FAC4862/103/0/2023

NFA4862/103/0/2023
ZFA4862/103/0/2023

Tutorial Letter 103/0/2023

Advanced Financial Accounting II

FAC4862/NFA4862/ZFA4862

Year module

Department of Financial Governance

IMPORTANT INFORMATION

This tutorial letter contains important information

about the module.
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INDEX Page

Due date 3

Personnel and contact details 3

Prescribed method of study 3

Suggested working programme 3

United Nations Global Compact Principles 4

Learning unit 3 Consolidated and separate financial statements 5

4 Business combinations 29

5 Investments in associates and joint ventures 57

6 Disclosure of interests in other entities 66

Self-assessment questions and suggested solutions 70

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DUE DATE
DUE DATE FOR THIS TUTORIAL LETTER: 28 MARCH 2023

TEST 2 ON TUTORIAL LETTER 103: 25 APRIL 2023

PERSONNEL AND CONTACT DETAILS

Personnel Telephone
Number
Lecturers
Ms T Mahuma 012 429 6109
Ms S Aboobaker 012 429 6381
Mr H Combrink 012 429 4792
Mr P Masha 012 429 2022
Mr S Mlotshwa -
Ms A Oosthuizen 012 429 8971
Ms T van Mourik 012 429 3549
Ms C Wright 012 429 2004

Please send all e-mail queries to [email protected].

Please use the following telephone number to contact the lecturers: 012 429 4720

PRESCRIBED METHOD OF STUDY

1. First study the relevant chapter(s) in the prescribed textbook in order to master the basic principles and
then supplement this knowledge with the additional information provided in the learning units (where
applicable).

2. Read the standards and the interpretations covered by the learning units.

3. Do the questions in the study material and make sure you understand the principles dealt with in the
questions.

4. Consider whether you have achieved the specific outcomes of the learning units or not.

5. After completion of all the learning units, attempt the self-assessment questions (open book, but within
the time constraint) to test whether you have mastered the contents of this tutorial letter or not.

SUGGESTED WORKING PROGRAMME

MARCH 2023
WEDNESDAY THURSDAY FRIDAY SATURDAY SUNDAY MONDAY TUESDAY
22 23 24 25 26 27 28
Consolidated Business Investments in Disclosure of Do self- Do self- Do self-
and separate combinations associates interests in assessment assessment assessment
financial and joint other entities questions questions questions
statements ventures

MJM
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UNITED NATIONS GLOBAL COMPACT PRINCIPLES

INTRODUCTION

The United Nations Global Compact (UNGC) is underpinned by the principle of

corporate sustainability, which emphasises a value- and principle-based approach to
doing business.

The UNGC advocates ten principles based on four main values, namely, human rights,
labour practices, environmental concerns and anti-corruption.

A summary of the principles is provided in the table below.

OBJECTIVES/OUTCOMES

After you have engaged this topic, you should be able to demonstrate an awareness of
the importance of the UNGC principles.

This topic is not examinable, but you should have a sufficient awareness of the UNGC
principles and how they are applicable in practice.

Summary of the ten principles of the UNGC

Human rights 1. Businesses should support and respect the protection of

internationally proclaimed human rights; and
2. make sure that they are not complicit in human rights
abuses.
Labour 3. Businesses should uphold freedom of association and the
effective recognition of the right to collective bargaining;
4. the elimination of all forms of forced and compulsory labour;
Ten 5. the effective abolition of child labour; and
principles 6. the elimination of discrimination in respect of employment
and occupation.
Environment 7. Businesses should support a precautionary approach to
environmental challenges;
8. undertake initiatives to promote greater environmental
responsibility; and
9. encourage the development and diffusion of environmentally
friendly technologies.
Anti-corruption 10. Businesses should work against corruption in all its forms,
including extortion and bribery.

Source: Greenstone (2014)

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LEARNING UNIT 3: CONSOLIDATED AND SEPARATE FINANCIAL

STATEMENTS
INTRODUCTION

IAS 27 prescribes accounting and disclosure requirements in respect of accounting for

the cost of investments in the separate records of investors in the case of investments
in subsidiaries, joint ventures and associates.

IFRS 10 deals with the definition of control and establishes control as the basis for
consolidation. IFRS 10 also sets out how to apply the principle of control and outlines
the accounting requirements for the preparation of consolidated financial statements.
IFRS 10 deals with the principles that should be applied to a business combination
(including the elimination of intragroup transactions, consolidation procedures, etc) from
the date of acquisition until the date of loss of control.

OBJECTIVES/OUTCOMES

On completion of this learning unit, you should

1. be able to define “control” (IFRS 10, Appendix A, and IFRS 10.5–18);

2. be able to identify situations in which consolidated financial statements should be

presented and the scope of consolidated financial statements (IFRS 10.4);

3. be able to apply the consolidation procedure (IFRS 10.19–24 and IFRS 10.B86–
B96), which includes

3.1 eliminating the parent’s investment in the subsidiary;

3.2 accounting for non-controlling interests in the profit or loss of consolidated
subsidiaries;
3.3 accounting for non-controlling interests in the net assets of consolidated
subsidiaries;
3.4 eliminating intragroup balances, transactions, income and expenses;
3.5 using uniform accounting policies;
3.6 using the same end-of-reporting-period date; and
3.7 presenting non-controlling interests in the statement of financial position;

4. be able to account for a loss of control transaction (IFRS 10.25 and IFRS 10.B97–
B99) (assessed in learning unit 7);

5. be able to account for changes in ownership interest (assessed in learning unit 7);

6. be able to account for the cost of investments in subsidiaries, joint ventures and
associates in the separate financial statements of the investor (IAS 27.9, 27.10,
27.13 and 27.14) at cost (IAS 27.10(a));

7. be able to account for dividends from subsidiaries, joint ventures and associates
(IAS 27.12); and

8. know how to prepare disclosures in separate financial statements (IAS 27.15–17).

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PRESCRIBED STUDY MATERIAL

You must study the following sources before you attempt the questions in this learning
unit:

1. Group Statements, Volume 1, 18th edition – all chapters

2. Group Statements, Volume 2, 18th edition – chapters 10 and 17

3. IAS 27, Separate Financial Statements

4. IFRS 10, Consolidated Financial Statements

COMMENT

Please note that Group Statements, Volume 1, was covered thoroughly in your
undergraduate studies and therefore this tutorial letter only contains a revision of the
basic consolidation principles. It is very important that you revise these principles.

MJM
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THE REST OF LEARNING UNIT 3 IS BASED ON THE ASSUMPTION THAT YOU

HAVE ALREADY STUDIED THE RELEVANT PRESCRIBED STUDY MATERIAL.

SECTION A: SAICA’S PRINCIPLES OF EXAMINATION LEVELS

SAICA’s principles of examination levels provide guidance on how the standards (or topics within a
standard) will be examined.

The principles of examination levels for IAS 27 are as follows:

Description Paragraph Level Notes

Objective 1 Core
Scope 2–3 Core
Definitions 4–8 Core
8A Excluded Investment entity matters
Preparation of separate 9 Core Separate financial statements
financial
statements 10(a) Core Cost measurement
10(b) Excluded Fair value in separate AFS
10(c) Excluded Equity method in separate AFS
10E1 Core Cost measurement principles
11–11B Excluded Investment entity matters
12 Core Dividends received
13–14 Excluded Group reorganisations
Disclosure 15–17 Core Refer to learning unit 4
16A Excluded Investment entity matters
Effective date and transition 18–20 Excluded

The principles of examination levels for IFRS 10 are as follows:

Description Paragraph Level Notes

Objective 1 Core
2–3 Core Meeting the objective
Scope 4 Awareness
4A–4B Excluded
Control 5–9 Core
10–14 Core Power
15–16 Core Returns
17–18 Core Link between power and returns
Accounting requirements 19–21 Core
22–24 Core Non-controlling interests
25–26 Core Loss of control – refer to learning
unit 7
Vertical Awareness The parent’s subsidiary has an
groups investment in a subsidiary/
associate
Change in Depends Refer to learning unit 7
ownership
IFRS 5 – Excluded Subsidiaries acquired with a view
groups to resale and subsidiaries classified
as held for sale

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Description Paragraph Level Notes

Determining whether an 27–30 Excluded Investment entity
entity is an investment
entity
Investment entities: 31–33 Excluded Investment entity
exception to consolidation
Defined terms A Core
Application guidance B1 Core
B2–B8 Core Assessing control
B9–B10 Core Power
B11–B13 Core Relevant activities
B14–B28 Core Rights that give power
B29–B33 Core Franchises
B34–B50 Core Voting rights
B51–B54 Core Power when voting or similar rights
do not have a significant effect
B55–B57 Core Exposure to variable returns
B58–B72 Excluded Link between power and returns –
delegated power
B73–B75 Excluded Relationship with other parties
B76–B79 Excluded Control of specified assets
B80–B83 Core Continuous assessment
B84 Excluded Principal/agent
B85 Core Market conditions
B85A–B85W Excluded Investment entity
B86–B88 Core Accounting requirements
B89–B91 Core Potential voting rights
B92–B95 Core Reporting date
B96 Core Changes in proportion held by NCI
B97–B99 Core Loss of control – refer to learning
unit 7
B99A Excluded Loss of control – not a business
B100–B101 Excluded Investment entity

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EXAMPLE

The following example illustrates the basic consolidation process:

Investment in subsidiary accounted for at cost

P Ltd acquired a 100% interest in S Ltd for R200 000 on 1 January 20.13 when S Ltd’s share capital
and retained earnings amounted to R80 000 and R120 000 respectively.

Investments in subsidiaries are accounted for at cost in terms of IAS 27.10(a).

Parent (P) Subsidiary (S) Total Pro Consolidated financial

Separate financial Financial statements forma statements
statements journals (P + S)

R’000 R’000 R’000 R’000 R’000

Assets Assets Assets
Investment in S Ltd Investment in
(cost) 200 Investments – 200 (200) S Ltd (cost) –
Trade debtors 100 Trade debtors 280 380 Trade debtors 380

Equity Equity Equity

Share capital (50) Share capital (80) (130) 80 Share capital (50)
Retained earnings (150 Retained earnings (150 (300) 120 Retained (180)
) ) earnings

Liabilities Liabilities Liabilities

Long-term loan (100 Long-term loan (50) (150) Long-term loan (150)
)
Note 1 Note 2 Note 3

Notes
1. When a parent prepares separate financial statements, it accounts for investments in
subsidiaries at cost. Separate financial statements are prepared by the parent and presented
in addition to the consolidated financial statements.

2. Broadly speaking, the first step in preparing consolidated financial statements is to combine
the financial statements of the parent and the subsidiaries (i.e., 100% of each line item of a
subsidiary is added to each line item of the parent).

3. Pro forma journals are prepared for consolidation purposes only and are not recognised in
the individual records of either the parent or a subsidiary. The pro forma journals eliminate
common balances. The only two common items in this case are the investment in the
subsidiary on the statement of financial position of the parent (P) and the portion of the equity
of the subsidiary (S) held by the parent. The investment held by the parent in the subsidiary is
therefore set off against the equity of the subsidiary, as follows:

Dr Cr
R’000 R’000
Share capital (SCE) 80
Retained earnings (SCE) 120
Investment in S Ltd (SFP) 200
At acquisition elimination journal

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SECTION B: QUESTIONS ON CONSOLIDATED AND SEPARATE

FINANCIAL STATEMENTS
QUESTION 3.1 (103 marks – 155 minutes)

The following trial balances of Bonn Ltd, Sydney Ltd and York Ltd are provided for the year ended
31 December 20.12:

Bonn Sydney York

Ltd Ltd Ltd
R R R
Credits

Share capital – 40 000 ordinary shares (one share, one vote) 48 000 - -
– 36 000 ordinary shares (one share, one vote) - 48 000 -
– 24 000 ordinary shares (one share, one vote) - - 24 000
Retained earnings – 1 January 20.12 216 000 68 300 40 800
Deferred tax 2 240 - -
Revenue 165 000 124 000 148 000
Other income 24 000 6 300 -
Long-term borrowings 25 510 40 600 4 000
480 750 287 200 216 800
Debits

Property, plant and equipment 237 000 82 000 72 500

Investments – Sydney Ltd 65 000 - -
– York Ltd - 35 000 -
Loan to York Ltd (interest free) 4 000 - -
Cost of sales 60 000 88 000 70 000
Finance costs 2 500 2 000 5 000
Other expenses 15 000 20 000 22 000
Dividends paid – ordinary 6 000 5 000 9 000
Income tax expense 26 250 4 200 14 280
Trade receivables 32 000 14 000 8 000
Inventories 33 000 37 000 16 020
480 750 287 200 216 800

Additional information

1. Bonn Ltd acquired an 80% interest in Sydney Ltd on 1 July 20.11 and paid R65 000 in cash
for the investment. From this date Bonn Ltd had control over Sydney Ltd as per the definition
of control in terms of IFRS 10, Consolidated Financial Statements. At that date the equity of
Sydney Ltd was as follows:

Share capital (36 000 ordinary shares) 48 000

Retained earnings 11 000

All the assets and liabilities of Sydney Ltd were fairly valued at the acquisition date and no
additional assets, liabilities or contingent liabilities were identified.

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2. Bonn Ltd acquired a 70% interest in York Ltd on 1 January 20.12 and paid R35 000 for the
investment. From this date Bonn Ltd had control over York Ltd as per the definition of control
in terms of IFRS 10, Consolidated Financial Statements. On the date of acquisition the fair
value of the assets and liabilities of York Ltd was as follows:

Carrying Fair
amount value
R R

Property, plant and equipment 45 000 45 000

Inventories 25 000 20 000
Trade receivables 18 000 8 000

No additional assets, liabilities or contingent liabilities were identified at the acquisition date.

3. Bonn Ltd sold machinery to Sydney Ltd for R45 000 on 1 July 20.12. The sale was made at
cost plus 20%. Sydney Ltd depreciates machinery at 20% per annum on the straight-line
method. This is the same policy that is used by the South African Revenue Service (SARS).

4. At 31 December 20.12 the directors of Bonn Ltd determined that the goodwill of Sydney Ltd
had been impaired by R10 000.

5. Assume a current tax rate of 27% and a capital gains tax (CGT) inclusion rate of 80%. Ignore
value added tax (VAT) and dividend tax.

6. Investments in subsidiaries are accounted for at cost in accordance with IAS 27.10(a).

7. The acquisitions of all the companies also met the definition of the acquisition of a business
in terms of IFRS 3 Business Combinations.

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REQUIRED
Marks
PART I

Prepare the following for the Bonn Ltd Group for the year ended 31 December 20.12:

(a) consolidation journals 50

(b) consolidated financial statements 38

Communication skills: presentation and layout 2

Assume that the group elected to measure non-controlling interests at the proportionate
share of the identifiable net assets at the acquisition date.

PART II

Assume that the group elected to measure the non-controlling interests of Sydney Ltd at
fair value at the acquisition date.

The fair value of the non-controlling interests of Sydney Ltd was determined at R15 200
at the acquisition date.

Prepare the following for the Bonn Ltd Group for the year ended 31 December 20.12:

(a) the at acquisition (1 July 20.11) consolidation journal to eliminate owner’s equity 4
(b) the “assets” section of the consolidated statement of financial position 8

Please note:

• Notes to the consolidated financial statements are not required.

• Comparative figures are not required.
• Round off all amounts to the nearest rand.
• Your answer must comply with International Financial Reporting Standards (IFRSs.

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QUESTION 3.1: SUGGESTED SOLUTION

PART I

BONN LTD GROUP

(a) Pro forma consolidation journals

Dr Cr
R R

J1 Share capital (SCE) 48 000

Retained earnings (SCE) 11 000
Goodwill (SFP) (balancing) 17 800f (1)
Non-controlling interests (SFP/SCE) [(48 000 + 11 000) x 20%] 11 800 (3)
Investment in Sydney Ltd (SFP) 65 000 (1)
Elimination of owner’s equity at acquisition
J2 Retained earnings (SCE) [(68 300 – 11 000) x 20%] 11 460 (2)
Non-controlling interests (SFP/SCE) 11 460 (1)
Non-controlling interests in retained earnings since acquisition
J3 Other income (P/L) (45 000 x 20/120) 7 500 (2)
Property, plant and equipment (SFP) 7 500 (1)
Deferred tax (SFP) (7 500 x 27%) 2 025 (1)
Income tax expense (P/L) 2 025 (1)
Accumulated depreciation (SFP) (7 500/5 x 6/12) 750 (2)
Depreciation (P/L) 750 (1)
Income tax expense (P/L) (750 x 27%) 203 (1)
Deferred tax (SFP) 203 (1)
Recording of intragroup sale of equipment [C1]
J4 Non-controlling interests (P/L) (16 100 [C5] x 20%) 3 220 (4)
Non-controlling interests (SFP/SCE) 3 220 (1)
Non-controlling interests in profit for the current year
J5 Dividend received (P/L) (5 000 x 80%) 4 000 (1)
Non-controlling interests (SFP/SCE) (5 000 x 20%) 1 000 (1)
Dividend paid (SCE) (Sydney Ltd) 5 000 (1)
Elimination of intragroup dividends and recording of non-
controlling interests therein
J6 Long-term borrowings (SFP) 4 000 (1)
Loan to York Ltd (SFP) 4 000 (1)
Elimination of intragroup loans
J7 Other expenses (impairment of goodwill) (P/L) 10 000 (1)
Accumulated impairment losses (SFP) (see comment below) 10 000g (1)
Impairment of Sydney Ltd’s goodwill at 31 December 20.12

COMMENT

Please refer to the relevant chapter in Group Statements for more examples on how to
eliminate intragroup transactions. The elimination adjustments required will be the same
for each respective scenario in the test or the examination.

Remember that if the subsidiary is the selling entity (the subsidiary sells to the parent,
investor or associate), the elimination of the unrealised profit will also affect the share of
profit of non-controlling interests.

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Dr Cr
R R
J8 Share capital (SCE) 24 000
Retained earnings (SCE) (given) 40 800
Inventory (SFP) (25 000 – 20 000) 5 000 (1)
Trade receivables (SFP) (18 000 – 8 000) 10 000 (1)
Deferred tax (SFP) [(5 000 + 10 000) x 27%] 4 050 (2)
Non-controlling interests (SFP/SCE) [C3] 16 155 (3)
Gain from bargain purchase (P/L) 2 695a (1)
Investment in York Ltd (SFP) 35 000 (1)
Elimination of owner’s equity at acquisition
J9 Inventory (SFP) 5 000 (1)
Cost of sales (P/L) 5 000 (1)
Trade receivables (SFP) 10 000 (1)
Other expenses [C2] (P/L) 10 000 (1)
Reversal of fair value adjustments at acquisition (see comment
below)
J10 Income tax expense (P/L) [(5 000 + 10 000) x 27%] 4 050 (1)
Deferred tax (SFP) 4 050 (1)
Tax effect of reversal of fair value adjustments at acquisition
J11 Non-controlling interests (P/L) 14 301 (5)
Non-controlling interests (SFP/SCE) 14 301 (1)
Non-controlling interests in profit for the current year
[(148 000 – 70 000 + 5 000 [C2]) – 5 000 – 22 000 + 10 000 [C2]
– 14 280 – 4 050 [C2]) x 30%]
J12 Dividend received (P/L) (9 000 x 70%) 6 300 (1)
Non-controlling interests (SFP/SCE) (9 000 x 30%) 2 700 (1)
Dividend paid (SCE) (York Ltd) 9 000 (1)
Elimination of intragroup dividends and recording of the non-
controlling interests therein
Total (54)
Maximum (50)
Communication skills: presentation and layout (1)

COMMENT

Journal 7
When NCI is measured at the proportionate share of the identifiable net assets, it will
not share in impairment losses relating to goodwill.

Journal 8
When an acquirer obtains control over an acquiree, the acquirer must measure the
identifiable assets acquired and the liabilities assumed at their acquisition-date fair
values.

Journal 9
The inventory and trade receivables of York Ltd were remeasured to their fair value at
the acquisition date (1 January 20.12) in journal 8.

Inventory and trade receivables are both current assets, which means it can be
assumed that the inventory will be sold within the next 12 months and the trade
receivables will be recovered within the next 12 months. The fair value adjustments
recognised at the acquisition date in journal 8 will have to be reversed at year end
since it is assumed that both the inventory and the trade receivables have realised
after acquisition in the subsidiary’s financial statements. This reversal is done in journal
9, and the tax implication is recorded in journal 10.

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The following trial balances indicate the consolidation process. The first step is to add the trial
balances of Bonn Ltd (A), Sydney Ltd (B) and York Ltd (C) together line by line to form a combined
trial balance (D). The principles of IFRS 10 are now applied, through the processing of pro forma
journals (E), to finalise the consolidated trial balance (F). This is the trial balance that is used to
prepare the consolidated financial statements. The entities now form one economic entity, which
cannot have multiple share capitals, investments in itself or transactions with itself, and these are
eliminated through pro forma journals. Furthermore, there is no goodwill or non-controlling interests
in the combined trial balance that must be recognised, through a pro forma journal, in the
consolidated financial statements.

A B C D E F
Consoli-
Combined Pro dated
Bonn Sydney York trial forma trial
Ltd Ltd Ltd balance journals balance
R R R R R R
Credits
Share capital 48 000 48 000 24 000 120 000 (72 000) 48 000
Retained earnings – 1 Jan 20.12 216 000 68 300 40 800 325 100 (63 260) 261 840
Deferred tax 2 240 - - 2 240 (1 822) 418
Revenue 165 000 124 000 148 000 437 000 - 437 000
Other income 24 000 6 300 - 30 300 (15 105) 15 195
Long-term borrowings 25 510 40 600 4 000 70 110 (4 000) 66 110
Non-controlling interests (SCE) - - - - 53 236 53 236
480 750 287 200 216 800 984 750 (102 951) 881 799
Debits
Property, plant and equipment 237 000 82 000 72 500 391 500 (6 750) 384 750
Goodwill - - - - 7 800 7 800
Investments – Sydney Ltd 65 000 - - 65 000 (65 000) -
– York Ltd - 35 000 - 35 000 (35 000) -
Loan to York Ltd (interest free) 4 000 - - 4 000 (4 000) -
Cost of sales 60 000 88 000 70 000 218 000 (5 000) 213 000
Finance costs 2 500 2 000 5 000 9 500 - 9 500
Other expenses 15 000 20 000 22 000 57 000 (750) 56 250
Dividends paid – ordinary 6 000 5 000 9 000 20 000 (14 000) 6 000
Income tax expense 26 250 4 200 14 280 44 730 2 228 46 958
Trade receivables 32 000 14 000 8 000 54 000 - 54 000
Inventories 33 000 37 000 16 020 86 020 - 86 020
Non-controlling interests (P/L) - - - - 17 521 17 521
480 750 287 200 216 800 984 750 (102 951) 881 799

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COMMENT

There are two non-controlling interests in the consolidated trial balance because the
profit or loss items of the subsidiaries were included 100% but the parent is not entitled
to 100%. The non-controlling interest share is indicated as a debit that only leaves the
profit after tax attributable to the parent. This can be compared with the retained
earnings of R364 806 (opening balance of R261 840, plus profit attributable to the
parent in the statement of profit or loss section in the amount of R108 966, less
dividends paid by the parent in the amount of R6 000) in the statement of financial
position. The allocation of the share of profits of non-controlling interests is as follows:
Dr Cr
R R
Non-controlling interests (P/L) 17 521
Non-controlling interests (SCE/SFP) 17 521

The consolidated trial balance is now used to prepare the consolidated financial
statements in (b).

