POSTGRADUTE DIPLOMA IN ACCOUNTING

ACC4023W
SCENARIO
12 APRIL 2022

PLEASE READ THE FOLLOWING INSTRUCTIONS VERY CAREFULLY:

1. The paper is 80 marks.
2. This document includes only the Scenario. You will have 24 minutes reading time
for the Scenario, from the time that you are instructed to start. During the reading
time, you may only read and annotate the Scenario.
3. You will have access to the Required as a separate document. You may only read
the Required when you are instructed to do so. From then onward, you will have
120 minutes writing time.
4. Please ensure that only your exam number appears on your answer books.
5. Only a handwritten attempt will be accepted, complete your answer in blue or black
ink only.
6. This is a limited open book exam and you may only have the allowed texts in the
exam venue.
7. No questions relating to the content of this test paper will be answered.
8. Please ensure that you submit all answer books at the end of the exam.
9. You will be asked to scan and upload a copy of your answer via Vula at the end of
the exam. Please note the following regarding the submission:
Your solution:
a) The name of the file with your solution must be your exam number : For example, for
a student with an exam number of 1234, their submission will look as follows: 1234.pdf
b) Please submit one PDF file with your solutions for to the FR4 2022 Vula site.
c) It is your responsibility to ensure that after conversion, your submission is legible so it
may be marked appropriately.

Check on submission:
a) You should be uploading one PDF file before submitting.
b) You must submit before leaving the exam venue.

10. The test paper consists of 5 pages including the cover page and comprises 1
question.
All the best!

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 THE SCENARIO FOLLOWS ON PAGES 2 TO 5…/

QUESTION 1 (80 MARKS)

Whistler Ltd (“Whistler”) is a South African public company with a financial year ending 31
March. Whistler Ltd is a relatively diversified holding company, which holds investments in
various local, as well as offshore, companies. The primary business of the Whistler group is
providing financial services, investment services and related technology advice to other
companies.
In addition to the services that the Whistler group companies provide to its clients, Whistler
Ltd (i.e. the parent company) also owns various investments which they hold primarily for
capital growth and income (for example in listed shares and commodities etc.) over which they
do not have control nor significant influence. This part of the business is run by portfolio
managers who are Certified Financial Analysts (CFAs).
The group accountant of Whistler is currently preparing the Whistler group financial statements
for the 31 March 2022 financial year end, and needs your assistance in the preparation
thereof. The financial statements of the Whistler group, as well as all affiliated entities are
prepared in accordance with the International Financial Reporting Standards (“IFRS”).
Currently, the profit of the Whistler group is as follows for the financial years ended 31 March
2022 and 2021 respectively. The FY2021 comparatives are correct and complete and are from
the audited prior year financial statements. The FY2022 profit figure is still in progress, and
needs to be adjusted based on the incomplete issues listed below.

R’000 2022 2021

Whistler group consolidated profit after tax 94 000 67 000

This profit needs to be adjusted for the items below (including any related tax effects) where
relevant:

• The portfolio managers’ investments in palladium (note 1);

• Recognition of group profits of Clear Capital Ltd (the only amounts recognised are dividend
income which have been included as ‘other income’) (note 2);
• No profit has been recognised on the sale of shares in Clear Capital Ltd (note 2);
• Change in use of the Maitland building (note 3). The rental income is the only aspect that
has been correctly accounted for in the profit.

1. Investment in palladium
The portfolio managers who manage the investments for Whistler Ltd have been interested in
the platinum group metals for a long period of time. These metals include platinum and
palladium which are mined in a limited number of countries around the world, including South
Africa and Russia. These metals have a numbers of uses and they are critical for various
industrial uses, such a catalytic converters, laboratory equipment, electrical contacts and
electrodes, platinum resistance thermometers, dentistry equipment, and jewellery.
Currently, 42% of the world’s annual supply of palladium is mined in Russia (the highest in the
world) and 41% is mined in South Africa (the second highest in the world). Much of the world
has imposed sanctions on Russia following its invasion of Ukraine, and therefore the global
supply of palladium has been severely impacted. As such, the portfolio managers believe that

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the price of palladium is only going to increase over the long term and wanted to benefit from
this through an investment.
The portfolio managers have considered investing in palladium through an exchange-traded
fund (ETF), which is a fund structure listed in the JSE which holds, amongst other things,
physical metals. However, the portfolio managers decided against this idea due to the high
costs in the currently available ETF products and calculated that it would be better to buy the
physical palladium bars (each exactly 1 kilogram) directly from miners and store them in safe
storage. When the portfolio managers want to liquidate their investment, they will sell the
palladium through a commodity broker.
Palladium prices are quoted by financial news services such as Bloomberg and Reuters. This
price is the most recent known trade price between commodity brokers and excludes any
costs and fees associated with the trade.
On 15 February 2022 Whistler purchased 10 1-kilogram palladium bars directly from a miner
for $62 345 each (priced in US Dollars). 1-kilogram palladium bars had a quoted price of
$72 178 each on Bloomberg on 31 March 2022.

