FAC3764/2023/Study pack 3

Department of Financial Accounting

IMPORTANT INFORMATION

This study pack contains integrated questions which will aid you in your preparation for
assessment 9.

Please note that this study pack does NOT contain all the content and principles included in
learning unit 1 – 11. This study pack should NOT be seen as a scope for assessment 9. Study
packs 1 and 2 are still applicable and should also be revised during your preparation
processes.

Open Rubric
 FAC3764/2023/Study pack 3

CONTENTS

Page

1 INTRODUCTION ............................................................................................................................ 3
2 LECTURERS AND CONTACT DETAILS ...................................................................................... 3
3 INTEGRATED QUESTIONS AND SOLUTIONS............................................................................ 4

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 FAC3764/2023/Study pack 3
Dear Student

1 INTRODUCTION

Within this study pack we include integrated questions and suggested solutions. These integrated
questions will help you to prepare for assessment 9.

Please note that this study pack does NOT contain all the content and principles included in learning
unit 1 – 11. This study pack should NOT be seen as a scope for assessment 9. Study packs 1 and 2
are still applicable and should also be revised during your preparation processes.

You will notice some calculations are in brackets opposite certain items in our suggested solutions
dealing with company financial statements. These calculations are given for tuition purposes only and
consequently do not form part of the statutory disclosure requirements.

2 LECTURERS AND CONTACT DETAILS

Please use only the following e-mail address for all communication with your lecturers:

FAC3764@unisa.ac.za

Please use only the following telephone numbers for communication with your lecturers:

Lecturers Telephone number

Marilize Els 012 429 8766
Itani Phaduli 012 429 3232
Dumazile Selela 012 429 4848
Nosipho Gumede 012 429 4633
Lauren Jordaan

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 FAC3764/2023/Study pack 3
3 INTEGRATED QUESTIONS AND SOLUTIONS

QUESTION 1 (48 MARKS) (86 MINUTES)

ICY Ltd was founded in East London in 20X10 and is one of the leading importers and distributors of
skincare and makeup products in South Africa. ICY Ltd is listed on the Johannesburg Stock Exchange
and recently began investing in companies that operate in the sports and entertainment industry. You
have been appointed as a financial accountant to assist in the preparation for the group financial
statements for the year ended 31 December 20X20. All the companies in the ICY Ltd Group have a
31 December year end. The following companies form part of the ICY Ltd Group.

Bronzer Ltd

Bronzer Ltd is a company based in Pretoria which manufactures sport equipment. It has 150 000 ordinary
shares in issue, and it was incorporated in 20X14. On 1 October 20X20, ICY Ltd acquired 52 500
ordinary shares in Bronzer Ltd from the previous shareholders. The full consideration of R1 500 000
was paid in cash on the same date. On the acquisition date, Bronzer Ltd’s identifiable assets and
liabilities were considered to be fairly valued and equal to the carrying amounts thereof except for
the property (refer below) which had a carrying amount of R1 770 000. Since 1 October 20X20,
ICY Ltd exercised significant influence over the financial and operating policy making decisions of
Bronzer Ltd.

Property
2
Bronzer Ltd owns a piece of land situated in the east of Pretoria. The land is 2 000m and is
surrounded by several office parks.

The property is zoned in the class “Business 4” which allows for the owner of the property to construct
office parks on the land. Based on information obtained at the Deeds Office (which is readily available),
ten similar properties were sold during the last six months in the area with the highest price of
R1 812 500 and the lowest price of R1 756 000. The average price was R1 780 000. Sales
commission of 5% was payable on the transactions.

Although the property is not for sale, Bronzer Ltd received a private offer for the land to the amount of
R1 875 000. The buyer plans to build a factory on the property. The building of a factory is not legally
permissible since the property is zoned for commercial use and the rezoning of the property is unlikely.
Other properties with office parks thereon in the same area generate sufficient income to ensure market
related profitability. The value of the property in its current use is R980 000. The founding documents and
accounting policy of the company do not prohibit the sale of the property. Bronzer Ltd has not made any
decision to sell the land and the future use of the land remains undetermined.

Transactions with ICY Ltd

Since 1 December 20X20, Bronzer Ltd sold inventory to ICY Ltd. Total sales from Bronzer Ltd to ICY Ltd
amounted to R160 000. Bronzer Ltd sells inventory at a profit mark up of 30% on the selling price. At
31 December 20X20, ICY Ltd had sold 50% of the inventory purchased from Bronzer Ltd during the
current financial year.

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 FAC3764/2023/Study pack 3
QUESTION 1 (continued)

BRONZER LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20X20
Retained Revaluation
Share capital earnings reserve
R R R
Opening balance – 1 January 20X20 150 000 1 439 100 -
Changes in equity for the year
Profit for the year - 2 034 079 -
Other comprehensive income - - 91 000
Dividends paid – 31 December 20X20 - (40 000) -
Closing balance - 31 December 20X20 150 000 3 433 179 91 000

Conceal Ltd

On 1 September 20X18, ICY Ltd acquired control of Conceal Ltd by acquiring 375 000 of the
500 000 issued ordinary shares of Conceal Ltd for a cash consideration of R1 400 000.The acquisition
of the interest by ICY Ltd met the definition of a business combination in terms of IFRS 3 – Business
Combinations. On the acquisition date, the retained earnings of Conceal Ltd amounted to R820 000
(credit balance). On this date, the assets and liabilities of Conceal Ltd were fairly valued except for
inventory which had a fair value of R190 000 (carrying amount: R245 000). On 1 September 20X18, the
market value of one Conceal Ltd share was R4,00.

The following are extracts of the financial statements prepared by the Conceal Ltd financial accountant.

CONCEAL LTD
STATEMENT OF CHANGES IN EQUITY FOR TH EYEAR ENDED 31 DECEMBER 20X20

Share Retained
capital earnings
R R
Opening balance – 1 January 20X20 1 000 000 2 260 110
Changes in equity for the year:
Profit for the year - 3 258 648
Other comprehensive income - -
Dividends paid – 31 December 20X20 - (65 000)
Closing balance – 31 December 20X20 1 000 000 5 453 758

On 1 August 20X20, ICY Ltd acquired an additional 50 000 ordinary shares in Conceal Ltd from the non-
controlling shareholders for a cash consideration of R600 000. The new assistant to the financial
accountant of ICY Ltd prepared part of the consolidated statement of changes in equity of the ICY Ltd
Group for the year ended 31 December 20X20 below:

ICY LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20X20
Non-controlling interest
R
Balance 1 January 20X20 (2 260 110 – 820 000) 1 440 110
Profit for the year 3 258 648
Acquisition of additional interest ?
Dividends paid (65 000)
4 614 044

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 FAC3764/2023/Study pack 3
QUESTION 1 (continued)

Transactions with ICY Ltd

On 30 August 20X20, Conceal Ltd sold land to ICY Ltd for R150 000. The carrying amount of the land
was R120 000. ICY Ltd classified the Land as property, plant and equipment. The transaction will be
settled in two equal instalments. At year end, ICY Ltd had settled 50% of the balance.

Additional information
1. ICY Ltd measures its investments in Conceal Ltd and Bronzer Ltd at cost in its separate
accounting records in terms of IAS 27, Separate Financial Statements.
2. The ICY Ltd Group applies the fair value model in terms of IAS 40, Investment Property to its
investment properties.
3. The ICY Ltd Group applies the cost model to all items of property, plant and equipment in terms of
IAS 16, Property, Plant and equipment.
4. The income and expenses of Conceal Ltd were earned evenly throughout the current year except
for the intercompany sale of land.
5. The income and expenses of Bronzer Ltd were earned evenly throughout the current year.
6. The ICY Ltd Group measures the non-controlling interest at fair value at the acquisition date.
7. The South African normal tax rate is 27% and capital gains tax is calculated at 80% thereof.
8. Each share carries one vote and the share capital of each of the companies in the ICY Ltd Group
has remained unchanged since incorporation.