(b) Consolidated financial statements

BONN LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.12

R
ASSETS
Non-current assets
Property, plant and equipment
(237 000 + 82 000 + 72 500 – 7 500[C1] + 750[C1]) 384 750 (3)
Goodwill (17 800f – 10 000g) 7 800 (2)
392 550
Current assets
Inventories (33 000 + 37 000 + 16 020) 86 020 (3)
Trade receivables (32 000 + 14 000 + 8 000) 54 000 (3)
140 020
Total assets 532 570

EQUITY AND LIABILITIES

Equity attributable to owners of the parent
Share capital 48 000 (1)
Retained earnings 364 806 (3)
412 806
Non-controlling interests (27 756e + 25 480l) 53 236 (2)
Total equity 466 042

Non-current liabilities
Long-term borrowings (25 510 + 40 600 + 4 000(interco loan) – 4 000 (J6)) 66 110 (2)
Deferred tax (2 240 (given) – 2 025 [C1] + 203 [C1] – 4 050 [C2] + 4 050 [C2]) 418 (1)
Total liabilities 66 528
Total equity and liabilities 532 570
Total (20)
Maximum (16)

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BONN LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.12
R

Revenue (165 000 + 124 000 + 148 000) 437 000 (1)
Cost of sales (60 000 + 88 000 + 70 000 – 5 000 ([C2] or (J9)) (213 000) (2)
Gross profit 224 000
Other income (24 000 + 6 300 – 4 000 (div)(J5) – 6 300 (div)(J12) – 7 500[C1] +
2 695a) 15 195 (4)
Other expenses (15 000 + 20 000 + 22 000 + 10 000g – 750 [C1] – 10 000 (J9)) (56 250) (3)
Finance costs (2 500 + 2 000 + 5 000) (9 500) (1)
Profit before tax 173 445
Income tax expense (26 250 + 4 200 + 14 280 – 2 025 [C1] + 203 [C1] + 4 050
([C2] or (J10)) (46 958) (4)
PROFIT FOR THE YEAR 126 487
Other comprehensive income for the year, net of tax –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 126 487
Profit attributable to:
Owners of the parent (126 487 – 17 521) 108 966 (1)
Non-controlling interests (3 220j + 14 301c) 17 521 (1)
126 487
Total comprehensive income attributable to:
Owners of the parent (126 487 – 17 521) 108 966
Non-controlling interests (3 220j + 14 301c) 17 521
126 487
(17)

BONN LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.12
Non-
Share Retained controlling Total
capital earnings Total interests equity
R R R R R

Balance at 1 January 20.12 48 000 261 8401 309 840 23 2602 333 100 (3½)
Changes in equity for 20.12
Acquisition of subsidiary - - - 16 155b 16 155 (1)
Total comprehensive income
for the year
Profit for the year - 108 966 108 966 17 521 126 487
Dividends paid (R0,15 per share) - (6 000) (6 000) (3 700)3 (9 700) (1½)
Balance at 31 December 20.12 48 000 364 806 412 806 53 236 466 042 (6)
Communication skills: presentation and layout (2)

1
216 000 + 45 840h = 261 840 or 216 000 + ((68 300 – 11 000) x 80%) = 261 840
2
23 260i or 11 800 (J1) + 11 460 (J2) = 23 260
3
2 700d + 1 000k = 3 700

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CALCULATIONS

C1. Sale of machinery

Intragroup profit
Selling price 45 000
Intragroup profit (45 000 x 20/120) 7 500
Tax effect @ 27% 2 025
Depreciation
7 500/5 years x 6/12 750
Tax effect @ 27% 203

COMMENT

If the subsidiary was the selling entity, the intragroup profit would have been recorded
in its separate financial statements. The elimination of the unrealised profit at year end
would therefore affect the profit of the subsidiary. The net effect of the elimination of
R4 860 (7 500 – 2 025 – 750 + 203) would therefore also need to be taken into account
in the calculation of profit attributable to non-controlling interests in (J4).

C2. Fair value adjustment

Profit before Fair value Profit for
York Ltd adjustments adjustments the year
Revenue 148 000 – 148 000
Cost of sales (70 000) 5 000 1 (65 000)
Finance costs (5 000) – (5 000)
Other expenses (22 000) 10 000 2 (12 000)
51 000 15 000 66 000
Income tax expense (14 280) (4 050)3 (18 330)
36 720 10 950 47 670
1
25 000 – 20 000 = 5 000 (J9)
2
18 000 – 8 000 = 10 000 (J9)
3
15 000 x 27% = 4 050 (J10) OR 1 350 +2 700

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C3. Analysis of the owner’s equity of York Ltd

Bonn Ltd
Total 70% NCI
At Since
At acquisition
Share capital 24 000
Retained earnings
(40 800 – 5 000 (inventory) + 1 350 (tax) –
10 000 (trade receivables) + 2 700 (tax)) 29 850
b
53 850 37 695 16 155
a
Equity represented by gain on bargain purchase (2 695) (2 695) -
Consideration and NCI 51 155 35 000 16 155
Since acquisition
Current year
Profit for the year before realisation of IFRS 3
adjustments at acquisition [C2] 36 720
Subsequent reversal of IFRS 3 adjustments at
consolidation when assets realised by
subsidiary [C2] 10 950
c
Profit for the year 47 670 33 369 14 301
d
Dividend paid (9 000) (6 300) (2 700)
89 825 27 069 27 756

C4. Proof of goodwill of York Ltd (IFRS 3.32)

Consideration transferred at acquisition date 35 000

Fair value of non-controlling interests
((24 000 + 40 800 – 5 000 – 10 000 + 1 350 + 2 700) x 30%) OR [C3] 16 155
Acquisition-date fair value of previously held equity
51 155
Net amount of identifiable assets acquired and liabilities assumed at acquisition
date (24 000 + 40 800 – 5 000 – 10 000 + 1 350 + 2 700) OR [C3] (53 850)
Gain on bargain purchase (2 695)

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C5. Analysis of the owner’s equity of Sydney Ltd

Bonn Ltd
Total 80% NCI
At Since
At acquisition
Share capital 48 000
Retained earnings 11 000
59 000 47 200 11 800
Equity represented by goodwill 17 800 17 800f –
Consideration and NCI 76 800 65 000 11 800

Since acquisition
Retained earnings (68 300 – 11 000) 57 300 45 840h 11 460
23 260і
Current year
Profit for the year1 16 100 12 880 3 220j
Dividend (5 000) (4 000) (1 000)k
Impairment of goodwill (10 000) (10 000)g –
135 200 44 720 25 480l

1
Profit for the year
Revenue 124 000
Other income 6 300
Cost of sales (88 000)
Finance costs (2 000)
Other expenses (20 000)
20 300
Income tax expense (4 200)
16 100

C6. Proof of goodwill of Sydney Ltd (IFRS 3.32)

Consideration transferred at acquisition date 65 000

Fair value of remaining non-controlling interests ((48 000 + 11 000) x 20%) 11 800
Acquisition-date fair value of previously held equity –
76 800
Net amount of identifiable assets acquired, and liabilities assumed at acquisition
date (48 000 + 11 000) (59 000)
Goodwill 17 800
Impairment at 31 December 20.12 (10 000)
7 800

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PART II

(a) Pro forma consolidation journal

Dr Cr
R R
J1 Share capital (SCE) 48 000
Retained earnings (SCE) 11 000
Goodwill (SFP) (balancing) 21 200 (1)
Non-controlling interests (SFP/SCE) 15 200 (2)
Investment in Sydney Ltd (SFP) 65 000 (1)
Elimination of owners’ equity at acquisition
(4)

COMMENT

When NCI is measured at fair value, it will share in impairment losses relating to
goodwill.

All the journals for when NCI is measured at fair value (Part II) and for when NCI is
measured at its proportionate share of the identifiable net assets (Part I) are the same,
but J8 and J2 differ from Part I in Part II. Compare the journal above with J2 in Part I (a).
Note that NCI is measured differently in Part II compared to Part I. Therefore, the amount
of goodwill recognised in Part II will differ from the amount of goodwill recognised in
Part I.

COMMENT

If all pro forma journals were required in Part II, the impairment of goodwill journal (J7 in
Part I) would be as follows:
Dr Cr
R R
Other expenses (impairment of goodwill) (P/L) 10 000
Accumulated impairment losses (SFP) 10 000
Non-controlling interests (SFP/SCE) 2 000
Non-controlling interests (P/L) 2 000
Impairment of Sydney Ltd’s goodwill at
31 December 20.12

The impairment loss allocated to NCI would be in the profit-sharing ratio, that is, 20% x
R10 000.

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(b) Asset section of the statement of financial position

BONN LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.12

R
ASSETS
Non-current assets
Property, plant and equipment
(237 000 + 82 000 + 72 500 – 7 500[C1] + 750[C1]) 384 750 (3)
Goodwill (21 200 – 10 000 (impairment)) 11 200 (3)
395 950
Current assets
Inventories (33 000 + 37 000 + 16 020) 86 020 (2)
Trade receivables (32 000 + 14 000 + 8 000) 54 000 (2)
140 020
Total assets 535 970
Total (10)
Maximum (8)

CALCULATIONS

C1. Analysis of the owner’s equity of Sydney Ltd

Bonn Ltd
Total 80% NCI
At Since
At acquisition
Share capital 48 000
Retained earnings 11 000
59 000 47 200 11 800
Equity represented by goodwill 21 200 17 800f 3 400
Consideration and NCI 80 200 65 000 15 200

Since acquisition
Retained earnings (68 300 – 11 000) 57 300 45 840 11 460

Current year
Profit for the year 16 100 12 880 3 220
Dividend (5 000) (4 000) (1 000)
Impairment of goodwill (10 000) (8 000) (2 000)
138 600 46 720 26 880

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C2. Proof of goodwill of Sydney Ltd (IFRS 3.32)

Consideration transferred at acquisition date 65 000

Fair value of remaining non-controlling interests (given) 15 200
Acquisition date fair value of previously held equity -
80 200
Net amount of identifiable assets acquired and liabilities assumed at acquisition
date (48 000 + 11 000) (59 000)
Goodwill 21 200
Impairment at 31 December 20.12 (10 000)
11 200

EXAMINATION TECHNIQUE

The proof of goodwill calculation is only provided for the sake of completeness and
should not be prepared if an analysis of owner’s equity is also prepared. The proof of
goodwill calculation is a duplication of the “at acquisition” section of the analysis of
owner’s equity. Therefore, only one of the two calculations should be used.

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QUESTION 3.2 (34 marks – 51 minutes)

Beach Holidays Ltd acquired 75% of R&R Ltd’s ordinary share capital for R1 300 000 on
1 March 20.11. Beach Holidays Ltd sells holiday time share and R&R Ltd sells holiday apartments
in the Bloubergstrand area. The acquisition of R&R Ltd also met the definition of the acquisition of
a business in terms of IFRS 3 Business Combinations.

The trial balance of R&R Ltd on the date of acquisition was as follows:

Carrying Fair
value value
R R
Inventory – holiday apartments 960 000 1 030 000
Office building 750 000 750 000
Trade and other receivables 340 000 340 000
Bank 160 000 160 000
Ordinary share capital (200 000) (200 000)
10% preference share capital (150 000) (150 000)
Retained earnings (1 250 000) (1 250 000)
Long-term loan (520 000) (520 000)
Trade and other payables (90 000) (90 000)

Additional information

1. R&R Ltd’s assets and liabilities, with the exception of inventory, were fairly valued on the date
of acquisition. No adjustments were made in the separate statements of R&R Ltd.

2. As at 30 September 20.11, 65% of the inventory acquired had been sold. You can assume
that no inventory was sold during the current year.

3. Both companies have a 30 September 20.12 financial year end.

4. The retained earnings of R&R Ltd increased by R180 000 from acquisition until the beginning
of the year. The current financial year presented a profit of R220 000, and a dividend of
R180 000 was declared and paid.

5. Beach Holidays Ltd also acquired 80% of R&R Ltd’s non-redeemable cumulative preference
share capital at acquisition for R130 000. R&R Ltd is obliged to pay a preference dividend for
a financial year if an ordinary dividend is declared in the financial year. The preference shares
were correctly classified as equity. All the preference dividends were declared and paid.
Should R&R Ltd be liquidated, Beach Holidays Ltd will be entitled to receive a proportionate
share of the assets available for distribution. The holders of the preference shares have equal
rights and ranking to the holders of ordinary shares in the event of liquidation.

6. R&R Ltd issued R100 000 in debentures to Beach Holidays Ltd on 1 May 20.12 at a premium
of 5%. The debentures are redeemable on 30 April 20.17 at the nominal value. A payment of
R12 000 is made annually on 30 April.

7. Assume a current tax rate of 27% and a capital gains tax (CGT) inclusion rate of 80%.
Ignore value added tax (VAT) and dividend tax.

8. Beach Holidays Ltd has elected to measure non-controlling interests at their proportionate
share of the identifiable net assets at the acquisition date.

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REQUIRED
Marks
Prepare the pro forma consolidation journal entries for the Beach Holidays Ltd Group for 33
the year ended 30 September 20.12.

Communication skills: presentation and layout 1

Please note:

• Journal narrations are required.

• Your answer must comply with International Financial Reporting Standards(IFRSs).

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QUESTION 3.2: SUGGESTED SOLUTION

Pro forma consolidation journal entries

Dr Cr
R R
J1 Ordinary share capital (SCE) 200 000
Preference share capital (SCE) 150 000
Retained earnings (SCE) 1 250 000
Inventory (SFP) (1 030 000 – 960 000) 70 000 (2)
Investment in R&R Ltd (SFP)
(1 300 000 + 130 000) 1 430 000 (2)
Non-controlling interests (SFP/SCE)
(375 275 [C1] + 30 000 [C2]) 405 275 (5)
Deferred tax liability (SFP) 18 900 (1)
Goodwill (SFP) (174 175 [C1] + 10 000 [C2]) 184 175 (2)
Elimination of owner’s equity in R&R Ltd on acquisition
date
J2 Retained earnings (SCE) (70 000 x 65%) 45 500 (1)
Inventory (SFP) (see comment box below) 45 500 (1)
Account for inventory sold in the previous year
J3 Deferred tax (SFP) (45 500 x 27%) 12 285 (1)
Retained earnings (SCE) 12 285 (1)
Taxation on inventory sold in previous year
J4 Retained earnings (SCE) 36 696 (1)
Non-controlling interests (SFP/SCE) [C1] or
[(180 000 – (70 000 x 73% x 65%)) x 25%] 36 696 (2)
Recognition of non-controlling interests in the since
acquisition earnings until the beginning of the current
reporting period
J5 Non-controlling interests (P/L) (51 250 [C1] +3 000[C2]) 54 250 (2)
Non-controlling interests (SFP/SCE) 54 250 (1)
Recognition of the non-controlling interests in the profit
for the year
J6 Dividends received (Beach Holidays) (P/L)
(135 000 [C1] + 12 000 [C2]) 147 000 (2)
Non-controlling interests (SFP/SCE)
(45 000 [C1] + 3 000 [C2]) 48 000 (2)
Dividends paid (R&R) (SCE) (180 000 + 15 000) 195 000 (2)
Elimination of intragroup dividend and accounting of
non-controlling interests’ portion of dividend
J7 Interest received (P/L) (Beach Holidays) [C3] 4 663 (3)
Finance charges (P/L) (R&R) 4 663 (1)
Elimination of interest on intragroup debentures
J8 Debenture liability (SFP) (R&R) [C3] 109 663 (2)
Investment in debentures (SFP) (Beach Holidays) 109 663 (1)
Elimination of intragroup debentures
Total (35)
Maximum (33)
Communication skills: presentation and layout (1)

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COMMENT

Journal 2

Sixty-five per cent of the inventory that had been measured at its fair value on the
acquisition date of 1 March 20.11 was sold at 30 September 20.11. Therefore, 65% of
the fair value adjustment will be realised in retained earnings. If the question was silent
on the percentage of inventory sold, you should have assumed that 100% was sold in
the subsequent financial year since inventory is a current asset and current assets will
realise within 12 months.

CALCULATIONS

C1. Analysis of owner’s equity of R&R Ltd – ordinary share capital

Beach Holidays
Total 75% NCI
At Since
At acquisition
Ordinary share capital 200 000
Retained earnings 1 250 000
Inventory adjustment – taken to
retained earnings 70 000
Deferred tax (18 900)
1 501 100 1 125 825 375 275
Equity represented by goodwill 174 175 174 175 - [3]
Consideration and NCI 1 675 275 1 300 000 375 275
Since acquisition
Retained earnings [180 000 –
(70 000 x 73% x 65%)] 146 785 110 089 36 696

Current year
Profit for the year
[220 000 – 15 000 (pref div)] 205 000 153 750 51 250 [2]
Dividends (180 000) (135 000) (45 000) [2]
1 847 060 128 839 418 221

C2. Analysis of owner’s equity of R&R Ltd – preference share capital

Beach Holidays
Total 80% NCI
At Since
At acquisition
Preference share capital 150 000 120 000 30 000
Equity represented by goodwill 10 000 10 000 -
Consideration and NCI 160 000 130 000 30 000 [1]
Current year
Profit attributable to preference
shareholders (150 000 x 10%) 15 000 12 000 3 000 [1]
Preference dividend (15 000) (12 000) (3 000) [2]
160 000 - 30 000

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COMMENT

Preference shares have preference to dividends over ordinary shares. During the year,
an ordinary dividend was declared, and a preference dividend will therefore also be
declared in the current year. As the preference shares are classified as equity, the
preference dividend is also equity.

C3. Calculation of debentures

HP 10 B11 SHARP EL 733A SHARP EL 738

• 2nd F C (Clear All) • 2nd F C. CE (Clear All) • 2nd F MODE (Clear All)
• 5 N • 5 n • 5 N
• 12 000 PMT • 12 000 PMT • 12 000 PMT
• 100 000 FV • 100 000 FV • 100 000 FV
• -105 000 PV • -105 000 PV • -105 000 PV
• I/YR ⇒ 10,659% • COMP i ⇒ 10,659% • COMP I/Y ⇒ 10,659%
[2]

Closing
1 May 20.12 Capital Interest Payment balance
Interest 30 Sept 20.12 105 000 4 663* - 109 663 [1]
Payment 30 April 20.13 109 663 6 528 (12 000) 104 192
Interest 30 Sept 20.13 104 192 4 627 - 108 819
Payment 30 April 20.14 108 819 6 478 (12 000) 103 297
Interest 30 Sept 20.14 103 297 4 588 - 107 885
Payment 30 April 20.15 107 885 6 423 (12 000) 102 307
Interest 30 Sept 20.15 102 307 4 544 - 106 851
Payment 30 April 20.16 106 851 6 361 (12 000) 101 212
Interest 30 Sept 20.16 101 212 4 495 - 105 707
Payment 30 April 20.17 105 707 6 293 (12 000) 100 000

* 105 000 x 10,659% x 5/12 = 4 663

OR

1 AMRT; AMRT x 5/12 = 4 663 [1]

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LEARNING UNIT 4: BUSINESS COMBINATIONS

INTRODUCTION

IFRS 3 deals with accounting for a business combination on the date of acquisition and
outlines the principles that apply to accounting for identifiable assets acquired and
liabilities assumed, non-controlling interests and goodwill or gain from a bargain
purchase, taking into account certain exceptions to recognition, measurement and
classification principles as established in other IFRS standards.

OBJECTIVES/OUTCOMES

On completion of this learning unit, you should

1. be able to identify a business combination;

2. be able to account for business combinations by applying the acquisition method;

3. be able to account for a business combination in which control is achieved in

stages;

4. be able to account for measurement period adjustments;

5. be able to determine what forms part of a business combination;

6. understand the recognition and subsequent measurement of particular assets

acquired in terms of IFRS 3; and

7. be able to test goodwill for impairment annually or more frequently if events or

changes in circumstances indicate that the asset in question might be impaired in
accordance with IAS 36.10(b).

PRESCRIBED STUDY MATERIAL

You must study the following sources before you attempt the questions in this learning
unit:

1. IFRS 3, Business Combinations.

2. Group Statements, Volume 1, 18th edition – chapter 2.

3. Group Statements, Volume 2, 18th edition – chapter 9.

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THE REST OF LEARNING UNIT 4 IS BASED ON THE ASSUMPTION THAT YOU

HAVE ALREADY STUDIED THE RELEVANT PRESCRIBED STUDY MATERIAL.

SECTION A: SAICA’S PRINCIPLES OF EXAMINATION LEVELS

SAICA’s principles of examination levels provide guidance on how the standards (or topics within a
standard) will be examined.

The principles of examination levels for IFRS 3 are as follows:

Description Paragraph Level Notes

Objective 1 Core
Scope 2(a)–2(b) Core
2(c) Awareness
2A Excluded
Identifying a business 3 Core
combination
The acquisition method 4–5 Core
6–7 Core Identify the acquirer
8–9 Core Determine the acquisition date
10–28 Core Recognise and measure assets,
liabilities and NCI
29 Excluded Reacquired rights
30 Excluded Share-based payment
transactions
31 Core Assets held for sale
32 Core Goodwill or gain from bargain
purchase
33 Excluded Exchange of only equity interests
34–36 Core Bargain purchases
37–40 Core Consideration transferred
41–44 Core Particular types of combinations
45–50 Core Measurement period
51 Core What is included in transaction
52(a) Excluded Pre-existing relationships
52(b)–52(c) Core Separate transactions
53 Core Transaction costs
Subsequent measurement and 54 Core
accounting 55 Excluded Reacquired rights
56 Core Contingent liabilities
57 Core Indemnification assets
58 Core Contingent consideration
Disclosures 59–63 Core Refer to learning unit 4
Effective date and transition 64–67 Excluded
Reference to IFRS 9 67A Excluded
Withdrawal of IFRS 3 (2004) 68 Excluded
Defined terms Core

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Description Paragraph Level Notes

Application guidance B1–B4 Excluded Entities under common control
B5–B6 Awareness Identify a business combination
B7–B12 Awareness Definition of a business
B13–B18 Excluded Identifying the acquirer
B19–B27 Excluded Reverse acquisitions
B28–B30 Deleted
B31–B34 Core Intangible assets
B35–B36 Excluded Reacquired rights
B37–B40 Core Assembled workforce and other
items that are not identifiable
E5 (B38) Excluded Put options over NCI
B41–B45 Core Fair value of particular assets and
NCI
B46 Core Goodwill or gain from bargain
purchase
B47–B49 Excluded Combinations of mutual entities
B50 Core What is included in transaction
B51–B53 Excluded Pre-existing relationship
settlement
B54–B55 Core Contingent payments to
employees or selling
shareholders
B56–B62 Excluded Share-based payment awards
exchanged for acquiree’s awards
B62A–B62B Excluded Equity-settled share-based
payment transactions of acquiree
B63 Core Other IFRSs that provide
guidance
B64–B67 Core Disclosure – refer to learning unit
4
B68–B69 Excluded Transitional provisions

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IDENTIFY A BUSINESS COMBINATION

In order to identify a business combination, the definition of a business as stated in IFRS 3 should
be considered and applied. The definition was amended in July 2019. The amendment has been
effective from 1 January 2020, with an option to pre-adopt.

