss and other comprehensive income.
Your solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
330
Accounting for government grants and disclosure of government assistance
Bank 15 000
Income from provision of dental services (P or L) (15 000)
Bank 15 000
Dental costs expense (P or L) (15 000)
Bricks Ltd erected a recreation centre for its employees drawn from underdeveloped rural
areas at a cost of R2,5 million, which was paid for on 1 January 20.0 in cash. The recreation
centre has an estimated useful life of 10 years, and was completed and put into use on
1 January 20.0.
Bricks Ltd received a government grant of R1 800 000 on 1 January 20.0 in cash. The
provision of such facilities to employees meets the government strategy to take care of the
physical wellbeing of its citizens in rural areas.
A tax allowance of 15% per annum on the straight-line method is allowed on the total cost
of this recreation centre.
However, on 1 January 20.2 the national government decided that R400 000 of the
government grant received on 1 January 20.0 must be paid back immediately since Bricks
Ltd did not meet all of the conditions of the government grant.
Assume a profit before tax prior to the above transactions of R500 000 for the years ended
31 December 20.0 to 31 December 20.2.
331
Accounting for government grants and disclosure of government assistance
Assume that Bricks Ltd will have future taxable income and that any debit balances on
deferred tax can be recognised.
Required
a. Prepare the journal entries (cash transactions included) for the years ended
31 December 20.0 to 31 December 20.2 in respect of the above transactions if it is
assumed that the government grant is treated as deferred income; and
i. the government grant is taxable when received in cash and any repayment is tax
deductible when paid in cash; and
ii. the government grant is not taxable and any repayment is not tax deductible.
b. Prepare the journal entries (cash transactions included) for the years ended
31 December 20.0 to 31 December 20.2 in respect of the above transactions if it is
assumed that the government grant is deducted from the carrying amount of the asset;
and
i. the government grant is taxable when received in cash and any repayment is tax
deductible when paid in cash; and
ii. the government grant is not taxable and any repayment is not tax deductible.
Your solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
Use the information provided in Question IAS 20.7 to prepare the notes to the annual
financial statements of Bricks Ltd for the years ended 31 December 20.0 to
31 December 20.2 for each of the scenarios.
Your solution must comply with the requirements of International Financial Reporting
Standards (IFRS). Total columns in the notes are not required.
Grants Ltd was approached by the government to participate in its programme relating to the
alleviation of unemployment in the rural areas. Consequently, Grants Ltd employed
50 additional employees at a total salary cost for the year ended 30 June 20.1 of R650 000.
The employees were appointed on 1 July 20.0.
The agreement between Grants Ltd and the government stated that:
− 50 additional employees would be employed for at least a five-year period during which
time they would be trained as part of the factory staff;
− a total grant of R3,7 million would be received from the government;
− the salaries of these employees would increase at 7,5% per year over the five-year period;
and
− should any of these employees be dismissed or leave before the end of five years, 1/50
(per employee) of the total grant would be repayable immediately to the government.
332
Accounting for government grants and disclosure of government assistance
The tax rate is 28%. The grant received is taxable in full in the year received in cash. Any
repayments will be tax deductible in the year in which they are paid back.
Assume that there will be sufficient other taxable income in the future and that deferred tax
assets can be recognised.
Required
a. Prepare the journal entries (cash transactions included) for the year ended 30 June 20.1
if it is assumed that the government grant is deducted from the related expense in the
statement of profit or loss and other comprehensive income.
b. Prepare the journal entries (cash transactions included) for the year ended 30 June 20.4
assuming that 10 of the 50 employees were dismissed. Assume that the government
grant is deducted from the related expense in the statement of profit or loss and other
comprehensive income.
Your solution to both (a) and (b) must comply with the requirements of International
Financial Reporting Standards (IFRS).
Cement Ltd erects low-cost housing. The provision of housing to all residents of South
Africa is a priority for the South African government. The government provided a loan of
R20 000 000 at a market-related rate of 10% per annum to Cement Ltd on 1 January 20.1.
Interest on this loan is payable half-yearly in arrears.
The loan agreement provides that the repayment of the loan will be waived by the South
African government on the date of completion of the project.
The housing project was completed on 30 June 20.1 and the total cost of R30 000 000 was
settled in cash on 30 June 20.1.
The useful life of the housing units is 20 years, commencing on 1 July 20.1.
Government grants are deducted from the carrying amount of the asset.
Required
Prepare the journal entries (cash transactions included) for the year ended 31 December 20.1
to account for the above transactions in accordance with the requirements of International
Financial Reporting Standards (IFRS).
333
Accounting for government grants and disclosure of government assistance
Break and Build Ltd erects low-cost houses. The provincial government of Gauteng decided
on 1 January 20.1 to donate land with a fair value of R5 000 000 to Break and Build Ltd for
the erection of such houses.
Break and Build Ltd received the land and the accompanying registration certificates on
1 February 20.1. Break and Build Ltd paid transfer taxes and professional fees of R50 000
related to the land received on this date. The erection of the low-cost houses commenced on
1 March 20.1 and had not been completed at year end. The total costs incurred during the
period 1 March 20.1 to 31 December 20.1 amounts to R800 000. This cost was settled in
cash.
It is the policy of Break and Build Ltd to treat government grants as deferred income and to
account for non-monetary assets at fair value.
Required
Prepare the journal entries (cash transactions included) for the year ended 31 December 20.1
to account for the above transactions in accordance with the requirements of International
Financial Reporting Standards (IFRS).
The national government of South Africa has embarked on a policy of developing certain
rural areas.
Help U Ltd manufactures pre-cast concrete walls that can be used in the construction of
houses that will significantly reduce their construction time. Help U Ltd has agreed to build
a new factory in one of these rural areas and the national government has agreed to provide
the following assistance:
− The immediate write-off of all capital expenses for tax purposes and a reduced corporate
tax rate in terms of recently legislated reforms to the tax legislation;
− Assistance in the form of an annual grant of 50% of the total staff cost of employees
during the first 5 years provided that they are drawn from the rural area in which the
factory will be set up;
− The awarding of an interest-free loan of R5 million, which will not be repayable, to
provide immediate financial support;
− Improvements to and provision of the road and rail infrastructure as well as water
reticulation and electricity that will also benefit the people living in the area; and
− A R10 million grant related to the construction of the factory building and the purchase
of specialised plant and equipment.
In addition to this, the national government has also agreed to purchase 80% of the pre-cast
concrete walls, manufactured by Help U Ltd, for the first 10 years. The terms of purchase
will be the same as those of other customers of Help U Ltd.
A government organisation based in Sweden has also undertaken to provide free technical
advice to Help U Ltd related to the material composition of these pre-cast concrete walls.
334
Accounting for government grants and disclosure of government assistance
Required
Identify and explain whether or not the types of government assistance provided to Help U
Ltd are government assistance and government grants in accordance with
IAS 20 Accounting for government grants and disclosures of government assistance and
SIC 10 Government assistance – no specific relation to operating activities.
The South African government advanced a loan of R10 million to Assist Ltd on
1 January 20.10 as immediate financial assistance. The loan bears interest at 5,5% per
annum. The capital is repayable in full on 31 December 20.15. The interest is payable
annually in arrears on 31 December and the first payment is due on 31 December 20.10. The
market-related interest rate for a similar type of loan is 10,5% per year.
Required
335
Accounting for government grants and disclosure of government assistance
336
IAS 21 & SIC 7
The effects of changes in foreign exchange
rates
__________________________________________________________________
QUESTIONS
Note: Assume that all entities in the questions to this chapter choose to apply hedge
accounting and meet the qualifying hedging criteria of IFRS 9.6.4.1 (Financial
instruments) in order to apply hedge accounting, unless stated otherwise. Ignore
the effect of the time value of money on all forward contracts.
337
The effects of changes in foreign exchange rates
Makeself Ltd manufactures Tossies locally and markets the product abroad. The company's
year end is 31 December. Makeself Ltd sold Tossies to the value of R10 000 to Importing
USA Inc on 7 August 20.2. No forward exchange contract (FEC) was taken out. The
transaction was invoiced in dollars at the spot rate ruling on transaction date.
Required
Journalise all the relevant transactions (without journal narrations) assuming that payment
by Importing USA Inc took place on the following dates:
a. 12 November 20.2
b. 31 December 20.3
c. 16 July 20.4
Your solution must comply with the requirements of International Financial Reporting
Standards (IFRS). Ignore taxation.
a. 12 November 20.2
Receivables (1) 10 000
Sales (10 000)
b. 31 December 20.3
Receivables (1) 10 000
Sales (10 000)
c. 16 July 20.4
Receivables (1) 10 000
Sales (10 000)
338
The effects of changes in foreign exchange rates
On 1 May 20.1 Pyne Ltd purchased goods from Eik Ltd, a company in England. The invoice
was for £10 000 payable on 31 July 20.1. The financial year end is 30 June.
The company applies fair value hedge accounting to the foreign exchange risk of recognised
liabilities. You may assume that the hedging criteria per IFRS 9.6.4.1 have been complied
with.
Required
Prepare all the journal entries (including cash transactions) pertaining to the above
transaction, so as to comply with the requirements of International Financial Reporting
Standards (IFRS) assuming the following:
a. No forward exchange contract (FEC) was taken out.
b. An FEC was taken out for the period 1 May 20.1 to 31 July 20.1.
c. An FEC was taken out for the period 1 June 20.1 to 31 July 20.1.
d. An FEC was taken out for the period 1 May 20.1 to 1 June 20.1. At that date the cover
was ‘rolled forward’/renewed to 31 July 20.1.
Ignore taxation.
339
The effects of changes in foreign exchange rates
30 June 20.1
Foreign exchange difference (loss) (2) 100
Payables (100)
Being exchange loss on translation of foreign creditor
31 July 20.1
Foreign exchange difference (loss) (3) 1 100
Payables (4) 44 100
Bank (45 200)
Being exchange loss on settlement of foreign creditor
b. An FEC was taken out for the period 1 May 20.1 to 31 July 20.1
Rand
Dr/(Cr)
1 May 20.1
Inventory (1) 44 000
Payables (44 000)
Being purchase of inventory for £10 000
30 June 20.1
Foreign exchange difference (loss) (2) 100
Payables (100)
Exchange loss on translation of creditor
31 July 20.1
Foreign exchange difference (loss) (3) 1 100
Payables (1 100)
Restatement of creditor at payment date
Payables 45 200
Forward exchange contract (asset) (200 + 400) (600)
Bank (7) (44 600)
Being settlement of creditor
340
The effects of changes in foreign exchange rates
c. An FEC was taken out for the period 1 June 20.1 to 31 July 20.1
Rand
Dr/(Cr)
1 May 20.1
Inventory (1) 44 000
Payables (44 000)
Being purchase of inventory for £10 000
1 June 20.1
No transaction
30 June 20.1
Foreign exchange difference (loss) (2) 100
Payables (100)
Being exchange loss on translation of creditor
31 July 20.1
Foreign exchange difference (loss) (3) 1 100
Payables (1 100)
Being restatement of creditor at payment date
Payables 45 200
Forward exchange contract (liability) 200
Forward exchange contract (asset) (400)
Bank (9) (45 000)
Being settlement of creditor
d. An FEC was taken out for the period 1 May 20.1 to 1 June 20.1.
At that date the cover was ‘rolled forward’ to 31 July 20.1
Rand
Dr/(Cr)
1 May 20.1
Inventory (1) 44 000
Payables (44 000)
Being purchase of inventory for £10 000
1 June 20.1
Bank 300
Foreign exchange difference (gain) (10) (300)
Being gain realised on renewal of FEC
30 June 20.1
Foreign exchange difference (loss) (2) 100
Payables (100)
Being exchange loss on translation of creditor
341
The effects of changes in foreign exchange rates
Rand
Dr/(Cr)
31 July 20.1
Foreign exchange difference (loss) (3) 1 100
Payables (1 100)
Being restatement of creditor at payment date
Payables 45 200
Forward exchange contract (liability) 200
Forward exchange contract (asset) (400)
Bank (9) (45 000)
Being settlement of creditor
South African Importing Ltd purchases certain products on foreign markets. Assume that the
purchase dates represent the dates on which the entity is irrevocably committed to the
transactions. These products are then sold to wholesalers on the local market. No forward
cover was taken out. The company's financial year ends on 31 December. You may assume
that the effect of time value of money is insignificant.
A B
Product Quqa from USA Exporters Inc
16 October 20.2 (purchase date) $10 000
31 December 20.2 – $3 500
12 August 20.3 $4 000 –
31 December 20.3 – $2 000
12 September 20.4 $6 000 –
31 December 20.4 – Nil
342
The effects of changes in foreign exchange rates
A B
Product Xaxa from American Textiles Inc
15 September 20.2 (purchase date) $8 000
20 November 20.2 $8 000 –
31 December 20.2 – $6 400
31 December 20.3 – Nil
Required
Journalise all relevant transactions (including cash transactions) for the years 20.2 to 20.4 so
as to comply with the requirements of International Financial Reporting Standards (IFRS).
Journal narrations are not required. Ignore taxation.
343
The effects of changes in foreign exchange rates
Creditor 8 000 –
Bank (8 000) –
344
The effects of changes in foreign exchange rates
The loan was approved on 1 January 20.2 and the money was deposited into the bank
account of Manufacturers Ltd on the same date.
An extract from the agreement entered into with the bank reads as follows:
Required
Journalise the above transactions (including cash transactions) for the three years ended
31 December 20.2, 20.3 and 20.4 so as to comply with the requirements of International
Financial Reporting Standards (IFRS). Journal narrations are not required. Ignore taxation.
Journals
20.2 20.3 20.4
Rand Rand Rand
Dr/(Cr) Dr/(Cr) Dr/(Cr)
345
The effects of changes in foreign exchange rates
Foreign exchange loss/(gain) (calc 1) (176 471) 466 248 223 777
Long-term loan (calc 1) 176 471 (466 248) (223 777)
Calculations
346
The effects of changes in foreign exchange rates
$ Rate Rand
A machine to the value of FC 1 000 was ordered on 1 January 20.1 in terms of a non-
cancellable order when the spot rate was R1 = FC 0,51.
Forward cover was immediately taken out at R1 = FC 0,50 for six months in view of the
expected delivery of the machine on 30 September 20.1. It was the intention of the entity to
roll the cover forward to 30 September 20.1.
The first forward exchange contract expired on 30 June 20.1 when the spot rate was
R1 = FC 0,41. A new contract was concluded at R1 = FC 0,40 for a further seven months.
The company's reporting date is 30 September. At this date the spot rate is R1 = FC 0,33
and forward exchange contracts with maturity dates on 31 January 20.2 are trading at
R1 = FC 0,38. The creditor is paid on 31 January 20.2 when the spot rate is R1 = FC 0,32.
The company has chosen to apply hedge accounting. All the hedging criteria per
IFRS 9.6.4.1 have been met. The company accounts for a hedge of foreign exchange risk of
a firm commitment as a cash flow hedge.
On 1 January 20.1 the company designated the FEC as the hedging instrument and any firm
commitment or foreign creditor that arises as a result of the transaction as the hedged item.
The renewal of the forward cover is part of, and consistent with, the company’s documented
risk management objectives.
Required
a. Provide the applicable journal entries for the year ended 30 September 20.1, if delivery
of the machine took place on 30 September 20.1 so as to comply with the requirements
of International Financial Reporting Standards (IFRS). Your answer should deal
specifically with hedging in terms of IFRS 9.
b. Also provide the journal entries for the settlement date of 31 January 20.2.
c. Present the movement in the cash flow hedge reserve for 20.1 in the statement of profit
or loss and other comprehensive income.
Ignore taxation.
347
The effects of changes in foreign exchange rates
Rand
Dr/(Cr)
a. 1 January 20.1
No transaction accounted for; FEC with RNil fair
value is taken out at no cost.
30 June 20.1
Bank 439
Cash flow hedge reserve (OCI) (1)(2) (439)
Gain on expiry of FEC, deferred as this is a cash flow hedge
30 September 20.1
Forward exchange contract (asset) (3) 132
Cash flow hedge reserve (OCI) (3)(4) (132)
Recognise forward exchange contract asset at year end. Exchange
gain is deferred as this is a cash flow hedge up to this point
b. 31 January 20.2
Foreign exchange loss (P or L) 95
Creditor (7) (95)
Restate creditor to spot rate at settlement date
Creditor 3 125
Forward exchange contract (asset) (9) (625)
Bank (10) (2 500)
Settle creditor and derecognise derivative (FEC)
348
The effects of changes in foreign exchange rates
c. Disclosure
COMPANY NAME
EXTRACT FROM STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 30 SEPTEMBER 20.1
20.1
Rand
Note: the adjustment of the initial cost of the machine with the R571 cash flow hedge
reserve is not a reclassification adjustment and therefore does not flow through other
comprehensive income (see IFRS 9.6.5.11(d)(i)).
On 15 September 20.2, SA Ltd received inventory from Germany with an invoice value of
DM200 000. The irrevocable order was placed on 30 June 20.2 and the goods were shipped
FOB on 31 July 20.2. The entity elected not to apply hedge accounting. Applicable spot
exchange rates at 31 July 20.2 are as follows:
SA Ltd decided to hedge only the rand/dollar leg of the transaction on 31 August 20.2 at a
cover premium of $0,02. Applicable spot exchange rates at 31 August 20.2 are as follows:
Settlement took place on 28 February 20.3 when the relevant spot exchange rates were as
follows:
Assume that all the inventories had been sold by the reporting date, 31 March 20.3.
Required
Provide the applicable journal entries, including cash transactions, from 30 June 20.2 to
31 March 20.3 so as to comply with the requirements of International Financial Reporting
Standards (IFRS). Journal narrations are not required. Ignore taxation.
349
The effects of changes in foreign exchange rates
Rand
Dr/(Cr)
31 July 20.2
Inventory (1) 133 976
Creditor (133 976)
28 February 20.3
Foreign exchange loss (2) 50 050
Creditor (50 050)
31 March 20.3
Cost of sales 133 976
Inventory (133 976)
Calculation
Rand
* Since the R/$ exchange rate is quoted indirectly, the cover premium has to be
deducted from the spot rate to arrive at the forward rate to reflect the expected
weakening of the rand.
Martin Ltd obtained a short-term loan amounting to £500 000 on 1 September 20.4. The
amount is repayable on 30 June 20.5 and the company immediately took out forward cover
at a discount of R0,04 for the full term. The spot rate on 1 September 20.4 was £1 = R4,50
and consequently the forward rate contracted at was £1 = R4,46.
The continued improvement of the rand against the pound sterling resulted in the company
deciding that forward cover was unnecessary. In view of this, the company took out an equal
but opposite forward cover contract on 1 January 20.5 for a term of six months. This was
acquired at a discount of R0,07. The spot rate on that date amounted to £1 = R4,38 and
consequently the forward rate was £1 = R4,31.
350
The effects of changes in foreign exchange rates
On 31 March 20.5, the financial reporting date, the spot rate amounted to £1 = R4,25 and
forward exchange contracts maturing on 30 June 20.5 traded at £1 = R4,20. Ignore the effect
of the time value of money on the short-term loan and FECs. The loan was granted on
market related terms. The company chooses not to apply hedge accounting.
Required
a. Provide the applicable journal entries (including cash transactions) for the financial
year ended 31 March 20.5 so as to comply with the requirements of International
Financial Reporting Standards (IFRS). Ignore journal narrations.
b. Briefly list the presentation and disclosure requirements of International Financial
Reporting Standards (IFRS) which result from the above transactions, without
preparing the actual notes. Ignore accounting policies.
Ignore taxation.
a. Journal entries
Rand
Dr/(Cr)
1 September 20.4
Bank 2 250 000
Short-term loan (1) (2 250 000)
31 March 20.5
Short-term loan (2) 125 000
Foreign exchange gain (P or L) (125 000)
b. Disclosure requirements
• The short-term loan is included on the face of the statement of financial position
under current liabilities, in the line item ‘financial liabilities’.
• The first FEC (R130 000) is included on the face of the statement of financial
position under current liabilities, in the line item ‘financial liabilities’.
351
The effects of changes in foreign exchange rates
• The second FEC (R55 000) is included on the face of the statement of financial
position under current assets, in the line item ‘financial assets’.
• The net foreign exchange gains of R50 000 (R125 000 – R130 000 + R55 000) are
included on the face of the statement of profit or loss and other comprehensive
income in the ‘other income’ line item.
• The note to financial liabilities will show the short-term loan of R2 125 000
(R2 250 000 – R125 000) as part of ‘financial liabilities measured at amortised
cost’ (IFRS 7.8(g)).
• The entity will include the short-term loan in the appropriate time band in the
analysis of concentration of interest rate risk (IFFS 7.34(a); B8).
• The entity will include the short-term loan in the appropriate time band in the
analysis of concentration of liquidity risk (IFRS 7.34(a), B8, 39(a), B11).
• The forward cover contract liability of R130 000 will be shown as part of
‘financial liabilities at fair value through profit or loss – held for trading’ in the
note to the financial liability line item (IFRS 7.8(e)).
• The entity will include the forward exchange contract (liability) in the appropriate
time band in the analysis of concentration of liquidity risk (IFRS 7.34(a), B8,
39(a), B11).
• The note to financial assets will show the forward exchange contract (asset) of
R55 000 as part of ‘financial assets at fair value through profit or loss –
mandatorily measured as such’ (IFRS 7.8(a)).
• The profit before tax note will show separately net gains on financial liabilities
measured at amortised cost of R125 000, net losses on financial liabilities at fair
value through profit or loss (held for trading) of R130 000 and net gains on
financial assets at fair value through profit or loss (mandatorily measured as such)
of R55 000 (IFRS 7.20(a)).
Disvest Ltd is a South African company with the South African rand as its functional and
presentation currency. On 1 October 20.4, Disvest Ltd formed a company, Soektog Inc, in
the USA and took up all the issued shares. Soektog Inc has the US dollar as its functional
currency. The following list of balances was extracted from the records of the foreign
company at 30 September 20.5:
Dr Cr
$ $
352
The effects of changes in foreign exchange rates
Dr Cr
$ $
Depreciation 15 400
Dividends (paid 30 June 20.5) 40 000
Property, plant and equipment at cost (1 October 20.4) 84 000
Accumulated depreciation – property, plant and equipment 15 400
Long-term loan (obtained 31 March 20.5) 75 000
Interest on long-term loan (incurred evenly) 4 500
Purchases 380 000
Sales 500 000
Share capital 100 000
Closing inventory at cost 60 000 60 000
798 400 798 400
Additional information
1. Soektog Inc's business is not seasonal and activities commenced immediately after
incorporation.
2. Closing inventory was purchased evenly during the last three months of the financial
year.
The rand weakened gradually/evenly against the dollar during the year.
5. Ignore taxation.
Required
Your solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
353
The effects of changes in foreign exchange rates
a. Translation
Rate Rand
Dr/(Cr)
The exchange gain on translation should be taken to equity via other comprehensive
income (foreign currency translation reserve) and should not be accounted for through
profit or loss.
Bee-bee Ltd ordered a machine from the US for $40 000 on 1 February 20.3 in terms of a
non-cancellable order. The machine was shipped FOB on 1 May 20.3 (transaction date). It
arrived in South Africa on 15 June 20.3 and was available for use on 1 July 20.3.
The creditor is payable on 1 June 20.3. On 1 February 20.3 a four-month FEC was taken out
for the full amount payable.
Bee-bee Ltd has a 31 March year end. Machinery is written off on a straight-line basis over
three years.
354
The effects of changes in foreign exchange rates
The entity applies cash flow hedge accounting to the foreign currency risk of firm
commitments and fair value hedge accounting to recognised liabilities.
Required
Prepare the journal entries for Bee-bee Ltd for the years ended 31 March 20.3 and
31 March 20.4 to account for the above-mentioned information.
Ignore taxation.
1 June 20.3
Foreign exchange difference (P or L) (7) 2 000
Creditor (2 000)
31 March 20.4
Depreciation (10) 70 100
Accumulated depreciation (70 100)
355
The effects of changes in foreign exchange rates
On 1 November 20.1, XYZ Ltd acquired a machine for $100 000 for manufacturing
purposes. The machine was put into use immediately. Payment of the purchase price will
take place on 15 October 20.2. Depreciation is written off at 20% per annum according to
the straight line method. Wear and tear is allowed at 10% per annum on the reducing
balance method and is weighted on a time proportional basis. The tax rate is 29%. The
company's reporting date is 31 December.
Required
Show the journal entries for 20.1 and 20.2 so as to comply with the requirements of
International Financial Reporting Standards (IFRS). Journal narrations are not required.
Ignore current tax.
Betha Ltd, a South African company, concluded the following foreign exchange
transactions:
• On 30 June 20.0, a loan of $10 000 was incurred. The capital is repayable on
31 December 20.1. The loan carries interest at a market-related rate of 10% per annum.
Interest is payable six-monthly in arrears.
• An FEC for $10 000 was concluded on the same day and is renewable on a six-monthly
basis. The FEC has been designated as a hedging instrument for changes in the fair
value of the capital of the loan. You may assume that all the hedging criteria per
IFRS 9.6.4.1 have been met.
Additional information
2. The applicable exchange rates are as follows (changes in exchange rates occurred
evenly during the periods):
356
The effects of changes in foreign exchange rates
Required
Prepare the journal entries, including closing entries, for the years 20.0 and 20.1 so as to
comply with the requirements of International Financial Reporting Standards (IFRS). Ignore
tax and journal narrations.
Valuta Ltd purchased certain manufacturing machinery during the year ended
31 December 20.8 for $500 000 from the US. The purchase was financed via a short-term
loan for the same amount from the transaction date. Freight and clearing charges in respect
of this transaction amounted to R75 000 and non-refundable import taxes to R100 000.
The foreign loan carries interest at 15% per annum (market related) and both the full
principal debt and the accrued interest are repayable on 30 June 20.9.
Forward cover was initially not obtained. On 1 September 20.8, the company decided, based
on advice given by its bankers, to acquire forward cover in respect of the $500 000 debt in
order to hedge itself against changes in the fair value of the principal component of the debt.
A forward rate of $1 = R2,30 was quoted. Depreciation on machinery is written off at 15%
per annum on cost. For tax purposes a wear-and-tear allowance of 20% per annum, which is
not calculated pro rata for the year, is applicable.
The order for the machinery was placed on 15 January 20.8 and the machinery was sent
FOB from New York on 1 February 20.8. It was cleared in Cape Town on 2 May 20.8 and
available for use by Valuta Ltd on 1 June 20.8. The financial statements for the year ended
31 December 20.8 were finalised on 14 March 20.9.
$1 = R
357
The effects of changes in foreign exchange rates
On 31 December 20.8, the forward rate on similar forward exchange contracts as the one
concluded on 1 September 20.8 was $1 = R2,32. The tax rate is 29%.
Required
State at what amounts the following items will be shown in the financial statements of
Valuta Ltd for the year ended 31 December 20.8:
a. Machinery and depreciation
b. Current liabilities related to the purchase transaction
c. Asset/liability related to the forward exchange contract
d. Foreign exchange differences
e. Deferred tax balance
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS). Ignore current tax.
Alfa Ltd imported inventory to the value of $10 000 from the US during the year ended
28 February 20.2. The company adds 40% to the cost price of inventory to determine the
selling price. On 28 February 20.2, 65% of the imported inventory was still on hand, but by
28 February 20.3 all imported inventory had been sold. Goods were shipped FOB on
1 October 20.1 (transaction date).
$1 = R
The company accounts for hedges of the changes in fair value of recognised liabilities as a
result of changes in foreign exchange rates as fair value hedges. You may assume that the
hedging criteria per IFRS 9.6.4.1 have been complied with. Ignore all aspects of taxation.
Required
a. Prepare the journal entries for the two years until 28 February 20.3 if the transaction
had not been covered. The foreign creditor was paid on 1 May 20.2.
b. Prepare the journal entries for the two years until 28 February 20.3 if a forward
exchange contract was taken out on 1 October 20.1 to cover the transaction at a
forward rate of $1 = R3,25, and it was renewed on 31 March 20.2 at a forward rate of
$1 = 3,30. On 28 February 20.2, the forward rate on similar FECs was $1 = R3,27.
The creditor was paid on the expiry date of the second FEC, namely 1 May 20.2.
358
The effects of changes in foreign exchange rates
c. Provide the journal entries for the year ended 28 February 20.2 if an FEC was taken
out on 30 April 20.1 in anticipation of the highly probable purchase transaction on
1 October 20.1 at a forward rate of $1 = R3,00. On 1 October 20.1, the forward rate on
similar FECs was $1 = R3,10. The foreign creditor was paid on 30 October 20.1, the
expiry date of the FEC.
d. Provide the journal entries for the year ended 28 February 20.2 if an FEC was already
taken out on 1 March 20.1 in anticipation of the purchase transaction at a forward rate
of $1 = R3,20. The FEC was renewed on 31 August 20.1 at $1 = R3,12. The renewal
of the forward cover is part of, and consistent with, the company’s documented risk
management objectives. On 1 October 20.1 the FEC rate on similar FECs is $1 =
R3,10. The foreign creditor was paid on 30 October 20.1, the expiry date of the FEC.
e. Provide the journal entries for the year to 28 February 20.2 if an FEC which expires on
31 March 20.2 (the day on which the foreign creditor must be paid) was taken out on
1 October 20.1 at a forward rate of $1 = R3,25. However, on 30 November 20.1 a
decision was taken to immediately settle the creditor, and an equal and opposite FEC
which also expires on 31 March 20.2 was taken out at $1 = R2,75. On 28 February
20.2 the forward rate on similar FECs, in respect of both the original FEC and the
equal and opposite FEC, is $1 = R3,27.
Journal narrations are not required and the solution must comply with the requirements of
International Financial Reporting Standards (IFRS).
On 1 January 20.1, Geelbek Ltd acquired an 80% share in Panvis Inc, an American
company. Panvis Inc manufactures and markets corn alkaline throughout the US. Panvis Inc
operates independently from Geelbek Ltd except that Geelbek Ltd now and then imports
corn alkaline from Panvis Inc to sell in South Africa.
$ $
Dr Cr
Additional information
1. All income and expense items were incurred evenly during the period 1 January 20.1
to 30 June 20.1.
359
The effects of changes in foreign exchange rates
2. Panvis Inc purchased all its property, plant and equipment on 1 January 20.0 on which
date the long-term loan was granted.
The dividend income was earned from other investments and not from the investment
in Panvis Inc.
5. It is the policy of the group to measure any non-controlling interest at acquisition date
at the non-controlling interest’s proportionate share of the acquiree’s identifiable net
assets.
Required
Prepare the consolidated financial statements of the Geelbek Ltd Group for the year ended
30 June 20.1 so as to comply with the requirements of International Financial Reporting
Standards (IFRS). Ignore all aspects of taxation. Notes and comparative amounts are not
required.
Ace Ltd bought inventory of FC50 000 on credit on 1 January 20.0 when the spot rate was
FC1 = R2,80. The creditor will be paid on 30 June 20.0. An FEC maturing on 30 June 20.0
is obtained on 1 January 20.0 at a forward exchange rate of FC1 = R3,00. The spot rate at
reporting date, 28 February 20.0, is FC1 = R2,82 and the forward rate for delivery four
months after that date is FC1 = R3,02.
The decision to hedge the import was unanimously taken at a meeting of the board of
directors, and the resolution was minuted as such.
360
The effects of changes in foreign exchange rates
Required
a. Discuss whether Ace Ltd is allowed to apply hedge accounting in terms of IFRS 9.
b. At 30 June 20.0 the chief executive officer of Ace Ltd asked you for a quantitative
indication of how effective the hedge actually was. Calculate hedge effectiveness if
the spot rate at 30 June 20.0 was:
• FC 1 = R3,03
• FC 1 = R3,90
361
The effects of changes in foreign exchange rates
362
IAS 23
Borrowing costs
__________________________________________________________________
QUESTIONS
363
Borrowing costs
You have recently been appointed as the accountant of Asterix Ltd. The company is
currently in the process of constructing a new plant for the production of a new product
known as Jos. The board of directors became aware of IAS 23 and approached you for
advice.
1. The board of directors appointed a committee to research the project. The committee
estimated that it would take twenty months to complete the plant.
3. Expenditure associated with the project has already been capitalised to the cost of the
plant.
Required
The borrowing costs that are directly attributable to the construction of the plant
should be capitalised as part of the cost of the plant (IAS 23.8). This refers to those
borrowing costs that would have been avoided if the expenditure on the qualifying
asset had not been incurred (IAS 23.10).
364
Borrowing costs
Where funds are borrowed generally, as is the case with the overdraft facility, the
borrowing costs capitalised are calculated by applying the capitalisation rate (24% in
this case) to the expenditures on that asset (IAS 23.14).
The amount of borrowing costs capitalised during a period must not exceed the amount
of borrowing costs actually incurred during that period (IAS 23.14).
b. Comment – Debentures
Where funds are borrowed specifically for the purpose of obtaining a qualifying asset,
the actual borrowing costs incurred during the period less any benefit (interest income)
on the temporary investment of those borrowings, should be capitalised (IAS 23.12).
In terms of IAS 23.06(a), any interest calculated in accordance with the effective
interest method of IFRS 9 can be capitalised as borrowing costs. Effective interest in
terms of IFRS 9 includes all fees, transaction costs, premiums and discounts. Therefore
the effective interest calculated on the debentures (taking into account the payment
based on the coupon rate as well as the redemption of the debentures at a premium of
5%), qualifies for capitalisation.
Part 1
Term 1 2 3 Total
Months 4 4 4 12
Rand Rand Rand Rand
Expenditure incurred evenly
during the period 100 000 400 000 1 400 000 1 900 000
Term 1 2 3 Total
Months 4 4 4 12
Rand Rand Rand Rand
Specific loans incurred
R800 000 @ 24% 64 000 64 000 – 128 000
R1 200 000 @ 16% – – 64 000 64 000
Assumptions
1. The loans were incurred specifically for the construction of the asset. Any shortages
were financed by means of a general bank overdraft facility.
365
Borrowing costs
2. The entity had no other general financing available, other than the bank overdraft
facility.
3. The unutilised portion of the loans was invested at 18% per annum and the interest was
capitalised to the investment at the end of each term. Interest income for the last term
was transferred to the current bank account of the entity.
4. Interest on the loans was paid from the available investment at the end of term 1 and 2
and thereafter from other internal funds.
5. Where there was a change in the specific loans, the new loan was incurred at the
beginning of the period and the old loan was redeemed from the available capital of the
new loan. The bank overdraft facility was not used to redeem any of the specific loans.
Required
Part 2
Term 1 2 3 Total
Months 4 4 4 12
Rand Rand Rand Rand
Expenditure incurred evenly
during the period 100 000 400 000 1 400 000 1 900 000
Term 1 2 3 Total
Months 4 4 4 12
Rand Rand Rand Rand
General loans incurred
R800 000 @ 24% 64 000 64 000 – 128 000
R1 200 000 @ 16% – – 64 000 64 000
64 000 64 000 64 000 192 000
Assumptions
1. The entity arranged a bank overdraft facility of R1 200 000 specifically for the
construction of the asset. The interest rate on the bank overdraft was 26% per annum
for the first four months and 18% per annum thereafter. Any shortages were financed
by means of the general pool of funds.
2. The entity had no other general financing available, other than the general loans.
366
Borrowing costs
3. Interest on the bank overdraft was paid from the available overdraft facility at the end
of term 1 and 2 and thereafter from other internal funds. The bank overdraft facility
was not redeemed during the 12-month period.
4. Where there was a change in the general loans, the new loan was incurred at the
beginning of the period and the old loan was redeemed from the available capital of the
new loan.
Required
Part 3
Term 1 2 3 Total
Months 4 4 4 12
Rand Rand Rand Rand
Expenditure incurred evenly
during the period 100 000 400 000 1 400 000 1 900 000
Term 1 2 3 Total
Months 4 4 4 12
Rand Rand Rand Rand
General loans incurred
R800 000 @ 24% 64 000 64 000 – 128 000
R1 200 000 @ 16% – – 64 000 64 000
Assumptions
1. None of the above financing arrangements are specific to the construction of the
qualifying asset.
2. Where there was a change in the loans, the new loan was incurred at the beginning of
the period and the old loan was redeemed from the available capital of the new loan.
Required
367
Borrowing costs
Part 1
Balance of investment
Rand
Term 1
Opening balance (loan incurred) 800 000
Expenditure incurred (100 000)
Balance 700 000
Interest paid (given) (64 000)
Interest received (1) 45 000
Closing balance 681 000
Term 2
Opening balance 681 000
Expenditure incurred (400 000)
Balance 281 000
Interest paid (given) (64 000)
Interest received (2) 28 860
Closing balance 245 860
Term 3
Opening balance 245 860
New loan incurred 1 200 000
Old loan redeemed (800 000)
Balance 645 860
Expenditure incurred (3) (645 860)
Balance –
Interest received (4) 8 719
Interest received transferred to current bank account (8 719)
Closing balance –
368
Borrowing costs
Part 2
369
Borrowing costs
Part 3
Calculation of capitalisation rate
Term 1: 220 000/(800 000 + 1 800 000) × 12/4 × 100 = 25,38%
Term 2: 136 000/(800 000 + 1 200 000) × 12/4 × 100 = 20,4%
Term 3: 136 000/(1 200 000 + 1 200 000) × 12/4 × 100 = 17%
370
Borrowing costs
Naas Haas Ltd ordered a Quickspeed machine from Madonna Inc, an American company,
on 18 February 20.8.
All of the above conditions were met and the Quickspeed was put into production on
31 July 20.8, immediately after the installation thereof. The installation of the machine is a
relatively simple process.
No foreign exchange contract was taken out. The exchange rate is not expected to improve
in the foreseeable future.
The directors included the machinery at R13 700 000 in the financial statements for the year
ended 31 December 20.8, consisting of the following:
Rand
371
Borrowing costs
Required
Discuss, with reference to the requirements of IAS 23, the accounting treatment applied by
the directors.
Exchange differences arising from foreign currency borrowings, to the extent that they are
regarded as an adjustment to interest costs, may be included in borrowing costs (IAS 23.6).
It is practice to limit the total amount that can be capitalised (interest and exchange
differences combined) to the amount of borrowing costs that would have been incurred on
an equivalent loan in the functional currency (rand in this case).
Borrowing costs can be capitalised as part of the costs of an asset should they be directly
attributable to the acquisition, construction or production of a qualifying asset (IAS 23.8).
To capitalise the foreign exchange differences against the cost of the machine, the machine
must comply with the definition of a qualifying asset, namely an asset that necessarily takes
a substantial period of time to get ready for its intended use (IAS 23.5). The period of four
months from the date of purchase (20 March 20.8) to the date on which the machine was put
into production (31 July 20.8) is probably not a substantial period of time. In addition, the
machine, being relatively simple to install, was ready for its intended use before shipping
and therefore does not qualify for capitalisation purposes.
Talita Ltd started constructing a new storeroom on 1 January 20.5. The following relevant
information is provided:
Expenditure in respect of the project was incurred evenly during each of the following
months:
Rand
On 30 April 20.5, active development of the storeroom ceased. Construction only started
again on 1 December 20.5.
From 1 January 20.5 up to 31 March 20.5, the project was primarily financed with a bank
overdraft facility which was specifically obtained for the project. Interest on the bank
overdraft facility at 15% per annum is payable monthly in arrears, and was paid each month
from other internal funds.
372
Borrowing costs
On 1 April 20.5, the full balance of the bank overdraft facility was repaid from the general
pool of funds of the company. From that date onwards, the project was also financed by
means of the general pool of funds.
During the year ended 31 December 20.5, the company’s general pool of funds consisted of
general interest-bearing debts of R8 000 000 at a weighted average rate of 17% per annum.
The total interest expense of Talita Ltd amounted to R1 374 567 for the year ended
31 December 20.5.
Talita Ltd capitalises borrowing costs on a monthly basis for accounting purposes.
Required
Disclose the following notes to the financial statements of Talita Ltd for the year ended
31 December 20.5, in accordance with International Financial Reporting Standards (IFRS):
• Property, plant and equipment
• Finance costs
Accounting policy notes and comparative amounts are not required. Round all calculations
to the nearest rand.
Disclosure
TALITA LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.5
4. Finance costs
Rand
The capitalisation rate used for the capitalisation of borrowing costs was 15% per
annum for specific borrowings and 17% per annum for general borrowings.
373
Borrowing costs
Calculations
1 January 20.5 –
Expenditure incurred 80 000
1 February 20.5 80 000
Expenditure incurred 30 000
1 March 20.5 110 000
Expenditure incurred 60 000
1 April 20.5 170 000
Note: Monthly interest paid on the bank overdraft is not included in balance of the
bank overdraft since it was paid from other internal funds (therefore not
capitalised to the balance of the bank overdraft)
374
Borrowing costs
Carrying Interest
amount
Rand Rand
226 201
December 20.5
Expenditure incurred 200 000
426 201
Interest on general pool of funds (calc 2) 4 572 4 572
Carrying amount 430 773
Borrowing costs capitalised 10 773
Piggy Ltd constructed an office block during the year ended 28 February 20.6. The carrying
amount of the property is as follows:
Rand
The property is classified as owner occupied and is accounted for in accordance with the
cost model. On 28 February 20.6 it was determined that the property had an open market
value of R8 500 000. It is expected that this value will not increase in the near future.
Required
Discuss, with reasons, how the abovementioned valuation will influence the measurement of
the office block in the financial statements of Piggy Ltd. Your answer must comply with
International Financial Reporting Standards (IFRS).
Capitalisation of borrowing costs may result in the carrying amount of an asset, inclusive of
capitalised borrowing costs, exceeding its recoverable amount (IAS 23.16 and IAS 36).
Where the market value of an asset has declined significantly during the period, this may
indicate that the asset is impaired (IAS 36.9).
IAS 23.16 requires that, where the carrying amount of a qualifying asset exceeds its
recoverable amount, the carrying amount of the qualifying asset should be written down to
its recoverable amount in accordance with the standard on impairment of assets (IAS 36).
Where the carrying amount is reduced to the recoverable amount, the impairment loss
should be recognised in profit or loss, since the office block is accounted for in accordance
with the cost model (IAS 36.59).
If construction continues in the following year, the capitalisation of borrowing costs should
also continue. An appropriate write-down should again be made against the carrying amount
of the asset at the end of the relevant financial year (IAS 23.16 and IAS 36).
375
Borrowing costs
JR Ltd, a company that has recently been incorporated, commenced with the construction of
a new office building, known as the Dallas project, during the 20.5 financial year. The
building is intended to be used as the administrative head office of the company after which
normal business operations will commence.
• Land was purchased on 1 January 20.2 for R500 000. A 100% loan, at an interest rate
of 12% per annum, was obtained on the same day from Pleasure Bank to finance this
purchase. Interest is payable annually in advance and is paid from surplus cash funds.
The loan is repayable in five equal annual instalments from 1 January 20.6.
• The construction of the office block was undertaken internally and commenced on
1 February 20.5.
• Klippe Kou Bank granted a mortgage loan of R1 500 000 for the project, subject to the
following conditions:
- The full loan must be taken up on 1 February 20.5.
- The loan is interest bearing at 20% per annum, payable annually in advance, from
surplus cash funds.
- No capital is repayable within the first three years.
• The cost and completion dates of the office building are as follows:
• Phases 2 and 3 commence only on completion of phases 1 and 2 respectively. The asset
can only be put into use on completion of phase 3.
• Expenditure within each phase is incurred evenly and paid for immediately.
• Any expenditure in respect of the project that exceeds external financing, is financed
from surplus cash funds of the company.
The office block was available for use as intended by management on 1 April 20.6 and was
also taken into use on that date. Office buildings are depreciated over 10 years according to
the straight-line method. Assume that there is no building allowance for tax purposes in
respect of the office building, as it was erected before new tax legislation came into effect.
Assume that JR Ltd does not carry on a ‘trade’ for tax purposes before the office block is
taken into use, and that pre-production interest is therefore deferred in accordance with
section 11A and only allowed as a tax deduction when the office block is taken into use.
376
Borrowing costs
Assume a tax rate of 30% and that there will be sufficient future taxable profit against which
any deductible temporary differences can be utilised. On 1 January 20.5, the balance on the
deferred tax account was RNil.
Assume a profit before tax of R1 000 000 for both years before taking the abovementioned
information into account.
Required
a. Calculate the cumulative borrowing costs that must be capitalised in respect of the land
and buildings for the years ended 31 December 20.5 and 31 December 20.6, in
accordance with International Financial Reporting Standards (IFRS).
b. Calculate the carrying amount of the land and buildings (Dallas project) to be included
in the financial statements of JR Ltd for the years ended 31 December 20.5 and
31 December 20.6, in accordance with International Financial Reporting Standards
(IFRS).
c. Disclose the following notes to the financial statements of JR Ltd for the year ended
31 December 20.6, in accordance with International Financial Reporting Standards
(IFRS):
• Finance costs
• Income tax expense
c. Disclosure
JR LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.6
The capitalisation rate used for the capitalisation of borrowing costs is as follows:
377
Borrowing costs
Calculations
1 Jan 20.6 – 31 Mar 20.6: 400 000 (1) × 12% × 3/12 12 000
1 Apr 20.6 – 31 Dec 20.6: 400 000 × 12% × 9/12 36 000
48 000
(1) 500 000 – (500 000/5) = 400 000
378
Borrowing costs
1 Feb 20.5 – 31 Dec 20.5: 1 500 000 × 20% × 11/12 275 000
Note: Borrowing costs on the land can only be capitalised from the commencement
of construction activities (1 Feb 20.5) (IAS 23.19).
1 Feb 20.5 – 31 Dec 20.5 (calc 2) 275 000 98 250 176 750
1 Jan 20.6 – 31 Mar 20.6 (calc 2) 75 000 750 74 250
350 000 251 000
379
Borrowing costs
* Note: The net capitalised interest (paid less received) is deducted from the total
interest, which implies that the investment income is presented in the
statement of profit or loss and other comprehensive income, regardless of
the fact that this reduces the amount of capitalised borrowing costs (carrying
amount of the asset). According to the authors, IAS 23 only allows an entity
to capitalise ‘borrowing costs’, not ‘investment income’. Investment income
does not form part of the definition of ‘borrowing costs’ in IAS 23.
Therefore, the investment income is only taken into account in the
calculation of the amount of borrowing costs that must be capitalised, but
only the borrowing costs (finance costs) are adjusted, not also the
investment income, because IAS 23 neither prescribes nor allows the
adjustment of investment income. The authors do however recognise that
other possible valid interpretations of the principles in IAS 23 may exist.
(1) 123 750 (calc 4.2) + 18 825 (calc 4.2) = 142 575
380
Borrowing costs
* Must be added back for tax purposes in 20.5 since it will only be allowed as
a deduction when the asset is taken into use, therefore in 20.6.
(4) 350 000 (calc 3.2) + 60 000 + 12 000 (calc 1) = 422 000
7. Deferred tax
20.6
Land (calc 4.1) 567 000 – 567 000 20 100
- Cost 500 000 – 500 000 Exempt (1)
- Borrowing costs 67 000 – 67 000 20 100
Office block (calc 4.2) 1 758 425 – 1 758 425 69 653
- Cost less depreciation 1 526 250 – 1 526 250 Exempt (1)
- Borrowing costs
less depreciation 232 175 – 232 175 69 653
Deferred tax 31 Dec 20.6 89 753
381
Borrowing costs
Explanatory notes
The historical cost portion of the land and the office buildings are subject to the stipulations
of IAS 12.15(b)(ii) – it results from the initial recognition of an asset or liability in a
transaction that, at the time of the transaction, affects neither accounting profit nor taxable
profit.
Under section 11A the pre-production interest incurred in respect of the land and buildings
is deferred for tax purposes until the commencement of a trade. Once the land and buildings
are brought into use, any interest incurred thereafter will however be deductible for tax
purposes under section 24J as it is incurred.
