(Confidential)

COLLEGE OF ACCOUNTING SCIENCES

TEST 4: 26 JULY 2022

INTEGRATED ASSESSMENT PAPER 1: MAC4862 and FAC4864

SCHOOL OF APPLIED ACCOUNTANCY

EXAMINATION PANEL AS APPROVED BY THE DEPARTMENT.

This Paper 1 question paper consists of 6 (six) pages Scenario and 2 (two) pages Required.
The total is out of 100 marks.

THE USE OF A NON-PROGRAMMABLE CALCULATOR IS PERMISSIBLE.

PLEASE NOTE:

 The test is a limited open-book test: Students are allowed to use ONE COPY of the 2021/2022 version of the
SAICA Student Handbook or any version published in one of the previous years.
 Ensure that you use the allocated time after completion of the test to scan your answer, check that the file
you would like to upload is the correct file and that it is complete. Further ensure that you upload your
answer to myUnisa timeously and make sure that the submission process is complete since NO EMAIL OR
LATE SUBMISSIONS WILL BE MARKED.
 It is your responsibility as a student to ensure that you have the necessary resources to successfully
complete the test. UNISA does not have control over load shedding and network downtime and will
therefore not be able to accommodate the remediation of these issues.
 Please ensure that you use the time allocation as stipulated i.e. 30 minutes reading time and 150 minutes
writing time.
 If you are writing all five modules, please submit within the time stipulated i.e. by 12:10 for the morning
session and by 18:10 for the afternoon session.
 If you are not writing all five modules, (writing 1 or 2 modules) please submit immediately on the Invigilator
APP as per instructions provided on the communication directly sent to you.
 This test paper remains the property of the University of South Africa.
 Please ensure that you have completed your details in full i.e. name, surname, student number, module
code of paper and test number on your script before submission.
 All tests and examinations should be answered in ENGLISH only.

UPLOADING INSTRUCTIONS PAPER 1:

 Please make sure that you correctly label each question on your answer sheet.
 Include your student number on every page.
 This paper consists of two modules MAC4862 and FAC4864.
 You will submit your full answer scripts on myUnisa (click on myAdmin then on Assessment admin and
on the dropdown menu on assignment submission) on the Assignment 4 links labelled FAC4864 and
MAC 4862.
 Page 2 of 8 INTEGRATED ASSESSMENT PAPER 1
TEST 4
QUESTION 1 100 MARKS

1. Background information

The Motana Health Ltd Group (‘the group’), is a leading multinational pharmaceutical group that
specialises in the development and manufacture of medication and medical products. The group has
recently expanded into offering medical services to patients through a network of day clinics.

The holding company of the group, Motana Health Ltd (‘Motana Health’) is listed on the Johannesburg
Stock Exchange. Motana Health manufactures a broad range of branded and generic medication for
sale to hospitals and pharmacies. The entities also forming part of the group during FY2022 were
Botcare (Pty) Ltd (‘Botcare”), and MedicAware Ltd (‘MedicAware’). All the companies in the group have
a year end of 30 June. The functional currency for each company in the group is the South African Rand
(R), except for Botcare whose functional currency was correctly determined as the Botswana Pula
(‘BWP’) at the acquisition date.

The manufacturing of branded medication is complex, requires years of research and patients usually
require a doctor’s prescription to purchase such medication. Motana Health owns patents or leases
(from international health care firms) the rights-to-produce branded medication. Generic medicines are
medicines for which Motana Health has not spent significant money on research and development and
comprise:
• out-of-patent medicines,for which patent protection has expired; and
• legal copies of branded medicines, this refers to medicine with open-source formulas or for which
Motana Health is authorised to reproduce using a formula similar to the branded medicine formula.

2. Financial information

The financial information presented below may be assumed to be correct, except for the draft
consolidated statement of cash flows, which may contain errors.