It is important that you first work through IE74 to IE123 in the IFRS textbook since the IFRS is what
you have in the examination/test and it is for your benefit to familiarise yourself with it.

To enhance your understanding of the relevant illustrative examples of the IFRS 3 amendment, refer
to the following screencasts that can be found on MyUnisa under the Lessons tab for Tutorial Letter
102:

- Part 1 – Overview
- Part 2 – Concentration test (numeric application)
- Part 3 – Similar assets
- Part 4 – Further criteria assessed

The amended definition of a business that is found in IFRS 3 is as follows:

An integrated set of activities and assets that is capable of being conducted and managed
for the purpose of providing goods or services to customers, generating investment income
(such as dividends or interest) or generating other income from ordinary activities.

The application of the guidance set out in paragraphs B7 to B12D is summarised in the mind map
provided below. Note that you must read these paragraphs of IFRS 3 and familiarise yourself with
them. The mind map is merely intended to enhance your understanding of the paragraphs.

Question 2.1 below highlights the major changes that occurred in the application of the definition of
a business. You can use the various sections of question 2.1 as practice questions once you have
studied the IFRS application paragraphs, the illustrative examples and the abovementioned
screencasts.

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APPLICATION GUIDANCE TO DETERMINE ACQUISITION OF A BUSINESS

Do the acquired assets and liabilities meet the definition of a business?

Do you want to apply the concentration test?

Yes
No

Have you met the

criteria for the No Business = inputs + a substantive process + the ability to
concentration contribute to the ability to create outputs
test? Do the activities and the assets have outputs at the
acquisition date?
Yes
No Yes

No Is the process critical to Is the process critical when applied to the Yes
the ability to develop or inputs to continue producing outputs, and
convert the inputs into is there a skilled, knowledgeable or
outputs? experienced organised workforce to
perform the process?

Yes No
No
Does the process significantly Yes
Do the inputs include a skilled, contribute to the ability to
knowledgeable or experienced continue producing output and
organised workforce to perform is it considered unique/scarce,
the process and other inputs or cannot be replaced without
that the workforce could significant impact on the ability
develop or convert into to continue producing
outputs? outputs?

Yes No

Acquisition is not a
business Acquisition is a
business

Purchased assets – apply Purchased assets –

asset standards (IAS16, apply IFRS 3, Business
IAS38, IAS40 etc) combinations

(SAICA – adapted)
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ACQUISITION METHOD

Step 1
The entity that obtains control of the acquiree (IFRS 3.6–7)
Who is the acquirer? See “control” as defined in IFRS 10.5–18

Step 2
The date on which the acquirer obtains control of the acquiree
When did the acquisition (IFRS 3.8–9)
occur?

Step 3
Recognition criteria:
Recognise the
identifiable assets and To qualify for recognition,
liabilities acquired in the • assets and liabilities should meet the definitions set out in the
business combination. Conceptual Framework; and
• assets and liabilities must be part of what is exchanged in the
business combination (not a separate transaction).

Exceptions:

• Contingent liabilities should be recognised if there is a

present obligation and its fair value can be measured
reliably (IFRS 3.22–23).
• An indemnification asset (debtor) should only be recognised
if an indemnification item (liability) is recognised on the
acquisition date (IFRS 3.27–28).

Note that the acquiree may not have recognised, in its own
financial statements, certain assets and liabilities that qualify for
recognition in the group financial statements. Examples are

• identifiable intangible assets not recognised by the acquiree

(IFRS 3.13); and
• restructuring provisions (meeting the liability definition).

Step 4 Measurement criteria:

Measure the assets and Assets and liabilities acquired should be measured at their fair
the liabilities acquired in values at the acquisition date.
the business
combination. Remember:
• The restatement of assets and liabilities to fair value has
deferred tax implications for the business combination.
• The restatement of assets to fair value may also result in an
additional depreciation/amortisation charge in the
consolidated financial statements (and, again, has deferred
tax implications).

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Step 5
Measure NCI at
Recognise and measure • fair value; or
NCI. • its proportionate share of the acquiree’s identifiable net
assets (IFRS 3.19).

Step 6 Consideration is measured at fair value on the acquisition date

(Except in the case of share-based payments).
Note: If the transferred
Measure the asset remains within the
consideration Consideration includes group, the asset should be
transferred. • assets transferred. measured at its carrying
• liabilities incurred; and amount at the acquisition
• equity interests issued. date.

Step 7 Goodwill = consideration transferred + NCI – net assets

acquired
Recognise and measure
goodwill. Goodwill is recognised as an asset and tested annually for
impairment.

Gain on bargain purchase is recognised as a gain in profit or a

loss on the acquisition date.

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EXAMPLES

The following examples illustrate the acquisition method prescribed by IFRS 3, Business
Combinations. In all the examples it may be assumed that Easy Ltd has control as defined in
IFRS 10, Consolidated Financial Statements.

(a) Easy Ltd acquired a 100% shareholding in Sub Ltd on 1 January 20.12 for a cash amount of
R100 000, at which date Sub Ltd’s share capital amounted to R20 000 and the retained
earnings amounted to R80 000.

Separate financial statements (Easy Consolidated financial statements

Ltd)

Dr Cr Dr Cr
R R R R
Investment (SFP) 100 000 Share capital (SCE) 20 000
Bank (SFP) 100 000 Retained earnings
(SCE) 80 000
Investment (SFP) 100 000

(b) Easy Ltd acquired an 80% shareholding in Sub Ltd on 1 January 20.12 for a cash amount of
R80 000, at which date Sub Ltd’s share capital amounted to R20 000 and the retained
earnings amounted to R80 000. Non-controlling interests (NCI) is measured at its
proportionate share of the acquiree’s identifiable net assets.

Separate financial statements (Easy Consolidated financial statements

Ltd)

Dr Cr Dr Cr
R R R R
Investment (SFP) 80 000 Share capital (SCE) 20 000
Bank (SFP) 80 000 Retained earnings
(SCE) 80 000
Investment (SFP) 80 000
NCI (SFP/SCE)
(100 000 x 20%) 20 000

(c) Easy Ltd acquired an 80% shareholding in Sub Ltd on 1 January 20.12 for a cash amount of
R90 000, at which date Sub Ltd’s share capital amounted to R20 000 and the retained
earnings amounted to R80 000. NCI is measured at its proportionate share of the acquiree’s
identifiable net assets.

Separate financial statements (Easy Consolidated financial statements

Ltd)

Dr Cr Dr Cr
R R R R
Investment (SFP) 90 000 Share capital (SCE) 20 000
Bank (SFP) 90 000 Retained earnings
(SCE) 80 000
Investment (SFP) 90 000
NCI (SFP/SCE)
(100 000 x 20%) 20 000
Goodwill (SFP)
(balancing) 10 000

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(d) Easy Ltd acquired an 80% shareholding in Sub Ltd on 1 January 20.12 for a cash amount of
R90 000, at which date Sub Ltd’s share capital amounted to R20 000 and the retained
earnings amounted to R80 000. NCI is measured at its fair value of R18 000 at the acquisition
date.

Separate financial statements (Easy Consolidated financial statements

Ltd)

Dr Cr Dr Cr
R R R R
Investment (SFP) 90 000 Share capital (SCE) 20 000
Bank (SFP) 90 000 Retained earnings
(SCE) 80 000
Investment (SFP) 90 000
NCI (SFP/SCE)
(given) 18 000
Goodwill (SFP)
(balancing) 8 000

(e) Easy Ltd acquired an 80% shareholding in Sub Ltd on 1 January 20.12 for a cash amount of
R80 000 and through the issuance of 10 000 shares (the fair value of one share was R1 on
the acquisition date), at which date Sub Ltd’s share capital amounted to R20 000 and the
retained earnings amounted to R80 000. NCI is measured at its fair value of R18 000 at the
acquisition date.

Separate financial statements (Easy Consolidated financial statements

Ltd)

Dr Cr Dr Cr
R R R R
Investment (SFP) 90 000 Share capital (SCE) 20 000
Bank (SFP) 80 000 Retained earnings 80 000
Share capital (SCE) 10 000 (SCE)
Investment (SFP) 90 000
NCI (SFP/SCE)
(given) 18 000
Goodwill (SFP) 8 000

(f) Easy Ltd acquired an 80% shareholding in Sub Ltd on 1 January 20.12 for a cash amount of
R80 000 and through the issuance of 10 000 shares (the fair value of one share was R1 on
the acquisition date), at which date Sub Ltd’s share capital amounted to R20 000 and the
retained earnings amounted to R80 000. NCI is measured at its fair value of R18 000 at the
acquisition date. At the acquisition date the carrying amounts of all assets and liabilities were
equal to their fair values, with the exception of plant, which had a fair value of R80 000 and
a carrying amount of R75 000. Assume a current tax rate of 27% and a capital gains tax
(CGT) inclusion rate of 80%. Ignore value added tax (VAT) and dividend tax.

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Separate financial statements (Easy Consolidated financial statements

Ltd)

Dr Cr Dr Cr
R R R R
Investment (SFP) 90 000 Share capital (SCE) 20 000
Bank (SFP) 80 000 Retained earnings 80 000
Share capital (SCE) 10 000 (SCE)
Plant (SFP)
(80 000 – 75 000) 5 000
Deferred tax (SFP)
(5 000 x 27%) 1 350
Investment (SFP) 90 000
NCI (SFP/SCE)
(given) 18 000
Goodwill (SFP) 4 350

(g) Easy Ltd acquired an 80% shareholding in Sub Ltd on 1 January 20.12 for a cash amount of
R80 000 and through the issuance of 10 000 shares (the fair value of one share was R1 on
the acquisition date), at which date Sub Ltd’s share capital amounted to R20 000 and the
retained earnings amounted to R80 000. NCI is measured at its fair value of R18 000 at the
acquisition date. At the acquisition date the carrying amounts of all assets and liabilities were
equal to their fair values, with the exception of plant, which had a fair value of R80 000 and
a carrying amount of R75 000. Sub Ltd owns a customer list that is frequently exchanged
with third parties. The fair value of this customer list amounted to R10 000 on the acquisition
date. The customer list has a remaining useful life of 10 years. Assume a current tax rate of
27% and a capital gains tax (CGT) inclusion rate of 80%. Ignore value added tax (VAT) and
dividend tax.

Separate financial statements (Easy Consolidated financial statements

Ltd)

Dr Cr Dr Cr
R R R R
Investment (SFP) 90 000 Share capital (SCE) 20 000
Bank (SFP) 80 000 Retained earnings 80 000
Share capital (SCE) 10 000 (SCE)
Plant (SFP)
(80 000 – 75 000) 5 000
Deferred tax (SFP)
(5 000 x 27%) 1 350
Intangible asset (SFP) 10 000
Deferred tax (SFP)
(10 000 x 27%) 2 700
Investment (SFP) 90 000
NCI (SFP/SCE) 18 000
(given)
Bargain purchase 2 950
(P/L)

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SECTION B: QUESTION ON BUSINESS COMBINATIONS

QUESTION 4.1A (10 marks – 15 minutes)

Designa Cars Ltd, a motor car dealer, purchased a portfolio of cars for resale. Within this portfolio
are 19 different cars. The fair value of the price paid for the portfolio of cars is equal to the aggregate
fair value of the 19 cars acquired.

The vehicles are of different makes and models, specifically five BMW vehicles of different
models, five Mercedes-Benz vehicles of different models, seven Toyota vehicles of different models
and two Ford vehicles of different models.

Two of the BMW vehicles and two of the Mercedes-Benz vehicles were customised as per specific
customer requirements. The changes made to these vehicles are cosmetic and do not change the
risks associated with the vehicles.

Owing to the wide range of cars in the portfolio, the class of customer is not the same for all the cars.

The risks associated with operation in the motor vehicle industry in relation to the different vehicles
acquired do not differ significantly No employees, other assets, other processes or other activities
are transferred.

REQUIRED
Marks
Designa Cars Ltd opted to apply the concentration test to the purchase of the portfolio in 10
terms of IFRS 3.B7A. Discuss whether the criteria in the concentration test are met or not
in terms of IFRS 3.B7B. Draw a conclusion on whether this acquisition resulted in the
acquisition of a business or not.

Please note:

• Round off all amounts to the nearest rand.

• Your answer must comply with International Financial Reporting Standards
(IFRSs).

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QUESTION 4.1A: SUGGESTED SOLUTION

Designa Cars Ltd opted to apply the concentration test to the purchase of the portfolio in
terms of IFRS 3.B7A. Discuss whether the criteria in the concentration test are met or not in
terms of IFRS 3.B7B. Draw a conclusion on whether this acquisition resulted in the
acquisition of a business or not.

Single identifiable asset/group:

Each vehicle is an individual asset and can be used separately from other tangible assets. (1)

The assets acquired are all motor vehicles and are therefore the same in nature. (1)

All the vehicles were purchased for the same purpose, that is, resale by Designa Cars Ltd
and therefore all of them are of the same class of asset, namely, inventory (IFRS 3.B7B (e)).
Consequently, they have the same risks. (1)

It does not matter that some of the vehicles were customised since they make up one asset.
The customisation did not change the risks attached to the assets. Therefore, all the vehicles
have similar risks (IFRS 3.B7B (e)). (1)

The assets are of the same nature and have similar risks. (1)

Therefore, the portfolio of vehicles is considered a single identifiable asset group and should
be recognised and measured as such in a business combination (IFRS 3.B7B (c)). (1)

Fair value:
The fair value of the price paid for the portfolio of cars is equal to the aggregate fair value of
the 19 cars acquired. (1)

This indicates that substantially all of the fair value of the assets acquired is concentrated
in the group of vehicles purchased (IFRS 3.B7B (b)). (1)

Concentration test:
Therefore, we can confirm that the criteria in the concentration test are met. (1)

Conclusion:
We can conclude that the acquisition of the portfolio did not result in the acquisition of a
business (IFRS 3.B7A (a)). (1)
(10)

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QUESTION 4.1B (15 marks – 23 minutes)

Designa Cars Ltd, a motor car dealer, purchased a portfolio of cars consisting of 22 different
vehicles. Nineteen of these vehicles are luxury motor cars purchased for resale while three of them
are large delivery trucks that will be used to deliver motor vehicles to other car dealers and bulk
buyers.

The three large delivery trucks purchased came with contracts for outsourced trained drivers. They
also came with a specialised motor plan for their service and maintenance, as well as outsourced
security needed during the transportation of deliveries. The processes and services performed
through these outsource contracts are minor if all the processes involved in generating the required
income (output) are considered.

No employees, other assets, other processes or other activities are transferred.

The aggregate fair value of the 19 luxury cars is similar to the aggregate fair value of the three
delivery trucks acquired.

The 19 cars are all of different makes and models, specifically five BMW vehicles of different
models, five Mercedes-Benz vehicles of different models, seven Toyota vehicles of different models
and two Ford vehicles of different models.

Two of the BMW vehicles and two of the Mercedes-Benz vehicles were customised as per specific
customer requirements. These changes are cosmetic and do not change the risks associated with
the vehicles.

Owing to the wide range of vehicles in the portfolio, the class of customer is not the same for all the
vehicles.

The risks associated with operation in the motor vehicle industry in relation to the different vehicles
acquired for resale do not differ significantly.

REQUIRED
Marks
(a) Designa Cars Ltd opted to apply the concentration test to the purchase of the 8
portfolio in terms of IFRS 3.B7A. Discuss whether the criteria in the concentration
test are met or not in terms of IFRS 3.B7B. Draw a conclusion on whether this
acquisition resulted in the acquisition of a business or not.

(b) Designa Cars Ltd did not opt to apply the concentration test to the purchase of the 7
portfolio in terms of IFRS 3.B7A. Discuss whether this acquisition resulted in the
acquisition of a business or not in terms of IFRS 3.B8–B12D.

Please note:

• Round off all amounts to the nearest rand.

• Your answer must comply with International Financial Reporting Standards
(IFRSs).

MJM
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QUESTION 4.1B: SUGGESTED SOLUTION

(a) Designa Cars Ltd opted to apply the concentration test to the purchase of the portfolio
in terms of IFRS 3.B7A. Discuss whether the criteria in the concentration test are met or
not in terms of IFRS 3.B7B. Draw a conclusion on whether this acquisition resulted in
the acquisition of a business or not.

Single identifiable asset/group:

Each vehicle is an individual asset and can be used separately from other tangible
assets. (1)

The assets acquired are all motor vehicles, so they are the same in nature. (1)

However, the vehicles were not all purchased for the same purpose by
Designa Cars Ltd and, therefore, they are not all of the same class of asset. (1)

The 19 luxury cars were purchased for the purpose of resale by Designa Cars Ltd and
are classified as inventory. The three delivery trucks will be used by Designa Cars Ltd
for other activities and are classified as property, plant and equipment. (1)

Therefore, the vehicles are not of the same class of asset and are not considered similar
(IFRS 3.B7B (f(ii))). (1)

Consequently, the portfolio of assets purchased does not have the same risk associated
with managing and creating output and may not be recognised as a single identifiable
asset group (IFRS 3.B7B (e)). (1)

The assets may not be recognised and measured as a single identifiable asset in a
business combination (IFRS 3.B7B (c)). (1)

Fair value:
There are substantially two groups of assets (i.e., luxury cars and delivery trucks). (1)

This indicates that substantially all of the fair value of the assets acquired is not
concentrated in just one group of vehicles purchased (IFRS 3.B7B (b)). (1)

Concentration test: (1)

Therefore, we can confirm that the criteria in the concentration test are not met.

Conclusion:
Designa Cars Ltd shall further assess in terms of IFRS 3.B8–B12D whether the portfolio
of vehicles acquired resulted in the acquisition of a business or not (IFRS 3.B7A (b)). (1)
Total (11)
Maximum (8)

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(b) Designa Cars Ltd did not opt to apply the concentration test to the purchase of the
portfolio in terms of IFRS 3.B7A. Discuss whether this acquisition resulted in the
acquisition of a business or not in terms of IFRS 3.B8–B12D.

IFRS 3.B12C
The purchasing of the portfolio of vehicles generates revenue from the resale of the luxury
cars. This revenue constitutes output from the activity of purchasing the portfolio of
vehicles. Therefore, we apply IFRS 3.B12C to assess if the acquired process is
substantive. (1)

The services provided by outsourced personnel are not critical to the ability to continue
producing outputs. (1)

They are minor/ancillary in the context of all processes involved in generating the
required output (IFRS 3.B12C (a)). (1)

The relevant inputs do not include an organised workforce with the necessary skills,
knowledge or experience to perform the process and do not include other inputs that the
workforce could develop or convert into outputs (IFRS 3.B12C (a)). (1)

The process of purchasing vehicles for resale and delivering such vehicles is a process
that is readily accessible in the marketplace. Vehicles are not unique or scarce and can
be replaced without significant cost (IFRS 3.B12C (b)). (2)

Therefore, the process acquired is not substantive and the acquisition of the portfolio of
vehicles did not result in the acquisition of a business. (1)
(7)

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QUESTION 4.1C (10 marks – 15 minutes)

Designa Cars Ltd is a motor car dealer that owns a 10% interest in Car Security Ltd. Car Security Ltd
specialises in the installation of security devices, such as gearlocks and anti-hijack systems, in all
types of motor cars. On 31 March 20.20 Designa Cars Ltd purchased a further 75% interest in
Car Security Ltd for a cash consideration of R3 000 000. On this date, Designa Cars Ltd obtained
control over Car Security Ltd in accordance with IFRS 10, Consolidated Financial Statements. The
fair value of the shares of Car Security Ltd is R60 per share on 31 March 20.20, and a total of 200
000 shares are in issue. Both companies have a 31 December year end.

The extracted trial balances of Car Security Ltd are shown in the table below at their fair values on
the relevant dates:

31 March 20.20 30 June 20.20

Dr/(Cr) Dr/(Cr)
R R

Retained earnings (10 000 000) (14 000 000)

Long-term liabilities (9 700 000) (9 600 000)
Property, plant and equipment 9 500 000 10 300 000
Financial asset 600 000 670 000
Intangible assets 3 000 000 3 000 000
Cash and cash equivalents 1 500 000 1 800 000
Trade and other receivables 400 000 530 000
Trade and other payables (800 000) (840 000)
Deferred tax liability (840 000) (920 000)

REQUIRED
Marks
Calculate the fair value of gross assets acquired in terms of IFRS 3.B7B (a) and (b) and 11
draw a conclusion on whether the criteria in the concentration test are met or not.

Please note:

• Round off all amounts to the nearest rand.

• Your answer must comply with International Financial Reporting Standards (IFRSs.

MJM
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QUESTION 4.1C: SUGGESTED SOLUTION

(a) The fair value of gross assets acquired in terms of IFRS 3. B7B is R15 000 000 [C1]. (6)

(b) The concentration test is met if substantially all of the fair value of the gross assets
acquired is concentrated in a single identifiable asset or group of similar identifiable
assets. None of the assets acquired can be grouped together as similar identifiable
assets. Therefore, each asset will be compared individually to the fair value of gross
assets acquired of R15 000 000 [C1]: (1)

Fair value Concentration

Property, plant and equipment 9 500 000 63%

Intangible assets 3 000 000 20%
Financial assets 600 000 4%
Cash and cash equivalents 1 500 000 10%
Trade and other receivables 400 000 3%
15 000 000 (2)

As the fair value of the gross assets acquired is not concentrated in a single identifiable
asset, the concentration test is not met for the purchase of the interest in Car Security Ltd. (1)
(10)

CALCULATIONS

C1. Fair value of the gross assets acquired (IFRS 3. B7B (b))

Consideration paid 3 000 000 [1]

NCI at fair value [(200 000 x R60) x 15%] 1 800 000 [1]
Fair value of remaining interest [(200 000 x R60) x 10%] 1 200 000 [1]
Cash and cash equivalents (1 500 000) [1]
Payables 800 000 [1]
Long-term liabilities 9 700 000 [1]
15 000 000
[6]
OR
Property, plant and equipment 9 500 000
Intangible assets 3 000 000
Financial assets 600 000
Trade and other receivables 400 000
Cash and cash equivalents (excluded) -
13 500 000
Plus: Excess [C2] 1 500 000
Fair value of gross assets acquired 15 000 000

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C2. Excess in terms of IFRS 3.B7B

Consideration paid 3 000 000

NCI at fair value [(200 000 x R60) x 15%] 1 800 000
Fair value of remaining interest [(200 000 x R60) x 10%] 1 200 000
6 000 000
Net identifiable assets acquired [C3] (4 500 000)
1 500 000

C3. Net identifiable assets acquired

Property, plant and equipment 9 500 000

Intangible assets 3 000 000
Financial assets 600 000
Cash and cash equivalents 1 500 000
Trade and other receivables 400 000
Long-term liabilities (9 700 000)
Trade and other payables (800 000)
Deferred tax liability -
4 500 000

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QUESTION 4.2 (47 marks – 71 minutes)

Batman Ltd is a security company operating in Gauteng. The management of Batman Ltd identified
external acquisition as an area of expansion. As a result, Batman Ltd purchased a 60% interest in
Robin Ltd on 1 January 20.11. On this date, Batman Ltd obtained control over Robin Ltd as defined
in IFRS 10, Consolidated Financial Statements.

