Fac4863 107 - 2020 - 0 - B

FAC4863/107/0/2020
NFA4863/107/0/2020
ZFA4863/107/0/2020
Tutorial letter 107/0/2020
APPLIED FINANCIAL ACCOUNTING I
FAC4863/NFA4863/ZFA4863
Year Module
Department of Financial Governance
IMPORTANT INFORMATION:
This tutorial letter contains important information

about your module.
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Dear student
This tutorial letter contains case studies that serves as preparation for the final exam.
INDEX Page
Case study 1 5
Case study 2 22
Case study 3 42
Case study 4 61
Case study 5 76
Case study 6 93
Case study 7 102
Case study 8 119
Case study 9 138
Case study 10 151
Case study 11 167
Case study 12 187
Please send all e-mail queries to: fac2postgrad@unisa.ac.za
Contact number for this tutorial letter:
012 429 4184
THEORY QUESTIONS
Marks are awarded for applying the theory to the content of the question. No marks are
awarded for writing the theory from the Accounting Standards.
Please note if theory is included in any solution, it is there for guidance purposes only.
Kindly note no marks are awarded for the theory.
Write neatly, use bullet points where possible and ensure to obtain the presentation
marks!
MJM
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CASE STUDIES
Question
Case number Marks Topics covered Page
study and name
1 1. Cable Ltd 100 IAS 21: Foreign exchange rates 5
IAS 36: Impairment of assets
IFRS 2: Share-based payments
IAS 40: Investments properties
2 1. Mining Ltd 40 The Conceptual Framework for Financial 22

Reporting
IAS 38: Intangible assets
IAS 12: Income taxes
IFRS 9: Financial instruments
2. Furn Décor Ltd 60 IFRS 9: Financial instruments 27
3 1. Tyger 40 IFRS 16: Leases 42

Properties Ltd
2. Aware Ltd 40 IAS 12: Income taxes 45
IAS 40: Investment property
IFRS 13: Fair value measurements
4 1. Entsha Ltd 100 61
5 1. CurWool Ltd 42 IAS 36: Impairment of assets 76

IFRS 16: Leases
2. Cloud Airlines 27 IAS 1: Presentation 79
Ltd IAS 16: Property, plant and equipment
IAS 21: Foreign exchange rates
6 1. Simbine Ltd 11 IAS 38: Intangible assets 93
2. Maloti Ltd 26 IAS 12: Income taxes 94
IAS 40: Investments properties
IFRS 16: Leases
7 1. California Ltd 42 IAS 2: Inventory 102
IAS 12: Income taxes
IAS 16: Property, plant and equipment
IFRIC 1: Changes in existing decommissioning,
Restoration and similar liabilities
2. Packman Ltd 38 IFRS 2: Share-based payment 106
IFRS 16: Leases
MJM
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Question
Case number Marks Topics covered Page
study and name
8 1. Leicester Ltd 30 IAS 37: Provisions 119
IFRS 5: Non-current assets held for sale
2. North Compass 55 IAS 12: Income taxes 122
Ltd IAS 16: Property, plant and equipment
IAS 40: Investment property
9 1. Thusa Ltd 13 IAS 38: Intangible assets 138
2. Colourlux Ltd 60 IAS 32: Financial Instruments: Presentation 139

IFRS 13: Fair value
10 1. Drumeo Ltd 40 IAS 1: Presentation 151
2. Kola Ltd 40 IAS 32: Financial instruments: 156

Presentation
IFRS 7: Financial instruments:
Disclosure
11 1. King Flowers 40 IAS 16: Property, plant and 167
Ltd equipment
IAS 36: Impairment
IFRIC 1: Changes in existing
decommissioning
liabilities
IFRIC 17: Distributions of non-cash assets to
owners
2. Topwood Ltd 30 IAS 2: Inventory 171
IAS 19: Employee benefits
3. Livpool Ltd 9 IAS 12: Income taxes 174
IFRS 16: Leases
12 1. Expert Ltd 20 Conceptual Framework for Financial Reporting 187
EXAM TECHNIQUE
Remember to show all your calculations. Calculations are only marked if it is used and
referenced in your solution.
MJM
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CASE STUDY 1 100 marks

YOU HAVE 30 MINUTES READING TIME. SPEND 30 MINUTES READING THE CASE STUDY
BEFORE YOU CONTINUE TO THE REQUIRED SECTION.
QUESTION 1 100 marks
IGNORE VALUE ADDED TAXATION
You are the chief financial officer of Cable Ltd (Cable), a company specialising in the distribution and
manufacture of an extensive range of electric cables. The company imports and manufactures
electric cables. Cable has a 28 February financial year end and the company’s functional and
presentation currency is South African Rands.
CHONGHONG LTD – SUPPLY OF HARD DRAWN COPPER WIRE (HDCW)
Cable has a long-standing relationship with Chonghong Ltd (Chonghong), a company situated in
Chongqing, China. Chonghong has supplied Cable for many years with quality HDCW. However,
due to increased shipping costs, Cable has no alternative other than to start building its own plant to
produce the wire itself.
Cable informed Chonghong at commencement of the 20.19 financial year that Cable will stop
purchasing its HDCW wire from Chonghong as soon as the planned plant has been completed.
Chonghong was saddened with the news, but offered Cable funding to enable Cable to build the
new HDCW-plant. In return Chonghong will require Cable to supply Chonghong with 40% of Cable’s
HDCW output. This will decrease the shipping costs for Chonghong to meet its other southern
hemisphere customers’ HDCW demand. This arrangement will also benefit Cable who will have
capacity to supply Chonghong with the required 40% of its HDCW output once the plant is
completed.
CHONGHONG LTD – LOAN
On 1 March 20.18, Cable received a $240 000 loan from Chonghong. The loan bears interest at an
annual interest rate of 10%. You may assume that this rate is the market related interest rate for the
duration of the loan. Interest payments are payable annually in arrears and the capital is repayable
on 28 February 20.20.
Assume the following exchange rates are applicable:
$1=R
1 March 20.18 12,95

28 February 20.19 11,80
28 February 20.20 14,65
Average 1 March 20.18 to 28 February 20.19 12,375
Average 1 March 20.19 to 28 February 20.20 13,225
Assume Cable did not consider the exchange rate to fluctuate significantly.
MJM
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HDCW PLANT
Cable acquired the machinery and equipment for the HDCW plant from a local supplier and obtained
control of the machinery and equipment when it was delivered to its premises (Property A) on
15 July 20.18. Cable immediately commenced with the installation of the plant which took a
substantial time to complete. Plant is a qualifying asset in terms of IAS 23 Borrowing Costs and the
borrowing costs directly attributable to the acquisition and installation of the plant is R37 125. The
following information relates to the acquired machinery and equipment:
Payment to supplier on 15 November 20.18 (normal credit terms 30 days) R4 651 885,44
Cost of transportation to factory R15 191
Cost of external engineers who commissioned the plant R61 438
Remuneration of employees assisting with the installation (2 of the 20 employees R26 000
is administration personnel and you may assume all 20 employees receive the
same remuneration)
Useful life of the plant 20 years
Residual value R280 000
Future cost to dismantle the plant after its useful life R750 000
As part of the commissioning of the plant, the engineers tested the functioning of the plant at a cost
of R18 500. The quality wire produced during this time satisfied the requirements specified by the
engineers and the plant was signed off by the engineers on 31 August 20.18. On this date
management was pleased that the plant will function as required and commenced with the
production of the HDCW the day thereafter. The wire that was produced during the testing cycle was
sold to local entrepreneurs at a total price of R8 000. Cable donated these proceeds towards a
children’s hospital in their vicinity.
The plant requires an inspection every two years. At initial recognition it was estimated that the first
inspection cost will amount to R60 000.
On 1 August 20.18 Cable acquired safety equipment for the plant amounting to R185 000 from a
nearby supplier. On that day Cable also acquired spare parts amounting to R125 000 from the same
supplier. 25% of these spare parts relate to minor replacement parts, such as valves and screws.
Safety equipment and spare parts which is categorised as plant, can be utilised for six years and
requires no major installation. Minor replacement parts were consumed during the current financial
year.
The plant will be measured according to the cost model and depreciation is accounted for according
to the straight-line method over the useful lives of the assets.
POWER CHINA INTERNATIONAL ENERGY PROJECT
During a state visit to China, the South African president signed an agreement with the Chinese
government allowing the Chinese government to build a new 4 600-megawatt coal power station in
the Limpopo Province. This power station will be for the exclusive use of a new Chinese-controlled
industrial park. Nine Chinese companies, including Chonghong, committed to invest $10 billion in
this industrial park at a signing ceremony in Beijing.
On 15 February 20.19, Chonghong informed Cable that they will be erecting their own cable factory
in three years’ time when the construction of the power station and accompanying industrial park will
be completed. Thereafter they will produce their own cables and therefore will not acquire any further
HDCW from Cable.
MJM
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Considering the above, your financial team was tasked to critically evaluate the future of the HDCW
plant. The team also noted that it is necessary to consider the loan with Chonghong when
determining the recoverable amount of the plant cash-generating unit as a buyer of the cash-
generating unit will have to assume the loan. It was identified that the following group of assets
relates to the operations of the plant and is largely independent of the cash inflows from other assets
in the business:
Note Cost Carrying amount

28 February 20.19
R R
Land 1 Refer to note 1 Refer to note 1
Building 1 Refer to note 1 Refer to note 1
Plant Refer above Refer above
Inventory 2 3 280 000 3 280 000
Trade receivables (including allowance for 3 - 1 210 000
expected credit losses)
Trade payables 4 - (786 828)
You may assume that all values are calculated correctly, unless indicated otherwise.
Notes:
1. Land and buildings
Property A consists of land and a building. This property is adjacent to Cable’s current
premises (Property B) and was acquired on 1 March 20.16. Cable has been leasing Property A
to a tenant since the company relocated its own business operations to Property B on
28 February 20.17.
A revaluation surplus amounting to R50 000 was recognised on the land of Property A on
28 February 20.17 when Cable commenced with the leasing of Property A to the tenant. To
date this is the only revaluation which Cable has performed on land.
Since Cable planned to utilise Property A as the premises for the new HDCW plant, the tenant
was given an official notification to vacate the premises on 30 June 20.18.
The following information relates to Property A:
Land Building
Accounting method according to IAS 16
Property, Plant and Equipment Revaluation Cost
Useful life at initial recognition Unlimited 20 years
Depreciation method N.A. Straight-line method
over useful life
Residual value at initial recognition - R280 000
Carrying amount
1 March 20.17 R1 750 000 R2 450 000
1 March 20.18 R1 750 000 R2 400 000
Fair value
30 June 20.18 R1 700 000 R2 400 000
The useful life and residual value of the building remained unchanged.
MJM
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The following fair values relating to land were determined on 28 February 20.19 in accordance
with IFRS 13 Fair Value Measurement:
Fair value of use of land in combination with other assets and liabilities 1 600 000
Fair value of land on a stand-alone basis 1 650 000
Cable uses the fair value model to account for assets in terms of IAS 40 Investment Property.
2. Inventory
Included in inventory is fibre optic cable to the value of R875 000.
On 1 September 20.17 Cable signed a non-cancellable two-year contract with Fox Ltd (Fox) to
supply the telecommunication company monthly with 1 000-meter fibre optic cables at a fixed
rate of R210 per meter for the first year of the contract and at a fixed rate of R225 per meter for
the second year of the contract.
For the first year of the contract with Fox, Cable had a supplier who supplied the fibre optic
cable to Cable at a fixed rate of R180 per meter. Due to unforeseen circumstances the supplier
was liquidated after the first year of the contract between Cable and Fox. Cable had no fibre
optic cable on hand at 31 August 20.18. Cabled purchased all required fibre optic cable for the
remainder of the contract with Fox on 1 September 20.18. Cable could only acquire fibre optic
cable at R250 per meter.
3. Trade receivables
Cable recognised an allowance account for credit losses relating to debtors amounting to
R145 000 for the year ended 28 February 20.18. This allowance account for credit losses,
which is included in the R1 210 000, should be adjusted to R105 000 for the year ended
28 February 20.19.
4. Trade payables
You may assume that this figure has been calculated correctly for the year ended
28 February 20.19. The recoverable amount of the plant cash-generating unit cannot be
determined without consideration of this liability.
Your team anticipates that Chonghong will gradually increase its HDCW market share in
South Africa after the company has moved its business to the planned industrial park in Limpopo. On
28 February 20.19, your team therefore indicated that the plant has a remaining useful life of
10 years where after it will be dismantled at a cost of R500 000.
The recoverable amount of the plant cash-generating unit on 28 February 20.19 was determined to
be R8 500 000.
SHARE CAPITAL
Of the 300 000 authorised ordinary shares, 100 000 shares have been issued since incorporation
and there is no restriction on Cable to issue the remaining 200 000 shares. The four directors of
Cable are the founding members and only shareholders of the company.
MJM
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1 March 20.18 R
Ordinary shares 5 000 000

Share premium 4 000 000
DIVIDENDS PAID
Ordinary dividend
All four directors of Cable are nearing retirement and on 1 September 20.18 the directors declared
and approved the following distributions:
• Each director will receive a repayment of their contributed share premium amounting to
R1 million per shareholder, payable in cash on the same date which the transfer of investment
property has been finalised at the deeds office (refer below).
• The company owns four properties in the luxurious Elements Private Golf Reserve which
enabled each director to entertain clients within the serene beauty of the bushveld. Due to the
increased costs to maintain these properties, Cable has decided to distribute the four
properties to its directors as dividends.
The following information relates to each property:
Original cost price:1 March 20.16 R2 000 000

Carrying amount: 1 September 20.18 R2 300 000
Market value: 1 September 20.18 R2 500 000
Market value: 31 December 20.18 R2 400 000
Tax value ?
Investment property transfer date at deeds office 31 December 20.18
Assume the cost to distribute the properties are negligible.
The properties have been accounted for as investment property according to the fair value method in
terms of IAS 40.
BONUS SCHEME
During the January 20.18 calendar year, you proposed a new bonus scheme to the board of
directors to assist the company with the retainment of key personnel, especially in the light of the
nearby retirement of the founding board members. This bonus scheme will be a first of its kind for
Cable. Key personnel will be granted a bonus after the completion of two years employment in the
form of either a predetermined number of shares in Cable itself or a cash payment equal to the value
of a predetermined number of shares in Cable. The company will have the option to determine the
method of settlement.
The board of directors had limited knowledge of the accounting of the suggested bonus scheme. The
majority supported the distribution of equity shares above a cash payment. According to their
understanding, a settlement in company shares will neither affect the company’s profit nor place
strain on the company’s cash flow resources.
You were tasked to prepare a presentation to the board of directors to inform them of the accounting
treatment of such a bonus scheme and to indicate to them the impact of the bonus scheme on the
profit of the company as well as to highlight any related cash flow risks it may entail.
MJM
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To prepare the presentation the following details pertaining to the bonus scheme, as well as
projected share price values, were made available:
Details of bonus scheme:
Commencement date of bonus scheme: 1 March 20.18

Bonus scheme remuneration option: Cash payment equal to the value of 1 000 shares of Cable or
1 000 actual shares in Cable.
Vesting condition: after 24 months of uninterrupted employment; and
Current number of employees who will qualify for the bonus scheme: five.
It is estimated that none of the five employees will leave the company during the vesting period.
Projected share values
Share price Fair value* of shares

R R
1 March 20.18 50 45
28 February 20.19 55 51
28 February 20.20 60 56
* The fair value of the shares is lower due to post vesting transfer restrictions.
RETAINED INCOME
The retained income balance on 1 March 20.18 amounted to R13 500 000. Profit for the year ended
28 February 20.19 amounted to R5 500 000 before any of the above items were considered. There
were no other comprehensive income movements except those indicated in the information above.
You may assume that the income tax expense for the year ended 28 February 20.19 correctly
amounted to R1 270 347.
Additional information
• Assume that the normal income tax rate is 28% and the capital gains inclusion rate is 80%.
• A fair annual discount rate is 10% before tax (compounded monthly).
• Assume that Cable accounts for all changes in estimates prospectively from the date of
change in estimate.
• Cable complies with International Financial Reporting Standards (IFRS)
MJM
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CASE STUDY 1
REQUIRED
YOU NOW HAVE 150 MINUTES TO COMPLETE THE CASE STUDY.
QUESTION 1
Marks
(a) Prepare the journal entries that Cable Ltd has to process in order to account for the 14
foreign loan in its financial records for the years ended 28 February 20.19 and
28 February 20.20.
Please note:
• Ignore taxation.
• Journals should be dated clearly and presented in date order.
• Journal narrations are not required.
(b) Disclose the following categories of assets, for the plant cash generating unit only, in 36
the notes to the financial statements of Cable Ltd for the year ended
28 February 20.19 in terms of IAS 16.73(d) and (e):
(a) Land;
(b) Buildings; and
(c) Plant.
Please note:
• Comparative figures are not required.
Communication skills: presentation and layout 1
(c) Prepare the journal entries necessary to recognise the dividend distribution to the 13
directors of Cable Ltd in the financial records of Cable Ltd for the year ended
28 February 20.19.
Please note:
• Journals should be dated clearly and presented in date order.
MJM
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Marks
(d) Prepare the handout document given to the members of the board of directors to 17
whom you presented an explanation of the accounting treatment of the proposed
bonus scheme for both settlement alternatives.
Your document had to be comprehensive in order to be distributed to members of the

board who did not attend your presentation on that day.
Your document should also address the board of directors’ concern with regard to the
impact the bonus scheme will have on the company’s profit or loss for the duration of
the vesting period as well as any related cash flow risk.
You decided that your explanation will be best understood by also including the
necessary journal entries in your presentation document with regard to the available
information.
Please note:
• Show one journal entry for recurring journals entries.
• Presentation and disclosure are not required.
Communication skills: logical argument 1
(e) Present the statement of changes in equity of Cable Ltd for the year ended 17
28 February 20.19. Comparative figures are not required.
Please note:
• Assume that the board of directors accepted the new bonus scheme,
commencing on 1 March 20.18. Also assume that the actual share values were
the same as the given projected values utilised in your presentation and that no
employees resigned during the 20.19 financial year nor is it expected that they
will resign during the 20.20 financial year. Ignore the effect of taxation on this
item only.
Please note
• Round off all amounts to the nearest rand.

• Assume all amounts are material.
• Your answer must comply with International Financial Reporting Standards (IFRS).
MJM
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CASE STUDY 1
QUESTION 1 – Suggested solution
(a) Journal entries – Foreign loan

Dr Cr
R R
1 March 20.18
J1 Bank ($240 000 x R12,95) (SFP) 3 108 000 (1½)
Loan (SFP) 3 108 000 (½)
Recognition of loan on transaction date
28 February 20.19
J2 Loan (SFP) 276 000 (1½)
((R11,80 – R12,95) x $240 000)
Foreign exchange difference (P/L) 276 000 (½)
Year-end remeasurement of loan at closing exchange
rate
J3 Finance charges (P/L) 259 874 (2)
[($240 000 x 10% x R12,375) – R37 125]
Plant 37 125 (1)
Foreign exchange difference (P/L) 13 800 (1½)
Bank ($240 000 x 10% x R11,80) (SFP) 283 200 (½)
Recognition of finance charges on foreign loan accrued
28 February 20.20
J4 Finance charges (P/L) 317 400 (1½)
($240 000 x 10% x R13,225)
Loan (SFP) 2 832 000 (1)
(R3 108 000 – R276 000)
Foreign exchange difference (balancing) 718 200 (½)
Bank (SFP) 3 867 600 (2)
(($240 000 x R14,65) + ($240 000 x 10% x R14,65))
Settlement of loan and final interest payment
Total (14)
Alternative to J4
J4 Foreign exchange (P/L)
($240 000 x (R14,65 – R11,80^)) 684 000 (1)
Loan/Foreign creditor (SFP) 684 000 (½)
Finance charges/Interest (P/L)
($240 000 x 10% x R13,225) 317 400 (1)
Foreign exchange (P/L) (balancing) 34 200 (½)
Loan/Foreign creditor or Bank (SFP)
($240 000 x 10% x R14,65) 351 600 (1)
Loan/Foreign creditor (SFP)
(R3 108 00 - R276 000 + R684 000 + R351 600) 3 867 600 (½)
Bank (SFP) 3 867 600 (½)
OR Loan/Foreign creditor (SFP) 3 516 000
(R3 108 000 - R276 000 + R684 000)
Bank (SFP) 3 516 000
MJM
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(b) CABLE LTD
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.19
1. Property, plant and equipment
Land Buildings Plant

R R R
Carrying amount at 28 February 20.18 - - -
Gross carrying amount or cost - - -
Accumulated depreciation - - -
C2 C2
Impairment losses through profit or loss - (318 965) (½) (681 035) (13)
(included in other expenses)
Impairment losses through other
1
comprehensive income (50 000) (1½) - -
4
Additions - - 5 105 882 (9½)
2 2
Transfer from investment properties 1 700 000 (1) 2 400 000 (½)
3 C1
Depreciation for the year [C2] (80 000) (2) (152 351) (5)
Carrying amount at 28 February 20.19 1 650 000 2 001 035 4 272 496
Gross carrying amount or cost 1 650 000 (½) 2 400 000 (½) 5 105 882 (½)
Accumulated depreciation and
impairment losses - (½) (398 965) (½) (833 386) (½)
(3) (4) (29)
Total (36)
Communication skills: presentation and layout (1)
1
R1 700 0002 - R1 650 000 (IFRS13.31) = R50 000
2
Fair value on 1 July 2018 (transfer date)
3
(R2 400 000 – R280 000)/212 (240 – 28) x 8 = R80 000
4
R5 028 750C1 + R77 132C2 = R5 105 882
MJM
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CALCULATIONS
C1. Plant
Calculations Total
Additions Depreciation
R R R
Purchase price
12 P/Y 4 500 000
FV R4 651 885,44 (½)
N 4 (½)
I/Y 10 (½)
PV R4 500 000
Transportation to factory 15 191 (½)
Engineers 61 438 (½)
Employees (R26 000 x 18/20) 23 400 (1)
Testing costs (R18 500 – R8 000) 10 500 (1)
Borrowing
costs (given) 37 125 (1)
Dismantling provision 102 346
12 P/Y
FV R750 000 (½)
N 240 (½)
I/Y 10 (½)
PV R102 346
4 750 000 4 750 000

Inspection cost (60 000) (½)
4 690 000
Depreciation
(R4 690 000 – R280 000)/240 x 6 (110 250) 110 250 (1½)
4 579 750
Annual inspection 60 000 (1)

Depreciation (R60 000/2 x 6/12) (15 000) 15 000 (1)
45 000
Safety equipment & spares

Safety equipment 185 000 (1)
Spares (R125 000 x 75%) 93 750 (1)
278 750 278 750
Depreciation (R278 750/(12 x 6) x 7) (27 101) 27 101 (1)
251 649
5 028 750
Depreciation (152 351)
Carrying amount 28 February 20.19 4 876 399 (9) 152 351 (5)
MJM
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C2. Impairment
Carrying
28 Feb 20.19 28 Feb 20.19
amount
Before Adjustments After Impairment
after
adjustments adjustments
impairment
R R R R R
Land 1 650 000 1 650 000 1 650 000 (1)
2
Buildings 2 320 000 2 320 000 (318 965) 2 001 035 (1½)
C1 1 3
Plant 4 876 399 77 132 4 953 531 (681 035) 4 272 496 (4)
2
Inventory 3 280 000 (150 000) 3 130 000 3 130 000 (2½)
4
Debtors 1 210 000 40 000 1 250 000 1 250 000 (1½)
5
Foreign loan (2 832 000) (2 832 000) (2 832 000) (½)
Decommissioning
1
provision (184 703) (184 703) (184 703) (½)
Creditors (786 828) (786 828) (86 828) (½)
9 500 000 1 000 000 8 500 000
Recoverable amount 8 500 000 (1)

1 000 000
1
Change in dismantling provision
Carrying amount:
R
Revised dismantling provision (refer below) (184 703) (1½)

Present value (refer below) 107 571 (1½)
Increase in dismantling provision 77 132
SHARP EL 738 Hp 10B11

12 P/Y 12 P/YR
FV R750 000 FV R750 000 (½)
N (240 – 6 = 234) N (240 – 6 = 234) (½)
I/Y 10 I/YR 10 (½)
PV R107 571 PV R107 571
SHARP EL 738 Hp 10B11

12 P/Y 12 P/YR
FV R500 000 FV R500 000 (½)
N 120 N 120 (½)
I/Y 10 I/YR 10 (½)
PV R184 703 PV R184 703
2
Inventory: Write-down to net realisable value (IAS 37.69)
R
Acquire at and carrying 1 000m x 6 months x R250 p/m 1 500 000 (1)
amount:
Supply at 1 000m x 6 months R225 p/m 1 350 000 (1)
Provision raised on 1 September 20.18 150 000
3
R1 000 000 x R2 320 000/(R2 320 000 + R4 953 532) = R318 965
4
R1 000 000 – R318 965 = R681 035
5
R145 000 – R105 000 = R40 000
6
R3 108 000 – R276 000 = R2 832 000 (from (a))
MJM
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(c) Journal entries

Dr Cr
R R
1 September 20.18
J1 Share premium (SCE) 4 000 000 (1)
Distribution to shareholders payable (SFP) 4 000 000 (½)
Share premium repaid to shareholders
J2 Retained earnings/Dividends paid (SCE) 10 000 000 (1)
Distribution to shareholders payable (SFP)
(4 x R2 500 000) 10 000 000 (½)
In species dividend declared
J3 Investment property (SFP) 800 000 (1½)
(R2 500 000 – R2 300 000) x 4
Fair value adjustment (P/L) 800 000 (½)
Account for asset at fair value before reclassification
as held for distribution
J4 Non-current assets held for distribution (SFP) 10 000 000 (1)
(R2 500 000 x 4)
Investment property (SFP) 10 000 000 (½)
Transfer investment property to assets held for
distribution
31 December 20.18
J5 Distribution to shareholders payable (SFP)
(R2 500 000 – R2 400 000) x 4 400 000 (1½)
Retained earnings/Dividends paid (SCE) 400 000 (½)
Remeasurement of dividend liability
J6 Distribution to shareholders payable (SFP)
(R4 000 000 + R10 000 000 – R400 000) 13 600 000 (2)
Loss on distribution of non-current asset (P/L)
(refer J4) 400 000 (½)
Bank (SFP) 4 000 000 (1)
Non-current assets held for distribution (SFP) 10 000 000 (1)
Settlement of the dividend declared and share
premium repaid
Total (13)
Communication skills: presentation (1)
Alternative to J3 & J4
J3 Non-current assets held for distribution (SFP)

(4 x R2 500 000) 10 000 000 (1½)
Fair value adjustment (P/L) 800 000 (1)
Investment Properties: (4 x R2 300 000) (SFP) 9 200 000 (1½)
Reclassify investment property to assets held for
sale
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(d) Bonus scheme
Accounting of Proposed New Bonus Scheme
The proposed new bonus scheme will constitute a share-based payment arrangement
in terms of IFRS 2 Share-based Payments with a cash alternative, since it will be an
agreement between Cable Ltd and its employees that entitles its employees to receive
either:
(a) Cash for amounts that are based on the value of Cable Ltd’s ordinary share
capital, or
(b) Ordinary shares in Cable Ltd (1)
In order to account for such a share-based arrangement, Cable Ltd first need to
determine whether the company has a present obligation to settle in cash. (IFRS2.41)
If Cable Ltd has a present obligation to settle in cash, Cable Ltd need to account for
the transaction in accordance with the requirements applying to cash-settled share-
based payment transactions. (IFRS2.42) (1)
Since this will be the first time Cable Ltd has such a bonus scheme, and therefore
does not have a past practice of settling in cash, and the entity is not legally prohibited
from issuing shares, Cable Ltd does not have a present obligation to settle in cash. (1)
(IFRS2.41)
Cable Ltd therefore need to account for the transaction (as a whole) in accordance
with the requirements applying to equity-settled share-based payment transactions for
the duration of the vesting period, but still has the option on settlement date to choose
how the share-based payment will be settled. (2)
As an equity-settled share-based payment transaction the following journal entry will

be recognised for the year ended 28 February 20.19 and 28 February 20.20:
28 February 20.19 & 28 February 20.20 Dr Cr

R R
J1 Employee benefit expense (P/L) 112 500 (2)
(1 000 shares x 5 employees x R45)/2 year vesting
period (1)
Share-based payment reserve (SCE) 112 500
Accounting of bonus scheme for the first year of the
vesting period
The profit or loss of the company will therefore be affected from commencement of the
bonus scheme until the end of the vesting period, with the fair value of the number of
shares granted on commencement date (1 March 20.18) (IFRS 2.16). Since there is a
required vesting period, the expense will be accounted for over the duration of the
vesting period on a straight-line method as the services of the personnel are rendered
(IFRS 2.20). (2)
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At the end of the vesting period, Cable Ltd will account for the payment of the bonus
scheme as follows, depending which settlement option the company selects: (1)
(a) Cash Settlement:
28 February 20.20 Dr Cr
R R
J1 Share-based payment reserve (SCE) 225 000 (1)
(R112 500 x 2 years)
Retained earnings (SCE) 75 000 (1)
Bank (SFP) (1 000 shares x 5 x R60) 300 000 (1)
Cash settlement of bonus scheme
(b) Equity Settlement:
28 February 20.20 Dr Cr
R R (1)
J1 Share-based payment reserve (SCE) 225 000 (1)
Share capital (SCE) 225 000
Equity settlement of bonus scheme
However, if Cable Ltd elects the settlement alternative with the higher fair value at the
date of settlement, Cable Ltd will have to recognise an additional expense in profit or
loss for the excess value given. The expense that will be recognised will be the
difference between:
(a) The cash paid and the fair value of the equity instruments that would otherwise
have been issued, or
(b) The fair value of the equity instruments issued and the amount of cash that would
otherwise have been paid. (1)
The cash settlement fair value will be determined based on the share price of the 1 000
shares granted at that time, and the equity settlement will be determined based on the
fair value of the 1 000 shares at that point in time. (1)
However, since the fair value of the 1 000 shares of Cable Ltd will always be lower than
the actual share price of the 1 000 shares, due to post vesting transfer restrictions, no
additional expense will be recognised in profit or loss on settlement date if the equity
settlement option is chosen. (1)
Only if Cable Ltd selects the cash settled option an additional expense amounting to
R4 000 [(R60 x 1 000) – (R56 x 1 000)] will recognised on date of settlement. (1)
A cash settled share-based payment will affect the cash flow of the company at the end
of the vesting period and the company should budget for such a payment should (1)
Cable Ltd wish to settle by means of a cash payment. However, should Cable Ltd incur
any liquidity constraints at date of settlement, the company can select to settle in its
shares. (1)
Since Cable Ltd has the choice of settlement and only need to decide on their
settlement option at the end of the vesting period, the cash flow risk entailed within this
bonus scheme is avoidable since it is within the company’s control. (1)
Total (23)
Maximum (17)
Communication skills: logical flow and conclusion (1)
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(e) CABLE LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY 20.19
Share-
Share Share Revaluation based Retained
capital premium surplus payment income
reserve
R R R R R
Balance on
1 2
1 March 20.18 5 000 000 4 000 000 38 800 - 13 500 000 (3)
Changes in equity for
20.19
3
Dividends (9 600 000) (1)
Equity distribution to
shareholders (4 000 000) (½)
Comprehensive income:
• Profit or loss 112 500 C1
3 096 590 (12)
• Other comprehensive
income (38 800) (½)
Balance on
28 February 20.19 5 000 000 - - 112 500 6 986 590
Total (17)
1
R50 000 – (R50 000 x 80% x 28%) = R38 800 [1½]
2
Given
3
R10 000 000 – R400 000 = R9 600 000 [Refer part (c) J5] [1]
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CALCULATION
C1. Profit for the year
Profit for the year (given) 5 500 000 (½)
Adjustments:
Foreign loan (refer (a)):