Therefore, temporary differences arise as a result of the application of section 11A. The
capitalised borrowing costs will, for accounting purposes, be recognised as depreciation in
profit or loss over the useful life of the asset, whilst the non-capitalised borrowing costs
will, for accounting purposes, immediately be recognised as an expense. For tax purposes,
the pre-production interest is deductible in total when a trade is commenced (in this case
also when the asset is taken into use).
The tax base of an asset is the amount that will be deductible for tax purposes in future
(IAS 12.17). On 31 December 20.5, all the pre-production interest is still deductible for tax
purposes in future since the asset has not been taken into use. The total pre-production
interest will however be claimed as a deduction for tax purposes during 20.6, and therefore
at the end of 20.6, no pre-production interest will be deductible for tax purposes in future.
Tronlek Ltd is a company in the electrical engineering industry. At the beginning of the 20.2
financial year, the directors decided to erect a specialised plant. The cost of the plant was
estimated at R3 000 000 and it is expected that the construction will take place over
approximately two years.
The project commenced on 1 April 20.2 and expenditure were initially financed by means of
a specific bank overdraft facility on which interest is capitalised monthly in arrears. The
interest rate on the bank overdraft facility was as follows:
382
Borrowing costs
On 1 July 20.2, the company succeeded in raising a long-term loan of R1 000 000
specifically for the project, and this amount was deposited into the company's cheque
account (overdraft facility). Interest on the long-term loan at 14% per annum is payable
quarterly in arrears and is debited against the cheque account (overdraft facility). No interest
was earned on surplus funds.
Expenditure in respect of the project was incurred evenly per month as follows:
Rand
1 April 20.2 to 30 June 20.2 (total for the period) 270 000
1 July 20.2 to 30 September 20.2 (total for the period) 540 000
1 October 20.2 to 31 December 20.2 (total for the period) 750 000
Assume that the specific loan was exhausted on 15 October 20.2 and that the remaining
expenditure was then again financed from the overdraft facility.
Section 11 (bA) of the Income Tax Act was applicable to this asset for the year ended
31 December 20.2, therefore interest incurred before the asset is taken into use (‘pre-
production interest’) is only allowed as a tax deduction when the asset is taken into use.
Assume a tax rate of 30% and an opening balance on the deferred tax account of RNil on
1 January 20.2.
Required
a. Calculate the borrowing costs to be capitalised for the year ended 31 December 20.2, in
accordance with International Financial Reporting Standards (IFRS). Round all
calculations to the nearest rand.
b. Calculate the balance on the deferred tax account on 31 December 20.2, in accordance
with International Financial Reporting Standards (IFRS).
The following sequence of events relating to Atlantic Ltd took place during the year ended
31 December 20.5:
15 January
Atlantic Ltd purchased a piece of land on the West Coast for R2 million, using a mortgage
bond that carries interest at 18% per annum. The directors have no formal plans relating to
the use of this land.
28 February
After extensive market research, the directors decided to build luxury townhouses on the
property. They immediately approached architects and town planners.
30 April
Building commenced on this date and the builders worked hard to finish the buildings in
time for the summer season.
31 October
All major buildings and townhouses were completed and ready for occupation. Only 25 of
the 100 townhouses were sold.
383
Borrowing costs
15 December
A large company bought 50 of the townhouses for their staff.
31 December
The remaining 25 townhouses are unsold but the directors are confident that they will be
sold in the new financial year.
Additional information
1. Building costs of R4 million were incurred evenly over the construction period
(30 April to 31 October).
2. Borrowing costs of R400 000 were incurred during 20.5, at an average borrowing rate
of 18%.
Required
a. Briefly discuss the relevant dates regarding the commencement and cessation of the
capitalisation of borrowing costs, in accordance with International Financial
Reporting Standards (IFRS).
b. Calculate the amount of borrowing costs to be capitalised for the year ended
31 December 20.5, in accordance with International Financial Reporting Standards
(IFRS).
c. The directors only want to capitalise the borrowing costs incurred on the building and
not the borrowing costs incurred in respect of the land as they are not certain what the
intended use of the property is. Advise the directors in accordance with International
Financial Reporting Standards (IFRS) of the acceptability, or not, of the above
treatment.
Dam Ltd is involved in the construction of dams. Borrowing costs are capitalised quarterly
for accounting purposes.
384
Borrowing costs
The interest rate on the bank overdraft changed from 17% to 19% on 1 April 20.4. None of
the available finance is considered to be specific to this project.
Required
Calculate the amount of borrowing costs that should be capitalised for the year ended
31 December 20.4, in accordance with International Financial Reporting Standards (IFRS).
Round all calculations to the nearest rand.
Chime Ltd is a wholly-owned subsidiary of Rhyme Ltd. Chime Ltd commenced with the
construction of a qualifying asset on 1 July 20.1 and on this date obtained a loan of
R1 500 000 at 15% interest per annum from Music Bank, specifically for constructing the
qualifying asset.
Rhyme Ltd finances capital expenditure with a general purpose loan of R2 000 000 from
Brass Bank at 14% per annum. Rhyme Ltd lends money to its subsidiaries for capital
expenditure in excess of original loans granted, at a rate of 16% per annum.
The average accumulated expenditure incurred on the qualifying asset for the six-month
period ended 31 December 20.1, amounted to R1 900 000. Construction activities are
expected to be completed during the 20.3 financial year.
Ignore taxation.
Required
a. Calculate and journalise the amount of borrowing costs to be capitalised by Chime Ltd
for the year ended 31 December 20.1, in accordance with International Financial
Reporting Standards (IFRS).
b. Calculate the amount of borrowing costs to be capitalised in the consolidated financial
statements of the Rhyme Ltd Group for the year ended 31 December 20.1 and prepare
the consolidation journal entries in respect of borrowing costs of the Rhyme Ltd
Group on 31 December 20.1. Your answer must comply with International Financial
Reporting Standards (IFRS).
385
Borrowing costs
386
IAS 24
Related party disclosures
__________________________________________________________________
QUESTIONS
387
Related party disclosures
Asort Ltd’s group structure includes various entities and management are concerned about
the implications that the disclosure requirements of the standard on related parties (IAS 24)
might have on their annual financial reporting.
Required
Explain how the disclosure requirements of IAS 24 address the qualitative characteristics of
faithful representation and comparability as set out in the Conceptual Framework for
Financial Reporting (2010).
Faithful representation
Transactions between related parties, however, are frequently entered into under conditions
which do not normally apply in the free market. These transactions would lead to an
impairment of the reliability of the financial statements in general. Good examples of related
party transactions are free management services delivered to a subsidiary by its parent and
an advertising campaign which benefits all the companies in a group, but the cost of which
is carried by only one of the companies in the group.
The scope of IAS 24 covers the identification and disclosure of these related party
transactions, and the application of this standard will therefore ultimately improve the
faithful representation and therefore also the usefulness of financial statements, because due
to this disclosure the users of financial statements then have the necessary information for
decision-making at their disposal.
Comparability
The scope of IAS 24 covers the identification and disclosure of these related party
transactions and the application of IAS 24 will therefore ultimately improve the
comparability, faithful representation and therefore also the usefulness of financial
statements.
Mr Smith holds 11% of the issued ordinary share capital and of the voting rights of
Devlop Ltd. His five-year-old son holds 40% of the voting rights as he has inherited shares
from his late uncle who was a shareholder of Devlop Ltd.
388
Related party disclosures
Required
a. Mr Smith’s son is a party that is related to Devlop Ltd, as his son owns an interest in
the entity that gives him significant influence over Devlop Ltd (par (a)(ii) of the
definition of a related party in IAS 24). Note that IAS 28.5 assumes that a party
exercises significant influence over an entity if it owns more than 20% of the voting
power of the entity.
A close family member of the five-year-old son would also be a related party of
Devlop Ltd in accordance with par (a) of the definition of a related party in IAS 24.
The question therefore is whether Mr Smith is a close family member of his five-year-
old son. IAS 24 defines a close member of family as those persons that may be
expected to influence or to be influenced by that person in their dealings with the
reporting entity.
One can reasonably assume that Mr Smith will influence his five-year-old son and as
such Mr Smith is also a related party of Devlop Ltd.
b. Mr Smith’s son will still be a related party of Devlop Ltd as he has significant
influence over Devlop Ltd. Mr Smith will only be a related party if he can influence
his son in his dealings with Devlop Ltd, or vice versa. Although his son is not a minor,
they will probably still influence one another. Mr Smith is therefore still a related party
of Devlop Ltd.
The following related party transaction occurred between Bubble Bath Ltd and its parent,
Soap Suds Ltd, for the financial year ended 31 December 20.9:
• Bubble Bath Ltd borrowed an amount of R275 000 as a medium-term loan from Clean
Bank on 31 December 20.9. The bank was not willing to grant the loan unless Soap
Suds Ltd signed as guarantor in respect of the loan. The loan is repayable in
24 monthly instalments, starting on 31 January 20.10. The market-related interest rate
on this loan is 20% per annum compounded monthly. Soap Suds Ltd does not make
use of debt in the financing of its operations.
Required
389
Related party disclosures
Saafaa Ltd is the reporting entity and manufactures soccer balls. Mr Zakumi is the managing
director of Saafaa Ltd and he controls Vuvuzela Ltd. Mr Zakumi is married to Mrs Zakumi.
Mr Zakumi is also a director of Rugby Ltd.
Saafaa Ltd is a subsidiary of Fiifaa Ltd. Fiifaa Ltd also controls Itali Ltd through its 75%
interest in the ordinary shares of Itali Ltd.
Saafaa Ltd owns 90% of the ordinary shares of Jerseys Ltd, a company that manufactures
soccer jerseys. Saafaa Ltd also has significant influence over Baggs Ltd, a company that
manufactures sports bags.
All the employees of Saafaa Ltd are members of the Bafaan Pension Fund and members of
the Soccas Trade Union.
Required
Indicate which of the parties are related to Saafaa Ltd and which are not.
390
Related party disclosures
Mr White is the senior manager in charge of the purchasing department of Red Ltd, a
company that makes significant purchases. Mr White arranges the purchase of a material
amount of inventory from Blue Ltd, a company which he controls.
Required
Discuss whether Mr White and Blue Ltd are related parties of Red Ltd.
Approximately 90% of the employees of a gold-mining company, Black Hole Ltd, are
members of the industry trade union, MUNSA. During the past financial year MUNSA,
under the leadership of Mr PM Mokgaba, was able to negotiate a 25% increase in the basic
wage rate of its union members, with a two-year backdated effect. Mr Mokgaba is also a
director of Black Hole Ltd.
Required
Discuss whether Mr Mokgaba and MUNSA are related parties of Black Hole Ltd.
The following information has been extracted from the financial statements of Romulus Ltd
and Remus Ltd for the year ended 31 December 20.8:
Romulus Remus
Ltd Ltd
Rand Rand
Revenue 15 000 12 000
Cost of sales (12 000) (10 000)
Gross profit 3 000 2 000
Other expense (1 000) (800)
Profit before tax 2 000 1 200
The following information has been brought to your attention by the senior accountant of
Romulus Ltd, Mrs Wolf:
• Mr Fox is an executive director of Romulus Ltd and a non-executive director of
Remus Ltd. His brother, Mr Jackal, is the executive director of Remus Ltd.
• Remus Ltd purchases inventory from Romulus Ltd. The normal pricing policy of
Romulus is to add a 50% mark-up to its cost price in order to calculate the selling
price. Inventory sold to Remus Ltd is, however, sold at a mark-up of 10% on cost price.
Goods at a cost price of R1,5 million were sold to Remus Ltd during the year ended
31 December 20.8. Remus Ltd owes Romulus Ltd R500 000 on 31 December 20.8 for
these purchases.
• Remus Ltd provides administrative services to the branches of Romulus Ltd. According
to the administrative manager of Remus Ltd, the cost of these services, if billed in the
open market, would amount to R200 000. No entries were accounted for in the records
of either company in respect of these transactions as it was agreed upon between the
companies that the service would be provided free of charge.
391
Related party disclosures
Required
Mr Binocular is the controlling shareholder of Birds Ltd. He also holds 40% of the ordinary
shares of Antelope Ltd, giving him significant influence over the company. Mr Binocular is
a director of Wildlife Ltd.
Birds Ltd has joint control over Kingfisher Ltd and Barbet Ltd. Kingfisher Ltd is the parent
of Canary Ltd.
Birds Ltd also controls Eagle Ltd and has significant influence over Pigeon Ltd. Pigeon Ltd
controls Penguin Ltd.
Required
The SA Government has significant influence over South African Airways (Pty) Ltd. South
African Airways (Pty) Ltd controls SA Travel (Pty) Ltd and has significant influence over
Fly Kooler (Pty) Ltd. The SA Government also has joint control of SA Training (Pty) Ltd.
During the past financial year there were material transactions between the Department of
Education and Stationary (Pty) Ltd, South African Airways (Pty) Ltd, SA Travel (Pty) Ltd,
SA Training (Pty) Ltd and Fly Kooler (Pty) Ltd.
Required
a. In terms of IAS 24.25, identify the related parties of the Department of Education that
will be exempt from the disclosure requirements of IAS 24.18.
b. Name the minimum disclosure requirements stated in IAS 24.26 that the reporting
entity must adhere to if that entity were to be exempt from the disclosure requirements
of IAS 24.18.
c. Indicate which entity or entities are not exempt in terms of IAS 24.25 and therefore has
to disclose all information in accordance with IAS 24.18, as well as which entity or
entities are not subject to the disclosure requirements of IAS 24 at all.
392
IAS 27
Separate financial statements
__________________________________________________________________
Note: As this chapter and the chapter on IFRS 10 both deal with consolidations, the
questions on these two chapters are integrated and such questions are presented
as part of the chapter on IFRS 10.
393
Separate financial statements
394
IAS 28 & IFRS 12
Investments in associates
__________________________________________________________________
Note: This chapter deals only with investments in associates. Investments in joint
ventures are dealt with in the chapter on IFRS 11.
IAS 28.1 Basic set of financial statements based on the equity method
IAS 28.2 Basic set of financial statements based on the equity method
IAS 28.3 Piecemeal acquisition of a holding in an associate
IAS 28.4 Associate with other post-acquisition reserves
IAS 28.5 Associate with significant post-acquisition losses
QUESTIONS
395
Investments in associates
Hommel Ltd acquired 70 000 of the issued ordinary shares of Abel (Pty) Ltd on
1 January 20.1 for R100 000. Abel (Pty) Ltd is unlisted and operates in the textile industry.
The acquisition of the shares enables Hommel Ltd to exercise significant influence over the
policy-making decisions of Abel (Pty) Ltd. At the date of acquisition the abridged statement
of financial position of Abel (Pty) Ltd was as follows:
Rand
ASSETS
Current assets 400 000
Total assets 400 000
After completion of the purchase transaction Hommel Ltd's statement of financial position
was as follows:
HOMMEL LTD
STATEMENT OF FINANCIAL POSITION AS AT 1 JANUARY 20.1
ASSETS Rand
Non-current assets
Investment in associate 100 000
Current assets 500 000
Total assets 600 000
The reporting date ends on 31 December each year. The revenue of Hommel Ltd for 20.1
amounted to R253 500, while cost of sales, other expenses and tax amounted to R55 000,
R37 500 and R45 080 respectively. A dividend of R40 000 was paid at year end.
The profit after tax of Abel (Pty) Ltd for 20.1 (from rental income) amounted to R43 200
(after tax of R16 800). A dividend of R16 000 was paid on 30 September 20.1.
396
Investments in associates
Required
a. Prepare the statement of profit or loss and other comprehensive income, statement of
financial position, as well as the statement of changes in equity, in which the
investment in Abel (Pty) Ltd is accounted for by using the equity method, of
Hommel Ltd for the year ended 31 December 20.1.
b. Provide the relevant notes to the financial statements of Hommel Ltd for the year
ended 31 December 20.1 in as far as this relates to the investment in associate.
Your solution must comply with the requirements of International Financial Reporting
Standards (IFRS). Comparative amounts are not required.
HOMMEL LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.1
Note Rand
ASSETS
Non-current assets
Investment in associate 3 106 800
Current assets (1) 579 920
Total assets 686 720
HOMMEL LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.1
Note Rand
Revenue 253 500
Cost of sales (55 000)
Gross profit 198 500
Other expenses (37 500)
Share of profit of associate (2) 2 10 800
Profit before tax 171 800
Income tax expense (45 080)
Profit for the year 126 720
Other comprehensive income –
Total comprehensive income for the year 126 720
397
Investments in associates
HOMMEL LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.1
HOMMEL LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.1
1. Accounting policy
3. Investment in associate
Hommel Ltd holds 70 000 ordinary shares (25% interest) in Abel (Pty) Ltd, an unlisted
company in the textiles industry.
Rand
Carrying amount of the investment:
Cost price of investment 100 000
Retained earnings since acquisition (1) 6 800
106 800
(Note: IFRS 12.21(b)(ii) and .B12(b) also require the disclosure of summarised
financial information of associates).
398
Investments in associates
The following are the trial balances of Hans Ltd and Aap Ltd as at 31 December 20.4:
Share capital (100 000/10 000 shares) (100 000) (10 000)
Retained earnings – 1 January 20.4 (50 000) (15 000)
Sales (600 000) (200 000)
Dividend from Aap Ltd (5 000) –
Current liabilities (37 000) (5 000)
Loan from Hans Ltd (non-current liability) – (20 000)
Cost of sales 300 000 100 000
Other expenses 150 000 50 000
Income tax expense 45 000 15 000
Land and buildings (separable) 47 000 –
Investment in Aap Ltd at cost price 4 500 –
Loan to Aap Ltd 20 000 –
Current assets 185 500 65 000
Dividend 40 000 20 000
Hans Ltd acquired 25% of the issued ordinary share capital of Aap Ltd, a manufacturing
concern, on 1 January 20.1, when the latter’s accumulated loss amounted to R2 000.
Aap Ltd's assets were considered to be fairly valued. Hans Ltd significantly influences the
operating and financial decisions of Aap Ltd.
The trial balances do not take the relationship between Hans Ltd and Aap Ltd into account.
On 31 December 20.4, Aap Ltd's shares traded on the JSE Ltd at R5, 00 per share.
Required
a. Prepare the statement of profit or loss and other comprehensive income, statement of
financial position and statement of changes in equity, in which the investment in
Aap Ltd is accounted for by using the equity method, of Hans Ltd for the year ended
31 December 20.4.
b. Provide the relevant notes to the financial statements of Hans Ltd for the year ended
31 December 20.4 in so far this relates to the investment in associate.
Your solution must comply with the requirements of International Financial Reporting
Standards (IFRS). An accounting policy note is not required. Comparative amounts are not
required.
399
Investments in associates
HANS LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.4
Notes Rand
ASSETS
Non-current assets 79 500
Property, plant and equipment 47 000
Investment in associate 2 12 500
Loan to Aap Ltd 2 20 000
Current assets 185 500
Total assets 265 000
HANS LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.4
Note Rand
(1) (25% × 20 000) (dividend) + [25% × (200 000 – 100 000 – 50 000 – 15 000 –
20 000)] = 8 750 or [25% × (200 000 – 100 000 – 50 000 – 15 000)] = 8 750
400
Investments in associates
HANS LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.4
(2) 50 000 (Hans Ltd) + (25% × 17 000 post-acquisition (Aap Ltd)) = 54 250
HANS LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.4
Hans Ltd holds 2 500 ordinary shares (25% interest) in Aap Ltd, a listed
manufacturing company.
Rand
Carrying amount of the investment
Cost price of investment 4 500
Retained earnings since acquisition (3) 8 000
12 500
(3) 25% × (15 000 + 2 000) + (200 000 – 100 000 – 50 000 – 15 000 – 20 000) ×
25% = 8 000
(4) 25% × 10 000 × 5,00 = 12 500
401
Investments in associates
Alex Ltd acquired a 10% interest in the share capital of Beer Ltd on incorporation of the
company on 1 January 20.1 for R40 000. On 1 January 20.6, Alex Ltd acquired a further 5%
interest in Beer Ltd for R50 000. On this date the fair value of a 15% share in the net assets
amounted to R135 000. It is the policy of Alex Ltd to recognise fair value adjustments in
respect of share investments through profit or loss in the statement of profit or loss and other
comprehensive income. Alex Ltd has exercised significant influence over the financial and
operating policies of Beer Ltd since 1 January 20.6. The abridged statements of profit or
loss and other comprehensive income of the two companies are as follows:
Additional information
Rand Rand
Assume that the income of both companies was earned evenly throughout the year.
The current tax rate was 30% throughout. Ignore capital gains tax.
Required
Prepare the statement of profit or loss and other comprehensive income and statement of
changes in equity (only a column for retained earnings) of Alex Ltd for the year ended
30 June 20.6 in which the investment in Beer Ltd is accounted for by using the equity
method. Show how the investment in associate should be disclosed in the statement of
financial position at 30 June 20.6. Your solution must comply with the requirements of
International Financial Reporting Standards (IFRS). Comparative amounts are not required.
402
Investments in associates
ALEX LTD
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.6
ASSETS Rand
Non-current assets
Investment in associate (1) (2) 161 000
ALEX LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 30 JUNE 20.6
Rand
(3) 15% × [(6/12 × 300 000) – 10 000] = 21 000 + (15% × 10 000 dividend) = 22 500 or
[15% × (300 000 × 6/12)] = 22 500
(4) 363 000 – (15% × 10 000 dividend received) + 22 500 = 384 000
ALEX LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
30 JUNE 20.6
Retained
earnings
Rand
403
Investments in associates
Ans Ltd, a listed company, acquired 25% of the ordinary shares of Bat Ltd, a company in
the food industry, on 1 January 20.1 for R12 500 when the net assets of Bat Ltd were
considered to be fairly valued. At this time the owners’ equity of Bat Ltd was as follows:
Rand
The abridged financial statements of Ans Ltd and Bat Ltd for the year ended 31 Decem-
ber 20.5 were as follows:
404
Investments in associates
Additional information
Required
Prepare the statement of profit or loss and other comprehensive income, statement of
changes in equity and statement of financial position of Ans Ltd for the year ended
31 December 20.5 in which the investment in Bat Ltd is accounted for by using the equity
method. Your solution must comply with the requirements of International Financial
Reporting Standards (IFRS). Disclose only the notes to the statement of profit or loss and
other comprehensive income and statement of financial position in respect of the investment
in the associate. Comparative amounts are not required.
405
Investments in associates
ANS LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.5
Note Rand
ASSETS
Non-current assets 73 750
Property, plant and equipment 60 000
Investment in associate 2 4 750
Loan to associate 9 000
Current assets 48 500
Inventory 20 000
Trade receivables 28 500
Total assets 122 250
ANS LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.5
Note Rand
406
Investments in associates
ANS LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.5
ANS LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.5
2. Investment in associate
Ans Ltd holds a 25% interest in the ordinary shares of Bat Ltd, an
unlisted company in the food industry.
Rand
Carrying amount of the investment:
Cost price of investment 12 500
Accumulated loss since acquisition (4) (9 000)
Revaluation surplus since acquisition (5) 1 250
4 750
407
Investments in associates
See Ltd acquired a 35% interest in Sand Ltd, a listed company in the financial sector, for
R45 000 on 1 January 20.2. Since that date See Ltd has exercised significant influence over
the financial and operating decisions of Sand Ltd. On 1 January 20.2, Sand Ltd had 50 000
issued ordinary shares (R50 000) and retained earnings of R70 000.
The following statements of profit or loss and other comprehensive income and statements
of changes in equity of See Ltd and Sand Ltd are available for the years ended
31 December 20.2 and 31 December 20.3. This information does not yet take the
relationship between See Ltd and Sand Ltd into account.
Retained earnings/
(accumulated loss)
See Ltd Sand Ltd
Rand Rand
408
Investments in associates
Required
a. Provide the journal entries for the years ended 31 December 20.2 and 20.3 in order to
account for the investment in Sand Ltd in accordance with the equity method.
b. Prepare the statement of profit or loss and other comprehensive income of See Ltd for
the year ended 31 December 20.3 in which the investment in Sand Ltd is accounted for
in accordance with the equity method, together with the relevant notes. Your solution
must comply with the requirements of International Financial Reporting Standards
(IFRS).
c. Show how the note ‘Investment in associate’ should be disclosed in the financial
statements of See Ltd at 31 December 20.3.
a. Journal entries
Rand
Dr/(Cr)
20.2
Share of loss of associate (P or L) (1) 45 000
Investment in associate (SFPos) (45 000)
20.3
Investment in associate (SFPos) (2) 8 250
Share of profit of associate (P or L) (8 250)
(1) 150 000 × 35% = 52 500 limited to cost price of investment = 45 000
(2) 45 000 × 35% = 15 750 – 7 500 (unrecognised loss) = 8 250
SEE LTD
STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED
31 DECEMBER 20.3
20.3 20.2
Note Rand Rand
409
Investments in associates
c. Disclosure
SEE LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.3
2. Investment in associate
20.3 20.2
Rand Rand
Carrying amount of investment
Cost price of investment 45 000 45 000
Accumulated loss since acquisition (3) (36 750) (45 000)
8 250 –
(Note: IFRS 12.21(b)(ii) and .B12(b) also require the disclosure of summarised financial
information of associates).
Hen Ltd acquired a 25% interest (150 000 ordinary shares) in the share capital of Ann Ltd, a
company in the retail industry, on 1 January 20.1 for R195 000. Hen Ltd accounts for its
interest in Ann Ltd in accordance with the equity method. Both companies are listed.
On 1 January 20.1, the issued share capital of Ann Ltd comprises 600 000 ordinary shares
amounting to R600 000 and Ann Ltd had retained earnings of R120 000, with no other
reserves. The net assets of Ann Ltd were fairly valued at this time.
The share capital of Hen Ltd, which has remained unchanged since acquisition, comprises
1 000 000 ordinary shares amounting to R1 000 000, and 200 000 10% preference shares
with a nominal value of R1 each.
410
Investments in associates
The following are the statements of profit or loss and other comprehensive income and the
statements of changes in equity of Hen Ltd and Ann Ltd for the years ended
31 December 20.2 and 20.1 without taking into account the relationship between the two
companies:
Retained earnings
Hen Ltd Ann Ltd
Rand Rand
Additional information
1. During the year ended 31 December 20.2, Hen Ltd started selling inventory to Ann Ltd
at cost price plus 25%. Total sales to Ann Ltd amounted to R80 000 for the year.
Included in the closing inventory of Ann Ltd on 31 December 20.2, is inventory of
R40 000 purchased from Hen Ltd.
411
Investments in associates
Required
a. Prepare the journal entries in respect of the elimination of the unrealised profit for the
year ended 31 December 20.2.
b. Prepare the statement of profit or loss and other comprehensive income and statement
of changes in equity (only a column for retained earnings) of Hen Ltd for the year
ended 31 December 20.2, in which the investment in Ann Ltd is accounted for by
using the equity method, together with the relevant notes. Your solution must comply
with the requirements of International Financial Reporting Standards (IFRS).
c. Show how the note ‘Investment in associate’ should be disclosed in the financial
statements of Hen Ltd at 31 December 20.2.
Alf Ltd acquired a 40% holding in Brom Ltd on 1 January 20.0 for R35 000. At that date
Brom Ltd had 50 000 issued ordinary shares amounting to R50 000 and retained earnings of
R30 000. At that date there were no other reserves.
Rand
The statements of profit or loss and other comprehensive income of the companies for the
year ended 31 December 20.6 are as follows:
412
Investments in associates
Additional information
Alf Ltd Brom Ltd
Rand Rand
Required
a. Prepare Alf Ltd's statement of profit or loss and other comprehensive income for the
year ended 31 December 20.6 in which the investment in Brom Ltd is accounted for by
using the equity method. Your solution must comply with the requirements of
International Financial Reporting Standards (IFRS). No notes are required.
Comparative amounts are not required.
b. Calculate the carrying amount of the following item in the statement of financial
position of Alf Ltd as at 31 December 20.6:
• Investment in associate.
On 1 March 20.4, Stein Ltd acquired 30% of the shares of Tollie Ltd for R60 000. On
1 June 20.4, Tollie Ltd acquired 40% of the equity shares of Reg Ltd for R30 000. The
following information in respect of the companies is available for the years ended as
indicated:
Additional information
1. Profit before tax is earned evenly throughout the periods except for a non-taxable
profit of R4 000 earned by Tollie Ltd on 18 October 20.4. Tollie Ltd earned this profit
by selling land to Stein Ltd for an amount of R36 000. (The R4 000 gain is included in
the R24 000 profit.)
3. You may assume that the investments were made at net asset value, i.e. no goodwill is
included in the investments.
413
Investments in associates
Required
a. Prepare the statement of profit or loss and other comprehensive income of Stein Ltd
for the year ended 28 February 20.5 in which investments in associates are accounted
for by using the equity method in accordance with the requirements of International
Financial Reporting Standards (IFRS). No notes are required. Comparative amounts
are not required.
b. Show how the ‘Investment in associate’ should be reflected in the statement of
financial position of Stein Ltd as at 28 February 20.5.
You are presented with the following trial balances at 31 December 20.7 of the companies
in the Alfa Ltd group:
Additional information
1. On 2 January 20.5, Alfa Ltd acquired 40% of the issued share capital of Ceta Ltd when
the retained earnings of Ceta Ltd amounted to R9 250. At that stage all the assets and
liabilities of Ceta Ltd were deemed to be valued fairly. Since 2 January 20.5, Alfa Ltd
has exercised significant influence over the financial and operating decisions of
Ceta Ltd. The investment is accounted for in accordance with the equity method.
2. Alfa Ltd also lent Ceta Ltd R20 000 on 2 January 20.5. The loan is repayable on
30 June 20.8.
414
Investments in associates
4. Since 2 January 20.5, Alfa Ltd has been selling inventories to Ceta Ltd at a profit of
50% on the cost price. Included in the inventories of Ceta Ltd on 31 December 20.6 is
R1 500 in respect of such inventories at the cost price for Ceta Ltd. Included in the
inventories of Ceta Ltd on 31 December 20.7 is R2 700 in respect of such inventories
at the cost price for Ceta Ltd. Total sales of Alfa Ltd to Ceta Ltd amounted to R10 000
during 20.7.
Required
Prepare the statement of profit or loss and other comprehensive income and the statement of
changes in equity of the Alfa Ltd Group for the year ended 31 December 20.7 as well as the
statement of financial position at that date, so as to comply with the requirements of
International Financial Reporting Standards (IFRS).
Comparative amounts and notes to the financial statements are not required.
415
Investments in associates
Additional information
1. Maan Ltd bought 40 000 ordinary shares in Sat Ltd on 1 March 20.1 for R40 000. On
this date, Sat Ltd had retained earnings of R25 000. There were no other reserves.
Since this date, Maan Ltd has exercised significant influence over the financial and
operating decisions of Sat Ltd, and consequently accounted for the investment in
accordance with the equity method.
2. Since acquiring its interest in Sat Ltd, Sat Ltd sells certain inventory items to
Maan Ltd at cost price plus 30%. Included in the inventory of Maan Ltd at
31 December 20.3 and 31 December 20.4 are inventory acquired from Sat Ltd to the
value of R26 000 and R19 500 respectively.
Required
Prepare the statement of profit or loss and other comprehensive income and statement of
changes in equity (retained earnings column only) of the Maan Ltd Group for the year ended
31 December 20.4 as well as the statement of financial position on this date, using the equity
method. Your solution must comply with the requirements of International Financial
Reporting Standards (IFRS).
Notes to the financial statements and comparative amounts are not required.
416
IAS 29 &
IFRIC 7
Financial reporting in hyperinflationary
economies
__________________________________________________________________
QUESTIONS
417
Financial reporting in hyperinflationary economies
Tourism Ltd is a South African company which attracts tourists to the scenic beauty of
Mpumalanga. Tourism Ltd owns 100 hectares of land in Mpumalanga, with a large portion
bordering on the Kruger National Park. A holiday resort is managed on the property, and the
facilities include a hotel, a number of chalets, tennis courts and a swimming pool.
Tourism Ltd also owns a small aeroplane that is used for the transport of tourists between
OR Tambo International Airport and the holiday resort in Mpumalanga. A number of motor
vehicles were purchased in order to take the tourists on guided tours as there is a lot of game
on the farm.
South Africa is currently experiencing problems with increasing crime. The unacceptably
high level of crime has had a very bad influence on the general economy of the country.
A South African newspaper recently reported that the cumulative inflation rate over three
years is 130%.
Required
a. IAS 29 will be applied to the primary financial statements of any entity that reports in
the currency of a hyperinflationary economy.
IAS 29 does not establish an absolute rate at which hyperinflation is deemed to arise. It
is a matter of judgement when restatement of financial statements becomes necessary in
accordance with IAS 29. Hyperinflation is indicated by characteristics of the economic
environment of a country which include, but are not limited to, the following:
• the general population prefers to keep its wealth in non-monetary assets or in a
relatively stable foreign currency. Amounts of local currency held are
immediately invested to maintain purchasing power;
• the general population regards monetary amounts not in terms of the local
currency but in terms of a relatively stable foreign currency. Prices may be
quoted in that foreign currency;
• sales and purchases on credit take place at prices that compensate for the
expected loss of purchasing power during the credit period, however short this
period may be;
• interest rates, wages and prices are linked to a price index; and
• the cumulative inflation rate over three years approximates, or exceeds, 100%
(IAS 29.3).
b. IAS 29 is applicable as the cumulative inflation rate exceeds 100%. The cumulative
inflation rate over three years is 130%.
418
Financial reporting in hyperinflationary economies
The following trial balance of Tourism Ltd (company in Question IAS 29.1) on
31 December 20.7 is provided:
Rand
Dr/(Cr)
Additional information
1. The American dollar is regarded as a stable currency throughout the world. The
exchange rates for the past year have been as follows:
• 1 January 20.7 $1 = R5,20
• 31 December 20.7 $1 = R7,50
2. Inventory represents two months’ purchases and all items in the statement of profit or
loss and other comprehensive income accrued evenly during the year.
3. Assume that the inflation rate for 20.7 is 130% and that the consumer price index on
1 January 20.7 was 100.
Required
Use a reliable price index. Notes to the financial statements and comparative amounts are
not required. Round all amounts to the nearest rand.
419
Financial reporting in hyperinflationary economies
a. TOURISM LTD
STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER 20.7
Rand
ASSETS
Non-current assets 4 140 000
Land and buildings 2 300 000
Motor vehicles 460 000
Aeroplane 1 150 000
Furniture and equipment 230 000
Current assets 160 494
Inventories 10 494
Trade receivables 150 000
Total assets 4 300 494
b. TOURISM LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHEN-
SIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.7
Rand
420
Financial reporting in hyperinflationary economies
TOURISM LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.7
Balance on 1 Jan 20.7 1 610 000 460 000 230 000 634 225 2 934 225
Changes in equity
for 20.7
Total comprehensive
income for the year – – – 1 036 269 1 036 269
Balance on 31 Dec 20.7 1 610 000 460 000 230 000 1 670 494 3 970 494
Calculations
Recorded Restated
Rand Rand Calculation
Statement of financial position
Land and buildings 1 000 000 2 300 000 @ 2,30/1,00
Motor vehicles 200 000 460 000 2,30/1,00
Aeroplane 500 000 1 150 000 2,30/1,00
Furniture and equipment 100 000 230 000 2,30/1,00
Inventories 10 000 10 494 #2,30/2,19167
Trade receivables 150 000 150 000
Trade and other payables (80 000) (80 000)
Loan (250 000) (250 000)
Equity (1) 1 630 000 3 970 494
Recorded Restated
Rand Rand Calculation
Statement of profit or loss and other
comprehensive income
Revenue 2 000 000 2 787 879 *2,30/1,65
Other expenses (1 350 000) (1 881 818) 2,30/1,65
Depreciation (80 000) (184 000) 2,30/1,00
Interest paid (25 000) (34 848) 2,30/1,65
Income tax expense (190 750) (265 894) 2,30/1,65
Profit before restatement gain 354 250 421 319
Gain arising from restatement due
to inflationary adjustment (2) 614 950
Profit after restatement gain (3) 1 036 269
421
Financial reporting in hyperinflationary economies
Recorded Restated
Rand Rand Calculation
Equity
Share capital – ordinary 700 000 1 610 000 @ 2,30/1,00
– preference 200 000 460 000 2,30/1,00
Non-distributable reserve 100 000 230 000 2,30/1,00
Retained earnings beginning of year 275 750 634 225 @ 2,30/1,00
1 275 750 3 970 494
* (2,30 + 1,00)/2 = 1,65 average index for the year for items affecting profit or loss
@ 1,00 + 130% = 2,30
(2) 1 036 269 – 421 319 = 614 950
(3) 3 970 494 – 2,30 (700 000 + 200 000 + 100 000 + 275 750) = 1 036 269
The following is the trial balance of Tourism Ltd (company in question IAS 29.1) on
31 December 20.7:
Rand
Dr/(Cr)
Additional information
1. The American dollar is regarded throughout the world as a stable currency. The
exchange rates for the past year have been:
• 1 January 20.7 $1 = R5,20
• 31 December 20.7 $1 = R7,50
2. Inventory represents two months’ purchases, and all items in the statement of profit or
loss and other comprehensive income accrued evenly during the year.
422
Financial reporting in hyperinflationary economies
Required
Prepare the statement of profit or loss and other comprehensive income, statement of
chances in equity and statement of financial position of Tourism Ltd for the year ended
31 December 20.7 in accordance with the requirements of IAS 29 using the Dollar exchange
rate. Notes to the financial statements and comparative amounts are not required. Round the
amounts to the nearest rand.
TOURISM LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.7
Rand
ASSETS
Non-current assets 2 596 155
Land and buildings 1 442 308
Motor vehicles 288 462
Aeroplane 721 154
Furniture and equipment 144 231
Current assets 160 262
Inventories 10 262
Trade receivables 150 000
Total assets 2 756 417
TOURISM LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.7
Rand
Revenue 2 362 205
Other expenses (1 594 488)
Depreciation (115 385)
Interest paid (29 528)
Gain on net monetary position 188 883
Profit before tax 811 687
Income tax expense (225 295)
Profit for the year 586 392
Other comprehensive income –
Total comprehensive income for the year 586 392
423
Financial reporting in hyperinflationary economies
TOURISM LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.7
Ordinary Preference Non-distri- Retained Total
share share butable earnings
capital capital reserve
Rand Rand Rand Rand Rand
Balance on 1 Jan 20.7 1 009 616 288 462 144 231 397 716 1 840 025
Changes in equity
for 20.7
Total comprehensive
income for the year – – – 586 392 586 392
Balance on 31 Dec 20.7 1 009 616 288 462 144 231 984 108 2 426 417
Calculations
424
Financial reporting in hyperinflationary economies
* (7,50 + 5,20)/2 = 6,35 average exchange rate for the year for items affecting profit or
loss
(2) 586 392 – 397 509 = 188 883
(3) 2 426 417 – (1 275 750 × 7,5/5,2) = 586 392
You are the financial manager of Rand Ltd, a South African company. Mr Greed, the
managing director, asked for some information. He is interested in taking over a company,
Zimbab Ltd, in a neighbouring country, but he is not sure whether it is worthwhile. The fact
that the information at hand is in a foreign currency and that the country where this
company is situated, has experienced hyperinflation for the past number of years makes it
even more difficult for him.
# Inventory carried at net realisable value of FC20 000 is included in the inventory
balance. The net realisable value of the remaining inventory is higher than the cost
price.
* The company’s sales are spread over two seasons. About two thirds of the sales are
attributable to sales during the first season, which represents the first six months of the
year. Sales occur evenly during a season.
425
Financial reporting in hyperinflationary economies
Required
a. Write a memo to Mr. Greed to advise him on what has to be done in order to present
the required information in South African Rand.
b. Calculate all the amounts in Rand as at 31 December 20.3 for Mr. Greed so that he can
make a decision about Zimbab Ltd. The profit or loss on the net monetary position
should not be calculated, and comparative amounts are also not required.
The following represents the abridged consolidated financial statements of the Elephant Ltd
Group for the year ended 31 December 20.1. The information on Buffalo Plc, a foreign
subsidiary, has not yet been consolidated for the year ended 31 December 20.1:
Elephant Buffalo
Ltd Group Plc
Rand FC
ASSETS
Non-current assets 155 000 36 000
Land 60 000 –
Equipment
– Cost 80 000 40 000
– Accumulated depreciation (20 000) (4 000)
Investment in Buffalo Plc (cost) 35 000 –
Current assets 75 000 44 000
Trade receivables 30 000 18 000
Inventory 25 000 18 000
Cash and cash equivalents 20 000 8 000
Total assets 230 000 80 000
426
Financial reporting in hyperinflationary economies
Additional information
1. On 1 January 20.1 Elephant Ltd acquired a 90% interest in Buffalo Plc. This was also
the incorporation date of Buffalo Plc. The non-controlling interest is measured at the
proportionate share of the acquiree’s identifiable net assets.
2. Buffalo Plc is operating in a country experiencing hyperinflation. The inflation rate for
the period 1 January 20.1 to 31 December 20.1 was 40%.
4. All items of income and expense of Buffalo Plc accrued evenly during the year.
427
Financial reporting in hyperinflationary economies
Required
Prepare the consolidated financial statements of the Elephant Ltd Group for the year ended
31 December 20.1. Your answer must comply with the requirements of International
Financial Reporting Standards (IFRS).
428
IAS 32
Financial instruments: presentation
__________________________________________________________________
Note: As this chapter and the chapter on IFRS 9 both deal with financial instruments,
the questions on these two chapters are integrated and such questions are
presented as part of the chapter on IFRS 9.
429
Financial instruments: presentation
430
IAS 33 &
Circular 03/2012
Earnings, headline earnings and dividend
per share
__________________________________________________________________
QUESTIONS
* These questions are not in the textbook, but are available in the electronic guide for
lecturers containing the suggested solutions for questions without answers.
Note: In all questions in this chapter, it is assumed that the entity presents all items of
income and expense recognised in a period in a single statement of profit or loss
and other comprehensive income [IAS 1.81(a)].
431
Earnings, headline earnings and dividend per share
e. List cases when the comparative amounts of basic earnings per share in the current
year are restated.
g. Explain how financial managers of listed companies are able to manipulate earnings to
reflect earnings per share lower than they would have been otherwise.
h. Explain briefly what is meant by ‘headline earnings per share’ according to Circular
03/2012.
a. Basic earnings are amounts attributable to ordinary equity holders (owners) of the
parent entity in respect of:
i. profit or loss from continuing operations attributable to the parent entity; and
ii. profit or loss attributable to the parent entity,
and are the amounts in (i) and (ii) adjusted for the after-tax amounts of preference
dividends, differences arising on the settlement of preference shares, and other similar
effects of preference shares classified as equity (IAS 33.12).
b. Basic earnings per share shall be calculated for profit or loss attributable to ordinary
equity holders (owners) of the parent entity and, if presented, profit or loss from
continuing operations attributable to those equity holders. Basic earnings per share
shall be calculated by dividing profit or loss attributable to ordinary equity holders of
the parent entity (the numerator) by the weighted average number of ordinary shares
outstanding (the denominator) during the period (IAS 33.9-10). Basic earnings per
share are presented for each class of ordinary share that has a different right to share in
profit for the year (IAS 33.66).
c. Dividend per share refers to the dividends declared to ordinary equity holders (owners)
of the parent for the year divided by the specific number of ordinary shares in issue at
the date of each dividend declaration.
432
Earnings, headline earnings and dividend per share
g. Timing of transactions
• Large (material) orders for sales received before year end but delayed and only
delivered after year end.
• The date of certifying contracts in progress is scheduled just after year end.
• Consumable stores are not included as inventories anymore, for example
stationery, petrol, etc.
• Repairs and maintenance of property, plant and equipment can be performed in
the current year instead of deferring it.
Estimation of figures
• Quantities of inventories, for example game, scrap and coal, can be estimated at
lower levels.
• The estimated useful life of assets can be shortened.
• The estimation of unsaleable inventories included in trading inventories can be
increased.
Reclassification of items
• Certain improvements or replacement of machinery is classified as repairs and
maintenance.
• The allocation of overheads to inventories could be changed by decreasing the
overheads included in closing inventories.
Since incorporation, Duiker Ltd has had an authorised share capital of 5 000 000 ordinary
shares and 500 000 8% non-cumulative preference shares with a nominal value of R2,00
each. The issued share capital was as follows:
433
Earnings, headline earnings and dividend per share
Ordinary shares
The profit/(loss) for the year amounted to R750 000 and (R115 000) for the years ended
30 June 20.7 and 30 June 20.6 respectively. The company has paid preference dividends
every year since incorporation except for the year ended 30 June 20.6.
Required
Show how the earnings per share must be disclosed in the financial statements of Duiker Ltd
for the year ended 30 June 20.7 so as to comply with the requirements of International
Financial Reporting Standards (IFRS).
Calculations
434
Earnings, headline earnings and dividend per share
Disclosure
DUIKER LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 30 JUNE 20.7
Total comprehensive income for the year 750 000 (115 000)
DUIKER LTD
NOTES FOR THE YEAR ENDED 30 JUNE 20.7
Profit for the year attributable to equity holders 750 000 (115 000)
Dividend on non-cumulative preference shares (36 000) –
Numerator for basic earnings 714 000 (115 000)
20.7 20.6
Weighted average number of ordinary shares used for
basic earnings per share 4 000 000 3 500 000
The issued share capital of Rooibok Ltd for the years ended 31 December 20.2 and 20.3 was
as follows:
20.3 20.2
Rand Rand
The statement of profit or loss and other comprehensive income has shown, inter alia, the
following:
20.3 20.2
Rand Rand
435
Earnings, headline earnings and dividend per share
The following dividends were declared by Rooibok Ltd for the years ended
31 December 20.2 and 31 December 20.3:
20.3 20.2
Rand Rand
Participating preference shareholders are entitled to share in the dividends on the basis of
1:4 cents for each cent earned by ordinary shareholders in addition to the fixed preference
dividend. This right to participate also applies in the event of liquidation.
Required
a. Calculate the basic earnings per share and the dividend per share.
b. Show how they will be disclosed in the financial statements of Rooibok Ltd for the
year ended 31 December 20.3 so as to comply with the requirements of International
Financial Reporting Standards (IFRS).
Rand Rand
436
Earnings, headline earnings and dividend per share
Note: Participating preference shares are not a class of ordinary shares. However, the
amounts attributable to the participating preference shares are not attributable to
ordinary shareholders and therefore need to be deducted in the calculation of
basic earnings.
b. Disclosure
ROOIBOK LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.3
Total comprehensive income for the year 200 000 180 000
ROOIBOK LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.3
20.3 20.2
Rand Rand
437
Earnings, headline earnings and dividend per share
ROOIBOK LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.3
Profit for the year attributable to equity holders 200 000 180 000
Participating preference shares (44 000) (40 000)
• Fixed preference dividend (5 000) (5 000)
• Participating preference dividend (39 000) (35 000)
Numerator for basic earnings 156 000 140 000
20.3 20.2
The following is an extract from the statement of profit or loss and other comprehensive
income of Blesbok Ltd for the year ended 30 June 20.5:
20.5 20.4
Rand Rand
The following dividends were paid by Blesbok Ltd for the years ended 30 June 20.4 and
30 June 20.5:
20.5 20.4
Rand Rand
Ordinary dividends
• 31 December 40 000 –
• 30 June 70 000 54 000
110 000 54 000
The issued share capital of the company has remained constant from incorporation until
31 March 20.5 at 1 000 000 ordinary shares. On 31 March 20.5, 400 000 ordinary shares
were issued at R2 each for cash.