An extract of the separate statements of profit or loss and other comprehensive income of the various
entities in the Motana Health Ltd Group for the year ended 30 June 2022 is as follows:

Motana Health Botcare MedicAware

R BWP R
Profit/ (Loss) before tax 35 887 500 (3 360 000) 3 250 000
Income tax expense (9 617 850) - (861 250)
PROFIT/(LOSS) AFTER TAX 26 269 650 (3 360 000) 2 388 750

An extract of the separate trial balance of Botcare as at 30 June 2022 is as follows:

BWP
Dr/(Cr)
Net asset value – 1 July 2021 15 150 000
 Page 3 of 8 INTEGRATED ASSESSMENT PAPER 1
TEST 4

An extract of the consolidated trial balance of the Motana Health Ltd Group as at 30 June 2022 is as
follows:
R
Dr/(Cr)
Foreign currency translation reserve – 1 July 2021 276 800
Non-controlling interests relating to Botcare (Pty) Ltd only – 31 December 2021 (4 242 890)

An extract of the draft consolidated statement of cash flows of the Motana Health Ltd Group for the year
ended 30 June 2022 is as follows:
2022
Note R
Cash flows from financing activities
Increase in share capital 1 1 000 000
Repayment of long-term borrowings 2 (14 750 000)
Lease payments 3 (2 500 000)
Proceeds on disposal of interest in Botcare 4 (22 275 000)
Dividends paid 5 (5 000 000)
Net cash used in financing activities (43 525 000)

Note
1. The amount disclosed as the increase in share capital of R1 000 000 is as a result of the
acquisition of the subsidiary, MedicAware Ltd, which is now included in the group.

2. The repayment of the long-term borrowings were determined as the movement between the
opening and closing balances of both long and short-term borrowings. Included in this amount is
a new borrowing raised of R5 000 000 during the current year that is repayable in 2025.

3. Motana Health entered into an agreement on 1 July 2021 for the lease of specialist equipment to
manufacture prosthetics. The lease agreement is for a period of five years at an annual rental of
R2 500 000 payable in arrears. The first payment paid on 30 June 2022 was recorded as the cash
flow effect of the agreement for FY2022. The lease was correctly recognised in the separate
accounting records of Motana Health in accordance with IFRS 16 Leases.

4. The proceeds on disposal of the 65% interest in Botcare (Pty) Ltd was calculated as the proceeds
of BWP16 500 000 x the closing rate of R1,35 on 31 December 2021.

5. The amount disclosed as dividends paid represent the dividends declared and paid by
Motana Health on 30 June 2022.

3. Current and potential investments

3.1 Botcare (Pty) Ltd

Motana Health owns an 80% controlling interest in Botcare since 1 January 2019. Botcare distributes
and sells medical equipment directly to companies and individuals in Botswana, in BWP. The medical
products and devices sold by Botcare are registered with the Botswana Medicines Regulatory Authority
(BoMRA), as required by legislation. Botcare is registered in Botswana in accordance with the Botswana
Companies Act, 2003. All companies registered in Botswana are regulated by the Companies and
Intellectual Property Authority, which includes the requirement to submit annual returns.

Motana Health acquired the controlling interest in Botcare for BWP12 000 000 when the equity of
Botcare consisted of share capital and retained earnings amounting to BWP1 500 000 and
BWP8 250 000 respectively at the acquisition date. All the assets and liabilities were deemed to be fairly
valued at the acquisition date, except for a licensing agreement. Botcare has the exclusive rights to
distribute the WonderCare machine in Botswana until 31 December 2023. In accordance with IAS 38
Intangible Assets, Botcare has correctly not recognised an asset in its separate accounting records. The
fair value of these exclusive rights were deemed to be BWP2 250 000 on the acquisition date. Goodwill
was correctly calculated and recognised at BWP3 095 000 at the acquisition date.
 Page 4 of 8 INTEGRATED ASSESSMENT PAPER 1
TEST 4

The medical equipment, which is the biggest component of Botcare’s expenses, has always been
imported from South Africa with the supplier payable in South African Rand. All other expenses are
incurred locally and are payable and settled in BWP.