Interest (R297 000 – R37 125(borrowing cost)) (259 875) (1)
Foreign exchange difference (R276 000 + R13 800) 289 800 (1)
Plant cash generating unit (refer (b)):

Employee cost (R26 000 – R23 400) (2 600) (1)
Plant testing income (8 000 – 8 000 (plant)) -
Depreciation (R80 000 + R152 351) (232 351) (1)
Impairment on plant (1 000 000) (½)
Trade receivables: Allowance account for credit losses 40 000 (½)
Inventory: Write-down to net replacement value (150 000) (½)
Finance charges: Dismantling provision (R107 571 – R102 346) (5 225) (1)
Spareparts (R125 000 x 25%) (31 250) (1)
Fair value adjustment (refer (b)):

Land (R1 750 000 – R1 700 000 (30 June 2018)) (50 000) (1)
Distributions (refer (c)):

Dividend distribution (Refer part (c) J3) 800 000 (½)
Loss with dividend distribution (400 000) (½)
Share-based payment (refer (d)): (112 500) (½)
Taxation (1 270 347) (½)

Adjusted profit for the year 3 096 590
(11)
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QUESTION 1 58 marks
IGNORE ANY VALUE-ADDED TAX IMPLICATIONS.
CRYPTOCURRENCY
You are a first-year auditing clerk who has been appointed to assist with the audit of Mining Ltd
(Mining) for the year ended 28 February 20.19. For the last few days you have been situated at the
head offices of the company which is in Johannesburg.
Early on the morning of 28 February 20.19, while you were still enjoying a double short latte in your
recyclable Seattle take-away cup, Mr IT Guy came running out of the fish tank (an office partitioned
off with glass) with his laptop held high above him. You could see that his excitement was
overflowing, as he was shouting enthusiastically. All attention was drawn to the thrilled information
technology (IT) specialist and as the realisation dawned through to everyone else in the office, they
started to put their hands together. Slowly at first, but then with eagerness and shouts of
congratulations.
An employee sitting across you saw your puzzled face and tried to speak above the noise: “Bitcoin”.
“Bit of what?” you asked confused. “BitCOIN” she repeated herself, this time a bit louder, smiling.
“He was successful in mining another Bitcoin. You know, cryptocurrency”, she explained.
Interesting, you thought to yourself – you were under the impression that Mining were in the mining
of coal only. You soon learnt that the company is mining Bitcoins mainly for the long-term growth
opportunity which potentially lies within this decentralised convertible virtual currency. The coin hit an
all-time high in December 20.17 when it traded at $19 783,21 a coin. It also dropped with more than
50% within 16 days thereafter. Currently it has a value amounting to R55 000 each.
A Bitcoin does not have a unique identification number, but the transaction from which it originates
(named a Satochi, after the founder(s) of Bitcoin) is traceable. However, in order to receive and
transfer bitcoins, or a portion thereof, a Bitcoin Wallet is required. Each Bitcoin Wallet has a unique
address.
The Bitcoin Wallet address of Mr IT Guy’s laptop is 18TGt8oGgLzkCpjxMbiRfvbDo9NqMiningg and

within this wallet the balance of the owned Bitcoins is reflected. Mining secures the Bitcoin Wallet by
safe guarding all their computers and the information thereon.
In November 20.13 the first Bitcoin automated teller machine (ATM) opened in a coffee house in
Vancouver, Canada. In May 20.18, South Africa’s first cryptocurrency ATM was installed in
Johannesburg, which made cryptocurrency accessible to individuals who do not have a bank
account.
Mining can also exchange its Bitcoins for goods or services.
Considering the above, you commenced your day by writing a very important e-mail to your audit
manager who spent her virtual currency (in the form of air miles) to travel to the Seychelles before
the expiry of the miles. She did however indicate that she could be reached via e-mail for important
matters.
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To: auditmanager@audit.co.za
From: me@audit.co.za
RE: Virtual Currency
Mrs Audit Manager,
It came to my attention that our client, Mining Ltd, is also mining virtual currencies - Bitcoin in
particular. The value of the Bitcoins (Bitcoin holdings) that have been mined during the year have not
yet been accounted for in the financial statements of Mining Ltd.
According to the South African Reserve Bank a virtual currency is a digital representation of value
that can be digitally traded and functions as a medium of exchange, a unit of account and/or a store
of value, but does not have legal tender* status.
Further readings on Bitcoin indicated that the potential of Bitcoin is not solely limited to serving as a
payment alternative, it has also been viewed as a commodity, asset class or security ripe for
speculative investment.
Considering the above, I have compiled a list of the possible recognition and measurement of
Mining Ltd’s Bitcoin holdings and will appreciate an indication on the way forward.
The Bitcoin holdings can be recognised and measured either as:
(1) A financial asset; or

(2) An intangible asset.
Hope the air miles rewarded you with fun in the sun.
Regards,
Me
Audit clerk
Audit in Action Inc
* Legal tender is a medium of payment recognised by a legal system to be valid for meeting a
financial obligation. Paper currency and coins are common forms of legal tender in many countries.
DEFERRED TAXATION
After the e-mail was written you returned to assist the accountant with finalising the company’s
deferred taxation calculation. The following incomplete calculation, as well as related information,
was supplied to you: (You may assume that the below information is correct.)
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Carrying Tax base Temporary Deferred tax at

amount differences 28%
Notes at 100% or asset/
80% (liability)
R R R R
28 February 20.18
Temporary differences 6 250 000 (1 750 000)
Unused tax loss 8 500 000 (6 250 000) 1 750 000
Deferred tax liability - -
28 February 20.19
Land 1 13 000 000 ?
a
Buildings 2 7 200 000 ?
b
Plant 3 3 500 000 ?
Inventory 4 1 050 000 ?
Deferred tax
a
R3 000 000 x 3 buildings x 20/25 years = R7 200 000
b
R7 000 000/7 x 3,5 years = R3 500 000
1. Land
Land is accounted for according to the revaluation method. On 28 February 20.19 the
revaluation surplus account reflects a closing balance of R2 328 000 relating to land only. This
amount was correctly recognised during the current financial year.
2. Buildings
The three buildings are accounted for according to the cost model and depreciated over their
useful lives according to the straight-line method.
On 28 February 20.19 the following journal entry was processed relating to one of the
warehouse buildings after the above schedule was already compiled:
Dr Cr
28 February 20.19 R R
J1 Non-current assets held for sale (SFP) (Balancing) 2 000 000
Accumulated depreciation and impairment (SFP)
(R3 000 000/25 years x 5 years) 600 000
Impairment loss (P/L) (R2 400 000 – R2 000 000) 400 000
Warehouse building at cost (SFP) (given) 3 000 000
Reclassification of warehouse to Non-current assets held for
sale on 28 February 20.19
The South African Revenue Services (SARS) allows a building allowance of 5% per annum,
not apportioned for part of a year, in terms of section 13(1)(b), on these buildings.
3. Plant
Plant was commissioned on 1 September 20.15 at a cost amounting to R7 000 000. The
SARS allows a wear and tear allowance with regard to the plant at 40% of the cost for the first
year and 20% for the subsequent three years (not apportioned for part of a year).
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4. Inventory
Mining valued its inventory at its net realisable value amounting to R1 050 000, which is
R150 000 below its cost price. According to section 22(1) of the Income Tax, the
Commissioner found that only 20% of the write-down to net realisable value to be just and
reasonable to represent the amount by which the value of such trading stock has diminished.
5. Lease of computers
The lease agreement for the lease of computers contains the following information:
Commencement 1 September 20.18

date
Lease term 3 years
Options contained Options to purchase computers at end of lease term
within the lease
At commencement of lease, there was no indication that the option will be
agreement
exercised
Lease payment R20 000 bi-annually in arrears
The SARS allows a wear and tear allowance over three years on a straight-line method
according to section 11(e) on the cost of computers. Mining depreciates right-of-use assets
according to the straight-line method. On 1 September 20.18 the computers had an expected
useful life of three years.
Mining could not determine the rate implicit in the lease. The incremental borrowing rate of
Mining was as follows:
• 7,75% per annum (compounded bi-annually) at 1 September 20.18; and

• 8,25% per annum (compounded bi-annually) at 28 February 20.19.
At inception of the lease, Mining acquired additional random-access memory (RAM) from
Incredible Connection to enhance the processing power of the computers. The cost of the
RAM amounted to R14 729.
On 28 February 20.19 Mining informed the lessor that they will exercise the option to purchase
the computer equipment at the end of the lease term. The lessor indicated that a final payment
amounting to R40 000 will be payable at the end of the lease term in order to exercise the
purchase option.
6. Bonus
It is company policy to reward deserving employees each financial year with a bonus, which is
payable in the month after the financial year end. For the year ended 28 February 20.18
R95 000 was paid for exceptional performance and in the current financial year that amount
totaled R146 500.
Section 7B of the Income Tax Act deems the expenditure incurred in respect of bonuses to be
incurred by the employer on the date during the tax year on which the amount is paid to the
employee by the employer.
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7. Leave pay
Employees are granted 28 days of leave during each calendar year. All leave that is not
utilised (taken) during a calendar year, may roll over to the following calendar year for six
months only. There after the leave will be forfeited.
Only personnel who resign will receive a cash payment for any unutilised leave at the date of
resignation. Leave accrues to employees on a pro-rata basis for the number of months of
employment. The following information relates to the leave balances of Mining.
Number of days
Opening balance 1 March 20.18 1 150
Accrued during the year 3 220

Utilised during the year (3 265)
Paid during the year (70)
Closing balance 28 February 20.19 1 035
It is expected that 2 employees will resign in March 20.19. They have each accrued 13 days of
unused leave on 28 February 20.19. The average cost to company per employee per day
amounts to R960, while the average gross salary per employee per day totals R850. Mining
remunerates employees based on their gross salary, when leave is paid out at resignation and
accrues leave based on the cost to the company.
8. Taxation
On 12 February 20.19 an additional assessment was issued for the 20.18 tax year. According
to this assessment R15 000 is payable to the SARS of which R2 500 relates to a penalty for
late payment. Mining did not object this additional assessment.
9. Foreign income
During the current financial year Mining received foreign income which is only taxable in the
country of origin at a rate of 25%. The tax that was paid to the company of origin amounted to
R15 000.
10. Profit before tax
After considering the abovementioned items, the profit before tax for the year ended
28 February 20.19 correctly amounted to R6 000 000.
• Assume that the normal income tax rate is 28% and that the capital gain inclusion rate is 80%.
• There are no temporary differences, other than those that are apparent from the information
contained in the question.
• The only non-taxable and non-deductible items included in the accounting profit or loss are
those that are apparent from the information provided.
• Mining expects to realise capital gains in the nearby future.
• You may assume that at inception of the lease contract Mining determined that the contract is
a lease in terms of IFRS 16.9.
• Property, plant and equipment (including computers) are accounted for at the cost model and
depreciated over its useful life according to the straight-line method.
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QUESTION 2 42 marks
IGNORE ANY VALUE-ADDED TAX IMPLICATIONS.
PART I
Furn Decor Ltd (Furn Decor) is a listed company on the Johannesburg Stock Exchange and deals in
the manufacturing and wholesaling of elegant home furniture. It has been in operation for the past
20 years and built a reputation for being the best when it comes to quality home furniture.
You are the newly appointed financial manager of Furn Decor. The financial director has asked you
to assist with the completion of the financial statements for the year ended 30 September 20.19.
An extract of the following balances was presented to you:
Balance on 1 October 20.18 R
Ordinary share capital 40 000 000

Retained earnings 10 250 000
The profit before tax amounted to R18 475 000 before taking the following information into account:
1. On 1 December 20.18, Furn Decor acquired 500 000 ordinary shares in CAP Ltd (CAP) for
R5,50 per share. The fair value of the shares on this date was R2 400 000. Furn Decor paid
R20 000 in transaction costs to acquire these shares. On 28 February 20.19, CAP
repurchased 15% of their shares pro-rata from all the shareholders at its fair value.
Transaction costs of R8 000 were paid by CAP. On 30 April 20.19, CAP issued dividends of
R0,80 per share to its existing shareholders.
This is the first time that Furn Decor has purchased equity instruments.
Furn Decor irrevocably elected in terms of IFRS 9.5.7.5 to present subsequent changes in the
fair value of the investment in the mark-to-market reserve.
Furn Decor has a policy of reclassifying previous fair value adjustments to retained earnings
upon derecognition or financial assets designated at fair value through OCI.
The following fair value schedule was made available to you:
Date Fair value

1 October 20.18 R4,80 per share
28 February 20.19 R6,85 per share
30 September 20.19 R8,20 per share
2. On 1 October 20.17, Furn Decor purchased unlisted corporate bonds at its face value (also fair
value) of R5 000 000. The bonds pay interest every four months at a nominal market related
coupon rate of 8% per annum. The bonds will mature on 30 September 20.22 at a premium of
15% of its face value. The bonds are correctly held within a business model where the
objective is achieved both by holding financial assets in order to collect contractual cash flows
of principal and interest as well as to sell the bonds.
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The financial director also made the following schedule regarding the credit losses balances
and fair values relating to these bonds available to you:
12 month Lifetime
Credit risk
Financial year ended expected expected Fair value
parameters
credit losses credit losses
30 September 20.18 R24 000 R120 000 Low R5 300 000
30 September 20.19 R30 000 R150 000 High (but not R5 550 000
credit impaired)
3. On 1 April 20.17, Furn Decor obtained a loan from Best Bank in order to finance a lucrative
investment project. The loan was for an amount of R5 000 000 and R785 000 is repayable
every 6 months, starting from 30 September 20.17, for the next 4 years. On 1 April 20.19, Furn
Decor decided to renegotiate the terms of the loan payable to maintain its liquidity. The loan
was settled by issuing 60 000 non-redeemable Class A preference shares of Furn Decor with a
fair value of R51 each. Preference dividend payments are at the discretion of Furn Decor.
PART II
You have been appointed as the IFRS consultant for Swiss Ltd (Swiss), a chocolate manufacturer
that is listed on the Johannesburg Stock Exchange. Swiss manufactures different varieties of milk
and dark chocolate and has branches all over South Africa.
Currently, the company is trying to expand its footprint in other African countries.
After extensive market research, it was determined that opening up a new branch in Zambia will
assist Swiss to gain entrance in the African market. In order to finance the expansion, Swiss issued
5 000 debentures with a nominal amount of R11 000 000 at a fair value of R2 000 per debenture on
30 September 20.19. Interest of R165 000 is payable quarterly, in arrears, and the debentures will
mature on 30 September 20.23. Each debenture is convertible at the option of the holder into
20 ordinary shares for every five debentures held. Debentures not converted, will be redeemed at
their nominal amount.
On 30 September 20.19 transaction costs of 800 000 were incurred by Swiss. Any transaction costs
incurred on the issuance would be deductible for tax purposes in the tax year in which these costs
are incurred. A market related interest rate on 30 September 20.19, for similar debentures without
conversion rights is 11% per annum, paid quarterly in arrears.
Only the following entries have been processed in respect of the issue of these debentures:
Dr Cr
R R
30 September 20.19
Bank (SFP) 11 000 000
Financial Liability: Debentures (SFP) 11 000 000
Transaction costs (P/L) 800 000
Bank (SFP) 800 000
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CASE STUDY 2
REQUIRED
QUESTION 1
Marks
(a) Prepare the audit work paper as instructed by your audit manager in the e-mail below
which she sent in response to your enquiry:
To: me@audit.co.za
From: auditmanager@audit.co.za
RE: Virtual Currency
Dear Me
Thank you for your e-mail, and the information relating to cryptocurrency. With regard
to your query, please refer to my comments below:
It is evident to me that Mining Ltd acquired the Bitcoin holdings mainly for capital
appreciation (investment) purposes, to gain from increases in the market value
thereof and will realise it at fair value when it is sold. Should the company decide to
transact with the Bitcoin holdings in order to obtain other goods or services, the
Bitcoin holdings will also be realised at fair value.
Therefore, in my view, to increase the usefulness of the information provided in the

financial statements, the Bitcoin holdings should be measured at fair value, with any
movement in the fair value thereof recognised in profit or loss, since this will provide
both relevant information to users of the financial statements as well as faithful
representation of the financial performance of Mining Ltd.
While I am on leave, please prepare a work paper containing the following:
(i) Discuss whether the recognition and measurement of the Bitcoin holdings at 16
fair value, with any movement in the fair value thereof recognised in profit or
loss, will be best achieved by accounting for the Bitcoin holdings as a financial
asset or as an intangible asset in terms of the International Financial Reporting
Standards relevant to each option;
Please note:
• Your answer should not refer to the Conceptual Framework.
(ii) Also kindly discuss whether Mining Ltd’s Bitcoin holdings qualifies as an asset 4
in terms of the definition of an asset according to the revised Conceptual
Framework of 2018; and
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Marks
(iii) If the revised Conceptual Framework of 2018 supports the recognition and 6
measurement of the Bitcoin holdings at fair value, with the movement in the fair
value thereof recognised in profit or loss.
Regards,
Audit Manager
(b) Disclose the taxation note to the financial statements of Mining Ltd for the year ended 30
28 February 20.19 as required by IAS12.79-.80.
Please note:
• Comparative figures are not required
• The movement in temporary differences in the current tax calculation has to be
calculated by using the statement of financial position method.
Please note
• Round off all amounts to the nearest rand.

QUESTION 3
REQUIRED
Marks
PART I
Prepare the equity and liabilities section of the Statement of Financial Position of 24
Furn Decor Ltd for the year ended 30 September 20.19.

Please note:
• Comparative amounts are required.
• Round off all amounts to the nearest Rand.
• Ignore any tax implications.
PART II
Prepare the correcting journal entries to account for the issue of debentures by Swiss Ltd for 17
the year ended 30 September 20.19.
Please note:
• Include journal entries relating to current and/or deferred taxation.
Please note:
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CASE STUDY 2
(a) Working Paper
Client Mining Ltd SFP 2

Preparer ME
Reviewer Mrs Audit Manager
Date 1/03/.19
Recognition and measurement of a Bitcoins
(i) Recognition and measurement options:
(1) Financial asset:
Recognition
IFRS 9 Financial Instruments allows for financial instruments to be measure at fair

value, with the movement in the fair value thereof to be recognised in profit or loss.
However, in order to account the Bitcoin holdings as a financial asset, the Bitcoin
holdings has to meet the definition of a financial instrument in terms of IAS 32
Financial Instruments: Presentation. (1)
In order for the Bitcoin holdings to meet the definition of a financial instrument as defined
in IAS 32 it has to be a contract that gives rise to a financial asset of one entity and
a financial liability (or equity instrument) of another entity. (1)
However the Bitcoin holdings:
• Is not a financial asset as defined in IAS 32, since:

• It is neither cash, due to the South African Reserve Bank that does not
regard bitcoins as legal tender and it cannot be readily exchanged for goods
or services (IAS 7 Statement of Cash Flows); (1)
• nor cash equivalents since their value is exposed to significant changes in
market value (IAS 7); (1)
• Is, not a contractual right since possession of a Bitcoin does not grant the holder
thereof any contractual right to receive cash or another financial asset; and (1)
• Is not an equity instrument or a contract to be settled in equity instruments. (1)
Therefore the Bitcoin Holdings cannot be recognised as a financial asset. (1)
(2) Intangible asset
In order to account for the Bitcoin holdings as an intangible asset the definition and
recognition requirements should be met (IAS 38.18).
Definition
The Bitcoin has to be an identifiable non-monetary asset without physical

substance. (no mark)
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Since Bitcoin is a form of digital money (virtual currency), it does not have any physical
substance. (1)
Each Bitcoin Wallet in which the value of the Bitcoin holdings is contained has a unique
address and the Bitcoin holdings can be traded on an exchange or in peer-to-peer
transactions, therefore is identifiable. (1)
Bitcoin is also identifiable as it identified to be separable since Mining Ltd can transfer
it via ATM of exchange it for other goods and services. (1)
Monetary assets are money held and assets to be received in fixed or a determinable
amount of money. The value of the Bitcoin holdings is not fixed or determinable, but
subject to major fluctuations that arise from supply and demand that cannot be predicted.
Therefore, it is not monetary but non-monetary in nature. Also, it does not have legal
tender status under the South African Reserve Bank and therefore will remain
non-monetary. (2)
Mining controls the Bitcoin as it can benefit from its long-term growth and it has
restricted access to the Bitcoin wallet by safeguarding their computers (IAS 38.13). (1)
Recognition
Mining Ltd can benefit economically from long term growth and by exchanging it for other
goods and services. (½)
The cost of the bitcoin can be measured reliably at R55 000. (½)
Conclusion
Considering the above, Mining Ltd can account for its Bitcoin holdings as an intangible
asset. (1)
Measurement
The Bitcoin was not purchased, but mined, therefore the initial measurement at cost
will consist of cost directly attributable in obtaining the Bitcoin (being the cost of
leasing the computer equipment, employee cost as well as the electricity cost). (1)
The Bitcoin holdings will subsequently be measured on either the cost model or the
revaluation model. (1)
Since Bitcoin transactions takes place with sufficient frequency and volume to provide
pricing information on an ongoing basis an observable, active market exists in order to
account for Bitcoin according to the revaluation model. (2)
The Bitcoin holdings has an indefinite useful life and therefore will not be amortised.
(1)
However, all movements, other than decreases greater than previous increases, will
be accounted for in other comprehensive income (OCI) and any realised gain will not
be recycled through profit or loss. Therefore the movement in the fair value of the
Bitcoin holdings will not be reflected in profit or loss. (2)
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Conclusion:
Since the Bitcoin holdings fail to meet the criteria to be recognised as a financial
instrument, recognition and measurement of the Bitcoin holdings at fair value will be best
achieved by accounting for the Bitcoin holdings as an intangible asset according to the
revaluation method. This will, however, not achieve the recognition of the movement in
the fair value of the Bitcoin holdings in profit or loss. (2)
To ensure that the financial statements will provide relevant information to the users
thereof, Mining Ltd can consider additional disclosure of relevant information.
Total (24)
Maximum (16)
(iii) Classification of a Bitcoin holdings as an asset:
According to the revised Conceptual Framework, Mining Ltd will be able to classify its Bitcoin
holdings as an asset, if a past event(s) has led the company to have control over a present
right to the Bitcoin holdings that has the potential to produce economic benefits to Mining Ltd
which will encompass an economic resource for Mining Ltd. (1)
Mining Ltd has obtained its Bitcoin holdings due to the mining thereof which is the past
event. (1)
Mining Ltd also obtained a right that has the potential to produce economic benefits since
the Bitcoin holdings entitles or enables Mining Ltd to receive cash by either selling the coins
on an exchange or redeeming it for cash at an automated teller machine (ATM). It also
enables Mining Ltd to receive another economic resource or extinguish liabilities by
transferring the coins. (2)
Mining Ltd also has control over its Bitcoin holdings since it has the present ability to
direct the use (either sell it on the exchange or exchange it for goods or services) of the coins
and to obtain the economic benefits that may flow from it. Mining Ltd also has the present
ability to prevent other parties from directing the use of the coins and obtaining the
economic benefits that may flow from it, since it is securely stored on Mining Ltd’s
computers which is under their control only. (2)
Conclusion:
According to the revised Conceptual Framework, the Bitcoin holdings can be classified as an
asset. (1)
Total (7)
Maximum (4)
(iv) Support of fair value measurement:
The revised Conceptual Framework of 2018 (Conceptual Framework) allows for a

measurement bases which accounts an asset at its current value, which includes the fair
value thereof. (1)
The revised Conceptual Framework, does however, also indicate that the enhancing
qualitative characteristics of comparability, understandability and verifiability together with
the cost constraint need to be taken into account to select the measurement basis. Since
an active market exists for Bitcoins, there will be limited cost constraints for Mining Ltd to
elect that its Bitcoin holdings should/can be measured at fair value. (3)
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Lastly, the revised Conceptual Framework indicates that since the statement of profit or loss
is the primary source of information about an entity’s financial performance for the
period, all income and expenses should be included in this statement. Only in
exceptional circumstances income or expenses arising form a change in the current value of
an asset or liability will be included in other comprehensive income, should it result in the
statement of profit or loss to provide more relevant information or be a more faithful
presentation of the company’s financial performance for the period; which imply that any
movements in the fair value of Mining Ltd Bitcoin holdings for the period under review should
be recognised in profit and loss. (4)
Conclusion:
Therefore, the revised Conceptual Framework supports the recognition and measurement of
Mining Ltd’s Bitcoin holdings at fair value with the movement in the fair value thereof
recognised in profit or loss. (1)
Total (9)
Maximum (6)
Communication skills: logical argument (1)
(b) Tax note to the financial statements of Mining Ltd
MINING LTD
12. Income tax expense

20.19
R
Major components of tax expense
SA Normal tax
Current tax 130 226
- Current year [C1] 117 726 (26½)
- Under provision for prior years (R15 000 – R2 500) 12 500 (1)
Deferred tax 930 174
- Movement in temporary differences [C2] (810 926) (½)
- Recognition of unused tax loss not previously recognised
[C3] (630 000) (1)
- Unused tax loss utilised [C3] 2 380 000 (½)
Foreign tax (given) 15 000 (1)
1 075 400
Total (30)
Communication skills: Presentation and layout (1)
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CALCULATIONS
C1. Current tax calculation

R
Profit before tax 6 000 000 [½]
Non-taxable/Non-deductible items:
- Foreign income not taxable (R15 000/25%) (60 000) [1]
- Impairment below tax base not deductible (250 000 x 20%) 50 000 [1]
- Penalty not deductible 2 500 [½]
Movement in temporary differences (taxable) [C2] 2 927 950 [22½]
Taxable profits before unused tax loss 8 920 450
Unused tax loss of prior year (given) (8 500 000) [1]
Taxable profit for the year 420 450
Tax at 28% 117 720 [½]

[26½]
C2. Deferred tax

Temporary Deferred
Carrying differences tax at 28%
Tax base
amount at 100% or asset/
80% (liability)
R R R R
28 February 20.18
Deferred tax at 100% inclusion
rate 6 250 000 (1 750 000)
Unused tax loss - 8 500 000 (6 250 000) 1 750 000
- -
28 February 20.19
Land @ 100% (cost) 10 000 000 10 000 000 - - [1]
Land @ 80%
a
(revaluation surplus) 3 000 000 - 2 400 000 (672 000) [2]
b c
Buildings 4 800 000 4 500 000 300 000 (84 000) [2]
NCAHFS – Building @ 80% d
2 000 000 e
2 250 000 (200 000) 56 0000 [2]
f g
Plant 3 500 000 - 3 500 000 (980 000) [2]
C5
Right-of-use asset 132 055 - 132 055 (36 975) [4]
C4
Lease of computers (121 405) (121 405) (33 993) [4]
f h
Inventory 1 050 000 1 170 000 (120 000) 33 600 [2]
f
Bonus accrual (146 500) - (146 500) 41 020 [1]
i j
Leave pay accrual (990 740) 968 640 (22 100) 271 219 [2]
5 772 080 (665 143) [22]
Movement in temporary differences through P/L –

excluding unused tax loss
(R5 772 050 – R2 400 000) – R6 250 000) (2 927 950) 819 826 [22½]
Movement in temporary differences through OCI (taxable) 2 400 000 (672 000)
Movement in unused tax loss (R0 – (R6 250 000)) 6 250 000 (1 750 000) [½]
2 375 510 (665 143)
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a
R2 328 000 x 100/[100 - (100 x 28% x 80%)] = R3 000 000 [1]
b
R3 000 000 x 2 x 20/25 = R4 800 000 or R7 200 000 x 2/3 [1]
c
R3 000 000 x 2 x 5% x 15 = R4 500 000 [1]
d
Fair value (given) [½]
e
R3 000 000 x 5% x 15 = R2 250 000 or R4 500 000/2 [1]
f
Given [½]
g
Fully written off for tax purposes [1]
h
R1 050 000 + (R150 000 x 80%) = R1 170 000 [1]
i
(1 035 days – (13 days x 2)) x R960 + (13 days x 2) x R850) = R990 740 [2]
j
990 740 - 26 days x R850 = R968 640 [½]
C3. Movement in unused tax loss

R
Unused tax loss not previously recognised 1 (630 000) [1]
Unused tax loss utilised2 2 380 000 [1]
1 750 000
[2]
1
(R8 500 000 – R6 250 000) x 28% = 630 000
2
R8 500 000 x 28% = 2 380 000
C4. Lease liability
Sharp EL-738 HP 10BII
1. 2ndF MODE (Clear all) 1. 2ndF C (Clear all)

2. 2ndF I/Y 2 ENT (P/Y) 2. 2 2ndF PMT(P/YR) [½]
3. R20 000 PMT 3. R20 000 PMT [½]
4. 7,75% I/Y 4. 7,75% I/YR [½]
5. 6 N 5. 6 N [½]
6. COMP PV  R105 271 6. PV  R105 271
1. AMRT 2 ENT  2 ENT 1. 1 INPUT 1 2ndF FV(AMORT) [1]

2.  2. = = =
3. BALANCE: R89 350 3. BALANCE: R89 350
1. 2ndF MODE (Clear all) 1. 2ndF C (Clear all)

2. 2ndF I/Y 2 ENT (P/Y) 2. 2 2ndF PMT(P/YR)
3. R20 000 PMT 3. R20 000 PMT
4. 8,25% I/Y 4. 8,25% I/YR [½]
5. 5 N 5. 5 N [½]
6. R40 000 FV 6. R40 000 FV [½]
7. COMP PV  R121 405 7. PV  R121 405
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C5. Right-of-use asset

R
Lease liability 105 271 [2]
Indirect costs 14 729 [½]
120 000
Depreciation (R120 000/3 x 6/12) (20 000) [1]
100 000
Reassessment: change in lease liability (R121 405 – R89 350) 32 055 [2½]
132 055
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QUESTION 2
FURN DECOR LTD
EXTRACT OF STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20.19
20.19 20.18
R R
Equity and liabilities
Equity
Ordinary share capital 40 000 000 40 000 000 (½)
Retained earnings [C2] 28 799 664 10 250 000 (7)
Mark-to-market reserve [C3] 1 428 000 - (5)
C4.2 C4.1
Fair value adjustment on debt instruments [C4] 294 747 (178 856) (4½)
Allowance for credit losses 150 000 24 000 (1)
Non-redeemable Class A preference share capital
(60 000 x 51) 3 060 000 (1)
Non-current liabilities
Long-term borrowings [C5.2] 2 123 292 (4)
Liabilities
Current liabilities
Current portion of long-term borrowings [C5.1] 1 241 514 (1)
(24)
CALCULATIONS
C1. Retained earnings

R R
Opening balance 10 250 000 [½]