REQUIRED:
Marks
a) Discuss with reference to IFRS 13, Fair Value Measurement, the initial measurement of 8
the fair value of the property in the consolidated statement of financial position of the ICY
Ltd Group at the acquisition date.
Communication skills: logical argument 1
b) Calculate the amount that will be presented as investment in associate in the 9
consolidated statement of financial position of the ICY Ltd Group as at
31 December 20X20.

For purposes of this required, you may assume that the fair value of the property is,
R1 775 000.
c) Prepare the related party note in terms of IAS 24, Related Parties as far as possible from 7
the given information, to be disclosed in the separate financial statements of ICY Ltd for
the year ended 31 December 20X20.
d) Discuss briefly whether you agree or disagree with the measurement of the amounts 22
presented in the non-controlling interest column of the consolidated statement of
changes in equity of the ICY Ltd Group for the year ended 31 December 20X20 prepared
by the new assistant.

Your discussion should include recommendations on how to correctly calculate the

amounts to be disclosed including the missing amount.
Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Accounting policy notes are not required.
Comparative amounts are not required.
Show all calculations.
Round all amounts to the nearest Rand.
48

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 FAC3764/2023/Study pack 3
QUESTION 1: Suggested solution

a) Discuss with reference to IFRS 13, Fair Value Measurement, the initial measurement of the fair value
of the property in the consolidated statement of financial position of the ICY Ltd Group at the
acquisition date.

IFRS 13.27 provides that a fair value measurement of a non-financial asset takes into account a marker
participant’s ability to generate economic benefits by using the asset in its highest and best use or by
selling it to another market participant that would use the asset in its highest and best use. Where an
entity intends not to use an acquired non-financial asset actively or to use it for less than its highest and
best use, fair value should be measured, assuming the asset’s highest and best use by market
participants.

The factors discussed below also need to be considered when measuring the fair value of non-financial
assets.

Consideration must be given to the market participant’s ability to use the asset. When assessing the
market participant’s ability to use the asset, we must assume that the market participant will use the
asset consistently at its highest and best use. The highest and best use is defined as the use of a non-
financial asset by market participants that would maximize the value of the asset or group of assets
within which the asset would be used. The notion of highest and best use is simply put, the best way for
the market participant to derive economic benefit from the asset. The highest and best use requires
consideration of whether the use is physically possible, legally permissible and financially feasible.

The current use of the property is not its highest and best use and therefore, R980 000 is not an
appropriate valuation.

Based on the given information, the use of the asset is physically possible, as the size of the property
(2 000m2) is sufficient to erect office blocks thereon. The land is also located in an area consisting of
office parks.

The private offer received of R1 875 000 is not an appropriate valuation as the intended use of the
property by the buyer is not legally permissible and rezoning of the property is unlikely.

The use of the asset is legally permissible as the property is zoned for an office park. There is also no
clause in the founding documents or in the policy of the company that prohibit the sale of the property.

The use of the asset is also financially feasible as the other office parks generate sufficient income to
ensure market related profitability.

Even though the property is not currently used as an office park, the highest and best use assumption
does not change.

The fair value of the property will be measured at the average price of the ten transactions, therefore
amounting to R1 780 000. In terms of IFRS 13, the transaction cost (commission) must be excluded
when measuring fair values.

b) Calculate the amount that will be presented as investment in associate in the consolidated statement
of financial position of the ICY Ltd Group as at 31 December 20X20.

Investment in associate R
Cost price 1 500 000
Gain on bargain purchase -
Share of profit in associate 177 982
Share of other comprehensive income from associate 31 850
Dividend paid by associate (14 000)
1 695 832

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 FAC3764/2023/Study pack 3

QUESTION 1 (continued)

c) Prepare the related party note in terms of IAS 24, Related Parties as far as possible from the given
information, to be disclosed in the separate financial statements of ICY Ltd for the year ended
31 December 20X20.

ICY LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20X20

Related party transactions

Related parties

ICY Ltd is related to Conceal Ltd because Conceal Ltd is a subsidiary of ICY Ltd.

ICY Ltd is related to Bronzer Ltd because Bronzer Ltd is an associate of ICY Ltd.

Transactions
The following transactions occurred between related parties of the company during the past
financial year:

2020
R
Inventory purchased from Bronzer Ltd 160 000
Land purchased from Conceal Ltd 150 000

Outstanding balances
Included in accounts payable is R75 000, owed to Conceal Ltd.

All the above transactions were entered into at market-related prices and at arm’s length terms and
conditions.

d) Discuss briefly whether you agree or disagree with the measurement of the amounts presented in
the non-controlling interest column of the consolidated statement of changes in equity of the ICY Ltd
Group for the year ended 31 December 20X20 prepared by the new assistant.

Opening balance

The amount is incorrect. The assistant included 100% and did not multiply by the NCI shareholding of
25%.

The fair value of the non-controlling interest at acquisition date of R500 000 was not included / was
omitted and must be added to get the opening balance.

The write down of inventory at acquisition of R40 150 after tax should be added back to the opening
retained earnings balance.

Profit for the year

The profit for the year amount is incorrect. 100% of the profit for the year was used instead of the NCI’s
share. The NCI are entitled to 25% of the profit before the acquisition of the additional interest by ICY Ltd
and 15% of the profit after the acquisition of the additional interest by ICY Ltd.

The profit for the year should be adjusted for the intercompany sale of Land that did not occur evenly.

The profit should also be apportioned for the period before the additional acquisition (7 months) and the
period after the additional acquisition (5 months).

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 FAC3764/2023/Study pack 3

QUESTION 1 (continued)
R
Profit for the year 3 258 648
Profit on sale of land not earned evenly (150 000 – 120 000) (30 000)
Tax on profit on sale of land (30 000 x 80% x 27%) 6 480
Profit for the year earned evenly 3 235 128

Before acquisition
Profit for 7 months (3 235 128 x 7/12) 1 887 158
x shareholding 25%
Profit before additional acquisition 471 790

After acquisition (3 235 128 x 5/12) + 30 000 – 6 480 1 371 490

Profit on the sale of land (150 000 – 120 000) (30 000)
Tax on profit (30 000 x 80% x 27%) 6 480
Adjusted profit 1 347 970
x shareholding 15%
Profit after additional acquisition 202 196

Total profit for the year attributable to NCI 673 985

Dividends paid

The amount is incorrect. The total dividends amount is used, ie 100%. This amount should be multiplied
by the NCI shareholding % at year end, which is 15%.
The dividend amount should be R65 000 x 15% = R9 750.

Acquisition of interest

The assistant did not calculate the amount that NCI should be reduced by, as a result of the additional
shares purchased by ICY Ltd.

