Assessment 9

10 October 2023

100 marks
180 minutes writing time
30 minutes for uploading

This assessment consists of 2 questions. This assessment consists of 9 pages.

INSTRUCTIONS:

1. Students must upload their answer scripts in a single PDF file (answer scripts must not be
password protected or uploaded as “read only” files).

2. NO emailed scripts will be accepted.

3. Students are advised to preview submissions (answer scripts) to ensure legibility and that
the correct answer script file has been uploaded.

4. Incorrect file format and uncollated answer scripts will not be considered.

5. Incorrect answer scripts and/or submissions made will not be marked and no opportunity
will be granted for resubmission.

6. Mark awarded for incomplete submission will be the student’s final mark. No opportunity for
resubmission will be granted.

7. Mark awarded for illegible scanned submission will be the student’s final mark. No
opportunity for resubmission will be granted.

8. Submissions will only be accepted from registered student accounts.

9. Students suspected of dishonest conduct during the assessment will be subjected to

disciplinary processes. UNISA has a zero tolerance for plagiarism and/or any other forms of
academic dishonesty.

10. Students are provided 30 minutes to submit their answer scripts after the official assessment
time. Submissions made after the official assessment time will be rejected and will not be
marked.

Open Rubric
 FAC3764 Assessment 9

FAC3764

Date: 10 OCTOBER 2023

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 FAC3764 Assessment 9
QUESTION 1 (50 marks) (90 minutes)

Khoro Limited (“Khoro”) is a South African based company that specialises in the designing,
manufacturing, installation, and servicing of wind turbines. The company is primary listed on the
Johannesburg Stock Exchange as well as dually listed on the Lusaka Stock Exchange (LuSE) in
Zambia. Khoro has a 30 September year end.

1. Manufacturing plant in Kalkfontein

On 1 February 2021, Khoro acquired a vacant piece of land for R3 500 000, with the intention of
constructing a manufacturing plant. Construction of the manufacturing plant commenced on 1 May 2021
and was completed on 1 July 2022 at a total cost of R8 800 000 (excluding the health and safety
compliance costs below) which were paid in cash. Management considered the land portion of the
manufacturing plant to be significant.

To comply with the health and safety standards, an inspection was conducted at a cost of R250 000 on
1 August 2022. The inspector issued a compliance certificate which confirmed that the plant complies
with all health and safety standard regulations of South Africa.

The plant was available for use as intended by management on 1 August 2022 and was brought into
use on the same date. On 1 August 2022, the plant was estimated to have a 15-year useful life and an
estimated residual value of R950 000 was allocated to it.

During the 2022 financial year, the manufacturing plant did not operate due to the stringent Covid-19
restrictions which affected the cash generation capabilities of the manufacturing plant. On
30 September 2022, Khoro estimated that the fair value less cost to sell and value in use of the plant
amounted to R8 500 000 and R8 200 000, respectively.

On 1 May 2023, Khoro’s management decided to lease out the manufacturing plant to Gole Ltd. The
lease agreement contains a lease in terms of IFRS 16, Leases.

The terms of the lease agreement were as follows:

Commencement date .............................................................................................. 1 May 2023
Monthly instalment (Paid in arrears at the end of each month) .............................. R150 000
Yearly increases ...................................................................................................... 10% annually
• The lease term is for 3 years.
• Ownership of the manufacturing plant will not transfer to Gole Ltd at the end of the lease period.
• Gole Ltd does not have an option to buy the manufacturing plant from Khoro Ltd at the end of the
lease term.
• At inception of the lease, the present value of the lease payments does not amount to the fair value
of the manufacturing plant.

On 30 September 2023, the fair value less cost to sell and value in use of the plant was determined to
be R8 150 000 and R8 480 000, respectively.

The estimated useful life and residual value of the plant remained unchanged throughout the period.

2. Property in Matatiele

On 1 January 2021, Khoro acquired a property in Matatiele for R4 500 000 (Land: R850 000; Building:
R3 650 000). The property was purchased with the intention to be rented out. A rental agreement was
signed with Toekoms Ltd, a distributor and wholesaler of inverters and solar panels. On acquisition date,
the building had an estimated useful life of 20 years and an insignificant residual value. The building
was ready for use as intended by management, as well as brought into use, on acquisition date.