Profit for the year 18 392 914
Given 18 475 000 [½]
Ordinary shares – CAP Ltd
Fair value 2 400 000 [½]
Paid (500 000 x 5,50) (2 750 000) [1]
Day 1 loss on purchase of shares (350 000)
Dividends received = 500 000 x 85% x 0,80 340 000 [1½]
Unlisted corporate bonds
Expected credit losses (150 000 – 24 000) (126 000) [1]
Interest on bonds [C4.1] (4 AMORT 6) INT 534 108 [½]
Loan from Bank
Interest on 30 April 2019 [C5] 4 input 4 (180 454) [½]
Balance 4 input 4 2 760 260 [½]
Issue of preference shares (60 000 x R51) (3 060 000) [½]
IFRIC 19 – Loss on derecognition of loan payable (299 740)
Transfer from mark-to-market reserve 150 750 [½]
28 793 664
[7½]
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C3. Mark-to-market reserve
R
Fair value adjustment 28 February 20.19
Paid (2 400 000 + 20 000) 2 420 000 [1]
Fair value (500 000 x 6,85) 3 425 000 [1]
1 005 000
Sale of 15% of shares (1 005 000 x 15%) (transfer to retained earnings) (150 750) [1]
Fair value adjustment 30 September 20.19
500 000 x 85% x (8,20 – 6,85) 573 750 [2]
1 428 000
[5]
OR [5]
Fair value adjustment 28 February 20.19
(500 000 x 15%) = 75 000 x (6,85 – 4,80) 153 750 [2]
Less: capitalised transaction costs (20 000 x 15%) (3 000) [1]
150 750
Fair value adjustment 30 Sep 20.19
(500 000 x 85%) = 425 000 x (8,20 – 4,80) 1 445 000 [1½]
Less: capitalised transaction costs (20 000 x 85%) (17 000) [½]
1 428 000 [5]
Note: If student did not use or perform first calc, award ½ to the second
500 000 if used
C4. Fair value adjustment on debt instrument
C4.1 P/YR = 3 [½]

FV = -5 750 000 (5 000 000 x 1,15) [½]
N = 15 (5 years x 3) [½]
PV = 5 000 000 [½]
PMT = -133 333 [(5 000 000 x 8%)/3] [½]
I = 10,34%
Balance on 30 September 20.18 (3 AMORT 3/1 AMORT 3) 5 121 144 [½]

Fair value (given) 5 300 000 [½]
Opening fair value – 1 October 20.18 178 856
C4.2 Balance on 30 September 20.19 (6 AMORT 6) 5 255 253 [½]

Fair value 5 550 000 [½]
Closing fair value 294 747
[4½]
C5. Long-term loan
P/YR = 2 [½]
PV = -5 000 000 [½]
FV = 0
N = 8 (4 x 2) [1]
PMT = 785 000 [½]
I = 10,73%
Balance on 30 September 20.18 (3 AMORT 3) (balance) 3 364 806 [½]

[3]
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C5.1 Current portion of long-term loan
Capital of PMT 4 and PMT 5 1 241 514

PMT 4 = 604 546 [½]
PMT 5 = 636 968 [½]
[1]
C5.2 Long-term loan
Long-term portion (3 364 806 – 1 241 514) 2 123 292 [1]

[4½]
PART II
FURN DECOR LTD
JOURNALS FOR THE YEAR ENDED 30 SEPTEMBER 20.19
Dr Cr
R R
J1 Liability component of convertible debenture (SFP) [C2] 1 760 629 (1½)
Bank (SFP) [11 million – (R2 000 x 5 000)] 1 000 000 (1)
Equity component of convertible debentures (SCE) [C1] 760 629 (4)
J2 Liability component of convertible debentures (SCE) [C3] 739 150 (1½)
Equity component of convertible debentures (SFP) [C3] 60 850 (1)
Transaction costs (P/L) 800 000 (1)
J3 Current tax payable (SFP) 224 000 (1½)
Equity component (SCE) [C4] 17 038 (1)
Income tax expense (P/L) [C5] 206 962 (1)
J4 Income tax expense (P/L) 206 962 (1½)
Equity component (SCE) [C6] 212 976 (1½)
Deferred tax liability (SFP) [C6] 419 938 (2½)
(17)
CALCULATIONS
C1. Calculation of debt/equity component
Proceeds (R2 000 x 5 000) 10 000 000 [½]

Liability component
PMT = 165 000 (given) [1]
N = 16 (4 x 4) [½]
FV = 11 000 000 [½]
I = 11% [½]
PV = 9 239 371
Equity component 760 629 [½]
[3½]
C2. 11 000 000 – 9 239 371 1 760 629 [1]
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C3. Allocation of transaction costs
Liability component: 9 239 371/10 000 000 x 800 000 739 150 [1]
Equity component: 760 629/10 000 000 x 800 000 60 850 [½]
800 000
[1½]
C4. 800 000 x 28% 224 000 [1]
C5. 739 150 x 28% 206 962 [½]
C6. 60 850 x 28% 17 038 [½]
C7. Deferred tax CA TB TD DT

1 2
Liability component 18 500 221 10 000 000 1 499 779 (419 938) [½]
1
9 239 371 – 739 150 [1]
2
Proceeds [½]
OR
Carrying amount of liability at 30 September 20.19 (9 239 371 - 739 150) 8 500 221 [1]
Tax base of liability at 30 September 20.19 10 000 000 [½]
Taxable temporary difference 1 499 779
Deferred tax liability (1 499 779 x 28%) 419 938 [½]

Recognise in equity (760 629 [C1] x 28%) (212 976) [1]
Recognise in profit and loss 206 962
MJM
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QUESTION 1 50 marks
IGNORE ANY ADDED-VALUE TAX IMPLICATIONS
You are the auditor of both Tyger Properties Ltd (Tyger), a company in the property development
industry, as well as Washi-Washi Ltd (Washi), a company who owns various car wash and valet
centres. Both companies are situated in the Western Cape Province and are listed on the
Johannesburg Stock Exchange. You are currently occupied with the finalisation of the audit of both
Tyger and Washi’s financial statements for the year ended 28 February 20.18.
On 12 April 20.18 you entered Building A of the Tygerforum Office Park in Tygervalley,
Western Cape. You have an appointment with the directors of Washi to discuss their draft financial
statements for the year ended 28 February 20.18. Your aim is to give a broad summary of the
company’s performance for the current financial year, as well as to finalise any outstanding matters.
Washi has experienced a decline in previous year profits, mainly due to the ongoing drought in the
Western Cape. However, by diversifying its business to provide waterless cleaning services, the
company has lifted its head and you were pleased to announce that the preliminary after-tax profit
for the 20.18 financial year amounted to R1 700 000.
It is the first year that this meeting is held in this office building. More than a year ago Washi
approached you for advice on selling their current administration building in Cape Town and leasing
a building until more favourable conditions might allow relief to their cash flow constraints. You
acknowledge the necessity of the decision and introduced Washi to one of your clients, Tyger, who
recently developed the Tygerforum Office Park in Tygervalley.
Tyger had been marketing the sale of Building A in this office park since November 2016. However,
the company agreed to lease Building A to Washi until the construction of the surrounding buildings
had been finalised, since they believed the fully developed office park will present the sale of the
property more lucrative. Tyger still intends to sell the property after the lease agreement with Washi
has expired. At inception of the lease, Washi indicated that they would lease the property for one
year only. Washi did not elect to recognise the lease as a short-term lease in terms of IFRS 16
Leases (paragraph 5). Washi occupied the building on 1 March 20.17, which was also the date of
commitment by the parties to the principal terms and conditions of the lease.
You were aware that Washi informed Tyger on 1 September 20.17 that they intend to extend the
lease term until 31 August 20.18, according to the option to extend the lease term provided in the
original lease agreement. However, only after discussing Tyger’s financial statements with its
directors earlier in the week, it came to your attention that Washi requested Tyger on
15 March 20.18 to amend the original lease contract to include an option to purchase the building
after the extended lease term has expired.
The chief financial officer of Washi replied that they were impressed with the building from the start,
and to remain conservative initially only extended the lease term. However, they were reluctant to
lose the building and after reviewing their preliminary profit for the 20.18 financial year, they were
confident to include an option to purchase the building. He diplomatically apologised for not
informing you and questioned if this decision will affect the financial statements for the year ended
28 February 20.18.
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• Washi measures its right-of-use assets according to the cost model in terms of IAS 16
Property, Plant and Equipment and depreciates the right-of-use assets on the straight-line
method.
• Washi presents its right-of-use assets as a separate line item in the statement of financial
position.
Tyger Properties Ltd
During April 20.18 you finalised the audit of the financial statements of Tyger for the year ended
28 February 20.18. Tyger’s accountant took a sabbatical during the current financial year and the
accounts clerk, who stood in for her, regarded it sufficient to allocate all lease payments received
from Washi to an income received account. Washi paid all payments on their respective due dates.
When the accountant returned on 1 April 20.18, she debited this income received account and
accounted for the lease as a finance lease in the capacity of a manufacturer or dealer lessor in the
accounting records for the year ended 28 February 20.18. The following were included in the items
that she recognised for the year ended 28 February 20.18:
Dr/(Cr)
R
Revenue (11 000 000)

Gross investment in lease (R1 785 000 + R1 090 210 + R11 600 000) 14 475 210
Cost of sales 10 200 000
Deferred tax liability (508 678)
Interest income calculated at an interest rate implicit in the lease ?
Unearned finance income ?
When you discussed the classification of the lease with her, she indicated that, with her return to the
office she noted from the modified lease contract that the intention of Washi is to purchase
Building A after the lease term has expired. Therefore, she accounted for the lease to reflect that all
risks and rewards incidental to ownership will transfer to Washi at the end of the lease term.
• The South African Revenue Services allows a 5% capital allowance in terms of

section 13(quin) on all new buildings used for commercial purposes (administration buildings).
• According to Tyger’s accounting policy, investment property is accounted for at fair value in
terms of IAS 40 Investment Property.
General information
• You may assume that the normal income tax rate is 28% and the capital gains inclusion rate is
80% for all periods.
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Appendix A
The following information, relating to the lease agreement between Tyger and Washi, forms part of
your audit working paper documents:
A. Lease agreement
Lease term – one year

Lease payments include
(a) Bi-annual payments on:
31 August 20.17 R850 000
28 February 20.18 R935 000
Total R1 785 000
(to accommodate Washi’s cash flow constraint, Tyger allowed for escalating lease payments)
and
(b) 2% of Washi’s audited profit after tax for the year (if any).
Exercisable options contained in lease agreement
Option to extend the lease term with an additional six months after the one year lease term at a bi-
annual lease payment in arrears, amounting to R1 090 210.
Economic life of the building from commencement of the lease – 30 years.
On 1 March 20.17 Washi’s lawyers verified, at an amount of R5 500, that the lease contract was in
the best interest of its client.
Termination and breach
If Washi cancels the contract prematurely, they (the lessee) will have to pay R20 000 in advance
on cancellation date to Tyger (the lessor).
Lease amendment
The lease contract was amended on 15 March 20.18 to include an option to purchase the asset at
the end of the lease term at its estimated fair value on the purchase date.
B. The fair value of Building A was as follows:
Fair value excluding Fair value Fair value

lease contract AI BII
R R R
28 February 20.17 11 000 000 12 500 000 13 500 000

1 September 20.17 11 150 000 12 050 000 13 050 000
28 February 20.18 11 455 000 12 300 000
1 September 20.18 (estimated) 11 600 000
I
Fair value A – Including the fair value of the remaining one-year lease contract with Washi
(correctly determined according to IFRS 13 Fair Value Measurements).
II
Fair value B – Including the fair value of the remaining one and a half year lease contract
with Washi (correctly determined according to IFRS 13).
C. Lease liability: Washi-Washi Ltd
Lease liability in the books of Washi on 1 March 20.17 amounted to R1 534 500.
Adjustment to present value of lease liability on 1 September 20.17:
R
Increase in lease liability determined with revised discount rate 770 250
Increase in lease liability determined without revised discount rate 780 925
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QUESTION 2 50 marks
IGNORE ANY VALUE-ADDED TAX
You are employed by Aware Ltd (Aware). Aware provides accounting consulting services to various
clients. Your portfolio includes the following three allocated clients who have approached you
regarding the following matters:
Client 1: Dubaico Ltd
Dubaico Ltd (Dubaico) is a diversified company specialising in a wide range of business activities.
The company is listed on the Johannesburg Stock Exchange and has a 30 June financial year end.
The current tax calculation for the year ended 30 June 20.18 was correctly calculated by Mr Ramco,
the financial accountant, as indicated below:
R
Loss before tax (2 450 000)
Non-taxable/non-deductible differences:
- Fair value adjustments on buildings (R800 000 x 20%) (160 000)
- Foreign income not taxable (see note 1) (200 000)
- Dividends received not taxable (350 000)
Movement in taxable temporary differences (840 000)
Assessed loss (4 000 000)
The following extract of the income tax expense note to the financial statements of Dubaico was
disclosed for the year ended 30 June 20.18:
DUBAICO LTD
NOTES FOR THE YEAR ENDED 30 JUNE 20.18
20.18
R
Major components of tax expense
SA Normal taxation
Current tax 80 500
Deferred tax (112 000)
- Movement in temporary differences 235 200
- Unused tax loss created (347 200)
Foreign tax 40 000
8 500
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The balance of the deferred tax account in the statement of financial position at 30 June 20.18 was
correctly calculated by Mr Ramco as follows:
Dr/(Cr)
R
Investment property (207 200)
Machinery (33 600)
Payments in advance (44 800)
(285 600)
Provision for warranties 50 400
(235 200)
Assessed loss (see note 2) 1 120 000
Deferred tax asset not recognised (see note 2) (772 800)
112 000
The directors and the auditors correctly concluded that a maximum deferred tax asset amounting to
R112 000 in respect of all temporary differences could be justified.
The following extract of the deferred tax note to the financial statements of Dubaico was disclosed
for the year ended 30 June 20.18:
DUBAICO LTD
8. Deferred taxation
20.18
R
Taxable temporary difference on assets (285 600)
Deductible temporary differences on liabilities 50 400
Deductible temporary differences on assessed tax loss 347 200
Deferred tax assets 112 000
Notes
1. Included in loss before tax is an amount of R200 000 for services rendered in a foreign country
and therefore not taxable in South Africa. The foreign tax on this income is payable at a tax
rate of 20%.
2. The South African Revenue Services (SARS) assessment for 30 June 20.18 reflects an
assessed tax loss of R4 000 000. On 30 June 20.18 the directors were not certain that
sufficient future taxable income would be earned to utilise the full assessed tax loss.
3. The SARS issued an additional assessment for the 20.17 year of assessment of R80 500
(payable) due to expenses not allowed as deductions by SARS. Dubaico accepted the
additional assessment and the amount was correctly accounted for as a current tax expense in
the financial records of Dubaico for the year ended 30 June 20.18.
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Client 2: Elmar Properties Ltd
Elmar Properties Ltd (Elmar) is a real estate investment company and listed on the Johannesburg
Stock Exchange. The preparation of the financial statements for the year ended 30 June 20.18 was
supervised by a newly appointed accountant.
Elmar bought an office building for the total amount of R4 200 000, payable on 1 May 20.18 when
the legal title and control of the building was transferred to Elmar. The office building is vacant and
will be held by Elmar to be leased out under an operating lease.
Despite the fact that Elmar advertised the office building through leasing agents since acquisition
date, the office building was still vacant on 30 June 20.18.
In addition to the abovementioned cash price, Elmar incurred the following costs relating to the
acquisition of the building:
• Legal fees of R34 500 to draw up the purchase agreement. Both parties agreed that a
purchase agreement must be drawn up for the transaction to be valid and that the seller will
reimburse 30% of the fee; and
• Property transfer duty of R1 850 000.
Elmar realised operating losses of R104 500 on this vacant office building for the year ended
30 June 20.18.
Client 3: Baron Ltd
Baron Ltd (Baron) is a private company and one of Africa's largest food distributors with a
31 December 20.17 financial year end. The company has applied the latest International Financial
Reporting Standards since its corporation a few years ago. The company measured certain financial
assets at fair value in its financial statements at year end and wants to increase consistency and
comparability in the fair value measurement of these assets.
During May 20.15 the Financial Service Board (FSB) ruled that a company may no longer trade with
over the counter (OTC) shares without a licence. Many unlisted companies traded their shares OTC.
This means their shares are traded via an electronic platform on a website without any stock
exchange licence in place and without any regulations.
After the FSB’s ruling, many unlisted companies that were trading their shares OTC were in a
situation where investors could not buy or sell these shares. This situation continued during 20.16.
ZAR X Ltd (ZARX) announced in the beginning of 20.17 that it has been granted a stock exchange
licence by the FSB. The licence enables the company to operate a fully-fledged, independent stock
exchange and provides an exciting alternative for smaller unlisted companies that want to list their
securities on a licenced exchange. ZARX plans for facilitate listings of restricted share schemes,
currently trading OTC, which the FSB ruled were in contravention of capital market regulations.
Baron purchased a small investment in the ordinary shares of Rock Ltd (Rock) on 2 January 20.13.
Rock was one of the companies that traded OTC and was therefore affected by the FSB ruling. Rock
immediately listed their shares on the ZARX Exchange when ZARX obtained its licence. Baron
accounts for these shares at fair value through profit or loss.
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After the FSB ruling in May 20.15, due to the lack of market price information from OTC trades,
Baron estimated the fair value of Rock’s shares based on a price-earnings (PE) multiple valuation
method. This typically involved using the PE multiple for similar listed companies, adjusted for entity
specific risk factors and multiplying this risk-adjusted PE by the company’s unadjusted audited
earnings for the year.
Since its listing on ZARX in February 20.17, Rock has been trading on a narrow band of between
R5,90 and R6,00 per share. Information from ZARX’s website indicated that 40 trades took place
during the last 60 days prior to the financial year end 31 December 20.17. The closing price for the
year ended 31 December 20.17 was R5,95, based on the last trade price on 31 December 20.17.
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CASE STUDY 3
REQUIRED
QUESTION 1
Marks
(a) (i) Write a memorandum to the financial manager of Tyger Properties Ltd, with 17
your audit findings regarding the lease agreement with Washi-Washi Ltd. Your
memorandum should include a discussion of the correct classification of the
lease transaction in the financial records of Tyger Properties Ltd for the year
ended 28 February 20.18.
Please note:
• Calculations are not required.
(ii) Assume that you do not agree with the classification of the lease as a finance 28
lease in the financial records of Tyger Properties Ltd. Provide the correcting
journal entries regarding the lease agreement with Washi-Washi Ltd in the
accounting records of Tyger Properties Ltd for the year ended
28 February 20.18.
Please note:
• Round all calculated amounts to the nearest Rand.
• Round any interest rate calculations to four decimals.
• Journal narrations are not required, and journals should be dated.
• Provide one cumulative journal at financial year end for any recurring
journals.
(b) Disclose the following notes to the financial statements of Washi-Washi Ltd for the
year ended 28 February 20.18.
(i) Leases, in terms of IFRS16 Leases, paragraphs 53, 54 and 59. 11

(ii) Events after the reporting date. 2
Please note:
• Round all calculated amounts to the nearest Rand.
• You may assume that the interest expense on lease liabilities was correctly
disclosed in the profit before tax note in the financial statements (refer to
IFRS 16.52).
Communication skills: presentation 1
Please note:
• Show all calculations.
• Ignore any Value Added Taxation implications.
• All amounts are deemed to be material.
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QUESTION 2
Marks
(a) (i) Identify concerns with regards to the note disclosure presented for the income 10
tax expense and the deferred tax balance in the financial statements of
Dubaico Ltd for the year ended 30 June 20.18. Explain any aspects of the
notes that were not in accordance with the requirements of IAS12 Income
Taxes. Your answer should provide reasons but should not include adjusted
disclosure (refer to Client 1).
(ii) Disclose the tax expense reconciliation of Dubaico Ltd for the year ended 6
30 June 20.18. Present the tax reconciliation in accordance with
IAS12.81(c)(i) (refer to Client 1). Comparative figures are not required.
(b) Discuss the amount at which the office building should initially be measured at in 8
the financial records of Elmar Properties Ltd. If a specific amount(s) should not form
part of the initial amount, or would not be correct to use, give brief reasons to
support this. Ignore any normal income tax implications (refer to Client 2).
Communication skills: logical argument

1
(c) Discuss at which level of the fair value hierarchy in terms of IFRS 13 Fair Value 13
Measurements, the inputs to the valuation techniques used by Baron Ltd in respect
of the investment in Rock Ltd for the 20.14 – 20.17 financial years, need to be
categorised.
1
Communication skills: logical argument
Please note:
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CASE STUDY 3
(a) Memorandum to financial manager
MEMORANDUM
TO: Tyger Properties Ltd: Financial Manager

FROM: Successful Auditor
RE: Lease classification
DATE: 3 October 20.18
To whom it may concern,
During our audit process, it came to our attention that the lease transaction with
Washi-Washi Ltd was accounted for as a finance lease at initial recognition. In our
professional opinion, IFRS 16 Leases guides us to conclude otherwise. Please allow us to
address the matter as follows:
(i) Correct classification of the lease transaction in the financial records of

Tyger Properties Ltd:
The lease classification is made at the inception date and is reassessed only if there is
a lease modification (IFRS 16.66).
The inception date is the earlier date of a lease agreement and the date of commitment
(1 March 20.17) by the parties to the principal terms and conditions of the lease
(Appendix A). (1)
A lessor shall classify each of its leases as either an operating lease or a finance lease
(IFRS 16.61).
Since the classification of a lease will depend on the substance of the transaction
rather that the form of the contract, Tyger Properties Ltd needs to assess the
substance of the lease transaction on this date (1 March 20.17) in order to classify
the lease as either a finance lease or an operating lease (IFRS 16.63). (1)
The lease of the building will be classified as a finance lease if it transfers substantially all
the risks and rewards incidental to the ownership of the building. If the lease does
not transfer substantially all the risks and rewards incidental to ownership of the
building, the lease will be classified as an operating lease (IFRS 16.62).
The following would, individually or in combination, normally lead to a lease being

classified as a finance lease (IFRS 16.63):
(a) The lease transfers ownership of the underlying asset to the lessee at the end of
the lease term.
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At inception of the lease the lease agreement did not include an option to
transfer ownership of Building A to Washi-Washi Ltd. At inception of the lease
Washi-Washi Ltd intention was to lease the building for one year only, and
Tyger Properties Ltd intended to sell the property after the lease term; all of
which implies that the property will be returned to Tyger Properties Ltd. (2)
(b) The lessee has the option to purchase the underlying asset at a price that is
expected to be sufficiently lower than the fair value at the date the option
becomes exercisable; for it to be reasonably certain at the inception date that the
option will be exercised.
A bargain purchase option does not exist at initial recognition. (1)
(c) The lease term is for the major part of the economic life of the underlying asset,
even if title is not transferred.
At inception of the lease, the lease term is for only 1 year of the remaining
30 years which is not considered to be for a major part of the economic life of
the building. (1)
(d) At the inception date, the present value of the lease payments amounts to at
least substantially all of the fair value of the underlying asset.
On 1 March 20.17 the fair value of Building A amounted to R11 000 000. On this
date the total of the lease payments (excluding the option to extend the lease for
another six months) amounted to R1 785 000, which is not at all close to the fair
value of the asset and the present value thereof will be even lower. (2)
(e) The underlying asset is of such a specialised nature that only the lessee can use
it without major modifications.
The nature of the buildings is not of a specialised nature. (1)
The following indicators further support that the lease is not a finance lease (IFRS 16.64):
(a) If the lessee can cancel the lease, the lessor’s losses associated with the
cancellation are borne by the lessee.
Washi having to pay only R20 000 in advance on cancellation date, suggests
that other losses associated with the cancellation, e.g. paying operating costs
while being vacant, will be borne by Tyger Properties Ltd. (2)
(b) Gains and losses from the fluctuation in the fair value of the residual accrue to the
lessee.
Any gain or loss arising from a change in the fair value of the investment
property is included in the profit or loss of Tyger Properties Ltd. No rent
rebate, equalling fair value increases, is available at the end of the lease. (1)
(c) The lessee has the ability to continue the lease for a secondary period at a rent that
is substantially lower than market rent.
The lease payment for the period relating to the option to extend the lease term is
subject to an increase. This suggests that the lease payments made during the
renewal period would not be at rates lower than market rate. (2)
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CONCLUSION
From the above it can be concluded that at inception of the lease, all risks and rewards
substantially incidental to ownership of the building did not transfer to Washi-Washi Ltd.
(1)
Therefore, the lease agreement with Washi-Washi Ltd is incorrectly classified as finance lease
and should be classified as an operating lease. (1)
As indicated in IFRS16.66 the lease classification is made at the inception date and is
reassessed only if there is a lease modification.
Only once the lease has been modified (on 15 March 20.18), Tyger Properties can reassess
the lease classification. (1)
Although there was a modification it was only negotiated at 15 March 20.18 which is after
reporting date, but still before the date the financial statements were authorised for
issue. (1)
This is a non-adjusting event after reporting date which will not change the classification of
the lease in the financial statements for the year ended 28 February 20.18. (1)
Total (23)
Maximum (17)
(ii) Correcting journal entries

Dr Cr
R R
1 March 20.17
Unearned finance income (SFP) (balancing) 3 475 210 (1)
Revenue (P/L) (given) 11 000 000 (1)
Gross investment in the lease (SFP) (given) 14 475 210 (1)
Reversal due to incorrect lease classification as
finance lease
Investment property (SFP) 12 500 000 (1)
Cost of sales (P/L) 10 200 000 (1)
Fair value adjustment (P/L) 2 300 000 (1)
Correct recognition as investment property and fair
value adjustment according to IAS40.40 &.63
(transfer from inventory)
28 February 20.18
Finance income (P/L) [C2] 2 291 707 (6½)
Unearned finance income (SFP) 2 291 707 (1)
Reversal due to incorrect lease classification as
finance lease
Gross investment in the lease (SFP) (given) 1 785 000 (1)
Rent receivable (SFP) (balancing) 132 855 (1)
Operating Lease Income (P/L) [C3] 1 917 855 (4)
Reallocate lease payments received
Fair value adjustment (P/L) [C4] 332 855 (2½)
Investment property (SFP) 332 855 (½)
Fair value adjustment on investment property
Income tax expense: Deferred tax (P/L) [C5] 151 842 (7)
Deferred tax (SFP) 151 842 (½)
Correction of deferred tax
Total (30)
Maximum (28)
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CALCULATIONS
C1. Unearned finance income

R
Lease payments receivable under finance lease
R1 785 000 + R1 090 210 2 875 210
Purchase option 11 600 000
14 475 210
Cash selling price/fair value (11 000 000)
3 475 210
C2. Finance charges
Interest rate implicit in lease
SHARP EL-738 HP 10bII

1. CFi (CASH) 2nd FMODE (CA) 1. 2ndFC (Clear all)
2. 2 P/Y 2. 2 P/YR [½]
3. ENT (R11 000 000) 3. CF1 (R11 000 000) [½] ENT
4. ENT R850 000 4. CF1 R850 000 [½] ENT
5. ENT R935 000 5. CF1 R935 000 [½] ENT
6. ENT R12 690 210a 6. CF1 R12 690 210a [1] ENT
nd nd
7. 2 F CFi (CASH) 7. 2 F CST IRR/YR 20,5706%
8. COMP I/Y 20,5706%
a
R1 090 210 + R11 600 000 = R12 690 210
Bi-annual finance charges:

Interest Capital Balance
R R R
11 000 000
R11 000 000 x 20,5706/100 x 6/12 1 131 383 850 000 11 281 383 [1½]
R11 281 383 x 20,5706/100 x 6/12 1 160 324 935 000 11 506 707 [1½]
1 183 499 1 090 210 11 600 000
3 475 206
R1 131 383 + R1 160 324 = R2 291 707
C3. Operating lease income
28 February 20.18 P/L

R R
Total lease payments (one year lease) 1 785 000

Less:
Amount recognised 1 March 20.17 – 31 August 20.17
(R1 785 000/2) (892 500) [1]
Balance on 1 September 20.17 892 500 892 500
Additional lease payment due to exercising option to
extend the lease term 1 090 210 [½]
1 982 710
R1 982 710/2 991 355 [1]
R1 700 000 x 2% 34 000 [1]
1 917 855
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C4. Fair value adjustment

R R
Fair value 1 March 20.17 12 500 000 [1]

Fair value 28 February 20.18 12 300 000 [½]
Less: Accrued Operating Lease Income (IAS40.50(c)) (132 855) (12 167 145) [½]
Adjustment 332 855
C5. Deferred tax
Carrying Tax base Temporary Deferred taxation

amount difference Asset/(Liability)
R R R R
Rent receivable 132 855 - 132 855 (37 199) [1]
a
Investment property 12 167 145 9 690 000 2 477 145 (623 321) [1½]
b
281 120 [1½]
c
342 201 [1]
(660 520)
a
R10 200 000 x (100% - 5%) = R9 690 000
b
R11 455 000 – R10 200 000 = R1 255 000 x 80% x 28%
c
R2 477 145 – R1 255 000 = R1 222 145 x 28%
R508 678(given) – R660 520 = R151 842 debit movement in P/L [1]
Tax rate 28% [½]
(b) Notes to the financial statements of Washi-Washi Ltd for the year ended
28 February 20.18
WASHI-WASHI LTD
4. Leases
Right-of-use asset
20.18
R
Carrying amount on 1 March 20.17 - (½)

Additions [C1] 1 540 000 (1)
Adjustments for lease reassessment (given) [IFRS 16.40(a)] 770 250 (1)
Depreciation[C1] (1 540 125) (2)
Carrying amount on 28 February 20.18 770 125 (½)
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The right-of-use asset presents the lease of Building A in the Tygerforum Office Park,
which is being used as an administration building (IFRS16.59(a)). (1)
The initial lease term of the building amounted to one year, however the company
decided on 1 September 20.17 to exercise an option, contained in the original lease
agreement, to extend the lease term with six months (IFRS16.59(b)(ii) & B50). (1)
The total cash outflow relating to leases amounted to R1 819 000 (R1 785 000 +
R34 000) for the current financial year (IFRS 16.53(g)). (1½)
The company elected to apply the cost model to recognise the right-of-use asset. (½)
The lease agreement consists of both fixed and variable lease payments. Therefore,
the reported information is sensitive to future variable lease payments. According to
the terms of the lessor, the lease payments are subject to a bi-annual increase of 10%
(R935 000 – R850 000)/R850 000) per year. Other variability in the lease payments
that are not reflected in the right-of-use asset is an annual payment amounting to 2%
of the audited profit for the year amounting to R34 000 (IFRS16.B48(a)(iii) & B49)
(IFRS 16.53(e)). (2½)
The lease agreement contains an option to early terminate the lease agreement. A
penalty of R20 000 will be payable on the date of early termination. The company does
not intend to exercise this early termination option (IFRS16.59(b)(ii) & B50). (1)
18. Events after Reporting Date

The board of directors decided on 15 March 20.18 to amend the lease contract for
Building A to include an option to purchase the building at the end of the lease term,
which they intend to exercise on 31 August 20.18, when the lease term expires. The
building will be purchased at the fair value of the building on that date. At the date the
decision was taken this value was estimated at R11 600 000. (2)
Total (14½)
Maximum (13)
CALCULATIONS
C1. Additions
(i) Building A
R R
Lease liability 1 534 500 [½]

Initial direct costs 5 500 [½]
1 540 000
Depreciation R1 540 000/12 x 6 (770 000) 770 000 [1]
770 000
Increase to lease liability due to reassessment 770 250 [1]
1 540 250
Depreciation R1 540 250/12 x 6 (770 125) 770 125 [1]
770 125 1 540 125
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(a) (i) Concerns the note disclosure presented for the income tax expense and
deferred tax balance at 30 June 20.18.
Income tax expense note:
1. Since the major components of the tax expense have to be disclosed

separately (IAS 12.79) and any adjustments recognised in the current
period for tax of prior periods is a component of the expense
(IAS 12.80(b)), Dubaico should have disclosed the under provision of
R80 500 for current tax of prior periods as a separate component. (2)
2. Dubaico should have disclosed the relationship between the tax expense
and the accounting profit in either or both:
(a) a numerical reconciliation between tax expense and the product of

accounting profit multiplied by the applicable tax rate
(IAS 12.81(c)(i)); or
(b) a numerical reconciliation between the average effective tax rate and
the applicable tax rate (IAS 12.81(c)(ii)). (2)
Deferred tax balance note:
1. In respect of each type of temporary difference Dubaico should have

separately disclosed the amount of the deferred tax recognised in the
statement of financial position and should not have disclosed the
temporary differences grouped by assets and liabilities (IAS 12.81(g)). (2)
2. Dubaico should have disclosed the amount of the unused tax losses
amounting to R2 760 000 (772 800 x 100/28), for which no deferred tax
asset is recognised (IAS 12.81(e)). (2)
3. Dubaico should have disclosed the amount of the deferred tax asset which
arose from an assessed loss, and the nature of the evidence supporting its
recognition, since the utilisation of the deferred tax asset is dependent on
future taxable profits in excess of the profits arising from the reversal of
existing taxable temporary differences (IAS 12.82).
Total (11)
Maximum (10)
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(ii) Tax expenses reconciliation