Required
Calculate and disclose the dividend per share in the financial statements of Blesbok Ltd for
the year ended 30 June 20.5 so as to comply with the requirements of International Financial
Reporting Standards (IFRS).
438
Earnings, headline earnings and dividend per share
Calculations
Disclosure
BLESBOK LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
30 JUNE 20.5
Note Retained
earnings
Rand
20.5 20.4
Rand Rand
* May also be disclosed in the notes to the financial statements (IAS 1.107).
Since incorporation, Gemsbok Ltd has had an issued share capital of 500 000 ordinary
shares. The company issued 500 000 12% debentures with a nominal value of R1 each on
30 June 20.2, all of which are mandatorily convertible (there is no option for cash
settlement) into 500 000 ordinary shares on 30 June 20.5.
439
Earnings, headline earnings and dividend per share
The company's profit for the year amounted to R442 000 for the year ended 20.4 (20.3 –
R392 000). Assume an applicable tax rate of 28%.
Required
Calculate the earnings per share and show how it must be disclosed in the financial
statements of Gemsbok Ltd for the year ended 30 June 20.4 so as to comply with the
requirements of International Financial Reporting Standards (IFRS).
Calculations
* Refer to IAS 33.23. No adjustment is made for the interest paid on the debentures as
basic earnings per IAS 33.12 includes all income and expenses recognised in profit or
loss.
** Included in basic earnings per share as consideration for the future shares is received
upon issuance of the debentures. The consideration is utilised in the current year to
generate earnings.
Disclosure
GEMSBOK LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 30 JUNE 20.4
Total comprehensive income for the year 442 000 392 000
440
Earnings, headline earnings and dividend per share
GEMSBOK LTD
NOTES FOR THE YEAR ENDED 30 JUNE 20.4
20.4 20.3
Rand Rand
20.4 20.3
An extract from the consolidated statement of profit or loss and other comprehensive
income of the Orange Ltd Group for the year ended 31 December 20.2 is as follows:
20.2 20.1
Rand Rand
The following dividends were declared and paid by Orange Ltd for the years ended
31 December 20.1 and 31 December 20.2:
20.2 20.1
Rand Rand
Orange Ltd issued 4 000 000 shares on 1 January 20.0. An additional 642 000 shares were
issued at R2,60 per share on 1 June 20.1 in order to obtain the total issued share capital of
Vaal Ltd with effect from 31 May 20.1. A capitalisation issue of one share for every two
shares held was made on 30 December 20.2.
441
Earnings, headline earnings and dividend per share
Required
Calculate and disclose earnings per share and dividend per share in the consolidated
financial statements of the Orange Ltd Group for the year ended 31 December 20.2 so as to
comply with the requirements of International Financial Reporting Standards (IFRS).
Calculations
20.2 20.1
Dividends Rand Rand
Ordinary dividends
31 December 400 000 –
30 June – 275 000
Note: The dividend per share is calculated by dividing actual dividends paid with the
actual number of ordinary shares outstanding at the date of the payment of the
dividend. The capitalisation issue in 20.2 requires that the shares for 20.1 be
restated.
442
Earnings, headline earnings and dividend per share
Disclosure
The dividend per ordinary share of 20.1 has been restated as a result of the
capitalisation issue on 30 December 20.2.
443
Earnings, headline earnings and dividend per share
Boerbok Ltd has had an issued ordinary share capital of R500 000 since incorporation.
Assume that Boerbok Ltd has been incorporated under the previous Companies Act and is
authorised to issue par value shares. On 1 January 20.2 the company made a capitalisation
issue of one share for every five shares held. On 1 January 20.3 a special resolution was
passed according to which the nominal (par) value of the ordinary shares was to be reduced
from R2 per share to 50c per share.
The profit for the year ended 30 June 20.3 amounted to R360 000 (20.2 – R276 000). No
dividends were declared during the years ended 30 June 20.2 and 30 June 20.3.
Required
Calculate the earnings per share for the years ended 30 June 20.3 and 30 June 20.2 so as to
comply with the requirements of International Financial Reporting Standards (IFRS).
Calculations
20.3 20.2
Rand Rand
Bontbok Ltd was incorporated in 20.9 with an authorised share capital of 2 500 000
ordinary shares of R2 each and 1 000 000 8% participating preference shares of R1 each.
Assume that Bontbok Ltd has been incorporated under the previous Companies Act and is
authorised to issue par value shares. The authorised share capital was issued in full on
the date of incorporation.
The ordinary shares were subdivided into 50c shares on 1 June 20.13. An additional
1 500 000 ordinary shares were issued on 1 September 20.13 for cash at a premium of 25c
per share after complying with all the necessary legal requirements.
444
Earnings, headline earnings and dividend per share
The participating preference shareholders share in dividends in the ratio 1:10 of the total
dividends attributable to ordinary shareholders. The 20.11 preference dividend was
proposed, declared and paid in 20.12 and no ordinary dividend was paid in 20.11.
The following information was extracted from the consolidated statement of profit or loss
and other comprehensive income of the Bontbok Ltd Group for the year ended
31 December 20.13:
20.13 20.12
Rand Rand
The following dividends were paid by Bontbok Ltd for the years ended 31 December 20.12
and 31 December 20.13:
20.13 20.12
Rand Rand
Required
Calculate and disclose the earnings per share and dividend per share in the consolidated
financial statements of the Bontbok Ltd Group for the year ended 31 December 20.13 so as
to comply with the requirements of International Financial Reporting Standards (IFRS).
Calculations
445
Earnings, headline earnings and dividend per share
(3) Please note that the dividend in arrears for 20.11 has already been taken into account
in the calculation of 20.11 earnings due to the cumulative nature thereof. In terms of
common law the preference dividend is deemed to be cumulative unless the contrary is
explicitly stated.
20.13 20.12
Dividends per share
Ordinary shares (4) 0,03 0,02
(4) 320 000/11 500 000 = 0,03; 240 000/10 000 000 = 0,02
Disclosure
446
Earnings, headline earnings and dividend per share
11. Dividends
The dividend per ordinary share for 20.12 has been restated for the subdivision of
shares on 1 June 20.13.
Ribbok Ltd, a company with a financial year end of 31 December, entered into an agreement
on 1 April 20.4 with senior management in terms of which 20 000 shares will be issued to
them at no cost if the market price of the company’s shares exceeds R50,00 per share on
31 December 20.7. Assume that the market price of the shares was as follows on the
following dates:
Rand
Required
Briefly discuss the effect of the contingently issuable shares on the diluted earnings per
share for the various years.
447
Earnings, headline earnings and dividend per share
20.4 As the share price exceeds R50,00, the weighted average number of shares for
diluted EPS purposes will increase with 15 000 shares (9/12 × 20 000). Note that
the shares are weighted as the contract was entered into on
1 April 20.4.
20.5 As the share price does not exceed R50,00, the contingently issuable shares will
have no effect on diluted EPS. The 20.4 diluted EPS number is not restated.
20.6 As the share price exceeds R50,00, the weighted average number of shares for
diluted EPS purposes will increase with 20 000 shares. The 20.5 diluted EPS
number is not restated.
The following information is available in respect of the Aseasy Ltd Group for the year ended
31 December 20.6:
Notes Rand
Additional information
1. Profit before tax was calculated after taking into account the following:
Rand
The income tax rate is 30%. The inclusion rate for capital gains tax is 50%.
2. 200 000 18% preference shares of R1 each are in issue in the books of Aseasy Ltd.
448
Earnings, headline earnings and dividend per share
Required
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
a.
Fair value of outstanding shares + total amount received from exercise of rights
Shares outstanding prior to exercise + shares issued in the exercise
= (R10 × 400 000 shares) + (R5 × 100 000 shares)
(400 000 + 100 000) shares
= R4 500 000
500 000 shares
= R9
449
Earnings, headline earnings and dividend per share
(2) (400 000 × 1,11111 × 6/12) + (500 000 × 6/12) = 472 222
(3) (100 000 × 3/12) = 25 000
(4) 104 000/497 222 = 0,21
Gross Net
Rand Rand
The following is an extract from the consolidated statement of profit or loss and other
comprehensive income of the Standard Ltd Group for the year ended 31 December 20.6:
Rand
Additional information
1. Profit before tax is calculated after taking into account the following:
Rand
Income
Gain on sale of factory building (non-controlling interest – R14 000) 100 000
(The gain of R100 000 represents a recoupment of wear and tear
allowances for tax purposes)
Fair value adjustment on investment property – land 10 000
Profit on expropriation of land 100 000
450
Earnings, headline earnings and dividend per share
Rand
Expenses
Goodwill – impairment loss 20 000
Reorganisation costs provided with downscaling of entity 30 000
Depreciation 30 000
Allowance for credit losses 20 000
2. The tax rate is 30%. The inclusion rate for capital gains tax is 50%.
4. At the beginning of the year Standard Ltd only had 150 000 ordinary shares in issue.
On 1 July 20.6 the parent had a one for three capitalisation issue.
Required
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Calculations
Rand
Disclosure
Notes Rand
Profit for the year 220 000
451
Earnings, headline earnings and dividend per share
Notes Rand
Profit attributable to:
Owners of the parent 196 000
Non-controlling interest 24 000
220 000
Rand
Headline earnings per share 0,33
Springbok Ltd was incorporated in 20.1 with an issued share capital of 150 000 9%
preference shares with a nominal value of R1 each, 150 000 12% non-cumulative preference
shares with a nominal value of R1 each and 300 000 ordinary shares. No changes in the
issued share capital have taken place since that date.
Extracts from the statement of profit or loss and other comprehensive income of the
company for the years ended 30 June 20.4 and 30 June 20.5 are as follows:
452
Earnings, headline earnings and dividend per share
20.5 20.4
Rand Rand
The tax rate was 30% for both 20.5 and 20.4 and 50% of capital gains are taxable.
20.5 20.4
Rand Rand
The following dividends were declared by Springbok Ltd for the years ended 30 June 20.4
and 20.5:
20.5 20.4
Rand Rand
Required
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
453
Earnings, headline earnings and dividend per share
20.5 20.4
Rand Rand
20.5 20.4
Rand Rand
c. SPRINGBOK LTD
NOTES FOR THE YEAR ENDED 30 JUNE 20.5
Profit for the year attributable to the equity holders 538 000 110 000
Dividends on 9% preference shares (13 500) (13 500)
Dividends on 12% non-cumulative preference shares (18 000) –
Numerator for basic earnings 506 500 96 500
Shares Shares
454
Earnings, headline earnings and dividend per share
d. SPRINGBOK LTD
NOTES FOR THE YEAR ENDED 30 JUNE 20.5
20.5 20.4
Rand Rand
11. Headline earnings per share
20.5 20.4
Gross Tax Net Gross Tax Net
Rand Rand Rand Rand Rand Rand
Steenbok Ltd’s profit for the year amounts to R6 200. This includes an after-tax operating
loss attributable to discontinued operations of R15 000.
The company’s share capital at the beginning of the year consisted of 300 000 ordinary
shares. Three years ago, 30 000 4% cumulative preference shares with a nominal value of
R1 each convertible after five years into an equal number of ordinary shares at the option of
Steenbok Ltd, were issued. Simultaneously, 100 000 compulsory convertible debentures
were issued that are to be converted into an equal number of ordinary shares after seven
years (the interest expense on the debentures amounted to R10 000 in the current year).
A preference dividend of R3 600 was declared during the current financial year.
455
Earnings, headline earnings and dividend per share
Required
Calculate the basic earnings per share and diluted earnings per share which must be
disclosed in the financial statements of Steenbok Ltd, so as to comply with the requirements
of International Financial Reporting Standards (IFRS).
Rand
Basic earnings per share
Profit from continuing operations (calc 1 – 3) 0,05
Loss from discontinued operations (1) (0,04)
Profit for the year 0,01
Calculations
456
Earnings, headline earnings and dividend per share
Shares
Rand
∴ Potential diluted earnings per share for profit from continuing
operations (5) 0,05
Diluted earnings per share – profit for the year (6) 0,02
(6) 6 200/430 000 = 0,02 (rounded up in order to balance with the total of
continuing and discontinued operations)
Note: The diluted earnings per share for profit for the year (1,44 cents) is higher than
the basic earnings per share for profit for the year (1,25 cents). However, as the
convertible preference shares cause dilution in respect of the earnings per share
for profit from continuing operations, these preference shares must be included
in the calculation of all diluted earnings per share amounts.
The following information relates to Kudu Ltd, a listed company in the manufacturing
industry:
1. Profit for the year ended 31 December 20.5 amounts to R722 200, after taking into
account tax of R202 000. The profit before tax includes the following items:
Rand
(Dr)/Cr
457
Earnings, headline earnings and dividend per share
Rand
(Dr)/Cr
2. Kudu Ltd acquired 8 000 shares in Njala Ltd on 1 July 20.4 at R4,00 per share. (This
represents a 5% interest.) On 1 January 20.5, 5 000 of these shares were sold at R5,10
per share. At 31 December 20.5 the price of the Njala Ltd’s shares increased to R5,15
(31 December 20.4 – R5,10). Assume that these shares are classified as a financial
asset at fair value through other comprehensive income (fair value adjustments are
recognised in equity via other comprehensive income).
3. At 1 January 20.5, Kudu Ltd’s issued share capital consisted of 500 000 shares.
4. On 1 September 20.5, 100 000 options were issued, which entitled the holders thereof
to purchase 100 000 shares in Kudu Ltd at R5/share at any stage from 1 February 20.6
to 31 December 20.6. The average price of Kudu Ltd’s shares for the year was R6 per
share, and the average price from 1 September 20.5 to 31 December 20.5 was R5,50
per share.
5. Assume a tax rate of 30% and that 50% of capital gains are taxable.
Required
a. Disclose earnings per share in the financial statements of Kudu Ltd for the year ended
31 December 20.5.
b. Disclose headline earnings per share in the financial statements of Kudu Ltd for the
year ended 31 December 20.5.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Calculations
458
Earnings, headline earnings and dividend per share
Rand
Diluted earnings per share
Profit from continuing operations (6) 1,32
Profit for the year (7) 1,44
Disclosure
a. KUDU LTD
STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED
31 DECEMBER 20.5
Note Rand
Total comprehensive income for the year 722 200
Basic earnings per share 6
– Profit from continuing operations attributable to
ordinary equity holders 1,33
– Profit from discontinued operations* (1) 0,12
– Profit attributable to ordinary equity holders 1,45
459
Earnings, headline earnings and dividend per share
KUDU LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.5
Reconciliation of numerators used for basic and diluted earnings per share
Rand
Profit for the year attributable to the equity holders of the parent 722 200
Dividends on preference shares –
Numerator for basic and diluted earnings for profit for the year 722 200
Profit from discontinued operations (58 800)
Numerator for basic and diluted earnings for profit from continuing
operations 663 400
Reconciliation of denominators used for basic and diluted earnings per share
Shares
b. KUDU LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.5
Rand
460
Earnings, headline earnings and dividend per share
The following is an extract from the statement of profit or loss and other comprehensive
income of the Gideon Ltd Group for the year ended 31 December 20.9:
Rand
Additional information
Profit before tax is calculated after taking into account the following:
Rand
461
Earnings, headline earnings and dividend per share
Required
Determine, with reference to Circular 03/2012, if the above items should be included or
excluded in the computation of headline earnings. Present your answer in the following
format:
The following information of Never-Never Ltd for the year ended 31 December 20.9 is
available:
20.9 20.8
Rand Rand
462
Earnings, headline earnings and dividend per share
Additional information
1. The capital structure of Never-Never Ltd was as follows at 31 December 20.8 (no
issues during 20.8):
Rand
2. All debentures are convertible on 1 July 20.9 at the option of Never-Never Ltd on the
following basis: one ordinary share will be issued for every two debentures held and
interest on debentures will only accumulate until 30 June 20.9. The convertible
debentures were issued on 1 July 20.6. Similar debentures without conversion rights
bear interest at 17% per annum.
3. Preference dividends for the years ended 31 December 20.9 and 31 December 20.8
were paid on 31 December 20.9.
Required
a. Calculate the earnings per share of Never-Never Ltd for the year ended
31 December 20.9.
b. Show how it must be disclosed in the financial statements, so as to comply with the
requirements of International Financial Reporting Standards (IFRS).
Mars Ltd, a company listed on the JSE Ltd in 20.2, had the following capital structure at
28 February 20.5:
Ordinary shares of R1 each – R800 000. Assume that Mars Ltd has been incorporated under
the previous Companies Act and is authorised to issue par value shares.
On 31 August 20.5 the company had a capitalisation issue from retained earnings of one
ordinary share for every eight held.
On 31 August 20.6 a special resolution was passed splitting the nominal value of ordinary
shares to R0,50 per share in order to improve the marketability of the shares.
The abridged consolidated statement of profit or loss and other comprehensive income of
the Mars Ltd Group for the year ended 28 February is as follows:
20.7 20.6
Rand Rand
463
Earnings, headline earnings and dividend per share
20.7 20.6
Rand Rand
Ordinary dividends to the value of R50 000 were paid by Mars Ltd on 28 February 20.6.
Required
a. Calculate the basic earnings per share and dividend per share (consolidated).
b. Show how they must be disclosed in the consolidated statement of profit or loss and
other comprehensive income and statement of changes in equity of the Mars Ltd Group
for the year ended 28 February 20.7, so as to comply with the requirements of
International Financial Reporting Standards (IFRS).
The following is an excerpt from the consolidated statement of profit or loss and other
comprehensive income of the Pluto Ltd Group for the year ended 31 December 20.9:
The following dividends were declared by Pluto Ltd for the years ended 31 December 20.8
and 31 December 20.9:
20.9 20.8
Rand Rand
464
Earnings, headline earnings and dividend per share
The following note was prepared by the accountant for inclusion in the annual financial
statements for the year ended 31 December 20.9:
Additional information
1. The following changes in the issued share capital of Pluto Ltd took place during the
past two years:
• 200 000 ordinary shares were issued on 1 July 20.9 by way of a rights issue. One
share was issued for every six held. All rights were taken up and the issue price
was deemed to be equal to the fair value of the shares.
• On 1 January 20.9, 150 000 10% non-cumulative preference shares with a
nominal value of R1 each were issued.
Required
Show how the earnings and dividend per share must be disclosed in the consolidated
financial statements and notes of the Pluto Ltd Group for the year ended 31 December 20.9
so as to comply with the requirements of International Financial Reporting Standards
(IFRS).
Klipspringer Ltd's profit for the years ended 31 March 20.7 and 31 March 20.8 amounted to
R180 000 and R253 750 respectively.
On 30 September 20.7, Klipspringer Ltd had a rights issue of one share for every two
previously held.
Before the announcement of the rights issue the shares traded on the JSE Ltd at R1,80 per
share. To ensure that all shares were taken up during the rights issue, the shares were
presented to intended shareholders at R1,25 each.
465
Earnings, headline earnings and dividend per share
Required
Calculate the basic earnings per share of Klipspringer Ltd for the years ended 31 March 20.8
and 31 March 20.7. Your answer must comply with the requirements of International
Financial Reporting Standards (IFRS).
An extract from the statement of profit or loss and other comprehensive income of the
company for the years ended 31 December shows the following:
20.8 20.7
Rand Rand
The following dividends were declared by Okapi Ltd for the year ended 31 December 20.7
and 31 December 20.8:
20.8 20.7
Rand Rand
On 28 February 20.8, 1 000 000 share options were granted to employees ranked lower than
the level of director. The grant vested immediately. In accordance with the option offer,
employees are entitled to take up, before 31 December 20.12, two shares at R1,00 per share
for every option held.
The average fair value of one ordinary share during the year was R1,25.
Required
Calculate and disclose the earnings per share in the financial statements of Okapi Ltd for the
year ended 31 December 20.8. Your answer must comply with the requirements of
International Financial Reporting Standards (IFRS).
466
IAS 34
Interim financial reporting
__________________________________________________________________
QUESTIONS
467
Interim financial reporting
Alpha Ltd has a financial year end of 31 December and presents interim financial reports
half-yearly.
Required
Which financial reports will Alpha Ltd present in its interim financial report as at
30 June 20.1?
The financial director of Niecke Ltd, a listed company, is uncertain about what the content
of the notes to the company’s interim financial report should be.
Required
What minimum information must an entity include in the notes to its interim financial
report, if not disclosed elsewhere in the interim financial report?
468
Interim financial reporting
• Segment revenue, profit, etc. only if segment information is disclosed in the annual
financial statements.
• Material events subsequent to the end of the interim period that have not been reflected
in the financial statements for the interim period.
• The effect of changes in the composition of the entity during the interim period,
including business combinations, acquisitions or disposal of subsidiaries and long-
term investments, restructurings and discontinued operations.
• Changes in contingent liabilities or contingent assets since the last annual reporting
date.
• On 1 January 20.2 a R36 000 upfront payment for the 20.2 advertising campaign was
made.
• Year-end bonuses of R48 000 were to be paid on 31 December 20.2. Should an
employee resign before 31 December 20.2, he is still entitled to a pro rata bonus (this
is stipulated in the employment contract).
• A payment of R60 000 for employee training was made on 1 February 20.2. This
training will be provided over a period of two years.
Required
Journalise all relevant transactions (journal narrations are not required) for interim reporting
purposes for the six months ended 30 June 20.2.
Rand
Dr/(Cr)
30 June 20.2
Advertising cost (P or L) (1) 18 000
Advertising paid in advance (SFPos) 18 000
Bank (36 000)
469
Interim financial reporting
Gamma Ltd’s profit before tax from 1 July 20.1 to 31 December 20.1 were as follows:
Rand
July 20 000
August 15 000
September 25 000
October 30 000
November 40 000
December 60 000
Gamma Ltd expects the following profit before tax from 1 January 20.2 to 30 June 20.2:
Rand
January 35 000
February 20 000
March 25 000
April 20 000
May 15 000
June 10 000
Gamma Ltd operates in a jurisdiction with a tax rate of 25% on the first R150 000 of annual
earnings and 45% on all additional earnings. The company’s year end is 30 June.
Required
Calculate the amount of income tax expense that will be reported in the interim report for
the six months ended 31 December 20.1.
Delta Ltd is a manufacturing entity with a year end of 31 December. The company had an
assessed loss of R200 000 for the year ended 31 December 20.2. No deferred tax asset has
been recognised for the assessed loss. Delta Ltd reports on 30 June 20.3 on the interim
results for the six months then ended.
For the first six months of the 20.3 financial year the company earned R500 000 and expects
to earn R600 000 in the remaining six months. A tax rate of 28% is applicable in the
jurisdiction in which Delta Ltd operates.
470
Interim financial reporting
Required
Calculate the income tax expense to be reported in the interim report for the six months
ended 30 June 20.3. Your answer must comply with the requirements of International
Financial Reporting Standards (IFRS).
Total Onslaught Ltd is engaged in the manufacturing and renting of gas-filled air balloons.
The following represents the unaudited trial balances for each quarter forming part of the
interim period starting on 1 July 20.1 and ending on 31 December 20.1.
471
Interim financial reporting
Additional information
1. Revenue would normally be earned evenly throughout the year, but as Christmas and
the December holidays fall in the second quarter, the sales during that quarter are
higher than those in the other quarters of the year.
2. The insurance costs incurred in the first quarter relate to the period 1 July 20.1 to
30 June 20.2. This is for the annual insurance.
The insurance costs incurred in the second quarter relate to the Christmas season when
the risks of injury and claims against the company are much higher.
3. Maintenance of air balloons usually amounts to R1 000 per quarter, but during the
first quarter all balloons are checked and re-gassed for the Christmas period that lies
ahead.
4. Depreciation on plant and equipment still has to be recognised at 20% per annum on
the straight-line basis. A new machine was bought on 1 November 20.1 to refill the
balloons more quickly with gas. No machines were disposed of during the period.
5. Cost of sales amount to 33,3% of the selling price. In the second quarter obsolete
inventory to the amount of R100 000 was written off. Had this write-down taken place
at year end, it would have been regarded as separately disclosable once it exceeded
R250 000. Historic records have, however, shown that in the past such write-downs
during interim periods have never exceeded R75 000. The write-down has already
been correctly accounted for.
6. The listed investment (classified as held for trading) had a market value of R85 000 at
close of business on 31 December 20.1.
7. The average effective tax rate for the full year is estimated to be 25% of the pre-tax
profit for the year.
8. The issued share capital of 500 000 shares remained unchanged. An interim dividend
of 5c per share was declared on 15 December 20.1 and has yet to be accounted for.
9. A claim for damages to the amount of R50 000 was lodged against the company
during June 20.1. At the end of December 20.1, the legal advisors of the company
were of the opinion that the claim would be successful and that the company would
have to pay the R50 000. This event was disclosed as a contingent liability in the
statement of financial position as at 30 June 20.1.
10. It is the company’s policy to prepare condensed interim financial statements. The
omission of any line items on the face of these financial statements is regarded as
misleading.
Required
Prepare an interim financial report (excluding a statement of cash flows) with accompanying
notes for the six-month interim period ended 31 December 20.1. Your answer must comply
with the requirements of IAS 34.
472
Interim financial reporting
Solar Ltd is engaged in the manufacturing of solar panels used for the heating of swimming
pools. The following represents the unaudited trial balance for the six-month interim period
ending 30 September 20.4.
Six months
ended
30 Sept 20.4
Rand
Dr/(Cr)
Additional information
1. As the general public build more swimming pools during the winter months, the
revenue during the first six months of the year are double those of the next six months.
4. Payment for employee training costs was made on 1 July 20.4. The training
programme will cover a period of two years.
5. During the first month of the current interim period, inventory to the amount of
R125 000 was damaged in a fire and written off. Had this write-down taken place at
year end, it would have been regarded as separately disclosable once it exceeded
R275 000. Historic records have, however, shown that in the past such write-downs
during interim periods have never exceeded R60 000.
473
Interim financial reporting
6. The listed investment had a market value of R215 000 at 30 September 20.4. This
investment was acquired for speculative purposes.
7. The company had an assessed loss of R50 000 for the year ended 31 March 20.4. No
deferred tax asset was raised for this loss. The taxable income for the last six months
of the current financial year is expected to be half that of the interim period. A normal
tax rate of 29% is applicable.
8. The issued share capital has remained unchanged. An interim dividend of 7,5c per
share was declared on 20 September 20.4 and it has not yet been accounted for.
9. On 31 May 20.4, a fire destroyed one of the machines. The machine had a cost price
of R450 000 and accumulated depreciation of R180 000 at 31 March 20.4. This loss
has yet to be accounted for. Machinery is depreciated at 20% per annum on cost price.
10. It is the company’s policy to prepare condensed interim financial statements. The
omission of any line items on the face of these financial statements should be regarded
as misleading.
Required
Prepare an interim financial report (excluding a statement of cash flows) with accompanying
notes for the interim period ending 30 September 20.4. Your answer must comply with the
requirements of IAS 34.
474
IAS 36 &
IFRIC 10
Impairment of assets
__________________________________________________________________
QUESTIONS
Note: For questions on IFRIC 10, refer to the chapter on financial instruments.
475
Impairment of assets
Sipho Ltd is a manufacturing company and owns various items of machinery. At the end of
the current year, two items were damaged, but are still in working order. The useful lives
and pattern of use of the machines were not influenced by the damage. The carrying
amounts of the two items on 31 December 20.4 were as follows:
Rand
Machine 1 can at this stage be disposed of for R490 000, in an orderly transaction between
market participants. In order to sell the machine, it has to be serviced and tuned at a cost of
R10 000. Direct selling expenses of R5 000 would also have to be incurred. Management
determined the value in use of the machine to be R488 000 using an appropriate discount
rate of 10%.
Machine 2 can at this stage be disposed of for R380 000, in an orderly transaction between
market participants. Direct selling expenses of R5 000 would also have to be incurred.
Management determined the value in use of the machine to be R390 000 using an
appropriate discount rate of 10%.
Required
Prepare the note on profit before tax that will accompany the financial statements of
Sipho Ltd for the year ended 31 December 20.4, so as to comply with the requirements of
International Financial Reporting Standards (IFRS). Comparative amounts and an
accounting policy note are not required.
SIPHO LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.4
Included in profit before tax are, inter alia, the following items:
Rand
Expenses
Impairment loss on machine (calc 1) 12 000
(included in cost of sales line item)
(Note: The above narrative information can be presented here or as part of the
property, plant and equipment note.)
476
Impairment of assets
Calculations
1. Machine 1
2. Machine 2
There is no impairment loss as the recoverable amount is higher than the carrying
amount.
477
Impairment of assets
Bloo Ltd is a manufacturing company and owns various items of machinery. At the end of
the year, one item of machinery was damaged, but it is still in working order. The machine
was acquired on 1 January 20.2 at a cost of R900 000. Depreciation was calculated on the
straight-line method over the expected useful life of 10 years. Owing to the damage the
useful life of the machine was reviewed, and management estimated that the remaining
useful life of the machine is now only three years from 31 December 20.4.
Management determined the fair value less costs of disposal to be R530 000 and the value
in use of the machine to be R525 000 using an appropriate discount rate of 10%.
Required
Calculate the impairment loss to be recognised by Bloo Ltd for the year ended
31 December 20.4 so as to comply with the requirements of International Financial
Reporting Standards (IFRS).
Impairment loss to be recognised by Bloo Ltd for the year ended 31 December 20.4:
Rand
Calculations
(1) 900 000/10 × 3 years (1 January 20.2 – 31 December 20.4) = 270 000
(Note: Depreciation for 20.4 is not based on the revised useful life, seeing as the
useful life was revised due to physical damage to the asset (impairment
indicator) which only occurred at year end).
478
Impairment of assets
Bravo Ltd is a manufacturing company that owns various items of machinery. As a result of
new technology in the manufacturing industry, Bravo Ltd now expects to earn less revenue
from two items of machinery. The carrying amounts of the two items on 31 December 20.4
were as follows:
Rand
Management determined the fair value less costs of disposal of machine ABC to be
R800 000 and that of machine XYZ to be R740 000 on 31 December 20.4.
Bravo Ltd is of the opinion that machine ABC will generate net cash inflows of R210 000
per annum over the next five years and this was confirmed in the most recent cash flow
budget of management. Machine ABC can be disposed of for a net amount of R15 000 at
the end of its useful life.
The budgeted net cash inflows for the next five years from machine XYZ (that occur at the
end of each year), are as follows:
Rand
Required
Calculate the impairment loss to be recognised by Bravo Ltd for the year ended
31 December 20.4 so as to comply with the requirements of International Financial
Reporting Standards (IFRS).
Impairment loss to be recognised by Bravo Ltd for the year ended 31 December 20.4:
Rand
Machine ABC (calc 1.3) 44 621
Machine XYZ (calc 2.3) 10 000
Total 54 621
479
Impairment of assets
Calculations
1. Machine ABC
1.1 Value in use Rand
2. Machine XYZ
2.1 Value in use
CFi 0 : 0
1 : 190 000
2 : 195 000
3 : 205 000
4 : 200 000
5 : 180 000
i = 10 (7/0,7)
∴ NPV = 736 272
480
Impairment of assets
The following information on the property, plant and equipment of Zoom Ltd is presented to
you:
A machine has suffered physical damage but is still working, although not as well as it used
to. The fair value less costs of disposal of the machine is less than its carrying amount. The
value in use of the machine cannot be determined independently of the value in use of other
assets. The smallest identifiable group of assets that includes the machine and generates cash
inflows that are largely independent of the cash inflows from other assets is the production
line to which the machine belongs. The value in use of the production line shows that the
production line, taken as a whole, is not impaired.
Required
Identify the machine’s cash-generating unit and discuss whether an impairment loss must be
recognised if:
a. the entity has no intention of replacing the machine;
b. the entity will sell the machine and replace it.
a. There is an indication that the machine may be impaired (suffered physical damage)
and therefore the recoverable amount of the machine must be calculated.
The recoverable amount of the machine alone cannot be calculated due to the following
(IAS 36.67):
i) The machine does not generate cash inflows from continuing use that are largely
independent of those from other assets.
ii) The fair value less costs of disposal of the machine can be determined, but the
value in use of the machine cannot be estimated to be close to its fair value less
costs of disposal due to the fact that the entity is still going to use the machine and
the future cash flows from continuing use can therefore not be estimated to be
negligible.
The recoverable amount of the machine alone can therefore not be determined.
The recoverable amount of the cash-generating unit (production line) to which that
asset belongs must therefore be determined (IAS 36.66).
The question stipulates that the production line as a whole is not impaired.
481
Impairment of assets
Owing to the fact that no impairment loss is recognised in respect of the production
line, no impairment loss will be recognised in respect of the machinery
(IAS 36.107(b)).
However, the entity may need to re-assess the depreciation period or the depreciation
method for the machine. A shorter depreciation period or an accelerated depreciation
method could perhaps be required to reflect the expected remaining useful life of the
machine or the pattern in which economic benefits are consumed by the entity (refer to
IAS 36.17).
b. There is an indication that the machine may be impaired (have suffered physical
damage) and therefore the recoverable amount of the machine must be calculated.
The recoverable amount of the machine alone can be calculated due to the fact that the
fair value less costs of disposal of the machine can be determined and the value in use
of the machine can be estimated to be close to its fair value less costs of disposal. This
is because the value in use of the machinery will consist mainly of the net disposal
proceeds, as the future cash flows from continuing use of the machinery are negligible
(IAS 36.67(a)).
The recoverable amount of the machine is therefore its fair value less costs of disposal.
Since the machine’s fair value less costs of disposal is less than its carrying amount, an
impairment loss is recognised.
Required
Calculate the carrying amounts of the assets after impairment was taken into account, as
well as the impairment loss that will be recognised per asset. Your answer must comply with
the requirements of International Financial Reporting Standards (IFRS).
482
Impairment of assets
Carrying amounts of the assets after impairment was taken into account, as well as the
impairment loss that will be recognised per asset:
Carrying Impairment
amount loss
Rand Rand
Asset A (1) 12 000 3 000
Asset B (2)(4) 5 715 4 285
Asset C (3)(5) 2 285 1 715
Goodwill (calc 2) – 1 000
10 000
(1) 15 000 – 12 000 = 3 000
(2) 6 897 (calc 2) – 1 182 (calc 3) = 5 715
(3) 2 758 (calc 2) – 473 (calc 3) = 2 285
(4) 3 103 (calc 2) + 1 182 (calc 3) = 4 285
(5) 1 242 (calc 2) + 473 (calc 3) = 1 715
Calculations
Note:
Due to the fact that cash-generating unit (CGU) Z is a CGU to which goodwill has been
allocated, it has to be tested for impairment at least annually.
If goodwill was not allocated to CGU Z, CGU Z would have been tested for impairment in
the following circumstances (ignore the effect of corporate assets):
• When there is an indication at reporting date that the CGU may be impaired; or
• When there is an indication at reporting date that asset A, asset B or asset C may be
impaired, but the recoverable amount of the individual asset cannot be determined. The
recoverable amount of the CGU (CGU Z) to which that individual asset belongs should
then be tested for impairment.
483
Impairment of assets
The adjusted carrying amount of asset A amounts to R10 345 which is less than the
fair value less costs of disposal of R12 000.
R1 655 (1) of the impairment loss must therefore be re-allocated to asset B and
asset C:
Asset B = R1 182 (3)
Asset C = R473 (4)
It is the accounting policy of Red Ltd to revalue its assets every three years at the end of the
year. At revaluation the accumulated depreciation is eliminated against the gross carrying
amount of the asset. Depreciation for each financial year is calculated on the most recent
revalued amount. The revaluation surplus is realised as the assets are used.
On 1 January 20.1, Red Ltd purchased a plant at a cost of R100 000. Depreciation is
calculated on the straight-line method over the expected useful life of 10 years. At the end of
20.3 the net replacement cost of this plant amounted to R71 750.
At the end of 20.4 there were indications that the plant was impaired. The recoverable
amount was determined to be R58 000.
At the end of 20.5 the circumstances that led to the impairment in 20.4 no longer existed
and the recoverable amount of the plant was determined as R54 000.
The South African Revenue Service allows a wear-and-tear allowance of 10% per annum
without any adjustments for impairment losses. The tax rate is 29%.
Required
Prepare all the journal entries for the plant of Red Ltd for the years ended
31 December 20.3, 31 December 20.4 and 31 December 20.5 so as to comply with the
requirements of International Financial Reporting Standards (IFRS). Journal narrations are
not required.
Red Ltd
Journal entries for the year ended 31 December 20.3
Rand
Dr/(Cr)
Plant at cost (100 000)*
Plant at valuation (1) 82 000*
Accumulated depreciation: plant (2) 20 000
Revaluation surplus (OCI) (3) (2 000)
* These amounts can also be journalised on a net basis.
484
Impairment of assets
Rand
Dr/(Cr)
Red Ltd
Journal entries for the year ended 31 December 20.4
Rand
Dr/(Cr)
Depreciation (P or L) 10 250
Accumulated depreciation: plant (10 250)
485
Impairment of assets
Red Ltd
Journal entries for the year ended 31 December 20.5
Rand
Dr/(Cr)
Depreciation (P or L) (1) 9 667
Accumulated depreciation and impairment losses: Plant (9 667)
Calculations
CA TB TD DT
1. Deferred tax
@ 29%
Rand Rand Rand Rand
31 December 20.3 (1)(2) 71 750 70 000 1 750 507
31 December 20.4 (1)(3) 58 000 60 000 (2 000) (580)
31 December 20.5 (1)(4) 54 000 50 000 4 000 1 160
CA = Carrying amount
TB = Tax base
TD = Temporary differences
DT = Deferred tax (SFPos)
(1) Given
(2) 100 000 × 70% = 70 000
(3) 100 000 × 60% = 60 000
(4) 100 000 × 50% = 50 000
486
Impairment of assets
On 1 January 20.1, Big Picture Ltd acquired all the net assets of Outthere Ltd which
operates in three different continents. The purchase price of R20 million could be allocated
as follows:
Purchase Carrying Goodwill
price amount
of assets
Rand Rand Rand
Europe 10 000 000 7 000 000 3 000 000
Asia 4 000 000 3 000 000 1 000 000
Africa 6 000 000 4 000 000 2 000 000
20 000 000 14 000 000 6 000 000
During 20.4 there was a severe drought throughout Africa and the production of the Africa
cash-generating unit decreased by 70%. Management determined the recoverable amount of
the Africa operations to be R1 500 000 on 31 December 20.4. Accumulated impairment
losses in respect of goodwill of the Africa operations amounted to R800 000 on
31 December 20.3.
By 20.7 the region had had adequate rainfall to relieve the drought conditions, and it is
estimated that production would again increase with approximately 50%.
All assets are written off over a period of 10 years on a straight-line basis.
Required
a. Calculate the impairment loss for the Africa continent for the year ended
31 December 20.4 and indicate how it will be allocated.
b. Calculate the reversal of the impairment loss for the Africa continent for the year
ended 31 December 20.7 if the recoverable amount is R1 600 000.
c. Calculate the reversal of the impairment loss for the Africa continent for the year
ended 31 December 20.7 if the recoverable amount is R1 000 000.
Your solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
a. Impairment loss for the Africa continent for the year ended 31 December 20.4 and
allocation thereof
Total Carrying Goodwill
amount of
assets
Rand Rand Rand
Purchase price – 1 Jan 20.1 6 000 000 4 000 000 2 000 000
Accumulated depreciation/amortisation (1) (1 600 000) (1 600 000) –
Accumulated impairment losses (given) (800 000) – (800 000)
Carrying amount – 31 Dec 20.4 3 600 000 2 400 000 1 200 000
Recoverable amount (1 500 000)
Impairment loss 2 100 000 (900 000) (1 200 000)
Carrying amount after loss – 31 Dec 20.4 1 500 000 –
(1) 4 000 000/10 × 4 = 1 600 000
487
Impairment of assets
b. Reversal of the impairment loss for the Africa continent for the year ended
31 December 20.7 if the recoverable amount is R1 600 000
Rand
Lower of:
Recoverable amount (R1 600 000); and
Carrying amount (unadjusted) (R1 200 000) 1 200 000
Carrying amount (adjusted) (750 000)
Reversal 450 000
c. Reversal of the impairment loss for the Africa continent for the year ended
31 December 20.7 if the recoverable amount is R1 000 000
Rand
Lower of:
Recoverable amount (R1 000 000); and
Carrying amount (unadjusted) (R1 200 000 (part b)) 1 000 000
Carrying amount (adjusted) (part b) (750 000)
Reversal 250 000
488
Impairment of assets
Required
Calculate the carrying amounts of the assets of cash-generating unit Z after the reversal of
the impairment loss, as well as the reversal of impairment loss that will be recognised per
asset. Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Carrying amounts of the assets of cash-generating unit Z after the reversal of the
impairment loss, as well as the reversal of impairment loss that will be recognised per
asset
Carrying Reversal of
amount impairment
loss
Rand Rand
Asset A (1) 16 000 2 000
Asset B (2)(3) 21 706 3 706
Asset C (4)(5) 19 294 3 294
9 000
(1) 14 000 – 16 000 = 2 000
(2) 21 375 (calc 2) + 331 (calc 3) = 21 706
(3) 3 375 (calc 1) + 331 (calc 3) = 3 706
(4) 19 000 (calc 2) + 294 (calc 3) = 19 294
(5) 3 000 (calc 1) + 294 (calc 3) = 3 294
Calculations
1. Allocation of reversal
Asset A: 14/48 (1) × 9 000 = 2 625
Asset B: 18/48 (1) × 9 000 = 3 375
Asset C: 16/48 (1) × 9 000 = 3 000
489
Impairment of assets
On 1 January 20.2, Power Ltd purchased all the net assets of Flower Ltd for R5 000. At that
date the fair value of Flower Ltd amounted to R4 000, which could be allocated as follows:
Rand
Goodwill is allocated to each cash-generating unit pro rata on the basis of the carrying
amounts of the assets in the cash-generating units.
For the year ended 31 December 20.2 the cut flower division and the pot-plant division were
not impaired.
During December 20.3 the pot-plant division incurred significant losses due to plant
diseases.
On 31 December 20.3 the carrying amounts of the net assets of the divisions are as follows:
Rand
On 31 December 20.3 the value in use of the pot-plant division amounted to R400 and the
fair value less costs of disposal amounted to R200. On 31 December 20.3 the value in use of
the cut flower division amounted to R2 700 and the fair value less costs of disposal
amounted to R2 800. During the year ended 31 December 20.3, no impairment losses have
been recognised in respect of the cut flower division or the pot-plant division.
Required
Calculate the impairment loss that Power Ltd will recognise in profit or loss for the year
ended 31 December 20.3, so as to comply with the requirements of International Financial
Reporting Standards (IFRS).
490
Impairment of assets
Kima Ltd is a manufacturer of several household products. A machine that is used in one of
the product lines was physically damaged during the year ended 30 June 20.7. The machine
is still working although not as well as it used to. The value in use of the machine cannot be
determined independently from the value in use of other assets. The smallest identifiable
group of assets that includes the machine and generates cash inflows that are largely
independent of cash inflows from other assets is the Vera production line to which the
machine belongs.
The management of Kima Ltd decided not to replace the machine after considering the
following:
Fair value less costs of disposal (plant and machinery) 1 200 000
A discount rate of 15% was used to extrapolate the short-term forecasts of management.
This rate does not exceed the long-term average growth rate for the market to which the
product line was allocated.
Management decided that the remaining useful life of the damaged machine will be three
years from 1 July 20.6. This change in the useful life is not as a result of the damage caused
to the machine and has not yet been accounted for in the information supplied above.
Required
a. Disclose the information in the notes of Kima Ltd for the year ended 30 June 20.7.
Notes on accounting policies and comparative amounts are not required.
b. Discuss, with reasons, how your answer in a. would change if at 30 June 20.7
management reflects a commitment to replace the machine and to sell it in the near
future, and cash flows from the continuing use of the machine until its disposal are
estimated to be negligible.
Your solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
491
Impairment of assets
On 28 February 20.8, Monty Ltd did an evaluation in order to determine whether there are
any indications that any of its assets had undergone impairment. The result of the evaluation
is as follows:
Rand
• On 28 February 20.6 an impairment loss amounting to R300 000 was recognised for
machine Y. The actual cash flows for the year ended 28 February 20.8 were consistent
and materially higher that those previously estimated, before the effect of discounting.
The major competitor for the product manufactured by machine Y left South Africa
during 20.7, therefore resulting in the increased cash flows. It is expected that this
trend will continue. On 28 February 20.8 the recoverable amount, based on the value
in use, was calculated as R550 000. The discount rate is 14% per annum and this is the
same rate that was used in previous years.
Additional information
• Machine X and machine Y are part of the assets of the manufacturing segment.
• Impairment losses in excess of R100 000 (recognised or reversed) are seen to be
material for disclosure purposes.
• The current tax rate is 29%.
Required
a. Disclose the above information in the profit before tax note and the property, plant and
equipment note of Monty Ltd for the year ended 28 February 20.8 so as to comply with
the requirements of International Financial Reporting Standards (IFRS).
b. Calculate the deferred tax asset/liability on 28 February 20.8 originating from the
machinery. The South African Revenue Service allows wear and tear at 33.33% per
annum on a straight-line basis on machinery.
492
Impairment of assets
Nubake Ltd is a company which owns several bakeries and supermarkets which form the
basis for the company’s segment reporting. On 30 December 20.1 a short circuit in one of
the bakeries caused damage to an oven, with a carrying amount of R180 000. The oven
could still be used, but only for eight hours and not 12 hours per day as in the past.
It is estimated that the oven will be in use for another four years, after which it will be sold
for R10 000. The net cash inflow per annum generated by using the oven will amount to
R50 000. If the oven were to be sold on 31 December 20.1 in an orderly transaction between
market participants, the selling price would have amounted to R150 000.
The company’s insurers indicated on 31 December 20.1 that R20 000 would be paid out in
connection with the damage (assume that the amount accrues on 31 December 20.1).
Nubake Ltd plans to use this money in the next financial year to repair the oven. Once this
has been done, the oven’s production capacity will exceed the original capacity determined
when it was brought into use for the first time. Consequently the annual cash flow generated
by the oven will increase to R80 000. Its useful life and scrap value will, however, not be
affected.
A discount rate of 7% after tax is regarded as appropriate. Assume a tax rate of 30%. The
company’s financial year ends on 31 December 20.1.
Required
a. Calculate the impairment loss, if any, for the year ended 31 December 20.1. Your
solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
b. Prepare the note dealing with profit before tax for the year ended 31 December 20.1.
Assume that all amounts are material. Your solution must comply with the
requirements of International Financial Reporting Standards (IFRS).
Problem Ltd has various cash-generating units. The plastic cash-generating unit has a
recoverable amount of R650 000 and consists of the following assets:
Rand
The fair value less costs of disposal of certain individual assets of the plastic cash-generating
unit could be obtained at 31 December 20.5 and were as follows:
Rand
493
Impairment of assets
Required
Calculate the carrying amount of each individual asset belonging to the plastic cash-
generating unit of Problem Ltd on 31 December 20.5 after the impairment has been taken
into account. Your answer must comply with the requirements of International Financial
Reporting Standards (IFRS).
Boom Ltd has three cash-generating units – XX, YY and ZZ. The two corporate assets are
the head-office building and the centralised data processor. The head-office building
supports all three cash-generating units, but the centralised data processor supports only XX
and YY on a 50:50 ratio. The head-office building cannot be allocated to the relevant
cash-generating units. The carrying amounts of the cash-generating units/assets of Boom Ltd
at 31 December 20.5 were as follows:
Rand
The recoverable amounts of the cash-generating units of Boom Ltd at 31 December 20.5
were as follows:
Rand
Assume that at 31 December 20.5 there are indications of impairment for all three of the
cash-generating units.
Required
Calculate the total impairment loss to be allocated to the assets of Boom Ltd for the year
ended 31 December 20.5 so as to comply with the requirements of International Financial
Reporting Standards (IFRS).