During the 2023 financial year, the board of directors of Khoro decided to change the investment
property accounting policy from the cost model to the fair value model to present users of financial
statements with a more realistic market value of the investment property.
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 FAC3764 Assessment 9
QUESTION 1 (Continued)
The following fair values of the property in Matatiele were received from an independent sworn appraiser
for the respective years:
Land Building Total
R R R
30 September 2021……………………………………………… 900 000 3 770 000 4 670 000
30 September 2022……………………………………………… 910 000 3 870 000 4 780 000
30 September 2023……………………………………………… 950 000 4 100 000 5 050 000

3. Zwanga division

The Zwanga division of Khoro provides consultation services within the South-African market. During
the 2023 financial year, Khoro’s board of directors took a strategic decision to sell the Zwanga division,
within a single transaction. On 1 July 2023, the division met all the criteria to be classified as a disposal
group held for sale in accordance with the requirements of IFRS 5, Non-current assets held for sale and
discontinued operations.

The disposal group consisted of the following assets:

Inventory .................................................................................................................. Note 1
Windy trademark ..................................................................................................... Note 2
Vehicle ..................................................................................................................... Note 3

The fair value less cost to sell of the Zwanga division was determined to amount to R2 087 500 and
R2 037 500 on 1 July 2023 and 30 September 2023, respectively.

Note 1
The inventory was acquired at a cost of R300 000 and had the following net realisable values at each
respective date:
01 July 2023…………………………………………………………………………………. R310 000
30 September 2023……………………………………………………………................... R250 000

Note 2
The Windy trademark was acquired from Gadgets Galore Innovators for R1 100 000 on
31 October 2022. On acquisition date, an indefinite useful life together with a residual value of Rnil was
allocated to the trademark. On 1 July 2023 and 30 September 2023, the Windy trademark had a
recoverable amount of R1 025 000 and R999 000, respectively.

Note 3
The vehicle was acquired on 1 October 2021, for R1 250 000. The vehicle was available for use as
intended by management, as well as brough into use, on acquisition date. On acquisition date, the useful
life of the vehicle was estimated to be 5 years with an insignificant residual value allocated to it. On
1 July 2023 and 30 September 2023, the recoverable amount of the vehicle was determined to amount
to R820 000 and R810 000, respectively.

Accounting policies
• Khoro accounts for inventory at the lower of cost and net realisable value.
• Khoro accounts for property, plant and equipment using the cost model. Depreciation on property,
plant and equipment is accounted for in accordance with the straight-line method over the estimated
useful life of the asset.
• Khoro accounts for intangible assets in accordance with the cost model. Amortisation on intangible
assets is accounted for in accordance with the straight-line method over the estimated useful life of
the asset.
• Before the change in accounting policy, Khoro accounted for investment property according to the
cost model whilst depreciation on investment property, was accounted for using the straight-line
method over the estimated useful life of the asset. After the change in accounting policy, Khoro
accounts for investment property according to the fair value model.

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 FAC3764 Assessment 9
QUESTION 1 (Continued)
Taxation
• The South African Revenue Service allows an annual building allowance of 5% on the Property in
Matatiele, according to section 13(1) of the Income Tax Act, on a straight-line method, not
apportioned for part of the year.
• The change in accounting policy on the Property in Matatiele, has no impact on tax legislation.
• The South-African normal tax rate is 27%. The capital gains tax inclusion rate is 80%.
• Deferred tax is provided for on all temporary differences using the statement of financial position
approach. There are no items causing temporary or exempt differences except those identified in
the question. The company will have sufficient profit in future against which any unused tax losses
can be utilised.

Assumptions
• All amounts are material.
• Ignore the implications of Value-Added Tax (VAT).

REQUIRED:

Marks
a) Prepare all relevant general journal entries to correctly account for the 14
manufacturing plant in Kalkfontein, in the accounting records of Khoro Limited for
the year ended 30 September 2023.