20.18
R
Tax expense reconciliation
Accounting loss (2 450 000) (½)
Tax at 28% (686 000) (½)

Tax effect of:
- Fair value adjustment on buildings not taxable (R160 000 x 28%) (44 800) (1)
- Dividends not taxable (R350 000 x 28%) (98 000) (1)
Unused tax loss not recognised (given) 772 800 (½)
Difference in tax rate on foreign income (R200 000 x (28% - 20%)) (16 000) (1½)
Under provision of current tax for prior periods 80 500 (½)
8 500 (½)
Total (6)
(b) Discuss the amount at which the office building should be recognised
(measured) at, at initial recognition
Elmar holds the office building with the intention to earn rentals and should
therefore classify the building as an investment property even though the
building is still vacant at the financial year end (IAS 40.5 and 40.8(d)). (2)
Since Elmar owns the investment property it shall be measured initially at its
cost (IAS 40.20), which includes any transaction cost (IAS 40.20) and directly
attributable expenditure (IAS 40.21). (1)
Elmar will therefore include the total amount payable amounting to R4 200 000
in the initial cost of the investment property as it comprises the purchase price (1)
(cash price).
It can be argued that the legal fees to draw up the purchase agreement are
directly attributable to bringing the office building to the location and condition
necessary for it to be capable of operating in the manner intended by
management or that the legal fees relates to the purchase of the office building
and should thus form part of the initial amount. (1)
The 30% legal fees that will be reimbursed by the seller will not be included in
the initial recognition amount since it is not expenditure incurred by Elmar. (1)
It can be argued that the property transfer duty of R1 850 000 are directly
attributable to bringing the office building to the location and condition necessary
for it to be capable of operating in the manner intended by management or that
property transfer duties are directly attributable expenditure in terms of
IAS 40.21. (1)
Since the cost of an investment property is not increased by operating losses

incurred before the investment property achieves the planned level of
occupancy. Elmar will not increase the cost of the office building with the
operating losses incurred amounting to R104 500 (IAS 40.23(b)). (1)
Therefore the office building should initially be measured at R6 084 500

(R4 200 000 + R34 500 + R1 850 000). (1)
Total (9)
Maximum (8)
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(c) Discuss the levels of fair value hierarchy in terms of IFR13 Fair Value
Measurements
20.14 year
During the 20.14 financial year, the shares of Rock Ltd were not listed on a
formal stock exchange, but were traded over the counter (OTC). It appears that
observable pricing information was available based on recent OTC trades (OTC (1)
market).
Although observable, the OTC market would not constitute a ‘quoted’ price since
it is not listed on an exchange and therefore does not present unadjusted prices
in an active market for identical assets which Rock Ltd can access at the
financial year end (Level 1). The OTC observable price would constitute a
level 2 input in the fair value hierarchy, since it does not constitute a Level 1
input but is directly observable for the shares (IFRS 13.81). (2)
20.15 and 20.16 year
During these two years, after the Financial Services Board’s (FSB) ruling, the
shares of Rock Ltd were no longer tradeable, and Baron Ltd resultantly valued
its investment in Rock Ltd by using a price-earnings (PE) valuation method
(income approach). Since there was no market based measurements available
to obtain a share price. (2)
Although the information states that this approach typically involves using the
PE- ratio of similar listed companies, which are observable, significant
unobservable risk adjustments are made to adjust the PE-ratio for the purposes
of the valuation, categorising this input a Level 3 input in the fair value hierarchy,
since relevant observable inputs are not available (IAS 13.87). (12
The audited earnings of Rock Ltd is the other significant input into the valuation
model, which one would assume is observable (historic audited earnings)
(Level 2). (1)
Since the inputs used to measure the fair value of the shares are categorised
within different levels of the fair value hierarchy, the fair value measurement has
to be categorised in its entirety in the same level of the fair value hierarchy as
the lowest level input that is significant to the entire measurement (IFRS 13.73). (1)
Therefore 20.15 and 20.16 year would constitute a level 3 in the hierarchy.
(1)
20.17 year
Rock Ltd listed on the ZAR X Ltd exchange during 20.17, which would constitute
a ‘quoted price’, since it is traded in an active market for identical shares where
transactions for the shares take place with sufficient frequency and volume to
provide pricing information on a ongoing basis (IFRS 13 Appendix A). (2)
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There were 40 trades in the past 60 days which indicate that frequent trading
does occur enough to meet the requirements of an/to be defined as an active
market. (1)
The price of R5,95 do not require any adjustment, since the share traded at
R5,95 on 31 December 20.17. (1)
The 20.17 year would therefor constitute a level 1 in the hierarchy due to it be an
unadjusted quoted price in an active market. (1)
Total (16)
Maximum (13)
Communication skills: Logical argument (1)
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QUESTION 1 100 marks
IGNORE ANY VALUE ADDED TAX
Entsha Ltd (Entsha) is a company that develops and implements commercialisation strategies for
new ideas and research. Entsha is listed on the AltX board of the Johannesburg Stock Exchange
(JSE). The AltX is an alternative public equity exchange for small, medium-sized and growing
companies in South Africa, operated in parallel with and wholly owned by the JSE Limited. Entsha
has a 30 June financial year end and the presentational and functional currency of Entsha is South
African rand.
1. Loan from Best Bank
Due to the shortage of accommodation of students in South Africa, Entsha invested in

properties close to various South African universities. These properties include houses and
residential apartments. The properties are rented exclusively to university students.
On 1 July 20.17, Entsha partially funded the purchases of some properties by obtaining a loan
of R10 000 000 in an active market from Best Bank. Entsha incurred a loan raising fee in
respect of the Best Bank loan of R80 000. The capital of the loan is repayable after 10 years
on 30 June 20.27 or at any time before when funds might be available. The directors of Entsha
were desperate to obtain the loan quickly and therefore were willing to agree to a higher fixed
interest rate of 10% per annum. The interest is payable annually at the end of June each year.
On 1 July 20.17, the present value of the cash flows (excluding transaction costs) and the fair
value of the loan was R10 313 940.
On 1 July 20.17, the internal rate of return of Enstha on the loan was estimated to be 9,5%. On
1 July 20.17, the instrument specific component of the internal rate of return of this specific
loan was 1,5%. On 30 June 20.18, the prime interest rate, as established by the National
Bank, was 8,25%. The prime interest rate is the observable (benchmark) interest rate used by
Entsha. The fair value of the loan based on market prices on 30 June 20.18 was R9 857 445.
The purpose of the loan is to fund investment property, which is subsequently measured at fair
value, the directors of Entsha therefore correctly decided that the loan should also be classified
as subsequently measured at fair value through profit or loss to ensure measurement
inconsistencies are eliminated. Entsha does not separate interest from fair value adjustments
on liabilities for recording or presentation purposes. Below is an extract of the general ledger of
Entsha:
Loan at fair value through P/L

30 June 20.18 Bank *1 000 000 1 July 20.17 Best Bank 10 313 940
* (10 000 000 x 10 %)
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2. Drone Africa
Entsha recognised the growth potential in unmanned aircrafts (drones) in the South African
commercial market. Entsha developed two types of drones.
Drone model Special features Uses

Osita Equipped with night vision. Detect and track poachers.
Ntsu Can reach altitude of 600 Useful in high-risk zones and
metres and fitted with high- for precision work.
definition cameras.
The Osita drones are used in both the Kruger and Mapungupwe National Parks in South
Africa. In order to supply technical advice to the users of the Osita drones and to perform
maintenance on the drones, Entsha purchased and erected brand new prefabricated modular
offices in both national parks. The prefabricated modular offices were purchased from
QuickSpace Ltd (QuickSpace). The expected useful life of a brand new prefabricated modular
office is five years, after which the intention is to sell the prefabricated modular offices as scrap
material for a negligible amount. The information below, relating to the prefabricated modular
offices, were correctly compiled by the financial manager of Entsha for the year ended
30 June 20.17:
Acquisition Quantity Location Total cost Total carrying Impairment

date at amount until
acquisition 30 June 20.17 30 June 20.17
R R
1 August 20.15 3 Mapungupwe 240 000 148 000 None
1 July 20.16 12 Kruger ? 768 000 None
The National Department of Health (NDH) is in the process of establishing 24-hour-manned

clinics throughout South Africa. The NDH will use prefabricated modular offices for the
24-hour-manned clinics. Entsha entered into a contract with the NDH on 1 June 20.18,
whereby:
• NDH undertook to purchase all the prefabricated modular offices when they are three years -
old at their fair value; and
• Costs to transport the prefabricated modular offices for sale to the NDH regional office in
Limpopo would be borne by Entsha.
During 20.18, the NDH purchased three-year-old prefabricated modular offices similar to the
ones used by Entsha, from the rental fleet of QuickSpace, at an average market related price
of R35 000 each. Entsha estimates that it would cost approximately R3 000 to transport each
of the prefabricated modular offices to the NDH regional office in Limpopo at current transport
prices. There is no principal market for prefabricated modular offices, but the sale to NDH is
considered to be the most advantageous market. Entsha’s management expects the fair value
of the prefabricated modular offices utilised in the Kruger National Park to be R40 000 each on
30 June 20.19.
Assume that, due to the agreement with NDH on 1 June 20.18, the three prefabricated
modular offices in the Mapungupwe National Park meet the classification criteria as assets
held for sale in terms of IFRS 5 Non-current Assets Held for Sale. On 1 June 20.18 and
30 June 20.18 the fair value (selling price to market participants) of these prefabricated
modular offices amounted to R37 000 and R38 000 respectively. Entsha performs impairment
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testing in terms of IAS 36 Impairment of Assets before assets are classified as held for sale in
terms of IFRS 5 Non-current Assets Held for Sale. Assume the fair value less costs of disposal
is the recoverable amount of the modular offices in terms of IAS 36. The 12 prefabricated
modular offices in the Kruger National Park will only be available for immediate sale in terms of
IFRS 5 on 30 June 20.19.
Any changes to the estimates that relate to the consumption of future economic benefits
embodied in a depreciable asset affects the depreciation expense of the current year.
Therefore, Entsha uses the latest estimated residual value and useful life of the modular
offices to calculate the depreciation expense for the current year, irrespective of when the
change occurred. The South African Revenue Service (SARS) has always allowed for a 20%
deduction per year on modular offices, not apportioned for part of a year.
3. Drone maintenance and repair kits
An Entsha drone maintenance and repair kit contains all the tools required to repair a drone
that is used for recreational purposes. A zipper case enables convenient organisation of all
these tools. Entsha obtained information at no cost from repair manuals available on the iFixit
website, which was used to design the maintenance and repair kits. The tools are imported
from Germany and the zipper case is manufactured by Entsha. On 15 August 20.15 Entsha
purchased a machine at a cost of R450 000. The machine is used to manufacture the heavy
duty zipper that is used in the zipper case. The machine was installed at a cost of R30 000 and
was available for use as intended by management on 1 September 20.15. The residual value
is negligible and the estimated useful life of the machine is four years. The R30 000 installation
cost was expensed as other expenses in the profit or loss of Entsha for the year ended
30 June 20.16.
During the 20.18 financial year a recently appointed accountant noticed that the initial
measurement of the machine did not include the installation costs. The accountant informed
the SARS of the error and the SARS indicated that the prior years’ assessments will not be re-
opened, but that they will allow the cumulative correction thereof in the 20.18 assessment,
without any penalties or interest. The SARS allowed a section 12C capital allowance on the
machine which is a 40% deduction in the first year and 20% deduction in the second, third and
fourth year, which is not apportioned for part of a year.
4. Ubtutor Ltd
Entsha acquired a 70%-controlling interest of Ubtutor Ltd (Ubtutor), a company that provides
the services of mathematics and accounting tutors in South Africa. The consideration paid at
acquisition date for this interest was R4 700 000. At the time of the acquisition the net asset
value of Ubtutor amounted to R5 200 000. The net asset value was deemed to be the fair
value of the net assets, except for buildings that was undervalued by R400 000. The non-
controlling interest was measured at the proportionate share of the company’s net assets at
acquisition date. Ubtutor applies the cost model in terms of IAS 16 Property, Plant and
Equipment.
During the 20.18 financial year Entsha noted that the demand for private tutors declined
significantly due to the availability of free maths and accounting lectures broadcasts on
national television as well as various other initiatives launched by the Skills Education Training
Authorities in South Africa. Refer to the table below for the net asset value in the separate
financial statements of Ubtutor and the recoverable amount of the company itself.
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Description 30 June 20.18

R
Net asset value in the separate financial statements of Ubtutor 5 900 000
Recoverable amount of Ubtutor determined by Entsha 5 600 000
The company as a whole is a cash generating unit. It is therefore not possible to allocate the
goodwill to a smaller cash generating unit within the company. No impairment losses have
been recorded since acquisition date.
5. Written put option
Dr Sibisi is one of the founding members of Entsha and still owns shares in the company. On
1 April 20.18, Entsha entered into the following agreement with Dr Sibisi:
• Dr Sibisi can decide to sell 10 000 of Entsha shares back to Entsha on 30 March 20.19
at R25 per share (gross physical settlement);
• Dr Sibisi will decide on and exercise his choice on 30 March 20.19; and
• On 1 April 20.18, Dr Sibisi will pay a premium of R10 000 on the option contract.
On 1 April 20.18, the present value of the R250 000 (R25 x 10 000) obligation is R227 273. An
appropriate discount rate for the period 1 April 20.18 to 30 June 20.18 amounted to 10% per
annum.
6. Extract of trial balance
The following balances, amongst others, appear in the trial balance of Entsha for the year
ended 30 June 20.18:
Trial balance on 30 June 20.18
Note Dr Cr
R R
Preference share capital 1 1 000 000
Financial liability at amortised cost: Debentures issued 2 945 000
Financial asset at fair value through OCI:
Shares (1/07/20.17) (assume correct) 3 2 064 000
1. Entsha issued 100 000 R10 cumulative preference shares on 1 January 20.18 which are
convertible on 31 December 20.22 into a number of ordinary shares. The number of ordinary
shares are determined by the issue price plus a 20% premium thereon divided by the share
price on 31 December 20.22. The fair value of the preference shares on 1 January 20.18 was
R1 000 000. The dividend rate is 6% per annum, whilst similar preference shares without
conversion rights currently earn a market related dividend at a rate of 8% per annum. All
unpaid preference dividends are accumulated for future declarations or until conversion date.
Except for the entry in respect of the proceeds received on issue of the preferences shares, no
other entries were recorded in respect of these preference shares.
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2. On 1 July 20.17, Entsha issued 1 000 10% debentures with a face value of R1 000 each at a
discount of 5%. The debentures carry interest at 10% per annum which is payable annually on
30 June. On 30 June 20.21, the debentures will be converted at the option of the debenture
holders into ordinary shares in the ratio of ten ordinary shares for each debenture. A fair rate of
return on similar debentures without conversion rights amounted to 12% on issue date and
12,5% on 30 June 20.18. The transaction costs amounted to R5 000 and was debited against
the debenture account, while the interest that was paid on 30 June 20.18 was debited against
the interest expense. Except for the entries in respect of the proceeds on issue, interest paid
and transaction cost, no other entries were recorded in respect of these debentures.
3. On 1 January 20.17, Entsha purchased 10 000 ordinary shares in a USA company at US$14
per share. Entsha irrevocably elected at initial recognition to classify this investment as at fair
value through other comprehensive income. The market price of the shares on 30 June 20.17
and 30 June 20.18 amounted to US$16 and US$19 respectively. On 30 June 20.18, the
shares were sold at fair value for cash. It is the accounting policy of Entsha not to present
foreign exchange differences and fair value adjustments separately. The following table
represents the appropriate rand/dollar exchange rates.
Date US$1=R
1 January 20.17 13,5
30 June 20.17 12,9
30 June 20.18 12,1
7. Email to auditor
Email
From: tsiego.moss@entsha.co.za
To: Masia.thabo@sizwe.co.za
Subject: IFRS 9 Loss allowance
Date: 2 July 20.18
Hi Thabo, I hope you are well?
See below my understanding of loss allowances relating to financial assets:
Allowance for expected credit losses
Expected credit losses on all classes of financial assets will always be recorded/presented in
an allowance account presented in other comprehensive income (OCI), i.e. Dr/Cr Expected
credit losses (P/L) and Cr/Dr Loss allowance (OCI), depending on whether there is an increase
or decrease in the expected credit losses.
Trade receivables
Can I always use the ‘simplified approach’ in calculating the loss allowance associated with
trade receivables? I.e. I only have to recognise the 12-month expected credit losses in profit or
loss (‘P/L’), regardless if there is no to little credit risk, a significant increase in credit risk or if
there is observable evidence of credit risk.
Do you agree with my understanding?
Kind regards
Tsiego M
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• Entsha applies the cost model in terms of IAS 16 Property, Plant and Equipment. Depreciation
is calculated using the straight-line method, taking into account the useful lives and residual
values.
• Entsha applies the fair value model for all its investment property in terms of IAS 40
Investment Property.
• The normal income tax rate is 28% and the capital gains tax inclusion rate is 80% for all
periods.
• Entsha early adopted IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with
Customers and IFRS 16 Leases for all relevant reporting periods.
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CASE STUDY 4
REQUIRED
QUESTION 1
Marks
(a) Calculate all the amounts of items that will be recognised in the statement of profit or 8
loss and other comprehensive income for the year ended 30 June 20.18 of
Entsha Ltd in respect of the Best Bank loan (refer note 1).
Please note:
• Your calculations should clearly indicate amounts that will be recognised in
profit or loss (P/L) or other comprehensive income (OCI).
• Ignore all normal income tax implications.
(b) Discuss in terms of IAS 16 Property, Plant and Equipment if the agreement with the 5
National Department of Health (refer note 2) gives rise to a residual value on the
prefabricated modular offices for purposes of calculating the depreciation expense
for the financial year ended 30 June 20.18.
Please note:
• Your discussion should include amounts.
Communications skills: logical argument 1
(c) Prepare all the journal entries that should be processed for the year ended 29
30 June 20.18 relating to the prefabricated modular offices (refer note 2). Also
include one journal to account for the deferred tax movement for the year on the
prefabricated modular offices.
Please note:
• Journals should be presented in date order.
• The deferred tax movement should be calculated by using die statement of
financial position method.
(d) Prepare the note relating to the correction of the error (refer note 3) in terms of IAS 8 8
Accounting Policies, Changes in Accounting Estimates and Errors for Entsha Ltd for
the year ended 30 June 20.18. The disclosure of the effect of the error on earnings
per share is not required.
Communications skills: presentation and layout 2
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Marks
(e) Calculate the total amount of impairment losses relating to Ubtutor Ltd (refer note 4) 10
that will be recognised in the Entsha Group annual financial statements for the year
ended 30 June 20.18.
Please note:
• If applicable, indicate separately any portion that is attributable to the non-
controlling interest.
(f) Prepare the journal entries to account for the written put option (refer note 5) in the 5
accounting records of Entsha Ltd for the year ended 30 June 20.18.
Please note:
• Journals should be dated.
(g) Prepare all the journal entries, which still have to be processed, in respect of the items 21
listed in the extract of the trial balance of Entsha Ltd for the year ended 30 June 20.18
(refer note 6). Your journal entries should not reverse any journals already processed
by Entsha Ltd. If necessary, correcting journals should be provided.
Please note:
• Journals should be dated.
(h) Prepare an email to Tsiego Moss in which you critically evaluate, in terms of 9
IFRS 9 Financial Instruments, his understanding of loss allowances on financial
assets (refer note 7). State clearly in your email what you agree and disagree with.
Provide reasons to support your answer. Ignore all normal income tax implications.
Communication skills: clarity of expression and layout 2
Please note:
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CASE STUDY 4
(a) Best Bank loan
R P/L or OCI
Day one loss: (10 313 940 – 10 000 000) 313 940 P/L (1½)
Loan raising fee 80 000 P/L (1)
1
Fair value adjustment (gain) and interest pmt: 831 478 P/L (4)
10 145 418 – 9 313 940 (10 313 940 – 1 000 000)
Expected fair value 30 June 20.18:
FV=10 000 000; PMT=1 000 000; N=9; I=9,75% (1,5% +
8,25%); PV=? 10 145 418
Fair value adjustment gain (9 857 445 – 10 145 418) (287 973) OCI (1½)
Total (8)
1
831 478 (10 145 418 – 10 313 940 = (168 522) (fair value P/L gain) + 1 000 000 (interest
payment))
(b) Residual value
According to IAS 16.6 the definition of a residual value of an asset is the estimated
amount that an entity would currently obtain from disposal of the asset after deducting
the estimated costs of disposal, if the asset was already at the age and in the condition
expected at the end of its useful life. Therefore, the current estimated amount were
made. (½)
Before the NDH contract the prefabricated modular offices would have been used for
five years and then sold as scrap metal for a negligible amount, implying the
prefabricated modular offices had a residual value of zero. (1)
However, on 1 June 20.18, the intention changes from use until almost worth nothing
to a mixed intention of use for three years and then sell at its fair value at that date. (1)
Therefore, the NDH contract will give rise to a residual value. (½)
The residual value need to be the estimated market value of a three-year-old
prefabricated modular office currently (20.18). During 20.18 NDH purchased similar
three-year-old prefabricated modular offices for an average market related price of
R35 000. Therefore, the current amount that Entsha will be able to obtain from the
disposal of similar a three-year-old prefabricated modular office (in the condition
expected at end of its useful life) amounts to R35 000. (2)
The estimated cost of disposal is the transport cost amounting to R3 000, that Entsha
will incur when the modular offices are transported to the regional office in Limpopo. (1)
Therefore the residual value amounts to R32 000 (R35 000 – R3 000) for each of the
prefabricated modular offices. (1)
Total (7)
Maximum (5)
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(c) Journals
Dr Cr
R R
1 June 20.18
Depreciation: Modular offices (Mapungupwe) (P/L) [C1] 44 000 (4½)
Accumulated depreciation: Modular offices (Mapungupwe) 44 000 (½)
(SFP)
Impairment loss (P/L) [C1] 2 000 (2)
Accumulated impairment: Modular offices (Mapungupwe) 2 000 (½)
(SFP)
Non-current assets held for sale (SFP) [C1] 102 000 (1)
Modular offices (Mapungupwe) (SFP) (given) 240 000 (1)
Accumulated depreciation: Modular offices (Mapungupwe) 136 000 (2)
(SFP) (44 000 + 92 000 (240 000 – 148 000))
Accumulated impairment: Modular offices (Mapungupwe) (SFP) 2 000 (1)
30 June 20.18
Non-current assets held for sale (SFP) 2 000 (½)
Impairment reversal (P/L) [C1] 2 000 (3½)
Depreciation: Modular offices (Kruger) (P/L) [C1] 192 000 (3½)
Accumulated depreciation: Modular offices (Kruger) (SFP) 192 000 (½)
Income tax expense (deferred) (P/L) [C2] 1 120 (8)
Deferred tax (SFP) 1 120 (½)
Total (29)
CALCULATIONS
C1. Depreciation expense 30 June 20.18
Kruger modular offices: R

CA amount 1 July 20.17 768 000 [½]
Residual value 20.18: (32 000 (from (b)) x 12 = 384 000) [1]
Depreciable amount: (768 000 – 384 000 = 384 000) [½]
Change in total useful life: 3 year
Depreciation for 20.18: (384 000 / 2[3-1]) (192 000) [1]
CA amount 30 June 20.18 (Kruger) 576 000
Mapungupwe modular offices:*

CA amount 1 July 20.17 148 000 [½]
Residual value 20.18: (32 000 (from (b)) x 3 = 96 000) [1]
Depreciable amount: (148 000 – 96 000 = 52 000) [½]
Change in total useful life: 3 year
Depreciation for 20.18: [52 000 / 13 months ((3 x 12 = 36 months –
23 months (11 months + 12 months)] x 11 months (HFS.: 1June 20.18)) (44 000) [2]
CA amount 1 June 20.18 (Mapungupwe) 104 000
Impairment at 1 June 20.18 (2 000) [½]
FV less costs to sell 1 June 20.18 (37 000 – 3 000 = 34 000) x 3 102 000 [1]
Impairment loss reversal (105 0001 – 102 000 = 3 000) limited 2 000 2 000 [2]
CA amount 30 June 20.18 (Mapungupwe) 104 000
1
FV less costs to sell 30 June 20.18 (38 000 – 3 000 = 35 000) x 3 105 000 [1]
* No change in intention of deferred tax recovery due to classification

as HFS, since CA less than CGT base cost.
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C2. Deferred tax movement
Date CA TB Temporary Deferred tax

difference asset/(liability)
at 28%
30 June 20.17 916 0001 912 0004 4 000 (1 120) [5]
30 June 20.18 680 0005 672 0006 8 000 (2 240) [2]
Movement 1 120 [½]

1
768 000 + 148 000 [½]
2
Kruger: 768 000 / 4 x 5 (original useful life) = 960 000 x 20% = 192 000 (wear & tear) [1½]
3
Mapungupwe: 240 000 x 20% = 48 000 (wear & tear) [½]
4
768 000 (960 000 – 192 0002) + 144 000 (240 000 – 48 000 – 48 0003) = 912 000 [2]
5
576 000 + 104 000 [½]
6
912 000 – 48 000 – 192 000 = 672 000 [1]
(d) Prior period error
In 20.16, an error was made in the calculation of property, plant and equipment. Installation
cost for machinery were expensed instead of being capitalised. The opening balance of
retained earnings at the beginning of the 20.17 was adjusted while the comparative amounts
were restated accordingly. The effect of the correction of the error on the results of 20.17 is as
follows:
20.17 1 July
R 20.17
R
Increase depreciation (30 000/4) (7 500) (1)
Decrease in tax expense (7 500 x 28%) 2 100 (1)
Decrease in profit (5 400) (½)
Increase in property,plant and equipment 16 2503 23 7501 (3)

Increase in deferred tax liability (4 550)4 (6 650)2 (1½
)
Increase in equity 11 700 17 100 (1)
Adjustment against retained earnings at the beginning of 20.17 17 100 (1)

1
23 750 (30 000 – 6 250 ((30 000/4) x 10/12)) [1½]
2
6 650 (23 750 x 28%) [½]
3
16 250 (23 750 – 7 500) [1]
4
4 550 (16 250 x 28%) [½]
Total (9)
Maximum (8)
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(e) Ubtutor Ltd - impairment
R
At acquisition goodwill:
Fair value at acquisition: 5 600 000
Net asset value 5 200 000 (½)
Buildings 400 000 (½)
Total 6 380 000
Consideration transferred 4 700 000 (½)
Non-controlling interest (30% x 5 600 000) 1 680 000 (1)
Goodwill (6 380 000 – 5 600 000) 780 000 (½)
Total impairment:
Carrying amount 30 June 20.18 7 414 286
Net asset value 5 900 000 (½)
Buildings 400 000 (½)
Goodwill (780 000/70 x 100) 1 114 286 (1)
Recoverable amount 5 600 000 (1)
Impairment (7 414 286 – 5 600 000) 1 814 286 (½)
Allocation of impairment 100% 70%(Entsha) 30%(NCI)

Goodwill 1 114 286 780 000 - (1½)
1 2 3
Other assets 700 000 490 000 210 000 (2)
Total 1 814 286 1 604 286 210 000 (1)
Total (11)
Maximum (10)
1
1 814 286 – 1 114 286 = 700 000 [1]
2
700 000 x 70% = 490 000 [½]
3
700 000 – 490 000 = 210 000 [½]
(f) Journals – written put option (IAS 32:IE30)
Dr Cr
R R
1 April 20.18
Bank (SFP) 10 000 (1)
Share buy-back reserve (SCE) 10 000 (½)
Share buy-back reserve (SCE) 227 273 (1)
Liabilty for share buy-back (SFP) 227 273 (½)
30 June 20.18
Interest expense (P/L) (227 273 x 10% x 3/12) 5 682 (1½)
Liabilty for share buy-back (SFP) 5 682 (½)
Total (5)
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(g) Journals
Dr Cr
R R
Preference shares
1 January 20.18
Preference share capital (SCE) 1 000 000 (1)
Financial liability at amortised cost: preference share (SFP) 1 000 000 (½)
30 June 20.18
Interest expense (P/L) [C3] (1 000 000 x 9,32% x 6/12) 46 603 (3)
Financial liability at amortised cost: preference share (SFP) 46 603 (½)
Convertible debentures
1 July 20.17
Financial liability at amortised cost: debentures (SFP) [C4] 10 747 (3½)
Equity component of convertible debentures (SCE) 10 747 (½)
Equity component of convertible debentures (SCE) [C4] 57 (2)
Financial liability at amortised cost: debentures (SFP) 57 (½)
30 June 20.18
Interest expense (P/L) [C4] 13 706 (2)
(934 310 x 12,17%( or 1 amort) - 100 000)
Financial liability at amortised cost: debentures (SFP) 13 706 (½)
Investment in shares
30 June 20.18
Financial asset at fair value through OCI:shares (SFP) 235 000 (2)
(2 299 000 (10 000 x 19 x 12,1) – 2 064 000 (given))
Mark-to-market reserve (OCI) 235 000 (½)
Bank (SFP) 2 299 000 (1)
Financial asset at fair value through OCI:shares (SFP) 2 299 000 (½)
Mark-to-market reserve (SCE)
(2 299 000 - 1 890 000 (10 000 x 14 x 13,5)) 409 000 (2)
Retained earnings (SCE) 409 000 (1)
Total (21)
C3. Convertible preference shares
Calculation of effective interest

N = 5 [½]
PV = 1 000 000 [½]
FV = 1 200 000 (1 000 000 x 1.20) [½]
PMT = 60 000 (1 000 000 x 6%) [½]
I = ? 9,32%
C4. Convertible debetures
C4.1 Liability component
N = 4 [½]
FV = (1 000 000) [½]
PMT = 100 000 (1 000 000 x 10%) [½]
I = 12% [½]
PV = ? 939 253
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C4.2 Equity component
Proceeds at issue 950 000 [½]

Liability component 939 253 [½]
Equity 10 747
C4.3 Effective interest rate
PV after transaction cost = 934 310 (939 253 – 4 943 (5 000 - 571)) [1]
N = 4
FV = 1 000 000
PMT = 100 000 (1 000 000 x 10%)
I = ? 12,17%
1
5 000 x (10 747/950 000) = 57 [1½]
1 input 1 2nd AMORT = 113 710 (rounding)
(h) Email: loss allowance
From:Masia.thabo@sizwe.co.za
To: tsiego.moss@entsha.co.za
Subject: Re IFRS 9 Loss allowance
Date: 30 July 20.18
Dear Tsiego
Please see below my comments relating to IFRS 9 loss allowances.
In terms of IFRS 9 defined terms