Due to the deteriorating macro economic conditions the company was facing, Motana Health decided
to divest its majority shareholding in Botcare to pursue other investment opportunities (see 3.3. below).
Motana Health sold a 65% interest in Botcare to an investment company from the United States on
31 December 2021. The interest was sold for a consideration of BWP16 500 000. The remaining 15%
interest held by Motana Health, fairly valued at BWP3 500 000, does not provide control or significant
influence over Botcare.

The change in the shareholders of Botcare did not have any significant impact on its current operations.
To increase the marketability of it’s shares, the newly appointed Chief Executive Officer of Botcare
decided to change the functional currency of Botcare to the US dollar (USD) effective from
1 January 2022. He indicated that one of the factors that motivated his decision was the fact that the
biggest component of the company’s expenses is also in a different currency to BWP.

3.2 MedicAware Ltd

Motana Health acquired 51% of the issued ordinary share capital of MedicAware on 1 July 2021.
MedicAware specialises in providing individualised bracelets to each customer containing all their
relevant medical information and contact details in case of an emergency. The acquisition enabled
Motana Health to obtain control over MedicAware from the 1 July 2021.

The share capital and retained earnings of MedicAware amounted to R1 000 000 and R13 000 000
respectively at that date. All the assets and liabilities were fairly valued and no additional assets,
liabilities or contingent liabilities were identified at that date.

The consideration paid for MedicAware consisted of the following:

• A cash amount of R6 000 000 payable and paid on 1 July 2021; and
• In addition, the issue of 2 000 ordinary shares of Motana Health to the open market. The fair value
of the shares amounted to R1 050 per share on 1 July 2021 and the proceeds received on the
issue of the shares were paid to the previous shareholders of MedicAware on 2 July 2022.

You may correctly assume that goodwill arose on the acquisition of the interest. MedicAware had
long-term borrowings amounting to R1 000 000 on 1 July 2021.

MedicaAware declared and paid a dividend amounting to R400 000 on 28 June 2022.

3.3 JinosMenos
Motana Health makes use of Active Aligner Braces in their medical services. Active Aligner Braces are
innovative 3D printed braces that provide faster, more accurate and comfortable teeth alignment
compared to the traditional ‘brackets and wires braces’ made from stainless steel and titanium.

These Active Aligner Braces are currently acquired from an unlisted private company called JinosMenos
(‘JM’), a US based manufacturer and supplier of 3D printed Active Aligner Braces. The dentists at
Motana Health’s clinics normally send the client’s 3D image of the initial position of teeth and the desired
results to JM. JM produces the required Active Aligner Braces and these are shipped to the Motana
Health dentist, for the client to start wearing. Active Aligners are currently the only product manufactured
and sold by JM.

The management of Motana Health is currently exploring the following possible strategies with regards
to JM:
• Acquisition of JM as a subsidiary;
• Acquiring JM through a joint venture; or
• Signing a distribution agreement with JM, whereby Motana Health serves as a sales and
distribution agent in South Africa.
 Page 5 of 8 INTEGRATED ASSESSMENT PAPER 1
TEST 4
The selected financial information of JM is presented below:

3.3a JM financial info

0 1 2 3
Return on Capital Employed Calculation 2022 2023 2024 2025
USD USD USD USD
Operating profit or loss
Revenue 1 135 912 1 345 979 1 487 902 1 625 798
Cost of Sales (283 978) (349 955) (386 855) (422 707)
Gross profit 851 934 996 024 1 101 047 1 203 091
Operating expenses (238 974) (283 168) (313 026) (342 037)
EBIT: Operating profit 612 960 712 856 788 021 861 054
Net operating assets
Opening PPE balance 1 500 000 1 506 002 1 540 563 1 573 665
Additional investment 120 000 150 000 150 000 150 000
Depreciation (113 998) (115 439) (116 898) (118 657)
Closing PPE balance 1 506 002 1 540 563 1 573 665 1 605 008
Net current assets 62 999 75 388 89 197 107 653
Current assets 158 620 174 033 187 947 210 109
Current liabilities (95 621) (98 645) (98 750) (102 456)
NOA: Net operating assets 1 569 001 1 615 951 1 662 862 1 712 661
ROCE: EBIT / NOA 39,1% 44,1% 47,4% 50,3%