• Journal narrations are required.

• Dates are not required.
• Tax consequences can be ignored.
Communication mark – presentation 1
b) Disclose the Property in Matatiele in the accounting records of Khoro Limited for 18
the year ended 30 September 2023, in accordance with the requirements of only
IAS 8, Accounting policies, changes in estimates and errors.

c) Advise the Chief Financial Officer (CFO) on the accounting implications (including 16
measurement) of the decision to sell the Zwanga division in the accounting records
of Khoro Limited on 1 July 2023.

• Limit your measurement discussion to 1 July 2023.

• Support your discussion with calculations, where applicable,
• Do not include any tax related discussions or calculations.
Communication mark - Logical argument 1
Please note:

Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).

Round off all calculations to the nearest Rand.

Comparative amounts are not required.
Accounting policy notes are not required.
[50]

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 FAC3764 Assessment 9
QUESTION 2 (50 marks) (90 minutes)

Spree Ltd was established in year 2011 and is now South Africa’s largest online store with major
divisions in electronics, lifestyle, media & gaming, and apparel. Spree Ltd is listed on the Johannesburg
Stock Exchange. You have been employed as the Group Consolidations and Reporting Specialist in the
Spree Group Reporting division responsible for providing technical support to the Group and to prepare
the consolidated financial statements for the year ended 30 June 2023. Your role reports to the Group
Financial Director, Mrs Julie Smith CA(SA), a member of the South African Institute of Chartered
Accountants (SAICA).

Spree Ltd holds investments in Zahara Ltd and Isabella (Pty) Ltd. All the companies in the Spree Ltd
Group have a 30 June year end. The bookkeeper has provided you with the following extract from the
Trial Balances of the companies in the Spree Ltd Group for the year ended 30 June 2023.

Isabella (Pty)
Spree Ltd Zahara Ltd Ltd
R R R
Property, plant and equipment at carrying
amount 1 487 438 1 814 074 1 129 686
Investments in equity instruments: - - -
-Investment in Zahara Ltd @ cost 950 950 - -
-Investment in Isabela Pty Ltd @ cost 310 250 - -
Trade and other receivables 1 222 038 826 428 489 747
Cash and cash equivalents 1 132 724 862 009 640 638
Inventories 1 490 455 981 111 655 980
Dividend paid - 30 June 2023 156 600 65 520 42 680
Share capital - 600 000 ordinary shares at R1
each (600 000) - -
Share capital - 400 000 ordinary shares at R1
each - (400 000) -
Share capital - 225 000 ordinary shares at R1
each - - (225 000)
Retained earnings - 1 July 2022 (3 046 516) (2 019 191) (1 063 565)
Profit for the year (1 754 041) (1 572 233) (1 136 902)
Deferred tax liability (364 015) (97 495) (53 242)
Trade and other payables (985 882) (460 223) (480 022)

Zahara Ltd

1. Zahara Ltd was founded in 2017 and sells premium kitchen and homeware from brick-and-mortar
stores and an online retail platform, targeting the millennial generation.

2. On 28 February 2021, Spree Ltd acquired a controlling interest in Zahara Ltd by purchasing 240 000
of the issued ordinary shares, the total purchase consideration of R950 950 was settled in cash on
the same date. The acquisition of the interest by Spree Ltd met the definition of a business
combination in terms of IFRS 3 - Business Combinations. On 28 February 2021, the share price of
Zahara Ltd was listed at market value of R3,70 per share. On 30 June 2020 the retained earnings
(credit) balance of Zahara Ltd amounted to R529 140. The profit for the year for 2021 financial year
amounted to R816 201.