Green Ltd acquired a 75% ownership interest in Gold Ltd for R900 000 on 1 January 20.7.
On that date, Gold Ltd’s identifiable net assets had a fair value of R1 100 000. The assets of
Gold Ltd together are the smallest group of assets that generate cash inflows that are largely
independent of the cash inflows from other assets or groups of assets. You can also assume
that Gold Ltd is a stand-alone cash-generating unit.
494
Impairment of assets
On 31 December 20.7 the carrying amount of the consolidated identifiable net assets of
Gold Ltd amounted to R820 000. The recoverable amount of the cash-generating unit, Gold
Ltd, was R790 000.
Required
a. Calculate the impairment loss to be allocated to the assets of Gold Ltd for the year
ended 31 December 20.7 so as to comply with the requirements of International
Financial Reporting Standards (IFRS). Assume that Green Ltd elected to measure the
non-controlling interest in the ordinary shares of Gold Ltd at its proportional interest in
the fair value of the identifiable net assets of Gold Ltd.
b. Calculate the impairment loss to be allocated to the assets of Gold Ltd for the year
ended 31 December 20.7 so as to comply with the requirements of International
Financial Reporting Standards (IFRS). Assume that Green Ltd elected to measure the
non-controlling interest in the ordinary shares of Gold Ltd at its fair value of R287 500.
On 1 January 20.0 Hotshot Ltd acquired a 100% interest (100% of net assets) in Gigo Ltd
for R200 000. Gigo Ltd’s operations consist of three shops, which can each be regarded as a
separate cash-generating unit. The individual assets of the branches do not generate cash
flows that are independent of those from the other assets of the branch. The fair values of
the net assets of the different shops on the date of acquisition were as follows:
Rand
The goodwill arising on acquisition could not be allocated between the different shops.
On 31 December 20.2 there were indications that the Johannesburg branch might be
impaired. On 31 December 20.2 the net assets of the different shops were as follows:
Carrying
amount
Rand
495
Impairment of assets
On 31 December 20.2 the value in use of the Johannesburg branch amounted to R110 000,
while that of Gigo Ltd amounted to R200 000. The fair value less costs of disposal of the
Johannesburg branch amounted to R100 000 and that of Gigo Ltd to R205 000.
Required
a. Calculate the total impairment loss that will be recognised in the profit or loss of
Hotshot Ltd for the year ended 31 December 20.2. Your answer must comply with the
requirements of International Financial Reporting Standards (IFRS).
b. Calculate the impairment loss to be allocated to each of the assets of the Johannesburg
branch for the year ended 31 December 20.2. Also calculate the final carrying amount
of each asset of the Johannesburg branch at 31 December 20.2. Your answer must
comply with the requirements of International Financial Reporting Standards (IFRS).
Happy Ltd is a company that runs two production lines, A and B. Since the beginning of the
current year, the profits from production line B declined considerably as the competition cut
their selling prices.
The non-current assets of Happy Ltd comprised the following at 31 October 20.9:
Production line B represents a cash-generating unit. The carrying amounts of the non-
current assets of production line B at 31 October 20.9 amounts to the following:
The fair value (based on quoted market prices) less costs of disposal of the furniture and
fittings of production line B amounts to R950 000 as at 31 October 20.9, and 40% of the
goodwill of Happy Ltd can be allocated to production line B.
496
Impairment of assets
At 31 October 20.9 the fair value less costs of disposal of production line B amounts to
R5 600 000.
The net cash flow expected from production line B in future is as follows:
At the end of 20.14 it should be possible to sell the plant and machinery, and the furniture
and fittings of production line B for R500 028 (net) after deducting all costs of disposal.
An appropriate after-tax discount rate is 12,96% and the tax rate is 28%.
Assume that up to the year ended 31 October 20.8, none of the cash-generating units have
been impaired.
Also assume that for the year ended 31 October 20.9, the recoverable amount of production
line A exceeds the carrying amount.
Required
Disclose the impairment loss in the ‘profit before tax’ note that will accompany the financial
statements of Happy Ltd for the year ended 31 October 20.9 in accordance with the
requirements of International Financial Reporting Standards (IFRS). Comparative amounts
are not required.
497
Impairment of assets
498
IAS 37 & IFRIC 1
Provisions, contingent liabilities and
contingent assets
__________________________________________________________________
QUESTIONS
499
Provisions, contingent liabilities and contingent assets
The following provisions have been included in the financial statements of Provider Ltd as
at 31 December 20.8:
Rand
a. Provision for repair costs for sales under warranty 250 000
b. Provision for repairs and maintenance of plant and machinery 75 000
c. Provision for expected operating losses to be incurred in a trade
show scheduled for March 20.9 35 000
d. Provision for the dismantling and selling of non-current assets classified
as held for sale 15 000
e. Provision for severance pay to employees in a discontinued operation 50 000
f. Provision for relocating and retraining staff affected by the
restructuring programme 60 000
Required
Discuss with brief reasons, in each of the above cases, whether a provision must be
recognised at 31 December 20.8 so as to comply with the requirements of International
Financial Reporting Standards (IFRS). Assume all amounts to be material.
a. The company has a present legal obligation as a result of past events, i.e. in terms of
the sales agreement the company is obliged to repair or replace any item sold under
warranty. If the amount of R250 000 is a reliable estimate of the obligation, then such
a provision will be raised in order to comply with IAS 37.
c. IAS 37.63 clearly states that provisions shall not be raised for future operating losses.
The recognition criteria of a provision require a legal or constructive present obligation
resulting from a past event which leaves the company with no realistic alternative other
than to settle the obligation. In this case, future operating losses, which are outflows of
economic benefits, will not be recognised as the event creating the obligation has not
occurred. Even if operating losses are expected, management generally retains the
discretion to change the activities, for example to dispose of or restructure the
operation. Therefore, in terms of IAS 37, a provision will not be raised.
500
Provisions, contingent liabilities and contingent assets
It could be argued that, if a contract had been signed in 20.8, the company is legally
committed to participate in the trade show leaving the company with no realistic
alternative but to incur the losses. In this case, it could be argued that the obligation
has arisen as a result of a past event, i.e. a contract concluded in 20.8, and therefore a
provision must be raised. Such a contract could be an onerous one.
d. Since non-current assets held for sale are measured at the lower of carrying amount
and fair value less costs to sell, no such provision can be raised.
e. In terms of IAS 37.80, costs for severance pay to employees directly resulting from a
restructuring are included in the restructuring provision as it is considered to be a
direct expenditure arising from the restructuring, since it is necessarily entailed by the
restructuring and not associated with the ongoing activities of the entity. A provision
may only be made if an entity has a detailed formal plan and has raised valid
expectations in those affected.
f. A provision for relocating and retraining staff could qualify as costs that are associated
with the ongoing activities of the entity. These costs are not included in a restructuring
provision. IAS 37.81 specifically excludes them from a restructuring provision.
Upstage Ltd manufactures a brand of quality watches. The company sells these watches to
the general public via retail outlets. All watches are sold with a one-year warranty.
Rand
The accountant has calculated the following warranty provisions for 20.8:
Rand
Based on the company’s past experience, approximately 25% of its goods sold are returned
with defects. However, the company decided to be prudent and made a provision based on
75% of goods sold being returned with defects, hence a provision for expected repair costs
of R45 000 has been raised.
501
Provisions, contingent liabilities and contingent assets
By the end of 20.8 the warranties for all watches sold in 20.7 had elapsed and no further
costs are expected to be incurred in respect of these sales.
Required
a. Comment on the decision taken by the company in raising a provision of R45 000.
Should you disagree with the provision raised, recommend a suitable provision.
b. Disclose all relevant information in respect of the suggested suitable provision above
in the short-term provision note of Upstage Ltd for the year ended 31 December 20.8.
No comparative amounts are required.
The answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
a. Discussion
Chapter 3 of the Conceptual Framework for Financial Reporting (2010) does not
include prudence or conservatism as an aspect of faithful representation because
including either would be inconsistent with neutrality. Also, in terms of IAS 37,
prudence does not justify the creation of excessive reserves or provisions as this would
cause a deliberate understatement of assets or income and an overstatement of
liabilities or expenses. This would result in the financial statements not being neutral
or faithfully represented. Based on past experience it is estimated that 25% of the
goods sold will be returned with defects. The fact that repairs amounting to only
R20 000 were done in the previous year serves as further proof that a provision in
excess of R25 000 would be excessive. Consequently it would be an unrealistic and
excessive estimate to provide for 75% of goods sold being returned with defects. The
provision raised should only be R25 000.
b. Disclosure
UPSTAGE LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.8
Warranty provision
A provision of R25 000 has been recognised for expected warranty claims in respect of
products sold during the current financial year. It is expected that all of this
expenditure will be incurred in the next financial year.
502
Provisions, contingent liabilities and contingent assets
1. During 20.3, Compu Ltd started to manufacture and sell computers. All computers are
equipped with B20 microchips. In November 20.3 a new microchip, the B40, which
can store double the information that the B20 can, was introduced to the market.
During a management meeting held on 30 November 20.3 it was decided that in future
only the new B40 microchip would be used, and that all the B20 microchips in
computers already sold before 1 December 20.3 would be replaced free of charge with
the new B40 during 20.4. This was announced through advertisements in the media
during December 20.3. Management has estimated that 75% of the approximately
3 000 customers who purchased a computer would act on these advertisements. These
estimates are based on past experience of a similar type of transaction. The cost to
replace a single microchip will amount to approximately R250.
2. A claim of R50 000 was instituted by Compu Ltd against Future Ltd on
3 September 20.3 on the grounds of infringement of a trademark. At the financial year
end, Compu Ltd’s legal advisors are of the opinion that the claim would probably
succeed, but are not virtually certain about its outcome.
Required
a. Discussion – provision
A provision is recognised provided that there is an obligation at the reporting date that arises
from a past event and it is probable that an outflow of economic benefits will be required
and a reliable estimate can be made of the amount (IAS 37.14).
The past event was the decision taken by management to replace the B20 microchips with
the B40. With the announcement of management’s decision in the media, a present
constructive obligation has arisen because there are valid expectations with the owners of
these computers – that B20 microchips will be replaced with B40 microchips. Compu Ltd
indicated with a specific current decision and statement that they accept the responsibility to
replace the B20 chip with a B40.
It is probable that there will be an outflow of economic resources since management has
estimated that about 75% of its customers will respond to the advertisements. This means
that there will be an outflow of economic resources as the company will have to purchase
the B40 microchips and utilise its economic resources to pay for them.
503
Provisions, contingent liabilities and contingent assets
The amount can be reliably estimated since management has estimated that of the 3 000
customers affected, about 75% will respond to the advertisement. The cost of the component
is known, so the provision can be reliably measured. The use of an estimate does not
undermine the reliability of the measurement (IAS 37.25). The estimates are based on past
experience of a similar type of offer made to customers.
A provision is recognised at 31 December 20.3 for R562 500 (3 000 × 75% × R250).
A contingent asset is a possible asset that arises from past events and whose existence will
be confirmed only by the occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the entity (IAS 37.10). IAS 37.31 states clearly that
an entity shall not recognise a contingent asset.
The legal claim will be the past event from which the contingent asset arises. The outcome
of the claim will only be established in future once the case has been heard in a court of law.
Because the inflow of economic benefits is probable but not virtually certain, no asset is
recognised, but disclosure in a note is required (IAS 37.34).
c. Disclosure
COMPU LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.3
1. Short-term provision
20.3
Rand
Provision for replacement costs
Balance on 31 December 20.2 –
Provision made during the year 562 500
Balance on 31 December 20.3 562 500
The provision has been made for the estimated cost of the replacement of the B20
microchip with the B40 microchip in computers sold before 1 December 20.3. It
is anticipated that these costs will be incurred during 20.4.
2. Contingent asset
Medgars Ltd, a retail store, has a policy of refunding the purchases of dissatisfied customers,
even though it is under no legal obligation to do so. Its policy of refunds is generally known
to its customers. According to Medgars Ltd’s refunding policy, customers may return
purchased goods within three months of the date of purchase provided that they still have
their price tickets attached.
504
Provisions, contingent liabilities and contingent assets
Previous experience shows that 10% of goods sold are returned in the month following the
month of sale, 5% in the second month and 2% in the third month after the sale.
Actual refunds amounted to R34 000 during 20.3 and R30 000 during 20.2. The balance on
the provision for refunds account amounted to R36 500 on 1 January 20.2.
20.3 20.2
Rand Rand
Required
a. Prepare the journal entries to account for the above information related to the
provision for refunds for the year ended 31 December 20.3.
b. Prepare an extract of the statement of financial position as well as the ‘short-term
provisions’ note to the financial statements of Medgars Ltd for the year ended
31 December 20.3 to reflect the information provided in the question. Your answer
must comply with the requirements of International Financial Reporting Standards
(IFRS).
a. Journal entries
20.3
Rand
Dr/(Cr)
31 December 20.3
Provision for refunds (SFPos) 34 000
Bank (SFPos) (34 000)
Amounts used during the year
(1) (110 000 × 2%) + (130 000 × 5%) + (140 000 × 10%) + (130 000 × 2%) +
(140 000 × 5%) + (140 000 × 2%) – 34 000 = 1 100
(2) (120 000 × 2%) + (130 000 × 5%) + (150 000 × 10%) + (130 000 × 2%) +
(150 000 × 5%) + (150 000 × 2%) = 37 000
505
Provisions, contingent liabilities and contingent assets
b. Disclosure
MEDGARS LTD
EXTRACT FROM THE STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER 20.3
MEDGARS LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.3
Provision has been made for estimated refunds to customers for goods purchased which
are expected to be incurred during the first three months of the new financial year.
Natco Products Ltd is faced with stiff competition in the chemical industry. In an attempt to
exploit a new market the company decided to produce a new chemical, Natco3, which is
superior to the previous chemicals produced. Before finalising the financial statements for
the year ended 31 December 20.8, the following matters require consideration:
1. During 20.8 the company purchased specialised plant and machinery to produce
Natco3. Owing to the high acidic content in this new product, the company expects to
replace component parts of the plant at regular intervals. The directors have provided
an amount of R10 000 per month to cover the estimated costs of replacing the
component parts of the new plant. No replacements were required during the 20.8 year
but the directors believe that the provision should remain in the financial statements as
the component parts would have to be replaced in the 20.9 financial year.
2. The directors realised that the production of the new product Natco3 contaminated the
land on which the factory is situated. Since incorporation, the company has always
maintained a policy of cleaning up any contamination caused by its manufacturing
process. No clean-up procedures have been initiated in 20.8, but the company has
made a provision of R250 000, the expected cost of a clean-up process that may be
required in the future.
506
Provisions, contingent liabilities and contingent assets
Required
Draft a letter to the financial director of Natco Products Ltd in which you review the
acceptability of the accounting treatment of the above provisions based on International
Financial Reporting Standards (IFRS).
Dear Sir,
In 20.8 Natco Products Ltd had not initiated a clean-up process. Although Natco Products
Ltd has no legal obligation it does have a constructive obligation to clean up any
contamination caused by its manufacturing process because of its published policy, past
actions and concern for its reputation. In these circumstances a provision of R250 000, the
expected cost of a clean-up process, could be raised which will be in compliance with
IAS 37.
Yours sincerely
A. Consultant
Note: Determining whether a constructive obligation exists is often more difficult than
identifying a legal obligation and in most cases judgement will be required,
depending on the circumstances of each case, to determine whether or not a
constructive obligation exists.
507
Provisions, contingent liabilities and contingent assets
Mad Max Ltd is a listed company that sources and sells old comic books. They use their
website, madmax.com, in a similar way to ebay.com. Individuals log onto the website and
are able to sell to or purchase classic collections of comic books from Mad Max Ltd.
On 31 December 20.5, Mad Max Ltd raised a justified provision for an obligation towards
the South African government for a future charity initiative. Mad Max Ltd had committed
themselves on 31 December 20.5 to contribute to a charity initiative called Mad Gov. Mad
Gov will work on the same principle as madmax.com, since old Government Gazettes will
be auctioned on a website called madgov.com. The proceeds of this initiative will be
donated to a charity of the government’s choice. Mad Max Ltd will pay over the agreed
amount of R10 000 000 on 31 December 20.10. You may assume that the time value of
money is material and that a nominal after-tax discount rate of 10% was applicable in 20.5
as well as 20.6.
Mad Max Ltd processed the following journals on 31 December 20.5 to account for the
provision:
Rand
Dr/(Cr)
Assume that the tax rate remained unchanged at 28%. The South African Revenue Service
will allow a deduction for the provision on a cash basis.
Required
a. Supply the adjusting journal entries to account for the provision and deferred tax
implications for the year ended 31 December 20.5.
b. Supply the necessary originating journals to account for the provision and deferred tax
implications for the year ended 31 December 20.6.
The solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
508
Provisions, contingent liabilities and contingent assets
Lion Ltd manufactures computers for both local and export markets. Faced with stiff
competition in the local market, the company decided to restructure its activities by
downsizing its local market and allocating more of its resources to the export of computers
to surrounding Southern African countries.
On 1 December 20.8 the board of directors decided to restructure its activities as from
31 March 20.9. A detailed plan was drafted by 31 December 20.8 on which day a public
announcement was made as to the restructuring intentions of the company. Lion Ltd’s
creditors, employees and customers were also informed of the restructuring plan by letters
on the day the public announcement was made.
At 31 December 20.8, provisions for the following costs were included in the trial balance
of the company:
Rand
Required
Advise Lion Ltd in terms of the requirements of International Financial Reporting Standards
(IFRS) whether a provision for the above costs is allowable for inclusion in the financial
statements at 31 December 20.8. State the reasons for your conclusions. Ignore all tax
implications and consider all amounts to be material.
The financial statements of Saheli Ltd are in the process of being finalised for the year
ended 31 December 20.8. The following matters require consideration in response to the
raising of provisions per IAS 37:
1. Saheli Ltd is a manufacturer of desktop inkjet printers. These printers are sold with a
warranty whereby the manufacturer is obliged to repair or replace the printers that fail
within the warranty period. Based on the company’s past experience and future
expectations it is estimated that 80% of its printers sold will have no defects, 15% will
have minor defects and 5% will have major defects. If minor defects were detected in
all products sold, repair costs of R1 million would result. If major defects were
detected in all products sold then repair costs of R3 million would result. No entries
have been made for this as the accountant is unsure of how to calculate an appropriate
provision.
509
Provisions, contingent liabilities and contingent assets
2. In response to changes in legislation introduced in the income tax system, Saheli Ltd is
required to retrain a large proportion of its administrative and sales workforce. If
adequate retraining is not given to its employees then Saheli Ltd will not be able to
continue selling its products and continue its business. As the company will not be
able to avoid this expenditure, a provision of R250 000 has been made in respect of
future training costs.
3. In January 20.8, Saheli Ltd reviewed its insurance arrangements for its liability in
respect of accidents sustained by customers in its chain of retail outlets. The company
pays insurance premiums of R20 000 per month to cover customer claims. The
directors decided that, based on past experience, the cost of these accidents is
approximately R150 000 per annum, therefore, instead of continuing its policy with an
insurance company, Saheli Ltd decided to self-insure. A provision of R12 500 per
month was made to carry the risk of Saheli Ltd paying for any customer claims. Two
accidents have been reported in the company’s retail outlets in the Gauteng area and
claims of R80 000 have been received. The final outcome of these claims by customers
will be decided during the court hearing scheduled for February 20.9.
Required
In respect of each of the above situations, briefly discuss whether a provision must be raised
for the financial year ending on 31 December 20.8, in accordance with the requirements of
International Financial Reporting Standards (IFRS).
After a wedding on 17 September 20.0, two people died, possibly as a result of food
poisoning from products sold by Cater Ltd. Legal proceedings have been instituted against
Cater Ltd seeking damages, but the company disputes liability.
Up to 31 December 20.0, Cater Ltd’s lawyers advised that it is probable that the entity
would be found liable, but they could not give any estimate on the amount that it would be
liable for.
On 30 November 20.1 the entity’s lawyers advise that owing to developments in the case it
is probable that the entity would be found liable for R300 000. The case will only be heard
during June 20.2.
Required
a. Discuss the accounting recognition of the above matter in the financial statements of
Cater Ltd for the years ended 31 December 20.0 and 31 December 20.1.
b. Disclose the above information in an extract of the statement of financial position
and prepare the ‘short-term provisions’ as well as the ‘contingent liabilities’ notes
(where applicable) to the financial statements of Cater Ltd for the year ended
31 December 20.0 and 31 December 20.1.
The solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
510
Provisions, contingent liabilities and contingent assets
The following information relates to the operations of Platinum Ltd, a mining company, for
the year ended 31 December 20.5:
2. Under new legislation the company is required to fit filters on all its heavy equipment
before 30 April 20.6. On 31 December 20.5 the company has not yet done so, but have
budgeted an amount of R200 000 for the fitting of the filters.
3. On 12 December 20.5 the board of directors decided to close down a division during
20.6. They made an announcement on 20 December 20.5 in the press concerning their
decision and released a formal business plan.
Some of this division’s personnel will leave the services of Platinum Ltd on
31 March 20.6, for which they will receive ex-gratia payments amounting to R600 000
in total. Other personnel will be relocated to other divisions, which will cost the
company R120 000 in re-establishment costs.
Required
a. Prepare the journal entries, where applicable, to account for the above transactions in
the records of Platinum Ltd for the year ended 31 December 20.5.
b. Disclose the above information in an extract of the statement of financial position and
prepare the notes relating to provisions in the financial statements of Platinum Ltd for
the year ended 31 December 20.5.
The solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
Potter Ltd, an equipment and furniture manufacturing company, has a head office in
Johannesburg and branches in Durban, Cape Town and Bloemfontein. The year end of the
company is 31 December and the annual financial statements for the year ended
31 December 20.8 are currently being finalised. The following problems have been
identified and the company has requested your advice:
511
Provisions, contingent liabilities and contingent assets
The terms of the lease agreement with Harry Ltd state that early termination of the
agreement would result in a penalty payment of 75% of the remaining lease payments,
payable two months after the termination of the lease agreement. This lease would have
terminated on 31 December 20.9. All the lease payments for the year ended
31 December 20.8 have been paid. The lease rental is R1 000 000 a year, payable in arrears.
Repair of machinery
The Bloemfontein branch uses three identical machines in the manufacturing process. One
of them was accidentally dropped while being moved from the one factory to the other, and
was badly damaged. The machine was not insured against damage caused by being moved.
During January 20.9 the machine was repaired at a cost of R150 000. The financial manager
considers creating a provision for the cost of repairing the machine in the financial year
ended 31 December 20.8. He argues that since the damage was caused by an accident that
took place during the moving of the factory, the cost must be accounted for in the year the
moving took place. A contract has already been entered into with Wolf Ltd for the repair of
the machine on 20 December 20.8 and it will therefore be prudent to make a provision on
31 December 20.8.
Required
Write a report to the financial manager of Potter Ltd in which you discuss the accounting
recognition, measurement and disclosure of the above-mentioned issues for the year ended
31 December 20.8 in accordance with the requirements of International Financial Reporting
Standards (IFRS).
Brilliant Cut Ltd is a diamond mining company with a 31 December year end.
Environmental legislation provides for the rehabilitation of the environment to its original
condition after the abandonment of the mining operations.
Brilliant Cut Ltd erected the Alpha diamond mining plant at a cost of R20 000 000.
On 1 January 20.2 (the day on which Brilliant Cut Ltd started with mining activities at its
Alpha plant) it was established that it would cost approximately R15 000 000 (at future
prices) to rehabilitate the environment after 20 years when the plant is abandoned.
The actual cost for the rehabilitation of the environment in December 20.21 (i.e. twenty
years after mining activities started) amounted to R16 500 000.
Additional information
The rehabilitation cost is tax deductible when it is actually paid in 20.21. The tax rate has
remained unchanged at 30%.
The company will earn sufficient taxable income in the future to justify the recognition of a
debit balance on the deferred tax account should it be necessary.
512
Provisions, contingent liabilities and contingent assets
A nominal after-tax discount rate was 10,5% for the financial years ended 31 December 20.2
to 31 December 20.3. During 20.4 the suitable after-tax discount rate changed to 8,4% and it
remained unchanged until 20.21.
The South African Revenue Service allows a wear-and-tear allowance of 5% per annum on
the plant. The company depreciates the plant over its useful life of 20 years and there is no
residual value.
Required
a. Prepare the journal entries for the financial years ended 31 December 20.2, 20.3, 20.4
and 20.21. Include the journal entries for the provision for environmental costs,
depreciation on the plant and deferred tax.
b. Prepare an extract of the statement of financial position of Brilliant Cut Ltd for the
year ended 31 December 20.21 to reflect the above transaction.
c. Prepare the following note to the financial statements for the year ended
31 December 20.21:
• Provision for environmental costs (no comparative amounts are required)
The solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
Early in 20.5, the Eastern Cape faced an outbreak of a disease that decreased the iron
reserves in piglets when they were born. This disease resulted in a large number of piglets
dying within the first two to three weeks of birth. In response to the outbreak, Indwe
Pharmaceuticals Ltd started its research on a medicine that would provide immunity to
piglets suffering from this disease, and by August 20.5 the company's researchers had found
a vaccination that was believed to be able to provide the required immunity.
The vaccination was sold to a number of farmers in the area. Indwe Pharmaceuticals Ltd
published a leaflet in the vaccination box that stated that the vaccination had no negative
side effects.
In November 20.5, a number of farmers brought a civil lawsuit against the company,
claiming for damages for severe side effects that the piglets had developed since being
vaccinated. At the year end (31 December 20.5) of Indwe Pharmaceuticals Ltd, the court
case had not yet been finalised.
On 28 December 20.5 after an extensive consultation process with the company's lawyers
and experts on animal medicine, the CEO of Indwe Pharmaceuticals Ltd, Mr Fox, placed an
advertisement in the national and local newspapers where he announced that the company
would like to offer an out-of-court settlement and compensate the affected farmers for the
losses suffered as a result of using the company's vaccination.
513
Provisions, contingent liabilities and contingent assets
The company lawyers and the experts on animal medication (based on experience from
representing other pharmaceutical companies facing similar charges) estimated as at the end
of the year that an out-of-court settlement would probably cost the company approximately
R30 million.
Indwe Pharmaceuticals Ltd plans to structure the settlement (should it be accepted by the
farmers) by paying four annual instalments of R7 500 000 each, commencing on
31 December 20.6. Assume a pre-tax interest rate of 15% where applicable in your answer.
Required
The solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
514
IAS 38 & SIC 32
Intangible assets
__________________________________________________________________
QUESTIONS
515
Intangible assets
Snap Ltd, a pharmaceutical company, recently started a research division in one of its
factories.
The total costs of R55 000 in respect of the new division, incurred by Snap Ltd for the
current year, were paid as follows:
Rand
Salaries
Chemists 25 000
Additional technical personnel appointed 5 000
Administrative personnel 1 000
Consulting fees
Initial payment for the sharing of knowledge with respect to remedy ‘V’ 5 000
General consulting work 3 000
Direct costs
Tablets, chemicals and raw materials 3 000
Patents and licenses 1 000
Sundry 2 000
General expenses
General overheads 5 000
Costs of partitions in the new division 3 000
Depreciation of equipment 2 000
55 000
Additional information
The total expenditure above of R55 000 may be grouped into the following categories:
[R24 000 (refer point 1) + R16 000 (refer to point 2) + R15 000 (refer to point 3) =
R55 000]
1. The division incurred the following work with regard to the development of five
potential new remedies:
Remedy Cost
incurred
Rand
‘V’ – It is expected that it will be marketed within the next 6 months 9 000
‘I’ – Project has been halted after initial work 5 000
‘G’ – It is expected that it will be marketed within the next year or two 6 000
‘S’ – In an early stage of development 3 000
‘X’ – In an early stage of development 1 000
24 000
2. The division also undertook testing and quality control with regard to existing
products, of which development had been completed in prior years. The total costs
amounted to R16 000.
516
Intangible assets
3. The remainder of the division's expenditure, namely R15 000, is in respect of general
research undertaken in order to formulate potential new products which could be
manufactured in the future.
The costs (R55 000) were accounted for in the financial statements of Snap Ltd by debiting
a fifth thereof against profit for the year. The remainder was shown in the statement of
financial position under ‘Research and development costs – in process’.
A minute of a recent directors' meeting during which the above matter was discussed
indicates that the board of directors plan to write off a fifth of the R55 000 to profit each
year.
Required
Discuss how the costs should be accounted for in accordance with the requirements of
International Financial Reporting Standards (IFRS). No reference to the Conceptual
Framework is required. Also indicate why the current accounting treatment is not
acceptable.
The accounting treatment for research and development costs is prescribed by IAS 38.
Such is the nature of research that there is no certainty that future economic benefits will be
realised from the specific expenditure on research. Research costs will therefore be
recognised as an expense in the period in which they are incurred and will not be recognised
as an asset (IAS 38.54).
The development costs of a project must be recognised as an expense in the period in which
they are incurred unless all of the following criteria are met (IAS 38.57):
• The technical feasibility of completing the product or process so that it will be
available for sale or use can be demonstrated.
• The entity intends to complete the product or process and sell or use it.
• The entity’s ability to use or sell the product or process can be demonstrated.
• Details are available of how the intangible asset will generate probable future
economic benefits: the existence of a market for the product of the intangible asset or
the intangible asset itself or, if it is to be used internally rather than sold, its usefulness
to the entity can be demonstrated.
• Adequate resources exist, or their availability can be demonstrated, to complete the
intangible asset and market or use the intangible asset.
• The costs attributable to the intangible asset can be separately identified and reliably
measured.
The amount of development costs recognised as an asset must then be amortised and
recognised as an expense on a systematic basis so as to reflect the pattern in which the
related economic benefits are recognised. The arbitrary allocation of five years by the board
of directors is thus not acceptable.
Amortisation may only commence once the product or process is available for use.
Snap Ltd’s amortisation before the intangible assets were available for use is thus not
acceptable.
517
Intangible assets
(1) If assumed that all the requirements in IAS 38.57 have been met, the costs can be
capitalised as an asset.
(2) 5 000 + 3 000 + 1 000 = 9 000
The R15 000 will not be amortised until the asset is ready for use, but should annually be
tested for impairment in accordance with IAS 36.10(a).
On 1 January 20.2, C Net Ltd obtained a licence to operate a cell phone network for a period
of 25 years. The total cost of the licence amounted to R5 000 000. The licence is amortised
on the straight-line basis over a period of 25 years, as it is expected that economic benefits
relating to the licence will flow to the entity over this period.
On 31 December 20.2 it is estimated that the licence will generate cash inflow amounting to
R1,5 million per annum. The annual cash outflow required to generate the inflow amounts
to R650 000. An after-tax discount rate of 14,4% is regarded as appropriate. The expected
future cash flow is less than the original estimate because a similar licence was awarded to a
major competitor on 31 July 20.2. The licence can be sold on 31 December 20.2 for
R4 million. Assume that all the cash flows occur on the last day of every year.
Assume that the South African Revenue Service does not allow a deduction of the cost of
the licence. Assume a tax rate of 28%. The correct profit before tax for the 20.2 year after
taking the above information into account amounted to R3 million.
Required
Disclose the above information in the notes that will accompany the financial statements of
C Net Ltd for the year ended 31 December 20.2 in accordance with the requirements of
International Financial Reporting Standards (IFRS). Ignore comparative amounts. Assume
all amounts to be material.
Calculations
1. Impairment loss
Rand
518
Intangible assets
Disclosure
C NET LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.2
1. Accounting policy
The financial statements are prepared on the historical cost basis in accordance with
the requirements of International Financial Reporting Standards (IFRS). The following
are the principal accounting policies which are consistent in all material respects with
those applied in previous years unless otherwise stated:
Licences purchased separately are initially recognised at cost. Licences are disclosed
at cost less accumulated amortisation and accumulated impairment losses. Licences
have a finite useful life and are amortised on the straight-line basis over 25 years.
2. Intangible assets
Rand
Licence (purchased):
Carrying amount at 1 January 20.2 –
Additions: purchased separately 5 000 000
Amortisation (1) (200 000)
Impairment loss recognised in profit or loss (see note 3) (calc 1) (603 461)
Carrying amount at 31 December 20.2 4 196 539
Gross carrying amount 5 000 000
Accumulated amortisation and impairment losses (803 461)
Profit before tax is stated after taking into account the following:
Rand
Expenses
519
Intangible assets
An impairment loss amounting to R603 461 was recognised on the licence granted to
operate the cell phone network. This impairment loss is the result of a second licence
being awarded to another cell phone network company. The recoverable amount
represents value in use, based on a discount rate of 20% (2).
(1) (3 000 000 + 200 000 + 603 461) × 28% = 1 064 969
(2) 200 000/3 000 000 × 28% = 1,87%
(3) 603 461/3 000 000 × 28% = 5,63%
(4) 1 064 969/3 000 000 × 100 = 35,50%
Fols Ltd is a company operating in diversified industries with a 31 December year end. The
following information regarding the development costs is applicable:
Ice machine
During the 20.5 financial year, development costs of R400 000 were incurred. During the
current financial year a further amount of R300 000 was incurred on development costs.
Assume that the necessary requirements were met to capitalise the development costs.
Production commenced on 1 July 20.6. The marketing division estimated the following
production and sales at this date:
520
Intangible assets
On 31 December 20.6 the marketing division presented the following adjusted estimates:
The sales for 20.6 realised as was predicted. The development costs are amortised on the
basis of the expected sales value. In order to ensure the realisation of the sales for 20.8, an
additional R30 000 marketing costs must be incurred during 20.8. This amount has not been
included in the 20.8 cost of sales figure. Technological obsolescence necessitated the
preparation of new estimates by the marketing division. Assume that all cash flow takes
place annually on 31 December, and that a discount rate of 10% before tax is appropriate.
A figure for fair value less costs of disposal is not available.
Microwave oven
During 20.4, research costs to the amount of R400 000 and development costs to the amount
of R900 000 were incurred in respect of this product. The development costs complied with
all the criteria for recognition as an asset and thus were capitalised in terms of International
Financial Reporting Standards (IFRS). Production commenced on 1 September 20.4. These
development costs were amortised based on the number of units produced per annum. It
may be assumed that sales and production occur evenly. During 20.4 it was expected that
production of this product will continue for a period of five years from 1 September 20.4.
On 1 September 20.5, production was halted due to a fault discovered in the production
process. Thereafter, additional development costs to the amount of R80 000 were incurred
up until 30 November 20.5, before the production foreman indicated to management that the
fault appeared to be inherent to the process and that additional development costs estimated
at R750 000 would have to be incurred before the fault would be eliminated. The costs of
R80 000 were written off in full in 20.5 due to the uncertain circumstances. Management
approved the recommendation and further decided that the development would be
contracted out to an international research institute. On 5 December 20.5 a contract was
entered into with Das Haus Research plc in the UK with the completion date set for
30 June 20.6. The success of tracing and neutralising the fault could not be determined at
the 20.5 year end and future economic benefits were uncertain.
On 30 June 20.6 the research report from Das Haus Research plc was presented and stated
that the fault in the production process could be neutralised. On this date the recoverable
amount of the previous year’s development costs was calculated as R800 000, using a
discount rate of 12%. The fee of R750 000 was paid on 1 August 20.6. Additional
development costs of R400 000 were incurred from 1 July 20.6 until 31 October 20.6, and
production commenced again on 1 November 20.6. At this date it was estimated that
production would occur evenly over a remaining period of 34 months. On
31 December 20.6 there are no indications of impairment.
521
Intangible assets
During 20.4 the following estimates pertaining to this product were presented and approved:
Rand
Research costs incurred – 20.4 200 000
Development costs incurred – 20.4 600 000
Amortised in 20.4 (based on number of units sold) 60 000
Amortised in 20.5 150 000
Amortised in 20.6 (evenly) 170 000
Amortised in 20.7 140 000
Amortised in 20.8 80 000
The marketing division revised the product at the 20.5 year end and was of the opinion that
the estimated future sales would be realised. There was therefore no indication of
impairment.
During 20.6, a competitor released a similar, more technologically advanced product to the
market. The result of this was that no sales of Polycole model P54 have occurred since
1 August 20.6. At the 20.6 year end the marketing division recommended that this product
be withdrawn from the market.
Required
Show all the information relating to the research and development costs in the financial
statements of Fols Ltd for the year ended 31 December 20.6 in accordance with the
requirements of International Financial Reporting Standards (IFRS). Accounting policy
notes are not required.
Calculations
20.5 A B C Total
Rand Rand Rand Rand
Balance – 1 January 20.5 (2) (6) – 840 000 540 000 1 380 000
Amortised (2) – (120 000) (150 000) (270 000)
Written off (3) – (720 000) – (720 000)
Incurred and capitalised 20.5 400 000 – – 400 000
Balance – 31 December 20.5 400 000 – 390 000 790 000
The R80 000 in respect of project B spent until 30 November 20.5 was written off in full in
20.5 due to the uncertainty.
20.6 A B C Total
Rand Rand Rand Rand
Balance – 1 January 20.6 400 000 – 390 000 790 000
Written back (5) – 720 000 – 720 000
Incurred and capitalised 20.6 (9) 300 000 1 150 000 – 1 450 000
Amortised (1) (4) (7) (79 545) (110 000) (99 167) (288 712)
Written off (calc 1) (8) (305 655) – (290 833) (596 488)
Balance – 31 December 20.6 314 800 1 760 000 – 2 074 800
522
Intangible assets
A = Ice machine
B = Microwave oven
C = Polycole model P54
(1) 500 000/(500 000 + 1 400 000 + 1 600 000 + 900 000) × 700 000 = 79 545
(2) 900 000 – (900 000 × 4/60) = 840 000; 900 000 × 8/60 = 120 000 (only for eight
months because amortisation calculated on number of units produced method)
(3) 840 000 – 120 000 = 720 000
(4) Number of months for amortising = 34
(750 000 + 400 000 + 720 000) × 2/34 = 110 000
(5) When reversing an impairment loss, the increased carrying amount may not exceed
what the carrying amount would have been if no impairment loss was recognised in
previous years – IAS 36.117. If no impairment loss was recognised i.r.o. the
microwave oven, the carrying amount would still have been R720 000 as no
amortisation took place because no production occurred. The recoverable amount of
R800 000 is therefore limited to R720 000.
If no impairment loss was recognised on the microwave oven, amortisation would still
have been provided on the it for the period 1 September 20.5 to 30 June 20.6 even if it
was not in use. In this question, however, the amortisation for this period is RNil,
because amortisation is based on number of units produced and no units have been
produced during this period.
(6) 600 000 – 60 000 = 540 000
(7) 170 000 × 7/12 = 99 167
(8) 390 000 – 99 167 = 290 833
(9) 750 000 + 400 000 = 1 150 000
Calculation 1
523
Intangible assets
Rand
Disclosure
FOLS LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.6
FOLS LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.6
2. Intangible assets
20.6 20.5
Rand Rand
Development costs (generated internally) (calc 1)
524
Intangible assets
Profit before tax is stated after taking into account the following:
20.6 20.5
Rand Rand
Expenses
Included in cost of sales:
– Development costs – amortised (1) 288 712 270 000
– directly written off – 80 000
– Impairment loss i.r.o. development costs 596 488 720 000
Income
Reversal of impairment loss i.r.o. development costs –
included in cost of sales 720 000 –
Impairment losses
During 20.5 development costs i.r.o. a microwave oven amounting to R720 000 were
written off due to the discovery of a fault in the production process. The defect was
identified and corrected after additional research and development costs had been expended.
Production once again commenced during the year, which led to development costs of
R720 000 being written back. The recoverable amount of the microwave oven’s
development costs is the value in use, which was calculated by using a discount rate of 12%.
During 20.6 a competitor launched a technologically advanced product into the market
which resulted in the company's product (Polycole model P54) being withdrawn from the
market as no further sales occurred. Development costs of R290 833 written off were in
relation to this.
Development costs amounting to R305 655 were written off due to expected lower future
economic benefits on account of technological obsolescence of one of the company's
products – an ice machine. The recoverable amount of these development costs is the value
in use, which was calculated by using a discount rate of 10%.
The financial director of Touch Ltd approached you for advice regarding the following
issues:
1. Touch Ltd has been in business for a number of years and has established a portfolio
of loyal customers. The financial director wants to include this portfolio of customers
in the statement of financial position as an intangible asset as he is of the opinion that
Touch Ltd is worth more than what is reflected by the company’s current net asset
value.
2. Market research has indicated that there is a need for a shocking device that can be
used for self-defence. Two prototypes were developed during the year at a cost of
R21 000. A final choice between the two prototypes will be made early in the next
financial year. The financial director wants to capitalise the R21 000 as an asset.
525
Intangible assets
3. R25 000 was spent during the current year to generate a trademark internally. It is
expected that the benefits from the trademark will flow to the entity over a period of
10 years. The company therefore wants to capitalise the trademark and amortise it over
10 years.
4. Early in the current year a new production process was brought into use. Personnel
were trained for three months to operate the new system. The total training expenditure
amounted to R22 000. The new system will be in use for at least eight years, and
therefore the company wants to capitalise the training expenditure and amortise it over
eight years.
5. Advertising costs amounting to R43 000 were incurred during the year i.r.o. radio and
television advertisements. The objective of these advertisements was to introduce to
the public two new products of Touch Ltd. It is expected that the demand for these
products will last for approximately three years. As the economic benefits will flow to
the entity over a three-year period, the financial director wants to capitalise the
advertising costs and then amortise them over three years.
Required
Indicate in each of the above cases whether or not the relevant costs may be capitalised.
Motivate your answer in accordance with the requirements of International Financial
Reporting Standards (IFRS). Assume all amounts are material.
If all these requirements are met, Touch Ltd may capitalise the development costs
amounting to R21 000.
526
Intangible assets
Eggs Galore (Pty) Ltd is a company trading in decorated ostrich eggs and has a December
year end. Owing to an extensive overseas market in African artefacts, Eggs Galore (Pty) Ltd
decided to export its products.
In order for Eggs Galore (Pty) Ltd to enter the export market, the development of a website
for its own use was necessitated. Potential export customers can visit the website to place
orders and complete transactions in a secure web environment.
During May and June 20.1, the management of Eggs Galore (Pty) Ltd investigated and
planned the development of their own website. Costs incurred during this period were as
follows:
Rand
Viability studies concluded that the website would lead to a substantial improvement in
profitability.
During July to November 20.1, a firm of web consultants was employed to complete the
website, and the following costs were incurred:
Rand
527
Intangible assets
The website was successfully completed and implemented on 31 December 20.1. Assume
that all the requirements of IAS 38.57 have been met for the capitalisation of website costs.
Although the future economic benefits of the website could not be accurately measured, it
was estimated they would only flow to the entity for a period of four years due to the rapid
change in technology.
Required
a. Advise the management of Eggs Galore (Pty) Ltd on the accounting treatment of the
expenditure incurred concerning the website. Your answer must be substantiated by
referring to the requirements of International Financial Reporting Standards (IFRS).
b. Calculate the carrying amount of the website at 31 December 20.2.
c. How will your answer in part a. change if the website is developed solely to promote
and advertise the entity’s products?
a. SIC 32 concludes that a website, developed by an entity for its own use, is an
internally generated intangible asset subject to the requirements for recognition in
IAS 38 being:
• an identifiable asset that will generate probable future economic benefits; and
• the costs of the asset can be reliably measured.
The planning stage of the website is similar to the research phase in IAS 38.54 – .56.
Expenditure incurred in this stage will be recognised as an expense when it is incurred.
Travelling costs of R8 000 and consultation fees paid of R27 000 will therefore be
expensed in the profit or loss of Eggs Galore (Pty) Ltd for the current year.
The application, infrastructure development and graphic design, as well as the content
development stages, are similar in nature to the development phase in IAS 38.57 – .64.
Expenditure incurred in the development phase will be recognised as an expense in the
period in which it is incurred unless all of the following criteria are met (IAS 38.57)
(which implies capitalisation of development costs):
• The technical feasibility of completing the website so that it will be available for
use.
• The intention to complete the website for use.
• The ability to use the website.
• How the website will generate probable future economic benefits.
• The availability of adequate technical, financial and other resources to complete
the development of the website.
• The ability to reliably measure the expenditure attributable to the website during
the development.
The expenditure incurred during July to November being content development costs
and programming of R130 000, as well as graphic design costs of R35 000, will be
capitalised as an internally generated intangible asset and be amortised on a systematic
basis to reflect the pattern in which the related economic benefits are recognised.
Owing to the rapid change in technology, the period of economic benefit from the
current website is estimated at four years.
528
Intangible assets
b. Rand
c. If the website is solely or primarily developed for promoting and advertising the
entity’s own products, the entity is not able to demonstrate how the website will
generate probable future economic benefits. Consequently all expenditure on
developing such a website will be recognised as an expense when incurred.
Avon Ltd, a company listed on the JSE Ltd, has a 30 September year end. The company is
involved in a number of different business activities.
1. On 1 December 20.3, Avon Ltd obtained a fishing quota, which entitles the company
to fish sardines on the east coast of South Africa for a three-year period, starting on
1 January 20.4. The company incurred the following expenditure to obtain the fishing
quota:
Rand
The calculation of the recoverable amount of the fishing quota showed that the
recoverable amount exceeded the carrying amount on 30 September 20.4.
2. Avon Ltd developed a new medicine for the treatment of a flu virus. Research costs of
R2 500 000 were incurred for the year ended 30 September 20.3 for this purpose. From
1 October 20.3 to 15 November 20.3 a further amount of R35 000 was spent on
research.
On the basis of the research findings, testing of the medicine started from
16 November 20.3. Clinical trials were undertaken from 16 November 20.3 to
31 January 20.4 at a cost of R750 000, but it could not be determined with certainty
during this period whether the medicine would actually be able to kill the flu virus.
From 1 February 20.4 to 30 June 20.4, further clinical trials were done at a cost of
R1 050 000. The clinical trials that were performed from 1 February 20.4 to
30 June 20.4, were completed successfully and confirmed that the new medicine will
be able to kill the flu virus. The distribution of the medicine was approved by the
Medicines Control Council on 30 June 20.4 and the manufacturing of the new
medicine commenced on 1 July 20.4.
529
Intangible assets
The marketing department determined that the demand for the new medicine is so great
that the recoverable amount was conservatively estimated at R80 million over a period
of 15 years.
3. During the year ended 30 September 20.4, Avon Ltd spent R65 000 on the
development of a customer list. It was expected that the benefits obtained from the
customer list would accrue to the company over a period of 10 years.
4. Avon Ltd owns a patent with a cost of R450 000, which is used to manufacture an
organic insect killer. The useful life of the patent was estimated at 15 years, and on
1 October 20.3 the carrying amount of the patent amounted to R390 000. The fair value
of the patent in an active market amounted to R300 000 on 30 September 20.4, since
another organic insect-killer patent was also approved and the competitor already
obtained a large share of the market.
5. All intangible assets of Avon Ltd are amortised over their estimated useful life
according to the straight line-method.
6. Assume the South African Revenue Service allows a deduction of 25% per annum (not
apportioned for part of the year) on the following:
7. Assume a tax rate of 28%. The deferred tax asset on 30 September 20.3 amounted to
R339 150. There are no other temporary differences, non-taxable items or non-
deductible items except for those arising from the above information.
Required
Prepare the general journal entries (cash transactions included) of Avon Ltd for all the
above transactions for the year ended 30 September 20.4 in accordance with the
requirements of International Financial Reporting Standards (IFRS). Round all calculated
amounts to the nearest rand.
On 1 January 20.0, Sky Ltd bought a licence for R1 million. As the licence is registered for
a period of 15 years, it was decided to amortise it on the straight-line basis over a period of
15 years. On 31 December 20.1 market research, however, indicated that the demand for the
product relating to the licence would only continue for another nine years (this did not result
in any impairment).