NCI column
R
NAV transferred (444 963 + 370 065 + 471 790) x 10/25 514 727
Goodwill transferred: 55 038 x 10/25 22 015
536 742

OR:
NAV transferred: (1 779 850 + 1 480 260 + 1 887 158) x 10/100 514 727
Goodwill transferred: 55 038 x 10/25 22 015
536 742

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 FAC3764/2023/Study pack 3
QUESTION 1 (continued)

Calculations:

Analysis of owner’s equity of Conceal Ltd (Subsidiary)

Acquisition date – 1 September 20X18
375 000 / 500 000
75% - 85% 25% - 15%
Total At Since NCI
R R R R
Share capital 1 000 000
Retained earnings 820 000
Inventory (245 000 – 190 000) (55 000)
Deferred tax on Inventory adjustment
(55 000 x 27%) 14 850
1 779 850 1 334 888 444 963
Goodwill 120 150 65 113 55 038
Investment at cost 1 400 000 500 0001

Since acquisition to beginning of

current year
Retained earnings
(2 260 110 – 820 000) + 40 150 1 480 260 1 110 195 370 065

Current year
Profit for the year – 1 January 20X20 –
31 July 20X20 (3 235 1282 / 12 x 7) 1 887 158 1 415 369 471 790

Change in control (1 August 20x20)

Consideration paid 600 000
Goodwill transferred (55 038 x 10/25) (22 015)
NAV transferred from NCI [444 963 +
370 065 + 471 790) x 10/25] (514 727)
Change in ownership equity reserve 63 258

Profit for the year – 1 August 20X20 –

31 December 20X20
[(3 235 1282 / 12 x 5) + 30 000 – 6 480] 1 371 490 1 165 767 205 724
Adjusted for:
Profit on sale of equipment
(150 000 – 120 000) (30 000) (25 500) (4 500)
Tax on profit on sale of equipment
(30 000 x 80% x 27%) 6 480 5 508 972
Adjusted profit 1 347 970 1 145 775 202 196

Dividends (65 000) (55 250) (9 750)

3 616 089 1 534 301

1 500 000 x 25% x R4,00 = R500 000

23 238 648 – 30 000 + (30 000 x 80% x 27%) = 3 235 128

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 FAC3764/2023/Study pack 3
QUESTION 1 (continued)

Analysis of owner’s equity of Bronzer Ltd (Associate)

Acquisition date – 1 October 20X20

(52 500 / 150 000)
Total CA
100% 35% 35%
R R R R
Share capital 150 000
Retained earnings 1 439 100
Profit for the year – 9 months 1 525 559
(2 034 079 / 12 x 9)
Fair value adjustment – Property 5 000
(1 775 000 – 1770 000)
Deferred tax on fair value adjustment (1 080)
(5 000 x 80% x 27%)
3 118 579 1 091 503
Goodwill 408 497
Investment at cost 1 500 000 1 500 000

Share of profit of associate

Profit after tax 2 034 079
For 3 months (2 034 079 / 12 x 3) 508 520 177 982 177 982

Share of other comprehensive income

Revaluation surplus 91 000 31 850 31 850

Dividend paid by associate (40 000) (14 000) (14 000)

Investment in associate 1 695 832

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 FAC3764/2023/Study pack 3
QUESTION 2 (56 MARKS) (101 MINUTES)

Paperlink Ltd (Paperlink) is the largest paper, plastics packaging and recycling business in South Africa.
Paperlink holds investments in other companies such as Shred Ltd (Shred) and Kleen Ltd (Kleen). The
Paperlink Ltd Group is listed on the JSE and all companies in the Paperlink Ltd Group have a 30 June
year end.

The following are extracts from the summarised trial balances of the entities in the Paperlink Ltd
Group for the year ended 30 June 20X22:

Paperlink Shred Ltd Kleen

Ltd Ltd
Dr/(Cr) Dr/(Cr) Dr/(Cr)
R R R
Property, plant and equipment at cost 1 617 000 1 299 641 561 000
- Investment in Shred Ltd at cost 1 400 000 - -
- Investment in Kleen Ltd at cost 250 000 - -
- Investment in equity instruments 130 000 - -
Trade and other receivables 303 230 296 850 85 700
Cash and cash equivalents 390 650 445 100 325 400
Inventories 214 600 388 310 129 200
Ordinary dividend paid – 30 June 20X22 180 000 152 000 75 000
Retained earnings –1 July 20X21 (1 918 000) (1 555 000) (650 000)
Share capital: – 150 000 ordinary shares (750 000) - -
– 120 000 ordinary shares - (240 000) -
– 90 000 ordinary shares - - (90 000)
Accumulated depreciation (150 400) (90 800) (53 000)
Deferred tax liability (60 300) (25 200) (10 150)
Trade and other payables (205 700) (180 450) (70 550)
Profit for the year (1 358 400) (475 331) (282 000)
– fair value adjustment on land, net after tax - (15 120) (20 600)
– fair value gain on equity instruments, net after tax (42 680) - -

1. Investment in Shred Ltd

Shred offers secure document shredding, product destruction, recycling and e-waste disposal
services throughout South Africa. To expand the business of the Paperlink Ltd Group, Paperlink
acquired 90 000 of the 120 000 issued ordinary shares of Shred on 1 July 20X21 for a cash
consideration amounting to R1 400 000. This acquisition met the definition of a business combination
as defined in IFRS 3, Business Combinations. At the acquisition date, the share capital amounted to
R240 000.

The carrying amounts of the assets and liabilities of Shred at acquisition date were considered to be
fairly valued, except for the solar energy unit (consisting of solar panels and integrated back-up
battery packs) that was acquired and installed on 1 January 20X21. Shred installed the solar energy
unit to ensure that they will be able to continue operating in times where they might experience load
shedding. The solar energy unit (equipment) had a carrying amount of R103 000, correctly calculated,
on 1 July 20X21. The remaining useful life of the solar energy unit was 3 years on this date. Both
companies depreciate equipment over the expected useful life of the asset using the straight-line
method. This is consistent with the allowance granted by the South African Revenue Service. The
expected useful life remained unchanged through-out the periods. An insignificant residual value was
allocated to the solar energy unit.

The accountant of Paperlink knows that on acquisition date all assets and liabilities must be measured
at fair value in terms of IFRS 13 but is not sure at what amount to measure the fair value of the solar
energy unit. Thus, the revaluation was not accounted for in the records of Shred Ltd.

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 FAC3764/2023/Study pack 3
QUESTION 2 (continued)

There are no principal market where second-hand solar energy units are sold in South Africa but two
markets were identified where second hand solar energy units are sold at different prices. The two
markets being the Mpumalanga Alternative Energy Market and the Green Solar Shop in the Free
State. Shred transacts in both markets and could access the prices in those markets for the solar
energy unit on 1 July 20X21 (the measurement date).

At the Mpumalanga Alternative Energy Market, the price that would be received to sell the solar
energy unit is R129 000. Transaction costs in that market are R2 800 and the costs to transport the
asset to that market are R6 000 (i.e., the net amount that would be received is R120 200).

At the Green Solar Shop, the price that would be received to sell the solar energy unit is R128 000.
Transaction costs in that market are R500 and the costs to transport the asset to that market are
R7 000 (i.e., the net amount that would be received is R120 500).

The above information is illustrated in the table below for ease of understanding:
Mpumalanga
Alternative Green Solar
Energy Market Shop
R R
Price 129 000 128 000
Transport costs (6 000) (7 000)
Transaction costs (2 800) (500)
Net price 120 200 120 500

2. Shred entered into a lease agreement with Realbasics Ltd (Realbasics) on 1 January 20X22 to
lease one of its new grinding machines to Realbasics. The lease agreement is a lease in terms of
IFRS 16, Leases. The following information relates to the lease:

Commencement of agreement 1 January 20X22

Cost price of machines R135 845
Fair value of leased machine R135 845
Duration of lease agreement 5 years
Instalment R22 500 payable half yearly in arrears
Unguaranteed residual value R28 500

The machine has no guaranteed residual value. Shred incurred R1 500 legal fees to secure the
lease agreement. At the end of the lease period the machine will be transferred to Realbasics at no
additional cost. The machine was available for use and brought into use on 1 January 20X22.
Transactions arising from the lease have not been recorded in the accounting records of Shred.

3. On 31 March 20X22, Paperlink sold standby diesel generator with an original cost price of R54 000,
for R53 800 to Shred. This generator was bought by Paperlink on 1 July 20X21 and has a useful
life of 10 years. The tax allowance on the generator is 10% per year apportioned for periods of use
less than a year. The residual value of the generator was insignificant. The carrying amount of the
generator will be recovered through use. The generator was classified as property, plant and
equipment under the cost model, in the accounting records of both Paperlink and Shred.