At the date of acquisition, all the identifiable assets and liabilities of Zahara Ltd were fairly valued
except for the following:

Carrying
Fair Value Amount
R R
Trade receivables .................................................................... 185 000 229 520
Contingent liability .................................................................... 53 000 -

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 FAC3764 Assessment 9
QUESTION 2 (Continued)

At the date of acquisition, Zahara Ltd disclosed a contingent liability amounting to R125 000 relating to
a lawsuit in its separate financial statements. While the claim represents a present obligation, however
the lawyers for Zahara Ltd believed the prospect of the outflow of economic benefits was not probable
at the time since there was insufficient evidence to support the claim. The fair value of the contingent
liability was estimated at R53 000 at the date of acquisition. The South African Revenue Services will
not grant a tax deduction should the claim be successful.

The fair value adjustments on all the items above were not accounted for in the separate accounting
records of Zahara Ltd.

Transactions with Zahara Ltd

3. Zahara Ltd sold inventory to Spree Ltd from 1 August 2022 at a mark-up of 20% on the cost price.
Total sales of inventory made by Zahara Ltd to Spree Ltd during the current year amounted to
R732 600. On 30 June 2023, Spree Ltd had inventory on hand amounting to R105 875 that was
purchased from Zahara Ltd.

4. On 1 January 2023, Spree Ltd sold its machinery to Zahara Ltd for R69 300, the carrying amount of
this machinery, correctly calculated, amounted to R50 120 on the date of sale. Spree Ltd had
originally bought this machinery from an external supplier on 1 July 2021 for R71 600, on this date
the machinery had an estimated useful life of five years and a residual value of Rnil was allocated
to it. This machinery was classified as property, plant, and equipment under the cost model, in the
accounting records of both Spree Ltd and Zahara Ltd. Spree Ltd depreciates the machinery using
the straight-line method over the estimated useful life. The group’s accounting policy to write off
depreciation on its new machinery is consistent with the tax allowances granted by the South African
Revenue Services.

Isabella (Pty) Ltd

5. Isabella (Pty) Ltd (Isabella) is a proudly South African company specialising in beauty, personal care
products and fine fragrances sold from its online store or through its IG Ambassadors.

6. On 1 January 2022, Spree Ltd acquired 35% of the issued ordinary shares in Isabella, the purchase
consideration was settled in cash on the same date. In terms of a contractual agreement with other
two operators, Spree Ltd exercises joint control over the economic activities of Isabella. The
arrangement was appropriately classified as a joint venture in terms of IFRS 11, Joint Arrangements.

At the acquisition date, the retained earnings of Isabella amounted to R744 495, and the market value
of Isabella’s shares were R2,52 per share. All the identifiable assets and liabilities of Isabella were fairly
valued at the date of acquisition, except for machinery (bottle sealing machine) with a carrying amount,
correctly calculated, of R24 000 at the acquisition date. The financial accountant of Isabella was unsure
about applying IFRS 13 Fair Value Measurement requirements to determine the fair value of the
machinery (bottle sealing machine). Therefore, the fair value adjustment relating to the bottle sealing
machine was not accounted for in Isabella’s records.

Since there are no principal market where second-hand bottle sealing machines are sold in South Africa,
two markets with different sales prices were identified. Isabella transacts in both markets and can access
the prices in those markets on the measurement date, 1 January 2022. Isabella’s financial accountant
has provided you with the information relating to the two markets as summarised below:

Sutherland Sealer
Market Specialist Shop
R R
Price………………………………………………………………… 42 000 44 000
Transport costs……………………………………………………. (3 000) (7 500)
Transaction costs………………………………………………… (2 500) (2 000)
Net Price 36 500 34 500

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 FAC3764 Assessment 9
QUESTION 2 (Continued)

The machinery had an original estimated useful life of four years and a remaining useful life of three
years at the date of acquisition. This machinery was classified as property, plant, and equipment under
the cost model, in the accounting records of Isabella. It is the accounting policy of Isabella Ltd to
recognise depreciation over the asset's estimated useful life on a straight-line basis. It is the group’s
accounting policy to write off depreciation on its new machinery consistent with the tax allowances
granted by the South African Revenue Services.

Transactions with Isabella

7. During the current year, Isabella sold selected fine fragrances and beauty products amounting to
R188 000 to Spree Ltd. Isabella sells inventory to Spree Ltd at a profit mark-up of 30% on the cost
price. On 30 June 2023, Spree Ltd had inventory valued at R85 000 on hand which was purchased
from Isabella.