A credit loss is the difference between all contractual cash flows that are due to an
entity in accordance with the contract and all the cash flows that the entity expects to
receive (i.e. all cash shortfalls), discounted at the original effective interest rate.
Expected credit losses are the weighted average of credit losses with the respective
risks or default occurring as the weights.
The loss allowance is the allowance for the expected credit losses on certain financial
assets (measured at amortised cost, lease receivables and contract assets etc).
Allowance for expected credit losses
I therefore disagree with the statement that a loss allowance applies to all financial
assets. Because the movements in the fair value of equity investments designated
at FVtOCI and financial assets classified as FVtP/L will not be recorded in an
allowance account, but recorded directly as a fair value adjustment (P/L or OCI
(mark-to-market reserve), depending on the classification) against the financial (2)
asset.
Furthermore, not all types of financial assets will always require the use of a loss
allowance account.
IFRS 9.5.5.1: Only financial assets classified at amortised cost, 'mandatory'
FVtOCI, lease receivables, contract assets, loan commitments and financial
guarantee contracts (with specific impairment requirements) will require the
possible use of an allowance account. (1)
If the use of an allowance account is applicable, the classification of the financial
asset will determine the presentation of the associated allowance. I therefore disagree
with the statement that a loss allowance account is always presented in OCI. (1)
The allowance account to record credit losses of financial assets classified at
amortised cost, will be presented in the SFP, and not OCI. (1)
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IFRS9.5.5.2: Credit losses of financial assets classified at 'mandatory' FVtOCI will

however be recorded in an OCI allowance account like you suggest in your email
and not reduce the carrying amount in the SFP. (1)
An entity shall directly reduce the gross carrying amount of a financial asset
when the entity has no reasonable expectations of recovering a financial asset in its
entirety or a portion thereof. This is referred to as a “write-off”, i.e. it is not an
allowance for expected credit losses, but a loss on actual irrecoverability (i.e. it is
actual bad debts, not a “provision” for bad debts). (1)
I agree that the movement (up or down) in the expected credit losses is recognised
in P/L (dr) or reversal thereof (cr)). (1)
Trade receivables:
In terms of IFRS 9.5.5.15 an entity shall always measure the loss allowance at the
amount equal to lifetime expected credit losses for trade receivables that do not
contain a significant financing component.
For trade receivables that do contain a significant financing component the entity can
choose as its accounting policy to measure the loss allowance at the amount equal to
lifetime expected credit losses. An entity may select its accounting policy for trade
recievables, lease receivables and contract assets independently from each other.
Therefore, the simplified approach can only be used if the trade receivables do not
contain a significant financing component or if the entity chose the simplified approach
as an accounting policy for trade receivables that contain a significant financing
component. (1)
However, the simplified approach requires the credit loss allowance account for such
receivables to be measured at an amount equal to lifetime expected credit losses and
not 12-month expected credit losses as you suggest. (1)
I therefore agree that for trade receivables that do not contain a significant financing
component or where the entity chose the simplified approach for trade receivables
that contain a significant financing component, the loss allowance should always be
measured at initial recognition and throughout the life of the receivable using the (1)
'simplified approach', but for trade receivables that contain a significant financing
component where the entity did not choose the simplified approach the loss allowance
will either be measured at the 12-month or lifetime expected credit losses depending
on the increase of credit risk at reporting date or. (1)
Please contact me if you need additional information.
Kind regards
Thabo
Total (12)
Maximum (9)
Communication skills: logical argument and layout (2)
MJM
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QUESTION 1 52 marks
IGNORE ANY VALUE ADDED TAX IMPLICATIONS
CurWool Ltd (CurWool) is a leader in the South African textile industry. CurWool has a 30 June
financial year end and is currently in the process of finalising its annual financial statements for the
year ended 30 June 20.17. The following matters must still be accounted for by CurWool’s newly
appointed financial accountant:
1. Lease – Cotton machine
The financial manager entered into a lease agreement with Technology Ltd to lease a two-in-
one cotton-cleaning-and-drying machine, for CurWool’s cotton division.
The lease commenced on 1 July 20.15 for a period of seven years and the lease agreement
does not make provision for any option to extend the lease term. The annual lease payment
amounts to R127 000 and is payable at the beginning of each annual lease period, with the
first payment payable on 1 July 20.15. The lease payments are linked to the consumer price
index (CPI) for durable goods. In terms of the lease agreement, the lease payments will be
adjusted every two years, based on the movement in the “CPI for durable goods” index for the
24 months preceding the date of change.
The rate implicit in the lease could not readily be determined. Assume that the “CPI for durable
goods” index and the lessee’s incremental borrowing rates are:
CPI for durable goods Incremental borrowing rate
1 July 20.15 96 8,0%

1 July 20.16 103 8,6%
1 July 20.17 106 9,2%
The legal fees incurred by CurWool in finalising the lease agreement amounted to R10 300
and were paid on 1 July 20.15.
The cotton machine is not a low value asset. CurWool elected to account for its
right-of-use assets (leased machinery) according to the cost model in terms of IAS 16
Property, Plant and Equipment. This asset is depreciated on the straight-line method over the
useful life of the asset. The right-of-use asset’s (leased machinery) expected useful life was
determined at 10 years at initial recognition.
2. Disposal group
Due to an unexpected decrease in the selling price of silk products, the board of directors of
CurWool approved a decision at a board meeting held on 30 October 20.16 to dispose certain
assets from the silk division, as a disposal group. The disposal group contains machinery, a
vehicle, investment property and inventory. On 30 November 20.16, all the requirements for
the disposal group to be classified as held for sale in terms of IFRS 5 Non-Current Assets Held
for Sale and Discontinued Operations were met. It is expected that the disposal group will be
sold for cash and that the disposal will be completed by the end of August 20.17.
MJM
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2.1 Machinery
The machinery included in the disposal group was acquired on 1 July 20.14. On this
date, the useful life of the machinery was estimated at eight years with a residual value
of Rnil.
The machinery is subsequently measured according to the cost model in terms of IAS 16
Property, Plant and Equipment. Depreciation is calculated on the straight-line method
over the machinery’s useful life. An impairment loss with regard to this machinery, has
correctly been accounted for in terms of IAS 36 Impairment of Assets on 30 June 20.15.
The impairment loss amounted to R350 000. On 1 July 20.16 the carrying amount of the
machinery amounted to R2 875 000.
2.2 Vehicle
The vehicle was acquired on 1 July 20.15 at a purchase price of R148 600. On this date
it was estimated that the vehicle will be sold for R35 000 at the end of its estimated
useful life of five years. The vehicle is subsequently measured according to the cost
model in terms of IAS 16 Property, Plant and Equipment and is depreciated on the
straight-line method, over the estimated useful life thereof.
2.3 Investment property
The investment property was acquired on 30 April 20.10 at a purchase price of

R9 580 000 and had an estimated useful life of 20 years on this date. Investment
property is measured according to the fair value model in terms of IAS 40 Investment
Property. Its respective fair values can be summarised as follow:
Date Fair value

R
30 June 20.16 11 680 000

30 November 20.16 12 100 500
30 June 20.17 12 375 000
2.4 Inventory
Inventory is accounted for at the lower of cost and net realisable value, in terms of
IAS 2 Inventories. The cost price of the inventory relating to the disposal group, that was
on hand at 30 November 20.16, amounted to R80 100. None of this inventory was sold
between 30 November 20.16 and 30 June 20.17. The net realisable value of the
inventory on hand was as follows:
Date Net realisable value

R
30 November 20.16 58 650

30 June 20.17 62 300
MJM
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2.5 General
It is the policy of CurWool to perform its annual impairment testing, in terms of lAS 36
Impairment of Assets, on the last day of the relevant financial year. On
30 November 20.16, there was no indication of any impairment regarding any of the
individual assets within the disposal group.
The fair value of the disposal group amounted to R14 300 000 and R16 500 000 on
30 November 20.16 and 30 June 20.17 respectively. The estimated commission and
other costs to sell the disposal group amounted to R635 000.
The gain or loss recognised in terms of paragraphs 20-22 of IFRS 5 Non-Current Assets
Held for Sale and Discontinued Operations, is not separately presented in the statement
of profit or loss and other comprehensive income.
3. Repurchase of equity instruments
CurWool has 500 000 ordinary shares in issue, of which 5% are owned by the Employee
Ownership Fund (EOF). All the shares were issued at incorporation of the company, at R11,00
per share. CurWool decided to repurchase all of the shares that were owned by the EOF at
R11,70 per share, on 30 June 20.17. The fair value of the shares on the repurchase date
amounted to R11,30 per share. This transaction is an IFRS 2 Share based payment
transaction.
4. Share appreciation rights
CurWool issued 100 000 unconditional share appreciation rights (SARs) that vested
immediately, to its executive management on 1 July 20.15. At that date it was estimated, with
the use of an option pricing model, that the fair value of the SARs was R15 per SAR. The
members of executive management are entitled to exercise the SARs at any time until
30 June 20.18, at which date it has to be exercised. No SARs were exercised by
30 June 20.17. The fair value of the SARs increased over time and amounted to R15,40 per
SAR and R16,70 per SAR on 30 June 20.16 and 30 June 20.17 respectively.
The new financial accountant realised, while he was reviewing the opening balances of the
current year financial statements, that the previous financial accountant overlooked the SAR
transaction and that it was never accounted for in the accounting records of CurWool.
5. Additional information
The profit before tax, before taking the above mentioned transactions into account, amounted
to R7 800 000 for the year ended 30 June 20.17. The closing balance of retained earnings as
disclosed in the 30 June 20.16 authorised annual financial statements, amounted to
R13 000 000. Assume there is no other comprehensive income for the current year, except as
indicated in the given information.
The normal income tax rate is 28% and the capital gains tax (CGT) inclusion rate is 80%. A tax
expert correctly calculated the tax expense for the 20.17 financial year at R2 264 964. This tax
expense was calculated after the above mentioned transactions were taken into account.
The directors of CurWool decided to early adopt the latest versions of International Financial
Reporting Standards (IFRS).
MJM
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QUESTION 2 27 marks
IGNORE ANY VALUE ADDED TAXATION, DIVIDEND TAXATION AND NORMAL INCOME
TAXATION IMPLICATIONS
Cloud Airlines Ltd (Cloud) began its operations in 20.4. Cloud is a specialist in airlift services. The
company provides cargo transport, leasing of aircraft and passenger airline services. The company
has a 30 June financial year end. The financial manager is in the process of reviewing the first draft
of the financial statements of Cloud for the year ended 30 June 20.17. The senior financial
accountant brought a number of outstanding financial reporting matters to the financial manager’s
attention that was not included in the first draft of the financial statements. The financial manager
provided you with an extract of these outstanding matters in order for you to assist them with the
finalisation of the financial statements of Cloud for the year ended 30 June 20.17:
1. Purchase of a new passenger airplane (XXY800-12)
On 1 June 20.16 Cloud signed a contract with the United States (U.S.) airplane manufacturer,
Wings Ltd, to purchase a new passenger airplane (XXY800-12) at a total amount of
$2 200 000 (U.S. dollar), payable in cash on delivery date. The airplane was delivered to Cloud
on 1 February 20.17 and was ready for its intended use on this date. Control of the airplane
passed to Cloud Airlines on delivery date. The airplane is depreciated on a straight-line basis
over the asset’s useful life of 25 years. The residual value of the plane is estimated at
R2 500 000. On 30 June 20.17 the residual value and useful life remained unchanged.
Date Spot rate

$1 = R
1 June 20.16 13,03

30 June 20.16 13,55
1 February 20.17 12,88
Cloud obtained a loan of R33 000 000 from Aviation Bank Ltd on 1 May 20.16 to finance the
anticipated purchase of the airplane. The loan is obtained at a variable interest rate of JIBAR
plus 2% per annum. Interest on the loan is payable annually on 30 April. The loan capital is
repayable in five equal annual instalments commencing on 30 April 20.17. In terms of the loan
agreement the JIBAR is pre-fixed and post-paid, meaning that the variable interest will be fixed
for each 12-month period at the beginning of that 12-month period (i.e. on 1 May) and interest
will be paid at the end thereof.
MJM
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The following information was provided to you by the financial manager:
JIBAR
(per annum)
1 May 2016 7,80%
1 July 2016 8,00%
30 April 2017/1 May 2017 9,30%
30 June 2017 10,00%
2. Damaged passenger airplane (BOO512-500)
On 30 June 20.16, a passenger airplane (BOO512-500) of Cloud was severely damaged as a

result of a bird strike during take-off. The airplane was out of service for eight months due to
repairs that had to be done to the structure of the airplane. In view of this, it was expected that
the net cash inflows generated by the passenger airplane would decline to R1 263 752,85 per
annum for the remainder of its useful life. You may assume for calculation purposes that the
cash inflows will take place at the end of each year. Auctioneers indicated that they could sell
the airplane on 30 June 20.16 at a price of R14 800 000 before deducting the auctioneer’s fee
of 4% on the selling price. An applicable pre-tax discount rate for Cloud is 8% per annum.
Cloud acquired the passenger airplane (BOO512-500) on 1 July 20.10 at a cost of

R26 570 000. The estimated useful life of the airplane was determined as 25 years on
purchasing date. The estimated future, cash inflow to be derived from the passenger airplanes
ultimate disposal amounts to R2 000 000.
The recoverable amount for the airplane is re-estimated as R14 120 000 on 30 June 20.17.
The residual value and useful life remained unchanged since initial recognition of the airplane.
3. Investment in bonds
On 1 July 20.15, Cloud purchased listed corporate bonds at their fair value. The corporate
bonds will be held within a business model with the objective to collect contractual cash flows
of interest and the principal amount and to sell the bonds. The bonds mature on 30 June 20.18
at their face value of R2 520 000. The bonds pay interest at a coupon rate of 11% per annum,
payable annually on 30 June. The market-related interest rate for similar listed corporate
bonds on 1 July 20.15 was 12,50% per annum.
On 1 May 20.16, the management of Cloud changed its business model for managing its
investment in listed bonds. From 1 May 20.16 the listed corporate bonds will be managed
within a business model with the objective to collect contractual cash flows of interest and the
principal amount. The market-related interest rate for similar listed corporate bonds on
1 May 20.16 and 30 June 20.16 was 14,50% and 14,40% per annum respectively.The fair
value of the change was correctly calculated by the accountant on 30 June 20.16 to be
R2 379 637. Cloud provided you with the following schedule relating to the bonds:
Date Estimated lifetime expected

credit losses (discounted
value) Credit risk assessment
R
30 June 20.16 17 200 Low credit risk

MJM
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On 30 June 20.16, Cloud determined that the probability that the issuer will default within the
next 12 months after reporting date is 2,50%. The probability of default remained unchanged
for the entire duration of the contract term of the corporate bonds. All contractual cash flows as
agreed to in the bond agreement were received on 30 June 20.16 and 30 June 20.17.
4. Expansion of the airline operations
The purchase of the new passenger airplane required Cloud to expand its current airline
operations. In order to finance the expansion, Cloud issued 1 235 000 9% cumulative
compulsory convertible preference shares on 1 April 20.17 at a discount of 5% on the nominal
value, collecting proceeds totalling R4 940 000. The preference shares are convertible on
31 March 20.19 into two ordinary shares for every preference share held. The cumulative
preference dividend payable on 31 May 20.17 remains unpaid. The market-interest rate for
similar preference shares without conversion rights is 10% per annum.
• The profit before tax for the financial years ended 30 June 20.16 and 30 June 20.17, before
the above transactions were taken into account, amounted to R8 860 000 and R10 350 000
respectively.
• Airplanes classified as property, plant and equipment are accounted for in terms of the cost
model of IAS 16 Property, Plant and Equipment and are depreciated over their useful lives on
a straight-line basis taking their residual values into account.
• Cloud early adopted IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with
Customers.
MJM
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CASE STUDY 5
REQUIRED
QUESTION 1
Marks
(a) Prepare the following journal entries:
(1) To account for the lease in the accounting records of CurWool Ltd for the 8
year ended 30 June 20.17.
(2) To account for the reassessment of the lease liability in the accounting 4
records of CurWool Ltd on 1 July 20.17.
Please note:
• Assume the lease transactions for the year ended 30 June 20.16 were
correctly accounted for in the accounting records of CurWool Ltd.
• Journal narrations are not required, but journals should be dated.
• Ignore any normal income tax implications.
(b) Disclose the note on the disposal group in terms of IFRS 5.41 Non-current Assets 24
Held for Sale and Discontinued Operations to the financial statements of
CurWool Ltd for the year ended 30 June 20.17. Comparative figures are not
required.
(c) Prepare the statement of changes in equity of CurWool Ltd for the year ended 16
30 June 20.17. The total column and comparative figures are not required.
Please note:

• Ignore any Value Added Taxation (VAT) implications.
• Round off all amounts to the nearest Rand, and any percentages to two decimals.
• All amounts are deemed to be material.
MJM
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QUESTION 2
Marks
(a) Prepare an extract of the other comprehensive income section of the statement of 6
profit or loss and other comprehensive income of Cloud Airlines Ltd for the year
Please note:
• Comparative figures are required.
• Notes are not required.
Communications skills: presentation 1
(b) Calculate the profit before tax of Cloud Airlines Ltd for the year ended 20
30 June 20.16 and 30 June 20.17.
Please note:

• Ignore any normal income tax (current and deferred tax) implications.
MJM
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CASE STUDY 5
(a) (1) Journal entries
Dr Cr
R R
1 July 20.16
Lease liability (SFP) 127 000 (1)
Bank (SFP) 127 000 (½)
Payment of annual lease payment
30 June 20.17
Finance cost / charges (P/L) [C1.2] 40 566 (3)
Lease liability (SFP) 40 566 (½)
Interest expense for the year on lease liability
Depreciation (P/L) [C2] 103 487 (2½)
Accumulated depreciation: Right-of-use asset (SFP) 103 487 (½)
Depreciation for the year on right-of-use asset
Total (8)
(2) Journal entries

Dr Cr
R R
1 July 20.17
Right-of-use-asset (SFP) 57 045 (3½)
Lease liability (SFP) 57 045 (½)
Reassessment of lease liability
Total (4)
(b) Disposal Group
CURWOOL LTD
8. Disposal group
Due to an unexpected decrease in the selling price of silk products, the board of
directors approved the decision at a board meeting held on 30 October 20.16 to
dispose certain assets from the silk division as a disposal group. The assets were
reclassified as non-current assets held for sale on 30 November 20.16. It is
expected that the assets under this disposal group will be sold for cash and that
the disposal will be completed by the end of August 20.17. The disposal group
under discussion comprise of: (1½)
R
Assets
Machinery [C6.1] 3 010 753
Vehicles [C6.1] 131 007
Investment property [C6.1] 12 375 000
Inventory [C6.1] 62 300
15 579 060 (18½)
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A total impairment loss of R1 285 910 was recognised on initial classification of

the disposal group as held for sale.
A gain of R1 635 910 was recognised due to an increase in the fair value less cost
to sell of the disposal group. The recognition of this gain was limited to cumulative
impairment losses previously recognised on the underlying assets of the disposal
group.
The above amounts are included in other expenses in the statement of profit or
loss and other comprehensive income. (2)
Total (22)
Communications skills: presentation and disclosure (1)
(c) Statement of changes in equity
CURWOOL LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 20.17
Share Retained
Capital earnings
R R
1 2
Balance at 30 June 20.16 5 500 000 13 000 000 (1½)
Correction in respect of cash-settled share-based
3
payment (1 108 800) (1½)
Restated balance at 30 June 20.16 5 500 000 11 891 200
Changes in equity for 20.17
Total comprehensive income for the year
- Profit after tax for the year [C7] 6 069 063 (10)
- Other comprehensive income for the year -
4 5
Repurchase of vested shares (275 000) (7 500) (3)
Balance at 30 June 20.17 5 225 000 17 952 763
Total (16)
Communications skills: presentation (1)
1
R500 000 x R11 = R5 500 000 [1]
2
Given [½]
3
R100 000 SAR x R15,40 = R1 540 000; R1 540 000 x 72% = R1 108 800 [1½]
4
(R500 000 x 5%) = R25 000; R25 000 x R11 = R275 000 [1½]
5
R25 000 x (R11,30 - R11) = R7 500 [1½]
CALCULATIONS
C1.1 Lease liability - Initial recognition
SHARP EL-738 HPII 10
1. (BGN/END) 1. (BGN/END) [½]

2. PMT (R127 000) 2. PMT (R127 000) [½]
3. N 7 3. N 7 [½]
4. I/Y 8% 4. I/YR 8% [½]
5. COMP PV R714 106 5. PV R714 106
[2]
MJM
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C1.2 Finance cost
AMRT 3  3 ENT 3 INPUT 3 2nd F FV (AMORT) [½]

 == [½]
[INT]: R40 566 [INT]: R40 566 [½]
Initial recognition of lease liability: R714 106 – R127 000 (payment 1 July 20.15) = R587 106
C2. Right-of-use asset and depreciation
Lease liability on initial recognition [C1.1] 587 106 [½]

Lease payment on 1 July 20.15 127 000 [½]
Initial direct costs (lessee) 10 300 [½]
Total cost of right-of-use asset 724 406
Depreciation per year (724 406 / 7) 103 487 [½]

[2]
C3.1 Re-assessed lease liability on 1 July 20.17
SHARP EL-738 HP 10BII
2ndF FV (BGN/END) 2ndF MAR (BEG/END) [½]

PMT R140 2291 PMT R140 2291
N 5 N 5 [½]
I/Y 8% I/YR 8% [½]
COMP PV = R604 685 PV = R604 685 [½]
[2]
1
127 000 x 106/96 = 140 229
Alternative 127 000 + (127 000 x (106 – 96)/96) = 140 229
C3.2 Re-assessment value
R
Lease liability on 1 July 20.17 (1-3 Amort) 420 640 [½]
Payment made on 1 July 20.17 127 000 [½]
Lease liability on 1 July 20.17 (before re-measurement and payment) 547 640
Re-assessed lease liability on 1 July 20.17. [C3.1] (604 685)
Re-assessment 57 045
[3]
Or alternatively:
Lease liability – initial recognition [C1.1] 587 106

Finance cost – 20.16 & 20.17 2
87 534
Payment made on 1 July 20.16 (127 000)
Lease liability on 30 June 20.17 (before re-measurement) 547 640 [1]
Re-assessed lease liability on 1 July 20.17. [C3.1] (604 685)
Re-assessment 57 045
[3]
2
Financial year 20.16 (1 Amort – 2 Amort INT) 46 968
Financial year 20.17 [C1.2] 40 566
87 534
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C4. Carrying amount of disposal group assets on 30 November 20.16
C4.1 Machinery
R
Carrying amount (on 1 July 20.16) 2 875 000 [½]
Depreciation – 20.17 (until 30 November 20.16) 1
(199 653) [1]
Carrying amount on 30 November 20.16 2 675 347
1
2 875 000 /((8-2) x (5/12)) = 199 653
[1½]
C4.2 Vehicle
R
Cost (1 July 20.15) 148 600 [½]
Depreciation – 20.16 2
(22 720) [1]
Depreciation – 20.17 (until 30 November 20.16) 3
(9 467) [½]
Carrying amount on 30 November 20.16 116 413
2
(148 600 – 35 000)/5 = 22 720
3
22 720 x 5/12 = 9 467
[2]
C5. Measurement of disposal group on 30 November 20.16
Calculation and allocation of impairment loss

Carrying Impairment Carrying
amount at re- loss amount after
classification impairment
loss
R R R
4
Machine 2 675 347 (1 232 289) 1 443 058 [2]
5
Vehicle 116 413 (53 621) 62 792 [1½]
2 791 760 (1 285 910) 1 505 850
Investment property (given) * 12 100 500 - 12 100 500 [1]
Inventory (given) * 58 650 - 58 650 [1]
Carrying amount on
30 November 20.16 14 950 910 (1 285 910) 13 665 000
Fair value less cost to sell of disposal

group 13 665 000
Fair value of disposal group 14 300 000 [½]
Cost to sell (635 000) [½]
Impairment 1 285 910

4
2 675 347 / 2 791 760 x 1 285 910 = 1 232 289
5
1 285 910 – 1 232 289 = 53 621
* Already at FV / NRV
[6½]
MJM
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C6. Measurement of disposal group on 30 June 20.17
C6.1 Allocation of reversal of impairment loss
Carrying Impairment / Carrying

amount at gain amount after
30 June 20.17 gain
R R R
6
Machine 1 443 058 1 567 695 3 010 753 [2½]
7
Vehicle 62 792 68 215 131 007 [2]
1 505 850 1 635 910 3 141 760
Investment property (given) * 12 375 000 - 12 375 000 [1]
Inventory (given) * 62 300 - 62 300 [1]
Carrying amount on 30 June 20.17 13 943 150 1 635 910 15 579 060
Fair value less cost to sell of disposal

group 15 865 000
Fair value of disposal group 16 500 000 [½]
Cost to sell (635 000) [½]
Gain 1 921 850
Limited to [C6.2] 1 635 910

6
R1 443 058 / R1 505 850 x R1 635 910 = R1 567 695
7
R1 635 910 – R1 567 695 = R68 215
* Already at FV / NRV
[7½]
MJM
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C6.2 Limitation test

R
Cumulative impairment loss written off in previous years (given) 350 000 [½]
Current year impairment loss [C5.1] 1 285 910 [½]
Reversal of impairment limited to 1 635 910
[1]
C7. Profit after tax
Profit before tax (given) 7 800 000 [½]
Adjustments
IFRS 16 Leases
- Depreciation [C2] (103 487) [½]
- Finance cost [C1.2] (40 566) [½]
IFRS 5 Non-current assets held for sale & discontinued operations

9
- Depreciation (209 120) [1]
- Fair value gain – Investment Property 10
695 000 [1]
- Inventory: Write off to NRV (30 Nov 2016) – Cost of Sales 11
(21 450) [1]
12
- Inventory: Reversal of previous write-off to net realisable value 3 650 [1]
13
- Net gain on disposal group 350 000 [1]
IFRS 2 Share-based payment

14
- Repurchase of shares (employee benefits) (10 000) [1½]
15
- Cash-settled share-based payment (130 000) [1½]
8 334 027
Taxation (given) (2 264 964) [½]
Profit for the year 6 069 063
[10]
9
R199 653 [C4.1] + R9 467 [C4.2] = R209 120
10
R12 375 000 – R11 680 000 = R695 000
11
R58 650 (NRV) – R80 100 (cost) = R21 450
12
R62 300 – R58 650 = R3 650
13
R1 285 910 [C5] – R1 635 910 [C6.1] = R350 000
14
R25 000 x (R11,70 – R11,30) = R10 000
15
R100 000 SAR x (R16,70 – R15,40) = R130 000
MJM
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(a) EXTRACT FROM THE STATEMENT OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME FOR CLOUD AIRLINES LTD FOR THE YEAR ENDED
30 JUNE 20.17
20.17 20.16
R R
Items that will be reclassified to profit or loss
Investment in debt instruments at fair value through OCI:
Fair value loss on remeasurement [C3] - (76 896) (4)
Expected credit loss reserve on investment in debt
instruments [C4] - 430 (1)
Amounts removed from accumulated fair value adjustments
and expected credit losses in equity upon reclassification to
amortised cost (R76 896 [C3.1) – R430) 76 466 - (1)
76 466 (76 466)
Other comprehensive income for the year 76 466 (76 466)
Total (6)
(b) Profit before tax
20.17 20.16
R R
Profit (given) 10 350 000 8 860 000 (1)

Depreciation – new airplane [C1] (430 600) - (2)
Depreciation – damaged airplane [C2.1] (747 789) (1 062 800) (2)
Finance costs – loan from Aviation Bank
20.16: (R33 000 000 x (7,80% + 2%) x 2/12); (539 000) (2)
20.17: (R33 000 000 x (7,80% + 2%) x 10/12) +
((R33 000 000 – R6 600 0001) x 2/12 x (9,30% + 2%)) (3 192 200) (4½)
Impairment (loss)/reversal 659 789 (5 985 200) (2)
Interest income: Investment in bonds
20.16: [C3.2] - 303 748 (½)
20.17: [C3.3] 307 067 (½)
Expected credit losses on investment in bonds [C4] (105) (430) (2)
Finance cost accrued– preference shares
(R812 231 [C5] x 10% x 3/12) (20 306) - (3½)
Adjusted profit before tax 6 925 856 1 576 318
(20)
1
R33 000 000/5 = R6 600 000
CALCULATIONS
C1. New airplane

R
Cost (R2 200 000 x R2,88) 28 336 000 [½]
Depreciation for 20.17 [(R28 336 000 – R2 500 000)/25 x 5/12] (430 600) [1½]
Carrying amount at 30 June 20.17 27 905 400
[2]
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C2.1 Damaged airplane (BOO512-500)
R
Cost 26 570 000
Accumulated depreciation (R26 570 000 x 5/25) (5 314 000)
Depreciation for 20.16 (R26 570 000/25) (1 062 800) [1]
Impairment loss 20.16 [C2.2] (5 985 200)
Carrying amount after impairment 30 June 20.16 14 208 000
Depreciation for 20.17 (R14 208 000/19) (747 789) [1]
Recoverable amount 14 120 000
Reversal of impairment [C2.3] 659 789
C2.2 Impairment loss
Carrying amount 30 June 20.16 [C2.1] 20 193 200
Recoverable amount (higher of) 14 208 000 [½]

• FV less cost to sell: R14 800 000 x 96% = R14 208 000 [1]
• Value in use: R12 600 000 [2]

1. 2nd F C.CE (Clear all) 1. 2nd F C (Clear all)
2. PMT R1 263 752,85 2. PMT R1 263 752,85 [½]
3. FV R2 000 000 3. FV R2 000 000 [½]
4. N 19 4. N 19 [½]
5. I/Y 8% 5. I/Y 8% [½]
6. COMP PV R12 600 000 6. PV R12 600 000
Impairment loss 5 985 200 [½]
C2.3 Limit of impairment reversal
Carrying amount had no impairment been recognized 19 130 400

Cost 26 570 000
Accumulated depreciation R26 570 000 x 7/25 (7 439 600) [1½]
C3. Investment in bonds
Present value on 1 July 20.15

2. I/Y 12,50% 2. I/YR 12,50% [½]
3. N 3 3. N 3 [½]
4. FV R2 520 000 4. FV R2 520 000 [½]
5. PMT R277 2001 5. PMT R277 2001 [½]
6. COMP PV R2 429 985 6. PV R2 429 985
R
1
R2 520 000 X 11% = R277 200
CA 30 June 20.16 (R2 429 985 + R303 748 (AMORT 1) – 277 200) 2 456 533 [1]
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C3.1 Fair value at 30 June 20.16
R
Fair value [C3] 2 456 533
Fair value loss (OCI) (76 896) [1]
Fair value 30 June 20.16 (given) 2 379 637
[4]
C3.2 Interest 2016

AMRT 1  1 ENT 1 INPUT 1 2nd F FV (AMORT)
 ==
[INT]: R303 748 [INT]: R303 748 [½]
C3.3 Interest 2017

 ==
[INT]: R307 067 [INT]: R307 067 [½]
C4. Expected credit losses on investment in bonds
R
Expected credit losses balance:
20.16: R17 200 x 2,50% = R430 (OCI) 430 [1]
20.17: R21 400 x 2,50% = R535 (SFP) 535 [1]
Expected credit loss in P/L for 20.17 (R535 – R430) 105
C5. Compulsory convertible preference shares