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 FAC3764/2023/Study pack 3
QUESTION 2 (continued)

4. Investment in Kleen (Pty) Ltd

On 1 February 20X22, Paperlink acquired 27 000 ordinary shares in Kleen (Pty) Ltd (Kleen) for
R250 000, which was paid in cash. Kleen is a collection, sorting, baling and recycling business
located in Akasia, Pretoria. At the acquisition date, the retained earnings of Kleen had a credit
balance and the identifiable assets and liabilities of Kleen were considered to be fairly valued and
equal to the carrying amounts thereof. Since 1 February 20X22, Paperlink exercised significant
influence over the financial and operating policy decisions of Kleen in accordance with IAS 28
Investments in Associates and Joint Ventures.

5. Since 1 February 20X22, Kleen sold PET materials (inventory) to Paperlink at a profit mark-up of
25% on the cost price. Total sales from Kleen to Paperlink for the year ended 30 June 20X22
amounted to R50 000. These sales took place evenly throughout the period post the acquisition of
Kleen. At year end, half of the inventory bought from Kleen was still on hand and was recorded as such
in Paperlink’s accounting records.

6. Equity instruments other than investments in subsidiaries and associates

Paperlink portfolio of equity instruments other than investments in subsidiaries and associates,
includes 50 000 shares. This portfolio is measured at fair value, with fair value changes presented in
Other Comprehensive Income (OCI). The shares are held for long-term capital growth. The shares
were originally bought at R1,50 per share and the fair value per share amounted to R2,60 on
30 June 20X22.

Additional information

7. The Paperlink Ltd Group depreciates its property, plant, and equipment using the straight-line
method over its expected useful life. Paperlink Ltd Group’s depreciation policy is consistent with tax
allowances granted by the South African Revenue Service.

8. The Paperlink Ltd Group presents items of Other Comprehensive Income net after tax.

9. Paperlink measures its investment in Shred and its investment in Kleen, at cost in its separate
financial statements in terms of IAS 27, Separate Financial Statements.

10. The Paperlink Ltd Group measures investments in associates using the equity method in accordance
with IAS 28, Investments in Associates and Joint Ventures.

11. The Paperlink Ltd Group measures its non-controlling interest at its proportionate share of identifiable
net assets.

12. The income and expenses of Shred and Kleen were earned and incurred evenly throughout the
current year unless indicated otherwise.

13. The SA normal tax rate is 27% and capital gains tax is calculated at 80% thereof. You may assume
that the tax rate has remained unchanged since 1 July 20X20.

14. Each share carries one vote and the share capital of all companies has remained unchanged
since 1 January 20X21.

15. All the companies in the Paperlink Ltd Group have a 30 June year end

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 FAC3764/2023/Study pack 3
QUESTION 2 (continued)

REQUIRED:

Marks
a) Draft a report to the accountant of the Paperlink Ltd Group, discussing the correct 12
amount that should be disclosed as the fair value of the solar energy unit on
1 July 20X21 in terms of IFRS 13, Fair Value Measurement. Your answer must make
clear reference to the requirements of fair value measurement.

Communication skills: Presentation and Layout 1½

b) For Part b, you may assume that the fair value of the solar energy unit is R121 000. 25

Prepare the extract of the Consolidated Statement of Profit or Loss and Other
Comprehensive Income of the Paperlink Ltd Group for the year ended 30 June 20X22
starting with the line item “Profit for the year.”

Communication skills: Presentation and Layout 2½

c) Prepare only the assets section of the Consolidated Statement of Financial Position of 12 ½
the Paperlink Ltd Group as at 30 June 20X22.

Only show transactions arising from the lease agreement, Investment in Kleen (Pty) Ltd
and Investment in Shred Ltd.

Communication skills: Presentation and Layout 2½

Please note:
Your answers must comply with the requirements of International Financial Reporting
Standards (IFRS).
Notes to the annual financial statements and comparative figures are not required.
Show all calculations.
Round all amounts to the nearest Rand.
Round all percentages calculated to the nearest three decimals.
You may ignore Value Added Tax and Dividend tax.
56

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 FAC3764/2023/Study pack 3
QUESTION 2: Suggested solution

a) Draft a report to the accountant of the Paperlink Ltd Group, discussing the correct amount
that should be disclosed as the fair value of the solar energy unit on 1 July 20X21 in
terms of IFRS 13, Fair Value Measurement. Your answer must make clear reference to the
requirements of fair value measurement.

To: Accountant of Paperlink Ltd

Subject: Fair value of the solar panels and back-up battery pack
Date: XXX

Dear Accountant of Paperlink Ltd/Mr xxx

In terms of IFRS 13, fair value is defined as 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.

An orderly transaction is defined as a transaction that assumes exposure to the market for a period
before the measurement date to allow for marketing activities that are usual and customary for
transactions involving such assets or liabilities; it is not a forced transaction (e.g. a forced liquidation or
distress sale).

In terms of IFRS 13, a fair value measurement assumes that the transaction to sell the asset or transfer
the liability takes place in the principal market for the asset or liability.

The principal market is defined as the market with the greatest volume and level of activity for the asset.
The fair value of the asset in a principal market would be measured using the price that would be received
in that market, after taking into account transport costs. (Thus, including the transport costs).

In the absence of a principal market, or if neither market is the principal market the transaction to sell
the asset (or transfer the liability) is assumed to take place in the most advantageous market for the asset
or liability. However, the most advantageous market will only be referred to in the absence of the principal
market. The fair value of the asset would be measured using the price in the most advantageous market.

The most advantageous market is the market that maximises the amount that would be received to sell
the asset, or that minimizes the amount that would be paid to transfer the liability, after taking into
account transaction and transport costs.

There is no principal market where second-hand solar energy units are sold in South Africa, therefore
Paperlink Ltd Group should use the most advantageous market to measure fair value.

Conclusion

The most advantageous market is the Green Solar Shop as it results in a net price (price in market less
transaction costs and transport costs) of R120 500 which is higher or greater net value than the
Mpumalanga Alternative Energy Market’s net price of R120 200. The fair value of the asset would be
measured using the price in that market (R128 000), less transport costs (R7 000), resulting in a fair
value measurement of R121 000. Although transaction costs are taken into account when determining
which market is the most advantageous market, the price used to measure the fair value of the asset is
not adjusted for those costs (however it is adjusted for transport costs)

Your sincerely FAC3764 Student

16
 FAC3764/2023/Study pack 3
QUESTION 2 (continued)

b) Prepare the extract of the Consolidated Statement of Profit or Loss and Other Comprehensive
Income of the Paperlink Ltd Group for the year ended 30 June 20X22 starting with the line
item “Profit for the year.”