The abridged statement of financial position of Robin Ltd was as follows on 1 January 20.11:

R’000 R’000

Share capital - 750

Retained earnings - 1 100
Net assets 1 850 -
1 850 1 850

The following matters were identified to be taken into account in calculating the identifiable assets
and liabilities at fair value at the acquisition date:

1. The fair value of the non-controlling interests was R820 000 on 1 January 20.11.

2. Machinery was valued at R300 000 more than the carrying amount. The remaining useful life
of the machinery from the date of acquisition is four years. Robin Ltd continued to account for
machinery in accordance with the cost model as per IAS 16.

3. Land with a cost price of R300 000 had a fair value of R400 000 on 1 January 20.11. The value
of the land has increased to R450 000 at 31 December 20.11. It is the policy of Robin Ltd to
account for land in accordance with the cost model as per IAS 40.

4. Robin Ltd disclosed a contingent liability of R450 000 in its financial statements on
1 January 20.11 relating to a court case involving a patent right for a taser gun that does not
meet industry standards. The claim represents a present obligation, but at this point the
attorneys of Robin Ltd are of the opinion that the claim is unlikely to lead to an outflow of
economic benefits. The R450 000 is the fair value of the claim, taking into account all possible
outcomes on 1 January 20.11.

The shareholders of Robin Ltd have, as part of the purchase agreement with Batman Ltd,
guaranteed to reimburse Batman Ltd 40% of the claim, should it be successful.

On 31 December 20.11 the court case has progressed to such an extent that it is virtually
certain that Robin Ltd will have to pay R550 000. Robin Ltd recognised a provision of R550 000
in its financial statements on 31 December 20.11. The related transaction has been correctly
recorded in Robin Ltd’s financial statements.

The claim will not be deductible for taxation purposes should it succeed.

5. Details of the consideration transferred to the shareholders of Robin Ltd are as follows:

• Cash of R810 000 was paid.

• Batman Ltd issued 1 000 ordinary shares. The fair value of the shares was R220 each
on 1 January 20.11. On the date of registration of the shares, 17 January 20.11, the
shares were valued at R200 each. The total number of shares in issue by Batman was
1 000 000 at 1 January 20.11.

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• Batman Ltd will make a cash payment of R225 060 on 31 December 20.12.
The South African Revenue Service agrees with the accounting treatment and will allow
a tax deduction for the interest expense.
• Batman Ltd is required to make an additional cash payment of R150 000 on
30 June 20.13 if the share price of Robin Ltd increases by more than 20%. The fair value
of the contingent consideration was estimated to be R65 000 on 1 January 20.11 and
R90 000 on 31 December 20.11. The share price of Robin Ltd had increased by 32% by
31 December 20.11. The changes in fair values on the contingent consideration were as
a result of events that occurred after the acquisition date.

Acquisition-related costs in respect of valuations and lawyer’s fees of R100 000 paid by
Batman Ltd are included in the cash consideration paid.

6. Robin Ltd has a licensed customer list on 1 January 20.11. The agreements relating to the
customer list do not prohibit the selling or leasing of the list. The useful life of the customer list
on 1 January 20.11 is four years and the fair value is R175 794. Robin Ltd has not recognised
an asset in this regard.

7. The abridged statement of profit or loss and other comprehensive income of Batman Ltd and
Robin Ltd for the year ended 31 December 20.11 is as follows (before taking the above
information into account):

Batman Ltd Robin Ltd

R’000 R’000
Statement of profit or loss and other comprehensive income

Profit for the year after tax 2 600 600

Dividends paid on 31 December 20.11 150

Additional information

• It is the group’s policy to measure investment property using the fair value model as per
IAS 40, Investment Property.
• Intangible assets are accounted for using the cost model as per IAS 38, Intangible Assets.
• Batman Ltd elected to measure non-controlling interests in Robin Ltd at fair value.
• Investments in subsidiaries are accounted for at cost in terms of IAS 27.10(a).
• The company tax rate is 27% and the capital gains tax inclusion (CGT) rate is 80%.
Ignore value added tax (VAT) and dividend tax.
• A market-related discount rate (before tax) is 10%, compounded annually.
• The acquisition of Robin Ltd also met the definition of the acquisition of a business in terms of
IFRS 3 Business Combinations.

MJM
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REQUIRED
Marks
(a) Prepare the journal entries in the separate records of Batman Ltd for the year ended 11
31 December 20.11, relating to the information in the question. Journal entries
relating to deferred taxation are also required.

(b) Prepare the pro forma journal entries for the Batman Ltd Group for the year ended 35
31 December 20.11. Journal entries relating to deferred taxation are also required.

Communication skills: presentation and layout 1

Please note:

• Round off all amounts to the nearest rand.

• Your answer must comply with International Financial Reporting Standards
(IFRSs).

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QUESTION 4.2: SUGGESTED SOLUTION

(a) Journal entries in the accounting records of Batman Ltd
Dr Cr
R R
1 January 20.11
J1 Investment in Robin Ltd (SFP) (balancing or [C1]) 1 181 000 (1)
Acquisition cost (P/L) (given) 100 000 (1)
Share capital/Equity (SCE) (1 000 x R220) 220 000 (2)
Contingent consideration (SFP) (given) 65 000 (1)
Liability (deferred consideration) (SFP) [C5] 186 000 (3)
Bank (SFP) 810 000 (1)
Accounting for the investment in Robin Ltd

COMMENT

Acquisition cost
This cost is incurred by the acquirer to affect a business combination. The
acquisition cost should not be included when measuring the consideration transferred.
Instead, it should be expensed by the acquirer when incurred (IFRS 3.53).

Cost to issue debt or equity

This cost should be accounted for in terms of IAS 32 as a deduction from the fair value
of a debt instrument or as a deduction from equity in respect of an equity instrument.

31 December 20.11
J2 Fair value adjustment (P/L) (90 000 - 65 000) 25 000 (1)
Contingent consideration (SFP) 25 000 (1)
Fair value adjustment on contingent consideration payable

COMMENT

As part of the acquisition of the subsidiary, a contingent consideration is due if the share
price of the subsidiary, Robin Ltd, increases by more than 20% at 30 June 20.13. In
terms of IFRS 3.39, this contingent consideration is recognised at the acquisition date
fair value of R65 000. Subsequently, the contingent consideration is measured at fair
value and the liability has to be remeasured to its fair value at year end, that is,
R90 000.

Dr Cr
R R

J3 Interest on liability (P/L) (10% x R186 000 (J1)) 18 600 (1)

Liability (deferred consideration) (SFP) 18 600 (1)
Interest on the deferred payment
J4 Bank/Receivables (SFP) 90 000
Dividends received (P/L) (R150 000 x 60%) 90 000 (2)
Dividends received from Robin Ltd
Total (15)
Maximum (11)

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COMMENT

The carrying amount and the tax base of the liability are equal since the interest on the
liability is deductible for tax purposes. There are therefore no deferred tax
implications in journals 2 and 3 above. Journal 4 is dividends and therefore no
deferred tax implications as well.

No journals are necessary in the records of Robin Ltd since the transaction by Batman
Ltd to acquire the shareholding involves the previous shareholders of Robin Ltd. The
transaction therefore does not have an impact on the issued share capital of Robin Ltd.

(b) Pro forma journal entries in the group’s accounting records

Dr Cr
R R
1 January 20.11
J1 Share capital (SCE) (given) 750 000
Retained earnings (SCE) (given) 1 100 000
Machinery (SFP) (given) 300 000 (1)
Land (SFP) (400 000 – 300 000) 100 000 (1)
Intangible asset – customer list (SFP) 175 794 (1)
Gain on bargain purchase (P/L)
[C2] or (balancing) 4 730 (1)
Indemnification asset (SFP) (450 000 x 40%) 180 000 (2)
Non-controlling interests (SFP/SCE) (given) 820 000 (1)
Recognised contingent liability (SFP) (given) 450 000 (1)
Deferred tax (SFP) [C3] 150 064 (4)
Investment in Robin Ltd (SFP) (part (a)) 1 181 000 (1)
Elimination of investment – at acquisition journal

COMMENT

Batman Ltd recognises and measures all identifiable assets acquired and the liabilities
assumed in the business combination at their acquisition-date fair values.

Take note of the group’s policy in respect of the measurement of NCI. In this case, it is
mentioned in the information that NCI is measured at fair value, and it is given as
R820 000 at the acquisition date.

The contingent liability in respect of the legal claim is recognised as a liability assumed
in a business combination since it is a present obligation resulting from past events
and its fair value can be measured reliably (IFRS 3.23).

COMMENT

Also take note that the indemnification asset (debtor) may only be recognised if the
indemnification item (in this case. the contingent liability) was recognised on
acquisition date (IFRS 3.27). The indemnification asset should be measured on the
same basis as the indemnification item (fair value in this case).

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Dr Cr
R R
31 December 20.11
J2 Depreciation (P/L) (300 000x ¼) 75 000 (1)
Accumulated depreciation (SFP) 75 000 (1)
Provision for depreciation on machinery revalued
J3 Deferred tax (SFP) (75 000 x 27%) 20 250 (1)
Income tax expense (P/L) 20 250 (1)
Taxation on depreciation adjustment

COMMENT

At acquisition, the fair value of the machinery was R300 000 higher than the carrying
amount in the separate records of Robin Ltd. Robin Ltd recognised depreciation in its
separate financial statements on the cost price of the machinery (in terms of its
accounting policy). At consolidation, however, the value of the machinery is R300 000
higher, resulting in an additional depreciation charge that is calculated over the
remaining useful life (four years) of the machinery.

J4 Contingent liability (SFP) (given) 450 000 (1)

Indemnification asset (SFP) 180 000 (1)
Legal expense (P/L) 270 000
Reversal of contingent liability raised at acquisition

COMMENT

Robin Ltd raised a provision of R550 000 relating to the legal claim in its own
accounting records at 31 December 20.11. A contingent liability was also recognised
as a liability (in respect of the legal claim) in the consolidated financial statements at
the acquisition date (R450 000). This contingent liability and the indemnification asset
previously recognised in the group’s financial statements (J1) on the acquisition date
must now be reversed in order to avoid “double accounting” for this liability.

J5 Amortisation – customer list (P/L) (175 794 / 4) 43 949 (1)

Intangible asset – customer list (SFP) 43 949 (1)
Amortisation of customer list
J6 Deferred tax (SFP) (43 949 x 27%) 11 866 (1)
Income tax expense (P/L) 11 866 (1)
Taxation on amortisation

COMMENT

The customer list is recognised as an intangible asset and is accounted for in

accordance with IAS 38. The intangible asset is amortised over its useful life.

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Dr Cr
R R

J7 Land (SFP) (450 000 – 400 000) 50 000 (1)

Fair value remeasurement (P/L) 50 000 (1)
Remeasurement in terms of IAS 40
J8 Income tax expense (P/L) (50 000 x 27% x 80%) 10 800 (1)
Deferred tax (SFP) 10 800 (1)
Taxation on fair value adjustment

COMMENT

Land is carried at cost in the separate records of Robin Ltd. However, it is the group’s
policy to account for investment property (which includes land) in accordance with the
fair value model as per IAS 40. We therefore have to account for the fair value movement
in the value of land at year end. In this case, we use the CGT inclusion rate of 80% since
the fair value adjustment is higher than the original cost price.

J9 Non-controlling interests (P/L) [C4] 328 947 (5)

Non-controlling interests (SFP/SCE) 328 947 (1)
NCI share of profits

COMMENT

At consolidation, we add 100% of the line items of the statement of profit or loss and
other comprehensive income of the subsidiary to the statement of profit or loss and other
comprehensive income of the parent to calculate the consolidated figures.

However, we are only entitled to 60% of the line items of the statement of profit or loss
and other comprehensive income of the subsidiary. We therefore allocate the 40% share
of the non-controlling interest via one line item, namely, non-controlling interest (P/L).

J10 Other income – dividends received (P/L) (150 000 x 60%) 90 000 (1)
Non-controlling interests (SFP/SCE) (150 000 x 40%) 60 000 (1)
Dividends paid (SCE) (given) 150 000 (1)
Total (37)
Maximum (35)
Communication skills: presentation and layout (1)

COMMENT

As part of the consolidation procedure, intragroup balances, transactions, income and

expenses must be eliminated in full. We therefore have to eliminate the intragroup
dividends.

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CALCULATIONS

C1. Consideration transferred

Cash (given) 810 000

Shares (1 000 x R220) 220 000
Deferred consideration [C5] 186 000
Contingent consideration (given) 65 000
Acquisition costs paid (given) (included in cash paid above) (100 000)
1 181 000 [1]

C2. Calculation of gain on bargain purchase (IFRS 3.32)

+ Consideration transferred [C1] 1 181 000

+ Non-controlling interests (given) 820 000
2 001 000
- Net identifiable assets acquired 2 005 730
Share capital (given) 750 000
Retained earnings (given) 1 100 000
Adjustments to the net assets (J1)
Contingent liability recognised (J1) (450 000)
Machinery – revaluation surplus (J1) 300 000
Land – fair value adjustment (J1) 100 000
Indemnification asset raised recognised (J1) 180 000
Intangible asset (customer list) (J1) 175 794
Deferred tax [C3] (150 064)
(4 730)

C3. Deferred tax

Machinery (300 000 x 27%) 81 000 [1]

Land (100 000 x 27% x 80%) 21 600 [1]
Intangible asset – customer list (175 794 x 27%) 47 464 [1]
Indemnification asset -
Recognised contingent liability (indemnified item) -
150 064
[3]

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COMMENT

A deferred tax liability is recognised on the customer list (intangible asset) since the
carrying amount of the customer list exceeds its tax base (the tax base of the customer
list is nil since no amounts in respect of this asset will be deductible for tax purposes in
the future against any taxable economic benefits) (IAS 12.7).

Deferred tax is not recognised on the indemnification asset since the carrying
amount and the tax base of the indemnification asset are equal (the economic benefits
from the indemnification asset will not be taxable in the future) (IAS 12.7).

Deferred tax is not recognised on the recognised contingent liability (indemnification

item) since the carrying amount and the tax base of the liability are equal. The tax base
of the contingent liability is its carrying amount minus amounts that will be tax deductible
in the future. In this case, no amounts will be deductible in the future in respect of this
liability. Therefore, the carrying amount and the tax base are equal (IAS 12.8).

C4. Non-controlling interests

Profit for the year (given) 600 000 [½]

Depreciation on machinery (J2) (75 000) [½]
Income tax on depreciation (J3) 20 250 [½]
Legal expense (J4) 270 000 [½]
Amortisation (J5) (43 949) [½]
Income tax on amortisation (J6) 11 866 [½]
Fair value remeasurement on land (J7) 50 000 [½]
Income tax on fair value remeasurement (J8) (10 800) [½]
822 367

 NCI for the year = R822 367 x 40% = R328 947 [½]
[4½]

C5. Deferred consideration

HP 10BII SHARP EL-733A SHARP EL-738

1. 2nd F C (Clear All) 1. 2nd F C (Clear All) 1. 2nd F MODE (Clear All)
2. 0 PMT 2. 0 PMT 2. 0 PMT
3. 10 I/YR 3. 10 i 3. 10 I/Y [1]
4. 2 N 4. 2 n 3. 2 N [1]
5. 225 060 FV 5. 225 060 FV 5. 225 060 FV [1]
6. PV  186 000 6. Comp PV  186 000 6. Comp PV  186 000
[3]

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C6. Analysis of owner’s equity of Robin Ltd

Batman Ltd
60% NCI
Total At Since
At acquisition
Share capital 750 000
Retained earnings 1 100 000
Equity (contingent liability) (450 000)
Equity (machinery) 300 000
Deferred tax (81 000)
Equity (land) 100 000
Deferred tax (21 600)
Equity (indemnification asset) 180 000
Intangible asset (customer list) 175 794
Deferred tax (47 464)
2 005 730 1 203 438 802 292
Gain on bargain purchase (4 730) (22 438) 17 708
Consideration and NCI 2 001 000 1 181 000 820 000

Since acquisition
Current year
Comprehensive income for the year 600 000
Depreciation on machinery (75 000)
Income tax on depreciation 20 250
Legal expense 270 000
Amortisation (43 949)
Income tax on amortisation 11 866
Fair value adjustment on land 50 000
Income tax on fair value adjustment (10 800)
Total current year profit 822 367 493 420 328 947

Dividends (150 000) (90 000) (60 000)

2 673 367 403 420 1 088 947

EXAMINATION TECHNIQUE

It was not necessary to make use of an owner’s equity analysis in this question.
Nonetheless, an owner’s equity analysis (AOE) is provided for those students who use
the analysis method.

Keep in mind that any calculation is marked if it is referenced and used in an answer. If
the AOE is used then ensure that the specific amount on the AOE is referenced where
it is used, and not the entire AOE calculation.

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LEARNING UNIT 5: INVESTMENTS IN ASSOCIATES AND JOINT

VENTURES
INTRODUCTION

IAS 28 outlines how to account for investments in associates and joint ventures by
means of the equity method. The accounting treatment of the investments in associates
and joint ventures in the separate financial statements of an investor is prescribed in IAS
27. The method to follow in determining whether a joint arrangement must be classified
as a joint venture is discussed in IFRS 11 and will be covered in learning unit 5.

OBJECTIVES/OUTCOMES

On completion of this learning unit, you should be able to

1. define the term “associate” in accordance with IAS 28;

2. discuss the existence or the absence of significant influence in an investment held

and the appropriate accounting treatment of the investment;

3. identify evidence of the existence of significant influence in cases where the

investor directly or indirectly holds less than 20% of the voting power of the
investee;

4. apply the equity method in accounting for investments in associates and joint
ventures in the consolidated or group financial statements of the investor; and

5. account for investments in associates or joint ventures in the separate financial

statements of the investor at cost (IAS 27.10(a)).

PRESCRIBED STUDY MATERIAL

You must study the following sources before you attempt the questions in this learning
unit:

1. Group Statements, Volume 2, 18th edition – chapter 11

2. IAS 28, Investments in Associates and Joint Ventures

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THE REST OF LEARNING UNIT 5 IS BASED ON THE ASSUMPTION THAT YOU

HAVE ALREADY STUDIED THE RELEVANT PRESCRIBED STUDY MATERIAL.

SECTION A: SAICA’S PRINCIPLES OF EXAMINATION LEVELS

SAICA’s principles of examination levels provide guidance how the standards (or topics within a
standard) will be examined.

The principles of examination levels for IAS 28 are as follows:

Description Paragraph Level Notes

Objective 1 Core
Scope 2 Awareness
Definitions 3–4 Core
Significant influence 5–7 Core
Equity method 10–15 Core
Application of equity method 16–17 Core
18–19 Excluded Venture capital organisation or
similar
20–21 Excluded Classification as held for sale
22–24 Core Discontinuing the use of the equity
method
25 Excluded Change in ownership – interest
remains an associate or a joint
venture
IFRS 5 – Excluded Classification as held for sale
groups
26–36 Core Equity method procedures
36A Excluded Investment entity matters
37–39 Core Equity method procedures
40–43 Core Impairment losses
Separate financial statements 44 Core
Effective date and transition 45–46 Excluded
Withdrawal of IAS 28 (2003) 47 Excluded

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EXAMPLE

The following example illustrates the basic equity accounting procedures:

Investment in associate accounted for at cost

On 1 January 20.17, I Ltd acquired a 30% interest in A Ltd for R200 000 and exercised significant
influence over the financial and operating policy decisions of A Ltd from that date.

I Ltd accounts for investments in associates at cost in terms of IAS 27.10(a).

A Ltd recorded profit after tax of R500 000 and other comprehensive income after tax (revaluation
surplus) of R100 000 for the year ended 31 December 20.17.

Investor (I) Pro

Separate financial statements forma
Group financial statements
journals

R’000 R’000 R’000

Assets Assets
Investment in A Ltd (cost) 200 180 Investment in A Ltd 380
Trade debtors 100 Trade debtors 100

Equity Equity
Share capital (50) Share capital (50)
Retained earnings (120) (150) Retained earnings (270)
Revaluation surplus (30) (30) Revaluation surplus (60)

Liabilities Liabilities
Long-term loan (100) Long-term loan (100)
Note 1 Note 2

Notes

1. When an investor prepares separate financial statements, it must account for investments in
associates at cost (IAS 27.10).

2. A pro forma journal must be prepared in order to equity account for an investment in an
associate in the group financial statements. I Ltd’s share of A Ltd’s profits and other
comprehensive income for the current and prior years must be recognised in the group
financial statements. The pro forma journal will be as follows:

Dr Cr
R’000 R’000
Investment in A Ltd (SFP) 180
Share of profit of associate (P/L) (500 000 x 30%) 150
Share of other comprehensive income of associate (OCI)
(100 000 x 30%) 30
Equity accounting of investment in associate for the current year

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SECTION B: QUESTION ON INVESTMENTS IN ASSOCIATES AND

JOINT VENTURES

QUESTION 5.1 (26 marks – 39 minutes)

Divine Ltd is a listed company on JSE Limited that specialises in catering at corporate functions. On
1 April 20.12, Divine Ltd acquired 30% of the shares of Snacks Ltd, a wholesaler of cocktail snacks,
for a consideration of R520 000. From this date, Divine Ltd has exercised significant influence over
the financial and operating policy decisions of Snacks Ltd.

The following balances were extracted from the trial balances of Divine Ltd and Snacks Ltd as at
30 June 20.12:

Divine Ltd Snacks Ltd

Dr/(Cr) Dr/(Cr)
R R
Cost of sales 583 100 594 739
Other expenses 128 400 98 040
Income tax expense 38 475 35 561
Property, plant and equipment 1 489 000 992 300
Inventory 531 430 497 100
Trade and other receivables 448 760 396 500
Revenue (833 000) (792 985)
Other income (21 000) (31 500)
Share capital (250 000 ordinary shares; 80 000 ordinary shares) (250 000) (130 000)
Retained earnings (1 July 20.11) (1 901 457) (1 348 155)
Revaluation surplus - (195 000)
Trade and other payables (212 962) (111 600)

The following information relates to the investment held in Snacks Ltd in the records of Divine Ltd:

30/06/20.12
Fair value
R
Investment in Snacks Ltd 537 900

Additional information

1. Divine Ltd and Snacks Ltd both have a 30 June year end.

2. Snacks Ltd was acquired by Divine Ltd when the share capital of 80 000 ordinary shares
amounted to R130 000, the retained earnings amounted to R1 418 600 and the revaluation
surplus amounted to R190 200. At the date of acquisition, the assets and the liabilities of
Snacks Ltd were deemed to be fairly valued, with the exception of the following:

Carrying
value Fair value
R R
Inventory 32 000 35 500

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The inventory identified was still on hand at 30 June 20.12 and the net realisable value of the
inventory was deemed to be higher than the fair value. No additional assets or liabilities were
identified at the date of acquisition.

3. It is the policy of Divine Ltd to account for equity investments in accordance with IAS 27.10(a)
in its separate financial statements.

4. Divine Ltd does not own any other investments in other companies.

5. During June 20.11 Snacks Ltd sold inventory with a sale price of R7 000 to Divine Ltd.
Snacks Ltd made a profit of 30% on the cost price. Divine Ltd used the inventory for a catering
function two months after purchasing it.