530
Intangible assets
From 1 January 20.2 it was decided to disclose licences at revalued amounts instead of at
historical cost. The market value of the licence amounted to R1 200 000 on that date. The
market value was determined with reference to prices in an active market. The remaining
useful life did not change. On revaluation any accumulated amortisation is eliminated
against the gross carrying amount. Licences will be revalued annually as from
1 January 20.2.
Sky Ltd realises revaluation surpluses while the assets are being used. Assume a normal tax
rate of 29% and that the South African Revenue Service grants an annual allowance of 5%
on this licence. Assume that sufficient future taxable profits will be available against which
deductible temporary differences can be utilised.
Required
Disclose all the notes that will accompany the financial statements of Sky Ltd, as well as an
extract from the statement of profit or loss and other comprehensive income and the
statement of changes in equity (ignore the total column) of Sky Ltd, for the year ended
31 December 20.2, in accordance with the requirements of International Financial Reporting
Standards (IFRS).
A specialised engineering company, Gert Ltd, has a research and development department
which is involved in various projects. The company's year end is 30 June. Details of the
projects are given below.
Project Dynamo
Three researchers were allocated to the project during the first three months of the financial
year ended 30 June 20.4 with the aim of developing an alternative to the light switch. The
researchers did not achieve any success and the research was therefore suspended. The costs
allocated to this project amounted to R180 000.
Project Litho
During the financial year ended 30 June 20.4 the researchers in the team developed a new
apparatus to do welding. The apparatus will ensure improved efficiency and increased
safety. The researchers are of the opinion that the product will prove to be highly successful
as safety in the workplace is a high priority for the trade unions. The research costs for the
financial year amounted to R20 000. The development costs for the financial year ended
30 June 20.4 amounted to R670 000 (assume that the requirements of IAS 38.57 have been
met) and are made up as follows: salaries R500 000, local consultants R50 000, raw
materials R30 000, and the installation of plant for production R90 000. The plant is of a
specialised nature, and will have no scrap value once the product is no longer manufactured.
The project was completed on 30 June 20.4 and production commenced on 1 July 20.4.
The research department is of the opinion that demand for the product will only last three
years due to ever-changing technology. There were no indications of impairment.
531
Intangible assets
Project Flash
Various researchers worked on this project during the 20.3 financial year in order to develop
an improved lawnmower. This project was then suspended due to the fact that this was not a
high-priority research project. At that stage the project did not have a commercial marketing
value and the amount of R350 000 was also treated as such. The research on this project
resumed on 1 January 20.4. All the requirements for the capitalisation of development costs
in accordance with IAS 38.57 had already been met by 1 February 20.4. The costs incurred
for 20.4 were as follows:
Rand
Additional development costs incurred from 1 July 20.4 to 31 August 20.4 amounted to
R500 000. Production commenced on 1 September 20.4 in an existing plant. It is expected
that the full costs incurred on this project during the financial years 20.3 to 20.5 will be
recovered, and that the economic benefits of the project can be expected to be enjoyed for
the next five years.
Project Romario
The development costs incurred on this project until 30 June 20.3 amounted to R700 000.
During the year ended 30 June 20.4 a further R900 000 of development costs were incurred.
During the year ended 30 June 20.5 development costs of R500 000 were incurred and the
project was completed on 30 November 20.4. Production, however, only commenced on
1 January 20.5 in an existing plant. On 15 October 20.2 the research and development
department presented a report on a feasibility study and concluded that the development of
this new product would lead to a substantial improvement in profitability. The future
economic benefits could not be accurately determined at that date although the estimates
calculated indicated that the profit on sale of this product would cover the costs of
development several times. The development costs incurred from 20.3 to 20.5 met all the
requirements for capitalisation in terms of IAS 38.57. Economic benefits of the project can
be expected for five years.
Project Limbo
The development of this project commenced on 1 July 20.3 and was completed on
1 February 20.4 at a cost of R570 000. Production commenced immediately in an existing
plant. The development costs incurred met all the requirements for capitalisation in terms of
IAS 38.57 on 1 July 20.3.
The marketing division estimated that 50 000 units of product Limbo can be manufactured
and sold per financial year. The expected period of demand for product Limbo is five years.
The knowledge obtained during the development of product Limbo can be sold at the end of
the five years for R20 000. An agreement with a third party to that effect has already been
signed.
532
Intangible assets
Required
Disclose intangible assets and profit before tax in the notes that will accompany the
financial statements of Gert Ltd for the year ended 30 June 20.5, in accordance with the
requirements of International Financial Reporting Standards (IFRS). Use a column for each
project and assume that there were no impairment losses identified during annual
impairment testing (where appropriate). The total column in the intangible asset note is not
required.
Blerts Ltd is a company operating in the electronics and related industries, and has a year
end of 31 December. The organisation has its own research and development department
and makes use of local and international research institutes.
The following information is relevant to development costs which have been recognised as
assets:
The marketing division estimated that the product will have a limited marketing useful life
and estimated the sales in units as follows:
20.4 – 40 000
20.5 – 100 000
20.6 – 60 000
20.7 – 30 000
20.8 – 20 000
The full production is sold during the relevant period of production and there is no
inventory on hand. Amortisation of development costs is based on estimated sale of units.
Hi-fi amplifier
The development costs of this product were incurred, and development was also completed
during 20.1. The amount capitalised up to 31 December 20.1 amounted to R900 000. The
production commenced on 1 January 20.2. At that date the economic benefits were expected
to be enjoyed by the company for five years. The estimate of economic benefits was revised
on 31 December 20.4 and was still considered to be relevant. This intangible asset is
amortised on a straight-line basis and there is no indications of impairment.
533
Intangible assets
The development of this product was completed during 20.3 at a cost of R5 million.
Management decided that, due to the material nature of the creation of this product, the
development costs shall be capitalised as part of the cost of the inventory. The market
demand for this product has been estimated to be only 10 units. The amortisation of the
development costs is based on units produced. During 20.3 only one product was
manufactured and this was on hand at year end. During 20.4, four Mil systems were
manufactured of which two were in inventory at 31 December 20.4. The system that was in
inventory at 31 December 20.3 was sold during the 20.4 financial year.
Patents
Required
The following is a list of costs incurred by Véju Ltd during their 28 February 20.2 financial
year:
1. Véju Ltd operates an existing website for its own use. The costs to develop the
website were capitalised in the previous year as an intangible asset as it complied with
IAS 38.57 at that time. However, Véju Ltd acquired copyrights during the
development of the website and these costs are now amortised over the existing
economic life of the website. Amortisation costs of the copyrights amounts to R2 500
for the year. This reflects the pattern in which the economic benefits are consumed.
534
Intangible assets
2. During the current year Véju Ltd paid R230 000 to Compusult (Pty) Ltd to secure the
above-mentioned website. Previously the website was mainly used to advertise the
products of Véju Ltd, but is now being integrated with the accounting function of
Véju Ltd to incorporate the placement, as well as payment, of orders. These costs
incurred prolonged the functioning of the website with an additional four years and
will substantially improve profitability in future.
3. During the securing of the website, one of the design staff members of Compusult
(Pty) Ltd worked for a month on a relatively high-risk approach to speed up the
process of securing the website on request of Véju Ltd. His efforts proved fruitless and
his salary for the period amounted to R30 000. This amount is not included in the
R230 000 payment mentioned in note 2.
4. Véju Ltd’s accounting software package complies with the recognition criteria of an
intangible asset. After upgrading the website, it was necessary to modify the existing
accounting software package to make it operate at its original assessed performance
standard. These costs amounted to R150 000.
5. Training costs amounting to R13 000 were paid by Véju Ltd to train personnel on the
accounting treatment and processing of orders placed on the new secure website.
7. Véju Ltd has an extensive customer list indicating all loyal supporting customers of
Véju Ltd. The directors are of the opinion that this list is worth at least R100 000 to
their opposition, and want to capitalise the list at R150 000.
8. Véju Ltd had a cocktail and presentation evening to expand the goodwill of Véju Ltd
within their existing customer base. Expenditure of R25 000 was incurred.
9. To entertain future VIP customers of Véju Ltd, the company applied for a fishing
quota with the Natal Parks Board. The company incurred the following costs during
the year in an attempt to obtain the quota:
Rand
On 28 February 20.2 it was still not certain whether their application for the fishing
quota had been successful.
Required
Indicate in each of the above cases whether or not the relevant costs can be capitalised.
Motivate your answer in accordance with the requirements of International Financial
Reporting Standards (IFRS). Assume all amounts to be material.
535
Intangible assets
On 1 January 20.0, Radio Ltd acquired a broadcasting licence for R600 000. This licence is
renewable every five years if the entity complies with the relevant legislative requirements.
The licence may be renewed indefinitely at little cost. Radio Ltd intends to renew the licence
indefinitely, and evidence supports its ability to do so. Historically, there has been no
compelling challenge to the licence renewal. The technology used in broadcasting is not
expected to be replaced by other technology at any time in the foreseeable future.
On 1 January 20.6 the licensing authority decided that it will no longer renew broadcasting
licences, but will rather auction them. It is expected that the costs to obtain a licence will be
significantly higher in future. In spite of this, Radio Ltd still expects that the licence will
continue to contribute to net cash inflows until it expires, and there is no other indication of
impairment.
Required
a. Indicate, with reasons, what the useful life of the broadcasting licence was up to 20.5
and whether it should be amortised or not.
b. Discuss the correct accounting treatment of the subsequent expenditure of R5 000 on
1 January 20.5.
c. Disclose the above information in the notes that will accompany the financial
statements of Radio Ltd for the year ended 31 December 20.6 in accordance with the
requirements of International Financial Reporting Standards (IFRS). Accounting
policy notes are not required.
536
IAS 40
Investment property
__________________________________________________________________
QUESTIONS
IAS 40.7 Fair value model and cost model, tax, disclosure
IAS 40.8 Sundry aspects, tax
IAS 40.9 Transfers and capital gains tax
IAS 40.10 Investment property and consolidations
537
Investment property
Wasser Ltd, a manufacturing concern, utilised surplus funds to purchase an office building
in the central business district of Pretoria. The capacity of the building is 10 000 m2 and is
fully let. The estimated useful life at the date of completion was 30 years.
Required
Briefly discuss the accounting treatment of the above land and buildings in the financial
statements of Wasser Ltd so as to comply with the requirements of International Financial
Reporting Standards (IFRS). Disclosure requirements are not to be discussed.
The land and buildings must be classified as investment property. Investment property is
defined as property (land or a building, or part of a building, or both) held (by the owner or
by a lessee under a finance lease) to earn rentals and/or for capital appreciation, rather than
for:
• use in the production or supply of goods or services or for administrative purposes; or
• sale in the ordinary course of the business.
Measurement at recognition
Investment property must be measured initially at its cost. The cost of a purchased
investment property comprises its purchase price and any directly attributable expenditure
such as professional fees for legal services, property transfer taxes and other transaction
costs.
Investment properties must be measured using either the fair value or the cost model.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. The fair value
of an investment property must therefore reflect market conditions at the reporting date. Any
gain or loss arising from a change in the fair value of the investment property must be
included in profit or loss for the period in which it arises.
If the investment property is measured by using the cost model according to IAS 16, it must
be measured at cost less any accumulated depreciation and accumulated impairment losses
to account for the land and the building classified as investment property. As the land has an
unlimited useful life, it will not be depreciated, while the building would be depreciated over
30 years.
A company owns a piece of land with hotel buildings thereon. This property is leased out to
a well-known hotel group under an operating lease.
538
Investment property
Required
Discuss comprehensively whether the directors of the company must account for the land
and hotel buildings as investment property so as to comply with the requirements of
International Financial Reporting Standards (IFRS).
Owner-occupied property is property held (by the owner or by a lessee under a finance
lease) for use in the production or supply of goods or services or for administrative
purposes.
The property referred to in the question is, however, not owner-managed but rented out to a
well-known hotel group under an operating lease. The ancillary services are therefore
provided not by the company, but by the hotel group. As no significant ancillary services are
provided and rental income is generated by the property, it must be accounted for as an
investment property.
1 January 20.5 Vacant land 1 200 000 1 260 000 1 220 000
1 March 20.6 Hot house 300 000 330 000 –
1 July 20.6 Office building 550 000 575 000 –
Additional information
1. It is the company’s policy to account for investment property using the fair value
model.
539
Investment property
2. The vacant land is situated in Cape Town and is held for long-term capital
appreciation.
3. The hot house and the office building are situated in Johannesburg and are leased out
in terms of non-cancellable operating lease agreements for a period of five years from
the dates they were acquired. The hothouse and office building were leased out at a
monthly rental of R3 500 and R4 000 respectively.
4. Repairs and maintenance of R7 500 were incurred on the hothouse during 20.6.
5. During January 20.6, an amount of R45 500 was spent to combat a sudden locust
plague that broke out on the vacant land.
6. During November 20.6, expenditure of R45 000 was incurred for the hothouse. This
expenditure will increase the future benefits expected from the hothouse.
7. The above properties were valued by Mrs B. Dlamini, an independent sworn appraiser
who has recent experience in the location and category of the properties being valued.
The valuer determined the fair value of the properties based on current prices in an
active market for similar properties in the same location and condition, and subject to
similar lease and other contracts.
Required
Disclose the above information in the notes to the financial statements of Fern Ltd for the
year ended 31 December 20.6 in accordance with the requirements of International Financial
Reporting Standards (IFRS). Comparative amounts are not required.
FERN LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.6
1. Accounting policy
The financial statements have been prepared in accordance with the requirements of
International Financial Reporting Standards (IFRS) and on the historical cost basis,
except for investment property which is accounted for at fair value. The following are
the principal accounting policies which are consistent in all material respects with
those applied in previous years, unless otherwise stated:
Investment property is accounted for by applying the fair value model. All property
held to earn rentals or for capital appreciation, or both, is classified as investment
property. The fair value of investment property is determined at reporting date by an
independent sworn appraiser based on current prices in an active market for similar
properties in the same location and condition.
540
Investment property
Leases under which the risks and rewards incidental to ownership of a leased asset are
effectively retained by the lessor are classified as operating leases. Lease income from
operating leases is recognised in income on a straight-line basis over the lease term.
2. Investment property
20.6
Rand
Profit before tax is stated after taking the following into account:
Income
Rental income from investment property (1) 59 000
Expenses
Direct operating expenses arising from investment property that
generated rental income 7 500
Direct operating expenses arising from investment property that did
not generate rental income 45 500
4. Operating leases
The following future minimum lease payments are receivable under non-cancellable
operating leases of investment property referred to in note 2:
541
Investment property
On 1 September 20.3, Zero Ltd acquired a new manufacturing property and decided to lease
the old property to another manufacturing company in terms of an operating lease
agreement. The details of the property leased out are as follows:
Rand
Cost
Land 500 000
Buildings 1 200 000
Accumulated depreciation on buildings – 1 January 20.3 240 000
Tax base of buildings – 1 January 20.3 1 020 000
Fair value – 1 September 20.3
Land 630 000
Buildings 1 210 000
Fair value – 31 December 20.3
Land 650 000
Buildings 1 235 000
Owner-occupied property is accounted for by using the cost model while investment
property is accounted for by using the fair value model. The company depreciates owner-
occupied buildings on the straight-line basis over 15 years with an RNil estimated residual
value. Upon review of the depreciation method, useful life and residual value of the building
at 31 December 20.2, it was found they did not differ from previous estimates.
The South African Revenue Service allows an annual building allowance of 5%, not
apportioned for part of the year.
Ignore VAT.
Required
Prepare the journal entries in respect of the above-mentioned property for the year ended
31 December 20.3.
Your answer should comply with the requirements of International Financial Reporting
Standards (IFRS).
542
Investment property
Rand
Dr/(Cr)
1 September 20.3
Depreciation (1) 53 333
Accumulated depreciation: Buildings (53 333)
Recognition of depreciation while property is owner-occupied
31 December 20.3
Investment property (6) 45 000
Fair value adjustment (P or L) (45 000)
Fair value adjustment at year end
543
Investment property
31 December 20.2
A B C D E F G
Rand Rand Rand Rand Rand Rand Rand
Owner occupied
property
Land 500 000 500 000 – – – 500 000 Exempt
Building 1200 000 1200 000 – – 1200 000 – –
Depreciation/ wear
and tear (1) (2) (240 000) (240 000) – – (180 000) (60 000) 18 000
Deferred tax asset 960 000 960 000 – – 1 020 000 440 000 18 000
31 December 20.3
A B C D E F G
Rand Rand Rand Rand Rand Rand Rand
Owner-occupied
property transferred to
investment property
Land
Balance on 1 Jan 20.3 500 000 500 000 – – – 500 000 Exempt
Revaluation
1 Sept 20.3 (3) (4) 130 000 – 130 000 – – 130 000 (25 974)
Transferred to
investment property 630 000 500 000 130 000 – – 630 000 (25 974)
FV adjustment
31 Dec 20.3 (5) (6) 20 000 – – 20 000 – 20 000 (3 996)
Deferred tax liability 650 000 500 000 130 000 20 000 – 650 000 (29 970)
A B C D E F G
Rand Rand Rand Rand Rand Rand Rand
Building
Balance on
1 Jan 20.3 960 000 960 000 – – 1020 000 (60 000) 18 000
Depreciation/ wear
& tear (7) (8) (9) (53 333) (53 333) – – (60 000) 6 667 (2 000)
Revaluation
1 Sept 20.3
(10) (11) 303 333 – 303 333 – – 303 333 (89 998)
Transfer to invest-
ment property 1 210 000 906 667 303 333 – 960 000 250 000 (73 998)
FV adjustment
31 Dec 20.3
(12) (13) 25 000 – – 25 000 – 25 000 (4 995)
Deferred tax
liability 1 235 000 906 667 303 333 25 000 960 000 275 000 (78 993)
544
Investment property
A = Total
B = Historical
C = Revaluation
D = Fair value adjustment
E = Tax base
F = Temporary difference
G = Deferred tax
FV = Fair value
Rand
On 1 March 20.4, Zero Ltd occupied their manufacturing property that was previously
leased to another manufacturer. The company applies the fair value model to account for
investment property and the cost model to account for property, plant and equipment.
Details of the property are as follows:
Rand
Cost
Land 3 200 000
Buildings 6 800 000
Fair value – 1 January 20.4
Land 3 600 000
Buildings 6 950 000
Fair value – 1 March 20.4
Land 3 680 000
Buildings 7 200 000
Tax base of buildings on 1 January 20.4 5 780 000
545
Investment property
The South African Revenue Service grants an annual building allowance of 5%, not
apportioned for part of a year.
Ignore VAT.
Required
Prepare the journal entries in respect of the above-mentioned property for the year ended
31 December 20.4.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
1 March 20.4
Rand
Dr/(Cr)
Investment property (1) 330 000
Fair value adjustment (P or L) (330 000)
Fair value adjustment on 1 March 20.4
31 December 20.4
Depreciation (2) 400 000
Accumulated depreciation: Buildings (400 000)
Depreciation for the 10 months ending 31 December 20.4
(1) (3 680 000 + 7 200 000) – (3 600 000 + 6 950 000) = 330 000
(2) 7 200 000/15 × 10/12 = 400 000
546
Investment property
Calculation
31 December 20.4
Property, plant and equipment
Land (3) 3 680 000 3 200 000 480 000 95 904
Building (4) (5) (6) 6 800 000 5 440 000 1 360 000 408 000
Deferred tax liability at year end 503 904
Deferred tax liability at
beginning of year (415 890)
Deferred tax recognised in
profit or loss – 20.4 (Dr) 88 014
Abel Ltd owns land and buildings which are leased to Bronk Ltd in terms of an operating
lease for 30 years at a market-related rental of R57 000 (inclusive of VAT) per annum. The
lease commenced on 1 January 20.5 and lease rentals are payable annually in arrears.
On the same day, Bronk Ltd sublet the entire property to Crown Ltd for R57 000 (inclusive
of VAT) per annum, payable annually in arrears, for a period of 30 years in terms of an
operating lease. Bronk Ltd had strategic reasons for entering into the sublease at the same
rental amount as the original lease.
On 1 January 20.5 the buildings on the property were estimated to have a remaining useful
life of 50 years and the risk of loss or damage thereto rests with Abel Ltd.
Bronk Ltd classifies a property interest held under an operating lease as investment property.
At 31 December 20.5, the fair value of the property interest held by Bronk Ltd, in terms of
its lease with Abel Ltd, was determined and valued at RNil after taking into account all
expected payments.
547
Investment property
All the companies mentioned above are registered VAT vendors and unrelated in all
respects.
Required
Prepare the journal entries to account for the above-mentioned transactions in the records of
Bronk Ltd for the year ended 31 December 20.5.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Rand
Dr/(Cr)
Refer to calculation 2
(1) 328 299 × 15% = 49 245
(2) (57 000 × 100/114) – 49 245 = 755
(3) 57 000 × 14/114 = 7 000
Bank 57 000
Rental income from investment property (1) (50 000)
VAT output (2) (7 000)
Lease rentals received from sublease
548
Investment property
* Note: As the fair value of the property interest, after taking into account all expected
payments, was determined to be RNil, it is necessary to add back any recognised
lease liability for the purpose of arriving at the fair value of the asset (IAS 40.41
and .50 (d)).
Calculation
1. i = 15%
n = 30
PMT = 50 000 (57 000 × 100/114)
Comp PV = 328 299
Redge Ltd owns a factory property which was leased out to a manufacturer from
1 January 20.2 in terms of an operating lease agreement at R3 000 per month for 10 years.
This property was acquired on 1 January 20.2 at a cost of R400 000, of which R50 000 was
attributable to the land and R350 000 to the building. On 1 February 20.6, the building was
repainted at a cost of R8 000. The South African Revenue Service grants a 5% annual
building allowance, not apportioned for part of a year, in respect of the property. The fair
values of this property at the beginning and end of the current financial year were as
follows:
Rand
31 December 20.5
Land 80 000
Building 405 000
31 December 20.6
Land 87 000
Building 410 000
On 1 December 20.6 the company bought a piece of vacant land for R120 000. It is still
uncertain what this land will be used for, but a decision regarding the matter will be taken
early in the next financial year. On 28 December 20.6, R2 000 was spent to combat a sudden
rat plague that broke out on this property. The fair value of this vacant land increased to
R122 000 on 31 December 20.6.
The fair values of the above properties were determined by Mr Y. Manyana, an independent
valuer who holds a recognised and relevant professional qualification and has recent
experience in the location and category of the properties being valued. The valuer
determined the fair value of these properties based on current prices in an active market for
similar property in the same location and condition, and subject to similar lease and other
contracts.
Where investment property is accounted for using the cost model, depreciation is provided
for on the straight-line basis over 25 years with an RNil estimated residual value.
549
Investment property
The company’s profit before tax, after taking into account all the above information,
amounted to R720 000.
Ignore VAT.
Required
Disclose the above information in the notes to the financial statements of Redge Ltd for the
year ended 31 December 20.6, based respectively on the following assumptions:
a. Investment property is accounted for by applying the fair value model.
b. Investment property is accounted for by applying the cost model.
Your answer should comply with the requirements of International Financial Reporting
Standards (IFRS). Comparative amounts are not required.
Slowjo Ltd owns an office block in Pretoria that is leased to Jojo Ltd in terms of a non-
cancellable operating lease agreement. This office block was acquired on 1 January 20.1 for
R750 000, of which R120 000 was attributable to the land and R630 000 to the building. On
31 December 20.2 the fair value of the land amounted to R155 000, and that of the building
to R645 000. On 1 December 20.3, Slowjo Ltd began to use two offices, which comprise
approximately 2% of the building’s floor space, for its own purposes. It is the company’s
policy to depreciate owner-occupied office buildings on the straight-line basis over 20 years.
On 1 March 20.3 a piece of land was bought for which the future use has not yet been
determined. This property is situated in Johannesburg. Transfer duties amounting to
R10 000 were paid immediately. Although the seller of the property does not usually sell on
credit, he agreed that Slowjo Ltd would only pay an amount of R95 000 for the land on
28 February 20.4.
550
Investment property
On 1 July 20.3 the company bought an office building at an auction for R202 000 of which
R120 000 was attributable to the land and R82 000 to the building. The reduced price
resulted from the neglected state of the building. The management of Slowjo Ltd, however,
felt that this building had good potential as it is situated close to the Centurion lake, and
therefore decided to renovate the building and lease it to tenants as furnished offices. During
the following month the building was repainted at a cost of R5 000, the carpets were
replaced at a cost of R12 000, and broken tiles were replaced at a cost of R7 500. On
1 August 20.3 the furniture for the offices was bought for R42 000, after which the tenants
moved in.
Rand
Costs of approximately 10% of the fair values will have to be incurred to dispose of the
properties.
The company accounts for investment properties according to the fair value model.
Furniture is depreciated over eight years on the straight-line basis.
The South African Revenue Service allows wear and tear on furniture at 10% per annum on
the straight-line basis.
A fair discount rate before tax is 10% per annum, compounded annually.
Required
a. Calculate the fair value adjustment on investment property for the year ended
31 December 20.3.
b. Calculate deferred tax in the statement of profit or loss and other comprehensive
income (profit or loss) for the year ended 31 December 20.3.
c. Disclose the reconciliation between the carrying amount of investment property at the
beginning and end of the year ended 31 December 20.3 in the investment property
note. Comparative amounts are not required.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
551
Investment property
On 1 July 20.4, a new factory property was acquired by Invest Ltd at a total cost of
R1 200 000, of which R250 000 was attributable to the land and the rest (R950 000) to the
buildings. Subsequently it was decided to lease the previously used property to a
manufacturing company from that date onwards in terms of an operating lease agreement, at
a monthly rental of R5 000. This property was purchased on 1 January 20.0 at a cost of
R80 000 for the land and R500 000 for the buildings. On 1 July 20.4 the fair value of this
property amounted to R690 000, of which R110 000 was attributable to the land and
R580 000 to the buildings. Owing to the good location of the property the fair value
increased to R115 000 for the land and R590 000 for the buildings by 31 December 20.4.
During 20.2, the company acquired vacant land for R100 000 with an original intention to
hold it for long-term capital appreciation. However, in the previous financial year the
company commenced with the construction of a factory building on this vacant land with the
purpose of leasing the factory building to a manufacturer once construction was completed.
The construction expenses for the factory building were incurred as follows on the following
dates:
At 31 December 20.2 and 31 December 20.3, the fair value of this vacant land amounted to
R125 000 and R135 000 respectively. At 31 December 20.3 the fair value of the factory
building under construction amounted to R85 000.
From 1 August 20.4, the property was leased out in terms of an operating lease agreement at
R2 000 per month. At 31 December 20.4 the fair value of these land and buildings amounted
to R140 000 and R145 000 respectively.
It is the company’s policy to account for property, plant and equipment using the cost
model, while investment property is accounted for using the fair value model.
Depreciation on buildings is provided for on the straight-line basis over 25 years with
residual values estimated at RNil.
The company regards a revaluation surplus as realised when the underlying asset is sold or
withdrawn from use.
The profit before tax, after taking into account all the information above, amounts to
R800 000.
The South African Revenue Service grants an annual building allowance of 5%, not
apportioned for part of the year.
552
Investment property
• The costs of the respective assets at acquisition reflect their ‘base cost’ for capital
gains tax purposes.
• The depreciation method and estimates of the useful life and residual values of the
buildings have remained unchanged even on the date of change in use as well as
throughout the period of ownership.
Required
a. Disclose the following notes to the financial statements of Invest Ltd for the year
ended 31 December 20.4:
• Property, plant and equipment
• Investment property
• Profit before tax
b. Calculate the deferred tax expense in the statement of profit or loss and other
comprehensive income (profit or loss) for the year ended 31 December 20.4.
c. Disclose the income tax expense note to the statement of profit or loss and other
comprehensive income (profit or loss) for the year ended 31 December 20.4.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS). Comparative amounts are not required.
On 1 January 20.1, H Ltd acquired an 80% interest in S Ltd. On the same day S Ltd bought
land with factory buildings on it for R1 300 000, of which R500 000 was attributable to the
land. These buildings have a useful life of 25 years. The property was immediately leased to
H Ltd at a market-related rental. The fair value of the property on 31 December 20.1 was
R1 400 000 (R540 000 i.r.o. land) and on 31 December 20.2 it was R1 550 000 (R600 000
i.r.o. land). The group accounts for property, plant and equipment according to the cost
model in terms of IAS 16, while the fair value model is used for investment property.
The South African Revenue Service grants a 5% annual allowance on the factory buildings,
not apportioned for part of a year.
Required
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
553
Investment property
554
IFRS 2
Share-based payment
_________________________________________________________________
QUESTIONS
555
Share-based payment
Colorado Ltd grants 10 000 rights to each of its 3 directors on condition that the directors
stay in the employment of Colorado Ltd for 3 years.
Rand
Required
Provide the journal entries in the records of Colorado Ltd over the 3 year vesting period
under each of the following assumptions:
a. The rights are options to ordinary shares in Colorado Ltd.
b. The rights are rights to a cash payment based on the share price of Colorado Ltd.
c. The rights are options to ordinary shares in Colorado Ltd, but the grant is cancelled at
the end of year 2 in exchange for a cash compensation of R13,50 per option that is
paid to each director. The director who resigned, resigned before the cancellation.
Your answers must comply with International Financial Reporting Standards (IFRS). Ignore
taxation.
a.
Rand
Dr/(Cr)
Year 1
Directors’ remuneration (P or L) (1) 100 000
Share-based payment reserve (Equity) (100 000)
Recognition of share-based payment in the first year of the vesting
period
Year 2
Directors’ remuneration (P or L) (2) 33 333
Share-based payment reserve (Equity) (33 333)
Recognition of share-based payment in the second year of the
vesting period
Year 3
Directors’ remuneration (P or L) (3) 66 667
Share-based payment reserve (Equity) (66 667)
Recognition of share-based payment in the third year of the vesting
period
556
Share-based payment
b.
Rand
Dr/(Cr)
Year 1
Directors’ remuneration (P or L) (1) 110 000
Cash-settled share-based payment liability (110 000)
Recognition of share-based payment in the first year of the vesting
period
Year 2
Directors’ remuneration (P or L) (2) 50 000
Cash-settled share-based payment liability (50 000)
Recognition of share-based payment in the second year of the
vesting period
Year 3
Directors’ remuneration (P or L) (3) 100 000
Cash-settled share-based payment liability (100 000)
Recognition of share-based payment in the third year of the vesting
period
c.
Rand
Dr/(Cr)
Year 1
Directors’ remuneration (P or L) (1) 100 000
Share-based payment reserve (Equity) (100 000)
Recognition of share-based payment in the first year of the vesting
period
Year 2
Directors’ remuneration (P or L) (2) 100 000
Share-based payment reserve (Equity) (100 000)
Accelerated vesting upon cancellation of the grant in the second
year of the vesting period
557
Share-based payment
(4) (13,50 – 12) × 10 000 × 2 = 30 000 (excess payment above fair value recognised
as an expense)
(5) (12 – 10) × 10 000 × 2 = 40 000 (payment above balance of reserve up to fair
value is also treated as a buy-back of equity; retained earnings is adjusted because
the share-based payment reserve is already extinguished)
(6) 13,50 × 10 000 × 2 = 270 000
On 1 January 20.7 Maine Ltd granted 20 share appreciation rights to each of its
400 employees. The rights entitle the employees to receive a cash payment equal to the
intrinsic value of the rights on exercise date. Only the employees who were in the
company’s employ on 1 January 20.7 are entitled to the grant and the rights will vest after
the rendering of 2 years of service.
In 20.7, 5 employees resigned and 3 new employees were appointed. It was anticipated that
a further 2 employees would resign in 20.8. In 20.8, 4 employees resigned and 1 new
employee was appointed. On 31 December 20.8, 60% of the employees exercised their
rights.
* The employee therefore ‘pays’ the strike price but also ‘receives’ a cash payment equal to
the Maine Ltd share price.
Required
Provide the journal entries in the records of Maine Ltd for the year ended
31 December 20.8. Your answer must comply with International Financial Reporting
Standards (IFRS). Ignore taxation.
Rand
Dr/(Cr)
31 December 20.8
Employee benefit expense (P or L) (1) 200 556
Cash-settled share-based payment liability (200 556)
Recognition of share-based payment in the second year of the
vesting period
558
Share-based payment
* The fair value of the rights not yet exercised differs from the fair value of the
rights that are exercised. The fair value of the rights that are exercised equals
their intrinsic value (share price less strike price) because time value no longer
plays a role when the rights are exercised.
On 1 July 20.6 Delaware Ltd granted one of its managers the right to receive a cash payment
equal to the value of 10 000 shares or 11 000 actual shares in the company. The settlement
date is 30 June 20.9 on condition that the manager is still employed by the company at that
stage. The company has the right to choose the method of settlement.
The fair value of Delaware Ltd is determined every year by a reputable firm of appraisers.
The following fair values per share were determined:
The value of the shares to be issued in terms of the grant was R27 per share on grant date
(lower than the share price due to the vesting conditions). On 30 June 20.9 the company
decided on a settlement in shares. The fair value of the shares that were issued amounted to
R38 per share on 30 June 20.9.
Required
Provide the journal entries for the three years ended 30 June 20.7, 30 June 20.8 and
30 June 20.9 in the records of Delaware Ltd. Your answer must comply with International
Financial Reporting Standards (IFRS). Ignore taxation.
559
Share-based payment
Rand
Dr/(Cr)
30 June 20.7
Employee benefit expense (P or L) (1) 99 000
Share-based payment reserve (Equity) (99 000)
Recognition of share-based payment in the first year of the vesting
period
30 June 20.8
Employee benefit expense (P or L) (1) 99 000
Share-based payment reserve (Equity) (99 000)
Recognition of share-based payment in the second year of the
vesting period
30 June 20.9
Employee benefit expense (P or L) (1) 99 000
Share-based payment reserve (Equity) (99 000)
Recognition of share-based payment in the third year of the vesting
period
On 1 July 20.0 Energex Ltd granted each of its 200 employees the right to receive either
1 200 Energex Ltd ordinary shares or alternatively a cash payment equal to the actual market
price of 1 000 Energex Ltd ordinary shares, upon condition that they remain in the employ
of Energex Ltd for 3 years from grant date. Energex Ltd can choose how the arrangement
will be settled, but has an established past practice of settling in cash. During the year ended
30 June 20.1, 10 employees resigned and it was expected that another 7 will resign in the
two years to follow. During the year ended 30 June 20.2, 5 employees resigned and it is
expected that another 4 will resign during the next year.
560
Share-based payment
* The fair value is lower than the actual share price due to post-vesting share transfer
restrictions imposed through the conditions of this grant.
Required
Provide the journal entries of the share-based payment scheme in the records of Energex Ltd
for the year ended 30 June 20.2 to comply with the requirements of International Financial
Reporting Standards (IFRS). Ignore taxation.
Detroit Ltd is a company that manufactures and sells cars in South Africa. Many years ago
Detroit Ltd acquired a 75% interest in Phoenix Ltd, a company that also manufactures cars
and sells its products across the country. Both companies are listed on the JSE Ltd and have
a 31 December financial year end.
On 1 January 20.0 Phoenix Ltd granted 20 000 options to ordinary shares in Detroit Ltd to
each of its four divisional managers. The scheme was independently initiated by
Phoenix Ltd. All the managers accepted the grant. The grant is, however, subject to the
following conditions:
• Condition 1: Each manager should remain in the employment of the company for at
least three years from the date the options were granted.
• Condition 2: The share price of the company should exceed R30 per share at the end of
the three year period.
• Condition 3: During the three year period, the divisional sales that each manager is
responsible for should increase with at least 6% in comparison with the immediately
preceding year. The moment this does not happen, the manager loses the full grant.
The expectation is that no manager will leave the employment of the company before the
options vest. It is however expected that only three of the four managers will comply with
Condition 3. At 31 December 20.1 the divisional managers were also worried that the share
price of Phoenix Ltd may not reach the R30 per share requirement on 31 December 20.2.
Due to the share price that keeps decreasing the company decided to reprice the options on
30 June 20.1. The immediate change in fair value due to repricing was R5 on 30 June 20.1.
561
Share-based payment
It is group policy to reclassify any equity that originated from share-based payment
transactions to retained earnings if market conditions are not satisfied on vesting date.
Required
a. Discuss how the share-based payment transaction shall be classified in the financial
statements of both Phoenix Ltd and the Detroit Ltd Group (consolidated financial
statements).
b. Provide the journal entries to account for the share-based payment arrangement in the
accounting records of Phoenix Ltd for the year ended 31 December 20.0 as well as
31 December 20.1.
c. Provide the pro forma consolidation journal entries to account for the share-based
payment arrangement in the group’s financial statements for the year ended
31 December 20.1. Ignore journals for non-controlling interest on the normal profit that
pulls through from Phoenix Ltd’s trial balance.
d. Briefly discuss how the accounting treatment would have differed if Detroit Ltd granted
options to Detroit Ltd shares to the employees of Phoenix Ltd. Your answer must
address the treatment for Detroit Ltd, Phoenix Ltd and the Detroit Ltd Group.
Your answers must comply with International Financial Reporting Standards (IFRS). Ignore
taxation.
562
IFRS 3
Business combinations
__________________________________________________________________
Note: As this chapter and the chapter on IFRS 10 both deal with similar issues, the
questions on these two chapters are integrated and such questions are presented
as part of the chapter on IFRS 10.
563
Business combinations
564
IFRS 5
Non-current assets held for sale and
discontinued operations
__________________________________________________________________
IFRS 5.1 Accounting treatment of individual non-current asset held for sale
IFRS 5.2 Criteria for classification and accounting treatment of individual non-current
assets held for sale
IFRS 5.3 Classification and accounting treatment of individual non-current assets held
for sale
IFRS 5.4 Accounting treatment of disposal group held for sale
IFRS 5.5 Reversal of impairment loss on disposal group held for sale
IFRS 5.6 Change in plan to dispose of non-current asset
IFRS 5.7 Disclosure of disposal group
QUESTIONS
IFRS 5.13 Disclosure of discontinued operation and non-current asset held for sale
IFRS 5.14 Disclosure of discontinued operation and disposal group held for sale
565
Non-current assets held for sale and discontinued operations
Sally Ltd owns a machine with a carrying amount of R150 000 on 31 December 20.3. On
this date management decided to sell the machine for R160 000 (fair value) by
28 February 20.4 and a valid non-cancellable contract was entered into with a buyer. Costs
in respect of the sales transaction will amount to R15 000. Assume that all the criteria of
IFRS 5 for the classification of the asset as a non-current asset held for sale, have been met.
Required
a. Determine the amount at which the machine should be disclosed in the statement of
financial position as at 31 December 20.3.
b. Discuss the accounting treatment of the transaction.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Rand
b. The machine met all the criteria of IFRS 5 for classification as a non-current asset held
for sale on 31 December 20.3. The machine should therefore be transferred from non-
current assets to current assets (non-current assets held for sale) and should then be
measured at the lower of its carrying amount and fair value less costs to sell
(IFRS 5.15). The ‘held-for-sale’ machine will thus be written down from R150 000 to
R145 000 and an impairment loss of R5 000 will be recognised in profit or loss for
20.3.
On 1 January 20.2 (beginning of the year), Charly Ltd owns a vehicle with an original cost
price of R200 000 and accumulated depreciation of R40 000. Charly Ltd writes off
depreciation on vehicles at 10% per annum in accordance with the straight-line method.
On 30 April 20.2, management decided to dispose of the asset within the next year and all
the criteria of IFRS 5 for the classification of the asset as held for sale were met on this date.
The fair value less costs to sell of the vehicle amounted to R125 000 on 30 April 20.2. At
year end, the fair value less costs to sell remained unchanged.
Required
a. List all the criteria set out in IFRS 5 which must be met before an item can be
classified as a non-current asset held for sale.
566
Non-current assets held for sale and discontinued operations
b. Calculate the amount that must be disclosed under ‘Non-current assets classified as
held for sale’ in the statement of financial position of Charly Ltd as at
31 December 20.2 as well as the amount of the impairment loss (if any) that must be
recognised in profit or loss in respect of the asset for the year ended 31 December 20.2.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
a. The criteria that must be met before an item can be classified as a non-current
asset held for sale
• An entity shall classify a non-current asset (or disposal group) as held for sale if
its carrying amount will be recovered principally through a sales transaction
rather than through continuing use (IFRS 5.6).
• For this to be the case, the asset (or disposal group) must be available for
immediate sale in its present condition subject only to terms that are usual and
customary for the sale of such assets (or disposal groups) and its sale must be
highly probable (IFRS 5.7).
• For the sale to be highly probable (IFRS 5.8):
− The appropriate level of management must be committed to a plan to sell the
asset (or disposal group), and an active programme to locate a buyer and
complete the plan must have been initiated.
− The asset (or disposal group) must be actively marketed for sale at a price
that is reasonable in relation to its current fair value.
− The sale should be expected to qualify for recognition as a completed sale
within one year from date of classification, unless acceptable grounds for
extending the period, as set out in IFRS 5.9, exist.
− Actions required to complete the plan should indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be
withdrawn.
A non-current asset held for sale must be measured at the lower of its carrying amount
and fair value less costs to sell (IFRS 5.15), therefore R125 000.
567
Non-current assets held for sale and discontinued operations
Howzit Ltd owns a number of assets, including the below-mentioned items. The two items
do not form part of a disposal group.
• Investment property carried at fair value of R760 000 on 1 January 20.3 (beginning of
year). The fair value of the investment property is R780 000 on 30 June 20.3, while
costs to sell the property amount to R25 000 on that date. These values remained
unchanged at year end.
• Machinery with a cost price of R300 000 and a carrying amount of R180 000 on
1 January 20.3. The machinery is depreciated at 10% per annum in accordance with the
straight-line method. The fair value less costs to sell of the machinery amounts to
R155 000 on 30 June 20.3 and remained unchanged at year end.
On 30 June 20.3, management decided to dispose of the above-mentioned assets within the
next year. All the criteria of IFRS 5 for the classification of the assets as non-current assets
held for sale, were met.
Required
Calculate the amount that must be disclosed as ‘Non-current assets classified as held for
sale’ in the statement of financial position of Howzit Ltd as at 31 December 20.3.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Calculations
1. Machinery Rand
A non-current asset classified as held for sale must be measured at the lower of its
carrying amount and fair value less costs to sell (IFRS 5.15), therefore R155 000.
568
Non-current assets held for sale and discontinued operations
2. Investment property
Investment property accounted for in accordance with the fair value model of IAS 40,
falls outside the measurement scope of IFRS 5 and should, after classification as held
for sale, still be measured in accordance with its applicable IFRS (IFRS 5.2).
The investment property shall consequently be measured at its fair value of R780 000
and the new carrying amount of R780 000 (fair value) will not be compared to the fair
value less costs to sell of R755 000 (1).
Darana Ltd has a 28 February year end and decided on 30 November 20.4 to dispose of a
disposal group within the next 12 months. All the criteria of IFRS 5 for the classification as
held for sale have been met on 30 November 20.4. The carrying amounts of the items
included in the disposal group are as follows:
Additional information
1. The fair value less costs to sell of the disposal group amounted to R980 000 on
30 November 20.4. Other costs associated with selling the disposal group amounted to
the following:
Rand
2. The share investments are accounted for at fair value through profit or loss.
Required
a. Determine the impairment loss, if any, that will be recognised in respect of the disposal
group of Darana Ltd on 30 November 20.4.
569
Non-current assets held for sale and discontinued operations
b. Allocate the impairment loss to the individual items in the disposal group on
30 November 20.4.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Note: The carrying amount of all assets and liabilities in the disposal group must,
immediately before classification as held for sale, be measured in accordance
with the applicable IFRSs (IFRS 5.18). Thereafter, the disposal group as a
whole will be remeasured at the lower of carrying amount and fair value less
costs to sell (IFRS 5.15).
The impairment loss is only allocated to non-current assets that fall within the
measurement scope of IFRS 5, and the allocation will be done in accordance with
IAS 36 (IFRS 5.23).
Total carrying amount of non-current assets that fall within the measurement scope of
IFRS 5:
Rand
570
Non-current assets held for sale and discontinued operations
Smart Talk Ltd has a disposal group that was classified as held for sale on
30 September 20.4. On date of classification, an impairment loss of R49 000 was recognised
in accordance with IFRS 5 in respect of the disposal group. No impairment losses were
previously recognised in accordance with IAS 36 in respect of any of the assets in the
disposal group.
On 30 September 20.4 the carrying amounts of the items included in the disposal group
(after recognition of the impairment loss) were as follows:
Land 98 000
Factory building (Depreciation: reducing balance at 5% per annum) 450 000
Plant (Depreciation: reducing balance at 10% per annum) 190 000
Inventories 80 000
Trade and other payables (30 000)
Share investments 100 000
888 000
Required
a. Calculate the impairment loss or reversal of impairment loss (if any) that should be
recognised in respect of the disposal group of Smart Talk Ltd on 31 December 20.4.
b. Allocate the impairment loss/(reversal) to the individual assets in the disposal group on
31 December 20.4.
571
Non-current assets held for sale and discontinued operations
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
a. Impairment loss/reversal
Land 98 000
Factory building (1) 450 000
Plant (1) 190 000
Inventories (at net realisable value since lower than cost) 50 000
Trade and other payables (2) (15 000)
Share investments (3) 120 000
Total carrying amount 893 000
Fair value less costs to sell of disposal group at 31 December 20.4 (4) 955 000
(1) Deprecation must be ceased after classification as held for sale (IFRS 5.25).
(2) 30 000 – 15 000 = 15 000
(3) 100 000 + 20 000 = 120 000
(4) 985 000 – 30 000 = 955 000
(5) 955 000 – 893 000 = 62 000
572
Non-current assets held for sale and discontinued operations
On 1 March 20.5 (beginning of the year), Reggie Ltd classified a plant as held for sale as it
met all the criteria of IFRS 5 for classification as a non-current asset held for sale on that
date. On 1 March 20.5 the carrying amount of the plant, after classification as a non-current
asset held for sale, amounted to R560 000. The original cost price of the plant was
R800 000 on 1 December 20.3 and depreciation on plant is written off at 20% per annum in
accordance with the straight-line method. No impairment losses were previously recognised
in accordance with IAS 36 in respect of the plant.
Owing to an increased demand in Reggie Ltd’s products, the directors decided on 30 June
20.5 to no longer dispose of the plant. On 30 June 20.5, the recoverable amount of the plant
amounted to R555 000 and the remaining useful life of the plant was estimated to be
3,5 years.
Required
a. Calculate the amount at which the plant must be measured at 30 June 20.5 due to the
decision to no longer sell the plant, as well as the adjustment to the carrying amount on
that date.
b. Calculate the amount of depreciation to be recognised in respect of the plant for the
year ended 28 February 20.6.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Since the asset is no longer classified as held for sale, the plant should be measured at
the lower of what its carrying amount would have been had it never been classified as
held for sale and its recoverable amount (IFRS 5.27).
Carrying amount of plant on 30 June 20.5 if the plant had never been classified as a
non-current asset held for sale:
Rand
573
Non-current assets held for sale and discontinued operations
Rand
Adjustment to existing carrying amount on 30 June 20.5:
On 28 February 20.5, City News Ltd decided to dispose of part of its assets and directly
associated liabilities in order to focus on its core products. The disposal groups identified
would normally form part of the production segment. It is expected that the actual sale of the
assets and liabilities will take place during May 20.5. The assets and associated liabilities
meet all the criteria of IFRS 5 to be classified as a disposal group held for sale. There are
two disposal groups and the amounts presented are the carrying amounts on
28 February 20.5, after classification as held for sale and after related impairment losses:
Additional information
1. Impairment losses of R800 000 (Group 1 = R500 000 and Group 2 = R300 000) were
recognised against plant and R200 000 (Group 1 = R140 000 and Group 2 = R60 000)
against vehicles, to arrive at the carrying amounts reflected above. The major classes
of assets are plant and vehicles with their respective carrying amounts of R5 280 000
and R1 320 000, after taking the impairment losses into account.