PAPERLINK LTD GROUP

EXTRACT OF THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 20X22

R
Profit for the year (C1) 1 757 482
Other comprehensive income for the year, after tax
Items that will not be reclassified to profit or loss:
Fair value adjustments on land; net after tax 15 120
Fair value gain on equity instruments, net after tax 42 680
Share of other comprehensive income of associate (20 600 x 30%) 6 180

TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1 821 462

Profit for the year attributable to: R

Owners of the parent 1 636 779
Non-controlling interests (475 331 + 16 246 – 4 386 - 6 000 + 1 620) x 25% 120 703
1 757 482
Total comprehensive income for the year attributable to:
Owners of the parent 1 696 979
Non-controlling interests 120 703 + (15 120 x 25%) 124 483
1 821 462
Calculations

C1 – Profit for the year R

Paperlink Ltd
Profit for the year (given) 1 358 400
Less: Dividend received from Shred (152 000 x 75%) (114 000)
Less: Dividend received from Kleen (75 000 x 30%) (22 500)
Less: Unrealised profit on disposal of generator (PPE) [53 800 – 49 950 (54 000 – 4 050
(54 000 / 10 x 9/12)] (3 850)
Tax on unrealised profit (3 850 x 27%) 1 040
Add realised portion through depreciation [3 850 / 111 x 3 OR 3 850 / 9,25 (10 – 0,75)
x 3/12] 104
Tax on depreciation (104 x 27%) (28)
1 219 166

Shred Ltd R
Profit for the year (given) 475 331
Finance income on lease 16 246
Tax on finance income (16 246 x 27%) (4 386)
Additional depreciation on revaluation of equipment (solar panels) (18 000 / 3 years) (6 000)
Tax on depreciation (6 000 x 27%) 1 620
482 811

17
 FAC3764/2023/Study pack 3
QUESTION 2 (continued)

R
Kleen (Pty) Ltd
Gain on bargain purchase (C2) 21 350
Share of profit of associate (282 000 x 5/12) x 30% 35 250
Unrealised profit (inventory) (50 000 x 50% x 25/125 x 30%) (1 500)
Tax on realised profit (1 500 x 27%) 405
55 505

Total profit for the year (1 219 166 + 482 811 + 55 505) 1 757 482

C2 – Gain on bargain purchase R

Share capital 90 000
Retained earnings 650 000
Profit (for 7 months) (282 000 x 7/12) 164 500
904 500
X 30% (271 350)
Consideration paid 250 000
Gain on bargain purchase (21 350)

c) Prepare only the assets section of the Consolidated Statement of Financial Position of the
Paperlink Ltd Group as at 30 June 20X22.

PAPERLINK LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20X22

ASSETS R
Non-current assets
Investment in associate (C1) 290 280
Goodwill (C2) 43 895
Net investment in finance lease (C3) 116 276

Current assets
Net investment in finance lease (131 091 – 116 276) 14 815

C1 – Investment in associate R
Cost 250 000
Gain on bargain purchase 21 350
Profit for the year (5 months) (282 000 x 5/12) x 30% 35 250
Other comprehensive income (20 600 x 30%) 6 180
Dividend paid (75 000 x 30%) (22 500)
290 280

C2 – Goodwill R
Share capital 240 000
Retained earnings 1 555 000
Revaluation surplus 18 000
Tax on revaluation surplus (18 000 x 27%) (4 860)
1 808 140
X 75% (1 356 105)
Consideration 1 400 000
Goodwill 43 895

18
 FAC3764/2023/Study pack 3
QUESTION 2 (continued)

C3 – Net investment in finance lease

Interest rate implicit in the lease
N= 10
Pmt = 22 500
FV = 28 500
PV = 137 345 (135 845 + 1 500)
Comp I = 11,829%

Amortisation table
Interest @
Date Instalment 11,289% Capital Balance
R R R R
1 Jan 20X22 - - - 137 345
30 June 20X22 (22 500) 16 246 (6 254) 131 091
31 Dec 20X22 (22 500) 15 506 (6 994) 124 097
30 June 20X23 (22 500) 14 679 (7 821) 116 276
31 Dec 20X23 (22 500) 13 753 (8 747) 107 529
30 June 20X24 (22 500) 12 720 (9 780) 97 749
31 Dec 20X24 (22 500) 11 562 (10 938) 86 811
30 June 20X25 (22 500) 10 268 (12 232) 74 579
31 Dec 20X25 (22 500) 8 822 (13 578) 60 901
30 June 20X26 (22 500) 7 204 (15 296) 45 605
31 Dec 20X26 (22 500) 5 395 (17 105) 28 500

Analysis of owner’s equity of Kleen Ltd

(27 000/90 000 = 30%) Invest-
100% 30% 30% ment in
Total At Since Associate
R R R R
At acquisition date
Share capital 90 000 27 000
Retained earnings 650 000 195 000
Profit (7 months) (282 000 x 7/12) 164 500 49 350
904 500 271 350
Gain on bargain purchase (21 350)
Consideration paid 250 000 250 000

Since acquisition date

Gain on bargain purchase 21 350 21 350

Current year
Profit for the year (282 000 – 164 500) OR
(282 000 x 5/12) 117 500 35 250 35 250
Other comprehensive income 20 600 6 180 6 180
Dividends paid (75 000) (22 500) (22 500)
967 600 250 000 40 280 290 280
Investment in Associate 290 280

19
 FAC3764/2023/Study pack 3
QUESTION 2 (continued)

Analysis of owner’s equity of Shred Ltd

(90 000 / 120 000 = 75%)
Paperlink Ltd
100% 75% 25%
Total At Since NCI
At acquisition date 240 000 180 000 60 000
Retained earnings 1 555 000 1 166 250 388 750
Revaluation surplus
(121 000 – 103 000) 18 000 13 500 4 500
Deferred tax on revaluation
(19 000 x 27%) (4 860) (3 645) (1 215)
1 808 140 1 356 105 452 035
Goodwill 43 895
Purchase consideration 1 400 000

Since acquisition
Current year 482 811 362 108 120 704
Profit for the year 475 331 356 498 118 833
Finance income 16 246 12 185 4 062
Tax on finance income (4 386) (3 290) (1 096)
Depreciation on solar panels
(18 000 / 3) (6 000) (4 500) (1 500)
Tax on depreciation
(6 000 x 27%) 1 620 1 215 405

Other comprehensive income 15 120 11 340 3 780

Dividends paid (152 000) (114 000) (38 000)
2 154 071 1 400 000 259 448 538 519

20
 FAC3764/2023/Study pack 3
QUESTION 3 (50 MARKS) (90 MINUTES)

PlanIT Ltd is an event planning and catering company. With the rise in the number of events since the
pandemic, PlanIT Ltd has been busier than ever before and its profits have soared. PlanIT Ltd has
decided to expand its operations by making the following investments:

Wot Ltd

On 1 January 20X22, PlanIT Ltd obtained control of Wot Ltd by acquiring 170 000 ordinary shares of
Wot Ltd. The purchase consideration was settled as follows:
 Cash of R150 000 was paid on the same date.
 20 000 ordinary shares in Derm Ltd with a fair value of R4.00 per share on 1 January 20X22.
The issue price of the shares was R3.00 each.
 Equipment, with a carrying amount of R800 000 and a fair value R900 000 on acquisition date.

All the identifiable assets and liabilities of Wot Ltd were fairly valued except for accounts receivable and
land. The accounts receivable balance was overvalued by R20 000 on 1 January 20X22. Land
with a carrying amount of R300 000 was undervalued by R40 000. On 31 December 20X22, the land’s
fair value was R420 000. Wot Ltd did not revalue the land in its separate accounting records as it applies
the cost model in terms of IAS16 as its policy for owner occupied property.

The new trainee assistant has limited knowledge on Group accounting and consolidations and prepared
the following pro forma at-acquisition journal:

Debit Credit
R R
Share capital 170 000
Retained earnings 1 599 690
Land (420 000 – 300 000) 120 000
Gain on bargain purchase 686 690
Accounts receivable 20 000
Investment in Wot Ltd (150 000 + 60 000 + 800 000) 1 010 000
Deferred tax [(120 000 x 27%) + (-20 000 x 27%) 27 000
Acquisition of Wot Ltd

Sale transaction

On 31 December 20X22, PlanIT Ltd sold 10% of its shares in Wot Ltd to the non-controlling shareholders
for R145 000.

CoCo Ltd

On 31 March 20X22, PlanIT Ltd acquired 35 000 of the ordinary shares of CoCo Ltd for R250 000.
Since this date, PlanIT Ltd exercised significant influence over the financial and operating decisions of
CoCo Ltd. On the acquisition date all the assets and liabilities of CoCo Ltd were considered to be fairly
valued.