6. During May 20.12 Snacks Ltd sold inventory to Divine Ltd for R18 000. Snacks Ltd made a
gross profit of 15% on the sale. At year end, 40% of the inventory was still on hand.

7. Snacks Ltd declared a dividend of R20 000 on 3 May 20.12. The dividend has not been paid
by 30 June 20.12.

8. Assume an income tax rate of 27% and a capital gains tax (CGT) inclusion rate of 80%.
Ignore dividends tax and value added tax (VAT.

9. The net profit after tax did not accrue evenly throughout the year for both of the companies.

REQUIRED
Marks
(a) Prepare the pro forma journal entries of Divine Ltd Group for the year ended 19
30 June 20.12. Journal entries relating to deferred taxation are also required.

Communication skills: presentation and layout 1

Please note:

• Round off all amounts to the nearest rand.

• Journal narrations are required.
• Your answer must comply with International Financial Reporting Standards
(IFRSs).

(b) Prepare the statement of profit or loss and other comprehensive income of the 5
Divine Ltd Group for the year ended 30 June 20.12. The Divine Ltd Group elected
to present expenses by function and to present other comprehensive income net of
tax in the statement of profit or loss and other comprehensive income.

Communication skills: presentation and layout 1

Please note:

• Round off all amounts to the nearest rand.

• Comparative figures are not required.
• Notes to the group financial statements are not required.
• The allocation of profit and total comprehensive income between the parent and
non-controlling interests is not required.
• Your answer must comply with International Financial Reporting Standards
(IFRSs).

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QUESTION 5.1: SUGGESTED SOLUTION

(a) Pro forma journal entries

Dr Cr
R R
J1 Investment in Snacks Ltd (SFP) [C1] 2 407 (5)
Share of profit of associate (P/L) 2 407 (1)
Recognition of excess upon acquisition of associate
J2 Investment in Snacks Ltd (SFP) (7 710 + 1 440) 9 150 (1)
Share of profit of associate (P/L) (25 700 [C2] x 30%) 7 710 (5)
Share of other comprehensive income of associate
(OCI) ((195 000 – 190 200) x 30%) 1 440 (2)
Recognition of share of profit and other comprehensive income
of associate for the year
J3 Share of profit of associate (P/L)
((18 000 x 40% x 15%) x 30%) 324 (2)
Inventory (SFP) 324 (1)
Elimination of unrealised profit in closing inventories
J4 Deferred tax (SFP) (324 x 27%) 87 (1)
Share of profit of associate (P/L) 87 (1)
Deferred tax on unrealised profit in closing inventories
J5 Other income (P/L) (20 000 x 30%) 6 000 (1)
Investment in Snacks Ltd (SFP) 6 000 (1)
Elimination of dividends received
Total (21)
Maximum (19)
Communication skills: presentation and layout (1)

COMMENT

Acquisition of the investment in associate (Snacks Ltd) (J1)

The difference between the cost of the investment (R520 000) and Divine Ltd’s share
of the net fair value of Snacks Ltd’s identifiable assets and liabilities (R522 407) [C1]
is accounted for as an excess of R2 407 (IAS 28.32(b)). If Divine Ltd paid more than
its share of the fair value of the identifiable assets and liabilities (R522 396), the
difference would be treated as goodwill and no adjustment would be required against
the cost of the investment since the goodwill would form part of the carrying amount
of the investment (IAS 28.32(a)).

Refer to section 11.4 in Group Statements, Volume 2, for further explanations in this
regard. Note that the textbook refers to the calculated excess as a “gain on a bargain
purchase”, which represents a different naming of the same concept. There is no
difference between an “excess” and a “gain on a bargain purchase”. Since IAS
28.32(b) refers to an “excess”, this term is used in all tutorial letters.

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COMMENT

Elimination of unrealised profit

Only the unrealised profit included in inventory on hand at year end is eliminated in
the pro forma journal entries (J4 and J5). The total sales of R18 000 in May 20.12
affecting revenue and cost of sales of the associate is not eliminated since the
separate line items of revenue and cost of sales of the associate were not disclosed
in the group financial statements, but the investor’s share of profit after tax is included
in the share of profit from associates/joint ventures (P/L) line item. Information on
associates/joint ventures is disclosed in three line items in the group financial
statements, as follows:

(i) Investment in associates/joint ventures (SFP)

(ii) Share of profit from associates/joint ventures (P/L)
(iii) Share of other comprehensive income of associates/joint ventures (OCI)

The unrealised profit on the transaction between Snacks Ltd and Divine Ltd in
June 20.11 does not need to be eliminated since this transaction occurred before
Snacks Ltd was an associate of Divine Ltd. Snacks Ltd only became an associate of
Divine Ltd on 1 April 20.12.

(b) DIVINE LTD GROUP

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE

YEAR ENDED 30 JUNE 20.12
20.12
R
Revenue 833 000 (1)
Cost of sales (583 100) (1)
Gross profit 249 900
Other income (21 000 – 6 000 (J5)) 15 000 (1)
Other expenses (128 400) (1)
Share of profit of associate (2 407 (J1) + 7 710 (J2) – 324 (J3) + 87 9 880 (2)
(J4))
Profit before tax 146 380
Income tax expense (38 475) (1)
PROFIT FOR THE YEAR 107 905
Other comprehensive income
Items that will not be reclassified to profit or loss:
Share of gain on property revaluation of associate (J2) 1 440 (1)
Other comprehensive income for the year, net of tax 1 440
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 109 345
Total (8)
Maximum (5)
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COMMENT

Note that no breakdown of the profit attributable to the shareholders of the parent and
the non-controlling interest is provided since there is no investment in a subsidiary and
therefore no non-controlling interest. This is also why the statement is not named the
“consolidated statement of profit or loss and other comprehensive income”.

The starting point for the group financial statements is the trial balance of the parent
(Divine Ltd). Snacks Ltd’s trial balance is not added line by line to that of Divine Ltd
but is equity accounted. Equity accounting is applied to ensure that the investment in
the associate is carried at cost plus the investor’s share of profit or loss and other
comprehensive income of the associate less any distributions received (refer to J6).
Therefore, in the statement of profit or loss and other comprehensive income, the only
line items relating to the associate that should be included are the share of profit or
loss of the associate and the share of other comprehensive income of the associate.

CALCULATIONS

C1. Analysis of the owner’s equity of Snacks Ltd

Divine Ltd
30%
Total At Since
At acquisition
Share capital 130 000
Retained earnings (1 418 600 + ((35 500 –
32 000) x (100% – 27%)) (inventory fair value
adjustment)] 1 421 155
Revaluation surplus 190 200
1 741 355 522 407 [4]
Excess (2 407)
Consideration transferred (given) 520 000 [1]

Current year
Profit for the year [C2] 25 700 7 710
Revaluation surplus (195 000 – 190 200) 4 800 1 440
Dividend (given) (20 000) (6 000)
1 751 855 3 150
[5]

C2. Profit of associate for the last three months

Profit for the year (792 985 + 31 500 – 594 739 – 98 040 – 35 561) 96 145 [3]
Profit for nine months before acquisition (1 418 600 – 1 348 155) (70 445) [2]
Profit for three months after acquisition 25 700
[5]

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EXAMINATION TECHNIQUE

Take note of the following guidelines regarding general mistakes that are made in the
application of IAS 28:

• Associates and joint ventures are consolidated on a line-by-line basis, based on

the interest held. This is incorrect because the equity method must be applied,
resulting in share of profit or loss and share of other comprehensive income being
recognised.

• Intragroup items, such as interest or loans, are eliminated. This is incorrect

because the equity method does not consolidate the assets, the liabilities, the
income or the expenses of an associate or a joint venture line by line. It is therefore
not necessary for intragroup items that do not have an unrealised profit element to
be eliminated.

• Unrealised profit on inventory must only be eliminated to the extent of the interest
held, for example, 30% and must not be eliminated at 100% as would be the case
for a subsidiary.

• Percentage shareholding is often calculated incorrectly. The number of shares

owned must be divided by the total number of shares issued, not the amount of
share capital, for example, 36 000 shares ÷ 120 000 issued shares = 30%, not
36 000 shares ÷ R200 000 share capital = 18%.

• You should provide journal narrations in order to obtain the relevant presentation
mark, unless the question specifically states that journal narrations are not
required.

DISCLOSURE

Items that must be presented in group financial statements for an investment in an

associate or a joint venture are as follows:

Statement of financial position:

- Investment in associate/joint venture with its corresponding note (refer to an
example in self-assessment question 1(b))

Statement of profit or loss and other comprehensive income:

- Share of profit of associate/joint venture
- Share of other comprehensive income of associate/joint venture

Statement of changes in equity:

- Opening balances of reserves (include share of movement in the associate’s
reserves from the date of acquisition up until the beginning of the year – reserves
such as retained earnings, revaluation surplus and mark-to-market reserve)

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LEARNING UNIT 6: DISCLOSURE OF INTERESTS IN OTHER ENTITIES

INTRODUCTION

IFRS 12 deals with the disclosures required to enable users of financial statements to
evaluate an entity’s interest in other entities.

OBJECTIVES/OUTCOMES

On completion of this learning unit, you should be able to

1. disclose the following in consolidated or group financial statements:

1.1 significant judgements and assumptions that an entity made in determining

that it has control of another entity, joint control of an arrangement or
significant influence over another entity;
1.2 significant judgements and assumptions that an entity made in determining
the type of joint arrangement (i.e., joint operation or joint venture); and
1.3 an entity’s interests in subsidiaries, interests in joint arrangements and
associates and interests in unconsolidated structured entities;

2. disclose the following in relation to an interest in a subsidiary:

2.1 the interest that non-controlling interests have in a group’s activities and cash
flows;
2.2 the nature and extent of significant restrictions;
2.3 the nature of the risks associated with an entity’s interests in consolidated
structured entities;
2.4 the consequences of changes in a parent’s ownership interest in a subsidiary
that do not result in a loss of control; and
2.5 the consequences of losing control of a subsidiary during the reporting
period;

3. disclose the following in relation to interests in joint arrangements and associates:

3.1 the nature, extent and financial effects of an entity’s interests in joint
arrangements and associates; and
3.2 the risks associated with an entity’s interests in joint ventures and
associates; and

4. disclose the following in relation to interests in unconsolidated structured entities:

4.1 the nature of interests; and

4.2 the nature of risks.

PRESCRIBED STUDY MATERIAL

You must study the following source before you attempt the questions in this learning
unit:

1. IFRS 12, Disclosure of Interests in Other Entities

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THE REST OF LEARNING UNIT 6 IS BASED ON THE ASSUMPTION THAT YOU

HAVE ALREADY STUDIED THE RELEVANT PRESCRIBED STUDY MATERIAL.

SECTION A: SAICA’S PRINCIPLES OF EXAMINATION LEVELS

SAICA’s principles of examination levels provide guidance how the standards (or topics within a
standard) will be examined.

The principles of examination levels for IFRS 12 are as follows:

Description Paragraph Level Notes

Objective 1 Core
2–4 Core Meeting the objective
2(a)(iii) Excluded Investment entity
Scope 5–6 Core
6(b)(ii) Excluded Investment entity
Significant judgements and 7–9 Core
assumptions 9A–9B Excluded Investment entity status
Interests in subsidiaries 10–11 Core
12 Core The interest of NCI
13 Core Significant restrictions
14–17 Core Nature of the risks
18 Core Changes in ownership interest that
do not result in a loss of control
19 Core Losing control of a subsidiary
Interests in unconsolidated 19A–19G Excluded Investment entities
subsidiaries
Interests in joint arrangements 20 Core
and associates 21–22 Core Nature, extent and financial effects
21A Excluded Investment entity
23 Core Risks associated with the interests
Interests in unconsolidated 24–25 Core
structured entities 25A Excluded Investment entity
26–28 Core Nature of interests
29–31 Core Nature of risks
Defined terms A Core
Application guidance B1 Core
B2–B6 Core Aggregation
B7–B9 Core Interests in other entities
B10–B17 Core Summarised financial information
B18–B20 Core Commitments for joint ventures
B21–B26 Core Unconsolidated structured entities

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SECTION B: QUESTION ON DISCLOSURE OF INTERESTS IN OTHER

ENTITIES
QUESTION 6.1 (11 marks – 17 minutes)

Energise Ltd was formed in Johannesburg in 20.1 and its purpose is to sell pre-paid electricity, both
locally and internationally. Energise Ltd has acquired many interests in foreign entities and
concluded many contractual arrangements with foreign entities due to the increasing demand for
pre-paid electricity in foreign countries.

Energise Ltd has a financial year end of 31 March. The following information is available relating to
Energise Ltd’s foreign interest:

Power LLC

On 1 April 20.4, Energise Ltd formed Power LLC, a company that is located and operated in Iran.
Energise Ltd did not acquire any of the share capital of Power LLC. A contractual arrangement was
entered into between Energise Ltd and the shareholders of Power LLC, stating that voting rights
relate to administrative tasks only and the relevant activities are directed by means of the contractual
arrangement.

Power LLC was formed in order to construct power plants in Iran. All the electricity generated will be
sold to Energise Ltd, which will sell and distribute it throughout Iran. The construction of power plants
is expected to continue until 20.24.

As a result of ongoing sanctions against Iran, Power LLC has been having trouble acquiring parts
required for the construction of power plants that have to be imported. Consequently, there has been
a delay in the construction of several power plants. Since Power LLC cannot sell the unfinished
power plants to Energise Ltd but is still incurring operating expenses, Power LLC has almost
depleted its funds.

The initial contractual arrangement between Energise Ltd and Power LLC did not make any
provision for financial support since it was not deemed necessary at that stage. However,
Energise Ltd has noted that Power LLC requires drastic intervention. Energise Ltd provided a loan
amounting to R1,2 billion to Power LLC on 1 January 20.12. A portion of the loan, which amounts to
R500 million, is secured by the power plants. The remainder of the loan is unsecured. No
repayments have yet been arranged. The entire loan carries interest at 10% per annum.

Energise Ltd did not consolidate Power LLC in its consolidated financial statements for the year
ended 31 March 20.12. There are currently no indications that the sanctions against Iran will be
lifted.

You may assume that the terms of the contractual agreement do not meet the criteria for control in
accordance with IFRS 10, joint control in accordance with IFRS 11 or significant influence in
accordance with IAS 28.

REQUIRED
Marks
Prepare the unconsolidated structured entity note to the consolidated financial 10
statements of the Energise Ltd Group for the year ended 31 March 20.12.

Communication skills: presentation and layout 1

Please note:

• Accounting policies are not required.

• Comparative figures are not required.
• Your answer must comply with International Financial Reporting Standards
(IFRSs).

MJM
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QUESTION 6.1: SUGGESTED SOLUTION

ENERGISE LTD GROUP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED

31 MARCH 20.12

1. Unconsolidated structured entity

IFRS 12.26 Energise Ltd is involved with an unconsolidated structured entity

through a contractual arrangement with the shareholders of Power LLC.
Energise Ltd does not own any of the share capital of Power LLC.
Energise Ltd entered into a contractual arrangement with the
shareholders of Power LLC, stating that voting rights relate to
administrative tasks only and the relevant activities are directed by
means of the contractual arrangement. Power LLC was set up to
construct power plants in Iran, which will generate electricity that will be
sold to Energise Ltd. (3)

IFRS 12. As a result of ongoing sanctions against Iran, Power LLC has been
B26(f) having trouble acquiring parts required for the construction of power
plants that have to be imported. Consequently, there has been a delay
in the construction of several power plants and Power LLC's funds have
almost been depleted. (1)

IFRS 12.30 Energise Ltd granted a loan of R1,2 billion to Power LLC as a result of
the delay. The loan provided to Power LLC has no fixed repayment
terms and carries interest at 10% per annum. The capital portion of the
loan was secured by Power LLC’s power plants to the value of (2)
R500 million.

IFRS 12. Energise Ltd earned interest income (included in other income) from its
B26(c) involvement with Power LLC during the financial year. (1)

The following table contains a summary of the carrying values recognised in the
statement of financial position and maximum exposure to loss from Energise Ltd’s
involvement with the structured entity at 31 March 20.12:

Maximum Line item in the

Description Carrying amount exposure to loss statement of
R’000 R’000 financial position

Long-term loan to Financial

Power LLC * 1 230 000 1 230 000 investments (3)
* (1 200 + 30 interest) IFRS 12.29(a) IFRS 12.29(c) IFRS 12.29(b) (10)
Communication skills: presentation and layout (1)

EXAMINATION TECHNIQUE

You do not have to show the references to the standard in your suggested solution. It is
provided in the solution for your benefit.

MJM
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SELF-ASSESSMENT QUESTIONS AND SUGGESTED SOLUTIONS

Question
Question Source Marks Topic(s) covered Page
name
1 MedTec Ltd FAC4862 40 • Preparation of 71
Test of 2017 consolidated statement
of profit or loss and other
comprehensive income
2 Read Ltd Unisa 40 • Pro forma journal entries 80
– associate
• Preparation of statement
of financial position
3 Ncwaba Ltd FAC4862 40 • Pro forma journal entries 86
and Beyond Test of 2018 – subsidiary and
Ltd associate
• Discussion of control in
terms of IFRS 10
4 Links Holdings FAC4862 40 • Discussion of appropriate 95
Ltd Test of 2020 recognition and
measurement of
identifiable assets
acquired and liabilities
• Calculation of
consideration transferred
• Disclosure of investment
in associate note
5 Kids Gear Up FAC 4862 40 • Journal entries in 105
Ltd test of 2022 separate book to account
for consideration paid
• Additional/correcting pro-
forma journal entries
including intragroup
transactions
• Discussion on
classification of
investment as associate
• Disclosure of
consolidated statement
of profit and loss and OCI
– Associate

MJM
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QUESTION 1 40 marks

YOU HAVE 15 MINUTES TO READ THIS QUESTION.

MedTec Ltd is a South African company in the medical technology industry that is listed on
JSE Limited. MedTec Ltd recently started to expand in order to gain access to more patents and
research in the medical industry.

MedTec Ltd acquired 70% of the ordinary share capital of Eyecon Ltd on 30 June 20.15 for a cash
consideration of R885 000. Eyecon Ltd’s retained earnings amounted to R1 085 000 on the date of
acquisition. The acquisition of Eyecon Ltd also met the definition of the acquisition of a business in
terms of IFRS 3, Business Combinations. The fair value of the non-controlling interest on that date
amounted to R365 000. Eyecon Ltd’s assets and liabilities were deemed to be fairly valued on the
acquisition date, and no additional assets, liabilities or contingent liabilities were identified.

MedTec Ltd also acquired 65% of the ordinary share capital of SmartLife Ltd on 30 April 20.16 for a
cash consideration of R1 150 000. The fair value of the non-controlling interest on that date
amounted to R630 000. A gain on a bargain purchase arose with this acquisition.

SmartLife Ltd’s assets and liabilities were deemed to be fairly valued on 30 April 20.16, with the
exception of the following:

• Land with a cost price of R1 600 000 was deemed to have a fair value of R1 850 000.

• Equipment was revalued at R134 000 more than the carrying amount. The remaining useful
life of the equipment remained unchanged at three years at that date. The equipment is used
in the production of income.

No additional assets, liabilities or contingent liabilities were identified on 30 April 20.16.

MedTec Ltd exercised control, as per the definition of control in accordance with IFRS 10,
Consolidated Financial Statements, over Eyecon Ltd and SmartLife Ltd from 30 June 20.15 and
30 April 20.16, respectively. All the companies in the group have a February year end.

The following intragroup transactions took place within the group during the year ended
28 February 20.17:

• From 30 June 20.15, Eyecon Ltd has been selling inventory to MedTec Ltd at cost price plus
20%. Included in the closing inventory of MedTec Ltd on 28 February 20.17 was inventory
amounting to R132 500 (20.16: R87 400) that was purchased from Eyecon Ltd.

• During the 20.17 financial year, sales from Eyecon Ltd to MedTec Ltd amounted to R335 200.

• On 1 August 20.16, Eyecon Ltd lent R300 000 to SmartLife Ltd. The loan is repayable in three
annual instalments, which will commence on 31 July 20.17. The loan bears interest at 9,3%,
compounded annually.

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• MedTec Ltd sold office furniture to SmartLife Ltd for R14 000 on 1 November 20.16. The
original cost price of the furniture was R15 700. The furniture was originally purchased on
1 September 20.15 and had a useful life of five years on that date.

The separate trial balances of the various companies as at 28 February 20.17 are as follows:

MedTec Eyecon SmartLife

Ltd Ltd Ltd
R R R
Ordinary share capital (100 000 ordinary shares each) (100 000) (100 000) (100 000)
Retained earnings (1 March 20.16) (6 462 300) (2 172 000) (1 298 000)
Mark-to-market reserve (28 February 20.17) (473 360) - -
Deferred tax (276 800) (138 400) (20 000)
Loan from Eyecon Ltd - - (300 000)
Trade and other payables (67 000) (43 000) (38 000)
Revenue (5 241 600) (2 420 000) (1 700 300)
Other income (including interest received) (127 922) (104 800) (46 100)
Land 4 610 400 2 700 000 1 600 000
Equipment (carrying amount) 925 400 264 000 694 420
Office furniture (carrying amount) 767 360 22 000 31 000
Patents (carrying amount) 1 057 000 21 000 39 420
Investment in Eyecon Ltd 885 000 - -
Investment in SmartLife Ltd 1 150 000 - -
Loan to SmartLife Ltd - 300 000 -
Inventory 248 200 130 400 23 460
Trade and other receivables 110 000 51 000 66 000
Cash and cash equivalents 96 322 77 800 79 900
Cost of sales 2 764 000 1 300 000 900 500
Finance costs - - 27 400
Other expenses 43 700 72 600 24 900
Income tax expense 91 600 39 400 15 400

Additional information

1. It is the group’s accounting policy to account for property, plant and equipment according to
the cost model in accordance with IAS 16, Property, Plant and Equipment.

2. The MedTec Ltd Group provides depreciation on property, plant and equipment items on the
straight-line method over the remaining useful life of the assets.

3. SmartLife Ltd’s income and expenses accrued evenly throughout the financial year.

4. It is the accounting policy of MedTec Ltd to account for investments in subsidiaries at cost in
accordance with IAS 27.10(a) in its separate financial statements.

5. MedTec Ltd elected to measure non-controlling interests at fair value at the acquisition date in
respect of all acquisitions.

6. Assume a normal income tax rate of 27% and a capital gains tax (CGT) inclusion rate of 80%.
Ignore value added tax (VAT) and dividend tax.

7. There were no changes in the issued ordinary share capital of any of the companies in the
group.

MJM
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REQUIRED

YOU HAVE 60 MINUTES TO ANSWER THIS QUESTION.

Marks

Prepare the consolidated statement of profit or loss and other comprehensive income of 39
the MedTec Ltd Group for the year ended 28 February 20.17. Income and expenses
should be presented in terms of their function.

Communication skills: presentation and layout 1

Please note:

• Round off all amounts to the nearest rand.

• Comparative figures are not required.
• Notes to the consolidated statement of profit or loss and other comprehensive
income are not required.
• Only the allocation of profit or loss for the period attributable to owners of the parent
and non-controlling interests as per IAS 1.81B(a) is required.
• Show all your calculations.
• Your answer must comply with International Financial Reporting Standards (IFRSs).