2. Since acquisition of the share investment, an amount of R400 000 (credit) has been
recognised in other comprehensive income on re-measurement of the financial asset to
fair value.
3. The liabilities comprise of deferred tax of R400 000 for each disposal group and the
remainder is long-term borrowings.
Required
Disclose the given information in the statement of financial position and ‘Disposal group
classified as held for sale’ note of City News Ltd as at 28 February 20.5, in accordance with
the requirements of International Financial Reporting Standards (IFRS). No comparative
amounts are required.
(UNISA – adapted)
574
Non-current assets held for sale and discontinued operations
Notes 20.5
Rand
ASSETS
Non-current assets x xxx xxx
Current assets 8 000 000
Non-current assets and disposal groups classified as held
for sale (1) 2 8 000 000
Total assets x xxx xxx
A decision to dispose of two groups of assets and related liabilities was taken during
February 20.5 with the objective to focus to a larger extent on core products of the
company. It is expected that the assets of the disposal groups will be sold for cash and
that the disposal will be completed by the end of May 20.5. The disposal groups
comprise the following:
Rand
Assets
Plant 5 280 000
Vehicles 1 320 000
Share investment 1 400 000
8 000 000
Liabilities
Long-term borrowings (4) 2 500 000
2 500 000
575
Non-current assets held for sale and discontinued operations
A total impairment loss of R1 000 000 (5) was recognised on initial classification of
the disposal group as held for sale and this amount is included in the ‘Other expenses’
line item in profit or loss. The disposal groups were previously reported as part of the
production segment.
(4) (2 400 000 – 400 000) + (900 000 – 400 000) = 2 500 000
(5) 800 000 + 200 000 = 1 000 000
Delta Ltd is a furniture distributor and obtains some of its products from a furniture factory
which is operated as a department of the company. The furniture factory represents a single
major line of business which operates independently and also maintains independent
financial records.
Upon further investigation it was found that the factory was not economical and that Delta
Ltd can obtain the same products at a lower price from other existing suppliers. On
30 June 20.5, the board of directors formally decided to discontinue and sell the factory. A
public announcement to this effect was made on the same day, after the approval of a
disposal plan. The assets and associated liabilities of the factory were also classified as a
disposal group on this date, since the assets and associated liabilities were ready for
immediate sale in their current condition and the sale was intended to be completed within a
year. All the other criteria of IFRS 5 to classify the disposal group as held for sale, were also
met on this date.
A B C
Rand Rand Rand
Dr/(Cr) Dr/(Cr) Dr/(Cr)
576
Non-current assets held for sale and discontinued operations
Delta Ltd did not have any inventories that were purchased from the factory on hand at the
respective trial balance dates.
All income and expenses are taxable or tax deductible and the tax rate for 20.4 and 20.5 is
30%.
Required
a. Explain to the accountant of Delta Ltd whether the furniture factory qualifies as a
discontinued operation and if so, from which date the results of the operation should
be disclosed separately.
b. If it is assumed that the furniture factory is a discontinued operation, calculate the
results of the discontinued operation that should be disclosed separately for the years
ended 31 December 20.4 and 20.5. A complete statement of profit or loss and other
comprehensive income is not required.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
In terms of IFRS 5.31, a component of an entity comprises operations and cash flows
that can be clearly distinguished, operationally and for financial reporting purposes,
from the rest of the entity.
The results of the discontinued operation should be disclosed separately from the date
on which it was classified as held for sale or, if earlier, from the date of disposal.
In this case the results of the furniture factory should be disclosed separately as from
30 June 20.5, since that is the date of classification as held for sale.
577
Non-current assets held for sale and discontinued operations
Note: If the initial disclosure event occurs in the current financial year, the
comparative amounts in the statement of profit or loss and other comprehensive
income should be restated so that the results of the discontinued operation are also
presented separately for the previous period (IFRS 5.34).
Note: In this question there is no information regarding the fair value less costs to sell
of the disposal group, therefore the disposal group could not be remeasured to its fair
value less costs to sell. The after-tax profit or loss on the measurement of a disposal
group or non-current asset held for sale to fair value less costs to sell as well as the
after-tax profit or loss on disposal of assets or disposal groups that form part of the
discontinued operation, will normally be included in the results of the discontinued
operation.
All the information of question IFRS 5.8 is applicable. The following is the statement of
profit or loss and other comprehensive income of Delta Ltd for the years ended
31 December 20.4 and 20.5. The results of the factory are not included in the results for
20.5 as shown below. All factory inventories had been sold by the end of the year.
20.5 20.4
Rand Rand
578
Non-current assets held for sale and discontinued operations
Required
Prepare the statement of profit or loss and other comprehensive income of Delta Ltd for the
year ended 31 December 20.5 in accordance with the requirements of International
Financial Reporting Standards (IFRS). The analysis as required by IFRS 5 must be
presented on the face of the statement of profit or loss and other comprehensive income and
no notes are required.
DELTA LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.5
20.5 20.4
Rand Rand
Continuing operations
Revenue (1) 2 700 000 2 000 000
Cost of sales (2) (2 160 000) (1 600 000)
Gross profit 540 000 400 000
Other expenses (3) (350 000) (222 000)
Profit before tax 190 000 178 000
Income tax expense (4) (57 000) (53 400)
Profit for the year from continuing operations 133 000 124 600
Discontinued operations
Revenue 600 000 1 000 000
Expenses (638 250) (1 003 000)
Profit before tax (38 250) (3 000)
Income tax benefit 11 475 900
Loss for the year from discontinued operations (26 775) (2 100)
According to IFRS 5.33(a), an entity should present a single amount on the face of the
statement of profit or loss and other comprehensive income, comprising the total of:
• the post-tax profit or loss of discontinued operations; and
• the post-tax gain or loss recognised on either the measurement to fair value less costs to
sell or on the disposal of assets or disposal groups of the discontinued operations.
579
Non-current assets held for sale and discontinued operations
IFRS 5.33(b) also requires the following analysis of the single amount (on previous page):
• the revenue, expenses and pre-tax profit or loss of the discontinued operation, as well
as the related tax expense.
• the gain or loss recognised on either the measurement to fair value less costs to sell or
on the disposal of assets or disposal groups of the discontinued operation, as well as
the related tax expense.
The analysis may be presented in the notes or on the face of the statement of profit or loss
and other comprehensive income.
The following is the statement of profit or loss and other comprehensive income of Golf Ltd
for the year ended 31 December 20.8 (before any adjustments in respect of discontinued
operations):
20.8 20.7
Rand Rand
Golf Ltd mainly operates in Gauteng and the Free State. On 1 October 20.8, the directors of
Golf Ltd formally decided to discontinue and dispose of its distribution branch in KwaZulu-
Natal and made a public announcement in this regard. On 1 October 20.8, a binding sales
agreement was entered into with Yesplease Ltd in terms of which all the assets and related
liabilities (excluding the head office account, bank overdraft and any provisions) of the
KwaZulu-Natal branch would be transferred to Yesplease Ltd on 28 February 20.9. The
assets and related liabilities of the KwaZulu-Natal branch that will be transferred to
Yesplease Ltd met all the criteria of IFRS 5 to be classified as a disposal group held for sale
on 1 October 20.8. Assume that the fair value less costs to sell of the disposal group,
equalled the carrying amount thereof at all times.
A B C D
Rand Rand Rand Rand
Dr/(Cr) Dr/(Cr) Dr/(Cr) Dr/(Cr)
580
Non-current assets held for sale and discontinued operations
The following items that relate to the discontinuance are included in ‘Other expenses’ for
the three months ended 31 December 20.8:
Rand
Required
a. Discuss (with reasons) whether or not the discontinuance of Golf Ltd’s operations in
KwaZulu-Natal, can be treated as a discontinued operation.
b. If it is assumed that the KwaZulu-Natal branch is a discontinued operation, prepare
the statement of profit or loss and other comprehensive income as well as the
‘Disposal group classified as held for sale’ note of Golf Ltd for the year ended
31 December 20.8. The analysis required by IFRS 5 must be presented on the face of
the statement of profit or loss and other comprehensive income and no other notes are
required.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
The KwaZulu-Natal branch consists of operations and cash flows that can clearly be
distinguished operationally and for financial reporting purposes, from the rest of the
entity. It is therefore a component of Golf Ltd’s business that was classified as held for
sale and:
• represents a separate geographical area of operations; and
• is part of a single coordinated plan to dispose of a separate geographical area of
operations.
The branch therefore meets the requirements of IFRS 5.31 and IFRS 5.32 and hence
can be treated as a discontinued operation.
581
Non-current assets held for sale and discontinued operations
GOLF LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.8
20.8 20.7
Rand Rand
Continuing operations
Revenue (1) 15 577 500 11 500 000
Cost of sales (2) (12 477 760) (9 200 000)
Gross profit 3 099 740 2 300 000
Other expenses (3) (2 448 740) (1 675 000)
Profit before tax 651 000 625 000
Income tax expense (4) (195 300) (187 500)
Profit for the year from continuing operations 455 700 437 500
Discontinued operations
Revenue (5) 2 422 500 2 500 000
Expenses (6) (2 473 500) (2 475 000)
Profit/(loss) before tax (51 000) 25 000
Income tax benefit/(expense) (7) 13 950 (7 500)
Profit/(loss) after tax (37 050) 17 500
Profit/(loss) on remeasurement to fair value less
costs to sell – –
Impairment loss on remeasurement of disposal group – –
Income tax benefit – –
Profit/(loss) for the year from discontinued operations (37 050) 17 500
582
Non-current assets held for sale and discontinued operations
GOLF LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.8
No impairment loss was recognised in respect of the disposal group. The disposal
group was previously reported as part of the xxx segment.
SAPU Ltd’s operating results have shown a setback due to losses incurred by its Upington
factory. As a result, the directors approved a formal plan on 30 June 20.5, to immediately
market and sell the Upington factory. A public announcement of the plan was also made on
this date. The intention is to sell all the assets and related liabilities (including any
provisions) of the factory in one single transaction. The assets and liabilities of the Upington
factory met all the criteria of IFRS 5 to be classified as a disposal group held for sale on
30 June 20.5.
Current assets A B
Rand Rand
The difference between the carrying amount and expected value of trade receivables arose as
a result of bad debts (credit losses). Assume that both the loss on inventories (write-down to
net realisable value) as well as the bad debts (credit losses) are deductible for tax purposes.
583
Non-current assets held for sale and discontinued operations
A = Cost price
B = Accumulated depreciation at 1 March 20.5
C = Tax base at 28 February 20.5
Depreciation on plant and equipment is written off in accordance with the straight-line
method at 20% per annum and at 15% per annum on other property, plant and equipment.
The South African Revenue Service allowed wear and tear on the cost price of all assets at
15% per annum according to the straight-line method, up to 30 June 20.5. From 1 July 20.5,
the assets were no longer used in the production of income.
The fair value of all the assets of the Upington factory was R939 900 on 30 June 20.5 and
the expected costs to sell were R50 000.
The Upington operation earned a gross profit, excluding depreciation and fixed overheads,
of R110 000 for the period 1 March 20.5 to 28 February 20.6, consisting of revenue of
R1 240 000 and cost of sales of R1 130 000. The fixed overheads for the period
1 March 20.5 to 28 February 20.6 were as follows:
Rand
Up to 28 February 20.6, R490 000 in respect of the trade receivables was received. The net
realisable value of inventories remained unchanged.
The fair value less costs to sell of the disposal group of the Upington factory amounted to
R385 000 on 28 February 20.6.
On 28 February 20.6 there were two potential buyers, but no sales contracts were entered
into.
Assume a tax rate of 30% and that the entity has sufficient taxable income from continuing
operations on 28 February 20.6, against which any tax losses from discontinued operations
can be utilised.
Required
584
Non-current assets held for sale and discontinued operations
c. Discuss how the disposal group will be presented on the face of the statement of
financial position of SAPU Ltd as at 28 February 20.6.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Calculations
585
Non-current assets held for sale and discontinued operations
(1) 471 458 (as calculated) + 39 792 (impairment loss – calc 3) = 511 250
(2) 645 600 × 15% × 4/12 = 32 280
(3) 141 350 × 15% × 4/12 = 7 068
2. Deferred tax
Carrying Tax Temporary Deferred
amount base difference tax
Rand Rand Rand Rand
(Dr)/Cr
28 February 20.5
Plant and machinery (1) 263 300 192 500 70 800 21 240
Other assets (2) 56 600 49 300 7 300 2 190
319 900 241 800 78 100 23 430
28 February 20.6
Plant and machinery (3) 187 774 160 220 27 554 8 266
Other assets (4) 42 226 42 232 (6) (2)
230 000 202 452 27 548 8 264
3. Disposal group
586
Non-current assets held for sale and discontinued operations
(1) 645 600 – 382 300 – (645 600 × 0,2 × 4/12) = 220 260
(2) 141 350 – 84 750 – (141 350 × 0,15 × 4/12) = 49 532
(3) 939 900 – 50 000 = 889 900
(4) 914 792 – 889 900 = 24 892
(5) 24 892 × 220 260/(220 260 + 49 532) = 20 322
(6) 24 892 × 49 532/(220 260 + 49 532) = 4 570
b. Disclosure
SAPU LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 28 FEBRUARY 20.6
Rand
Discontinued operations
Revenue 1 240 000
Expenses (1) (1 711 458)
Loss before tax (471 458)
Income tax benefit (part a.) 118 937
Loss after tax (352 521)
Profit/(loss) on remeasurement to fair value less costs to sell (part a.) (27 854)
Impairment loss on remeasurement of disposal group (39 792)
Income tax benefit 11 938
Profit/(loss) for the year from discontinued operations (380 375)
587
Non-current assets held for sale and discontinued operations
(1) 1 130 000 + 230 000 + 50 108 + 301 350 = 1 711 458 (refer part a.)
SAPU LTD
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.6
A decision to dispose of the assets and related liabilities of the Upington factory was
taken on 30 June 20.5 after a disposal plan for the operations of the Upington factory
had been approved. It is expected that the disposal group will be sold for cash and that
the disposal will be completed at the beginning of the new financial year. The
Upington factory was previously reported as part of the xxx segment. The disposal
group comprises:
Rand
Assets
Plant and machinery (1) 187 774
Other assets (2) 42 226
Inventories 230 000
460 000
Liabilities
Provision for severance pay 75 000
(1) 199 938 – 12 164 = 187 774 (part a.) or 220 260 – 32 486 = 187 774 (part a.)
(2) 44 962 – 2 736 = 42 226 (part a.) or 49 532 – 7 306 = 42 226 (part a.)
c. The assets of the disposal group will be presented under current assets in the line item
‘Disposal group classified as held for sale’, in the statement of financial position as at
28 February 20.6. The liabilities of the disposal group will be presented under current
liabilities in the line item ‘Liabilities in respect of disposal group classified as held for
sale’.
Digit Ltd is a furniture distributor that purchases all its furniture from a furniture factory,
which is operated as a department of the company. The furniture factory, of which the
results were previously reported as part of the Gauteng geographical segment, was not
profitable. Digit Ltd’s distribution department can purchase similar furniture at lower prices
from external suppliers.
On 15 September 20.5, the board of directors approved a detailed formal disposal plan for
the discontinuance of the factory department and made a public announcement in this regard
on the same date. An active marketing plan regarding the once-off sale of the assets and
liabilities of the factory was initiated on 31 January 20.6 and a binding sales agreement in
respect of the assets and liabilities, including any provisions made in respect of the
discontinuance, was concluded on the same date. It is expected that the plan for the
discontinuance and disposal of the furniture factory will be completed by 30 April 20.6.
588
Non-current assets held for sale and discontinued operations
The following information is presented to you on 28 February 20.6 (before taking into
account any adjustments relating to the discontinuance):
Additional information
1. Assume that the direct costs of discontinuance are deductible for tax purposes while all
other discontinuance costs are not deductible for tax purposes.
2. The following information regarding the plant and equipment for both the furniture
factory and furniture distribution department is available:
589
Non-current assets held for sale and discontinued operations
Digit Ltd accounts for all property, plant and equipment in accordance with the cost
model. No depreciation for the current financial year has been recognised.
3. The current assets consist mainly of trade receivables. One of the debtors of the
furniture factory was declared insolvent and liquidated on 31 January 20.6. A total
amount of R50 000 was outstanding and Digit Ltd will receive forty cents in the rand
of the outstanding amount after year end. The South African Revenue Service will
allow the bad debt (credit loss) as a deduction in the current financial year.
4. The assets and liabilities of the furniture factory met all the criteria of IFRS 5 to be
classified as a disposal group held for sale on 31 January 20.6. On 31 January 20.6, the
fair value less costs to sell of the disposal group was determined to be R70 000, based
on the sales agreement. The fair value less costs to sell of the disposal group remained
unchanged on 28 February 20.6.
Required
a. Prepare the statement of profit or loss and other comprehensive income of Digit Ltd
for the year ended 28 February 20.6. The analysis as required by IFRS 5 must be
presented on the face of the statement of profit or loss and other comprehensive
income (Only those notes indicated in part b. are required).
b. Prepare the following notes to the financial statements of Digit Ltd for the year ended
28 February 20.6:
• Income tax expense (ignore the tax rate reconciliation)
• Disposal group classified as held for sale
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS). Ignore comparative amounts. Round all calculations to the nearest rand.
(UNISA – adapted)
590
Non-current assets held for sale and discontinued operations
DIGIT LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 28 FEBRUARY 20.6
Rand
Continuing operations
Revenue 3 400 000
Cost of sales (1 800 000)
Gross profit 1 600 000
Other expenses (1) (770 000)
Finance costs (35 000)
Profit before tax 795 000
Income tax expense (calc 1) (238 500)
Profit for the year from continuing operations 556 500
Discontinued operations
Revenue (3) 2 040 000
Expenses (4) (2 735 667)
Profit/(loss) before tax (695 667)
Income tax benefit (calc 3) 156 200
Profit/(loss) after tax (539 467)
Profit/(loss) on remeasurement to fair value less costs to sell (11 433)
Impairment loss on remeasurement of disposal group (calc 5) (16 333)
Income tax benefit (7) 4 900
Loss for the year from discontinued operations (550 900)
591
Non-current assets held for sale and discontinued operations
b. Notes
DIGIT LTD
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.6
A decision to dispose of the assets and liabilities of the furniture factory was taken on
15 September 20.5 after a formal detailed plan for the discontinuance of the furniture
factory was approved. The plan regarding the once-off sale of the assets and liabilities
reached a stage of completion on 31 January 20.6 after a binding sales agreement had
been entered into. It is expected that the plan for the discontinuance will be completed
by 30 April 20.6. The disposal group was previously reported as part of the Gauteng
geographical segment.
Calculations
592
Non-current assets held for sale and discontinued operations
(1) 695 667 (per SoCI) + 16 333 (impairment loss – calc 5) = 712 000
(2) 120 000 + 40 000 = 160 000
(3) 800 000 × 20% × 11/12 = 146 667
593
Non-current assets held for sale and discontinued operations
28 February 20.6
Plant and equipment (2) 317 000 200 000 117 000 35 100
Provision for direct costs (32 000) – (32 000) (9 600)
Provision for severance
pay (120 000) (120 000) – –
Provision for fine (15 000) (15 000) – –
150 000 65 000 85 000 25 500
594
Non-current assets held for sale and discontinued operations
The formal discontinuation date (suspension of production) is 15 November 20.4 and the
plant will be available for immediate sale in its current condition on that date. The plant and
inventory were actively marketed to independent parties from that date and are expected to
be realised in separate transactions. The disposal date is expected to be early in the new
financial year. The plant met all the criteria of IFRS 5 to be classified as a non-current asset
held for sale on 15 November 20.4.
The results of the discontinued operation for the year ended 31 December 20.4 are as
follows:
1 Jan 20.4 - 16 Nov 20.4 -
15 Nov 20.4 31 Dec 20.4
Rand Rand
The carrying amount and tax base of the plant amounted to R600 000 on 1 January 20.4,
and the fair value less costs to sell amounted to R100 000 on 15 November 20.4. The fair
value less costs to sell remained unchanged at year end.
Plant is depreciated at 20% per annum in accordance with the reducing balance method for
both accounting and tax purposes. Assume that the tax allowances were only granted up to
the date of suspension of production.
Additional information
1. The profit before tax for the year ended 31 December 20.4 includes depreciation.
2. The estimated profit before tax for the period 1 January 20.5 up to the date of disposal
amounts to R80 000.
Required
Prepare the statement of profit or loss and other comprehensive income (only in respect of
discontinued operations), as well as the ‘Non-current assets classified as held for sale’ note
of Karp Ltd for the year ended 31 December 20.4, in accordance with the requirements of
International Financial Reporting Standards (IFRS). The analysis as required by IFRS 5
must be presented on the face of the statement of profit or loss and other comprehensive
income and no other notes are required. Comparative amounts can be ignored.
595
Non-current assets held for sale and discontinued operations
Boxom Ltd is a company with diversified operations. During the financial year ended
28 February 20.5, a serious levelling off in the clothing industry arose which led to the
board of directors formally deciding to suspend production of this operation from
15 January 20.5. All the assets and liabilities will be sold in a single transaction early in the
next financial year since the economic prospects for this industry are not favourable. A
public announcement to this effect was made on 15 January 20.5.
Continuing Clothing
operations operation
Rand Rand
The profit/(loss) before tax (before taking into account
impairment losses) for the year ended 28 February 20.5
is as follows:
1 March 20.4 to 15 January 20.5 1 680 000 (50 000)
16 January 20.5 to 28 February 20.5 220 000 5 000
The assets of the discontinued operation met all the criteria of IFRS 5 to be classified as a
disposal group held for sale on 15 January 20.5 and consist of the following:
Carrying
amount
Rand
The fair value less costs to sell of the disposal group amounted to R480 000 on
15 January 20.5. This amount remained unchanged at year end.
Plant is depreciated at 20% per annum in accordance with the reducing balance method for
both accounting and tax purposes. The tax base of the plant of the clothing division
amounted to R540 000 on 1 March 20.4. Assume that the tax allowances were only granted
up to the date of suspension of production.
Assume a tax rate of 30%. There are no other temporary differences, non-taxable items or
non-deductible items, other than those arising from the above information.
596
Non-current assets held for sale and discontinued operations
Required
Prepare the statement of profit or loss and other comprehensive income as well as the
‘Disposal group classified as held for sale’ note of Boxom Ltd for the year ended
28 February 20.5, in accordance with the requirements of International Financial Reporting
Standards (IFRS). The analysis as required by IFRS 5 must be disclosed in the notes to the
financial statements and no other notes are required. Comparative amounts can be ignored.
597
Non-current assets held for sale and discontinued operations
598
IFRS 7
Financial instruments: disclosure
__________________________________________________________________
Note: As this chapter and the chapter on IFRS 9 both deal with financial instruments,
the questions on these two chapters are integrated and such questions are
presented as part of the chapter on IFRS 9.
599
Financial instruments: disclosure
600
IFRS 8
Operating segments
_________________________________________________________________
QUESTIONS
601
Operating segments
a. The requirements of this standard are compulsory for listed companies only.
b. When both the parent’s separate financial statements and the consolidated
financial statements are presented, segment information need only be provided in
respect of the consolidated financial statements.
e. The term ‘chief operating decision maker’ refers to a manager with a specific
title.
g. An entity does not present comparative amounts for a reportable segment if that
segment did not satisfy the criteria for reportability in the prior period.
Consolidated revenue
Sales to customers 10 000 40 000 20 000 4 000
Inter-segment sales 5 000 – 12 000 6 000
Required
Which of the above segments are reportable segments in accordance with the
requirements of IFRS 8?
Operating segments A B C D
Rand Rand Rand Rand
602
Operating segments
Required
Which of the above segments are reportable segments in accordance with IFRS 8?
Operating segments A B C
Rand Rand Rand
Rand
Required
Which of the above segments are reportable segments in accordance with IFRS 8?
Segments I, II, III and IV will be disclosed as each segment's revenue is more than
10% of the total combined revenue (IFRS 8.13). Even though the majority of the
revenue of segment IV is not earned from sales to external customers, it is still a
reportable segment (IFRS 8.13 and IFRS 8.IN12).
603
Operating segments
(1) 60 000 × 3/6 = 30 000; 60 000 × 2/6 = 20 000; 60 000 × 1/6 = 10 000
Segments A, B and C will be disclosed (IFRS 8.13). Interest received and paid are
included in the profit or loss of an operating segment if reviewed by the chief
operating decision maker (assumed because no information to the contrary was given)
(IFRS 8.23 and IFRS 8.IN17). The same applies to the share of profit of associate
(IFRS 8.23). The income tax expense is not included in this case because it is not
reviewed by the chief operating decision maker (IFRS 8.23).
The following information was extracted from the records of Monorcos Ltd, a company
listed on the JSE Ltd:
• Diamonds
• Industrial
• Energy
604
Operating segments
Geographical areas
• Europe
• Africa (outside South Africa)
• South Africa
Rand
605
Operating segments
1. Assets not allocated to a segment amounted to R60 000 and include an investment in
an associate of R35 000. This is the only associate of Monorcos Ltd.
2. General expenses incurred and not allocated to a segment amounted to R20 000.
6. Income tax expense is not reviewed by the chief operating decision maker.
8. Except for certain amounts not allocated to segments as indicated above, Monorcos
Ltd applies the same accounting policies to its segment reporting as for the entity as a
whole.
9. Revenue from one customer of the Diamonds segment represents R200 000 of the
total revenue of Monorcos Ltd.
Required
Disclose the segment information for Monorcos Ltd in accordance with IFRS 8.
MONORCOS LTD
Types of products and services from which segments derive their revenues
Diamonds
Mining of diamonds
Industrial
Kaolin mining
Road construction
Energy
Oil production
Coal mining.
606
Operating segments
Inter-segment transfers are priced at market value. Income tax expense and all amounts
regarding investments in associate entities are not allocated to operating segments. In all
other material respects, Monorcos Ltd generally applies the same accounting policies to its
segment reporting as for the entity as a whole.
Information regarding operating segments for the year ended 31 December 20.1:
Revenue from external customers 700 000 500 000 300 000 1 500 000
Inter-segment revenue – 20 000 – 20 000
Interest expense 40 000 – – 40 000
Depreciation 20 000 25 000 12 000 57 000
Segment profit (1) 260 000 220 000 100 000 580 000
Segment assets 600 000 300 000 200 000 1 100 000
Segment liabilities 400 000 100 000 100 000 600 000
Capital expenditure incurred on
non-current assets 100 000 80 000 30 000 210 000
(1) 700 000 – 400 000 – 40 000 = 260 000; 520 000 – 300 000 = 220 000;
300 000 – 200 000 = 100 000
Rand
Revenue
Total revenue for reportable segments 1 520 000
Elimination of inter-segment revenue (20 000)
Entity’s revenue 1 500 000
Profit
Total profit for reportable segments 580 000
Elimination of inter-segment profits (12 000)
Unallocated expenses (20 000)
Share of profit of associate 200 000
Profit before income tax expense 748 000
Assets
Total assets for reportable segments 1 100 000
Investment in associate not allocated 35 000
Other unallocated assets 25 000
Entity’s assets 1 160 000
607
Operating segments
Revenue from one customer of the Diamonds segment represents R200 000 of the total
revenue of the entity.
A client's accountant has asked your advice in connection with segment reporting. He would
like to know under which circumstances segment information should be restated.
The comparative amounts must be restated unless the information is not available and
the cost to develop it would be excessive. The fact that comparative amounts have
been restated must be disclosed.
If an entity changes the structure of its internal organisation in a manner that causes the
composition of its reportable segments to change and it does not restate prior period
segment information on the new basis, then for the purpose of comparison the entity
must report segment data for both the old and the new bases of segmentation in the
year in which the change occurs (IFRS 8.29 – .30).
608
Operating segments
The following segment information from the consolidated financial statements of Jerry Ltd
for the years ended 31 December 20.6 and 20.7 is available:
Operating segments A B C D
Rand Rand Rand Rand
Sales to customers
20.6 750 000 313 000 160 000 591 000
20.7 865 000 412 000 271 000 603 000
Total assets
20.6 1 250 000 865 000 512 000 908 000
20.7 1 310 000 913 000 596 000 1 002 000
Results of operations
20.6 profit/(loss) 365 000 245 000 6 000 (286 000)
20.7 profit/(loss) 483 000 297 000 224 000 (15 000)
The company has not changed the basis for segment reporting and it is expected that the
current trend in results will continue.
Required
By using the given information only, show how the segment information should be
disclosed in the consolidated financial statements of the group for the year ended
31 December 20.7. Your solution must comply with the requirements of IFRS 8.
Operating segments
Information concerning the operating segments for the year ended 31 December 20.7 is as
follows:
609
Operating segments
A B C D Total
Rand Rand Rand Rand Rand
20.6
Revenue 750 000 313 000 160 000 591 000 1 814 000
Profit/(loss) (1) 365 000 250 000 6 000 (286 000) 335 000
Assets (2) 1 250 000 870 000 512 000 908 000 3 540 000
20.7
Revenue 865 000 412 000 271 000 603 000 2 151 000
Profit/(loss) 483 000 297 000 224 000 (15 000) 989 000
Assets 1 310 000 913 000 596 000 1 002 000 3 821 000
The accounting policy of Segment B has been changed in respect of inventory in order to
comply with group policy. The comparative amounts have been restated by the resultant
surplus of R5 000.
Note: Further disclosures in other notes to the financial statements may be required in
terms of IAS 8.
Bishop Ltd is a listed company which has to date published segment results only for retail
and wholesale sales in its financial statements. The company also manufactures a wide range
of consumables, and has retail and wholesale distribution points in Australia, the UK and
South Africa. The company possesses a number of sawmills and supplies wood to the
wholesale market in South Africa.
Required
Taking the circumstances of Bishop Ltd into account, discuss in broad terms the following
aspects of segment reporting:
a. The segments which should be included in the segment report.
b. The information relating to each segment which should be disclosed in the segment
report.
Broad guidelines
610
Operating segments
• Not every part of an entity is necessarily an operating segment, for example a corporate
headquarters or functional departments that do not earn revenues, or the revenues are
only incidental to the activities of the entity (IFRS 8.6).
• The determination of operating segments is dependent on a certain amount of
judgement (IFRS 8.8).
• Generally, an operating segment has a segment manager (IFRS 8.9).
• In this case, Bishop Ltd may identify operating segments based on the type of products
or based on the geographical location. The entity will determine which of these sets of
components constitute the operating segments by reference to the core principle (IFRS
8.10).
• Identification of reportable operating segments is based on applying the aggregation
criteria (IFRS 8.12) and the quantitative thresholds (IFRS 8.13). According to the
latter, segments are reported if their revenue, profit or loss or assets are 10% or more of
the combined revenue, profit or loss or assets. Reportable segments must represent at
least 75% of the entity’s total revenues (IFRS 8.15).
Possible segments
• Manufacturing
• Wholesale
• Retail
• Sawmill and wood section
• South Africa
• UK
• Australia
611
Operating segments
- Total assets;
- Additions to reportable segment non-current assets;
- Investments in associates and joint ventures accounted for by the equity
method; and
- Liabilities.
• Measurement of operating segment profit or loss, assets and liabilities, including
the basis of accounting for inter-segment transactions and changes in
measurement methods from prior periods (IFRS 8.27).
• Reconciliations of the total of reportable segments’ revenue, profit or loss, assets,
liabilities and other material items to the corresponding amounts for the entity as
a whole (IFRS 8.28).
• Entity-wide disclosures:
- Information about products and services (IFRS 8.32)
- Information about geographical areas (IFRS 8.33)
- Information about major customers (IFRS 8.34)
The following are details of the operations of three companies in the same group:
Cicero Ltd and Viceroy Ltd are manufacturers, while Icarus Ltd is partially responsible for
the marketing of their products. The total sales of Icarus Ltd resulted from goods purchased
from Cicero Ltd and Viceroy Ltd in the ratio 60:40. Icarus Ltd purchases goods at cost price
plus 25% and at the reporting date had R325 000 inventory on hand of which 60% was
purchased from Cicero Ltd. Approximately 30% of Cicero Ltd's sales are to Icarus Ltd.
Viceroy Ltd is situated in Taiwan, while Cicero Ltd and Icarus Ltd operate in Gauteng.
The following information is taken from the records and financial statements of the
companies for the year ended 31 December 20.3:
Property, plant and equipment 3 500 000 1 000 000 500 000
Goodwill – – 37 000
Net current assets/(liabilities) (600 000) 75 000 83 000
Long-term borrowings (1 780 000) – –
Intragroup loans dr/(cr) 800 000 – (800 000)
612
Operating segments
Interest on intragroup loans amounted to R120 000 for both Cicero Ltd and Icarus Ltd.
Cicero Ltd paid interest on long-term borrowings amounting to R267 000. Interest has
already been taken into account in the calculation of profit. The profit of Cicero Ltd
includes an amount of R52 000 received as share of profit of associates and a dividend of
R100 000 received from Icarus Ltd.
The Cicero Ltd group identifies operating segments based on the type of product or service.
Interest, dividends and the related investments and liabilities are not reviewed by the chief
operating decision maker because the Cicero Ltd group regards these items as of a non-
operating nature.
The group has no customers from which it earns revenues that represent 10% or more of the
total revenue of the group.
Required
Disclose all segment information for the Cicero Ltd group for the year ended
31 December 20.3 in accordance with the requirements of IFRS 8.
CICERO LTD
SEGMENT REPORT FOR THE YEAR ENDED 31 DECEMBER 20.3
Types of products and services from which segments derive their revenues
Inter-segment transfers are priced at cost plus 25%. Segment information is accounted for by
using the group accounting policies, except that interest, dividends and the related
investments and liabilities are not allocated to operating segments because these are
regarded to be of a non-operating nature.
The following is the financial information regarding the operating segments for the
year ended 31 December 20.3:
Revenue from customers (1) 74 500 000 51 000 000 125 500 000
Inter-segment revenue (1) 42 500 000 – 42 500 000
Segment profit excluding
associates (2) 1 312 000 325 000 1 637 000
Share of profit of associate 52 000 – 52 000
Segment assets (3) 4 575 000 620 000 5 195 000
Segment liabilities 600 000 – 600 000
613
Operating segments
Rand
Revenue
Total revenue for reportable segments 168 000 000
Elimination of inter-segment revenue (42 500 000)
Group’s revenue 125 500 000
Profit
Total profit for reportable segments 1 637 000
Elimination of inter-segment profits (65 000)
Share of profit of associate 52 000
Interest expense (267 000)
Group’s profit before tax 1 357 000
Assets
Total assets for reportable segments 5 195 000
Elimination of inter-segment profit in inventory (65 000)
Group’s assets 5 130 000
Liabilities
Total liabilities for reportable segments 600 000
Unallocated liabilities 1 780 000
Group’s liabilities 2 380 000
Revenue from customers (4) 110 500 000 15 000 000 125 500 000
Non-current assets (5) 4 037 000 1 000 000 5 037 000
Revenue Rand
614
Operating segments
Profit Rand
Assets Rand
Liabilities Rand
The following is the segment information in respect of Joker Ltd for the year ended
30 June 20.8:
20.8
Manufacturing 14 000 000 900 000 21 000 000
Mining 153 000 000 6 500 000 95 000 000
Agriculture 31 000 000 920 000 32 000 000
South Africa 161 000 000 6 890 000 92 000 000
Rest of Africa 11 000 000 500 000 12 000 000
Europe 26 000 000 930 000 44 000 000
615
Operating segments
Additional information
1. During the year the company changed its accounting policy in respect of inventory in
the South Africa segment. This change resulted in a decrease of R1 100 000 in respect
of profit for 20.7. This amount has not been corrected in the 20.7 figures. The new
policy was used in the preparation of the 20.8 figures.
Required
a. Discuss which of the operating segments are reportable in both 20.7 and 20.8. Show
all supporting calculations.
b. Disclose the segment information of Joker Ltd for the year ended 30 June 20.8 so as to
comply with the requirements of IFRS 8. Use only the information given.
Martina Ltd, Steffi Ltd and Monica Ltd are all listed on the JSE Ltd. Steffi Ltd and Monica
Ltd are wholly-owned subsidiaries of Martina Ltd. The following information is relevant:
Martina Ltd and Monica Ltd operate primarily in Pretoria and Cape Town (the South Africa
segment), while Steffi Ltd operates primarily in Maputo (the Mozambique segment).
Martina Ltd and Steffi Ltd are manufacturers of hardware, while Monica Ltd operates as a
general dealer.
The long-term borrowings were incurred on 1 March 20.1, and no redemption of capital has
taken place since then.
Monica Ltd purchases all its inventory from Martina Ltd and Steffi Ltd in the ratio of
approximately 70:30. The closing inventory of Monica Ltd will also be in the same ratio.
Sales to Monica Ltd take place at cost plus 20%. Approximately 40% of the sales of both
companies, being Martina Ltd and Steffi Ltd, are supplied to Monica Ltd.
The chief operating decision maker assesses the performance of segments based on their
geographical location.
616
Operating segments
The Martina Ltd group accounts for segment information by using the group accounting
policies. Interest expense is regularly reviewed by management to assess the performance of
operating segments. Income tax expense is, however, not reviewed.
Revenue from one South African customer represents 12% of the total revenue of the
Martina Ltd group.
Required
a. Calculate the consolidated revenue, profit before tax and total assets as they will
appear in the group statements for the year ended 28 February 20.2.
b. Prepare the segment report of the Martina Ltd group for the year ended 28 February
20.2 in accordance with the requirements of IFRS 8.
Nkosi Ltd is a company in the electronics industry and is listed on the JSE Ltd. The
company has various subsidiaries in the same industry. The group has five operating
segments, namely Computers, Cell phones, Television, Radio and Appliances. The
following segment information for the year ended 31 December 20.8 was extracted from the
consolidated records of the Nkosi Ltd Group:
Sales 5 880 000 4 800 000 1 404 000 1 248 000 1 200 000
Profit/(loss)
before tax 720 000 540 000 126 000 144 000 (120 000)
Plant at carrying
amount 960 000 720 000 204 000 176 000 180 000
Total equity 1 200 000 960 000 240 000 264 000 258 000
Total liabilities 4 200 000 3 360 000 960 000 900 000 984 000
The following information for the Nkosi Ltd group is also available:
Rand
617
Operating segments
Rand
Other comprehensive income
Items that will not be reclassified to profit or loss
Gain on property revaluation 144 000
Total comprehensive income for the year 1 209 600
Additional information
1. All segments operate in South Africa, except for the Computers segment, which also
produces some computer products for the Canadian market. Approximately 20% of the
revenue of the Computers segment represents sales to Canada. All of this revenue is
derived from a single Canadian customer.
2. The difference between the total combined revenue of all segments and the
consolidated revenue of the Nkosi Ltd group is due to inter-segment sales included in
the revenue of the Television segment.
3. All inter-segment sales take place at a profit of 20% on the selling price. The closing
inventory of the Cell phones segment includes R250 000 of parts inventory that was
purchased from the Computers segment. The remaining difference between the total
combined profit of all segments and the consolidated profit of the Nkosi Ltd Group is
due to head office expenses not allocated to operating segments.
4. Other expenses include an amount of R300 000 for depreciation on buildings. The
Nkosi Ltd group allocates depreciation to operating segments on the basis of the size
of the floor area used by each segment. The floor area used by each segment is as
follows:
m2
Computers 20 000
Cell phones 15 000
Television 6 000
Radio 5 000
Appliances 4 000
Total 50 000
5. The segment assets include non-current assets of R9 966 000 and current assets of
R2 100 000 in respect of South African operations, and current assets of R640 000 in
respect of Canadian operations.
6. The profit of the Television segment includes an impairment loss on plant amounting
to R75 000.
618
Operating segments
7. The only capital expenditure incurred during the year was the purchase of a new
delivery vehicle for the Computers segment amounting to R200 000.
8. The Nkosi Ltd group applies its group accounting policies to segment reporting,
except that the share of profit of associates and income tax expense are not allocated to
operating segments.
9. All finance costs relate to interest paid on the bank overdraft of the Cell phones
segment. This amount has already been taken into account in determining the segment
profit.
Required
a. Discuss which of the operating segments of the Nkosi Ltd Group is reportable in terms
of IFRS 8. Show all relevant calculations. Round all percentages to one decimal point.
b. Assuming that the Computers, Cell phones and Television segments are reportable,
disclose all information required by IFRS 8.
619
Operating segments
620
IFRS 9, IAS 32,
IFRS 7, IFRS 13, IFRIC 10 &
IFRIC 19
Financial instruments
__________________________________________________________________
Note: This chapter does not address current tax and deferred tax on financial instruments.
QUESTIONS
621
Financial instruments
You are the auditor of Pricey Parts Ltd, a supplier of motor car spare parts. During your
audit for the year ended 31 December 20.2, you were responsible for the review of the
following items in the statement of financial position:
The amount represents a loss incurred by the year end on a bankers’ acceptance future. This
speculative instrument was entered into in an attempt to improve reported profits.
Given the current International Financial Reporting Standards (IFRS), you do not agree with
the manner in which your client has treated the item detailed above.
Required
Draft a letter to the management of the company explaining why you disagree with the
accounting treatment of the item detailed above. Your letter should also recommend the
proposed accounting treatment and detail its effect on the statement of profit or loss and
other comprehensive income for the year ended 31 December 20.2.
(QE 1991 – adapted)
Futures are derivatives because they require only a small initial investment (or no
investment at all), they expire on a future date and their value fluctuates together with
fluctuations in interest rates, exchange rates, share prices, commodity prices, etc.
IFRS 9.4.2.1(a) stipulates that liabilities, including derivatives that are liabilities, shall be
subsequently measured at fair value with changes in the fair value recognised in profit or
loss.
Since the bankers’ acceptance future was entered into for speculative purposes, no hedge
accounting is applicable and the loss should be written off in profit or loss in the statement
of profit or loss and other comprehensive income. A deferred loss on the bankers’
acceptance future may consequently not be created.
The loss included in profit or loss should be disclosed separately in the note to profit before
tax (IFRS 7.20(a)(i)).
Letter: Conclusion
Note: Initial entry done by Pricey Parts Ltd was Dr Deferred loss on banker’s acceptance
future, Cr Future (liability)
622
Financial instruments
Discuss how each of the following items should be classified and measured initially and
subsequently thereto for accounting purposes in terms of IFRS 9:
• Trade receivables, held with the objective to collect contractual cash flows due*
• Allowance account (‘provision’) for credit losses (‘doubtful debts’)
• Investment in shares, but not held for speculative purposes or otherwise elected
• Quoted/listed investment in municipal bonds, held with the objective to collect
contractual cash flows due*
• Derivative assets
• Long-term borrowings not held for trading or otherwise designated
• Trade payables not otherwise designated
* Assume that interest is solely a compensation for the time value of money and credit risk
associated with the principal amount outstanding.
• Trade receivables
Receivables are measured at fair value at initial recognition, including transaction costs
directly attributable to this financial asset (IFRS 9.5.1.1). Subsequently they are
measured (according to the initial classification) at amortised cost, unless they do not
have a significant financing component (IFRS 9.5.1.3). In such a case they are initially
and subsequently measured at the transaction price.
Allowance account for credit losses is an impairment loss adjustment (IFRS 9.5.5). A
credit loss is the difference between all contractual cash flows that are due to an entity
in accordance with the contract and all the cash flows that the entity expects to receive
(i.e. all cash shortfalls), discounted at the original effective interest rate (or credit-
adjusted effective interest rate for purchased or originated credit-impaired financial
assets). Expected credit losses are the weighted average of credit losses with the
respective risks of a default (non-payment) occurring as the weights. An entity
recognises a loss allowance for expected credit losses in every reporting period and
not only when there is an indicator of impairment. The allowance account (balance) is
measured at each reporting date, as follows:
– If the credit risk (risk that the counterparty will not pay) on a financial asset has
increased significantly since initial recognition: at an amount equal to the
lifetime expected credit losses; or
– If the credit risk on a financial asset has not increased significantly since initial
recognition: at an amount equal to 12-month expected credit losses. The latter
are the portion of lifetime expected credit losses that represent the expected
credit losses that result from default events (i.e. events causing non-payment) on
a financial instrument that are possible within the 12 months after the reporting
date (i.e. the effect of the entire credit loss on an asset weighted by the
probability that this loss will occur in the next 12 months).
623
Financial instruments
Short-term receivables are normally not discounted, as the effect of time value of
money is usually immaterial, therefore the allowance account for credit losses on such
receivables are also not discounted.
The investment in the shares is classified as a financial asset at fair value through profit
or loss since it is an equity instrument that is not held for trading or elected at initial
recognition as measured at fair value through other comprehensive income
(IFRS 9.5.7.5).
The investment is initially measured at fair value on the date of acquisition, excluding
directly attributable transaction costs (IFRS 9.5.1.1).
The municipal bonds investment is initially measured at fair value, including directly
attributable transaction costs (IFRS 9.5.1.1).
Subsequently, the municipal bonds investment is, according to the initial classification,
measured at amortised cost by using the effective interest method.
• Derivative assets
Derivatives are classified as measured at fair value through profit or loss since they are
geared and therefore do not have cash flows that are solely payments of principal and
interest on principal outstanding on specified dates. Derivatives are initially measured
(according to the initial classification) at fair value, excluding directly attributable
transaction costs. Thereafter, they are measured at fair value (excluding transaction
costs).
• Long-term borrowings
• Trade payables
These trade payables are financial liabilities classified as measured at amortised cost
using the effective interest method (the default classification) because they do not
constitute one of the exceptions as per IFRS 9.4.2.1.
Trade payables should (as with long-term borrowings) initially be measured at fair
value less attributable transaction costs, using the effective interest method, and
thereafter at amortised cost (IFRS 9.5.3.1).
624
Financial instruments
A company purchased 3 000 listed debentures at a price of R190,00 per debenture at the
beginning of 20.1. The debentures are 10% R200 debentures and are redeemable at par at
the end of 20.3.
Transaction costs amounted to R2 000. Interest is payable annually at the end of the year
and you may assume that the purchase price is at fair value.
The debentures are held within a business model with the objective to collect contractual
cash flows that are solely payments of principal and interest on the principal outstanding on
the specified dates. Assume that interest is solely a compensation for the time value of
money and credit risk associated with the principal amount outstanding.
Required
Your answer should comply with the requirements of International Financial Reporting
Standards (IFRS).
Calculations
Rand
1. Cost
Initial payment (3 000 × R190) (fair value) 570 000
Transaction costs 2 000
572 000
Rand
(outflow)
2. Cash flow
1 Jan 20.1 (572 000)
31 Dec 20.1 (600 000 × 10%) 60 000
31 Dec 20.2 (600 000 × 10%) 60 000
31 Dec 20.3 [(600 000 × 10%) + 600 000] 660 000
OR
n =3
PMT = 600 000 × 10% = 60 000
FV = 600 000
PV = –572 000
Comp i = 11,94099%
625
Financial instruments
a. Journals
Rand
Dr/(Cr)
1 January 20.1
Debentures at amortised cost (SFPos) 570 000
Bank (570 000)
Purchase of debentures
1 January 20.1
Debentures at amortised cost (SFPos) 2 000
Bank (2 000)
Transaction costs recognised
31 December 20.1
Debentures at amortised cost (SFPos) 68 302
Interest received (P or L) (68 302)
Recognise interest accrued @ 11,94099% (1)
31 December 20.1
Bank (2) 60 000
Debentures at amortised cost (SFPos) (60 000)
Interest actually received
31 December 20.2
Debentures at amortised cost (SFPos) 69 294
Interest received (P or L) (3) (69 294)
Recognise interest accrued
31 December 20.2
Bank 60 000
Debentures at amortised cost (SFPos) (60 000)
Interest actually received
31 December 20.3
Debentures at amortised cost (SFPos) 70 404
Interest received (P or L) (4) (70 404)
Recognise interest accrued
31 December 20.3
Bank 660 000
Debentures at amortised cost (SFPos) (660 000)
Receive interest and repayment at redemption
626
Financial instruments
Fair Ltd acquired 10 000 ordinary shares on the JSE Ltd for R100 000 (fair value) with
related transaction costs of R1 000. The fair value of the investment is R120 000 at year
end.