CoCo Ltd is a logistics company that was incorporated in 20X18. CoCo Ltd’s head office is in East
London, South Africa.

The strategic reason for the purchase of the shares was to take advantage of CoCo Ltd’s fleet of trucks
to transport its catering equipment across the country.

21
 FAC3764/2023/Study pack 3
QUESTION 3 (continued)

The published market price for the investment in CoCo Ltd was R295 000 on
31 December 20X22.

During the year, CoCo Ltd purchased inventory from PlanIT Ltd for R350 000. PlanIT Ltd sold the
inventory to CoCo Ltd at a profit mark-up of 25% on the cost price. On 31 December 20X22, CoCo Ltd
had inventory on hand that was purchased from PlanIT Ltd amounting to R120 000.

The new trainee assistant prepared the following journal entries to account for the above intragroup
transaction of inventory for the year ending 31 December 20X22.
Debit Credit
R R
Investment in associate (120 000 x 65%) 78 000
Cost of sales (120 000 x 35%) 42 000
Revenue 120 000
Elimination of unrealised profit in closing inventory

Income tax expense (78 000 x 27%) 21 060

Deferred tax 21 060
Tax implication of unrealised profit in closing inventory

The following are extracts from the financial statements of the entities in the PlanIT Ltd Group for the year
ended 31 December 20X22:

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR
ENDED 31 DECEMBER 20X22

PlanIT Ltd Wot Ltd CoCo Ltd

R R R
Revenue 6 592 455 3 522 401 1 825 253
Cost of Sales (3 691 911) (1 099 422) (899 991)
Gross profit 2 900 544 2 422 979 925 262
Other income 595 486 101 567 232 548
Other expenses (403 286) (122 451) (133 452)
Profit before tax 3 092 744 2 402 095 1 024 358
Income tax expense (901 304) (802 405) (319 633)
PROFIT FOR THE YEAR 2 191 440 1 599 690 704 725
Other comprehensive income - - -
TOTAL COMPREHENSIVE INCOME FOR THE
YEAR 2 191 440 1 599 690 704 725

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20X22

PanIT Ltd Wot Ltd CoCo Ltd

Retained Retained Retained
earnings earnings earnings
R R R
Balance at 1 January 20X22 1 342 560 1 010 011 545 205
Changes in equity for 20X22:
Profit for the year 2 191 440 1 599 690 704 725
Dividends paid (31 December 20X22) (400 000) (200 000) (100 000)
Balance at 31 December 20X22 3 134 000 2 409 701 1 149 930

22
 FAC3764/2023/Study pack 3
QUESTION 3 (continued)

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20X22

PlanIT Ltd Wot Ltd CoCo Ltd

R R R
ASSETS
Non-current assets
Property, plant and equipment 1 842 900 944 655 756 311
Investment in Wot Ltd at cost 1 130 000
Investment in Coco Ltd at cost 250 000
Total non-current assets 3 222 900 944 655 756 311

Current assets
Cash and cash equivalents 1 086 866 1 245 000 921 357
Inventory 606 543 504 298 326 544
Trade and other receivables 458 657 321 608 223 103
Total current assets 2 152 066 2 070 906 1 471 014
Total assets 5 374 966 3 015 561 2 227 325

EQUITY
Share capital:
- 500 000 ordinary shares 1 000 000
- 200 000 ordinary shares 200 000
- 100 000 ordinary shares 100 000
Retained earnings 3 134 000 2 409 701 1 149 930
Total equity 4 134 000 2 609 701 1 249 930

LIABILITIES
Non-current liabilities
Deferred tax liability 320 000 198 000 121 000
Total non-current liabilities 320 000 198 000 121 000
Current liabilities
Trade and other payables 920 966 207 860 856 395
Total current liabilities 920 966 207 860 856 395
Total liabilities 1 240 966 405 860 977 395
Total equity and liabilities 5 374 966 3 015 561 2 227 325

Other information

1. The profits of Wot Ltd and CoCo Ltd were earned evenly throughout the current year.

2. Investments in subsidiaries, associates and joint ventures are measured at cost in PlanIT Ltd’s
separate financial statements.

3. The PlanIT Ltd Group measures non-controlling interests at their proportionate share of the acquiree’s
identifiable net assets at the acquisition date.

4. The South African normal tax rate is 27% and the capital gains tax (CGT) inclusion rate is 80%. You
may assume that both tax rates have remained unchanged.

5. Goodwill has correctly never been impaired.

6. Each share carries one vote and the issued share capital of all entities in the group remained
unchanged since 1 January 20X20.

7. All the companies within the PlanIT Ltd Group have a 31 December year end.

23
 FAC3764/2023/Study pack 3
QUESTION 3 (continued)

REQUIRED

Marks
a) Prepare any correcting journal entries you deem necessary to correctly account for the 9
sale of inventory from PlanIT Ltd to Coco Ltd in the consolidated accounting records of
the PlanIT Ltd Group for the year ended 31 December 20X22.

b) Critically discuss the accuracy (accounts and amounts) of the pro forma at-acquisition 11
journal entry prepared by the new assistant to account for PlanIT’s investment in Wot Ltd
in the PlanIT Group’s financial statements.
Do NOT prepare any correcting journal.

c) Prepare only the asset section of the consolidated statement of financial position of the 15 ½
PlanIT Ltd Group for the year ended 31 December 20X22.

d) Prepare the “Investment in associate” note to the consolidated financial statements of 9½

the PlanIT Ltd Group as at 31 December 20X22.

The following information is not required:

 Unrecognised share of losses; and
 Risks relating to associates

e) Discuss the impact the sale transaction (selling 10% shares in Wot Ltd) on 5
31 December 20X22 will have on the PlanIT Group.
Your discussion should include the type of transaction it is and how the PlanIT Group will
account (include amounts) for this transaction in the 20X22 financial year.

Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Comparative figures to the consolidated financial statements are not required.
All calculations must be shown and all amounts must be rounded off to the nearest Rand.
50

24
 FAC3764/2023/Study pack 3
QUESTION 3: Suggested solution

a) Prepare any correcting journal entries you deem necessary to correctly account for the sale
of inventory from PlanIT Ltd to Coco Ltd in the consolidated accounting records of the
PlanIT Ltd Group for the year ended 31 December 20X22.

Debit Credit
R R
Revenue [120 000 + 42 000 (120 000 x 35%)] 162 000
Cost of sales [(42 000 + 33 600 (120 000 x 100 / 125 x 35%] 75 600
Investment in associate [78 000 + 8 400 (120 000 x 25 / 125 x 35%] 86 400

Deferred tax [21 060 + 2 268 (8 400 x 27%)] 23 328

Income tax expense 23 328

b) Critically discuss the accuracy (accounts and amounts) of the pro forma at-acquisition journal
entry prepared by the new assistant to account for PlanIT’s investment in Wot Ltd in the PlanIT
Group’s financial statements.

The share capital account has been correctly debited, however the amount is incorrect. The total share
capital amount of R200 000 should be debited instead and not only the % interest in the subsidiary.

The retained earnings account has been correctly debited, however the amount is incorrect. The
retained earnings balance at acquisition date, 1 January 20X22, of R1 010 011 should be used and not
the profit for the year.

Land has been incorrectly credited. Land was undervalued and should be debited. The amount of
R120 000 is incorrect. The amount should be R40 000.

Accounts receivable is incorrectly debited. It should be credited because accounts receivable was
overstated. The amount of R20 000 is correct.

The investment in Wot Ltd has been correctly credited but the amount is incorrect. The cash amount of
R150 000 is correct. The shares in Derm Ltd should be measured at its fair value of R4,00 and will
amount to R80 000. The equipment should be measured at its fair value of R900 000 and not the
carrying amount of R800 000.