MJM
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QUESTION 1: SUGGESTED SOLUTION

MEDTEC LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE

INCOME FOR THE YEAR ENDED 28 FEBRUARY 20.17

Revenue [C1] 8 743 317 (4)

Cost of sales [C2] (4 523 955) (5)
Gross profit 4 219 362
Other income [C6] 294 421 (12)
Other expenses [C7] (136 879) (2)
Finance costs [C8] (6 558) (2)
Profit before tax 4 370 346
Income tax expense [C10] (131 270) (6)
PROFIT FOR THE YEAR 4 239 076
Other comprehensive income for the year, net of tax -
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 4 239 076

Profit attributable to:

Owners of the parent (balancing) 3 689 417 (1)
Non-controlling interests (332 194 [C11] + 217 465 [C11]) 549 659 (10)
4 239 076
Total (42)
Maximum (39)
Communication skills: presentation and layout (1)

COMMENT

• Ensure that you transfer all calculated amounts to the face of the consolidated
statement of P/L and OCI to earn maximum marks.
• Cross-reference all calculations.
• The profit for the year and total comprehensive income for the year will be allocated
between NCI and the parent in accordance with IAS 1.81 at the end of the
consolidated statement of profit or loss and other comprehensive income.
• You can find the format of the consolidated statement of P/L and OCI in your IFRSs
(Part B1, IAD 1 IG).
• When you are required to prepare the statement of P/L and OCI, write down the
format from the standard, and as you do your calculations, immediately transfer the
amounts to the face of the statement of P/L and OCI to earn marks for your
calculations.

MJM
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CALCULATIONS

C1. Revenue

MedTec Ltd (5 241 600) [1]

Eyecon Ltd (2 420 000) [1]
SmartLife Ltd (1 700 300 x 10/12) (1 416 917) [1]
Elimination of intragroup sales for 20.17 335 200 [1]
(8 743 317)
[4]

COMMENT

In the past, very few students proportioned the income and expense items of SmartLife
Ltd for the 10 months while it was a subsidiary.

C2. Cost of sales

MedTec Ltd 2 764 000

Eyecon Ltd 1 300 000
SmartLife Ltd (900 500 x 10/12) 750 417 [1]
Elimination of intragroup sales for 20.17 (335 200) [1]
Realisation of unrealised intragroup profit for 20.16 [C3] or
(20/120 x 87 400) (14 567) [1]
Depreciation on revalued equipment [C5] or (134 000/3 x 10/12) 37 222 [1]
Elimination of unrealised intragroup profit for 20.17 [C4] or
(20/120 x 132 500) 22 083 [1]
4 523 955
[5]

COMMENT

• According to the given information, the equipment is used in the production of

income.
• The depreciation on this equipment will therefore be included in the cost of sales,
not other expenses.

C3. Unrealised profit in inventory – 20.16

Inventory – opening balance 1 March 20.16 87 400

Unrealised profit (20/120 x 87 400) (14 567) [1]

Deferred tax expense (14 567 x 27%) 3 933 [1]
Adjustment for 20.17 (10 634)

C4. Unrealised profit in inventory – 20.17

Inventory – closing balance 28 February 20.17 132 500

Unrealised profit (20/120 x 132 500) 22 083 [1]

Deferred tax expense (22 083 x 27%) (5 962) [1]
Adjustment for 20.17 16 121

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COMMENT

• Eyecon Ltd sold inventory to MedTec Ltd, which constitutes an intragroup sale from
the subsidiary to the parent.
• The unrealised profit is therefore with the subsidiary and the subsidiary’s profit will
be affected by the elimination of the unrealised profit. You have to take this into
account when you calculate the subsidiary’s profit and the share of NCI in that profit.
• If you are still uncertain about the effect that intragroup transactions have on certain
line items, refer to Group Statements, Volume 1, chapter 5.

C5. Depreciation on revalued equipment

Remaining useful life 3

Revaluation at acquisition date 134 000

Additional depreciation for 20.17 (134 000/3 x 10/12) 37 222 [1]

Deferred tax expense (37 222 x 27%) (10 050) [1]
Adjustment for 20.17 27 172

C6. Other income

Gain on bargain purchase [C12] (41 520) [8]

MedTec Ltd (127 922)
Eyecon Ltd (104 800)
SmartLife Ltd (46 100 x 10/12) (38 417) [1]
Elimination of intragroup interest on loan (300 000 x 9,3% x 7/12) 16 275 [1]
Elimination of intragroup gain on disposal of office furniture [C9] or
(14 000 – (15 700 – (15 700/60 x 14))) 1 963 [2]
(294 421)
[12]

C7. Other expenses

MedTec Ltd 43 700

Eyecon Ltd 72 600
SmartLife Ltd (24 900 x 10/12) 20 750 [1]
Elimination of intragroup depreciation on furniture [C9] or (1 963/46 x 4) (171) [1]
136 879
[2]

C8. Finance costs

SmartLife Ltd (27 400 x 10/12) 22 833 [1]

Elimination of intragroup interest on loan [C6] (16 275) [1]
6 558
[2]

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C9. Intragroup gain on disposal of office furniture and depreciation

Cost price 15 700

Accumulated depreciation up to 1 November 20.16 (15 700/60 x 14) (3 663)
Carrying amount on 1 November 20.16 12 037
Selling price (14 000)
Unrealised profit on disposal of furniture (1 963)
Deferred tax on gain (1 963 x 27%) 530

Depreciation on furniture (1 963/(60 – 14) x 4) (171)

Deferred tax (171 x 27%) 46

C10. Income tax expense

MedTec Ltd 91 600

Eyecon Ltd 39 400
SmartLife Ltd (15 400 x 10/12) 12 833 [1]
Tax implication of intragroup profit for 20.16 [C3] or (14 567 x 27%) 3 933 [1]
Tax implication of additional depreciation [C5] or (37 222 x 27%) (10 050) [1]
Tax implication of intragroup profit for 20.17 [C4] or (22 083 x 27%) (5 962) [1]
Tax implication of gain on disposal of furniture [C9] or (1 963 x 27%) (530) [1]
Tax implication on depreciation on furniture sold [C9] or (171 x 27%) 46 [1]
131 270
[6]

C11. Non-controlling interests

Eyecon Ltd
Revenue 2 420 000
Other income 104 800
Cost of sales (1 300 000)
Other expenses (72 600)
Finance costs -
Income tax expense (39 400)
Profit for the year 1 112 800 [2]
After-tax effect of realisation of intragroup profit of 20.16 [C3] 10 634 [1]
After-tax effect of elimination of intragroup profit [C4] (16 121) [1]
1 107 313

Non-controlling interest (1 107 313 x 30%) 332 194 [1]

SmartLife Ltd
Revenue 1 700 300
Other income 46 100
Cost of sales (900 500)
Other expenses (24 900)
Finance costs (27 400)
Income tax expense (15 400)
Profit for full year 778 200 [2]
Profit for 10 months (778 200 x 10/12) 648 500 [1]
After-tax effect of additional depreciation [C5] (27 172) [1]
621 328

Non-controlling interests (621 328 x 35%) 217 465 [1]

[10]

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C12. SmartLife Ltd – goodwill/gain on bargain purchase (IFRS 3.32)

Consideration transferred 1 150 000 [1]

Non-controlling interests 630 000 [1]
1 780 000
- Net identifiable assets acquired 1 821 520
Share capital 100 000 [1]
Retained earnings 1 298 000 [1]
Profit for 2 months not a subsidiary [C11] (778 200 x 2/12) 129 700 [1]
Adjustments to the net assets:
Revaluation of equipment (134 000 x 73%) 97 820 [1]
Revaluation of land [(1 850 000 – 1 600 000) x (1 – 27% x 80%)] 196 000 [2]
Gain on bargain purchase (41 520)
[8]

C13. Eyecon Ltd – goodwill/gain on bargain purchase (IFRS 3.32) (for completeness)

Consideration transferred 885 000

Non-controlling interest 365 000
1 250 000
- Net identifiable assets acquired 1 185 000
Share capital 100 000
Retained earnings 1 085 000
Goodwill 65 000

C14. Analysis of owner’s equity of Eyecon Ltd (for completeness)

MedTec Ltd 70%

Total At Since NCI
At acquisition
Share capital 100 000
Retained earnings 1 085 000
1 185 000 829 500 355 500
Equity represented by goodwill
(balancing) 65 000 55 500 9 500
Consideration and NCI 1 250 000 885 000 365 000

Since acquisition
Beginning of the year
Retained earnings (2 172 000 –
1 085 000 – 10 634[C3]) 1 076 366 753 456 322 910

Current year
Profit for the year [C11] 1 107 313 775 119 332 194
3 433 679 1 528 575 1 020 104

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C15. Analysis of owner’s equity of SmartLife Ltd (for completeness)

MedTec Ltd 65%

Total At Since NCI
At acquisition
Share capital 100 000
Retained earnings 1 298 000
Profit for 2 months 129 700
Revaluation of equipment 97 820
Revaluation of land 196 000
1 821 520 1 183 988 637 532
Gain on bargain purchase
(balancing) (41 520) (33 988) (7 532)
Consideration and NCI 1 780 000 1 150 000 630 000

Current year
Profit for the year [C11] 621 328 403 863 217 465
2 401 328 403 863 847 465

MJM
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QUESTION 2 40 marks

YOU HAVE 15 MINUTES TO READ THIS QUESTION.

Read Ltd was incorporated in 19.2 in Bloemfontein and is one of the oldest bookstores in the area.
Since its incorporation, the company has undergone many changes and expansions. It has also
acquired two investments that will ensure that the business continues to grow.

Read Ltd purchased 36 000 shares in Bookz Ltd, a company that exclusively sells children’s books,
for an amount of R440 000 on 1 January 20.9. As of this date, Read Ltd exercised significant
influence over the financial and operating policy decisions of Bookz Ltd. The assets and the liabilities
of Bookz Ltd were fairly valued on this date, with the exception of trade and other receivables, which
were overvalued by R10 000. Bookz Ltd recovered the carrying amount of the trade and other
receivables in February 20.9.

Read Ltd wanted to expand its business further and on 1 December 20.10 it entered into a joint
operation to create Textz on the same date. Textz is not a separate legal entity. Textz is a supplier
of school and university textbooks, an industry that has expanded significantly over the past two
decades. Read Ltd is entitled to 45% of all Textz’s assets and liabilities, as well as revenues and
expenses, through a contractual arrangement.

The following balances are extracted from the trial balance of Bookz Ltd at various dates:

01/01/20.9 01/12/20.10
R R
Share capital 200 000 200 000
Retained earnings 1 060 000 1 480 000
Revaluation surplus 210 000 245 000
1 470 000 1 925 000

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The following are the separate trial balances as at 30 November 20.11, without the inclusion of Textz
in the separate trial balance of Read Ltd:

Read Ltd Bookz Ltd Textz

R R R
Dr/(Cr) Dr/(Cr) Dr/(Cr)
Share capital (500 000 shares; 120 000 shares) (500 000) (200 000) –
Retained earnings (3 560 000) (1 630 000) (204 000)
Revaluation surplus (522 000) (290 000) –
Long-term loans – (100 000) –
Deferred tax liability (23 000) (8 500) –
Loan from Read Ltd – (12 500) (45 000)
Loan from other owners – – (55 000)
Trade and other payables (485 000) (202 500) (154 000)
Bank overdraft – (15 400) –
Property, plant and equipment 2 952 000 1 660 900 257 000
Investment in Bookz Ltd 440 000 – –
Loan to Bookz Ltd 12 500 – –
Loan to Textz 45 000 – –
Trade and other receivables 594 000 396 000 102 000
Inventory 467 000 402 000 99 000
Cash and cash equivalents 579 500 – –
– – –

Additional information

1. All the entities have a 30 November year end.

2. It is the accounting policy of Read Ltd to account for investments in associates at cost in
accordance with IAS 27.10(a) in its separate financial statements.

3. On 31 December 20.10 Textz sold office equipment to Read Ltd for an amount of R63 000.
Textz originally purchased this office equipment for an amount of R60 000 on the date when
the joint operation was established. At that date, Textz assessed the useful life of the office
equipment at six years. The accounting policy of both Textz and Read Ltd is to depreciate
office equipment over its remaining useful life on the straight-line method.

4. Bookz Ltd purchased inventory from Read Ltd from its date of acquisition. Read Ltd sold the
inventory at a profit margin of 25% on cost. Total sales amounted to R400 000 in the 20.10
financial year and R620 000 in the 20.11 financial year.

Inventory purchased from Read Ltd still on hand at year end was as follows:

30 November 20.10 – R90 000

30 November 20.11 – R130 000

5. Bookz Ltd declared a dividend of R30 000 on 1 September 20.11.

6. Read Ltd has the right to demand repayment of the loans to Bookz Ltd and Textz at any time.
The loans are provided interest free.

7. Assume an income tax rate of 27% and a capital gains tax (CGT) inclusion rate of 80%.

8. Ignore value added tax (VAT) and dividend tax.

MJM
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REQUIRED

YOU NOW HAVE 60 MINUTES TO ANSWER THIS QUESTION.

Marks
(a) Prepare the pro forma journal entries to account for the investment in Bookz Ltd in 25
the financial statements of the Read Ltd Group for the year ended
30 November 20.11. Journal entries relating to deferred taxation are also required.

Communication skills: presentation and layout 1

(b) Present the asset section on the face of the statement of financial position of the 13
Read Ltd Group as at 30 November 20.11.

Communication skills: presentation and layout 1

Please note:

• Journal narrations are required.

• Comparative figures are not required.
• Round off all amounts to the nearest rand.
• Your answer must comply with International Financial Reporting Standards (IFRSs).

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QUESTION 2: SUGGESTED SOLUTION

(a) Pro forma journal entries

Dr Cr
R R
J1 Investment in associate (SFP) (128 160 + 10 500) 138 690 (1)
Retained earnings (SCE) [C3] 128 190 (2)
Revaluation surplus (SCE) [C3] 10 500 (1)
Recognition of equity since acquisition until beginning
of year
J2 Retained earnings – beginning of year (SCE)
(balancing) 3 942 (1)
Deferred tax (SFP) (5 400 x 27%) 1 458 (1)
Investment in associate (SFP)
(90 000 x 25/125 x 30%) 5 400 (2)
Reversal of prior year unrealised profit in closing
inventory
J3 Cost of sales (P/L) (90 000 x 100/125 x 30%) 21 600 (2)
Investment in associate (SFP) (90 000 x 25/125 x 30%) 5 400 (2)
Revenue (P/L) (90 000 x 30%) 27 000 (1)
Reversal of unrealised profit in opening inventories
upon sale
J4 Income tax expense (P/L) (5 400 x 27%) 1 458 (1)
Deferred tax (SFP) 1 458 (1)
Reversal of deferred tax on unrealised profit in
opening inventories upon sale
J5 Revenue (P/L) (130 000 x 30%) 39 000 (1)
Cost of sales (P/L) (130 000 x 100/125 x 30%) 31 200 (1)
Investment in associate (SFP)
(130 000 x 25/125 x 30%) 7 800 (1)
Reversal of current year unrealised profit in closing
inventory
J6 Deferred tax (SFP) (7 800 x 27%) 2 106 (1)
Income tax expense (P/L) 2 106 (1)
Recognition of deferred tax on unrealised profit in
closing inventory
J7 Investment in associate (SFP) (54 000 + 13 500) 67 500 (1)
Share of profit of associate (P/L) [C3] 54 000 (2)
Share of other comprehensive income of associate
(OCI) [C3] 13 500 (1)
Recognition of share of profit and other
comprehensive income of associate
J8 Other income (P/L) [C3] 9 000 (1)
Investment in associate (SFP) 9 000 (1)
Reversal of intragroup dividend received
Total (26)
Maximum (25)
Communication skills: presentation and layout (1)

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COMMENT

• Take note that intragroup items such as the sale amounts between Read Ltd and
Bookz Ltd or the intragroup loans are not to be eliminated. The equity method does
not consolidate assets, liabilities, income or expenses of an associate, and
intragroup items that do not have an unrealised profit element are not eliminated.
Refer to IAS 28.28 and the comment box below question 4.2 in this regard.
• Unrealised profit on inventory entries should not be eliminated at 100% but at 30%.

(b) Asset section of the statement of financial position

READ LTD GROUP

STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20.11

20.11
R
ASSETS
Non-current assets
Property, plant and equipment
[2 952 000 + (257 000 x 45%) – 1 725 [C1] + 267 [C1]] 3 066 192 (5)
Investment in associate [C2] 629 390 (5)
3 695 582
Current assets
Inventory [467 000 + (99 000 x 45%)] 511 550 (1)
Trade and other receivables [594 000 + (102 000 x 45%)] 639 900 (1)
Cash and cash equivalents (given) 579 500 (1)
Loan to Bookz Ltd (given) 12 500 (1)
Loan to Textz [45 000 – (45 000 x 45%)] 24 750 (2)
1 768 200
Total assets 5 463 782
Total (16)
Maximum (13)
Communication skills: presentation and layout (1)

CALCULATIONS

C1. Unrealised profit in equipment

Cost of equipment on 1 December 20.10 60 000

Accumulated depreciation at 31 December 20.10
(1 month elapsed on 31 December 20.10 = 60 000 / 6 x 1/12) (833) [1]
Carrying amount at 31 December 20.10 59 167
Proceeds on sale of equipment 63 000 [1]
Unrealised profit 3 833

Apportioned to Read Ltd (3 833 x 45%) 1 725 [1]

Reversal of current year depreciation
(1 725 / 71 months remaining useful life x 11) 267 [1]
[4]

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C2. Investment in associate

Cost (given) 440 000 [1]

Recognition of equity since acquisition until beginning of year
(128 190 + 10 500) (J1) 138 690 [1]
Reversal of current year unrealised profit in closing inventory (J5) (7 800) [1]
Recognition of share of profit and other comprehensive income (J7) 67 500 [1]
Reversal of intragroup dividend received (J8) (9 000) [1]
629 390 [5]

COMMENT

Take note that calculation C2 does not include J4 and J5 since the net effect on the
investment in associate of these two journals is zero.

You can also add the consideration paid of R440 000 to the total movement in the
investment balance of R189 390 calculated in the analysis of the owner’s equity of
Bookz Ltd [C3] to determine the same carrying amount of the investment in associate
of R629 390 that was calculated in C2.

C3. Analysis of the owner’s equity of Bookz Ltd – ordinary share capital

Read Ltd
30%
Total At Since
At acquisition
Share capital 200 000
Retained earnings [1 060 000 – (10 000 x 73%)] 1 052 700
Revaluation surplus 210 000
1 462 700 438 810
Goodwill 1 190
Consideration transferred 440 000

Since acquisition
Retained earnings (1 480 000 – 1 060 000 +
(10 000 x 73%)) 427 300 128 190 [2]
Revaluation surplus (245 000 – 210 000) 35 000 10 500 [1]

Current year
Profit for the year
(1 630 000 – 1 480 000 + 30 000 (dividend)) 180 000 54 000 [2]
Share of other comprehensive income
(290 000 (given) – 245 000 (given)) 45 000 13 500 [1]
Dividend (30 000) (9 000) [1]
2 120 000 197 190

EXAMINATION TECHNIQUE

• There is no column for non-controlling interests in the above analysis because the
investment is an associate, not a subsidiary. Moreover, it would be a waste of time
to complete the other owner’s column of 70% since it would not be used.
• Take care not to waste valuable time by preparing the full statement of financial
position or to include notes to the financial statements since that does not form part
of what is required.

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QUESTION 3 40 marks

YOU HAVE 15 MINUTES TO READ THIS QUESTION.

This question consists of two independent parts.

PART I 30 marks

Sam Baloyi incorporated Ncwaba Ltd (Ncwaba) in 20.01 during his CTA studies. The purpose of the
company was to formalise Sam’s car wash business, which had grown sufficiently to allow him to
focus on his studies full time. Since then, Sam has used his business acumen and the skills and
knowledge he acquired to establish a national chain of franchise car wash operations.

Recently, Ncwaba invested in two companies, namely, Hlamba Ltd (Hlamba) and Isevisi Ltd (Isevisi).
In line with its future expectations and at the request of finance providers, Ncwaba has adopted
International Financial Reporting Standards as its financial reporting framework.

Investment in Hlamba

Ncwaba acquired an 80% interest in Hlamba on 1 March 20.17 and exercised control over Hlamba,
as per the definition of control in accordance with IFRS 10, Consolidated Financial Statements, from
that date. The acquisition of Hlamba also met the definition of the acquisition of a business in terms
of IFRS 3, Business Combinations. Hlamba’s issued ordinary share capital and retained earnings
amounted to R100 000 (100 000 shares) and R350 000, respectively, on the date of acquisition.
The purchase consideration paid for the acquisition was as follows:

• A cash amount of R150 000 was paid on 1 March 20.17.

• A cash amount of R175 000 is payable by Ncwaba on 28 February 20.18.
• Ncwaba issued 1 000 of its authorised shares to the selling shareholders of Hlamba. The price
per share was R134 on 1 March 20.17 and R135 on 15 March 20.17. The latter date was the
date on which the shares were registered in the name of the selling shareholders.
• A contingent consideration of R100 000 is only payable on 28 February 20.19, if the profit after
tax of Hlamba increases by 20% year-on-year. The profit after tax of Hlamba has increased
by 22% by 28 February 20.18. The fair value of the contingent consideration was R60 000 on
1 March 20.17 and R75 000 on 28 February 20.18.
• Included in the cash amount paid by Ncwaba on 1 March 20.17 were lawyer’s fees of R15 000,
costs relating to the share issue of R12 000 and other acquisition-related costs of R10 000.

All the assets and liabilities of Hlamba were deemed to be fairly valued on 1 March 20.17, with the
exception of the following:

• The equipment of Hlamba had a fair value of R250 000 and a carrying amount of R175 000.
The remaining useful life of the equipment on 1 March 20.17 was five years.

No additional assets, liabilities or contingent liabilities were identified on 1 March 20.17.

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Investment in Isevisi

The investment in Isevisi was acquired on 1 September 20.17 when Ncwaba obtained 40% of the
share capital and voting rights of Isevisi. Ncwaba exercised significant influence over the financial
and operating policy decisions of Isevisi from that date. The issued ordinary shares of Isevisi
consisted of 100 000 shares, and the share capital and the retained earnings amounted to R100 000
and R400 000, respectively, at that date. The purchase consideration for the acquisition consisted
of a cash amount of R150 000 that was paid to the selling shareholders on 1 September 20.17. In
addition to the cash amount, Ncwaba paid lawyer’s fees of R10 000 and other acquisition-related
costs of R5 000 directly to the respective service providers.

All the assets and liabilities of Isevisi were considered to be fairly valued at the acquisition date.

Intragroup transactions

The following intragroup transactions took place within the group in the year ended
28 February 20.18:

• Ncwaba has been selling inventory to Hlamba at cost price plus 20% from 1 March 20.17.
In the 20.18 financial year, sales from Ncwaba to Hlamba amounted to R100 000. Included in
the closing inventory of Hlamba on 28 February 20.18 was inventory amounting to R33 000
that was purchased from Ncwaba.