The management of Motana Health were particularly impressed by the current and projected before-tax
returns on capital employed of JM. All profits are distributed to shareholders after accounting for
operational requirements and capital expenditure. JM does not have excess cash or other investments.

The expected growth of JM’s operating profits beyond the 2025 financial year is in line with the expected
industry growth. Businesses in a similar industry to that of JM currently have a Market Value of Invested
Capital / Earnings Before Interest and Tax (MVIC / EBIT) multiple of 11x and this is expected to remain
relatively constant for the foreseeable future.

JM’s current debt-equity ratio is 25% and is projected to remain constant over the next few years. JM
has fixed annual finance charges, amounting to $70 000 payable annually in arrears, relating to debt
which is repayable in full in five years’ time. The interest rate on the debt is a market related interest rate
of 5.24% per annum.

The required return on the investment in JM is the equivalent of Motana Health’s USD based WACC
plus an additional risk adjustment of two percentage points. The difference between the USD based
WACC and Rand based WACC is the inflation differences between the US and South Africa.

The US annual inflation rate is projected to be 6,81% per annum while SA annual inflation is
approximating 4,55% per annum. The nominal WACC of Motana Health, based on Rand market values
capital structure, is 15,50%.

Motana Health plans to purchase Active Aligner Braces to the value of $252 000 annually (excluding
custom duty costs), for the next three years. The acquisition of JM will enable them to source the Active
Aligner Braces at cost, thus saving on the normal purchase price and custom duties which are 30% of
the purchase price. There is also potential growth to be achieved by selling the braces to the African
market. This growth has not been quantified yet, as the majority of JM’s customers are currently in the
US.
 Page 6 of 8 INTEGRATED ASSESSMENT PAPER 1
TEST 4
3.3b JM Investment Financing opportunities
Motana Health has determined that they will currently need R100m (USD5 948 840) to purchase JM
and cover all the transaction costs. The purchase can be financed by obtaining a loan or issuing Euro
Bonds, on the 30th June 2022, with the following terms and conditions:

Option 1 SA Bank Loan

The five-year loan of R100m can be sourced from Techinvest Bank. The loan bears interest at 8% per
annum which is accumulated annually to the opening loan balance. The loan repayment (capital and
interest) will be made at the end of the loan term. The initiation fees and loan issue costs will be R2,5m
and will be deductible for tax purposes. The loan will be collateralised by the equity investment in JM.

Option 2: Corporate EuroBonds

Issuing non-listed secured Corporate EuroBonds. The bonds can be issued in lots of 5 with a face value
of EUR1 000 (€) per bond. These corporate bonds will be issued at a premium of 5,00% and are
redeemable in three years’ time at face value. The issue costs will amount to 2,00% of the gross
proceeds from the bonds issue. A coupon rate of 4,50% per annum, payable semi-annually in arrears,
will be made on the bonds. As part of the bond issue conditions; Motana Health should be risk rated
annually by an approved international credit rating agency.