2. N 2 2. N 2 [½]
3. I/Y 10% 3. I/YR 10% [½]
4. PMT R468 0001 4. PMT R468 0001 [1]
5. COMP PV R812 231 5. PV R812 231
1
R4 940 000 x 100/95 x 9% = R468 000
R
Financial liability 812 231
Equity component 4 127 769
Total proceeds 4 940 000
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QUESTION 1 11 marks
IGNORE ANY VALUE ADDED TAXATION AND NORMAL INCOME TAXATION IMPLICATIONS
You recently completed your Certificate in the Theory of Accounting and decided to work at a
local accounting firm during November, as your training contract will only start in January. The
managing partner of the accounting firm noticed your pure talent and love for accounting and
therefore sent you a few queries. These queries are listed below:
Query 1
Simbine Ltd (Simbine) has a 30 September year end. Simbine Ltd purchased 5 000 unlisted bonds
in Wayde Ltd on 1 April 20.17 at R2 450 000. It is the objective of Simbine's business model to
both collect contractual cash flows and sell unlisted bonds. The contractual cashflows are solely
payments of principal and interest. Simbine also had to pay transaction costs amounting to R25 000
on this date. Simbine was able to buy the bonds at a discount due to the excellent negotiation
skills of Simbine's financial manager. The bonds mature on 31 March 20.20 and will be redeemed
at face value. The bonds each have a face value of R500, the coupon interest rate on the bonds is
7% per annum and the coupon payments are paid six-monthly in arrears. The market related
interest rate for similar unlisted bonds is as follows:
Date Rate
1 April 20.17 7,5%

30 September 20.17 8,0%
The bonds were not credit impaired at acquisition date or at any other date thereafter and you may
assume that the expected credit loss reserve related to the bonds amounted to R50 000 on
1 April 20.17. On 30 September 20.17 Simbine estimated that the credit risk of the bonds did not
increase significantly from initial recognition and estimated that the credit loss reserve remained
unchanged. Simbine early adopted IFRS 9 Financial Instruments. Simbine did not designate these
bonds into any specific category in terms of IFRS 9 Financial Instruments.
Query 2
Gongqa Ltd (Gongqa) has an April year end. The directors of Gongqa successfully tendered for a
15 year, non-renewable, casino license. The total acquisition cost amounted to R25 000 000 and
the casino license period commenced on 1 June 20.16.
Gongqa intends to operate the casino for only 10 years, after which it will be sold to the highest
bidder. The directors expect to sell the license in 10 years' time for not less than R25 000 000, as
similar casino licenses are not available. The casino license is therefore not amortised. At
1 June 20.16 and 30 April 20.17, Gongqa has no commitment from any third party to acquire
the casino license from them.
Gongqa also incurred R200 000 for the training of staff that will work in the casino. This amount
was capitalised as part of the cost of the casino license, and will be amortised over two years, as
the directors expects additional training will be needed after the two year period.
MJM
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QUESTION 2 26 marks
Maloti Ltd (Maloti) is a company that produces googleberry products. Googleberries are indigenous
only to the Injisuthi region of the Drakensberg and have recently been classified as a superfood due
to their concentrated mineral and nutrient dense characteristics. Googleberries are especially high in
fiber, vitamin C and antioxidants. Maloti is listed on the JSE Limited and has a 30 June financial year
end.
The financial manager of Maloti performed the deferred tax calculations based on the statement of
financial position method. She sent certain deferred tax journal entries to you, the financial director,
with notes, for your review in order to enable her to finalise the financial statements for the year
ended 30 June 20.17:
Journal 1
Dr Cr
R R
30 June 20.17
Deferred tax (SFP) ((1 100 000 – 1 000 000) x 80%) 80 000
Income tax expense (deferred) (OCI) 80 000
Recognition of deferred tax for the current year
Maloti purchased vacant land outside Winterton for R1 000 000 on 1 March 20.17. The land is held
for long-term capital appreciation. The fair value of the land amounted to R1 100 000 on
30 June 20.17. The base cost approximates the original cost. Investment property is measured in
accordance with the fair value model in terms of IAS 40 Investment Property.
Journal 2
Dr Cr
R R
30 June 20.17
Deferred tax (lease liability) (SFP) 145 600
(520 000 (520 000 – 0 (tax base)) x 28%)
Deferred tax (right-of-use asset) (SFP) 145 600
(520 000 (520 000 – 0 (tax base)) x 28%)
Income tax expense (deferred) (P/L) -
Maloti leased a machine from Tessi Ltd (Tessi) in terms of a lease agreement on 30 June 20.17. The
cash selling price (excluding Value Added Tax (VAT)) of the machine is R520 000. The machine is
not considered to be a low value asset in terms of IFRS 16 Leases. Three annual lease payments of
R248 977 (including VAT) each are payable in arrears. The interest rate implicit in the lease is 12%
per annum. There are no guaranteed or unguaranteed residual values. No initial direct costs were
incurred by either Maloti or Tessi. Maloti is a registered VAT vendor and uses the machine to
produce taxable supplies. The lease agreement qualifies as an instalment credit agreement in terms
of the VAT Act. Ownership of the machine will not transfer to Maloti at the end of the lease term.
Maloti did not make any other payments to Tessi at the inception of the lease.
Journal 3
Dr Cr
R R
30 June 20.17
Income tax expense (deferred) (P/L) 26 460
Deferred tax (SFP) ((94 500 (189 000/2) – 0 (tax base)) x 28%) 26 460
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Maloti purchased a power bar recipe at a cost of R210 000 on 1 January 20.16. At this date the
useful life was estimated at five years and the residual value immaterial. The correct carrying amount
of the intangible asset amounted to R189 000 on 30 June 20.16. The SARS indicated that they will
not allow capital allowances on the power bar recipe. Maloti uses the power bar recipe to produce
power bars that includes the googleberry juice as one of its ingredients. During the 20.17 financial
year Maloti discovered that the power bar recipe will increase the human nutrient absorption. In light
thereof, the remaining useful life and residual value of the power bar recipe were re-estimated at two
years and R50 000 respectively during the finalisation of the 20.17 financial year. Intangible assets
are measured in accordance with the cost model in terms of IAS 38 Intangible Assets. Depreciation
is provided for on the straight-line method over the asset’s remaining useful life.
Journal 4
Dr Cr
R R
30 June 20.17
Deferred tax (SFP) 201 600
Income tax expense (deferred) (P/L) 201 600
((720 000 – 0 (tax base)) x 28%)
During the 20.17 financial year Maloti started their research on an immune enhancing power bar
recipe that will increase the human nutrient absorption of googleberries. Maloti estimates that during
the following two years Maloti will be able to develop and test the shelf life of various googleberry
power bars. Maloti is confident that the first immune enhancing googleberry power bar will be
available to the public in 20.20. The total research costs incurred during the 20.17 financial year
amounted to R720 000. The project was not approved by the Research and Development
Adjudication Committee.
Journal 5
Dr Cr
R R
30 June 20.17
Deferred tax (SFP) 98 000
Income tax expense (deferred) (P/L) ((850 000 – 1 200 000) x 28%) 98 000
Recognition of deferred tax (movement in unused tax loss) for the year
At the 20.16 financial year end Maloti’s directors were uncertain of Maloti’s ability to generate taxable
profits in the nearby future, but during the 20.17 financial year Maloti generated taxable profit and the
directors were now certain there will be taxable profit in the future. Below is an extract of the final tax
calculation:
20.16 20.17
R R
Assessed tax loss per SARS assessment (1 200 000) -

Taxable profit before assessed loss from previous year* - 850 000
Total taxable temporary differences (excluding unused tax loss) as at
30 June* 50 000 300 000
* For journal 5 you may assume that these amounts are correct and that all the necessary
adjustments relating to the abovementioned journals 1-5 have been made.
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• The normal income tax rate is 28% and the capital gains tax inclusion rate is 80% for all
periods.
• The VAT rate is 15%. Ignore any VAT consequences on all of the journal entries except for
Journal 2.
• Maloti early adopted IFRS 9 Financial Instruments and IFRS 16 Leases for all the relevant
reporting periods.
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CASE STUDY 6
REQUIRED
QUESTION 1
Marks
(a) Process the journal entry to account for the investment in unlisted bonds (query 1) at 4
initial recognition in the accounting records of Simbine Ltd.
Communication skills: Presentation and format 1
(b) In respect of the information in query 2, write a memorandum to the accountant of 5

Gongqa Ltd in which you explain to him, with reasons, the following:
(1) Whether or not the accountant correctly accounted for the information in query
2, for the year ended 30 April 20.17.
Please note:
• Do not discuss any definitions.
• Do not discuss the initial recognition and initial measurement of the casino
license.
• Amounts are not required as part of your discussion.
Communication skills: Logical argument and format 1

Please note:

QUESTION 2
Marks
Review the financial manager of Maloti Ltd’s deferred taxation journal entries for the 24
financial year ended 30 June 20.17. Provide feedback to her in a memo that details your
concerns with regard to any inaccuracies that are apparent from the information provided.
Support your feedback with reasons and brief calculations together with the suggested
correct treatment of any inaccuracies noted. Your discussion should not include any
journal entries. Discuss each journal separately.
Communications skills: Layout and structure 2
Please note:
• Assume that all amounts are material.

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CASE STUDY 6
(a)
Dr Cr
R R
1 April 20.17
Financial asset at fair value through OCI (SFP)
(2 466 9681 + 25 000) 2 491 968 (3)
Bank (2 450 000 + 25 000) 2 475 000 (½)
Day one gain (P/L) (balancing) 16 968 (½)
Recognise investment in umlisted bonds and capitalise
transaction costs
Total (4)
Communication skills: presentation and format (1)
1
FV = 5 000 x R500 = R2 500 000 [½]

PMT = 5 000 x R500 x 7% x 6/12 = R 87 500 [1]
N = 6 (3 x 2) [½]
I = 7,5%/2 (HP: 7.5%; 2P/YR) [½]
PV = ? 2 466 968
(b) To: Accountant

From: Student
Date: 15 November 20.17
Subject: Compliance with IFRS (i.e. accounting treatment of the casino license and
training costs and the accounting policy in respect of government grants)
Dear Sir
In relation to the compliance with IFRS (i.e. accounting treatment of the casino license
and training costs, find attached Appendix A.
Yours faithfully
S.T.U.D.E.N.T.
Casino license and training costs
The casino license has been awarded for 15 years, Gongqa Ltd only intends to
use the license for 10 years and the license should therefore be amortised over
10 years (IAS 38.94). (1)
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• The residual value of an intangible asset with a finite useful life shall be
assumed to be zero unless:
- there is a commitment from a third party to purchase the asset at the end of
its useful life. At 1 June 20.16 and 30 April 20.17, Gongqa Ltd has no
commitment from any third party to acquire the casino license from them. (1)
OR
- There is an active market for the asset. Similar casino licenses are not
available, there is no active market for the casino license (IAS 38.100).
(1)
The residual value should therefore be zero. (1)
• It was therefore not correct not to amortise the casino license; or The casino
license should therefore be amortised. (1)
• The expenditure on training activities should be recognised as an expense when

incurred (lAS 38.69(b)); or
An entity usually has insufficient control over the expected future economic
benefits arising from training costs to meet the definition of an intangible asset
(IAS 38.15). (1)
It was therefore incorrect to capitalise the training costs as part of the cost of the
license. (1)
Total (7)
Maximum (5)
Communication skills: logical argument and format (1)
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MEMO
To: Financial Manager

From: Student
Date: 15 July 20.17
Subject: Comments and concerns relating to deferred tax journal entries for the
year ended 30 June 20.17
Dear Madam
Please find below the concerns and suggested corrections of the inaccuracies noted in your
deferred tax journals and calculations.
Should you have any further queries please contact me on 000.
Regards, STUDENT
Journal 1:
DR & CR of journal:
The fair value increase on land will result in a taxable amount, when the taxable profit for
the period in which the carrying amount of land is recovered and determined. (1)
Therefore deferred tax (SFP) needs to be credited (not debited), since a taxable
temporary difference needs to be accounted for. (1)
Consequently income tax expense (deferred) should be debited (not credited). (½)
P/L vs OCI:
The land is classified as an investment property since it is held for capital appreciation (½)
and is measured in terms of the fair value model in accordance with IAS 40 Investment
Property. (½)
Therefore the fair value adjustments will be recorded in profit or loss (P/L).
The fair value adjustment is recorded in P/L and consequently the deferred tax debit should
also be recorded in P/L (not OCI) (IAS 12.58 & 61A). (1)
Tax rate:
The investment property will be realised through sale, capital gains tax will be liable on any
realised amount above cost (base cost for taxation purposes) of the asset (IAS 12.15(c)). (1)
The applicable capital gains tax rate is an 80% inclusion rate x 28% and not only 80% (1)
(IAS 12.47).
Amount:
Therefore the correct amount to measure the deferred tax liability on land is R22 400
(R100 000 (R1 100 000 – R1 000 000) x 80% x 28%) (1)
Journal 2:
Lease liability
Calculation:
The carrying amount of the lease liability is calculated incorrectly. Maloti did not pay the
claimed VAT over to Tessi Ltd at inception of the lease; therefore, the VAT is being (1)
financed by Maloti and included in the lease payments. Therefore the lease liability will
include the VAT amount R520 000 x 1,15 = R598 000. (1½)
The carrying amount of the lease liability includes VAT that will not be deductible for tax
purposes in the future, because the VAT of R78 000 (520 000 x 15%) has already been
recouped from SARS at inception of the lease (instalment credit agreement). (2)
Therefore the tax base of the lease liability is R78 000 (R598 000 – R520 000) (IAS 12.8). (1)
Consequently the deferred tax calculation was done incorrectly and should be as follows:
R598 000 (carrying amount) – R78 000 (tax base) = R520 000 x 28% = R145 600. (2)
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Journal 3:
Amount:
The carrying amount of the intangible asset at 30 June 20.17 is incorrect, because the
revised residual value was not taken into account to calculate the depreciable amount (IAS (1)
38.8).
The carrying amount of the intangible asset should be
R189 000 – R69 500 (R189 000 – R50 000)/2) = R119 500 (2)
The carrying amount of the asset (R119 500) relates to the balance of the asset at initial
recognition since there was no subsequent remeasurement. Intangible assets are
measured in accordance with the cost model and at the time of the initial transaction,
affects neither the accounting profit nor the taxable profit (tax loss) (IAS 12.15(b)). (1½)
Therefore the temporary difference of R119 500 (R119 500 – RNil) (1)
is exempt and consequently a no deferred tax liability is raised (not R26 460). (1)
Journal 4:
Amount:
The R720 000 research expenditure incurred during the 20.17 financial year is not an
intangible asset and should be expensed (IAS 38.54). (1)
Consequently, there is no temporary difference and no deferred tax should be recognised. (1)
Journal 5:
Amount:
IAS 12.34: A deferred tax asset shall be recognised for the carryforward of unused tax
losses to the extent that it is probable that future taxable profits will be available against
which the unused tax losses can be used.
Maloti will recognise a deferred tax asset arising from the unused tax loss in 20.17 because
Maloti is certain there will be sufficient taxable profit available in the future (IAS 12.34).
(1)
20.16:
The deferred tax asset relating to the unused tax loss at 30 June 20.16 is limited to the
taxable temporary differences at year end amounting to R50 000 since the directors of
Maluti are uncertain about the ability of Maloti to generate taxable profits in the future.
Therefore the deferred tax asset raised (unused tax loss created) is R50 000 x 28% =
R14 000 (3)
20.17:
The 20.16 assessed loss of R1 200 000 is utilised in 20.17 against the taxable profit of
R850 000, consequently the unused tax loss for 20.17 amounts to R350 000 (R1 200 000
– R850 000). (2½)
The deferred tax asset raised relating to the unused tax loss as at 30 June 20.17 is not
limited to the taxable temporary differences at year end (30 June 20.17) of R300 000
because Maloti is certain of sufficient profit in the future.
Therefore, the total unused tax loss for 20.17 of R350 000 can be raised as an asset. (2½)
The movement of the unused tax loss from the 20.16 to 20.17 financial year that should be
recognised in deferred tax is R84 000 (R98 000 (R350 000 x 28%) – R14 000 (R50 000 x
28%)) (not R98 000). (2½)
Total (24)
Communication skills: logical flow and layout (2)
MJM
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QUESTION 1 42 marks
California Footwear Ltd (California) is a leading manufacturer in the shoe industry and consists of a
variety of divisions, with each offering different products. California is listed on the Johannesburg
Stock Exchange (JSE) and it has a 30 June financial year end.
1. Shoe manufacturing division
Amongst the products manufactured by California are shoes. California manufactures two
different shoe ranges, namely the Hunters safety boots (Hunters) and the Manolo Blank point
shoes (Manolo). The production of both shoe ranges, takes place in the shoe manufacturing
division.
The shoe manufacturing division, comprising of a factory building, the Hunters shoe range
(machinery and the Hunters safety boots patent) and the Manolo shoe range (machinery and
the Manolo Blank point shoes patent), were acquired from Nika Ltd on 1 July 20.11. On this
date all of the assets were deemed to be fairly valued. Goodwill of R550 000 arose on the
acquisition as a result of the consideration paid being in excess of the fair values of all the
assets. The acquisition of the shoe manufacturing division constitutes a business in terms of
IFRS 3 Business Combinations.
The factory building, machinery and patents as individual assets cannot generate cash flows
independently. The Hunters shoe range and Manolo shoe range can, however, generate cash
flows independently. The number of Hunters safety boots and Manolo Blank point shoes that
are manufactured changes regularly depending on the demand for the products. As a result
the portion of the factory building devoted to each shoe range can’t be determined and the
total goodwill that arose on acquisition was allocated to the shoe manufacturing division as a
whole.
On 30 June 20.15 the carrying amounts of the non-current assets of the shoe manufacturing
division were as follows:
R
Factory building (refer to note 1.1) 5 190 000
Hunters shoe range (refer to note 1.2)
Machinery 2 250 000
Patent – Hunters safety boots 425 000
Manolo shoe range (refer to note 1.3)
Machinery 1 900 000
Patent – Manolo Blank point shoes 360 000
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1.1 Factory building
The total cost price of the factory building was determined as R6 300 000 (including
dismantling costs) on 1 July 20.11. On 1 July 20.11 the useful life of the factory building was
estimated at 20 years. Assume that the land on which the factory building is situated is
immaterial. In accordance with legislation, California is obliged to return the site to its original
condition at the end of its useful life.
On 1 July 20.11 it was estimated that the present value of the future costs to dismantle the
factory building at the end of its useful life amounts to R250 000. The factory building can be
sold for scrap metal once dismantled. It is estimated that R750 000 would currently be
obtained from the sale thereof, after the estimated costs of disposal have been deducted, if the
factory building was already of the age and condition as at the end of its useful life. On
1 July 20.11 the pre-tax discount rate used to calculate the present value of the dismantling
costs, compounded annually, was 12% per annum. On 30 June 20.16 the dismantling costs
were re-estimated to amount to R1 447 000 on 30 June 20.31.
1.2 Hunters shoe range
The cost price of the machinery of the Hunters shoe range was determined as R4 500 000 on
1 July 20.11. The useful life was estimated at eight years with a residual value of Rnil.
The Hunters safety boot is manufactured by the Hunters shoe range. The Hunters safety boot
uses the most recent technology to ensure that the boot is durable even when used in
unfavourable conditions and comes with a five-year warranty on the soles of the boots. The
patent for the exclusive rights to manufacture the Hunters safety boot was registered in
California’s name on 1 July 20.11 and the useful live was estimated at eight years with no
residual value.
During June 20.16 a competitor company introduced their new safety boots with more durable
material, using newer technology and with a longer warranty provided on the boots. The
material used in the manufacturing of their boot is also recyclable which contributes to the
increased demand for their product. In order to maintain its market share, California decided to
reduce the selling price of the Hunters safety boots to R450 per pair. The decrease in the
selling price will result in California sustaining a loss and therefore, California decided to
restructure the operations of the Hunters shoe range. The announcement regarding the
restructuring was made on 30 June 20.16 and the main features of the plan were also
communicated to all the parties affected by the restructuring on this date.
On 30 June 20.16 California had a 1 000 pairs of Hunters safety boots on hand at a total cost
of R600 000. On 30 June 20.16 California had a contract in place to sell 500 pairs of the
Hunters safety boots at the contractually agreed upon price of R550 per pair during July 20.16.
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After the decision to restructure the following information from the Hunters shoe range as at
30 June 20.16 was available:
20.17 20.18 20.19
R R R
Net cash inflow of non-current assets
(before any of the outflows listed below) 526 563 526 563 526 563
Costs to restructure (80 000) - -
Costs savings as a result of the restructuring 210 000 210 000 210 000
Depreciation of the machinery (562 500) (562 500) (562 500)
Amortisation of the patent (80 000) (80 000) (80 000)
Maintenance costs (50 000) (50 000) (50 000)
The cash flows do not take inflation into account and will occur at the end of each year, except
for the costs to restructure which will occur at the beginning of July 20.16. The fair nominal rate
of return on similar assets was 13% (pre-tax) on 30 June 20.16. The fair real rate of return on
similar assets was 10% (pre-tax) on 30 June 20.16.
1.3 Manolo shoe range
The cost price of the machinery of the Manolo shoe range was determined as R3 800 000 on
1 July 20.11. The useful life was estimated at eight years with a residual value of Rnil.
The Manolo Blank point shoe is manufactured in the Manolo shoe range. The Manolo Blank
point shoe is manufactured with a trademark red sole. The patent for the Manolo Blank point
shoe was registered in California’s name on 1 July 20.11 and the useful live was estimated at
eight years with no residual value.
1.4 Value in use and fair value less costs of disposal
The value in use and fair value less costs of disposal amounted to the following on
30 June 20.16:
Fair value
Value in use less costs of
disposal
R R
Factory building ? 4 000 000
Hunters shoe range Refer to note 1.2 2 100 000
Machinery ? 1 387 500
Patent ? 350 000
Manolo shoe range 1 950 000 2 100 000
Shoe manufacturing division as a whole 8 150 000 8 253 138
The fair value less costs of disposal of the Hunters and Monolo Shoe range was calculated as
the amount that an independent third party will pay to acquire all the assets of the division.
The fair value of the shoe manufacturing division as a whole was calculated as the amount that
an independent third party will pay to acquire all the assets and liabilities of the division.
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1.5 Accounting policies
An extract from California’s accounting policies provided the following information:
California Footwear Ltd

Notes to financial statements for the year ended 30 June 20.15
Property, plant and equipment
1. The factory building is subsequently measured in accordance with the cost model and it is
depreciated over its useful life on a straight-line basis.
2. Machinery of the shoe manufacturing division is subsequently measured in accordance
with the cost model and it is depreciated over its useful life on a straight-line basis.
Intangible assets
1. The Hunters safety boots patent and the Manolo Blank point shoes patent are
subsequently measured in accordance with the cost model and amortised over their useful
lives on a straight-line basis.
There have been no changes in the accounting policies of California for the year ended
30 June 20.16.
• The normal income tax rate is 28% and the capital gains tax inclusion rate is 80%.
• You can assume that all useful lives and residual values mentioned in the information above
remained unchanged during all of the financial years.
• The South African Revenue Service (SARS) grants an allowance on machinery used in
manufacturing in accordance with section 12C of the Income Tax Act, calculated as 20% per
year on the cost of the machinery, which is not apportioned for part of a year.
• In accordance with section 13(1)(b) of the Income Tax Act, the SARS allows a deduction for
the factory building of 5% per annum on the cost of the building, which is not apportioned for
part of a year.
• In accordance with section 11(gB) of the Income Tax Act, the SARS allows a deduction of
100% of the full expense incurred regarding the registration of the patents in the year that the
expense was incurred.
• The SARS indicated that any write-off of inventory will be accepted as a tax deduction.
• On 30 June 20.15 the deferred tax balance was correctly calculated as a liability of
R2 171 854.
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QUESTION 2 38 marks
Packman Ltd (Packman) is listed on the Johannesburg Stock Exchange and manufactures various
brick manufacturing machines. The quality and the various range of machines manufactured have
made Packman a leader in the brick manufacturing industry for over 10 years. Packman supplies the
brick manufacturing machines locally and internationally. The company currently employs 1 650
employees at four of its manufacturing plants located in South Africa. The financial accountant of
Packman is in the process of finalising the financial statements for the year ended 30 June 20.16
and requires your assistance with the following transactions:
1. Termination benefits
During the past two years unfavourable market conditions in the economy have had a negative
impact in the construction industry. The industry has taken strain as a result of fewer
construction projects being offered. This is evident by the reduced aggregate market
capitalisation of construction companies. Packman was directly affected by the decrease in
construction activities, which has resulted in significant losses in their revenue. This has led to
the management of Packman implementing cost-reduction initiatives in order to improve
profitability. The directors took a decision on 1 December 20.14 to retrench 365 employees.
On 14 February 20.15 each of these employees were offered a lump-sum payment of
R750 000 on condition that their employment at Packman be terminated on
30 September 20.15. The terms of the offer stated that Packman could not withdraw the offer.
At 30 June 20.15 it was expected that 360 employees would accept the offer. However, on
30 September 20.15 only 350 accepted the offer. The amounts due to these employees were
settled on 15 October 20.15.
2. Share option scheme
Packman implemented the Siyakhula share option scheme. On 1 January 20.14 Packman
granted 3 000 options to each employee to purchase shares at R10 per share subject to the
following two conditions:
1. The share price of Packman increase to R24,50 per share on 31 December 20.15, and
2. The employee remains in service at Packman until 31 December 20.15.
There were 2 000 employees at the time the options were granted. On 1 January 20.14, 95%
of the employees were expected to still be in service on 31 December 20.15. This estimate
was revised to 96% on 30 June 20.14. At 30 June 20.15, the estimate of the number of
employees that will remain in service at Packman until 31 December 20.15 was estimated to
be 82%. This estimate takes into consideration the number of employees that will be
retrenched.
As a result of the decision taken on 1 December 20.14 to retrench 365 employees, the
management of Packman cancelled the share options allocated to 350 employees, who
accepted the termination of employment offer. The remaining 15 employees were not part of
the share option scheme. On 30 September 20.15 the 350 employees were paid R18 000
each as compensation for the loss of their share options.
On 30 November 20.15, the terms of the share-based payment transaction were changed as it
was determined that the share price would not reach R24,50 by 31 December 20.15. The
terms were revised to require that the employees remain in service at Packman until
31 December 20.16 and that the share price reach R18,00 by 31 December 20.16. The overall
modification is beneficial for the employees. The share-based payment expense for 20.16 due
to the modification (taking into account the incremental fair value and the remaining vesting
period) is R14 366 423.
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On 30 November 20.15, it was anticipated that the remaining 1 650 employees would still
be in service on 31 December 20.15. On 30 June 20.16 it was estimated that 98% of the
1 650 employees will still be in service at Packman until 31 December 20.16.
The fair value of the original share options (before modification) was determined as
follows:
1 January 20.14 R5 per option

30 June 20.14 R7,50 per option
30 June 20.15 R4,50 per option
30 September 20.15 R3,50 per option
30 November 20.15 R2 per option
The fair value of the share options at grant date reflects the effects of any market conditions
specified in the terms and conditions of the share options granted.
3. Leave benefits
The employees of Packman are entitled to 20 working days' non-vesting paid annual leave for
each completed year of service. Unused paid annual leave may be carried forward up to a
maximum of eight days. Paid annual leave is first taken from the current year's balance, and
then from the balance carried forward from the previous year (last-in, first-out-basis).
The leave pay accrual amounted to R10 500 000 on 30 June 20.15. The unused leave balance
for the year ended 30 June 20.15 amounted to three days per employee which is carried
forward to the 20.16 financial year. During the 20.16 financial year, 90% of the employees took
13 days paid annual leave and the remaining 10% took 23 days paid annual leave. The 350
employees that were retrenched, left Packman before taking their leave.
The average salary per employee for the year ended 30 June 20.17 will be R250 000. The
total employees in service on 1 July 20.15 were 2 000 employees. It is expected that 3% of the
employees will resign in the 20.17 financial year before taking their leave. The total working
days in a calendar year are 252 days.
4. Lease transaction
On 1 July 20.15 Packman leased a brick laying machine to Dusty Ltd. The details of the
lease were as follows:
Lease term 4 years

Lease payments R250 000
Unguaranteed residual value 50 000
Implicit interest rate 8,7574%
Selling price (same as its fair value) R850 000
Useful life 4 years
The lease payments are payable annually in arrears on 30 June. At the end of the lease
term, the machine will be returned to Packman Ltd.
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The amortisation in respect of the lease transaction has been correctly calculated as
follows:
Year Minimum Capital Interest Balance

lease payments repayment (8,7574%)
R R R R
01 July 20.15 850 000
30 June 20.16 250 000 175 562 74 438 674 438
30 June 20.17 250 000 190 937 59 063 483 501
30 June 20.18 250 000 207 658 42 342 275 843
30 June 20.19 250 000 225 843 24 157 50 000
30 June 20.19 50 000 - - -
Total 1 050 000 800 000 200 000
The financial accountant calculated the following balances at 30 June 20.16 using the above
amortisation table:
R
Gross investment in the lease 800 000
Net investment in the lease 674 438
Unearned finance income 125 562
At the end of 30 June 20.16 management revised the initial estimate of the unguaranteed
residual value to R30 000. The financial accountant has not adjusted the accounting records to
account for the new unguaranteed residual value.
MJM
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CASE STUDY 7
REQUIRED
QUESTION 1
Marks
(a) In respect of the shoe manufacturing division only, prepare the journal entries in 29
the accounting records of California Footwear Ltd for the year ended 30 June 20.16.
Please note:
• You are not required to prepare any journal entries regarding normal income
tax (current and deferred).
• You are not required to prepare the journal entries to account for the
depreciation/amortisation expense for the year ended 30 June 20.16.
• You are not required to prepare the journal entry to account for the finance
charge in respect of the dismantling provision for the year ended 30 June
20.16.
(b) Disclose the deferred tax in respect of the shoe manufacturing division only, that 12
should be included in the income tax expense note of California Footwear Ltd for
the year ended 30 June 20.16.
Please note:
• You are required to use the statement of financial position method when
calculating the movement in temporary differences.
• You are not required to disclose comparative figures.
• You are not required to disclose or calculate the current tax.
• You are not required to disclose the tax rate/expense reconciliation.
Please note:

• Ignore any Dividend Tax and Value Added Taxation (VAT) implications.
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QUESTION 2
REQUIRED
Marks
(a) Prepare the journal entries to account for the share-based payment transaction 16
(transaction 2) in the accounting records of Packman Ltd for the financial years
ended 30 June 20.15 and 20.16.
Please note:
(b) Disclose the share-based payment reserve in the statement of changes in equity of 3
Packman Ltd for the year ended 30 June 20.16.
Please note:
• The total column and comparative figures are not required.
(c) Disclose the staff benefits (excluding the share option scheme) in the profit before 5
tax note to the financial statements of Packman Ltd for the year ended
30 June 20.16.
Please note:
• Assume that all items and amounts are material.
(d) Discuss how the change in the unguaranteed residual value will impact the amounts 11
recognised in respect of the lease transaction for the year ended 30 June 20.16.
Support your discussion with calculations.
Please note:
• Your discussion should exclude the presentation and disclosure requirements.
• Ignore any normal income tax and Value Added Taxation (VAT) implications.
Please note:
MJM
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CASE STUDY 7
QUESTION 1
(a) Journal entries
Dr Cr
30 June 20.16 R R
J1 Provision for dismantling costs (SFP) [C1] 176 223 (3½)
Factory building (cost) (SFP) 176 223 (½)
Change in estimate of dismantling provision regarding
factory building at 30 June 20.16
J2 Restructuring expense (P/L) (given) 80 000 (1)
Restructuring provision (SFP) 80 000 (½)
Recognise restructuring provision on 30 June 20.16
J3 Cost of sales (P/L) [C2] 100 000 (2)
Inventory (SFP) 100 000 (½)
Hunters safety boots written down to net realisable
value on 30 June 20.16
J4 Impairment loss (P/L) [C4] 298 870 (8)
Accumulated depreciation and impairment losses: 298 870 (½)
Hunters machine (SFP)
Recognition of impairment loss on Hunters shoe range
on 30 June 20.16
J5 Impairment loss (P/L) [C5] 591 157 (8)
Goodwill (SFP) (given) 550 000 (1½)
Accumulated depreciation and impairment losses: 41 157 (3)
Factory building (SFP) [C5]
Recognition of impairment loss on shoe manufacturing
division on 30 June 20.16
Total (29)
(b) CALIFORNIA FOOTWEAR LTD
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20.16

