Class example 1 ACC3241/3641 University of Venda July 2024

IFRS 3 Business combination

Sibasa Limited is a solar panels manufacturing company operating in Musina/Makhado SEZ. The management of Sibasa
Limited has identified external acquisition as an area of expansion. As a result, Sibasa Limited purchased a 60% interest
in Kutama Limited on 1 January 2021. On this date Sibasa Limited obtained control over Kutama Limited when the share
capital and retained earnings of Kutama Limited amounted to R800 000 and R1 050 000 respectively.

All the companies in the group have a 31 December year end.

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

1. Machinery was valued at R300 000 more than the carrying amount. The remaining useful life from the date of
acquisition is four years. Kutama Limited continued to account for machinery in accordance with the cost model as
per IAS 16.
2. The fair value of the non-controlling interests was R805 000 on 1 January 2021.
3. Land with a cost price of R300 000 had a fair value of R400 000 on 1 January 2021. The value of the land has
increased to R450 000 at 31 December 2021. It is the policy of Kutama Limited to account for land in accordance
with the cost model as per IAS 40 Investment Property.
4. Details of the consideration transferred to the shareholders of Kutama Limited are as follows:

o Cash consideration of R620 000 was paid on 1 January 2021 into the lawyer’s trust account.
o Sibasa Limited will make a cash payment of R225 060 on 31 December 2022. The South African Revenue
Services agrees with the accounting treatment and will allow the tax deduction for interest expense.
o Sibasa Limited issued 1 000 ordinary shares to the shareholders of Kutama Limited. The fair value of the
shares was R460 each on 1 January 2021. On registration date of the shares on 22 January 2021, the
shares were valued at R465 each. The total number of shares in issue by Sibasa Limited was 1 000 000 at
1 January 2021.
o Sibasa Limited is required to make an additional cash payment of R150 000 on 30 June 2023 if the share
price of Kutama Limited increases by more than 20%. The fair value of the contingent consideration was
estimated to be R60 000 on 1 January 2021 and R85 000 on 31 December 2021. The share price of Kutama
Limited had increased by 32% by 31 December 2021. The changes in fair values on the contingent
consideration is as a result of after acquisition date events.

Included in the cash consideration paid is acquisition related costs in respect of valuations and lawyer’s fees of
R120 000 which was paid by Sibasa Limited.

6. Kutama Limited has a licensed customer list on 1 January 2021. The agreements relating to the customer list does
not prohibit the selling or leasing thereof. The useful life of the customer list is four years on 1 January 2021 and
the fair value is R175 794. Kutama Limited has not recognised an asset in this regard.

5. Kutama Limited disclosed a contingent liability of R450 000 in their financial statements on 1 January 2021 relating
to a court case involving a patent right not meeting industry standards. The claim represents a present obligation
but at this point in time the attorneys of Kutama Limited are of the opinion that it is unlikely to lead to an outflow of
economic benefits due to a lack of evidence to support the claim. The R450 000 is the fair value of the claim taking
into account all possible outcomes on 1 January 2021.

As part of the purchase agreement by Sibasa Limited, the shareholders have guaranteed to reimburse Sibasa
Limited 40% of the claim, should it be successful.

On 31 December 2021 the court case has progressed to such an extent that it is virtually certain that Kutama
Limited will have to pay R550 000. Kutama Limited recognised a provision of R550 000 in its financial statements
on 31 December 2021. The related transaction have been recorded correctly in Kutama Limited’s financial
statements.

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

6. 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.
• Sibasa Limited elected to measure the non-controlling interests in Kutama Limited at fair value.
• Investments in subsidiaries are accounted for at cost in terms of IAS 27.10(a).
• The normal income tax rate is 28% and the Capital Gains Tax inclusion rate is 80%. Ignore Value Added Tax (VAT)
and Dividend Tax.
• A market-related interest rate (before tax) is 10%, compounded annually.
 • The acquisition of Kutama Limited also met the definition of acquiring a business, as defined in IFRS 3 Business
Combinations.

6. The abridged statement of profit or loss and other comprehensive income of Sibasa Limited and Kutama
Limited for the year ended 31 December 2021 is as follows (before taking the above information into account):

Sibasa Limited Kutama Limited

Dividends paid on 31 December 2021 - 150 000

You are required to:

1. Calculate the goodwill in terms of IFRS 3 on the acquisition of Kutama Limited by Sibasa Limited on the 01 January
2021
2. Prepare the journal entries in the separate records of Sibasa Limited in terms of IFRS for the year ended 31
December 2021, relating to the information in the question. Journal entries relating to deferred taxation are also
required.
3. Prepare the pro forma journal entries for the Sibasa Limited Group in terms of IFRS for the year ended 31 December
2021. Also prepare Analysis of owners equity of Kutama Limited. Journal entries relating to deferred taxation are
also required.