4. Additional information:

• Assume that JM will only be taxed in the US at 21% on their generated annual taxable income
and the tax is paid in the year the income is generated.
• JM’s depreciation charges approximates the tax capital allowances.
• Assume a normal income tax rate of 27% and a capital gains tax inclusion rate of 80% in South
Africa. Ignore value added tax (VAT) and dividends tax unless specifically required.
• The Botswana corporate income tax rate on companies is 22% and the capital gains tax inclusion
rate is 100%.
• BotCare had a cash and cash equivalents balance of BWP12 500 on 31 December 2021.
• Cash flows from dividends paid and received and cash flows from interest paid and received are
classified as operating activities.
• No additional shares were issued by any of the group companies, except as indicated in the
scenario.
• The profit or losses accrued evenly for all companies in the group.
• The group elected to measure non-controlling interests at fair value at acquisition date for all
acquisitions
• The incremental borrowing rate of Motana Health is 8% per annum.
• Round off all amounts to the nearest Rand.
• Your answer must comply with International Financial Reporting Standards (IFRS).
• The following exchange rates applied at the respective dates:
BWP1 = R EUR1 = R

1 January 2019 1,31

Average – 1 January 2019 to 1 July 2021 1,30
1 July 2021 1,29
Average – 1 July 2021 to 31 December 2021 1,32
31 December 2021 1,35
Average – 1 January 2022 to 30 June 2022 1,33
30 June 2022 1,28 16,60
Average – 1 July 2022 – 30 June 2025 (projected) 1,40 18,50

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UNISA 2022
 Page 7 of 8 INTEGRATED ASSESSMENT PAPER 1
TEST 4

TEST 4: 26/07/2022

INTEGRATED ASSESSMENT
PAPER 1: MAC4862 and FAC4864
SCHOOL OF APPLIED ACCOUNTANCY

REQUIRED

This is the REQUIRED part of PAPER 1 of INTEGRATED ASSESSMENT and consists of two (2)
pages, including this cover page.
 Page 8 of 8 INTEGRATED ASSESSMENT PAPER 1
TEST 4

QUESTION 1 100 MARKS

REQUIRED MARKS
Sub- Total
total

(a) (i) Determine the appropriate required discount rate to be used to value the 3
JinosMenos investment,
(ii) Calculate the maximum Rand equity value, as at 30 June 2022, of 14
JinosMenos, based on the Free Cash Flow method of valuation, and 23
(iii) Discuss the potential key challenges that can be experienced in integrating 5
JinosMenos into Motana Health.
Communication mark: presentation and layout 1
(b) (i) Determine which is the most cost-effective financing option between the SA 10
Bank loan and Corporate EuroBonds, based on before tax cost, as at 30
June 2022 and
18
(ii) Discuss the risks inherent in each financing option to assist management in 7
selecting the most suitable financing option.
Communication mark: logical arguments 1
(c) Recommend which one of the three strategic options (i.e. acquisition as a
subsidiary, acquisition through a joint venture, or entering into a sales and
8
distribution agent agreement), would be most desirable for Motana Health. 9
[Note: Support your recommendation with reasons].
Communication mark: logical arguments 1
(d) Critically discuss and conclude on the Chief Executvie Officer’s decision that the 6
US dollar should be the functional currency of Botcare (Pty) Ltd from
7
1 January 2022 .
Communication mark: logical arguments 1
(e) Prepare the consolidated statement of profit or loss and other comprehensive 22
income of the Motana Health Ltd Group for the year ended 30 June 2022. The
Motana Health Ltd Group has elected to present other comprehensive income
net of tax in terms of IAS 1.91(a). Your answer should start with "PROFIT FOR
THE YEAR".
[Note:
23
• You should present your calculations per company for the consolidated
statement of profit or loss and other comprehensive income.
• Comparative figures and notes to the consolidated statement of profit or loss
and other comprehensive income are not required.
• Profit and total comprehensive income attributable to owners of the parent
and non-controlling interests as per IAS 1.81B are not required.]
Communication mark: presentation and layout 1
(f) Critically analyse and discuss, including calculations, the potential errors made 19
and corrections required in the extract of the draft consolidated statement of cash
flows of the Motana Health Ltd Group for the year ended 30 June 2022.
20
[Note: Your discussion and calculations should exclude the requirement for
comparative figures.]
Communication mark: logical arguments 1
TOTAL 100

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UNISA 2022