R
Major components of tax expense:
Deferred tax
- Movement in temporary differences [C6] (1 271 475)
Total (12)
CALCULATIONS
C1. Change in provision for dismantling costs (IFRIC 1.5)

R
Balance on 30 June 20.16 based on old estimated costs
(PV = 250 000, N = 5, I = 12%, FV = ?) or (PV = 250 000, N = 20,
I = 12%, 1 input 5 amort = ?) 440 585 [1½]
Balance on 30 June 20.16 based on new estimated costs 264 362 [1½]
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(FV = 1 447 000, N = 15, I = 12%, PV = ?)
Balance 176 223
[3]
C2. Inventory written off to net realisable value on 30 June 20.16
R
Closing balance – 30 June 20.16 (given) 600 000 [½]
Net realisable value – 30 June 20.16 (500 000)
Inventory to be sold at R550 per pair in terms of the contract
(500 x R550) 275 000 [½]
Remaining pairs to be sold at R450 per pair (R450 x 500) 225 000 [½]
100 000
[1½]
C3. Value in use of Hunters shoe range – 30 June 20.16
R
PMT = (526 563 + 210 000 – 50 000), N = 3, I = 10%, PV = ? 1 707 380 [2½]
(IAS 36.43(b))
C4. Impairment loss on Hunters shoe range – 30 June 20.16
R
Carrying amount of Hunters shoe range – 30 June 20.16 2 506 250
Machinery (4 500 000/8 x 3) or (4 500 000 – (4 500 000/8 x 5)) 1 687 500 [1]
Patent (425 000 – (425 000/4)) or (425 000/4 x 3) 318 750 [1]
Inventory [C2] 500 000 [½]
Recoverable amount – higher of: 2 207 380 [½]

Value in use [C3] (1 707 380 + 500 000) 2 207 380 [2½]
Fair value less costs to sell 2 100 000 [1]
Impairment loss 298 870
Impairment loss allocation

Limit - machinery (IAS 36.105) (1 687 500 – 1 387 500 (given)) 300 000 [½]
Limit – patent (IAS 36.105)
(Fair value less costs to sell of R350 000 (given) exceeds carrying amount
of R318 750) - [½]
Impairment loss of R298 870 allocated to machinery
[7½]
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C5. Impairment loss on shoe manufacturing division – 30 June 20.16
R
Carrying amount - 30 June 20.16 8 844 295
Factory building (5 190 000 – (6 300 000 – 750 000)/20)) – 176 223 [C1]) 4 736 277 [2]
Hunters shoe range [C4] 2 207 380 [½]
Manolo shoe range
(1 900 000/4 x 3 = 1 425 000) + (360 000/4 x 3 = 270 000) 1 695 000 [2]
Goodwill (given) 550 000 [½]
Dismantling provision [C1] (264 362) [½]
Restructuring provision (given) (80 000) [½]
Recoverable amount – higher of: 8 253 138 [½]

Value in use 8 150 000 [½]
Fair value less costs to sell 8 253 138 [½]
Impairment loss allocation

Allocated to goodwill (IAS 36.105) 550 000 [1]
Hunters shoe range (already written off to value in use) [C6] - [½]
Manolo shoe range (carrying amount of 1 695 000 below recoverable
amount of 2 100 000) - [½]
Factory building (591 157 – 550 000) 41 157 [½]
Limit factory building (4 736 277 – 4 000 000) = 736 277 [1]
[11]
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C6. Calculation of deferred tax
Carrying Tax base Temporary Deferred

amount difference tax
(100%/ asset/
80%) (liability)
@ 28%
30 June 20.15 (2 171 854) [½]
30 June 20.16
1 9
Factory building 4 695 120 4 537 500 157 620 (44 134) [3]
2
Provision for dismantling (264 362) - (264 362) 74 021 [1]
costs
Machinery – Hunters shoe 3
1 388 630 10
- 1 388 630 (388 816) [1½]
range
Machinery – Manolo shoe 4
1 425 000 10
- 1 425 000 (399 000) [1]
range
Patents – Hunters shoe 5
318 750 11
- 318 750 (89 250) [1]
range
Patents – Manolo shoe 6
270 000 11
- 270 000 (75 600) [1]
range
7
Inventory 500 000 500 000 - - [1]
8
Restructuring provision (80 000) - (80 000) 22 400 [1]
3 215 638 (900 379)
Movement in temporary differences

12
(through P/L) 1 271 475 [1]
Total [12]
1
4 736 277 [C5] – 41 157 [C5]
2
[C1]
3
1 687 500 [C4] – 298 870 [C4]
4
[C5]
5
[C4]
6
[C5]
7
[C2]
8
Given
9
((6 300 000 – 250 000) – (6 050 000 x 5% x 5))
10
Purchased 1 July 20.11, for year ended 30 June 20.16 last 20% allowance will be claimed.
Thus, fully written off on 30 June 20.16.
11
Tax deduction was claimed during financial year ended 30 June 20.11
12
(900 379) – (2 171 854)
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QUESTION 2
(a) Journal entries

Dr Cr
R R
30 June 20.15
J1 Employee benefit expense (P/L) [C1] 11 250 000 (4½)
Share-based payment reserve (SCE) 11 250 000 (½)
Recognise share-based payment transaction
expense
30 September 20.15
Recognise accelerated expense due to the
cancellation
Retained earnings (SCE)
((350 x 3 000) x (5 - 3,50)) 1 575 000 (1½)
Share-based payment reserve (SCE) [C2] 5 250 000 (1)
Bank (R18 000 x 350) 6 300 000 (1)
Recognising payment for cancellation of share
scheme 1
30 June 20.16
Recognise share-based payment transaction
expense
Total (16)
(b) PACKMAN LTD

Share-
based
payment
reserve
R
Balance at 1 July 20.15 [C1] 18 450 000 (1)
Changes in equity 20.16
Equity settled share-based payment transaction
2 021 250 [J2] – 5 250 000 [J3] + 19 357 673 [J4] 16 128 923 (1½)
Transfer to:
Retained earnings [J3] (1 575 000) (½)
Balance at 30 June 20.16 33 003 923
Total (3)
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(c) PACKMAN LTD
18. Profit before tax note
The following information is included in profit before tax:

Employee benefit cost:
Termination benefits [C5] 7 500 000 (2)
Leave pay provision [C6] (932 143) (3)
6 567 857
Total (5)
(d) Lease transaction
COMMENT
In terms of IFRS 16.77 if there has been a reduction in the estimated unguaranteed
residual value, the allocation of the finance income over the lease term must be
revised and any reduction in respect of finance income must be recognised
immediately.
Packman Ltd has revised the unguaranteed residual value from R50 000 to R30 000 and,
therefore, should revise the allocation of finance income over the lease period. The interest
rate implicit in the lease is recalculated as 8% [C7]. (3)
On the date of change, Packman Ltd should recalculate the gross investment in lease
amount (i.e. aggregate of the minimum lease payments and the revised unguaranteed
residual value) as well as the revised net investment in lease (i.e. the present value of the
minimum lease payments and the revised unguaranteed residual value). The difference
between the amounts will indicate the revised unearned finance income amount. (1)
On 30 June 20.16 the recalculated gross investment in the lease is R780 000 (1 030 000
[C7] – 250 000 [C7]) and the net investment in the lease is R668 036 (820 000 [C7] –
181 964 [C7] + 30 000) resulting in the revised unearned finance income amount of
R111 964. (3)
The difference between these revised amounts and the existing amounts would determine
the adjustment that would need to be passed immediately by Packman Ltd. The adjustment
would be as follows:
• The finance income earned will be reduced (debited) during the current year with an
amount of R6 402 (74 438 – 68 036 [C7]). (1½)
• The unearned finance income will be reduced (debited) by the change in its carrying
amount of R13 598 (125 562 – 111 964 [C7]). (1½)
• The gross investment in lease will be reduced (credited) by R20 000 which is the
absolute amount of the unguaranteed residual value foregone. (1)
Total (11)
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CALCULATIONS
C1. Share-based payment expense for 30 June 20.15
R
20.15: 2 000 x 3 000 x 82% x R5 x 18/24 = 18 450 000 [2½]
20.14: 2 000 x 3 000 x 96% x R5 x 6/24 = (7 200 000) [1½]
(11 250 000)
[4]
C2. Share-based payment expense for cancelled options
30 September 20.15: 350 x 3 000 x R5 = 5 250 000 [1]

30 June 20.15: 18 450 000 [C1]/2 000 x 350 = (3 228 750) [1]
(2 021 250)
[2]
C3. Additional share-based payment expense
Fair value of share option paid to employees

18 000/3 000 6,0 [½]
Fair value of share option at 30 September 20.15 (given) (3,5) [½]
2,5
Additional expense 350 x 3 000 x 2,5 R2 625 000
[1]
C4. Share-based payment expense for 30 June 20.16
Original 1 650 x 98% x 3 000 x R5 x 30/36 = 20 212 500 [2]

Modification 14 366 423
34 578 923
Previous estimate 18 450 000 [C1] – 3 228 750 [C2] (15 221 250)
19 357 673
[2]
C5. Movement in termination benefit liablity
Opening balance 1 July 20.15 – 360 x 750 000 270 000 000 [1]
Paid out on 15 October 20.15 – 350 x 750 000 (262 500 000) [1]
7 500 000
[2]
C6. Movement in leave provision
Opening balance – 30 June 20.15 (given) 10 500 000 [½]

Closing balance – 30 June 20.16
((8* x ((250 000) / 252) x (1 485 x 97%)) 11 432 143 [2½]
932 143
[3]
*Balance of leave days carried forward to 20.16

Number of employees 2 000 – 350 = 1 650
0,90 x 1 650 = 1 485 employees [½]
3 + 20 – 13 = 10 days limited to 8 days carried forward [1]
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C7. Lease transaction
PV -850 000 [½]

N 4 [½]
FV 30 000 [½]
PMT 250 000 [½]
COMP I 8% [2]
Year Minimum Capital Interest Balance

lease repayment (8%)
payments
R R R R
01 July 20.15 850 000
30 June 20.16 250 000 181 964 68 036 668 036 [½]
30 June 20.17 250 000 196 528 53 472 471 508
30 June 20.18 250 000 212 259 37 741 259 249
30 June 20.19 250 000 229 249 20 751 30 000
30 June 20.19 30 000 - - - [½]
Total 1 030 000 820 000 180 000
R
Gross investment in the lease 780 000 [½]
Net investment in the lease 668 036 [½]
Unearned finance income 111 964 [½]
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QUESTION 1 30 marks
Ignore any Value Added Taxation (VAT) implications.
Leicester Ltd (Leicester) is a company listed on the Johannesburg Stock Exchange that provides air
transport services for traveling passengers and freight. The end of the reporting period of Leicester is
30 June 20.16.
1. Passenger aircraft operation
Leicester operates both passenger and freight aircraft. The passenger and freight aircraft are
operated as separate major lines of business, each with its own financial records and
managers.
On 5 July 20.15, a formal decision was taken at a shareholders' meeting of Leicester to

dispose of the passenger aircraft operation in a single transaction. Leicester decided to focus
on the freight aircraft business since it is more profitable. On 5 July 20.15, the financial director
and senior managers commenced with the documentation of a formal detail plan for the
discontinuance of the passenger aircraft operation. A public announcement explaining the
company's plans and actions regarding the passenger aircraft operations was made on
31 August 20.15.
On 1 September 20.15, Totham Ltd (Totham) indicated that they are interested to acquire the
passenger aircraft operations from Leicester. On this date the passenger aircraft operations
complied with all the requirements of IFRS 5 Non-current Assets held for Sale and
Discontinued Operations to be classified as a disposal group. From 1 September 20.15, all
business activities of the passenger aircraft operation will be suspended.
On 1 September 20.15, the fair value less cost to sell of the disposal group amounted to
R14 700 000. The sale transaction with Totham is expected to be finalised on 31 July 20.16, at
which date Totham will take ownership of the disposal group.
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On 1 September 20.15, the relevant correct information regarding the assets and liabilities of
the passenger aircraft disposal group of Leicester was as follows:
Accumulated
depreciation Carrying amount
Cost price
on 1 September 20.15
30 June 20.15
R R R
Passenger aircraft 30 000 000 16 500 000 11 750 000
Transport buses 1 800 000 1 260 000 480 000
Investment property
- at fair value 1 200 000 - 2 500 000
Inventory
- (net realisable value on
1 September 2015 R800 000) 720 000 - 720 000
Trade receivables - - 600 000
Trade payables - - (550 000)
Passenger aircraft and transport buses are subsequently measured according to the cost
model. Depreciation is accounted for according to the straight-line method over the useful lives
of the assets.
The passenger aircraft was acquired at a cost of R30 000 000 and available for use for the first
time on 1 July 20.4. The aircraft has a useful life of 20 years with no residual value.
Transport buses (purchased on 1 January 20.12 and was immediately available for use) are
depreciated over five years and have no residual values.
The investment property was acquired on 1 July 20.14 at a fair value of R1 200 000.
Investment property is accounted for according to the fair value model. On 30 June 20.15, the
investment property had a fair value of R1 800 000.
During the final stages of the negotiations with Totham, Leicester decided to withdraw the
transport buses from the disposal group, since Totham was not longer interested in acquiring
the buses. Leicester will be able to utilise the transport buses in the freight aircraft operations.
On 30 November 20.15, the transport buses were officially withdrawn from the disposal group
and from that date it was used to transport employees of the freight aircraft operations. The
remaining assets and liabilities of the disposal group still met the criteria to quality as held for
sale (IFRS 5.6-12).
The recoverable amount of the transport buses amounted to R360 000 on 30 November 2015.
2. Contract with advertising company
Leicester has a legal agreement with an advertising company to advertise their passenger
airline on a bill-board close to the airport.
According to the contract, Leicester will pay R200 000 per month for the duration of the
contract which will expire on 31 December 20.16. The agreement between Leicester and the
advertising company cannot be terminated and the monthly payments will have to be made at
the end of each month irrespective of the disposal or termination of the passenger aircraft
operation.
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3. Investment in unlisted bonds
On 1 February 20.16, Leicester purchased 1 000 unlisted bonds in Sunderland Ltd at

R4 900 000. The objective of Leicester's business model with regards to the investment in
bonds is achieved by both collecting contractual cash flows and selling the bonds. Therefore
both collecting contractual cash flows and selling the bonds are integral to achieving the
objective of the business model. Leicester also had to pay transaction costs related to the
investment in bonds on 1 February 20.16. Leicester was able to buy the bonds at a discount
due to the excellent negotiation skills of Leicester's financial manager. The bonds mature on
31 January 20.19 and will be redeemed at face value.
The bonds were not credit impaired at acquisition or at any other date thereafter and you may
assume that the allowance for expected credit losses relating to the bonds amounted to
R50 000 on 30 June 20.16. Leicester did not designate these bonds into any specific category
in terms of IFRS 9 Financial Instruments .
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QUESTION 2 55 marks
North Compass Freight Services Ltd (NCFS) is a leader in the South African shipping and logistic
industry. The company transports goods to all parts of the world. NCFS owns a warehouse in
Johannesburg that facilitates the storage of its shipping containers. NCFS transports customers’
goods in NCFS containers by road, air or sea. NCFS was founded back in August 19.80 by
Frederic Johnson and has grown from a small shipping company into a major freight and logistic
business in South Africa.
The financial accountant of NCFS was dismissed during December 20.14 due to misconduct. While
the financial director of NCFS was preparing the financial statements she realised that some of the
financial reports were not yet prepared by the financial accountant and were incomplete. You were
requested to assist in finalising the financial statements of NCFS for the year ended
31 December 20.14.
The following matters for the year ended 31 December 20.14 must still be accounted for:
1. Property
NCFS owns a warehouse and an office building. The warehouse facilitates the storage of the
shipping containers of NCFS and also provides office space to NCFS employees. On
acquisition date of the warehouse the useful life was estimated as 22 years and the residual
value deemed negligible. The estimated residual value and the useful life remained unchanged
from the acquisition date. The warehouse qualifies for a tax allowance of 5% per annum (not
apportioned for a part of a year) on the cost of the warehouse in terms of section 13quin of the
Income Tax Act.
The office building was used as the head office of NCFS from acquisition date of the building
until 31 March 20.14. On acquisition date of the office building the useful life was estimated as
25 years and the residual value deemed negligible. Due to the demand for property in the area
NCFS decided to lease its office building to another company. The operating lease agreement
with the company commenced on 1 April 20.14. The fair value of the office building on
1 April 20.14 is R5 200 000. On 31 March 20.14 the employees of NCFS moved from the office
building to the warehouse where additional office space was made available. The building has
never been impaired in terms of IAS 36 Impairment of Assets. The estimated residual value
and the useful life remained unchanged from acquisition date. The office building does not
qualify for any tax allowances.
Warehouse Office building

Acquisition date 1 January 19.95 30 June 19.96
Total acquisition cost R2 000 000 R1 200 000
Fair value on 31 December 20.13 R8 460 000 R4 950 000
Fair value on 31 December 20.14 R9 000 000 R5 500 000
Tax base on 31 December 20.13 R100 000 -
The warehouse and office building are measured in accordance with the cost model of IAS 16
Property, Plant and Equipment. Depreciation for the year on the warehouse and office building
is provided for on the straight-line method over the asset’s remaining useful life.
Investment property is measured in accordance with the fair value model of IAS 40
Investment Property.
MJM
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2. Shipping containers
NCFS is expanding its services to the rest of Africa. This led to an increase in demand for
shipping services and consequently NCFS requires more shipping containers for the storage
and transport of customers’ goods. NCFS decided to purchase new shipping containers from a
supplier in England. On 30 June 20.14 NCFS placed a non-cancellable order for 80 shipping
containers from its supplier in England for a total amount of £320 000. Due to NCFS’ exposure
to foreign exchange currency risk on this order, NCFS entered into a five-month forward
exchange contract (FEC) at a forward rate of £1 = R17,10 for the full amount payable. NCFS
entered into the FEC on the same date the order was placed. NCFS obtained control of the
shipping containers on 31 August 20.14. On this date NCFS paid £8 000 to a freight company
in England for the shipping of the containers. The shipping containers arrived in Cape Town
harbour on 31 October 20.14. The purchase price was settled with the supplier in England on
30 November 20.14. The shipping containers were ready for use as intended by management
on 1 December 20.14.
The following exchange rates are applicable:
Spot rate Forward rate

£1 = R £1 = R
30 June 20.14 16,90 17,10 (5 month FEC)
31 July 20.14 17,00 17,30 (4 month FEC)
31 August 20.14 17,25 17,28 (3 month FEC)
30 September 20.14 17,30 17,32 (2 month FEC)
31 October 20.14 17,34 17,40 (1 month FEC)
30 November 20.14 17,38 n/a
The accounting policy of NCFS is not to do hedge accounting. The South African Revenue
Service (SARS) accepts the accounting treatment of remeasurement gains or losses on FECs
and foreign creditors for tax purposes.
The shipping containers are accounted for in accordance with the cost model of IAS 16
Property, Plant and Equipment. Depreciation on the shipping containers is provided for on the
straight-line method over the shipping containers’ useful life of 12 years. The residual value is
deemed negligible.
The shipping containers included in the financial records of NCFS on 1 January 20.14 were all
purchased on 1 March 20.5 at a total cost of R6 745 000. The SARS allows a write-off period
of 10 years on the containers in terms of Interpretation Note 47 (not apportioned for a part of
the year). Assume that the SARS accepts the total cost of the shipping containers as
recognised in the financial records of NCFS as the value on which the tax allowance is based.
3. Investment in shares
NCFS owns an extensive investment portfolio in equity instruments that is managed by a

reputable asset management company. The purpose of this investment portfolio is to achieve
long term capital growth on the portfolio. The total fair value gain on the investment portfolio
held by NCFS amounted to R180 000 for the year ended 31 December 20.14. NCFS acquired
this investment portfolio on 15 July 20.14 at a cost of R5 800 000. NCFS’s accounting policy is
to present subsequent changes in the fair value of investments in equity instruments in other
comprehensive income in accordance with IFRS 9.5.7.5. During 20.14 NCFS received
dividends of R290 000 on its investment portfolio in equity instruments.
MJM
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4. Investment in debentures
On 1 January 20.13 NCFS acquired 400 000 debentures issued by New Gold Ltd, a public
company in South Africa. New Gold Ltd debentures are securities backed by gold bullion and
are listed on the Johannesburg Stock Exchange. The investment in debentures is held by
NCFS within a business model of which the objective is to collect contractual cash flows and
when an opportunity arises it will sell the bonds to re-invest the cash in other investments with
higher returns. In other words, both collecting contractual cash flows and selling the
debentures are integral to achieving the business model’s objective.
NCFS acquired the 400 000 debentures at its total fair value of R5 750 124 on
1 January 20.13. A coupon rate of 6% per annum is payable in arrears on 30 June and
31 December. The debentures mature on 31 December 20.15 at a face value of R6 000 000.
On 1 January 20.13 the market-related interest rate for similar listed debentures was 7,578%
per annum. The fair value of the investment in debentures amounted to R5 830 000 and
R5 920 000 on 31 December 20.13 and 31 December 20.14 respectively.
Management estimated the 12-month loss allowance for expected credit losses on initial
recognition of the debentures at an amount of R320 000. There was no significant increase in
the credit risk of the debentures since initial recognition and therefore management estimated
the 12-month loss allowance for expected credit losses on the debentures at R85 000 and
R100 000 on 31 December 20.13 and 31 December 20.14 respectively.
Assume that the SARS accepts the amortised cost of the debentures as the tax base of the
debentures. The SARS does not allow expected credit losses on the listed debentures as a
deduction for tax purposes. NCFS received a tax directive from SARS indicating that any
future taxable profits on the debentures will be taxed at 28%.
5. Insurance
NCFS obtained an insurance contract for the transport of its customers’ goods on 1 May 20.13.
The insurance premium is payable annually in advance to the insurer. The insurance contract
renews on 1 May annually. The premium paid on 1 May 20.14 amounted to R675 000. This
amount has not yet been accounted for in the financial statements for the financial year ended
31 December 20.14. On further inspection of the financial records you also noted that the total
insurance premium of R630 000 paid on 1 May 20.13 was included in other expenses in the
statement of profit or loss and other comprehensive income for the year ended
31 December 20.13. SARS allows the total insurance premium paid as a deduction in the year
it is paid in terms of section 23H of the Income Tax Act. Since the SARS allowed the total
20.13 insurance premium of R630 000 as a deduction in the 20.13 financial year it is not
necessary for the 20.13 tax assessment to be re-opened.
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6. Assessed loss
A new entrant into the logistic market during 20.13 negatively affected the profits of NCFS for
the year ended 31 December 20.13. On 31 December 20.13 NCFS had an accumulated tax
loss of R780 200 and at that date indications were that the company would not make taxable
profits in the foreseeable future. NCFS however adjusted its business strategy during 20.14
and was able to obtain a number of new clients. This improved its prospects to such an extent
that NCFS made a profit for the financial year ended 31 December 20.14 (see matter 7 below).
7. Profit before tax
The profit before tax for NCFS for the year ended 31 December 20.14, before the matters
above were taken into account, amounted to R21 500 000.
- The directors of NCFS decided to early adopt IFRS 9 Financial Instruments with effect from
1 January 20.13.
- The normal income tax rate is 28% and the capital gains tax inclusion rate is 80%.
- The only temporary differences are those that are apparent from the information provided
above.
- Assume all amounts are material.
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CASE STUDY 8
REQUIRED
QUESTION 1
REQUIRED
Marks
(a) Provide the journal entries in the financial records of Leicester Ltd to account for: 15
(i) the classification of the disposal group as assets held for sale in terms of
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations on
1 September 20.15; and
(ii) the withdrawal of the transport buses from the disposal group on
30 November 20.15.
Please note:
• Journal narrations are required.
• Ignore any normal income tax (current and deferred) implications.
Communication skills: Presentation and layout 1
(b) (i) Discuss whether the agreement between Leicester Ltd and the advertising 4
company will be an onerous contract in the financial statements for the year
ended 30 June 20.16, in terms of IAS 37 Provisions, Contingent Liabilities and
Contingent Assets.
(ii) Assuming that the time value of money is material and that the contract with 4
the advertising company is an onerous contract, briefly discuss the following
discount rates and which should be applied to determine the present value of
the contract:
(a) General inflation rate.

(b) Incremental borrowing rate of the entity.
(c) Weighted average cost of capital of the entity.
Communication skills: Logical argument 1

Please note:
• Your answer should not include any calculations.
(c) Discuss, with reasons, the amount at which the financial asset should be measured 4
at, at initial recognition, in the financial records of Leicester Ltd.
Please note:
• Your answer should not include any calculations.
• Ignore any normal income tax (current and deferred) implications.
Please note:
• Assume that all items and amounts are material.

• Round of all amounts to the nearest Rand.
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QUESTION 2
Marks
(a) Prepare the journal entries to account for all matters relating to the shipping 12
containers in matter 2, in the financial statements of North Compass Freight
Services Ltd for the year ended 31 December 20.14.
Please note:
• Ignore journal narrations but include journal dates.
• Ignore the time value of money.
(b) Prepare the journal entries to be processed on 1 January 20.14 to correct the error 3
in matter 5, including the deferred tax implications thereof, in the accounting records
of North Compass Freight Services Ltd for the year ended 31 December 20.14.
(c) Calculate the profit before tax figure, after taking into account matters 1 to 5, as it 13
should appear in the statement of profit or loss and other comprehensive income of
North Compass Freight Services Ltd for the year ended 31 December 20.14.
(d) Prepare an extract of the other comprehensive income section of the statement of 8
profit or loss and other comprehensive income of
North Compass Freight Services Ltd for year ended 31 December 20.14. You must
present items of other comprehensive income according to IAS 1.91(b) (items are
presented before the related tax effects, with one amount for the total amount of
income tax relating to those items). Comparative figures and notes are not required.
Communications skills: Presentation and layout 2
(e) Disclose the income tax expense note in terms of IAS 12.80 and IAS 12.81(c)(i) to 15
the financial statements of North Compass Freight Services Ltd for the year ended
31 December 20.14. Comparative figures are not required.
Please note:
• Ignore any Value Added Taxation (VAT).

• Round all amounts off to the nearest Rand.
MJM
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CASE STUDY 8
QUESTION 1
Abbreviations
DAHFS = Disposal group assets held for sale
Acc dep = Accumulated depreciation
(a) Journals
Dr Cr
R R
1 September 20.15
(i) J1 DAHFS (balance) (SFP) 16 050 000 (½)
Cost – Passenger aircraft (SFP) 30 000 000 (½)
Cost - Transport buses (SFP) 1 800 000 (½)
Acc dep – Passenger aircraft (SFP)
(30 000 000 – 11 750 000) 18 250 000 (½)
Acc dep - Transport buses (SFP)
(1 800 000 – 480 000) 1 320 000 (½)
Investment Property (SFP) 2 500 000 (½)
Inventory (SFP) 720 000 (½)
Trade receivables (SFP) 600 000 (½)
Reclassify assets to non-current assets held for sale
J2 Trade payables (SFP) 550 000 (½)
Liabilities associated with disposal group (SFP) 550 000 (½)
Reclassify liabilities as non-current assets held for
sale
J3 Impairment loss (P/L)[C1]) 800 000 (2)
DAHFS – Passenger aircraft (SFP) [C1] 768 602 (1)
DAHFS – Transport buses (SFP) [C1] 31 398 (1)
Allocation of impairment loss on disposal group after
reclassification
30 November 20.15
(ii) J1 Adjustment to transport buses (P/L) [C2] 88 602 (4)
DAHFS – Transport buses (SFP) 88 602 (½)
Adjustment to the carrying amount of DAHFS due to
the transport buses which cease to be classified as an
asset held for sale.
J2 Transport buses (SFP) 360 000 (1)
DAHFS – Transport buses (SFP) 360 000 (½)
Vehicle put into use in the freight aircraft operation
Total (15)
CALCULATIONS
C1. Impairment loss

R
Assets held for sale in disposal group [J1] 16 050 000 [½]
Liability associated with disposal group (550 000) [½]
Carrying amount of disposal group 15 500 000
Fair value less cost to sell (14 700 000) [½]
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Allocation of impairment loss: R

Passenger aircraft (800 000 x (11 750 000/12 230 000 1)) 768 602 [½]
Transport buses (800 000 x (480 000/12 230 000)) 31 398 [½]
[2½]
1
11 750 000 + 480 000 = 12 230 000
C2. Adjustment to transport buses
Reclassify at lower of: R
Recoverable amount (given) 360 000
What the carrying amount would have been if the transport buses
had not been classified as held for sale
[480 000 - (1 800 000/5 x 3/12)] or [2]
[1 800 000 – 1 260 000 – (1 800 000/5 x 5/12)] 390 000
Difference between:
Carrying amount (480 000 - 31 398 [C1]) 448 602 [1]
Recoverable amount (lower) 360 000 [½]
88 602
[3½]
(b) (i) Onerous contract
IAS 37:68 defines an onerous contract as a contract in which the unavoidable

costs of meeting the obligations under the contract exceed the economic benefits
expected to be received under it.
The unavoidable costs under a contract reflect the least net cost of exiting from
the contract, which is the lower of the cost of fulfilling it and any compensation or
penalties arising from failure to fulfil it (IFRS 37.68).
Application
Since the contract cannot be terminated, the monthly payments payable to the
advertising company will remain payable from 1 September 20.15 until the
contract expires on 31 December 20.16 even though the passenger aircraft
operations have been suspended from 1 September 20.15. This will be the
unavoidable cost to meet the obligation under the contract, since there is no
compensation or penalty which will arise from failure to fulfill the contract. (3)
The least net cost of fulfilling the contract is R800 000 (R200 000 x 4) for the
period 1 September 20.15 to 31 December 20.15 and will exceed the economic
benefits expected to be received by Leicester under it. No economic benefits will
be received by Leicester due to the fact that all business activities of the
passenger aircraft operation will be suspended from 1 September 20.15. (2)
Conclusion
The agreement with the advertising company is an onerous contract. Therefore a
liability exists that have to be recognised in the records of Leicester for the year
ended 30 June 2016. (1)
Total (6)
Maximum (4)
MJM
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(ii) Discount rate
The discount rate which should be applied to the obligation where the time value
of money is material shall be a pre-tax rate that reflects current market
assessments of the time value of money and the risks specific to the liability
(IAS 37.47).
The discount rate does not reflect risks for which future cash flow estimates have
been adjusted (not relevant as the future cash flows are contractually fixed and
cannot be adjusted). (1)
The company’s weighted average cost of capital would not be appropriate as

it incorporates equity as well (not specific to a liability only). (1)
A general inflation rate can also not be used since it represents a general rate
of increases in prices and is not specific to the liability, which is being (1)
measured.
Conclusion
Thus, the company’s incremental borrowing rate should be used as the
discount rate since it reflects the market assessment (the bank’s view of
company’s credit risk) of time value of money and is specific to a liability
(borrowing money to settle an obligation). (1½)
Total (4½)
Maximum (4)
(c) Fair value measurement
The investment in bonds is classified as debt intruments measured at fair value

throught other comprehensive income (OCI). The investment in bonds will be
measured at initial recognition at their fair value plus, transaction cost (IFRS 9.5.11). (1)
The best evidence of the fair value of a financial instrument at initial recognition is
normally the transaction price. If an entity determines that the fair value at initial
recognition differs from the transaction price, the instrument should be measured at
fair value if fair value is evidenced by a quoted price in an active market for an
identical asset or based on a valuation technique that uses only data from
observable markets. (2)
It is mentioned that Leicester paid less than the market price due to the excellent
negotiation skills of Leicester’s financial manager. The bonds should therefore be
measured at fair value and not the transaction price. (1)
Since the bonds are not listed, there will not be any quoted prices in an active
market for an identical asset, but the fair value can be determined with a valuation
technique which uses observable inputs only, namely market rates and cash
flows. (2)
Total (6)
Maximum (4)
MJM
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QUESTION 2 - Suggested solution
(a) Journal entries