2. Clear Capital Ltd

Whistler Ltd owns an investment in Clear Capital Ltd, which forms part of the operations of the
Whistler group. The accountant has not yet accounted Whistler’s investment in Clear Capital
in the FY2022 consolidated group profit figure given above, except for the dividend income
received during 2022 by Whistler Ltd which has been included in the group profit, as it was
included in Whistler’s separate company profit or loss. The following information is relevant
for Whistler’s investment in Clear Capital:
1. Clear Capital Ltd is a company incorporated in Canada, with a functional currency of the
Canadian Dollar ($). Whistler Ltd acquired 75% of the shares in Clear Capital Ltd for R2.6
million on 1 April 2020.

2. On 1 April 2020, Clear Capital had equity balances of $300 000 recognised in its separate
financial statements. All assets and liabilities were considered fairly valued in the separate
financial statements. The non-controlling interest was measured at its fair value of
R800 000, and therefore, goodwill was correctly calculated to be $40 000 (in Canadian
Dollars).

3. Clear Capital earned profits after tax, correctly calculated, of $100 000 for the year ended
31 March 2021, and $80 000 up to 28 February 2022. A dividend of $40 000 was declared
and paid on 31 January 2022.

4. 26% of Clear Capital was sold for $160 000 on 28 February 2022, leaving a 49%
shareholding which is not considered to be a controlling interest. The fair value of the
remaining 49% shareholding was considered to be $320 000 at that date. The payment
for the sale of the shares is only going to be received from the buyer in cash on 31 May
2022.

5. During the month of March 2022, Clear Capital Ltd earned profit of $15 000 and
declared and paid a dividend (on 31 March) of $ 5 000.

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3. Maitland building

On 1 April 2018, Whistler Ltd purchased a building in Maitland, Cape Town for R10 million,
which it used for various administrative functions. The building had a 20-year useful life and
no residual value due to the future land use restrictions of the building site. These estimates
have never changed. SARS allowed a tax deduction of 5% per annum on the building.

On 31 March 2020, following the COVID-19 outbreak at the time, Whistler Ltd impaired the
building to its recoverable amount of R8 million. Whistler continued to occupy the building until
1 April 2021. On 1 April 2021, Whistler moved out of the building and began renting it to a third
party under an operating lease. The lease income has been correctly included in profit (the
only item related to the building to be included in the profit in FY2022).

The fair value of the building was R9.6 million on 1 April 2021 and R10.15 million on 31 March
2022. This fair value was calculated by a member of the Whistler accounting team by using a
discounted cash flow model taking into account the rental income that the building will earn,
as well as any related costs expected to be incurred over the useful life of the building. The
accountant assumed an increase in rental income of 5% per annum over the remaining useful
life of the building. The rental income and estimated rental income increases are market
related.

ADDITIONAL INFORMATION

• Assume all items of profit or loss are earned evenly unless otherwise stated.
• Whistler Ltd accounts for its investments in subsidiaries, joint ventures and associate
companies at cost in its separate financial statements.
• Whistler Ltd has had R1 million share capital in issue throughout the 2022 financial
year (being 1 million shares issued at R1 each).
• Other than amounts that are obvious from the information above, there are no other
equity balances in either the group or separate financial statements of Whistler Ltd.
• Buildings classified as property, plant and equipment are accounted for using the cost
model.
• Buildings classified as investment property are accounted for using the fair value
model.
• You can ignore the land when dealing with the Maitland building.
• The corporate tax rate in Canada is 25%. There are no reconciling items in the tax
charge of Clear Capital Ltd i.e. the effective tax rate is 25% of the pre-tax profit of
Canada. There is no dividends withholding tax in Canada. Assume that dividends
received from Canadian companies are taxed in South Africa at a rate of 20%.
• Assume a corporate tax rate of 28% and a capital gains inclusion rate of 80% has
always applied and always will apply (i.e. ignore any changes in tax rates actually
announced by the Minister of Finance).

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The following exchange rates applied:

Date 1 Canadian Dollar to

South African Rand
1 April 2020 R10.00
31 March 2021 R11.00
31 January 2022 R12.00
28 February 2022 R12.20
31 March 2022 R12.50
Average rates:
1 April 2020 – 31 March 2021 R10.60
1 April 2021 – 28 February 2022 R11.50
1 March 2022 – 31 March 2022 R12.40

Date 1 US Dollar to South

African Rand
15 February 2022 R15.20
31 March 2022 R14.75
Average rates:
15 February 2022 – 31 March 2022 R14.95