• Ncwaba sold car wash equipment to Isevisi for R25 000 on 1 December 20.17. The carrying
amount in the records of Ncwaba was R20 000 at that date. The equipment was originally
purchased on 1 December 20.15 and had a useful life of six years on that date (the useful life
did not change after the sale).

No dividends were declared or paid by any of the companies in the group in the current financial
year.

Financial information

The following is an extract of the financial information of the companies in the group for the year
ended 28 February 20.18:

R
Profit after tax for the period 1 March 20.17 to 28 February 20.18
- Ncwaba 350 000
- Hlamba 250 000
- Isevisi 225 000

Additional information

1. The Ncwaba Group applies the following accounting policies:

• Equipment is accounted for according to the cost model in accordance with IAS 16,
Property, Plant and Equipment.
• Depreciation on equipment is provided on the straight-line method over the remaining
useful life of the asset.

2. It is the accounting policy of Ncwaba to account for investments in associates and subsidiaries
at cost in accordance with IAS 27.10(a) in its separate financial statements.

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3. The Ncwaba Group’s income and expenses accrued evenly throughout the financial year.

4. Assume a normal income tax rate of 27% and a capital gains tax (CGT) inclusion rate of 80%.
Ignore value added tax (VAT) and dividend tax.

5. Non-controlling interests are measured at the proportionate share of the acquiree’s identifiable
net assets at the acquisition date.

6. There were no changes in the issued ordinary share capital of any of the companies in the
group.

7. A market-related pre-tax discount rate is 12%, compounded annually.

8. All the companies in the Ncwaba Group have a 28 February year end.

PART II 10 marks

Beyond Ltd (Beyond) is a small retail company that was started by three enterprising, recently
qualified students. The company’s business processes are expertly managed and therefore show
great potential for scalability. The company’s relevant activities are the selling and buying of items
and services.

Beyond’s share capital consists of 100 000 issued ordinary shares. Each share gives the
shareholder one voting right. 55 000 of the ordinary shares were purchased by
Alternative Investments Ltd (Alternative) on 1 December 20.17. CashCow Ltd (CashCow) holds the
remainder of the shares.

Alternative and CashCow are both listed on the JSE Limited in the retail sector. Both companies
intend to increase their market capitalisation and are in the process of acquiring a number of
companies that will help increase profits, which will increase their share prices and therefore
increase their market capitalisation.

Alternative and CashCow signed a shareholders’ agreement to formalise their working relationship.
It was determined that CashCow has the right to veto any decisions about transactions that will not
benefit CashCow’s business in general and CashCow has the right to appoint service providers and
to terminate their services.

All the companies have a 28 February year end.

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REQUIRED

YOU NOW HAVE 60 MINUTES TO ANSWER THIS QUESTION.

Marks

PART I

Provide the pro forma consolidation journal entries of the Ncwaba Ltd Group for the year 29
ended 28 February 20.18. Journal entries relating to deferred taxation are also required.

Communication skills: presentation and layout 1

PART II

Discuss, with reasons, whether CashCow Ltd should consolidate Beyond Ltd in its 9
consolidated financial statements for the year ended 28 February 20.18.

Communication skills: logical flow and conclusion 1

Please note:

• Round off all amounts to the nearest rand.

• Journal narrations are required.
• Show all your calculations.
• Your answer must comply with International Financial Reporting Standards
(IFRSs).

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QUESTION 3: SUGGESTED SOLUTION

PART I
Dr Cr
R R
Hlamba Ltd
J1 Share capital (SCE) (given) 100 000 (1)
Retained earnings (SCE) (given) 350 000 (1)
Equipment (SFP) (250 000 – 175 000) 75 000 (1)
Goodwill (SFP) (balancing) 59 650 (1)
Deferred tax (SFP) (75 000 x 27%) 20 250 (1)
Investment in Hlamba (SFP) [C1] 463 250 (8)
Non-controlling interests (SFP) [C7] 100 900 (1)
At acquisition elimination journal
J2 Other expenses (depreciation) (P/L) 15 000
Accumulated depreciation (SFP) (75 000/5) OR [C3] 15 000 (1)
Depreciation on equipment revalued at acquisition
J3 Deferred tax (SFP) (15 000 x 27%) 4 050 (1)
Income tax expense (P/L) 4 050
Taxation effect of depreciation
J4 Revenue (P/L) (given) 100 000 (1)
Cost of sales (P/L) 100 000
Elimination of intragroup sales for 20.18
J5 Cost of sales (P/L) [C4] 5 500 (1)
Inventory (SFP) [C4] or (20/120 x 33 000) 5 500 (1)
Intragroup sales of inventory (SFP)
J6 Deferred tax (SFP) (5 500 x 27%) 1 485 (1)
Income tax expense (P/L) 1 485
Taxation effect of intragroup sales
J7 Non-controlling interests (P/L) ((250 000 – 15 000 [J2] + 47 810 (1)
4 050 [J3]) x 20%) or (239 050 x 20%)
Non-controlling interests (SFP) 47 810 (1)
Allocation of share of profit or loss and other comprehensive
income of non-controlling interests

Isevisi Ltd
J8 Investment in Isevisi (SFP) [C5] 35 000 (3)
Share of P/L of associate (P/L) 35 000 (1)
Recognition of excess at acquisition
J9 Investment in Isevisi (SFP) (225 000 x 40% x 6/12) 45 000 (2)
Share of P/L of associate (P/L) 45 000 (1)
Allocation of share of P/L of associate (equity method)
J10 Other income (P/L) ((25 000 – 20 000) x 40%) OR [C6] 2 000 (1)
Depreciation (P/L) (2 000/4 x 3/12) or [C6] 125 (1)
Investment in associate (SFP) (balancing) 1 875 (1)
Elimination on downstream intragroup transaction
J11 Deferred tax (SFP) 506 (1)
Income tax expense (P/L) (1 875 x 27%) 506 (1)
Taxation effect of intragroup sale
Total (34)
Maximum (29)
Communication skills: presentation and layout (1)

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COMMENT

Refer to the screencast on myUnisa for a discussion of this question. The screencast
covers the scenario, what is required and the solution and will help you develop the skills
required to attempt questions containing similar principles.

COMMENT

Good examination technique is to always provide the excess journal [J8], even if
goodwill is calculated. Since a mistake could be made in the calculation of goodwill,
providing the excess journal ensures that marks can still be earned for the journal.

CALCULATIONS

C1. Consideration paid

Cash paid on 1 March 20.17 (given) 150 000 [1]

Less: Costs that must be either expensed or capitalised (37 000)
Lawyer’s fees included in cash paid on 1 March 20.17 – expensed (15 000) [1]
Other acquisition costs included in cash paid on 1 March 20.17 – expensed (10 000) [1]
Share issue costs – capitalised against share capital (12 000) [1]
Cash payable on 28 February 20.18 [C2] 156 250 [2]
Shares issued (1 000 x 134) 134 000 [1]
Contingent consideration (given) 60 000 [1]
463 250
[8]

COMMENT

The main principle that applies to determining the consideration paid is that the fair value
must be used. Furthermore, all acquisition-related expenses, except costs for registering
and issuing debt and equity securities, must be expensed (IFRS 3.53).

It is important to determine how the parent treated these costs in its separate accounting
records to determine if any adjustment is required in the consolidated records. The
information in the question must therefore be read carefully.

C2. Cash payable on 28 February 20.18

HP 10 B11 Sharp EL 733A Sharp EL 738

• 2nd F C (Clear All) • 2nd F C.CE (Clear All) • 2nd F MODE (Clear All)
• 1 N • 1 n • 1 N [1]
• R0 PMT • R0 PMT • R0 PMT
• 175 000 FV • 175 000 FV • 175 000 FV [1]
• 12% I/YR • 12% i • 12% I/Y [1]
• PV ⇒ 156 250 • COMP PV ⇒ 156 250 • COMP PV ⇒ 156 250
[2]

C3. Depreciation on equipment revalued at acquisition

Remaining useful life 5 years

Revaluation at acquisition date (250 000 – 175 000) 75 000

Additional depreciation for 20.18 (75 000/5) 15 000 [1]

Taxation expense (15 000 x 27%) (4 050) [1]
Adjustment for 20.18 10 950
[2]

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C4. Unrealised profit in inventory – 20.18

Inventory – closing balance 28 February 20.18 33 000

Unrealised profit (20/120 x 33 000) 5 500 [1]

Deferred tax expense (5 500 x 27%) (1 485) [1]
Adjustment for 20.18 4 015
[2]

C5. Excess at acquisition of Isevisi

Share capital (given) 100 000

Retained earnings (given) 400 000
500 000 [½]

Ncwaba’s share of 40% (500 000 x 40%) 200 000 [½]

Consideration paid: (165 000)
Cash paid (given) 150 000 [½]
Lawyer’s fees (given) 10 000 [½]
Other acquisition-related costs (given) 5 000 [½]
Excess at acquisition 35 000
[2½]

C6. Profit on sale of equipment – 20.18

Profit on sale of equipment ((25 000 – 20 000) x 40%) 2 000 [1]

Profit realised in 20.18 (2 000/4 x 3/12) (125) [1]
Net effect on group profit or loss 1 875
Deferred tax expense (1 875 x 27%) (506) [1]
Adjustment for 20.18 1 369
[3]

C7. Analysis of owner’s equity of Hlamba Ltd (for the sake of completeness)

Ncwaba Ltd 80%

Total At Since NCI
At acquisition
Share capital 100 000
Retained earnings 350 000
Equipment (250 000 – 175 000) 75 000
Deferred tax (75 000 x 27%) (20 250)
504 500 403 600 100 900
Equity represented by goodwill
(balancing) 59 650 59 650 –
Consideration and NCI [C1] 564 050 463 250 100 900

Since acquisition
Current year
Profit for the year 239 050 191 240 47 810
Profit (given) 250 000
Depreciation (75 000/5 x 73%) (10 950)
803 100 191 240 148 610

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C8. Analysis of owner’s equity of Isevisi Ltd (for the sake of completeness)

Ncwaba Ltd 40%

Total At Since
At acquisition
Share capital 100 000
Retained earnings 400 000
500 000 200 000
Excess (balancing) 35 000
Consideration [C5] 165 000

Current year
Profit for the year (225 000 x 6/12) 112 500 45 000
612 500 45 000

PART II

Discussion of whether CashCow Ltd should consolidate Beyond Ltd or not

An entity that is a parent must present consolidated financial statements (IFRS 10.4).

An investor determines whether it is a parent by assessing whether it controls an investee

(IFRS 10.5).

Control
An investor controls an investee when it is exposed, or has rights, to variable returns from
its involvement with the investee and has the ability to affect those returns through its power
over the investee (IFRS 10.6–7).

1A. Power over the investee (IFRS 10.7(a))

To have power over an investee, an investor must have existing rights that gives it a current
ability to direct the relevant activities (IFRS 10.B9).

Existing rights
The right to direct an investee to enter into transactions or to veto any changes to
transactions for the benefit of the investor (IFRS 10.B15(d)):

CashCow Ltd only has 45% of the shareholding of Beyond Ltd but can still have power even
if it holds less than a majority of the voting rights of an investee (IFRS 10.B38). (2)

According to the shareholders’ agreement, CashCow Ltd has the right to veto any decisions
about transactions that will not benefit Beyond Ltd’s business in general. This also indicates
that CashCow Ltd has the right to direct the relevant activities of Beyond Ltd. (2)

Direct relevant activities

The right to appoint and remunerate an investee’s key management personnel or service
providers and to terminate their services or employment (IFRS 10.B12(b)):

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The relevant activities of Beyond Ltd are the selling and buying of items and services. (1)

According to the shareholders’ agreement, CashCow Ltd has the right to appoint service
providers and to terminate their services. This indicates that CashCow Ltd has the ability to
direct the relevant activities. (2)

CashCow Ltd does not hold the majority of the shares but it does have power over Beyond Ltd. (1)

1B. Exposure/rights to variable returns (IFRS 10.7(b))

CashCow Ltd has rights to variable returns in the form of dividends due to its 45%
shareholding in Beyond Ltd. (1)

1C. Link between power and returns (IFRS 10.7(c))

Since it has the right to appoint and terminate service providers and to veto transactions,
CashCow Ltd can use its power to affect its returns from its involvement with Beyond Ltd. (2)

Conclusion
CashCow Ltd is required to consolidate Beyond Ltd in its consolidated financial statements
for the year ended 28 February 20.18. (1)
Total (12)
Maximum (9)
Communication skills: logical flow and conclusion (1)

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QUESTION 4 40 marks

YOU HAVE 15 MINUTES TO READ THIS QUESTION.

Links Holdings Ltd is a South African-based globally competitive holding company that is listed on
the Johannesburg Stock Exchange. The company, through its investments in subsidiaries and
investments in associates, retails computer appliances, hardware, printing devices, cameras,
gaming devices, software and accessories.

The financial year end of all the companies of the Links Holdings Ltd Group is 31 December. The
Group Accountant (Scopatu Manaa), a CTA student at a leading African university, has prepared
and presented the following information to you, the Group Chief Financial Officer, in preparation for
the finalisation of the consolidation procedures.

IncredibleLink Ltd

Links Holdings Ltd acquired an 85% interest in the ordinary share capital of IncredibleLink Ltd, a
retailer of electronics and appliances, on 1 August 20.19. As a result of this acquisition,
Links Holdings Ltd obtained control over IncredibleLink Ltd from 1 August 20.19 in accordance with
IFRS 10, Consolidated Financial Statements. The acquisition date has been correctly determined
as 1 August 20.19 in accordance with IFRS 3, Business Combinations.

The net asset value of IncredibleLink Ltd amounted to R1 541 667 as at 1 August 20.19.

All the assets and liabilities of IncredibleLink Ltd were deemed to be fairly valued, except as indicated
below:

• IncredibleLink Ltd owns a formally registered trademark for an internally developed brand of
electronic goods. The trademark had a fair value of R165 000 and an indefinite useful life on
1 August 20.19. The trademark was not recorded in records of IncredibleLink Ltd.

• IncredibleLink Ltd disclosed a contingent liability of R145 000 in its interim financial statements
for the period ended 30 June 20.19 relating to a court case instituted through a class action
by its customers. The court case deals with IncredibleLink Ltd’s branded electronic goods that
allegedly do not meet industry standards. Even though this claim represents a present
obligation, the attorneys of IncredibleLink Ltd are of the opinion that it is unlikely that the claim
will lead to an outflow of economic benefits at that point in time. On 1 August 20.19,
Links Holdings Ltd has not yet reliably assessed the fair value of the claim. The shareholders
of IncredibleLink Ltd provided a guarantee as part of the purchase agreement with Links
Holdings Ltd to reimburse Links Holdings Ltd 40% of the claim, should it be successful.

On 15 January 20.20, Links Holdings Ltd obtained an independent valuator’s report regarding
an assessment of the claim at its fair value of R185 000 on 1 August 20.19, having taken into
account all possible outcomes on that date. The finalisation of the fair value of the contingent
liability was the only outstanding item relating to the acquisition of IncredibleLink Ltd. The claim
will not be deductible for taxation purposes should it succeed.

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• IncredibleLink Ltd maintains a unique subscriber list that is licensed and contains detailed
information about the subscribers. The terms of the agreement entered into by
IncredibleLink Ltd and the subscribers prohibit IncredibleLink Ltd from exchanging information
about the subscribers with any external party to the agreement. The fair value of the subscriber
list amounted to R125 000 on 1 August 20.19, and the subscriber list has an indefinite useful
life.

No additional assets, liabilities or contingent liabilities were identified on the acquisition date, except
as provided for in the above notes.

The consideration and other costs relating to the acquisition of the investment in IncredibleLink Ltd
comprised the following:

• A cash payment of R600 000 was made to the transacting attorneys on 1 August 20.19.
Links Holdings Ltd appointed Earnestly Young Services Ltd, a company that specialises in
business combinations, to assist with the structuring of the arrangement. The costs related to
the services provided by Earnestly Young Services Ltd amounted to R37 500 and were
included in the cash payment made to the transacting attorneys.

• A cash amount of R300 000 is payable by Links Holdings Ltd on 31 July 20.20.

• On 1 August 20.19, Links Holdings Ltd issued 2 000 non-convertible debentures at a nominal
value of R125 per debenture. The interest on the debentures is payable annually in arears at
a nominal interest rate of 9,25% per annum. The debentures will be settled in cash on
30 July 20.24.

• Links Holdings Ltd transferred a delivery vehicle to the previous shareholders of

IncredibleLink Ltd on 1 August 20.19. The delivery vehicle had a carrying amount of R165 000
and a fair value of R135 000 on that date. The delivery vehicle was correctly recorded in the
asset register of IncredibleLink Ltd on 1 August 20.19.

• Links Holdings Ltd issued 2 500 of its ordinary shares to the shareholders of IncredibleLink Ltd
on 1 August 20.19 when the share price of each share was R126. The ordinary shares were
registered on 11 August 20.19 when the shares were valued at R129 each. Links Holdings Ltd
incurred share issue costs amounting to R23 420 with regard to the issuance of the 2 500
ordinary shares. The share issue costs of R23 420 were included in the cash payment made
to the transacting attorneys on 1 August 20.19.

• IncredibleLink Ltd has undertaken to refund Links Holdings Ltd R120 000 on
31 December 20.19 should the gross profit for the four months ending 30 November 20.19 not
increase by 11%. The fair value of this consideration amounted to R95 000 on 1 August 20.19,
taking into account all possible outcomes. During the four months ended 30 November 20.19
there was a lot of uncertainty in the global economic environment, which particularly affected
electronic and technological consumer goods. Consequently, the gross profit increased by
only 0,5%.

Gamer Ltd

Gamer Ltd is a retail company that offers recreational and professional gaming products at its
physical stores in Johannesburg, Bloemfontein and Durban and through a convenient online
shopping hub. The head office of Gamer Ltd is in Johannesburg.

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The extract of the preliminary trial balance of Gamer Ltd as at 31 December 20.19 contained the
following balances, which may be accepted as correct, except where stated otherwise:

Dr/(Cr)
R

Non-current assets 1 202 367

Current assets 875 290
Ordinary share capital (100 000 shares) (200 000)
Retained earnings (1 January 20.19) (476 874)
Revaluation reserve (240 880)
Profit after tax for the year (293 582)
Revenue (971 712)
Non-current liabilities (564 115)
Current liabilities (302 206)

Links Holdings Ltd acquired a 25% interest in Gamer Ltd on 1 August 20.19 and exercised
significant influence over the operating and financial policy decisions of Gamer Ltd from that date.
The purchase consideration amounted to R250 000 on that date. You may correctly assume that an
excess arose on the acquisition.

On 1 August 20.19 all the assets and liabilities of Gamer Ltd were deemed to be fairly valued, with
the exception of land and trade receivables, which were undervalued by R90 500 and R40 500,
respectively. No additional assets or liabilities were identified at the acquisition date. Gamer Ltd did
not revalue any of its assets or liabilities at the acquisition date in its separate accounting records.
The affected trade receivables were still outstanding on 31 December 20.19, and the assessment
remained unchanged.

An independent sworn appraiser valued the land upwards by R130 000 on 31 December 20.19.
Gamer Ltd accounted for this revaluation in its separate financial statements for the year ended
31 December 20.19. No other revaluation was recorded by Gamer Ltd for the current financial year.

The fair value of the shares of Gamer Ltd amounted to R13,85 per share on 31 December 20.19.

Gamer Ltd did not declare dividends in the current year.

Additional information

1. It is the accounting policy of Links Holdings Ltd to account for investments in subsidiaries and
investments in associates at cost in its separate financial statements.

2. Links Holdings Ltd elected to measure non-controlling interests at their proportionate share of
the acquiree’s net assets at the acquisition date for all acquisitions.

3. A market-related pre-tax discount rate is 10,75%, compounded annually. The market interest
rate for instruments similar to the debentures issued by Links Holdings Ltd is 10,75% per
annum.

4. Assume a normal income tax rate of 27% and a capital gains tax (CGT) inclusion rate of 80%.
Ignore the effects of dividend tax and value added tax (VAT).

5. It is the accounting policy of the Links Holdings Ltd Group to account for land in accordance
with the revaluation model as per IAS 16, Property, Plant and Equipment.

6. The investment in Gamer Ltd is material to Links Holdings Ltd.

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REQUIRED

YOU NOW HAVE 60 MINUTES TO ANSWER THIS QUESTION.

Marks

(a) Discuss, with reasons and showing all calculations, the appropriate recognition and 16
measurement of the identifiable assets acquired, and the liabilities assumed by
Links Holdings Ltd at the acquisition of IncredibleLink Ltd on 1 August 20.19.
Your answer should be based on the principles and the requirements established
by IFRS 3, Business Combinations.

Communication skills: logical flow and conclusion 1

Please note:
• You are required to provide reasons for all your considerations.
• In your answer you should consider the relevant taxation implications, where
applicable.
• You are not required to discuss any non-controlling interests.
• You are not required to refer to the Conceptual Framework.
• You are not required to calculate goodwill or gain from a bargain purchase.
10
(b) Calculate the consideration transferred by Links Holdings Ltd for the acquisition of
IncredibleLink Ltd on 1 August 20.19 in accordance with IFRS 3,
Business Combinations.
12
(c) Prepare the investment in associate note in the notes to the consolidated financial
statements of the Links Holdings Ltd Group for the year ended 31 December 20.19.

Communication skills: presentation and layout 1

Please note:

• Round off all amounts to the nearest rand.

• Show all your calculations.
• Your answer must comply with International Financial Reporting Standards (IFRSs).

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QUESTION 4: SUGGESTED SOLUTION

(a) Discuss, with reasons and showing all calculations, the appropriate recognition and
measurement of the identifiable assets acquired and the liabilities assumed by
Links Holdings Ltd at the acquisition of IncredibleLink Ltd on 1 August 20.19. Your
answer should be based on the principles and the requirements established by IFRS 3,
Business Combinations.

1. General
On 1 August 20.19 Links Holdings Ltd acquired 85% of the ordinary shares of
IncredibleLink Ltd and obtained control over IncredibleLink Ltd from that date in
accordance with IFRS 3. (1)
Links Holdings Ltd must measure the identifiable assets acquired and the liabilities
assumed of IncredibleLink Ltd at their acquisition-date fair values (IFRS 3.18) on the
acquisition date of 1 August 20.19. (1)

The net asset value as at 1 August 20.19 amounted to R1 541 667. (1)
2. Intangible assets

Links Holdings Ltd must recognise the identifiable intangible assets acquired in a
business combination separately from goodwill (IFRS 3.B31). (1)

An intangible asset is identifiable if it meets either the separability criterion or the

contractual-legal criterion (IFRS 3.B31).