Required
Journalise the initial recognition and fair value adjustment at year end if the share
investment is classified as:
a. At fair value through profit or loss;
b. At fair value through other comprehensive income.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
a. Rand
Dr/(Cr)
Purchase date
Year end
Investment – at fair value through profit or loss (SFPos) 20 000
Fair value adjustment on share investment (P or L) (1) (20 000)
Fair value adjustment at year end
b.
Purchase date
Investment – at fair value through other comprehensive income (SFPos) 101 000
Bank (2) (101 000)
Purchase cost including transaction costs
Year end
Investment – at fair value through other comprehensive income (SFPos) 19 000
Mark-to-market reserve (OCI) (3) (19 000)
Fair value adjustment at year end
627
Financial instruments
The initial intention of the company was to acquire the option to purchase the shares. You
may assume that the qualifying hedging criteria have been met, and that the hedge is for a
highly probable forecast transaction. The year end of the company is 28 February 20.5. On
that date the fair value of an option was R16 and that of a share R357.
Required
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Options (SFPos) 20
Bank (20)
Capitalise transaction costs
28 February 20.5
Options (SFPos) (2) 1 380
Deferred hedging gain (OCI) (1 380)
Remeasure options to fair value (Cash flow hedge)
31 March 20.5
Options (SFPos) (3) 1 800
Deferred hedging gain (OCI) (1 800)
Remeasure options to fair value at maturity
628
Financial instruments
Rand
Dr/(Cr)
The net loss is equal to the original purchase price of the options plus transaction
costs.
b. If the shares were purchased, the journal entries on 1 January 20.5 and
28 February 20.5 would be the same. The journals on 31 March 20.5 will be:
Rand
Dr/(Cr)
31 March 20.5
Options (SFPos) 1 800
Deferred hedging gain (OCI) (1 800)
Remeasure to fair value at purchase of shares
(Same as previous journal)
Note:
The deferred hedging gain of R3 180 (R1 380 + R1 800) that has been accumulated in
equity, should be reclassified to profit or loss when the asset (shares) results in income or
expenses (fair value adjustments and dividends) recognised in profit or loss.
629
Financial instruments
The financial manager of Moriba Ltd approached you for advice in respect of the accounting
treatment of the following foreign exchange transactions for the year ended 31 March 20.0.
On 1 February 20.0 the company ordered inventories (an unrecognised firm commitment) to
the value of £32 900 from the UK. The inventories were delivered free on board (FOB) on
1 May 20.0. The amount is payable one month after delivery.
On 1 February 20.0 a four-month forward exchange contract (FEC) was taken out for the
payment of the full amount. Assume that the FEC is effective and complies with all the
qualifying hedging criteria as required i.t.o. IFRS 9.
Required
Discuss how the FEC in respect of the purchase of the inventories should be treated for
accounting purposes in accordance with the requirements of International Financial
Reporting Standards (IFRS) on 31 March 20.0 and thereafter.
The FEC is a hedge of the foreign currency risk of a firm commitment and can thus be
accounted for as either a fair value hedge or a cash flow hedge – see IFRS 9.6.5.4.
Although the transaction had not occurred by 31 March 20.0, the FEC is translated at the
market-related forward rate and the gain or loss credited or debited to other comprehensive
income (‘deferred hedging gain’).
In view of IFRS 9.6.5.11(d), and since this transaction results in the recognition of a non-
financial asset (inventory), the cumulative deferred hedging gain is treated as follows:
The associated gains or losses are removed from equity (deferred hedging gain) and are
included in the initial cost or other carrying amount of the asset (inventory) (‘base
adjustment’).
630
Financial instruments
If seen as a fair value hedge, the following will apply (IFRS 9.6.5.8):
• The gain or loss from remeasuring the FEC at fair value is recognised in profit or loss;
and
• The gain or loss from remeasuring the hedged item (firm commitment) will adjust the
value of the hedged item and the other transaction leg will also be recognised in profit
or loss.
This loss on the firm commitment will be recognised in the same way as the gain on the
FEC and will eventually be adjusted against the value of the inventory with recognition
thereof. After recognition of the inventory, the hedging gains/losses on remeasuring the FEC
would be recognised in profit or loss.
Type 1
The preference shares are convertible into ordinary shares on a one-to-one basis at the
discretion of the shareholder. The preference share dividends are cumulative but not
compulsory. The issuer, Bon-Bon Ltd, has no contractual obligation to deliver cash or
another financial asset to another party.
Type 2
The preference shares are convertible into debentures at the discretion of the issuer and
therefore there is no current contractual obligation on the board of directors of Bon-Bon Ltd
to do this conversion, i.e. to transfer cash or another financial asset to another party. The
preference share dividends are cumulative but not compulsory. Consequently it appears as if
these shares must be classified as equity.
Since the interest on debentures is deductible for tax purposes, while preference dividends
are not deductible and in the light of the (assumed) 18% dividend rate on the preference
shares, it is improbable that this choice for conversion will not be exercised. In pursuance of
economic compulsion, the directors believe that these preference shares should be classified
as a financial liability.
631
Financial instruments
Required
Discuss how each type of preference share should be classified and disclosed in the financial
statements of Bon-Bon Ltd in accordance with the requirements of International Financial
Reporting Standards (IFRS).
Type 1
The shares are treated as equity shares since they bear no obligation to settle in cash and the
number of shares to be issued is fixed. All the disclosure requirements for ordinary and
preference shares in terms of IAS 1 must be met. The shares are consequently included in
share capital on initial recognition and the dividends paid will be treated as dividends paid
in the statement of changes in equity. The conditions relating to conversion should also be
disclosed.
Type 2
The financial manager of Renox Limited approaches you for advice on IAS 32 Financial
instruments: Presentation. He provides the following information:
• In order to obtain funding, the company sourced a convertible loan of R4,2 million
from a financial institution. The loan bears interest at 15% per annum and is repayable
in equal instalments over eight years. The loan is convertible, at the option of the
financial institution, upon the repayment of each instalment into a fixed number of
ordinary shares of Renox Limited. The conversion will take place at a rate of one
ordinary share for every R10,00 of the debt that is repaid.
Of the R4,2 million, R4 million relates to a loan without a conversion option and
R200 000 to the option.
• Debentures of R6 million were also issued by Renox Limited. The debentures bear
interest at 15,5% per annum and are repayable after 10 years if they are not converted
into shares. If the share price of Renox Limited increases to above R12,00 per share,
the debentures are convertible into ordinary shares at one ordinary share for every
R12,00 of the debt that is repayable.
The current market value of Renox Ltd’s ordinary shares is R8 per share.
Required
a. Discuss how every transaction should initially be classified (equity or liability) in the
financial statements of Renox Limited in terms of IAS 32.
b. Discuss which information should be disclosed in respect of every transaction in terms
of IFRS 7.
632
Financial instruments
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
a. Principles
The substance of a financial instrument, rather than its legal form, regulates its
classification in the statement of financial position of the issuer.
The classification is done when the instrument is initially recognised and is not
changed until the financial instrument is removed from the statement of financial
position.
An equity instrument is any contract that evidences a residual interest in the assets of
an entity after all its liabilities have been deducted.
The critical characteristic in the distinction between a financial liability and an equity
instrument is a contractual obligation as discussed above.
Application
Loan
IAS 32 stipulates that where a financial instrument contains both a liability and an
equity element, the elements must be classified separately.
The purchase option of R200 000 represents an equity instrument – a purchase option
that grants the holder the right to convert the instrument into a fixed number of
ordinary shares for a fixed amount of cash in Renox Ltd’s own equity instruments,
within a specified period of time.
Debentures
A compulsory conversion exists for the debentures if the share price increases to
above R12,00. However, uncertainty exists as to whether the price of the shares will
increase to above R12,00.
633
Financial instruments
IAS 32.25 stipulates that where the rights and obligations regarding the manner of
settlement of a financial instrument depend on the occurrence or non-occurrence of
uncertain future events or on the outcome of uncertain circumstances that are beyond
the control of the issuer or the holder, the financial instrument should be classified as a
liability (contingent settlement provisions).
The debenture will be classified as a liability, since an obligation existed at the time of
issue that the loan could be repaid.
• IFRS 7.8: The carrying amount of financial liabilities measured at amortised cost
(R4 000 000).
• IFRS 7.20(b): The total interest expense (calculated using the effective interest
method) for financial liabilities that are not at fair value through profit or loss.
• IFRS 7.21: The accounting policies used in preparing the financial statements
and that are relevant to an understanding of the financial statements, including
the treatment of:
– long-term loans and the liability portion of the convertible debentures
carried at amortised cost; and
– the purchase option.
• IFRS 7.31: The nature and extent of risks, arising from the financial instruments,
to which the entity is exposed during the period and at reporting date, and how
the entity manages those risks.
• IFRS 7.33 – 34 applied: The exposure to interest rate risk, including:
– contractual repricing dates, where applicable;
– effective interest rates, when applicable for both the loan and the debentures
(as interest rates are fixed in both instances).
• IFRS 7.39: Exposure to liquidity risk, including:
– contractual repricing dates.
(Note: The disclosure requirements of IFRS 13.91-99 were not addressed as this was not
required and none of the above instruments are normally carried at fair value after initial
recognition).
The managing director of Conglomerate Ltd has suggested a transaction which he believes
would reduce the effective after-tax interest rate on a five-year loan of R200 million granted
to Lucky Ltd, a wholly-owned subsidiary of Conglomerate Ltd.
The transaction requires, inter alia, that Lucky Ltd issues debentures of R200 million to
Insuro Ltd, a large insurance company. Lucky Ltd invests the proceeds of the debentures in
preference shares to the value of R200 million, which are issued by a company in the Insuro
group.
The managing director is of the opinion that the debentures and preference shares do not
have to be disclosed in the group annual financial statements of Conglomerate Ltd, since the
substance of the transactions is to improve the after-tax return. He mentions that, should the
preference shares and debentures need to be disclosed in the consolidated financial
statements as assets and liabilities, various financing ratios would be adversely affected, and
he would not enter into the transaction. (QE 1992 – adapted)
634
Financial instruments
Required
Discuss whether you agree with the proposed disclosure required by the managing director.
The correct disclosure (if applicable) should also be discussed. Your answer must comply
with the requirements of International Financial Reporting Standards (IFRS).
In terms of IAS 32.42 a financial asset and a financial liability may only be offset against
each other if the following requirements are complied with:
• A legally enforceable right exists to set off the recognised amounts; and
• The intention is either to settle on a net basis or to realise the asset and settle the
liability simultaneously.
No indication is given in the question as to whether such a legally enforceable right exists
and therefore the debentures and preference shares must be disclosed separately in the
annual financial statements of Lucky Ltd, as well as in the consolidated financial statements.
The preference shares taken up by Lucky Ltd must be classified as either a financial asset at
fair value through profit or loss or elected as a financial asset at fair value through other
comprehensive income. Fair value adjustments will be accounted for according to the initial
classification, at either through profit or loss, or through other comprehensive income.
The debentures must be disclosed under interest-bearing long-term liabilities, using the
amortised cost method. The interest rate, short-term portion and repayment conditions must
also be disclosed, and the disclosure requirements of IFRS 7 must be adhered to.
On 1 July 20.0, Venus Ltd listed its existing 25 000 000 issued shares on the JSE Ltd.
In addition, it was decided to issue 500 000 compulsory convertible debentures of R1 each
on the same date. These debentures bear interest at 9% per annum until conversion on
30 June 20.3. On that date (30 June 20.3), the debentures will be converted into ordinary
shares on a one-for-one basis. Similar debentures, without conversion rights, bear interest at
13% per annum.
The following costs were incurred in respect of the listing of the shares and the issue of the
convertible debentures:
Rand
635
Financial instruments
Rand
Debenture issue 25 000
Accountant’s advice 17 000
Securities transfer tax 5 000
Internal administrative costs 3 000
3 025 000
Required
a. Discuss the accounting treatment of the transaction costs related to the share listing
and the debenture issue in complying with International Financial Reporting Standards
(IFRS). Mention amounts in your answer.
b. Calculate the finance costs to be recognised in the statement of profit or loss and other
comprehensive income for the year ended 30 June 20.1, as well as the amortised cost
balance of the debenture liability on the same date.
a.
The costs of an equity transaction consist only of those external incremental costs, directly
attributable to the equity transaction, and that would otherwise have been avoided (see
IAS 32.37). Internal administrative costs therefore do not form part of the cost of an equity
transaction.
The transaction costs of an equity transaction (excluding internal administrative costs) must
be accounted for as a reduction in equity (IAS 32.37).
Listing of shares
IAS 32 does not specifically exclude listing costs. The transaction costs of the listing of
shares will be accounted for as follows:
• The internal administrative costs (R500 000) are recognised as an expense in profit or
loss, since only external costs can be costs of an equity transaction.
• The listing costs and accountant’s advice (R2 500 000) will be deducted from equity,
net of any related income tax benefit.
Debentures issued
IAS 32.38 states that transaction costs incurred on the issue of a compound instrument
should be allocated to the different components of the instrument on the basis of the
proceeds of the components of the instrument.
636
Financial instruments
Weight Costs
Liability component 106 252 4 675
Equity component 393 748 17 325
500 000 22 000
The R17 325 related to equity is shown as a reduction in the statement of changes in
equity.
The external costs allocated to the liability component will be amortised as part of the
liability and should not be recognised in profit or loss initially (IFRS 9.5.1.1).
b.
637
Financial instruments
The following information relates to Ko Samet Ltd for the year ended 28 February 20.2:
Share capital
100 000 Redeemable preference shares of R2,00 each. These shares pay dividends at
a market-related rate of 10% per annum. These payments are not within the
discretion of the entity. Of the shares, 50% will be redeemed at par for cash
on 28 February 20.3, while the remainder will be redeemed on 31 August
20.4.
Inventory
Ko Samet Ltd placed an order to purchase inventory (highly probable forecast transaction)
from the US in the amount of $46 000 on 10 January 20.2. To protect the company,
management immediately took out an FEC for this inventory purchase, which expires three
months later on the settlement date. The goods were shipped FOB on 20 February 20.2 and
the creditor was paid on 10 April 20.2. On 20 February 20.2 the forward rate for an FEC
maturing on 10 April 20.2 amounted to R12,38, while at year end an FEC maturing on
10 April 20.2 traded at R12,49. The hedge of the foreign currency creditor is accounted for
as a fair value hedge.
Foreign loan
Ko Samet Ltd finances some of its activities with funds from the US. Owing to current
market conditions and projections, it appears as if the Rand will not recover in the near
future. The board of directors decided to hedge the company against future exchange losses
that may arise from the repayment of this foreign loan (i.e. the future cash flows are
hedged).
The company entered into a six-month FEC on 1 January 20.2 for an amount of $300 000.
This FEC covers the semi-annual instalment that is payable on 1 July 20.2. The total amount
due comprises $300 000 of which $72 000 relates to interest. An equivalent FEC traded at
R12,80 on 28 February 20.2.
Ignore the time value of money. Assume that all qualifying hedging criteria are adhered to.
638
Financial instruments
Required
a. Discuss the correct accounting classification of the preference shares and debentures
in the financial statements of Ko Samet Ltd for the year ended 28 February 20.2 in
accordance with IAS 32.
b. Supply the journal entries regarding the purchase of inventory for the year ended
28 February 20.2. Ignore taxation.
c. Journalise the hedging of the instalment on the foreign loan, as well as the recording
of the finance costs for the year ended 28 February 20.2. Ignore taxation.
(UNISA – adapted)
IAS 32.15 requires that the issuer of a financial instrument classifies the instrument in
its component parts as a liability or as equity in accordance with the substance of the
contractual arrangement on initial recognition. The substance, rather than the legal
form, governs its classification.
Preference shares
The preference shares are redeemable in cash on a predetermined date and create an
obligation for the issuer to deliver cash to the holders, thus meeting the definition of a
financial liability. Since the dividend payment is compulsory, and therefore a financial
liability, the instrument complies in both cases with the description of a financial
liability. The instrument shall therefore be classified as a liability (substance over
form).
The preference shares redeemable on 28 February 20.3 (12 months after year end)
(50% × 100 000 × R2 = R100 000) shall be classified as a current liability.
Dividends paid on the preference shares should be classified as part of finance costs
since the classification of a financial instrument in the statement of financial position
drives the classification of its related statement of profit or loss and other
comprehensive income items.
639
Financial instruments
Debentures
Irrespective of the fact that the debentures must be converted to ordinary shares, there
is still an obligation to pay interest on the debentures up to 28 February 20.5 and this
cash outflow represents a financial liability. The present value of the future obligatory
interest payments should be recognised as a liability on 28 February 20.2.
The compulsory conversion to ordinary shares gives rise to an equity instrument since
the issue of a company’s own shares is not classified as a financial liability.
Consequently the total issue price of the debentures (50 000 × R11,00 = R550 000)
less the present value of the future interest payment on 28 February 20.2 should be
classified as equity. The debentures are therefore a compound instrument.
b. Inventory
Rand
Dr/(Cr)
10 January 20.2
No entry, since the FEC has no fair value at time of issuance.
20 February 20.2
Determine the limit of amount that may be taken to equity in terms
of IFRS 9.6.5.11(a):
Loss on change of future cash flows up to 20 February 20.2 (1) (2 760)
Gain on forward exchange contract (2) 2 760
Effectiveness: 2 760/2 760 (for illustration purposes only) 100%
Journal entries:
FEC asset (derivative instrument) (SFPos) 2 760
Deferred hedging reserve (OCI) (2) (2 760)
Fair value adjustment (cash flow hedge – inventory not yet recorded)
28 February 20.2
Foreign exchange difference (P or L) 4 600
Payables (SFPos) (4) (4 600)
Restate creditor at closing rate at year end
640
Financial instruments
c. Foreign loan
Rand
Dr/(Cr)
28 February 20.2
Finance costs (P or L) (1) 271 800
Interest accrued (SFPos) (271 800)
Interest accrual at year-end
• On 1 May 20.1 20 industrial share index futures were purchased for speculative
purposes and were classified as at fair value through profit or loss. The industrial share
index on 1 May 20.1 was 2 400. Transaction costs were R200 and the margin deposit
R40 000. The 20 futures were sold on 15 July 20.1. The mark-to-market indexes are as
follows:
641
Financial instruments
• The company held industrial shares for speculative purposes and classified these as at
fair value through profit or loss. A decline in the share prices is anticipated and
consequently the company decided to hedge the transaction. On 1 May 20.1,
15 industrial share index futures were sold. The contracts mature on 1 August 20.1,
and 15 contracts were entered into. Transaction costs were R150. The margin deposit
was R50 000. You may assume that all the qualifying hedging criteria in IFRS 9.6.4.1
were complied with (ignore tax). The mark-to-market indexes are as follows:
The year end of the company is 30 June 20.1. Each index point represents R10 in value.
Gains and losses are settled on a daily basis.
Required
Journalise the transactions. Your answer must comply with the requirements of International
Financial Reporting Standards (IFRS).
1. Non-cumulative preferences shares that are not redeemable with discretionary dividend
payments.
4. Debentures which are convertible into a fixed number of ordinary shares at the option
of the holder thereof.
5. An option issued by a company, granting the right to acquire a fixed number of shares
in that company at a fixed price.
Required
Briefly classify each of the instruments as either equity or a liability in the books of the
issuer. Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Plex-Fame Ltd has invested R143 million in government bonds. The government bonds are
held within a business model with the objective to collect contractual cash flows that are
solely payments of principal and interest on the principal outstanding on the specified dates.
Interest on the government bonds is solely a compensation for the time value of money and
credit risk associated with the principal amount outstanding.
642
Financial instruments
During the past year, a portion of these bonds was set aside to cover interest and principal
obligations on the company’s loan of US $25 million. The loan is not held for trading or
otherwise designated. At the time the loan agreement was signed, Plex-Fame Ltd entered
into a forward contract to buy US dollars for the same amounts as the capital obligations
under the loan, and in respect of the same dates on which the obligations will mature.
The financial director is of the opinion that, in substance, the debt has been settled and
consequently both the bonds and the loan have been removed (derecognised) from the
company’s statement of financial position.
Required
Discuss the appropriate accounting treatment and disclosure of the above in terms of the
requirements of International Financial Reporting Standards (IFRS) (QE 1991 – adapted).
On 1 January 19.9 when the ruling market interest rate was 12%, Casheeze Ltd purchased
the following securities:
Fair value at
acquisition
Rand
Additional information
1. At the end of 19.9, the fair values of the investments in Quickbuck Ltd and
Riskfree Ltd are R2 700 and R5 190 respectively.
2. Interest rates have fallen to 10% at 31 December 19.9, boosting the fair value of
Breakeven Ltd’s debentures to R5 634. It is Casheeze Ltd’s policy to account for
interest income separately from fair value adjustments.
643
Financial instruments
3. Assume that Casheeze Ltd accounts for financial instruments using settlement date
accounting and that instruments were not designated as either at fair value through
profit or loss or elected as at fair value through other comprehensive income if they
would generally have been classified differently.
4. Ignore taxes.
Required
a. State which category each of the above-mentioned financial instruments falls into, and
how they should be measured, on initial recognition and subsequent thereto.
b. Prepare the journal entries (also for cash transactions) for the year ended
31 December 19.9, for all the above-mentioned transactions in the books of
Casheeze Ltd. Show the purchase price and transaction costs separately.
c. On 1 July 20.0, 75 of the ordinary shares in Riskfree Ltd were sold for R30 per share.
Prepare the journal entries to record the above-mentioned transaction in the books of
Casheeze Ltd.
d. On 1 September 20.0, Quickbuck Ltd had a capitalisation issue of one share for every
10 ordinary shares held.
i. Prepare the journal entries to record the above-mentioned transaction in the
books of Casheeze Ltd.
ii. Calculate the value of each share after the capitalisation issue, if the fair value of
the investment is still R2 700.
e. At 31 December 20.0, when interest rates are 8%, the directors decide to hold the
investment in Breakeven Ltd until maturity in order to collect contractual cash flows.
Prepare the journal entry/ies to record the above-mentioned decision in the books of
Casheeze Ltd.
f. On 31 December 20.0, Casheeze Ltd established that Moneyshort Ltd is experiencing
financial difficulties due to mismanagement and that there is a 100% chance that only
50% of the future cash flows of the debentures will be paid out. Prepare the journal
entry/ies to account for the above-mentioned information at 31 December 20.0.
(UNISA – adapted)
B Ltd purchases options for R32 500. The options give the right to buy 5 000 shares in PHB
Pilliton Ltd at R130 (market price at purchase date of options) per share, with associated
transaction costs of R500. These purchased options expire on 30 June 20.7. PHB Pilliton's
shares traded at R150 per share at year end (31 December 20.6) and the fair value per option
increased to R26,50 per option.
Required
644
Financial instruments
Bambi Ltd entered into the following transactions during the year ended 31 December 20.6:
Transaction 1
On 15 April 20.6, 10 000 units of inventory, which are generally available in the market,
were ordered from a supplier by way of a non-cancellable contract at R10 per unit. The
R100 000 will be paid within 30 days after the inventory has been received and it will be
delivered on 30 April 20.6 and paid for on 30 May 20.6. The market price of the generally
available inventory increased by R2 per unit on 20 May 20.6.
Transaction 2
An FEC was entered into on 30 November 20.6 in terms of which $150 000 will be
purchased on 30 January 20.7 at R6,20 per $. At year end the exchange rates are as follows:
$ Rand
Spot rate 1 = 6,22
Forward rate (similar contract) 1 = 6,30
Required
Journalise the above transactions (also cash transactions) in detail for the year ended
31 December 20.6 and explain in respect of each transaction why it was accounted for on
the specific date. Your answer must comply with the requirements of International Financial
Reporting Standards (IFRS). Journal narrations are not required.
Bimba Ltd entered into several transactions during the year ended 31 December 20.6:
Transaction 1
On 2 February 20.6, 5 000 listed shares in Specky Ltd were purchased for R100 000, with
brokerage amounting to R500. These shares form part of a portfolio of financial instruments
that are managed together and showed a pattern of short-term profit taking in the recent past.
The company does not intend to sell these shares in the near future. On 31 December 20.6
the shares were trading at R19 per share on the JSE Ltd.
Transaction 2
On 16 April 20.6, 6 000 unlisted shares in Specter Ltd were purchased for R60 000, with
brokerage amounting to R500 and regulatory fees of R200. The company intends to sell
these unlisted shares the moment they can get a higher price for them. Owing to the fact that
these are unlisted shares, a quoted price on an active market is not available and it is also
clear from other evidence that it is not possible to measure the fair value of these shares by
using a valuation technique. On 31 December 20.6 it was still not possible to determine the
fair value of these shares as such. It was however established that the cost price of the shares
was a faithful representation of their fair value.
645
Financial instruments
Transaction 3
On 1 July 20.6 (and redeemable on 30 June 20.10), 500 000 12% R1 listed government
bonds were purchased for R555 604, while the market rate for instruments with similar
terms and conditions is currently 10% per annum. The government bonds are redeemable at
a premium of 7%, interest is paid annually in arrears on 30 June and the associated
transaction costs are the following: brokerage = R1 000, regulatory fees = R400 and
management time spent = R2 000. The government bonds are held within a business model
whose objective is achieved by both collecting contractual cash flows (that are solely
payments of principal and interest on the principal outstanding on the specified dates) and
selling the bonds. Interest on the government bonds is solely a compensation for the time
value of money, credit risk associated with the principal amount outstanding and a
reasonable profit margin. At 31 December 20.6 the fair value of these bonds amounted to
R605 132.
Transaction 4
On 2 October 20.6, 7 500 listed shares in Notty Ltd were purchased for R150 000 with
brokerage amounting to R750. Notty Ltd is a major supplier of Bimba Ltd and, due to their
strategic importance, Bimba Ltd does not intend to sell these shares in the near future and
has elected at initial recognition to account for the changes in the fair value in other
comprehensive income. On 31 December 20.6 these shares were trading at R21 per share on
the JSE Ltd.
Required
Provide journal entries in respect of each of these transactions for the year ended
31 December 20.6, as well as the statement of financial position amounts as at 31 December
20.6. In each case indicate in what category of financial asset you would classify the item.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS). Journal narrations are not required.
You are a senior technical advisor at a large professional services firm. One of your clients
needs your advice on the measurement of financial instruments.
Required
Mambo Ltd entered into the following transactions during the year ended
31 December 20.6:
646
Financial instruments
Transaction 1
Credit sales to the amount of R2 million were made to debtors after ensuring, through credit
control procedures, that these receivables are of an exceptionally high quality. The effect of
the time value of money is insignificant.
Transaction 2
At the beginning of the year, a debit loan of R1 million with a term of five years was granted
to a supplier of an essential raw material in respect of the production process of Mambo Ltd.
Mambo Ltd is convinced that the granting of the loan will lead to a long and prosperous
relationship (at least for five years) between the two companies. The loan was granted at an
interest rate of 8%, while the current market rate for loans with similar terms, conditions and
credit rating is 12%. Transaction costs associated with the loan amount to R1 000. Interest is
payable annually in arrears and the capital is repayable in full after five years.
Transaction 3
A debit loan of R1,5 million for a term of four years was made at the beginning of the year
to a supplier of a less essential raw material in the production process of Mambo Ltd. The
loan was granted at an interest rate of 12%, while the current market rate for loans with
similar terms, conditions and credit rating is 12%. Transaction costs associated with the loan
amount to R1 500. Interest is payable annually in arrears and the capital is repayable in full
after four years.
Required
Provide in each case all the journal entries related to the above transactions for the year
ended 31 December 20.6 as well as the balances at year end as they would appear in the
statement of financial position of Mambo Ltd. Your answer must comply with the
requirements of International Financial Reporting Standards (IFRS). Journal narrations are
not required.
Dumbo Ltd is a financially healthy company with massive cash reserves. Consequently, the
board of directors decided to acquire several financial assets and on 31 December 20.6 (year
end) the company held a number of such investments. The following information relates to
these investments and you may in all cases assume that these investments were acquired at
fair value:
These shares were acquired on 1 June 20.6 at R12,50 per share with associated transaction
costs amounting to R2 500. Dumbo Ltd intends to sell them as soon as the return on the
original capital outlay is sufficient – they therefore speculate with these shares. In the
meantime the share market has dropped drastically and at year end (31 December 20.6)
these shares were trading at R11,00 per share. The shares were not designated to any
specific category of financial asset on initial recognition, but were classified based on the
entity’s business model.
647
Financial instruments
These shares were acquired on 1 January 20.5 at R10,50 per share with associated
transaction costs of R3 000. Dumbo Ltd intended originally to hold them for a period of
10 years to secure maximum capital growth and dividends from this investment, and elected
to designate this investment as at fair value through other comprehensive income. Owing to
favourable economic predictions in respect of the South African economy and the nature of
the product of Ecdon Ltd, it was expected that the business and value of shares would show
extreme growth for at least 10 years and consequently good dividends would be paid.
However, due to flooding of the market with similar imported Chinese products at prices
much lower than those at which Ecdon Ltd could manufacture their products, the share price
of Ecdon Ltd had dropped to R9,50 by 31 December 20.5 and to R7,00 by
31 December 20.6.
Early in 20.5, Ecdon Ltd petitioned the government for import protection on its products
and by the end of December 20.5 it appeared as if the government would implement the
import protection. However, on 1 April 20.6 a new director-general was appointed by the
Department of Trade and Industry and by 30 December 20.6 this department announced in a
press release that they would definitely not implement import protection measures for the
products of Ecdon Ltd. According to the press release, the free market should be left to sort
out the matter.
This is an extremely risky investment in a new company that should, according to the
financial director, show brilliant growth in the short term and therefore must be treated as a
speculative investment. The shares do not trade in an active market and it is difficult to
determine their fair value at this stage. The shares were purchased on 1 March 20.6 at
R2 per share and brokerage amounted to R2 800, while the financial director spent time to
the value of R2 000 on the evaluation of the target company and the purchase transaction.
On 31 December 20.6, the board of directors gathered the following information:
• Annual estimated cash flows from this asset (directors’ best estimate) for an
indeterminable period is R25 000 per year.
• Directors’ best estimate of the rate of return on investments with a similar risk profile
is 10% per annum.
Investment 4: 1 000 8% listed R1 000 municipal bonds in the Kimberley Metro (Sol
Plaatje Municipality)
The investment in R1 000 bonds was made on 1 January 20.4 for strategic reasons. The
bonds are held within a business model with the objective to collect contractual cash flows
that are solely payments of principal and interest on the principal outstanding on the
specified dates until their maturity date on 31 December 20.13. Interest on the bonds is
solely a compensation for the time value of money, credit risk associated with the principal
amount outstanding and other basic risks. The investment has not been designated as any
other category of financial asset. The fair value (transaction price) of the bonds (to be
redeemed at par) on 1 January 20.4 was R877 109 and the market interest rate for similar
bonds at that stage was 10% per annum. The associated transaction costs in respect of the
investment were R2 000. On purchase date the bonds were not credit-impaired and credit
risk was assessed as insignificant. The 12-months’ expected credit losses were estimated as
RNil.
648
Financial instruments
On 28 December 20.6, the financial director of Dumbo Ltd received a letter from the
Kimberley Metro which indicated that the Metro would be forced to reduce the original
benefits promised at the time of the bond issue. This action is unavoidable due to the long
drought in the Northern Cape, as well as the refusal of municipal taxpayers to pay their
municipal levies that are in arrears. According to this letter, the Metro will have to reduce
the interest paid on these debentures to 6%, while the eventual redemption will no longer
take place at par but at 86% of the original par value of the bonds.
Required
a. Identify the level in the fair value hierarchy (see IFRS 13) of Investment 3.
b. Provide all the related journal entries (cash transactions included) in respect of the
above investments from initial recognition to 31 December 20.6.
c. Provide, for each of the above investments, the carrying amount in the statement of
financial position of Dumbo Ltd for the year ended 31 December 20.6.
d. Provide the carrying amount of Investment 4 as at 31 December 20.7 and also at
31 December 20.13 (immediately before redemption).
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Round off all amounts to the nearest rand.
A Ltd, a company with a 31 December year end, purchased the following shares:
Company B Ltd
Number of shares purchased 10 000
Purchase date 30 June 20.3
Fair value per share
− 30 June 20.3 R15,00
− 31 December 20.4 R17,00
− 31 December 20.5 R12,00
− 31 December 20.6 R13,50
− 30 June 20.7 R9,50
− 31 December 20.7 R13,80
The investment has on initial recognition been correctly classified as a financial asset at fair
value through other comprehensive income.
Required
a. Prepare extracts of the statement of profit or loss and other comprehensive income of
A Ltd for the year ended 31 December 20.6 to reflect the movements on the investment
in B Ltd.
b. The company prepares interim financial statements on 30 June. On 30 June 20.7 the
directors were of the opinion that the investment was impaired. Prepare the journal
entries relating to this investment for the year ended 31 December 20.7.
649
Financial instruments
InDebt Ltd has a financial liability of R400 000 in favour of Capital Ltd. During 20.9
InDebt Ltd experienced financial difficulties and its board of directors decided to approach
Capital Ltd with a debt-for-equity swap offer. If accepted, the liability will be settled in full
through the issuing of ordinary shares in InDebt Ltd.
The debt-for-equity swap offer was accepted on 30 June 20.9, on which date the R400 000
liability was settled in full by issuing 32 000 ordinary InDebt Ltd shares at its fair value of
R12.50 per share.
You may assume that the interest on the liability was paid up at all times and that the
interest rate on the liability was market related. InDebt Ltd and Capital Ltd are not related.
Required
a. Provide the journal entries in respect of the above debt-for-equity swap transaction on
30 June 20.9.
b. Provide the journal entries in respect of the above debt-for-equity swap transaction if
InDebt Ltd decided to issue 33 000 shares at R12,50 in full and final settlement of the
liability.
650
IFRS 10, IFRS 12, IFRS 3 &
IAS 27
Consolidated financial statements and
separate financial statements
__________________________________________________________________
QUESTIONS
651
Consolidated financial statements and separate financial statements
Acc Ltd is a company holding shares in several other companies. However, the level of
control in respect of none of these investments leads to these investments being classified as
either a subsidiary (IAS 27/IFRS 10), joint venture or associate (IAS 28).
Bac Ltd is a company with investments in the shares of several other companies and each of
these investments can be classified as a subsidiary, joint venture or associate in terms of the
relevant International Financial Reporting Standards (IFRS).
Required
Indicate, with reasons, whether the financial statements (not consolidated financial
statements) of Acc and Bac Ltd containing these investment accounts can be classified as
separate financial statements or not.
The financial statements of Acc Ltd cannot be classified as separate financial statements as
none of the investments held can be classified as subsidiaries, joint ventures or associates
(IAS 27.4 and .7). The financial statements of Acc Ltd can rather possibly be called
‘individual’ financial statements, to distinguish them from separate financial statements.
The financial statements of Bac Ltd can be classified as separate financial statements, as all
the investments held by this parent, venturer or investor can be classified as either
subsidiaries, joint ventures or associates (IAS 27.7).
Required
In terms of IFRS 10.2(a) and IFRS 10.4, the consolidated financial statements of a group
should consolidate all subsidiaries of the parent (i.e. all entities controlled by the parent).
However, a parent need not present consolidated financial statements if and only if:
• the parent is itself a wholly-owned subsidiary, or a partly-owned subsidiary of another
entity and its other owners, including those not otherwise entitled to vote, have been
informed about, and do not object to, the parent not presenting consolidated financial
statements; and
• the parent’s debt or equity instruments are not traded in a public market; and
652
Consolidated financial statements and separate financial statements
• the parent did not file, nor is it in the process of filing, its financial statements with a
securities commission or other regulatory organisation for the purpose of issuing any
class of instruments in a public market; and
• the ultimate or any intermediate parent of the parent produces consolidated financial
statements available for public use that comply with International Financial Reporting
Standards.
Parent Ltd owns two subsidiaries namely One Ltd and Two Ltd. The investments in these
subsidiaries appear in the statement of financial position in the company’s separate financial
statements and these subsidiaries must be consolidated in the consolidated financial
statements of the Parent Ltd Group.
According to IAS 27.10, investments in subsidiaries, joint ventures and associates can be
accounted for, amongst others, at cost or at fair value in accordance with IFRS 9.
Investments accounted for at cost shall be accounted for in accordance with IFRS 5 when
they are classified as held for sale in accordance with IFRS 5. The measurement of
investments accounted for in accordance with IFRS 9 is not changed in such circumstances.
Assume an income tax rate of 28% and that 50% of capital gains are taxed. Also assume that
the deferred tax balance, apart from any balances arising from these items, amounts to RNil.
Required
a. State at what amounts the investments in One Ltd and Two Ltd should be presented in
the statement of financial position in the separate financial statements of Parent Ltd as
at 31 December 20.5, if Parent Ltd elected as its accounting policy to show investments
in subsidiaries in its own (separate) financial statements at cost. Also state what other
line items in the statement of financial position will be affected by the decision to carry
these investments at cost and provide the related amounts.
b. State at what amounts the investments in One Ltd and Two Ltd should be presented in
the statement of financial position in the separate financial statements of Parent Ltd as
at 31 December 20.5, if Parent Ltd made an irrevocable election to show investments in
these subsidiaries in its own (separate) financial statements at fair value through other
comprehensive income (IFRS 9.5.7.5). Also state what other line items on the
statement of financial position will be affected by the decision to carry these
investments at fair value through other comprehensive income, and provide the
relevant amounts.
653
Consolidated financial statements and separate financial statements
c. If Parent Ltd rather elected to show investments in these subsidiaries in its own
(separate) financial statements at fair value through profit or loss, draft the journal
entries required in the separate financial statements of Parent Ltd to account for the
movement in fair value.
d. Provide the consolidation journal entries that will arise from carrying the investments
in the subsidiaries at cost, at fair value through other comprehensive income and at fair
value through profit or loss respectively.
e. Discuss whether Parent Ltd may elect to carry the investment in One Ltd at cost and
that of Two Ltd at fair value in its separate financial statements.
f. Identify any other allowable method(s) of measuring the investments in subsidiaries in
the separate financial statements of Parent Ltd.
a. The accounting policy selected, is to carry the investments at cost in the separate
financial statements of Parent Ltd:
– Investment in One Ltd R100 000
– Investment in Two Ltd R130 000
No other line items in the statement of financial position will be affected at year end.
b. The accounting policy selected is to carry the investments at fair value through other
comprehensive income in the separate financial statements of Parent Ltd:
– Investment in One Ltd R200 000
– Investment in Two Ltd R180 000
Since these investments are not held for trading Parent Ltd can make an election in
terms of IFRS 9.5.7.5 to present all changes in fair value in other comprehensive
income. Consequently other line items to be affected would be the mark-to-market
reserve and deferred tax.
(1) [(200 000 – 100 000) × 86%] + [(180 000 – 130 000) × 86%] = R129 000
The deferred tax line item in the Statement of financial position would be R21 000 (2).
(2) [(200 000 – 100 000) × 14%] + [(180 000 – 130 000) × 14%] = R21 000
c. The accounting policy selected is to carry the investments at fair value through profit
or loss in the separate financial statements of Parent Ltd:
– Investment in One Ltd R200 000
– Investment in Two Ltd R180 000
Since Parent Ltd has not made an election in terms of IFRS 9.5.7.5 to present all
changes in fair value in other comprehensive income, all fair value changes are
recognised in profit or loss. Consequently the journal entry Parent Ltd would process to
account for the movement in fair value in its separate financial statements would be
as follows:
654
Consolidated financial statements and separate financial statements
Rand
Dr/(Cr)
If the accounting policy of Parent Ltd is to carry these investments at fair value
through other comprehensive income, then the following pro forma journal entry
will be required:
Rand
Dr/(Cr)
If the accounting policy of Parent Ltd is to carry these investments at fair value
through profit or loss, then the following pro forma journal entry will be required:
Rand
Dr/(Cr)
655
Consolidated financial statements and separate financial statements
e. In terms of IAS 27.10, the same accounting policy should be applied for each category
of investments. Consequently, all investments in subsidiaries must either be accounted
for at cost or at fair value, while all investments in, for example, associates should be
accounted for at either cost or fair value. The investment in One Ltd may therefore not
be carried at cost if at the same time the investment in Two Ltd is carried at fair value,
therefore both must either be carried at cost or both must be carried at fair value.
f. IAS 27.10 also allows the equity method to account for the investments in the separate
financial statements.
Blue Bull Ltd recently acquired a 40% interest in Sharks Ltd. On the same date, Blue Bull
Ltd also acquired options to purchase a further 20% interest in Sharks Ltd. These options
are exercisable, at the option of Blue Bull Ltd, at any time during the next three years.
During the audit of Blue Bull Ltd it was mentioned that there may be a possibility that
Sharks Ltd would need to be consolidated as a subsidiary in the financial statements of Blue
Bull Ltd. Sharks Ltd has shown good financial performance during the year resulting in
these options being in the money (fair value of the shares are greater than the current
exercise price of the options). Blue Bull Ltd has the financial ability to exercise these
options.
Required
Control arises when the investor 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 relevant activities of the investee (IFRS 10.10). An investor with the
current ability to direct the relevant activities has the power even if its rights to direct have
not been exercised (IFRS 10.12).
Current (40%) as well as potential (20%) voting rights should be considered when
determining if an investor has power over and investee (IFRS 10.B50).
In assessing whether it has power, an investor considers only substantive rights whereby the
holder must have the practical ability to exercise the right (IFRS 10.B22). Barriers that
prevent the holder from exercising such rights include but are not limited to: an exercise
price that creates a financial barrier that would prevent or deter the holder from exercising
such rights (IFRS 10.B23(a)(ii)). The holder of potential voting rights shall consider the
exercise price of the instrument in assessing whether it has power over the investee
(IFRS 10.B23(c)).
656
Consolidated financial statements and separate financial statements
Blue Bull Ltd has the current ability to exercise these options (currently exercisable and has
the financial ability to exercise) and the options are in the money which would not deter
Blue Bull Ltd from exercising its options. Blue Bull Ltd therefore controls Sharks Ltd and
should consolidate Sharks Ltd in its consolidated annual financial statements.
It should be kept in mind that only 40% of the subsidiary (actual share ownership) will be
consolidated (non-controlling interest will thus be 60%).
The directors of Stella Ltd recently approached you with the following questions:
Required
Control arises when the investor 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). Power arises from rights. Sometimes assessing
power is straightforward, such as when power over an investee is obtained directly and
solely from voting rights arising from equity instruments such as shares. In other cases,
the assessment will be more complex and require more than one factor to be considered
(IFRS 10.11).
657
Consolidated financial statements and separate financial statements
In assessing the purpose and design of the investee, an investor shall consider the
involvement and decisions made at the investee’s inception as part of its design and
evaluate whether the transaction terms and features of the involvement provide the
investor with rights that are sufficient to give it power (IFRS 10.B51).
A structured entity is an entity that has been designed so that voting or similar rights
are not the dominant factor in deciding who controls the entity (IFRS 12 Appendix A).
Finance Ltd is a structured entity controlled by Stella Ltd that needs to be consolidated
in the group annual financial statements.
b. According to IFRS 10.B92, the financial statements of the parent and its subsidiaries
used in the preparation of the consolidated financial statements shall be prepared as of
the same date.
When the end of the reporting period of the parent is different from that of the
subsidiary, the subsidiary prepares, for consolidation purposes, additional financial
statements as of the same date as the financial statements of the parent unless it is
impractical to do so.
If it is impractical, the subsidiary shall adjust its financial statements for the effects of
significant transactions or events that occur between the subsidiary’s reporting date
and the parent’s reporting date. The difference between the reporting dates shall be no
more than three months. The length of the reporting periods and any difference
between the ends of the reporting periods shall be the same from period to period.
Stella Ltd would therefore instruct Finance Ltd to either prepare additional financial
statements or adjust their financial statements for all significant transactions and events
during the two-month period. The latter option is acceptable because the requirement
of three months is not exceeded, provided that it is impractical to prepare additional
financial statements.
658
Consolidated financial statements and separate financial statements
Holder Ltd acquired an 80% interest in Sub Ltd on 1 January 20.5. This was the
incorporation date of Sub Ltd.
Holder Ltd sold 25% of its share in Sub Ltd on 1 January 20.8 for R50 000.
The trial balances of Holder Ltd and Sub Ltd as at 31 December 20.8, the companies’
financial year end, showed the following amounts:
The Holder Ltd Group measures non-controlling interest at their proportional share of the
net assets of the subsidiary.
Required
a. Calculate the equity adjustment the group will recognise on the partial sale of their
interest in Sub Ltd.
b. Prepare the consolidated statement of financial position as at 31 December 20.8, as
well as the statement of changes in equity for the year ended 31 December 20.8, of the
Holder Ltd Group.
• Notes are not required.
• Comparative amounts are not required.
c. Discuss what the effect will be in the consolidated as well as the separate financial
statements if Holder Ltd sold 50% of its interest in Sub Ltd, and not only 25%.
Assume a selling price of R100 000 and that the fair value of the remaining 40%
interest in Sub Ltd is R95 000.
659
Consolidated financial statements and separate financial statements
Hercules Ltd is a JSE-listed investment company. Hercules Ltd has investments in most
industry sectors, but had never in the past invested in the mining industry because a suitable
opportunity has never arisen. However, during the current financial year (ended
30 June 20.1) the board became aware of a struggling mining company, Minerals (Pty) Ltd,
which was incorporated 2 years ago. According to Hercules Ltd the biggest ‘asset’ of
Minerals (Pty) Ltd is a prospecting right in respect of platinum that was granted by the
government shortly after incorporation. However, due to a lack of funding and management
expertise, Minerals (Pty) Ltd could not as of yet make noticeable progress with prospecting.
The board of Hercules Ltd therefore approached the existing shareholders of Minerals (Pty)
Ltd on 14 August 20.0 and made an offer on a 51% interest in Minerals (Pty) Ltd. The
shareholders of Minerals (Pty) Ltd were willing to trade their controlling interest for a non-
controlling interest to gain access to funding via Hercules Ltd. Negotiations were finalised
by the end of December and both parties agreed on 1 January 20.1 that Hercules Ltd
acquires a 51% interest in Minerals (Pty) Ltd from the previous shareholders.
In spite of a valuation of R26 million that was conducted recently, Minerals (Pty) Ltd
recognised the cost price of the prospecting right as an expense because the probable inflow
of economic benefits could not be demonstrated due to the above problems. The prospecting
right had a 9 year remaining term as of 1 January 20.1.
Minerals (Pty) Ltd already (before take-over by Hercules Ltd) appointed contractors to carry
out prospecting activities and purchased various mining equipment and vehicles for this
purpose. Minerals (Pty) Ltd has 22 full-time employees in its service.
The purchase price of the 51% interest will be settled by Hercules Ltd in favour of the
previous shareholders as follows:
• A cash payment of R1 500 000 on 1 January 20.1.
• Mining equipment with a value of R7 600 000. The equipment was purchased by
Hercules Ltd in December 20.0 for R5 500 000 and it was not yet ready for use as at
1 January 20.1, the date on which it was transferred to the previous shareholders.
• A cash payment of R4 000 000 on 1 January 20.3.