Investment in Invest Global Ltd Bonds

8. On 1 February 2023, Spree Ltd purchased 9 500 bonds from Invest Global Ltd with a fair value of
R120 per bond and incurred R5 000 transaction costs that were directly attributable to the acquisition
of the bonds, settled in cash on the same date. The bonds are redeemable at par value of R100
each on 30 January 2027 and interest is paid annually, in arrears, on 31 January, at a coupon rate
of 12%. Spree Ltd holds the investment in Invest Global bonds with the objective of collecting future
contractual cashflows of principal and interest at specific dates until maturity date. The bonds were
not regarded as credit impaired on initial recognition and the credit risk has not increased at any
stage since purchase.

The 12-month probability of default was assessed at 2% and 4% on 1 February 2023 and
30 June 2023, respectively, while the lifetime probability of default was measured at 3% and 5% on
1 February 2023 and 30 June 2023, respectively.

9. The impact of the investment in Invest Global Ltd’s bonds has been accounted for in Spree Ltd profit
for the year end 30 June 2023.

Matters arising from the preparation of consolidated financial statements for the year ended
30 June 20x23.

10. While preparing the consolidated financial statements for the year ended 30 June 2023, Mrs Julie
Smith CA(SA) had indicated that despite your email indicating the amount at which the investment
in Invest Global bonds should be disclosed in the consolidated statement of financial position as at
30 June 2023, she firmly believes that accounting for the effect of expected credit losses in this
investment is not necessary since the credit risk is low on this instrument and this requirement is
more relevant to financial institutions. Therefore, she intends to remove the allowance for expected
credit losses from the calculation.

Additional information

11. The Spree Ltd Group applies the cost model to all items of property, plant, and equipment in terms
of IAS 16, Property, Plant and equipment.

12. Spree Ltd measures its investments in Zahara Ltd and Isabella (Pty) Ltd at cost in its separate
accounting records in terms of IAS 27, Separate Financial Statements.

13. The Spree Ltd Group accounts for joint ventures using the equity method, in accordance with
IAS 28, Investments in Associates and Joint Ventures.

14. The Spree Ltd Group elected to measure non-controlling interests in an acquiree at fair value at the
date of acquisition.

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 FAC3764 Assessment 9
QUESTION 2 (Continued)

15. The South African normal tax rate is 27% and the capital gains tax inclusion rate is 80%. You may
assume that both the tax rates have been effective and remained unchanged since
28 February 2021.

16. The income and expenses of all companies within the Spree Ltd Group were earned evenly
throughout the current year except where specifically indicated.

17. Each share carries one vote and the share capital of each of the companies in the Spree Ltd Group
has remained unchanged since incorporation.

REQUIRED:

Marks
a) Draft an email to the Group Financial Director of Spree Ltd Group to discuss the 12
correct classification and measurement of the investment in Invest Global Ltd bonds,
for the year ended 30 June 2023, according to the requirements of IFRS 9, Financial
instruments.
Communication mark: presentation and lay-out 1
Communication mark - Logical argument 1
b) Calculate the consolidated profit for the year attributable to the owners of the parent 10
that will be presented in the Consolidated statement of profit or loss and other
comprehensive income for the Spree Ltd Group for the year ended 30 June 2023.

c) Prepare only the non-current assets and equity sections of the Consolidated 23
statement of financial position of the Spree Ltd Group as at 30 June 2023.

d) Explain, with reasons, the ethical concerns relating to the matters arising from the 3
preparation of consolidated financial statements for the year ended 30 June 2023 as
outlined in point 10.

Please note:

Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).

Accounting policy notes are not required.

All calculations must be shown, and amounts must be rounded off to the nearest Rand.
All percentages calculated should be rounded to the nearest four decimals.
Show all data input into your financial calculator, where applicable.
Notes to the annual financial statements and comparative figures are not required.
Ignore Value added tax (VAT) and Dividend tax.
[50]

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UNISA 2023

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