The deferred tax rate used on Land is incorrect, the CGT rate of 21,6% should be used and it should be
calculated on the amount of R40 000. Deferred tax should be credited with R8 640. The tax rate used
to calculate the deferred tax on the overstated accounts receivable balance is correct. Deferred tax
should be debited with the amount of R5 400. This will result in a net deferred tax credit of R3 240.

Non-controlling interest has been omitted in the journal. NCI should be measured at its proportionate
share of 15% of the net assets of Wot Ltd. Non-controlling interest will amount to R184 016 ((R200 000
+ 1010 011 + 40 000 – 20 000 – 3 240) x 15%)).

25
 FAC3764/2023/Study pack 3
QUESTION 3 (continued)

c) Prepare only the asset section of the consolidated statement of financial position of the PlanIT
Ltd Group for the year ended 31 December 20X22.

PlanIT Ltd Group

Extract of the Consolidated Statement of financial position as at 31 December 20X22
R
ASSETS
Non-current assets
Property, plant and equipment (1 842 900 + 944 655) 2 787 555
Investment in associate C1 429 075
Goodwill C2 87 245

Current assets
Inventory (606 543 + 504 298) 1 110 841
Trade and other receivables (458 657 + 321 608) 780 265
Cash and cash equivalents (1 086 866 + 1 245 000) 2 331 866

Total assets

C1 – Investment in associate
Consideration 250 000
Gain on bargain purchase 37 485
Share capital 100 000
Retained earnings 545 205
Profit for the year – 3 months (704 725 x 3/12) 176 181
Total 821 386
x 35%
287 485
Profit for the year – 9 months (794 725 x 9/12 x 35%) 184 990
Intercompany sales (from Part A) (8 400)
Dividends paid (35 000)
429 075

C2 – Goodwill
Consideration 1 130 000
NCI (1 226 771 x 15%) 184 016
Net asset value 1 226 771
Share capital 200 000
Retained earnings 1 010 011
Land 40 000
Deferred tax (40 000 x 21,6%) (8 640)
Accounts receivable (20 000)
Deferred tax (20 000 x 27%) 5 400
87 245

26
 FAC3764/2023/Study pack 3
QUESTION 3 (continued)

d) Prepare the “Investment in associate” note to the consolidated financial statements of the
PlanIT Ltd Group as at 31 December 20X22.

PlanIT Ltd Group

Notes to the consolidated financial statements for the year ended 31 December 20X22

PlanIT Ltd has a 35% interest in the associate, CoCo Ltd, a company operating in the logistics industry.
CoCo Ltd is accounted for in accordance with the equity method. CoCo Ltd is incorporated in South
Africa and its principle place of business is in East London. CoCo Ltd acts as a transport agent for the
products of PlanIT Ltd.

1.1 Summarised financial information of CoCo Ltd

R
Non-current assets 756 311
Current assets 1 471 014
Total assets 2 227 325

Non-current liabilities 121 000

Current liabilities 856 395
Total liabilities 977 395

Revenue 1 825 253

Profit for the year 704 725
Total comprehensive income for the year 704 725

1.2 Reconciliation of the summarised financial information to the carrying amount of the
investment in associate.
R
Summarised financial information: Net assets as at 31 December 20X22
(2 227 325 – 977 395) 1 249 930
35% interest in the net asset value of the associate (1 249 930 x 35%) 437 475
Plus: Goodwill included in the cost price of investment -
Minus: Intercompany sales of inventory (8 400)
Carrying amount of investment in associate 429 075

1.3 Fair value of the investment in associate

The fair value of the investment in associate 295 000

e) Discuss the impact the sale transaction (selling 10% shares in Wot Ltd) on
31 December 20X22 will have on the PlanIT Group.

The sale transaction where PlanIT Ltd sold a portion of the shares to other shareholders did not result
in a loss of control.

IFRS 10 classifies these types of transactions as a transaction between equity owners of the subsidiary.

PlanIT Ltd would have recorded a profit on sale on the disposal of the shares of R32 000 [R145 000 –
R113 000 (R1 130 000 x 10%)] which will need to be reversed in the Group financial statements.

A group adjustment will need to be calculated between the group value equating 10% of the value of
Wot Ltd and the R145 000.

The group adjustment is not a profit but is recorded as an equity adjustment in a separate equity reserve.

27
 FAC3764/2023/Study pack 3
QUESTION 4 (41 MARKS) (74 MINUTES)

Snap Ltd (Snap) is a photography company that was established in the early 19X90’s. The company
specialises in events, portraits and fashion. The staff complement has grown over the years and Snap
has become a well-known name in the photography circles, both in South Africa and internationally. You
are assisting the reporting team to finalise the Snap Ltd Group (Snap Group) financial statements for
the year ended 30 September 20X21. The following companies are part of Snap’s portfolio.

Insta Ltd (Insta)

Snap holds 75% of the ordinary share capital in Insta. It acquired control of the entity in 20X16. Insta is
involved in digital printing. The company was established in the 20X00’s when the demand for
professional photography printing was increasing.

Shortly after acquisition, Insta started selling inventory to Snap. Insta charges a mark-up of 25% on cost
price. Total sales for the current year amounted to R978 000 (20X20: R789 500). On
30 September 20X21, Snap had inventory on hand purchased from Insta of R164 500 (20X20:
R255 000).

Insta wanted to expand its network and grow its footprint within the photography space. Insta
approached companies that are external to the Snap Group - LebeloF (Pty) Ltd (Lebelo) and Codak
(Pty) Ltd (Codak). They contractually agreed to have joint control over a newly formed company, TacTic
(Pty) Ltd (TacTic) which will oversee the marketing and brand awareness of the companies. TacTic is a
separate juristic person and registered as a company in terms of the Companies Act. The financial year
end was agreed to be 30 September 20X21.

All three parties manage TacTic and act collectively to direct the activities that significantly affect the
returns of the arrangement. All decisions about the relevant activities require the unanimous consent of
Insta, LebeloF and Codak. Any cash flow shortages of TacTic will be financed by the parties in
accordance with their ownership interest. TacTic will own all its assets and liabilities and none of the
three parties have rights to the residual interest of TicTac.

Each party paid R56 000 for a 33,3% share of the equity shares of TacTic. No gain on bargain purchase
nor goodwill arose from this transaction. Operations in TacTic began on 1 February 20X21. TacTic
incurred a loss of R66 500 for the period ended 30 September 20X21.

Gramalot Ltd (Gramalot)

Snap acquired a 48% interest in Gramalot on 1 April 20X21. At that date, Gramalot had a share capital
of R500 000. The purchase consideration of R1 600 000 will be settled in cash on 1 December 20X21.
The other two shareholders, Athi Quthing (AthiQ) and Khaya Noah hold a 20% and 32% interest,
respectively. Each share entitles the holder to one vote. Any decisions regarding the operating and
financial activities of Gramalot require majority vote.

AthiQ’s involvement in the entity is minimal due to her various commitments and she signed an
agreement on 28 May 20X21, with Snap, appointing Snap as her proxy for her vote for all shareholder
meetings as of 1 June 20X21. AthiQ is still entitled to her share of returns generated by Gramalot.

An assessment of Gramalot’s identifiable net assets was done by Snap on 1 April 20X21 and it revealed
the following:
 Land with a carrying amount of R750 000, had a fair value of R857 000.
 Office equipment with a carrying amount of R280 550, had a fair value of R328 500. The remaining
useful life of the office equipment was 5 years with a negligible residual value.

On 1 June 20X21, the fair value of the land had increased to R861 000, and the office equipment’s fair
value was now R317 550 with the carrying amount being R224 440.