• An additional payment in the form of platinum futures that will be transferred on
1 January 20.3 if platinum reserves of more than the sector norm are found at that stage.
This possible payment is correctly classified as ‘at fair value through profit or loss’ in
terms of IFRS 9 and had a fair value of R2 000 000 on 1 January 20.1, which decreased
to R1 700 000 on 30 June 20.1.
• 5 000 ordinary shares in Hercules Ltd, issued at 1 January 20.1. Issue costs amounted to
R2 500.
660
Consolidated financial statements and separate financial statements
The trial balances of Minerals (Pty) Ltd on the respective dates were as follows:
01/01/20.1 30/06/20.1
Rand Rand
Minerals (Pty) Ltd signed a guarantee of R1 400 000 for the debt of Sapphire (Pty) Ltd, a
third party. Because the possibility of outflow of economic benefits was estimated to be less
probable, Minerals (Pty) Ltd only disclosed this guarantee as a contingent liability. The fair
value of the obligation for Minerals (Pty) Ltd was estimated to be R900 000 on
1 January 20.1 (not deductible for tax). The estimate systematically increased to R1 100 000
by 30 June 20.1 due to circumstances that arose after the acquisition date.
Assume that all profits/losses accrued evenly except where the contrary is stated.
Assume a tax rate of 28%. Ignore any form of taxation other than income tax.
Required
a. Discuss whether IFRS 3 is applicable to the acquisition of Minerals (Pty) Ltd and also
the resulting accounting treatment of the prospecting right.
b. Provide the journal entries in the separate records of Hercules Ltd only on
1 January 20.1 and only in respect of the acquisition of Minerals (Pty) Ltd. Ignore tax
implications for this part.
c. Assuming that IFRS 3 is indeed applicable, provide all pro forma journal entries for
the year ended 30 June 20.1 that are needed to account for Minerals (Pty) Ltd in the
consolidated financial statements of the Hercules Ltd group.
Your answers must comply with International Financial Reporting Standards (IFRS).
(NWU – adapted)
661
Consolidated financial statements and separate financial statements
662
IFRS 11 & IFRS 12
Joint arrangements
______________________________________________________________
QUESTIONS
Note: There are more questions on the application of the equity method in the chapter
on IAS 28.
663
Joint arrangements
Hawson Ltd decided with three other parties to form a company, Stanford Ltd. A contractual
arrangement between the parties stipulates that they exercise joint control over Stanford Ltd
since the unanimous consent of all four parties are required when taking decisions about the
company’s activities. Each of the parties owns an equal shareholding in Stanford Ltd.
On 1 January 20.2 Hawson Ltd made a loan to Stanford Ltd of R100 000 which is repayable
after 10 years. Interest is payable annually in arrears at 15% per annum.
The summarised financial statements of both companies at 31 December 20.2 are as follows:
Hawson Stanford
Ltd Ltd
Rand Rand
ASSETS
Non-current assets 1 050 000 150 000
Property, plant and equipment 900 000 150 000
Share investment in Stanford Ltd 50 000 –
Loan to Stanford Ltd 100 000 –
Current assets 450 000 200 000
Total assets 1 500 000 350 000
Hawson Stanford
Ltd Ltd
Rand Rand
664
Joint arrangements
Hawson Stanford
Ltd Ltd
Retained earnings Rand Rand
Additional information
2. The share investment in Stanford Ltd was accounted for at cost in the abovementioned
financial statements of Hawson Ltd.
Required
Prepare the consolidated financial statements of Hawson Ltd for the year ended
31 December 20.2 so as to comply with the requirements of International Financial
Reporting Standards (IFRS) if it is assumed that:
a. The joint arrangement is classified as a joint operation. The contractual arrangement
stipulates that assets, liabilities, income and expenses are divided in accordance with
the shareholding of the joint operators.
b. The joint arrangement is classified as a joint venture.
Comparative amounts and notes are not required. Only the retained earnings column of the
consolidated statement of changes in equity is required.
a. Joint operation
In accordance with IFRS 11.20, a joint operator shall recognise the following in its financial
statements in relation to its interest in a joint operation:
This treatment will be the same for both the separate and consolidated financial statements
of the operator.
665
Joint arrangements
Rand
ASSETS
Non-current assets 1 012 500
Property, plant and equipment (1) 937 500
Loan to joint operation (Stanford Ltd) (2) 75 000
Current assets (3) 500 000
Total assets 1 512 500
(1) 485 000 + (25% × 60 000) – (25% × 15 000 dividend received) = 496 250
(2) 15 000 – (25% × 15 000) = 11 250
666
Joint arrangements
b. Joint venture
According to IFRS 11.24, a joint venturer shall recognise its interest in a joint venture as an
investment and shall account for that investment using the equity method in IAS 28.
Rand
ASSETS
Non-current assets 1 062 500
Property, plant and equipment 900 000
Investment in joint venture (Stanford Ltd) (1) 62 500
Loan to joint venture (Stanford Ltd) 100 000
Current assets 450 000
Total assets 1 512 500
(1) 50 000 (cost) + (25% × 50 000 post-acquisition portion of net assets) = 62 500
Rand
(1) 485 000 – (25% × 15 000 dividend from joint venture) = 481 250
(2) 45 000 × 25% = 11 250
667
Joint arrangements
The following are abridged trial balances of PA Ltd and MA Ltd at 30 June 20.3:
PA Ltd MA Ltd
Rand Rand
Dr/(Cr) Dr/(Cr)
Share capital (100 000 ; 80 000 shares) (100 000) (80 000)
Mark-to-market reserve (15 000) –
Retained earnings (21 000) (14 500)
Profit before tax (17 000) (10 500)
Trade and other payables (84 000) (26 000)
Loan from PA Ltd – (10 000)
Property, plant and equipment 80 000 42 000
Investment in MA Ltd - Shares at fair value 60 000 –
- Loan 10 000 –
Inventory 10 000 30 000
Trade receivables 65 000 60 000
Income tax expense 7 000 5 000
Dividends paid 5 000 4 000
Additional information
1. On 1 July 20.0 PA Ltd acquired 40 000 shares in MA Ltd, on which date MA Ltd's
retained earnings amounted to R7 000. PA Ltd accounts for the share investment in
MA Ltd at fair value with changes in fair value recognised in other comprehensive
income. The other 40 000 shares in MA Ltd are held by Skoonma Ltd. PA Ltd and
Skoonma Ltd exercise joint control over MA Ltd in terms of a contractual agreement.
Assume that this joint arrangement has been correctly classified as a joint operation.
The contractual arrangement stipulates that all assets, liabilities, income and expenses
are divided according to the shareholding of the joint operators.
668
Joint arrangements
3. PA Ltd purchases all its inventory from MA Ltd at cost plus a profit of 25%. The
opening inventory of PA Ltd amounted to R7 500.
Required
a. Prepare the consolidation journal entry in respect of the correction of the value of the
investment in MA Ltd for the purposes of the preparation of the consolidated financial
statements for the year ended 30 June 20.3.
b. Prepare the consolidated statement of financial position as at 30 June 20.3 as well as
the statement of profit or loss and other comprehensive income and statement of
changes in equity (only the column for retained earnings) for the year ended 30 June
20.3 of PA Ltd. Your solution must comply with the requirements of International
Financial Reporting Standards (IFRS). Notes are not required. Comparative amounts
are not required.
PA LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 30 JUNE 20.3
Rand
ASSETS
Non-current assets 107 500
Property, plant and equipment (1) 101 000
Goodwill (2) 1 500
Loan to joint operation (MA Ltd) (3) 5 000
Current assets 119 000
Inventory (4) 24 000
Trade receivables (5) 95 000
Total assets 226 500
669
Joint arrangements
Rand
EQUITY AND LIABILITIES
Total equity 129 500
Share capital (6) 100 000
Retained earnings 29 500
Current liabilities
Trade and other payables (7) 97 000
Total equity and liabilities 226 500
PA LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND
OTHER COMPREHENSIVE INCOME FOR THE YEAR
ENDED 30 JUNE 20.3
Rand
PA LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 20.3
Retained
earnings
Rand
670
Joint arrangements
Calculation
1. Unrealised profit in inventory Rand
Opening inventory (1) 1 500
Closing inventory (2) 2 000
(1) 25/125 × 7 500 = 1 500
(2) 25/125 × 10 000 = 2 000
Clyde Ltd formed Bonnie (Pty) Ltd on 1 January 20.5 with two other companies. A
contractual arrangement between the parties stipulates that they have joint control over
Bonnie (Pty) Ltd since the unanimous consent of all three parties is required when taking
decisions about the company’s activities. You may assume that this joint arrangement is
classified as a joint operation. The contractual arrangement stipulates that all assets,
liabilities, income and expenses are divided in accordance with the shareholding of the joint
operators.
Clyde Ltd obtained a 40% holding in Bonnie (Pty) Ltd and manages the joint operation for
a fee.
The accountant was uncertain with regard to the accounting for the interest in Bonnie (Pty)
Ltd. The abridged trial balances of the above two companies for the year ended
31 December 20.6 are as follows:
Clyde Ltd Bonnie
(Pty) Ltd
Rand Rand
Share capital (15 000 000 ; 2 000 000 shares) (15 000 000) (2 000 000)
Retained earnings (35 697 000) (950 000)
Revenue (53 550 000) (9 000 000)
Cost of sales 24 098 000 4 050 000
Other income (3 338 000) –
Other expenses 16 068 000 3 100 000
Income tax expense 6 543 000 750 000
Ordinary dividends paid 3 000 000 –
Long-term borrowings (15 000 000) –
Loan from Clyde Ltd – (3 375 000)
Loan from other investors – (2 250 000)
Deferred tax (2 889 000) –
Property, plant and equipment 62 674 000 8 325 000
Investment in Bonnie (Pty) Ltd at cost price 800 000 –
Loan to Bonnie (Pty) Ltd 3 375 000 –
Inventory 12 615 000 675 000
Trade receivables 10 596 000 900 000
Cash 816 000 450 000
Trade and other payables (8 931 000) (675 000)
Bank overdraft (6 180 000) –
671
Joint arrangements
Additional information
5. Bonnie (Pty) Ltd still owes R180 000 to Clyde Ltd in respect of inventory purchased.
This amount is included in trade receivables and trade and other payables respectively.
6. Total inventory sales by Clyde Ltd to Bonnie (Pty) Ltd for the financial year amounts
to R1 350 000.
7. Included in the assets of Bonnie (Pty) Ltd is machinery and equipment purchased from
Clyde Ltd at a loss of R10 000. The R10 000 loss resulted from an actual decline in the
value of the assets. This loss is included in other expenses of Clyde Ltd.
Required
a. Calculate the following amounts that will be published in the consolidated statement of
financial position of Clyde Ltd at 31 December 20.6:
• Loan to joint operation
• Inventories
• Trade receivables
• Deferred tax
• Trade and other payables
b. Prepare the consolidated statement of profit or loss and other comprehensive income
of Clyde Ltd for the year ended 31 December 20.6 so as to comply with the
requirements of International Financial Reporting Standards (IFRS). Comparative
amounts, notes and earnings per share are not required.
672
Joint arrangements
c. Prepare the notes in connection with the joint operation for the year ended
31 December 20.6 to comply with the disclosure requirements of IFRS 12.
Rand
Rand
(6) 53 550 000 + (9 000 000 × 40%) – (1 350 000 × 40%) = 56 610 000
(7) 24 098 000 + (4 050 000 × 40%) – (1 350 000 × 40%) + (90 000 × 40%) – (60
000 × 40%) = 25 190 000
(8) 3 338 000 – (300 000 × 40%) – (338 000 × 40%) = 3 083 000
(9) 16 068 000 + (40% × (3 100 000 – 338 000 – 300 000)) = 17 053 000
(10) 6 543 000 + (750 000 × 40%) – (90 000 × 40% × 29%) + (60 000 × 40% × 29%)
= 6 839 520
673
Joint arrangements
1. Accounting policy
Joint arrangements are classified as joint operations when the parties that have
joint control over the arrangement have rights to the assets and obligations for
the liabilities relating to the arrangement.
• the entity’s assets, including its share of any assets held jointly;
• the entity’s liabilities, including its share of any liabilities incurred jointly;
• the entity’s revenue from the sale of its share of the output arising from the
joint operation;
• the entity’s share of the revenue from the sale of the output by the joint
operation;
• the entity’s expenses, including its share of any expenses incurred jointly.
3. Joint operations
The entity holds a 40% interest in a joint operation, Bonnie (Pty) Ltd. A contractual
arrangement between the entity and the two other shareholders stipulates that the
parties have joint control over Bonnie (Pty) Ltd as the unanimous consent of all three
parties are required to make decisions about the activities of the operation.
The joint operation’s principal place of business and country of incorporation is the
Republic of South Africa.
Remarks
674
Joint arrangements
Avril Ltd acquired 45% of the share capital of Blink (Pty) Ltd on 1 January 20.7 for
R49 500. On this date, the equity of Blink (Pty) Ltd consisted of the following:
Rand
Avril Ltd has joint control over Blink (Pty) Ltd in terms of a contractual arrangement. The
contractual arrangement stipulates that the parties have rights to the net assets of Blink (Pty)
Ltd and, as a result, the arrangement has been classified as a joint venture.
Rand Rand
ASSETS
Non-current assets 1 064 500 120 000
Property, plant and equipment 1 000 000 120 000
Share investment in Blink (Pty) Ltd 64 500 –
Current assets 230 000 120 000
Inventory 200 000 110 000
Cash and cash equivalents 30 000 10 000
Total assets 1 294 500 240 000
675
Joint arrangements
Avril Blink
Ltd (Pty) Ltd
Rand Rand
Additional information
1. Avril Ltd accounts for the share investment in Blink (Pty) Ltd at fair value and
recognises changes in its fair value in other comprehensive income in accordance with
IFRS 9.5.7.5.
2. Assume a tax rate of 28% and that 66% of capital gains are taxable.
Required
a. Provide the journal entries for the year ended 31 December 20.9 to account for the
interest in the joint venture using the equity method.
b. Prepare the consolidated financial statements of the Avril Ltd Group for the year ended
31 December 20.9. Your answer must comply with the requirements of International
Financial Reporting Standards (IFRS). Comparative amounts and notes are not
required and only the retained earnings column in the statement of changes in equity is
required.
c. Prepare the notes for the year ended 31 December 20.9 in connection with the joint
venture to comply with the disclosure requirements in IFRS 12.
676
Joint arrangements
Rand
ASSETS
Non-current assets 1 108 000
Property, plant and equipment 1 000 000
Investment in joint venture (1) 108 000
Current assets 230 000
Inventory 200 000
Cash and cash equivalents 30 000
Total assets 1 338 000
677
Joint arrangements
Rand
1. Accounting policy
Joint arrangements are classified as joint ventures when the parties that have joint
control, have rights to the net assets of the arrangement.
Interests in joint ventures are accounted for as investments using the equity method.
678
Joint arrangements
3. Joint ventures
The entity has a 45% interest in a joint venture, Blink (Pty) Ltd. A contractual
arrangement between the entity and the other shareholders stipulates that the parties
have joint control over Blink (Pty) Ltd as the unanimous consent of all parties are
required when making decisions about the company’s activities.
The joint venture’s principal place of business and country of incorporation is the
Republic of South Africa.
The investment in the joint venture is measured using the equity method.
Remarks
Alfa Ltd, a listed company, and four other construction companies each have a 20% holding
in a jointly controlled entity, Group 5 Ltd. Alfa Ltd acquired the holding on 1 January 20.3
for R28 000, on which date Group 5 Ltd's retained earnings amounted to R15 000. A
contractual arrangement between the shareholders stipulates that all the parties have joint
control over Group 5 Ltd. Assume that the arrangement has been correctly classified as a
joint operation.
679
Joint arrangements
Profit before interest and investment income 948 200 146 700
Investment income 25 600 –
Finance charges (63 800) (9 300)
Profit before tax 910 000 137 400
Income tax expense (365 000) (53 600)
Profit for the year 545 000 83 800
Other comprehensive income – –
Total comprehensive income for the year 545 000 83 800
680
Joint arrangements
Additional information
1. The above financial statements were prepared without taking into account the
relationship between the two companies.
2. Alfa Ltd is responsible for the day-to-day management of Group 5 Ltd for an agreed
management fee.
3. The long-term loan of R39 000 to Group 5 Ltd was granted on 1 January 20.6 and is
repayable after 8 years in one payment. The loan carries interest at 10% per annum,
and included in the current liabilities of Group 5 Ltd is the total interest due to Alfa
Ltd for the past year. The interest was paid in cash to Alfa Ltd on 14 January 20.9.
Alfa Ltd has already accrued for the interest.
4. Alfa Ltd disposed of depreciable property, plant and equipment with a carrying
amount of R45 000 to Group 5 Ltd on 31 December 20.8 at a profit of R15 000. The
original cost price of the assets amounted to R70 000.
5. Included in the profit before interest and investment income of Group 5 Ltd are the
following expenses:
Rand
6. Group 5 Ltd sold inventory with a cost price of R71 000 to Alfa Ltd for R87 000
during September 20.8. All such inventory has subsequently been sold by Alfa Ltd.
7. The tax rate for the companies has remained unchanged at 29% for the past number of
years.
Required
Prepare the abridged consolidated statement of financial position, statement of profit or loss
and other comprehensive income and statement of changes in equity (retained earnings
column only) of Alfa Ltd at 31 December 20.8 so as to comply with the requirements of
International Financial Reporting Standards (IFRS). Comparative amounts, earnings per
share and notes are not required.
681
Joint arrangements
Four companies, Romeo Ltd, Sierra Ltd, Tango Ltd and Uniform Ltd entered into an
agreement in terms of which they created a purchase consortium. They want to use the
consortium to negotiate better inventory prices.
The agreement stipulates that each of the parties will have a 25% interest in the consortium
and that it will be under their joint control. The unanimous consent of all four parties is
required when decisions are made about the activities of the consortium.
Required
Briefly discuss the type of joint arrangement the purchase consortium should be classified as
if assumed that:
a. The consortium will not be structured through a separate vehicle (entity);
b. The consortium will be structured through a separate vehicle, RSTU Ltd. Assume that
the memorandum of incorporation and the contractual arrangement stipulate that the
assets and liabilities of the newly formed entity will be the assets and liabilities of that
entity and that the shareholders do not have the rights to and obligations for the assets
and liabilities of RSTU Ltd.
Your answer should only be based on the information provided and you do not need to
consider other facts and circumstances.
682
IFRS 12
Disclosure of interests in other entities
__________________________________________________________________
Note: As this chapter and the chapters on IAS 28, IFRS 10 and IFRS 11 all deal with
interests in other entities, the questions on these chapters are integrated and such
questions are presented as part of the chapters on IAS 28, IFRS 10 and IFRS 11.
683
Disclosure of interests in other entities
684
IFRS 13
Fair value measurement
__________________________________________________________________
Note: IFRS 13 provides extensive guidance on the measurement of fair value. The
standard affects most other standards that require fair value measurement and/or
disclosure, therefore the questions on this chapter are integrated with various
other chapters and such questions are presented as part of other chapters.
Especially refer to the chapter on IFRS 9 where some of the principles in
IFRS 13 are specifically addressed.
685
Fair value measurement
686
IFRS 15
Revenue from contracts with customers
__________________________________________________________________
QUESTIONS
687
Revenue from contracts with customers
4. Sales of products in the amount of R500 000 to various customers, subject to a 60-day
money-back guarantee if the customer is not satisfied with the product. It is expected
that 5% of products sold will be refunded.
6. Three delivery vehicles sold to a customer and for which the customer already paid.
Registration and licencing of the vehicles in the customer’s name have been
completed. Because of limited space, the customer requested that the vehicles be kept
at the dealer’s premises until the customer is ready to collect them.
Required
Briefly state, with reasons, the general prescribed accounting treatment of each of the above
items so as to comply with the requirements of IFRS 15.
Revenue is recognised at the amount of the transaction price (IFRS 15.46), which is
the amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer (IFRS 15 Appendix A). A
discount is a form of variable consideration (IFRS 15.51) that is taken into account to
determine the transaction price (IFRS 15.48). As the customers usually pay within
terms, the entity probably expects that the discount will be granted and hence the
discount will be accounted for as a reduction in revenue on the date of recognising the
revenue (e.g. the date of sale).
VAT is collected on behalf of the tax authority. Revenue excludes amounts collected
on behalf of third parties (IFRS 15.47) and hence will exclude VAT. The latter is
recognised as a separate liability as the amount of VAT is payable to the tax authority.
688
Revenue from contracts with customers
3. Royalties
When the guidance of IFRS 15.B63 is taken into account, the revenue from this sales-
based royalty will probably be recognised on the date(s) of sale of the books.
4. Refunds
5. Consignment sales
This represents a consignment arrangement and the distributor most probably does not
control the goods, as they are held for sale to the end customer. The entity (wholesaler)
will therefore not recognise revenue before the goods are sold to the end customers
(IFRS 15.B77).
6. Bill-and-hold arrangement
689
Revenue from contracts with customers
b. Some of the sales of Bezt Clothing Ltd are layby sales (i.e. some items are set aside
for a customer upon payment of a deposit and delivery is taken upon receipt of the
final payment). Experience has shown that customers have the intention of completing
the sale and most such sales are actually completed. Bezt Clothing Ltd regards any
deposit of more than 50% of the sales price as a significant deposit. The company
cansell the layby clothing to other customers and replace them with the same items
during the layby period. The following information is available:
• On 5 January 20.3 a layby sale of clothing amounting to R500, which was
identified and ready for delivery, was made to Mr Steyn. No deposit was received.
• On 6 January 20.3 a R100 deposit was received.
• The balance of the outstanding amount was paid as follows:
– 6 February 20.3 – R50
– 18 March 20.3 – R50
– 16 June 20.3 – R25
– 30 July 20.3 – R25
– 10 October 20.3 – R200
– 5 November 20.3 – R50
• The clothing was delivered on 5 November 20.3.
690
Revenue from contracts with customers
Required
On which date should revenue be recognised in each of the above independent cases so as to
comply with the requirements of International Financial Reporting Standards (IFRS)?
Provide brief reasons for your answers.
a. The revenue should be recognised on 26 January 20.3 as this is the date that delivery is
made and control is thus transferred to the customer (IFRS 15.31).
b. The revenue should be recognised on 5 November 20.3 as the customer obtains control
of the goods on this date (IFRS 15.31). Control is not transferred before this date as the
company can sell the layby clothing to other customers and replace them with the same
items, thus the customer does not have the ability to direct the use of the asset (IFRS
15.33). The amount prepaid by the customer is recognised as a contract liability (IFRS
15.106 and .B44) until such time the goods are delivered.
c. The revenue should be recognised on 5 March 20.3 as the customer obtains control of
the goods on this date (IFRS 15.31). The amount prepaid by the customer is recognised
as a contract liability (IFRS 15.106 and .B44) until such time the goods are delivered.
d. The revenue should be recognised on 6 January 20.3. The purchaser had entered into a
‘bill-and-hold’ arrangement with the seller and in such a situation revenue may be
recognised when the arrangement is substantive (e.g. requested by the customer), the
product is identified separately as belonging to the customer, the product is ready for
physical transfer to the customer and the entity cannot direct it to another customer
(IFRS 15.B81).
e. The revenue should be recognised on 22 January 20.3. The purchaser had entered into
a ‘bill-and-hold’ arrangement with the seller and in such a situation revenue may be
recognised when the arrangement is substantive (e.g. requested by the customer), the
product is identified separately as belonging to the customer, the product is ready for
physical transfer to the customer and the entity cannot direct it to another customer
(IFRS 15.B81).
Hersteldienste Ltd is a company that sells, repairs and installs television sets, DVD players,
telecommunication systems and other electrical goods. Maintenance contracts are concluded
for television sets whereby maintenance takes place for the period of the contract. The
company also receives royalties under a licence for a patented aerial that is manufactured by
an aerial manufacturer. The company also presents training courses to any person who wants
to become a qualified repair technician.
691
Revenue from contracts with customers
The following transactions have occurred for the year ended 30 June 20.9:
Rand
Required
Calculate the amount of revenue that should be recognised for the year ended 30 June 20.9
in respect of the above transactions so as to comply with the requirements of International
Financial Reporting Standards (IFRS).
Revenue Rand
692
Revenue from contracts with customers
Case A
1. Past experience has shown that practically all layby sales are completed. R10 000 of
the amount represents initial small deposits made by customers who have not made
any further payments. The balance represents amounts paid by customers who have
made significant deposits during the year. Total layby sales for the year were
R100 000 (excluding VAT). None of the goods have been taken by customers yet,
although Lion’s Head Ltd is not allowed to sell them to any other customers before the
layby period has lapsed.
3. The balance on the receivables account for COD sales at the end of the year was
R11 400. The balance at the beginning of the year was R9 120. The customers are
creditworthy.
4. Sales subject to approval are accounted for separately. Invoices with a VAT-inclusive
value of R20 727 relate to goods accepted by the customer. A further amount of
R13 473 (VAT inclusive) is presumed to be accepted, as the time period for rejection
has elapsed. All of these customers are considered to be creditworthy. However, based
on past experience and the nature of the goods sold, Lion’s Head Ltd cannot
objectively say that the remainder of the goods will necessarily be accepted by the
customers.
Case B
693
Revenue from contracts with customers
The customer appears to be in financial difficulty. Although the deposit was paid, the
October instalment was received late, the November instalment was received on
29 December, and the December instalment has not yet been received.
Although credit checks at the time of the sale showed the customer to be financially sound,
the unexpected death of the managing director in October has given rise to serious financial
difficulties.
Case C
On 1 October 20.2, Discounts Ltd sold goods with a selling price of R2 750 and R3 200 to
Mr Xoli and Mrs Ice, respectively, on credit. In an effort to collect trade receivables more
quickly, Discounts Ltd agreed on a 7% settlement discount for settlement within 30 days
(i.e. 31 October 20.2) of outstanding amounts. At the date of sale it was expected that both
accounts will be settled within the 30-day period.
Mr Xoli settled his account in cash on 25 October 20.2, but Mrs Ice’s account was still
unpaid at 31 December 20.2 (paid during January 20.3).
Ignore VAT and round calculated amounts off to the nearest rand.
Required
a. Calculate the amount of revenue that should be recognised for Case A for the year
ended 31 December 20.2.
b. Calculate the amount of revenue that should be recognised for Case B for the year
ended 31 December 20.2.
c. Calculate the amount of revenue that should be recognised for Case C for the year
ended 31 December 20.2.
The solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
a. Case A
Rand
694
Revenue from contracts with customers
Rand
b. Case B
At the date of sale, it appeared as though the amounts were collectible (see IFRS 15.9(e))
and, as control has passed to the buyer, the cash selling price of R700 000 should be
recognised as revenue.
This amount should be recognised in full even though payments are made by means of
instalments (outstanding instalments are accounted for as a receivable, i.e. a financial asset
under IFRS 9).
As the doubt as to collectability arose after the sale, a separate allowance account for credit
losses must be raised rather than adjusting the revenue as originally recorded (refer IFRS 9:
section on impairment of financial assets). The amount of the value adjustments (allowance
account) will be calculated by taking into account the value of security held by Signal Hill
Ltd and the amount actually received.
As the collectability of the amount was in doubt when the interest income was earned,
Signal Hill Ltd should consider whether recognition (accrual) of the interest portion (of the
instalment) is appropriate before the instalment is actually received.
c. Case C
IFRS 15.46 states that revenue is recognised at the amount of the transaction price, which is
the amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer (IFRS 15 Appendix A). A discount is
a form of variable consideration (IFRS 15.51) that is taken into account when determining
the transaction price (IFRS 15.48).
Rand
695
Revenue from contracts with customers
On 11 November 20.2, when it becomes apparent that Mrs Ice did not utilise the settlement
discount, Discounts Ltd will not adjust the amount of revenue recognised on 1 October 20.2.
When Mrs Ice settles the amount of R3 200 during January 20.3, the additional R224
(R3 200 × 7%) received will be recognised as a finance income (arguments can also be
made to adjust revenue from the sale of goods).
Chick Chefs Ltd manufactures and sells expensive professional kitchen utensils.
On1 November 20.0, Chick Chefs Ltd sold a set of kitchen knives to Mr Fouché Du Toit for
R65 000. In order to motivate Mr Du Toit to settle the outstanding amount promptly, Chick
Chefs Ltd offered him a settlement discount of 10% should he settle the outstanding amount
within one month (i.e. on 30 November 20.0).
On 1 November 20.0, Chick Chefs Ltd also offered Mr Du Toit a service to sharpen his
knives every two months for a period of two years after transaction date. The total stand-
alone selling price of this service amounts to R12 000, and it was agreed that Mr Du Toit
would settle the amount as and when the sharpenings are performed (all sharpenings have
equal values). Mr Du Toit handed in his knives on 31 December 20.0 for the first
sharpening, and Chick Chefs Ltd returned the sharpened knives to him on the same date.
Mr Du Toit also purchased a set of pans on 1 November 20.0 with a cash selling price of
R30 000. No settlement discount was offered on this transaction, since it was agreed that Mr
Du Toit would settle the outstanding amount by making two-monthly instalments of R3 000
payable in arrears for a period of two years. The first instalment is payable on
31 December 20.0.
Mr Du Toit made an electronic payment transfer of R69 000 to Chick Chefs Ltd on
31 December 20.0. This amount is made up as follows:
Rand
Set of kitchen knives 65 000
Knife sharpening service 1 000
Instalment on set of pans 3 000
Total 69 000
Required
a. Journalise the above revenue transactions in the records of Chick Chefs Ltd
on1 November 20.0.
b. Journalise the above revenue transactions in the records of Chick Chefs Ltd on
31 December 20.0.
Journal narrations are not required and the solution must comply with the requirements of
International Financial Reporting Standards (IFRS).
696
Revenue from contracts with customers
b. 31 December 20.0
(1) Interest for the period 1 November 20.0 to 31 December 20.0 on sale of pans
(2) PV = 30 000
N = 12
PMT = 3 000
I =?
Computed at 2,92% per two-month period or 17, 54% per year.
Thus interest for the period 1 November 20.0 to 31 December 20.0 = R877
(3) 58 500 + 3 000 instalment paid = 61 500
(4) Settlement discount lost due to late payment (arguments can also be made to adjust the
revenue line item)
Digital Television Broadcasting Corporation Ltd (DTBC), a South African company and
provider of pay channel TV, entered into the following transaction with one of its customers,
an Internet company, Incredible Web Services Ltd (IWS):
DTBC would broadcast the normal IWS advertisement during December 20.9 on its pay
channel and in exchange IWS would add a DTBC advertisement by means of a ‘banner’
during December 20.9 on IWS’s website.
The marketing directors of both companies felt that it was not necessary for the exchange of
invoices since both companies provide advertising services and the value of both
advertisements was considered to be equal.
Required
Discuss, with reasons, whether the treatment of the above transaction would be in
accordance with the requirements of International Financial Reporting Standards (IFRS) in
the records of DTBC Ltd.
697
Revenue from contracts with customers
DTBC Ltd entered into what is referred to as a ‘barter transaction’ to provide advertising
services in exchange for receiving advertising services from its customer (in this case
IWS Ltd).
IFRS 15.5(d) states that non-monetary exchanges between entities in the same line of
business to facilitate sales to customers or potential customers are scoped out of the
standard. This scope exemption is clearly not applicable to DTBC Ltd, as it is not in the
same line of business as IWS Ltd. Furthermore, IFRS 15.9(d) requires contracts to have
commercial substance (e.g. the future cash flows are expected to change because goods or
services are exchanged for goods or services that are of a different nature or value). It is
clear from the above that although DTBC Ltd and IWS Ltd provide advertising services, the
services are dissimilar (the transaction has commercial substance) and hence the exchange
transaction is accounted for as a contract with a customer in accordance with IFRS 15.
The consideration received by DTBC is an advertising service from IWS and therefore of a
non-cash nature. IFRS 15.66 requires revenue in this case to be measured at the fair value of
the non-cash consideration received, i.e. the advertising service received from IWS. When
the fair value of the services received cannot be estimated reliably, the revenue is measured
at the fair value of the services provided (see IFRS 15.67). The issue is therefore whether
DTBC can reliably measure revenue at the fair value of the advertising services received or
provided in this barter transaction.
Revenue from a barter transaction involving advertising can most likely not be measured
reliably at the fair value of advertising services received as information to estimate such a
fair value may be limited. However, the seller is likely to be able to reliably measure
revenue at the fair value of the advertising services it provides in the barter transaction (e.g.
by reference to non-barter transactions that occur frequently and involve advertising similar
to the advertising in the barter transaction). Since DTBC is a pay channel provider, it is
assumed that it can reliably measure revenue of the advertising services it provides.
The treatment of this transaction by the marketing directors thus does not meet the
requirements of IFRS 15. DTBC should recognise and measure the revenue in accordance
with IFRS 15.
The company’s contract activities for the year ended 31 December 20.5 are summarised
overleaf:
698
Revenue from contracts with customers
Contract A Contract B
Rand Rand
The retention monies will be paid by the customers once the full contracts are completed in
time and to the customers’ satisfaction.
Required
a. Journalise all the transactions resulting from the above information for the year ended
31 December 20.5.
b. Disclose all relevant information in the financial statements of Bakkies Ltd for the year
ended 31 December 20.5 so as to comply with the requirements of International
Financial Reporting Standards (IFRS). Only the following notes are required:
• Accounting policy
• Revenue
• Contract assets and liabilities
Contract A Contract B
Rand Rand
Dr/(Cr) Dr/(Cr)
Costs incurred
Contract expenses (1) 392 000 100 000
Bank/Payables (392 000) (100 000)
Contract revenue
Unbilled contract revenue (asset) 482 461 133 333
Contract revenue (2) (482 461) (133 333)
699
Revenue from contracts with customers
Contract A Contract B
Rand Rand
Dr/(Cr) Dr/(Cr)
Work certified and retention monies
Contract debtors 440 000 146 500
Retention debtors (5) 10 000 3 500
Unbilled contract revenue (asset) (3) (450 000) (133 333)
Contract revenue billed in advance (liability) (4) – (16 667)
Payments received
Bank (6) 405 000 146 500
Contract debtors (405 000) (146 500)
(1) 450 000 – 58 000 = 392 000
(2) 450 000/650 000 × 800 000 = 553 846 (20.5 cumulative)
58 000/650 000 × 800 000 = 71 385 (20.4)
553 846 – 71 385 = 482 461 (20.5)
100 000/150 000 × 200 000 = 133 333
(3) 500 000 – 50 000 = 450 000
(4) 150 000 – 133 333 (total revenue to date) = 16 667
(5) 15 000 – 5 000 = 10 000
(6) 450 000 – 10 000 retention – 35 000 = 405 000 or 450 000 – 45 000 = 405 000
b. Disclosure
BAKKIES LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.5
Note 20.5 20.4
Rand Rand
ASSETS
Current assets
Retention debtors 18 500 5 000
Trade receivables 3 88 846 21 385
BAKKIES LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.5
Note 20.5 20.4
Rand Rand
Revenue (1) 2 615 794 71 385
Contract expenses (cost of sales) (2) (492 000) (58 000)
Gross profit/contract profit 123 794 13 385
Administrative expenses (20 000) (5 000)
Profit before tax 103 794 8 385
Income tax expense (not required) – –
Profit for the year 103 794 8 385
Other comprehensive income – –
Total comprehensive income for the year 103 794 8 385
700
Revenue from contracts with customers
BAKKIES LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.5
1. Accounting policy
Revenue from construction contracts is recognised over time with reference to the
progress towards complete satisfaction of the contract. The percentage of completion is
measured with reference to the ratio of costs incurred to date to total estimated costs.
2. Revenue
Revenue represents construction contract revenue recognised during the year. The
aggregate amount of the contract price that is unsatisfied at the reporting date is
R312 821 (20.4: R728 615) (calculations: 800 000 + 200 000 – 553 846 – 133 333;
800 000 – 71 385, see calc 3) and the contracts are expected to be finalised during the
next reporting period. Revenue is measured with reference to the ratio of costs incurred
to date to total estimated costs. This is considered a reasonably accurate reflection of
the satisfaction of the performance obligation as certifications of actual completed
work do not occur with sufficient frequency.
Customers are billed as the work is certified, and payments are generally received
shortly thereafter. The timing of revenue recognition is generally sooner than
payments by customers because of the infrequency of certifications and because of
retention monies withheld by customers.
Unbilled contract revenue increased due to lagging billings on one of the contracts.
Revenue billed in advance arose in the current year due to contract expenditure on one
of the contracts that was lagging behind certification of physical work completed to
date.
701
Revenue from contracts with customers
Calculations
Trade Store CC is a general dealer doing business in the country. The following items, inter
alia, are included in the revenue of R781 340 for the year ended 31 December 20.8:
1. Layby sales
Payments have been made on the following parcels in the storeroom and these are
included in the revenue of R781 340:
702
Revenue from contracts with customers
3161 342 52
4031 171 104
4056 513 311
5315 410 352
Experience has shown that layby sales, of which more than 80% has been collected,
will be completed. Trade Store CC can sell the layby goods to other customers and
replace them with the same items during the layby period.
2. COD sales
The following COD invoices have not been collected at 31 December 20.8 and are
included in receivables and revenue:
• Invoice number 4136 amounting to R363 (VAT excluded) was delivered to a farm
where only an employee was home. The money will be collected when the farmer
visits the town again. The farmer is creditworthy.
• Invoice number 5110 amounting to R123 (VAT excluded) was paid by cheque.
The cheque was accidentally post-dated to 15 January 20.9.
3. Branch sales
Inventory at a sales value of R27 300 (VAT excluded) was delivered to a farm store
(branch) and is included in revenue. The following balances are applicable to the
branch:
1 January 31 December
20.8 20.8
Rand Rand
Dr/(Cr) Dr/(Cr)
4. Consignment inventory
5. Undelivered goods
703
Revenue from contracts with customers
6. Additional information
All selling prices are strictly determined at cost plus 50%. The cost of all inventory
(excluding layby sales) on the premises of Trade Store CC at 31 December 20.8
amounted to R211 700. The VAT rate is 14%.
Required
a. Calculate the amount of revenue that Trade Store CC may recognise for the year ended
31 December 20.8.
b. Calculate the value of the inventory on hand of Trade Store CC at 31 December 20.8.
The solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
The financial year of Lowe Ltd ends on 31 December 20.7. The company announced a
reduction in the price of its products on 15 November 20.7. In the notification sent to the
company's customers, the marketing manager inadvertently created the impression that
further price reductions were expected.
The sales of Lowe Ltd fell drastically as customers were waiting for prices to decrease, and
the reason for the decrease in the sales was determined at the end of November 20.7. The
customers were then informed that there would be no further reduction in the prices.
The result thereof was that customers who wished to replenish their inventory levels to
normal levels placed large orders with the company during December 20.7. As a result, the
company encountered the following two problems:
• A large number of orders that were placed before 31 December 20.7 were only filled on
10 January 20.8 purely because the despatch department could not accommodate the
abnormal volume in December 20.7.
• A large order was received before 31 December 20.7. On 31 December 20.7, only 80%
of this order could be despatched as Lowe Ltd did not have enough of a specific item on
hand. The whole order was held back until 6 January 20.8 when the order could be
executed in full, as it had been placed by an overseas customer.
It is the intention of the management of Lowe Ltd to include the uncompleted orders as
revenue for the year ended 31 December 20.7. They maintain that the reason for the orders
not being completed is directly attributable to the marketing manager’s error, and that the
results of 20.7 would have, in any case, included these sales if the error had not been made.
Required
Discuss, with reasons, whether the treatment of the orders on 31 December 20.7 is in
accordance with the requirements of International Financial Reporting Standards (IFRS)
(UP – adapted).
704
Revenue from contracts with customers
Pamco Ltd is a manufacturer of various machines. It also sells spares for the machines and
has been in the business for many years. On 1 August 20.8, Pamco Ltd entered into a written
agreement with Precision Ltd for the supply of machinery to be used in Precision Ltd’s
production process.
The cash selling price of the machinery was R1 250 000, and at the time of the closing of the
agreement, Precision Ltd was not in a position to pay the full purchase price. It was agreed
that a deposit of R275 000 would be paid immediately and the remaining debt would be
settled in three equal instalments on the following dates: 31 January 20.9, 31 July 20.9 and
31 January 20.10. Interest would be charged at 6% below prime on the outstanding balance.
The machinery would be delivered to Precision Ltd, who would also be responsible for its
installation, on 31 August 20.8.
The contract also included a clause for the sale of spares for the machinery. The goods are to
be despatched in two equal batches. The first delivery will be on 30 November 20.8 and the
second delivery will take place on 28 February 20.9. The selling price of each batch of
spares is R75 800, and if Precision Ltd settles the debt on receipt of the goods, it will be
entitled to a 5% settlement discount like Pamco Ltd’s other customers of machine spares
receive.
Required
a. Discuss the recognition of revenue from the sale of the machinery and the spares in the
records of Pamco Ltd for the year ended 31 January 20.9.
b. Discuss the measurement of revenue from the sale of the machinery and the spares in
the records of Pamco Ltd for the year ended 31 January 20.9.
The solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
The revenue account in the general ledger of Hangklip Ltd showed a balance of R435 987
for the financial year ended 31 December 20.3.
1. Layby sales of R800 included in revenue in respect of cash received for goods with a
total sales value of R1 200.
2. Layby sales of R100 included in revenue in respect of cash received for goods with a
total sales value of R2 100.
4. Consignment inventory with a selling price of R8 000 is held at the local garage. Of
this amount, inventory with a theoretical cost of R2 000 is unsold at year end.
705
Revenue from contracts with customers
5. Consignment inventory with a selling price of R5 000 was delivered to the local store.
This amount represents inventory taken by the manager’s son to sell for his own
benefit. Of this amount, inventory with a theoretical cost of R2 500 is unsold at year
end.
6. Sales of R700 made to a friend of the manager. The friend will be sent an account for
this amount at the end of January 20.4, as the goods are only to be delivered in
January 20.4. Inventory representing half of this amount has been included in the
inventory counted at year end. The other half of the inventory has been ordered but had
not yet arrived by year end.
Experience has shown that most layby sales are completed. In terms of Hangklip Ltd’s
policy, goods subject to layby sales can be sold to other customers and replaced with similar
items for as long as the customer has not paid the majority of the purchase price. Once the
majority of the price has been paid, the item is kept specifically for imminent collection by
the customer.
All inventory on the premises of Hangklip Ltd at closing time on 31 December 20.3 was
included in the inventory figure of R36 543. All sales take place at cost plus 50%.
Ignore VAT.
Required
a. Calculate the amount of revenue that Hangklip Ltd may recognise for the year ended
31 December 20.3.
b. Calculate the value of the inventory on hand of Hangklip Ltd at 31 December 20.3.
The solution must comply with the requirements of International Financial Reporting
Standards (IFRS).
Nqutu Ltd is a South African listed company that manufactures and distributes ethnic
jewellery countrywide as well as in the United Kingdom. Nqutu Ltd’s head office is situated
in KwaZulu-Natal and its jewellery range includes beaded necklaces, bangles and earrings.
For the last ten years, Nqutu Ltd has also provided a free service to polish all jewellery in
the first two years after purchase to all its account holders.
Nqutu Ltd’s established and regular customers are required to open an account with Nqutu
Ltd with a fixed monthly fee of R100. This is used partly to provide the free polishing
service to clients. From past experience, approximately 30% of all jewellery sold is handed
in for polishing in the first year after selling date, and approximately 50% of jewellery sold
is handed in for polishing in the second year after selling date.
The account also serves as a motivation to increase sales to customers, since points are built
up for amounts spent on Nqutu Ltd products, thus a hidden component is built into the R100
fixed monthly fee to finance the points system.
These points can be redeemed at a certain stage for Nqutu Ltd products. Customers may
decide when and how they want to redeem their points. The points structure works as
follows:
706
Revenue from contracts with customers
Required
Discuss the accounting recognition of the fixed monthly fee by Nqutu Ltd for the year ended
31 December 20.7 in accordance with the requirements of International Financial Reporting
Standards (IFRS).
(UJ – adapted)
Grunter Ltd manufactures boats for the fishing industry. As Grunter Ltd has developed a
new technique for building fishing vessels, a contract with a leader in the fishing industry
was concluded on 1 May 20.4 for the construction of a 160-tonne vessel. The contract will
run for three years compared to approximately eight months for other fishing boats. The
company only worked on this contract during 20.5 and 20.6.
Revenue is recognised over time with reference to the progress towards complete
satisfaction of the contract (percentage of completion method). The percentage of
completion is determined as the ratio of costs incurred to date to total estimated costs.
The South African Revenue Service will allow a section 24C allowance for the long-term
contract based on the company’s most recent estimates. The current tax rate is 28%.
20.6 20.5
Rand Rand
* This amount was allowed as a deduction for tax purposes in 20.6 because it was not a
criminal offence.
707
Revenue from contracts with customers
Required
a. Calculate the profit before tax for the years ended 31 March 20.5 and 20.6.
b. Disclose all the relevant items regarding the construction contract in the statement of
financial position, statement of profit or loss and other comprehensive income and only
the retained earnings column of the statement of changes in equity of Grunter Ltd for
the year ended 31 March 20.6, and disclose the construction contract revenue
information as it would appear in the notes to the financial statements so as to comply
with the requirements of International Financial Reporting Standards (IFRS). Assume
that the company has a credit balance on the deferred tax account that will be able to
absorb any debit arising during the past two years. Disclose only the following notes:
• Accounting policy
• Revenue
• Income tax expense
• Contract assets and liabilities
Consider the following independent cases of various companies in the construction industry:
Case A
Zondi Ltd incurred R200 000 of costs in connection with winning a successful bid on a
contract to build a new bridge over the Khamanzi River near Greytown in KZN, following
the recent drowning of two school children that had to cross the river to get to school. The
costs were incurred during the proposal and contract negotiations, and include the initial
bridge design.
Required
Briefly discuss how Zondi Ltd should account for the costs incurred.
Case B
Gumede Ltd entered into a contract with a customer to build an office building. Amongst
others, the following costs were incurred:
Rand
Transport heavy equipment to the building site 65 000
Direct costs related to supplies, equipment, material and labour (building phase) 500 000
Costs related to abnormal wastage of materials 40 000
Gumede Ltd expects to recover all incurred costs under the contract.
Required
Briefly discuss how Gumede Ltd should account for the costs incurred.
708
Revenue from contracts with customers
Case C
Rantlha Ltd entered into a construction contract to build a coal processing plant. Rantlha Ltd
concluded that its performance creates an asset that the customer controls and that control is
transferred over time. Moreover, it concluded that the ratio of costs incurred to date to total
estimated costs is a reasonable method for measuring its progress toward satisfying its
performance obligation in terms of the contract.
Rantlha Ltd paid commissions totalling R350 000 to its sales agent for securing the contract
and correctly recognises a contract asset for this amount. As of the end of the first year of
the contract, Rantlha Ltd estimates its performance is 30% complete and recognises 30% of
the contract price as revenue.
Required
Briefly discuss how much of the contract asset should be amortised as of the end of the first
year of the contract.
Case D
Mbobo Ltd entered into a contract to a build a dam for the South African government. The
total contract price is R100 million, with a performance bonus of R40 million that will be
paid based on the timing of completion. The amount of the performance bonus decreases by
10% per week for every week beyond the agreed-upon completion date.
Mbobo Ltd concluded that the expected value method is most predictive in estimating the
amount of variable consideration that the company is expected to be entitled to.
Management estimates that there is a 60% probability that the contract will be completed by
the agreed-upon completion date, a 30% probability that it will be completed one week late,
and a 10% probability that it will be completed two weeks late.
Required
Briefly discuss how Mbobo Ltd should determine the transaction price for purposes of
measuring revenue.
709
Revenue from contracts with customers
710