Trademark

The trademark has been formally registered and, as a result, meets the contractual-
legal criterion. The trademark is therefore identifiable and should be recognised as an (1)
intangible asset at the acquisition date.
Links Holdings Ltd must recognise the trademark at its fair value of R165 000 on
1 August 20.19. The trademark has an indefinite useful life. Therefore, the carrying
amount of the intangible asset will be recovered through sale and the deferred tax
liability will increase by R35 640 (165 000 x (27% x 80%)). (2)

Subscriber list

IncredibleLink Ltd maintains a unique subscriber list that is licensed and that would
normally meet the separability criterion (IFRS 3.B33). (1)

However, the agreement entered into by IncredibleLink Ltd and the subscribers
prohibits IncredibleLink Ltd from exchanging information about the subscribers with any
external party to the agreement. (1)

As a result, the subscriber list acquired by Links Holdings Ltd does not meet the
separability criterion and is therefore not an identifiable intangible asset at the
acquisition date (IFRS 3.B33). (1)

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3. Contingent liability

Links Holdings Ltd must recognise, as of the acquisition date, a contingent liability
assumed as a result of the acquisition of IncredibleLink Ltd if it is a present obligation
that arises from past events and its fair value can be measured reliably (IFRS 3.23). (1)
On 1 August 20.19 the contingent liability represents a present obligation. However, the
fair value of the contingent liability has not yet been measured reliably by
Links Holdings Ltd. (1)

However, on 15 January 20.20 Links Holdings Ltd obtained an independent valuator’s

report regarding an assessment of the claim at its fair value of R185 000 on
1 August 20.19, having taken into account all possible outcomes on that date. (1)

The independent valuator’s report provides new facts and information about
circumstances that existed as at the acquisition date that, had they been known, would
have resulted in the recognition of a contingent liability at the acquisition date (IFRS (1)
3.45).

Links Holdings Ltd will recognise the contingent liability at its fair value of R185 000.
The claim will not be deductible for taxation purposes should it succeed. Therefore, no
temporary difference arises. (2)

4. Indemnification asset

The shareholders of IncredibleLink Ltd provided a guarantee as part of the purchase

agreement with Links Holdings Ltd to reimburse Links Holdings Ltd 40% of the claim,
should it be successful. (1)

Links Holdings Ltd will recognise an indemnification asset at the same time that it
recognises the contingent liability that it indemnified and measured on the same basis
as the contingent liability (IFRS 3.27). (1)

The indemnification asset will be measured at R74 000 (165 000 x 40%) on
1 August 20.19. The receipt of the indemnification asset will have no tax consequences
and therefore no temporary difference arises. (2)
Total (20)
Maximum (16)
Communication: clarity of expression (1)

COMMENT

Trademark
Note that, according to the information provided, the trademark has an indefinite useful
life. Therefore, accounting for amortisation is incorrect (IAS 38.107).

Contingent liability
The contingent liability treatment included the measurement period adjustment.
Therefore, the contingent liability should be measured at R185 000.

Furthermore, there will be no resulting deferred tax since the carrying amount of the
contingent liability is equal to the tax base.

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(b) Calculate the consideration transferred by Links Holdings Ltd for the acquisition of
IncredibleLink Ltd on 1 August 20.19 in accordance with IFRS 3, Business
Combinations.

Consideration transferred

Cash amount paid 600 000 (1)

Cost related to Earnestly Young Services Ltd (37 500) (1)
Costs directly related to issue of shares (23 420) (1)
Future cash payment [FV: 300 000; i: 10,75%; N: 1] 270 880 (4)
Debentures [C1] 236 053 (3)
Issue of shares (2 500 x 126) 315 000 (1)
Fair value of vehicle transferred 135 000 (1)
Contingent consideration asset (95 000) (1)
1 401 013
Total (13)
Maximum (10)

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(c) Prepare the investment in associate note in the notes to the consolidated financial
statements of the Links Holdings Ltd Group for the year ended 31 December 20.19.

LINKS HOLDINGS LTD GROUP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED

31 DECEMBER 20.19

1. Investment in associate

Links Holdings Ltd acquired a 25% interest in the retail company, Gamer Ltd, on
1 August 20.19. Gamer Ltd is incorporated in South Africa where it conducts its
principal business, and its head office is in Johannesburg. The associate is
measured using the equity method. (2)

Summarised financial information of Gamer Ltd

R

Non-current assets 1 202 367 (½)

Current assets 875 290 (½)
Non-current liabilities (564 115) (½)
Current liabilities (302 206) (½)
Revenue (971 712) (½)
Profit for the year (293 582) (½)
Other comprehensive income for the year [C2] (101 920) (2)
Total comprehensive income (293 582 + 101 920) (395 772) (1)

No dividends were received from the associate during the year

Reconciliation of the summarised information

Net asset value
(1 202 367 – 875 290 – 564 115 – 302 206) 1 211 336 (2)
Fair value adjustment – trade receivables (40 500 x 73%) 29 565 (1)
Net asset value of associate 1 240 901

25% interest in net assets of associate 310 225 (1)

Carrying amount of investment in associate at 31 December 20.19 310 225

Fair value of investment in associate

The fair value of the investment in the associate is R346 250 (R13,85 x 25 000) (2)
Total (14)
Maximum (12)
Communication skills: presentation and layout (1)

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COMMENT

Links Holdings Ltd should disclose the name of the associate (Gamer Ltd), the nature
of the entity’s relationship with the associate, the principal place of business of the
associate, the proportion of ownership interest or participating share held by Links
Holdings Ltd and, if different, the proportion of voting rights held.

Furthermore, Links Holdings Ltd should disclose whether the investment in the
associate is measured using the equity method or at fair value, as well as the
summarised financial information of the associate.

The associate is accounted for using the equity method. Therefore, the fair value of the
entity’s investment in the associate should be disclosed if there is a quoted market price
for the investment (IFRS 12.21).

CALCULATIONS

C1. Debentures

HP 10BII SHARP EL-733A SHARP EL-738

2nd F C (Clear All) 2nd F C (Clear All) 2nd F MODE (Clear All)
PMT 23 125 PMT 23 125 PMT 23 125
(250 000 x 9,25%) (1)
I/YR 10,75% I 10,75% I/YR 10,75% (1)
N 5 N 5 N 5 (1)
FV 250 000 FV 250 000 FV 250 000
(2 000 x 125) (1)
PV 236 053 COMP PV 236 053 COMP PV 236 053

C2. Revaluation reserve

Balance – 31 December 20.19 240 880 [1]

Revaluation on land (130 000 x (1 – (27% x 80%)) (101 920) [1]
Balance as at acquisition 138 960
[2]

C3. Net asset value (for completeness)

Share capital 200 000

Retained earnings 476 874
Revaluation reserve [C1] 140 000
Profit for 7 months (293 582 x 7/12) 171 256
Trade receivables remeasurement (40 500 x 73%) 29 565
Land remeasurement [90 500 x (1 – (27% x 80%)] 70 952
Net asset value at acquisition 1 088 647
Profit for the current year (293 582 x 5/12) 122 326
Revaluation on land [(130 000 – 90 500) x (1 – (27% x 80%)] 30 968
Net asset value at year end 1 241 941

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C4. Excess on acquisition of Gamer Ltd (for completeness)

Net asset value at acquisition [C3] 1 088 647

Links Holdings Ltd’s share (1 088 647 x 25%) 272 162

Consideration paid (250 000)
Excess 22 162

C5. Analysis of owner’s equity of IncredibleLink Ltd (for completeness)

Total At NCI
85% 15%
R
At acquisition (1 August 20.19)
Net asset value 1 541 667
Intangible asset (165 000 x 78,4%) 129 360
1 671 027 1 420 373 250 654
Equity represented by goodwill 19 360 19 360 -
Consideration and NCI 1 690 387 1 401 013 250 654

Measurement period adjustment

Net asset value 1 671 027
Contingent liability (185 000)
Indemnification asset (185 000 x 40%) 74 000
1 560 027 1 326 023 234 004
Equity represented by goodwill 74 990 74 990 -
Consideration and NCI 1 635 017 1 401 013 234 004

MJM
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QUESTION 5 40 marks

YOU HAVE 15 MINUTES TO READ THIS QUESTION.

This question consists of two independent parts.

PART I 26 marks

Adventure Equipt Ltd (‘Equipt’) is a company listed on the Johannesburg Stock Exchange. Equipt
operates in the retail sector and has several subsidiaries in the same industry. All the companies in
the group have a 31 December year end.

Equipt acquired a 65% shareholding in KidsGearUp Ltd (‘KGU’) on 1 January 20.21 from
Holiday Activities Ltd (‘HA’). The acquisition of KGU met the definition of acquiring a business, as
defined in IFRS 3 Business Combinations. Since 1 January 20.21 Equipt is exposed to variable
returns from its involvement with KGU and has the ability to affect those returns through its power
over KGU.

The purchase agreement contained the following terms regarding the consideration:

1. A cash amount of R3 360 000 was transferred on 1 January 20.21 by Equipt.

2. Equipt transferred a piece of land to HA. The fair value of the land was R1 280 000 and the
carrying amount was R1 600 000 on 1 January 20.21.

3. 2 000 ordinary shares of Equipt were issued to HA on 1 January 20.21 as part of the
consideration payable. The shares were registered in the name of HA on 16 January 20.21.

4. Costs related to the share issue amounted to R16 000 and was included in the cash amount
of R3 360 000 paid by Equipt.

5. KGU had an outstanding account with one of Equipt’s creditors. Equipt settled the account of
R800 000 on 3 January 20.21 by paying the creditor directly. The fair value of the account was
R800 000 on 1 January 20.21.

On 1 January 20.21 KGU had a share capital balance of R3 200 000 (100 000 shares) and retained
earnings of R1 280 000.

The asset register and the accounting records for KGU reflected the following as at 1 January 20.21:

• Equipment with a carrying amount of R380 000 was appraised at R700 000. The remaining
useful life has been determined by the appraiser as three and a half years from
1 January 20.21. The residual value remained Rnil at that date.

• Land in Gauteng was originally purchased for R9 600 000 but due to a lack of market interest
in that area, the sworn appraiser determined a current fair value of R9 120 000.

The carrying amounts of all the other assets and liabilities were equal to their fair value. No additional
assets, liabilities or contingent liabilities were identified on 1 January 20.21.

On 1 July 20.21 Equipt granted KGU a loan amounting to R4 480 000. Capital of R640 000 was
repaid on year end, with the balance of the capital still outstanding.

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The accountant processed the following pro forma consolidation journal entries in the consolidated
accounting records of the Equipt Group at year end:

R R
Dr Cr

J1a Other income (P/L) 124 800

Non-controlling interests (SFP/SCE) 67 200
Dividends paid (SCE) (given) 192 000
Reversal of intragroup dividends
J1b Other income (interest income) (P/L) 172 800
Finance charges (interest expense) (P/L)
(3 840 000 x 9% x 6/12) 172 800
Elimination of intragroup interest on loan

The published share prices of the companies were as follows at the respective dates:

Equipt

1 January 20.21 R81,60

16 January 20.21 R81,45
31 December 20.21 R81,70

KGU

1 January 20.21 R57,60

Additional information

1. It is the group’s accounting policy to measure machinery in accordance with the revaluation
model and the rest of property, plant and equipment items in accordance with the cost model
per IAS 16 Property, Plant and Equipment.

2. Investments in subsidiaries are accounted for at cost in accordance with IAS 27.10(a).

3. Equipt elected to measure non-controlling interests at fair value at acquisition date for all the
acquisitions.

4. KGU declared and paid dividends of R192 000 on 31 December 20.21.

5. KGU has a profit after tax for the year ended 31 December 20.21 of R720 000 and a fair value
gain on other financial assets through other comprehensive income of R57 600 net of tax.

6. Goodwill that was recognised at acquisition of KGU was impaired during the current year due
to the impact of Covid 19 restrictions. The recoverable amount of KGU was R280 000 lower
than its consolidated carrying amount. The impairment assessment in the separate accounting
records of Equipt indicated that no impairment in the separate accounting records was
required.

7. The loan to KGU carries interest at 9% per annum. Repayments of capital and interest are
made annually at year end.

8. The company tax rate is 27% and the Capital Gains Tax inclusion rate is 80%. Ignore value
added tax (VAT) and dividend tax.

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PART II 14 marks

Playgreat Ltd

Equipt is considering investing in a new company, namely Playgreat Ltd (Playgreat). Playgreat
manufactures and sells playground equipment. This investment will assist Equipt to expand into
other playground activities.

Equipt can purchase 15% of the share capital and voting rights of Playgreat. On the proposed
purchase date, Equipt will also receive an option to acquire an additional 20% interest from one of
the other shareholders, namely PlaySafe Ltd (PlaySafe). A condition of the option is that it will only
become exercisable on the date when the South African Institute for Playpark Safety (SAIPS)
completes the inspection of Equipt’s new playground. The date of the inspection is not confirmed.

Fun Club Ltd

Fun Club Ltd is a company that offers arcade activities for the whole family through different types
of gaming machines. All customers have to do to enjoy these activities is buy a fun club card, fill it
up with cash and choose a machine to play on.

Equipt purchased 30% of the shares and voting rights of Fun Club Ltd (Fun Club) on 1 January 20.21
for a consideration of R3 000 000. From this date, Equipt exercised significant influence over the
financial and operating policy decisions of Fun Club. All the assets and liabilities were fairly valued
at 1 January 20.21, except for inventory that were overvalued by R82 500 and financial assets that
was undervalued by R37 500.

On 1 June 20.21, Fun Club sold a motor vehicle to Equipt. Fun Club initially purchased this motor
vehicle on 1 September 20.19 for an amount of R247 500 with a useful life of 5 years from that date.
Equipt paid an amount of R210 000 for the vehicle and recognises depreciation over the remaining
useful life. At year end Fun Club fair valued their portfolio of financial assets and the overvalued
inventory identified on 1 January 20.21 was realised.

The following is an extract of the trial balance of Fun Club as at 31 December 20.21:
Dr/(Cr)
R

Share capital: 1 January 20.21 (150 000)

Retained earnings: 1 January 20.21 (9 795 000)
Mark-to-market reserve: 1 January 20.21 (315 000)
Profit for the year (1 538 850)
Fair value movement on financial assets (gross) (120 000)
Deferred tax (219 000)
Trade and other payables (5 818 500)
Revenue -
Other income -
Property, plant and equipment 7 933 500
Other financial assets 840 000
Inventory 6 315 000
Trade and other receivables 3 900 000
Cash and cash equivalents (1 332 150)
Cost of sales -
Other expenses -
Income tax expense -
Dividend declared and paid 300 000

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REQUIRED

YOU NOW HAVE 60 MINUTES TO ANSWER THIS QUESTION.

Marks

PART I

(a) Provide the journal entries to recognise the consideration paid to purchase the 5
interest in KidsGearUp Ltd in the separate accounting records of
Adventure Equipt Ltd.

(b) Prepare the additional pro forma consolidation journal entries to account for the 21
investment in KidsGearUp Ltd in the consolidated financial statements of the
Adventure Equipt Ltd Group for the year ended 31 December 20.21. Provide any
correcting journal entries, if required.

Communication skills: presentation and layout 1

Please note:
• Journal narrations are required.
• Journal entries relating to deferred taxation are required.
• All calculations must be shown clearly.
• Round off all amounts to the nearest Rand.

PART II

(a) Discuss whether Playgreat Ltd would be classified as an associate of the Adventure 4
Equipt Ltd Group if the 15% interest is Playgreat Ltd is acquired.

Please note:
• Discussions regarding appropriate accounting treatment are not required.

(b) Disclose the following line-items only, in the consolidated statement of profit and 9
loss and other comprehensive income of the Adventure Equipt Ltd Group for the
year ended 31 December 20.21.

- Share of profit or loss of associate; and

- Share of other comprehensive income of associate

Please note:

• Your answer must comply with International Financial Reporting Standards (IFRS).

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QUESTION 5 - Suggested solution

PART I

(a) Provide the journal entries to recognise the consideration paid to purchase the interest
in KidsGearUp Ltd in the separate accounting records of Adventure Equipt Ltd.

Dr Cr
R R

J1 Impairment Loss (P/L) 320 000

Land (SFP) (1 600 000 – 1 280 000) 320 000 (1)
Land remeasured to fair value at acquisition date
J2 Investment in KGU (SFP) 5 587 200
Share capital (SCE) ((2 000 x 81,60) - 16 000) 147 200 (2)
Bank (SFP) (3 360 000 + 800 000) 4 160 000 (2)
Land (SFP) (IFRS 3.37) @ FV 1 280 000 (1)
Consideration paid to acquire investment in KGU
Total (6)
Maximum (5)

(b) Prepare the additional pro forma consolidation journal entries to account for the
investment in KidsGearUp Ltd in the consolidated financial statements of the Adventure
Equipt Ltd Group for the year ended 31 December 20.21. Provide any correcting journal
entries, if required.

Dr Cr
R R

J1 Share Capital (SCE) 3 200 000

Retained Earnings (SCE) 1 280 000 (1)
Equipment (SFP) (700 000 – 380 000) 320 000 (1)
Land (SFP) (9 120 000 – 9 600 000) 480 000 (1)
Deferred tax (SFP)
((320 000 x 27%) - (480 000 x 27% x 80%)) 17 280 (1)
Investment in KGU (SFP) (part a) 5 587 200 (1)
Non-Controlling Interest (SCE/SFP) [@ FV]
(100 000 x 35% x 57,60) 2 016 000 (2)
Goodwill (SFP) 3 265 920 (1)
At acquisition elimination journal
J2 Group Loan (SFP) (4 480 000 – 640 000) 3 840 000 (1)
Financial Assets - Loan to KGU (SFP) 3 840 000 (1)
Elimination of intragroup loan
J3 Depreciation (P/L) (320 000/3,5) 91 429 (1)
Accumulated Depreciation: Equipment (SFP) 91 429 (1)
Accounting for additional depreciation on equipment
J4 Deferred tax (SFP) (91 429 x 27%) 24 686 (1)
Income tax expense (P/L) 24 686
Accounting for deferred tax on depreciation

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Dr Cr
R R

J5 Impairment loss (P/L) (given) 280 000 (1)

Goodwill (SFP) 280 000 (1)
Accounting for impairment loss on goodwill
J6 Non-controlling interest (SCE/SFP) (280 000 x 35%) 98 000 (1)
Non-controlling Interest (P/L) 98 000 (1)
Accounting for NCI’s share in impairment loss on
goodwill
J7 Non-controlling interests (OCI)
(57 600 (net tax) x 35%) 20 160 (1)
Non-controlling interests (P/L)
[(720 000 – 91 429(J4) + 24 686 (J5)) x 35%] 228 640 (2)
Non-controlling interests (SCE/SFP) 248 800 (1)
Accounting for NCI’s current year share in profits & OCI
J8 Interest income (P/L) 28 800 (1)
Finance charges (P/L) (640 000 x 9% x 6/12) OR
((4 480 000 x 9% x 6/12) – 172 800) 28 800 (1)
Correcting/additional journal to correctly account for intra-
group interest on loan
Total (23)
Maximum (21)

Already processed by accountant (given)

J1a Other income (P/L) 124 800

Non-controlling interests (SFP/SCE) 67 200
Dividends paid (SCE) 192 000
Reversal of intragroup dividends
J1b Interest Income (P/L) (3 840 000 x 9% x 6/12) 172 800
Finance charges (P/L) 172 800
Elimination of intragroup interest on loan

COMMENT

Please note that the dividend elimination journal was already processed, and you do
not then need to provide this journal again. Remember to read the required carefully.
The required indicates that the ‘additional’ journals should be provided. Providing
unnecessary journals is not good exam technique and can course you to lose time.

However, it was necessary to provide the interest journal to account for the portion of
interest not yet eliminated, as the accountant did not process the entire interest amount
that should have been eliminated. Many students either processed the entire amount
or did not provide the journal at all.

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PART II

(a) Discuss whether Playgreat Ltd is an associate of the Adventure Equipt Ltd Group,
assuming that Adventure Equipt Ltd does acquire the 15% interest.

An associate is an entity over which the investor has significant influence [IAS 28.3].

Significant influence is the power to participate in the financial and operating policy decisions
of the investee but is not control or joint control of those policies [IAS 28.3].

If Equipt holds, directly or indirectly, 20% or more of the voting power of Playgreat, it is
presumed that Equipt has significant influence, unless it can be clearly demonstrated that
this is not the case [IAS 28.5]. (1)
In this case, Equipt only has 15% of the voting power and significant influence is therefore
NOT presumed. (1)
The existence and effect of potential voting rights that are currently exercisable or convertible
are considered when assessing whether an entity has significant influence [IAS 28.7].

Potential voting rights are not currently exercisable or convertible when, for example, they
cannot be exercised or converted until a future date or until the occurrence of a future event
[IAS 28.7].

• However, potential voting rights must be considered and the option to acquire an
additional 20% interest is dependent on the successful inspection of Equipt’s
playground by SAIPS (South African institute for playpark safety). (1)

• It is still unsure of when the inspection by SAIPS will take place, therefore the option
is not currently exercisable and the potential voting rights should be ignored in the
assessment. (1)

• Playgreat Ltd is therefore not an associate of Equipt. (1)

Total (5)
Maximum (4)

(b) ADVENTURE EQUIPT LTD GROUP

EXTRACT OF THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.21

Share of profit of associate [C1] 539 648 (10)

Profit before tax XXXXX
Income tax expense XXXXX
PROFIT FOR THE YEAR XXXXX
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Share of other comprehensive income of associates
[(120 000 – 37 500) x 78,4% x 30%] 19 404 (2)
Other comprehensive income for the year, net of tax XXXXX
TOTAL COMPREHENSIVE INCOME FOR THE YEAR XXXXX
Total (12)
Maximum (9)

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COMMENT

Remember when equity accounting for an associate, there are only three line-items
available namely, investment in associate; share of profit of associate and share of
other comprehensive income of associate. You should account for an associate only
within these three line-items. Therefore, when asked for disclosure, careful not to
include each item line-by-line as that is a principal error. Many students that make this
error and earn no marks.

It should also be noted that other comprehensive income (OCI) is presented net of the
tax. The tax rate used will be the rate the underlying asset will realise at in future. In
this instance CGT is applicable. Many students did not present the OCI item net of tax
or accounted for the tax at the normal rate instead of the CGT rate.

CALCULATIONS

C1. Share of profit of associate – Fun Club Ltd

Profit for the period 1 538 850 [½]

Reversal of fair value adjustment on inventory (82 500 x 73%) or [C3] 60 225 [½]
Eliminate initial unrealised profit on sale of motor vehicle [C2] (49 125) [2]
Deferred tax effect (49 125 x 27%) 13 264 [1]
Realise intragroup profit on sale of motor vehicle (49 125/39 x 7) 8 817 [1]
Deferred tax effect (8 817 x 27%) (2 381) [½]
1 569 650
Share of profit of associate (1 569 650 x 30%) 470 895 [½]
Excess at acquisition [C3] 68 753 [4]
539 648
Total [10]

C2. Unrealised profit on sale of motor vehicle

Motor vehicle carrying value 1 June 20.21 [247 500/60 x (60 – 21)] 160 875 [1½]
Selling price to Adventure Equipt Ltd 210 000 [½]
49 125
[2]

C3. Excess on acquisition of Fun Club Ltd

Share capital (given) 150 000

Retained earnings (given) 9 795 000 [1]
Mark-to-market reserve (given) 315 000
Fair value adjustment on financial assets (37 500 x 78,4%) 29 400 [1]
Fair value adjustment on inventory (82 500 x 73%) (60 225) [1]
10 229 175
Adventure Equipt Ltd’s share (10 229 175 x 30%) 3 068 753 [½]
Excess at acquisition (68 753)
Investment in Fun Club Ltd 3 000 000 [½]
[4]

MJM