28
 FAC3764/2023/Study pack 3
QUESTION 4 (continued)

Trial balance extracts

The trial balances for the year ending 30 September 20X21 of the companies within the Snap Group
have been prepared by the respective bookkeepers and accountants in each company and the extracts
are given below.

Snap Insta Gramalot

Dr / (Cr) Dr / (Cr) Dr / (Cr)
R R R
Profit before tax (4 575 000) (2 832 000) (1 750 000)
Tax expense (P/L) 1 268 750 873 360 512 500
Dividends declared - 27 September 20X21 750 000 550 000 265 000
Retained earnings - 1 October 20X20 (3 553 900) (2 954 000) (1 680 000)

Snap’s bookkeeper has provided some notes on the following transaction in Snap’s accounting records:

On 1 April 20X21, Snap issued a R1 000 000 6% convertible bonds to third parties external to the Snap
group. The bonds can be converted into a fixed number of ordinary shares of Snap at the option of the
bond holder on 31 March 20X24. The bookkeeper recognised the cash received and raised the liability
of R1 000 000. He also recognised interest expense of R30 000, which is included in other expenses.
Annual fair interest rates on similar bonds without the conversion option are as follows:

1 April 20X21 10%

30 September 20X21 9%

Additional information

1. The Snap Group applies the cost model on all its property, plant and equipment in terms of
IAS 16, Property, Plant and equipment.

2. The Snap Group measures its non-controlling interest at their proportionate share of the acquiree’s
identifiable net assets at the acquisition date.

3. Investments in subsidiaries, associates and joint ventures are measured at cost in Snap’s separate
financial statements.

4. You may assume a fair pre-tax interest rate of 7%, compounded annually.

5. The South African normal tax rate is 27% and the capital gains inclusion rate is 80%. You may
assume that both tax rates have remained unchanged since 1 January 20X16.

6. You may assume that profits have been earned evenly throughout the year.

7. The goodwill in Gramalot has never been impaired.

8. All the companies in the Snap Group have a 30 September year end.

29
 FAC3764/2023/Study pack 3
QUESTION 4 (continued)

REQUIRED

Marks
a) Discuss how the joint arrangement in TacTic should be classified in accordance with 5
IFRS 11, Joint Arrangements in the consolidated financial statements of the Snap Group.
Regardless of your answer in (a), you may assume that TacTic is a joint venture
for the remainder of the question.
b) Calculate the goodwill or gain from a bargain purchase amount that would arise on 13
acquisition of Gramalot by Snap for the year ended 30 September 20X21.
You may assume that Snap has control of Gramalot from 1 June 20X21.
c) Prepare the pro forma consolidation journal entries in respect of the intragroup 7
transaction between Snap and Insta that will be processed for the year ended
30 September 20X21.
d) Prepare an extract from the statement of profit or loss and other comprehensive income 15
of Snap Group for the year ended 30 September 20X21. Start your extract at the profit
before tax line item. You may ignore the attribution of profits between parent and non-
controlling interests.
Communication skills: Layout and presentation 1
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 FAC3764/2023/Study pack 3
QUESTION 4: Suggested solution

a) Discuss how the joint arrangement in TacTic should be classified in accordance with IFRS 11,
Joint Arrangements in the consolidated financial statements of the Snap Group.

The considerations for classifying a joint arrangement are as follows:

Is the joint arrangement structured through a separate vehicle?

The joint arrangement is structured through a separate vehicle. TacTic Ltd can be classified as either a
joint operation or a joint venture.

Does the legal form provide the parties with rights to the assets and obligations for the liabilities of the
arrangement?
TacTic Ltd is a company with its own legal person and as registered in the Companies Act, this would
imply that the assets and liabilities of TacTic Ltd are its own.

Does the contractual arrangement provide the parties with rights to the assets and obligations for the
liabilities of the arrangement?
The contractual arrangements do not modify the rights and obligations, determined by the legal form of
TicTac Ltd.

Do the parties obtain the output of assets of the arrangement? Is the arrangement dependent on cash
flows from the parties to finance its liabilities?
Insta, LebeloF, Codak will be financing the cash flow shortages of TicTac Ltd. Therefore they have rights
to all the economic benefits of the assets in TacTic Ltd and they are obligated to settle the liabilities and
Insta, LebeloF, Codak effectively have the obligation to fund the settlement of TicTac Ltd liabilities.

If we answered YES to any of the questions above, the arrangement will be classified as a joint
operation.

In conclusion, the arrangement is classified as a joint operation.

b) Calculate the goodwill or gain from a bargain purchase amount that would arise on acquisition of
Gramalot by Snap for the year ended 30 September 20X21.

R
Net asset value 3 159 994
Share capital 500 000
Retained earnings 1 680 000
8 months profit [(1 750 000 – 512 500) x 8/12] 825 000
Land (861 000 – 750 000) 111 000
Equipment (317 550 – 244 440) 93 110
Deferred tax [(111 000 x 27% x 80%) + (93 110 x 27%] (49 116)

Non-controlling interest (3 159 994 x 52%) 1 643 197

Purchase consideration (FV = 1 600 000; PMT = 0; I = 0.07; Comp PV)) 1 546 778

Goodwill 29 981

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 FAC3764/2023/Study pack 3
QUESTION 4 (Continued)

c) Prepare the pro forma consolidation journal entries in respect of the intragroup transaction between
Snap and Insta that will be processed for the year ended 30 September 20X21.

Dr Cr
R R
1. Retained earnings (51 000 x 73%) 37 230
Income tax expense (P/L) (51 000 x 27%) 13 770
Cost of sales (255 000 x 25 / 125) 51 000
Prior year unrealised profit on inventory realised in the current
year

2. Sales 978 000

Cost of sales 978 000
Elimination of total intragroup sales for the year

3. Cost of sales (164 500 x 25 / 125) 32 900

Inventory 32 900
Elimination of unrealised profit for the current year

4. Deferred tax (32 900 x 27%) 8 883

Income tax expense / Deferred tax (P/L) 8 883
Tax effect of eliminating unrealised profit for the current year

d) Prepare an extract from the statement of profit or loss and other comprehensive income of
Snap Group for the year ended 30 September 20X21.

Snap Ltd Group

Consolidated Statement of Profit or Loss for the year ended 30 September 20X21

R
Profit before tax (calc 1) 7 425 117
Income tax expense (calc 2) (2 316 097)
PROFIT FOR THE YEAR 5 109 021

Calculation 1 – Profit before tax

Given amounts
Snap Ltd 4 575 000
Insta Ltd 2 832 000
Gramalot Ltd (1 750 000 x 4/12) 583 333
TacTic (Joint Venture) (66 500 x 33,3%) (22 166)

Intercompany transactions
Prior year 51 000
Current year (32 900)

At acquisition adjustments
Additional depreciation on equipment (93 110 / 58 x 4) (6 421)

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 FAC3764/2023/Study pack 3

QUESTION 4 (Continued)

Correction of accounting for the convertible bond:

Interest reversed (incorrect accounting by bookkeeper) 30 000
Interest on bond (900 526 x 10% x 6/12) (45 028)
FV = R1 000 000
N=3
I = 10%
Pmt = R60 000
PV = R900 526

Elimination of intragroup dividends received

Insta Ltd (412 500)
Gramalot Ltd (127 200)
7 425 117

Calcualtion 2 – Tax expense

Snap Ltd 1 268 750
Insta Ltd 873 360
Gramalot Ltd (512 500 x 4/12) 170 833
Tax on prior year inventory (51 000 x 27%) 13 770
Tax on current year inventory (32 900 x 27%) (8 883)
Tax on depreciation (6 421 x 27%) (1 734)
2 316 097

©
Unisa 2023

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