Dr Cr
R R
31 August 20.14
J1* Shipping containers (SFP) (£320 000 x 17,25) 5 520 000 (1)
Creditor (SFP) 5 520 000 (½)
Recognise containers at spot rate on transaction date
J2* Shipping containers (SFP) (£8 000 x 17,25) 138 000 (1½)
Bank (SFP) 138 000 (½)
Recognise transport costs as part of the cost of the
shipping containers.
30 November 20.14
J3 Foreign exchange loss (P/L)
(£320 000 x (17,38 – 17,25)) 41 600 (1½)
Creditor (SFP) 41 600 (½)
Remeasure creditor to spot rate on settlement date
(loss)
J4 Creditor (SFP)
(£320 000 x 17,38) or (41 600[J3] + 5 520 000[J1]) 5 561 600 (1)
Foreign exchange gain (P/L) 89 600 (1)
Bank (SFP) (£320 000 x 17,10) 5 472 000 (1)
Derecognition of FEC and payment of creditor
J5 31 December 20.14
Depreciation (P/L) [C1] 601 375 (3)
Accumulated depreciation: shipping containers (SFP) 601 375 (½)
Recognise depreciation on shipping containers ___
Total (12)
* Journal 1 and Journal 2 may be presented as one journal (total marks: 3½).
MJM
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(b) Journal entries

Dr Cr
R R
1 January 20.14
J1 Prepaid expenses (SFP) (630 000 x 4/12) 210 000 (1)
Retained earnings (SCE) 210 000 (½)
Recognise an asset for prepaid expenditure incorrectly
included in other expenses
J2 Retained earnings (SCE) 58 800 (½)
Deferred tax liability (SFP) (210 000 x 28%) 58 800 (1)
Recognise deffered tax on correction of prepaid __
insurance (3)
Alternative journal
J1 Prepaid expenses (SFP) (630 000 x 4/12) 210 000 (1)
Retained earnings (SCE) (balancing) 151 200 (1)
Deferred tax liability (SFP) (210 000 x 28%) 58 800 (1)
Recognise an asset for prepaid expenditure incorrectly
included in other expenses __
(3)
(c) Calculation of profit before tax

R
Profit before tax (given) 21 500 000 (½)
Adjustments:
Matter 1
Depreciation: warehouse [C2] (90 909) (1)
Depreciation: office building [C3] (12 000) (1)
Fair value gain on investment property [C3] or [5 500 000 – 5 200 000] 300 000 (1)
Matter 2
Foreign exchange loss [part a J3] (41 600) (½)
Foreign exchange gain 89 600 (½)
Depreciation: shipping containers [part aJ5] or [C1] 601 375 (½)
Matter 4
Interest income: debentures [C6] 443 139 (4)
Impairment loss: debentures (100 000 – 85 000) (15 000) (1)
Matter 5
20.14 Insurance premium (675 000 x 8/12) (450 000) (1)
20.13 Insurance premium (630 000 x 4/12) (210 000) (1)
Matter 3
Dividends received (given) 290 000 (1)
Profit before tax 21 201 855 ___
Total (13)
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(d) EXTRACT FROM THE STATEMENT OF PROFIT OR LOSS AND OTHER COMPRENSIVE
INCOME FOR NORTH COMPASS FREIGHT SERVICES LTD FOR THE YEAR ENDED
31 DECEMBER 20.14
20.14
Other comprehensive income R
Items that will not be reclassified to profit or loss
Gain on revaluation of office building [C3] 4 852 000 (1)
Fair value adjustment on investment in equity instrument (given) 180 000 (½)
Income tax relating to items that will not be reclassified
((4 852 000 – 1 652 000 [C3] + 144 000 [C5]) x 28%) (936 320) (2)
4 095 680
Items that will be reclassified to profit or loss
Loss allowance on debentures accumulated in equity (IFRS 9.5.5.2)
(100 000 – 85 000)) 15 000 (1)
Fair value gain on investment in debentures [C6] 6 861 (3)
Income tax relating to items that will be reclassified (6 861 x 28%) (1 921) (½)
19 940
Other comprehensive income for the year, net of tax 4 115 620
Total (8)
Communications skills: Presentation and layout (2)
(e) NORTH COMPASS FREIGHT SERVICES (PTY) LTD

NOTES TO THE FINANCIAL STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20.14
20.14
Major component of tax expense
R
SA normal tax
Current tax
- Current year [C8] 5 376 392 (10)
Deferred tax
- Movement in temporary differences (1)
[(897 256 [C8] x 28%)] 251 231
- Unused tax loss utilised (780 200 (given) x 28%) 218 456 (1)
5 846 079
Tax rate reconciliation
Accounting profit (part c) 21 201 855 (½)
Tax at 28% 5 936 519 (½)
Tax effect of:

Depreciation: office building (12 000[C8] x 28%) 3 360 (½)
Fair value adjustment of investment property (60 000[C8] x 28%) (16 800) (½)
Impairment loss on listed bonds (15 000[C8] x 28%] 4 200 (½)
Dividends received (290 000 x 28%) (81 200) (½)
Income tax expense 5 846 079
Total (15)
Communications skills: Presentation and layout (2)
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CALCULATIONS
C1. Depreciation of shipping containers R

“Old” shipping containers (6 745 000/12) 562 083 [½]
“New” shipping containers
- Cost (5 520 000[ part a J1] + 138 000[part a J2]) = 5 658 000 [1]
- Depreciation 5 658 000/12 x 1/12 39 292 [1]
601 375
[2½]
C2. Warehouse
Temporary
Carrying
Tax base difference
amount
at 100%
R R R
Carrying amount 31/12/20.13
(2 000 000/22 x 3) 272 727 100 000 172 727
Depreciation (2 000 000/22) (90 909) **(100 000) 9 091 [1]
Carrying amount 31/12/20.14 181 818 - 181 818
[1]
*Remaining useful life

Original useful life 22
1 January 1995 – 31 December 20.13 (19)
Remaining useful life on 31 December 20.13 3
**2 000 000 x 5% = 100 000
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C3. Office building transferred to investment property
Carrying amount Temporary

Tax base difference
Cost at 100%
Total Revaluation
(exempt)
R R R R R
Carrying amount 31/12/20.13 360 000 **360 000 - - -

Depreciation (12 000) ***(12 000) - - - [1]
348 000 348 000 - - -
Revaluation (OCI)
(5 200 000 – 348 000) 4 852 000 4 852 000 - 4 852 000
Carrying amount
1 April 201.4 5 200 000 348 000 4 852 000 4 852 000
Temporary
difference
at 80%
Correction of deferred tax
(balancing) (4 852 000 –
3 200 000) (1 652 000)
Investment property at
80% 5 200 000 348 000 4 852 000 1 200 000 3 200 000a
Fair value (P/L)
(5 200 000 – 5 500 000) 300 000 300 000 - 240 000 [1]
5 500 000 348 000 5 152 000 1 200 000 3 440 000
a
(5 200 000 – 1 200 000) x 80% = 3 200 000

Original useful life 25,0
30 June 19.96 – 31 December 20.13 17,5
Remaining useful life 31 December 20.13 7,5
** 1 200 000 x 90*/300 = 360 000

*** 1 200 000/25 x 3/12 = 12 000
C4. Shipping containers

Temporary
Carrying
Tax base difference
amount
at 100%
R R R
(6 745 000/*144 x 38) 1 779 930 **674 500 1 105 430
Additions [C1] 5 600 400 5 600 400 -
Depreciation/tax allowance (601 375) ***(1 234 540) 633 165 [2]
Carrying amount 31/12/2.014 6 778 955 5 040 360 1 738 595
Taxable temporary difference P/L for 20.14 R633 565 [2]
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Original useful life (12 years x 12 months) 144 months
1 March 20.5 – 31 December 20.13 ((8 years x 12 months) + 10 months) 106 months
Remaining useful life 31 December 20.13 38 months
**6 745 000/10 x 1 = 674 500
***(5 600 400 + 6 745 000)/10 = 1 234 540
C5. Investment in equity instruments
Temporary
Carrying difference
Tax base
amount at 80%
R R R
Carrying amount 31/12/20.13 - - -
Additions (given) 5 800 000 5 800 000 -
Mark to market reserve (OCI) 180 000 - 144 000 [1½]
Carrying amount 31/12/20.14 5 980 000 5 800 000 144 000
Taxable temporary difference OCI for 20.14 144 000 [1½]
C6. Investment in debentures
R
Fair value 1/1/20.14 (given) 5 830 000 [½]
Effective interest 30/06/20.14 (5 827 303* x 7,578% x 6/12) or AMORT 220 797 [3]
Coupon interest 30/06/20.14 (6 000 000 x 6% x 6/12) (180 000) [½]
Carrying amount 30/6/20.14 5 870 797
Effective interest 31/12/20.14 (5 868 100** x 7,578% x 6/12) or AMORT 222 342 [1]
Coupon interest 31/12/20.14 (6 000 000 x 6% x 6/12) (180 000) [½]
Carrying amount 31/12/20.14 5 913 139
Fair value 31 December 20.14 (given) 5 920 000 [½]

Fair value gain (OCI) 6 861
Total interest income for 20.14 (220 797 + 222 342) 443 139
[6]
*Amortised balance at 01/01/20.14 [½]

FV = 6 000 000 [½]
I = 7,578%/2 = 3,789%
N=2x2=4 [½]
PMT = 6 000 000 x 6% x 6/12 = 180 000 [½]
PV = 5 827 303
**AMORT 1 = 5 868 100
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C7. Prepaid expenses

Temporary
Carrying
Tax base difference
amount
at 100%
R R R
Prepaid insurance 31/12/20.13 (630 000 x 4/12) 210 000 - 210 000 [½]
Prepaid insurance 31/12/20.14 (675 000 x 4/12) 225 000 - 225 000 [½]
Taxable temporary difference P/L for 20.14 - 15 000 [1]
C8. Income tax calculation R
Profit before tax (Part c) 21 201 855 [½]

Non-taxable/non-deductible items
Depreciation: office building (1 200 000/25 x 3½) 12 000 [1½]
Fair value adjustment: investment property
(300 000[C3] x 20%) (60 000) [1]
Impairment loss on listed bonds (part c) 15 000 [½]
Dividends received (290 000) [½]
Movement in temporary differences
(-9 091[C2] – 240 000[C3] – 663 165[C4] - 15 000[C7]) (897 256) [5]
Taxable profit before unused tax loss 19 981 099
Unused tax loss of prior year (given) (780 200) [½]
Taxable profit 19 201 399
Current tax @ 28% 5 376 392 [½]
[10]
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QUESTION 1 13 marks
Thusa Advisory Inc (Thusa) is an accounting advisory firm operating from Mahikeng. One of the
partners of the firm sent the following email relating to a client of Thusa.
From: Gopolong, Tsiego

Sent: 28 June 20.15 07:26 AM
To: traineeaccountant@thusa.co.za
Cc: technicaldivision@thusa.co.za
Subject: Accounting issues
Trainee Accountant
Kindly refer to the below:
Client A: Intangible asset
Client A is in the music industry and has obtained the copyright to distribute the music of a
well-known musician. The agreement allows the client to record the musician for a period of three
years. During the first three-month period of the agreement, the musician was sick and unable to do
any recordings. The studio time that was booked by the client had to be paid even during the period
when the musician was sick and unable to do any recordings. The following costs were incurred by
the client:
R
Legal costs of acquiring the copyrights 20 000 000
Studio time lost during start-up period (first three months) 3 000 000
Studio time (nine months) 9 500 000
Advertising campaign to launch new recordings of musician 1 500 000
Due to the success of the release of the new recordings of the musician, the client is of the opinion
that the value of the copyright to the musician’s music increased significantly during the last six
months. The client estimated the value of the copyrights at R42 million.
Thank you and regards,
Tsiego Gopolong
Senior Partner
Thusa Advisory Inc
MJM
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QUESTION 2 60 marks
Colourlux Ltd (Colourlux) is a leading manufacturer and distributor of industrial, decorative and
specialised paints. Colourlux has a wide range of quality products, supported by the latest
technology. The company is listed on the Johannesburg Stock Exchange and has a 30 June
financial year end. Colourlux is an accredited member of the South African Paint Manufacturers
Association (SAPMA).
The financial accountant of Colourlux is in the process of finalising the financial statements for the
year ended 30 June 20.15 and requires your assistance with the following transactions:
1. Factory in Port Elizabeth
Colourlux owns a factory in Port Elizabeth which manufactures a wide variety of automotive
repair paints used by the panel beater industry. The factory in Port Elizabeth is the only factory
of Colourlux that manufactures this kind of industrial paint. The financial manager of the factory
reports to the chief executive officer of Colourlux on a monthly basis. The factory in
Port Elizabeth represents a separate major line of business of Colourlux’s operations.
On 1 November 20.13 Colourlux entered into an agreement with RepairAlot Ltd (RepairAlot) in
terms of which Colourlux agreed to supply each branch of RepairAlot with 60 litres of paint per
month until 28 February 20.17. The agreement is a non-cancellable contract without any
penalty clauses. Throughout the duration of the agreement RepairAlot had 45 branches
located across South Africa. In terms of the agreement the selling price of the paint was fixed
at R1 120 per 20 litres of paint. On 1 November 20.13 the total costs of manufacturing 20 litres
of paint amounted to R960. On 1 December 20.14, due to an unexpected permanent increase
in the price of raw materials, the total costs of manufacturing 20 litres of paint increased to
R1 230. The selling price per 20 litres of paint remained unchanged and did not lead to a
contract modification as per IFRS 15 Revenue from Contracts with Customer. In terms of the
agreement, the inventory is delivered immediately to the branches of RepairAlot and no
inventory of this paint is on hand at any stage at the Port Elizabeth factory. Colourlux
accounted for the sales and cost of sales associated with this agreement on a monthly basis in
the profit figure provided for the year (refer to point 3).
As a result of the unexpected rise in the price of raw materials and the fact that it is the only
automotive repair paint factory of Colourlux, the board of directors approved a decision at the
board meeting held on 15 January 20.15 to sell the factory as a single unit. The buyer of the
factory has to be willing to take over the agreement with RepairAlot. A detailed formal plan for
discontinuance of the factory was finalised on 1 February 20.15 and the main features of the
plan was announced on the same date.
Three interested buyers were identified during February 20.15 and by 25 February 20.15
negotiations with one of the buyers were finalised. On 1 March 20.15, all the requirements to
be classified as held for sale in terms of IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations were met.
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On 1 March 20.15, the relevant information regarding the assets and liabilities of the
Port Elizabeth factory were as follow:
Accumulated
depreciation
Carrying and impairment Net realisable
amount Original cost losses value
1 March 20.15 price 30 June 20.14 1 March 20.15
R R R R
Land 1 000 000 1 000 000 - -
Factory building ? 1 500 000 ? -
Plant ? 1 200 000 430 000 -
Investment property 1 400 000¹ 1 100 000 - -
Investment in
Velvet Sheen Ltd 1 130 000¹ 670 000 - -
Inventory 265 000 - - 210 000
Trade receivables² 230 000³ - - -
Trade payables² (205 000) - - -
¹ Fair value on 1 March 20.15.

² Related sales and purchases were included in the profit provided (refer to point 3).
³ The movement in the loss allowance for lifetime expected credit losses were included in
the profit provided (refer to point 3).
It is the accounting policy of Colourlux to account for land, plant and factory buildings in terms
of the cost model of IAS 16 Property, Plant and Equipment. Investment property is measured
in terms of the fair value model of IAS 40 Investment Properties. Depreciation on plant and
factory buildings is provided for on the straight-line method. Colourlux tests non-current assets
held for sale for impairment in terms of IAS 36 Impairment of Assets before applying IFRS 5
Non-current Assets Held for Sale and Discontinued Operations.
The plant was acquired on 1 January 20.12. The useful life of the plant was estimated at eight
years with a residual value of Rnil. On 30 June 20.14 the recoverable amount was estimated at
R770 000.
The factory building was acquired on 1 July 20.11. The useful life of the factory building was
estimated at 25 years with a residual value of R200 000.
There were no changes in the estimated useful life and residual value of the plant or the
factory building since the date it was acquired. The recoverable amounts of land and plant
were higher than the carrying amounts on 1 March 20.15. The fair value less costs to sell of
the factory building was R1 200 000 on 1 March 20.15. On 1 March 20.15, it was estimated
that the factory building will generate net cash inflows of R6 000 per month for the remainder
of its useful life.
The fair value of the investment property amounted to R1 280 000 on 30 June 20.14 and
R1 550 000 on 30 June 20.15 respectively.
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The investment in Velvet Sheen Ltd (Velvet Sheen) was acquired on 1 January 20.14 and is
an equity investment which is not held for trading purposes. On initial recognition of the
investment in Velvet Sheen the management of Colourlux elected to present changes in the
fair value of the investment in other comprehensive income using the mark-to-market reserve.
The fair value of the investment amounted to R950 000 on 30 June 20.14 and R1 050 000 on
30 June 20.15 respectively.
On 30 June 20.15, none of the inventory on hand at 1 March 20.15 were sold but the net
realisable value amounted to R195 000.
The lifetime credit losses on trade receivables were as expected and all the trade receivables
were settled at R230 000 on 30 June 20.15. Only 40% of the trade payables were still
outstanding on 30 June 20.15.
The fair value of the disposal group amounted to R5 350 000 on 1 March 20.15 and
R5 680 000 on 30 June 20.15. The costs to sell this disposal group amounted to R100 000 on
1 March 20.15 and R150 000 on 30 June 20.15.
Assume that the effect of discounting is material when the relevant period exceeds 12 months.
Assume that the pre-tax rate of 8% per annum (compounded monthly) represents a fair
discount rate and that cash flows occur at the end of the month.
2. Transactions with employees
2.1 The factory employees of Colourlux are entitled to 20 working days' non-vesting paid
annual leave for each completed year of service. Unused paid annual leave may be
carried forward for one calendar year. Paid annual leave is first taken from the previous
year's balance carried forward, and then from the current year's entitlement (first-in, first-
out-basis).
The leave pay accrual amounted to R1 800 000 on 30 June 20.14. The unused balance
was five days per employee carried forward to 20.15. For the 20.15 financial year, 80%
of the employees took 18 days' paid annual leave and the remaining employees took
25 days' paid annual leave in 20.15. In 20.15, 5% of the total employees resigned before
taking their leave. The average salary per employee was R240 000 per year in 20.15.
The total employees in service on 1 July 20.14 were 500 employees. The total working
days in a calendar year are 252 days. A salary increase of 5% will be granted in 20.16. It
is expected that 10% of the employees will resign in 20.16 before leave can be taken and
that each of the remaining employees will take 20 days' paid annual leave in the 20.16
financial year.
2.2 On 1 January 20.14, Colourlux entered into an agreement with the directors of Colourlux.
According to the agreement all 12 directors will receive either 6 000 share options or
4 000 share appreciation rights (SARs). Each share option or SARs is equal to one
ordinary share of Colourlux. The share options or SARs will vest on 31 December 20.16,
provided that the directors remain in service at Colourlux until that date and the share
price of Colourlux exceeds R150 per share on 31 December 20.16.
The agreement states that Colourlux has the choice of settlement and can thus either
settle in share options or SARs. The terms and conditions associated with the share
options and SARs are identical. The share options have an exercise price of R20 per
share option and must be exercised by 31 December 20.17. The SARs also have to be
exercised by 31 December 20.17.
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This is the first transaction of its kind and thus Colourlux does not have any past practice
or stated policy of settling in cash. Colourlux is also not legally prohibited from issuing
shares. Throughout the duration of the agreement Colourlux has not given any indication
to the directors that the agreement will be settled in cash.
On 1 March 20.15, after negotiations at a board meeting, Colourlux agreed to modify the
agreement to decrease the exercise price of the share options to R15 per share and
extend the exercise date to 31 December 20.18.
The following fair values are applicable at the respective dates:
Fair value per share option at Fair value per share option at
Fair value per
Date an exercise price of an exercise price of
SAR
R20 per share R15 per share
Including Including
both the Including both the Including
service only the service only the
condition and increase in condition and increase in
the increase share price the increase share price
in share price condition in share price condition
condition condition
R R R R R
01/01/20.14 38 45 N/A N/A 50
30/06/20.14 57 68 N/A N/A 72
01/03/20.15 61 65 71 76 80
30/06/20.15 69 75 78 85 87
On 1 January 20.14, it was expected that nine directors would remain in service until
31 December 20.16. On 30 June 20.14, there were 11 remaining directors and it was still
estimated that nine directors would remain in service until vesting date. On
1 March 20.15, there were 11 directors remaining and the estimation of directors that will
remain in service until vesting date changed to eight directors. On 30 June 20.15, there
were 10 directors remaining and it was still estimated that eight directors would remain in
service until vesting date.
The financial accountant of Colourlux accounted for this agreement as a cash-settled

share-based payment in accordance with the principles of cash-settled share-based
payments as per IFRS 2 Share-based Payment. The amounts processed by the financial
accountant regarding this agreement are included in the retained earnings and profit
before tax figures provided (refer to point 3). The amounts associated with this
agreement are deemed to be material to the 20.14 and 20.15 financial statements of
Colourlux.
3. Financial information
The profit before tax of Colourlux for the year ended 30 June 20.15 amounted to R1 800 000.
None of the transactions as set out in point 1 to 2.2 has been recorded in the profit before tax
figure except for the sales and cost of sales associated with the agreement with RepairAlot
(refer to point 1), the movement in the loss allowance for lifetime expected credit losses on
trade receivables (refer to point 1) and the salaries of the factory employees (refer to point 2.2)
that were already recorded in this profit before tax amount.
The retained earnings, as presented in the audited financial statements for the year ended
30 June 20.14, amounted to R5 040 000 on 30 June 20.14.
On 15 June 20.15, Colourlux declared a dividend of R1 200 000 for the year ended
30 June 20.15.
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CASE STUDY 9
REQUIRED
QUESTION 1
Marks
Prepare an email addressing the following:
Advise Client A regarding the correct recognition and measurement (initial and subsequent 12
measurement) of the acquired copyrights in terms with IAS 38 Intangible Assets. Your
advise should not make reference to the definition of an intangible asset.
Communications skills: Logical argument 1
Please note:
• Ignore any normal tax implications.

• Ignore any Valued Added Taxation (VAT) implications.
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QUESTION 2
Marks
(a) Calculate the profit/(loss) before tax of Colourlux Ltd for the year ended 47
30 June 20.15.
(b) Prepare the statement of changes in equity of Colourlux Ltd for the year ended 10
30 June 20.15.
Please note:
• The share capital column, total column and comparative figures are not
required.
• Notes to the statement of changes in equity are not required.
• Ignore any normal income tax and deferred tax implications.
Please note:

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CASE STUDY 9
QUESTION 1
Correct recognition and measurement (including measurement after recognition) of

the acquired copyrights
Recognition and measurement
An intangible asset shall be recognised if it is probable that the expected future economic
benefits that are attributable to the asset will flow to the entity; and the cost of the asset can
be measured reliably (IAS 38.21). (1)
Normally, the price an entity pays to acquire separately an intangible asset will reflect
expectations about the probability that the expected future economic benefits embodied in
the asset will flow to the entity. In other words, the entity expects there to be an inflow of
economic benefits, even if there is uncertainty about the timing or the amount of the inflow.
Therefore, the probability recognition criterion is always considered to be satisfied for
separately acquired intangible assets (IAS 38.25). (1)
In addition, the cost of a separately acquired intangible asset can usually be measured
reliably (IAS 38.26). (1)
The client acquired the copyrights even though the timing and amount of the benefits are
uncertain at recognition date, the probability recognition criteria is satisfied as the
acquisition of the copyrights reflect the expectations of the client that the future economic
benefits will flow to the client. (1)
The cost incurred by the client can be measured reliable as the purchase consideration was
paid in cash. (1)
An intangible asset shall be measured initially at cost (IAS 38.24). Therefore, the cost of the
intangible asset at initial recognition is the legal costs of R20 million. (1)
The cost of the studio time (R3 million + R9,5 million) should be expensed as it is normal
“operational costs” (IAS 38.29(c)) and are not part of the cost of the intangible asset. (1)
The costs of advertising (cost of introducing a new product) are not part of the cost of the
intangible asset, therefore the R1,5 million should be expensed (IAS 38.29(a)). Advertising
cost is specifically listed as an example of cost that should be expensed. (1)
Measurement after recognition
The client can choose either the cost model or the revaluation model (IAS 38.72). (1)
The client can only apply the revaluation model if the fair value can be determined by
making reference to an active market (IAS 38.75). (1)
An active market in terms of IFRS 13 refers to a market in which transaction for the
intangible asset take place with sufficient frequency and volume to provide pricing
information on an ongoing basis (IFRS 13 Appendix A). (1)
It is uncommon for an active market to exist for an intangible asset (IAS 38.78) (1)
An active market cannot exist for music copyrights as contracts are negotiated between
individual buyers and sellers and transactions are relatively infrequent.
Each such asset is unique.
Prices are often not available to the public. (IAS 38.78) (2)
The client shall assess whether the useful life of the copyrights is finite or indefinite
(IAS 36.88).
The depreciable amount of the copyrights will be allocated on a systematic basis over its
useful life (IAS 38. 97). (1)
Therefore the client will use the cost model and amortise the copyrights (R20 million) over
its finite useful life of three years. (1)
The client should assess at each reporting period whether there is an indication of
impairment (IAS 38.111).
There is no indication of impairment of the copyrights, therefore no impairment testing will
be done. (1)
Total (15)
Maximum (12)
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(a) Profit/(loss) before tax of Colourlux Ltd for the year ended 30 June 20.15
R
Profit before tax (given) 1 800 000
Onerous contract [C1] (365 824) (3)
Correction due to onerous contract on sales and cost of sales
(1 230 – 1 120) x 3 x 45 x 7 (103 950) (1)
Impairment loss on factory building (109 333)
Non-current assets held for sale:

Interest on onerous contract – 1 March 20.15 [C1] (7 068) (½)
Interest on onerous contract – 30 June 20.15 [C1] (8 247) (½)
Fair value adjustment on investment property – 1 March 20.15
(1 400 000 – 1 280 000) 120 000 (½)
Fair value adjustment on investment property – 30 June 20.15
(1 550 000 – 1 400 000) 150 000 (½)
Inventory written down to net realisable value – 1 March 20.15
(265 000 – 210 000) (55 000) (½)
Inventory written down to net realisable value – 30 June 20.15
(210 000 – 195 000) (15 000) (½)
Depreciation on plant – 1 March 20.15
((1 200 000 – 430 000)/5,5 x 8/12 = 93 333) (93 333) (2)
Depreciation on factory building – 1 March 20.15 [C2] (34 667) (½)
Impairment loss on non-current assets held for sale – 1 March 20.15 [C3] (63 325) (15)
Gain on non-current assets held for sale –30 June 20.15 [C4] 227 658 (9)
Transactions with employees

Employee costs – adjust for share-based payment incorrectly accounted
for as cash-settled [C5] 960 000 (2)
Employee costs – adjust for share-based payment as equity-settled [C5] (771 000) (4½)
Increase in accrual for leave pay [C6] (594 000) (7)

1 036 911
Total (47)
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(b) COLOURLUX LTD
Equity
related to
Share- disposal
based Mark-to- group
Retained
payment market held for
earnings
reserve reserve sale
R R R R
Balance at 1 July 20.14
[C5]; [C7] 5 067 000 405 000 280 000 - (½)
As presented previously (given) 5 040 000 (1)
Correction in respect of cash-
settled share-based payment
[C5] 432 000 (2)
Correction in respect of equity-
settled share-based payment
[C5] (405 000) 405 000 (2½)
Changes in equity for 20.15
Dividends (given) (1 200 000) (½)
Total comprehensive income for
the year
Profit before tax for the year
(from part a) 1 036 911 (½)
Other comprehensive income
for the year [C7]; [C8] 180 000 (80 000) (1½)
Share-based payment [C5] or
(part a) 771 000 (½)
Transfer to separate component
of equity [C8] (460 000) (460 000) 460 000 (1)
Balance at 30 June 20.15
(balancing) 4 903 911 1 176 000 - 380 000
Total (10)
COMMENT
Colourlux has a choice to settle the share-based payment either in share options or
share appreciation rights. Thus it should be determined whether Colourlux has a present
obligation to settle in cash in order to determine how the share-based payment should be
accounted for. Colourlux will have a present obligation if the choice of share options has
no commercial substance or it has a past practice of settling in cash (IFRS 2.41). Neither
is applicable and the share-based payment should be accounted for as an equity-settled
share-based payment transaction (IFRS 2.43). The financial accountant incorrectly
accounted for it as a cash-settled share-based payment transaction. As this information
was available, this represents an error in terms of IAS 8 Accounting policies, Changes in
Accounting Estimates and Errors and should be corrected retrospectively.
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CALCULATIONS
C1. Onerous contract
1 December 20.14 – date contract became onerous R

P/YR = 12
PMT = (1 230 – 1 120) x 3 x 45 = 14 850 [1½]
N = [((12 x 3) + 4) – (12 + 1)] = 27 [1]
I = 8% [½]
FV = 0
PV = ? 365 824
1 March 20.15 – date of IFRS 5 reclassification

Interest (1 INPUT 3 AMORT) 7 068 [½]
Balance 328 342 [½]
30 June 20.15 – year end

Interest (4 INPUT 7 AMORT) 8 247 [½]
Balance 277 189 [½]
[5]
C2. Impairment loss on factory building – 1 March 20.15

R
Cost – 1 July 20.11 1 500 000 [½]
Depreciation – 30 June 20.14 (1 500 000 – 200 000)/25 x 3 (156 000) [2]
Depreciation – 1 March 20.15 (1 500 000 – 200 000)/25 x 8/12 (34 667) [2]
Carrying amount – 1 March 20.15 1 309 333 [1½]
Recoverable amount: higher of 1 200 000 [3½]
Fair value less costs to sell 1 200 000
Value in use (R735 750 + R200 000) 935 750
12 P/YR
FV = 0
N = ((22 x 12) – 8) = 256
PMT = 6 000
I = 8%
PV = ?
109 333 [9½]
C3. Impairment loss on non-current assets held for sale – 1 March 20.15
R
Land (given) 1 000 000 [½]
Factory building [C2] 1 200 000 [5]
Plant (1 200 000 – 430 000 - ((1 200 000 – 430 000)/5,5 x 8/12) = 93 333) 676 667 [1]
Investment property (given) 1 400 000 [½]
Equity investment in Velvet Sheen Ltd (given) 1 130 000 [½]
Inventory (lower of cost or net realisable value) 210 000 [½]
Trade receivables (given) 230 000 [½]
Trade payables (given) (205 000) [½]
Onerous contract [C1] (328 342) [½]
Carrying amount – 1 March 20.15 5 313 325
Fair value less costs to sell (5 350 000 – 100 000) 5 250 000 [1]
Impairment loss (IFRS 5.15) (63 325)
[10½]
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C4. Gain on remeasurment of non-current assets held for sale – 30 June 20.15
R
Land [C3] 1 000 000 [½]
Factory building [C3] 1 200 000 [½]
Plant [C3] 676 667 [½]
Impairment loss [C3] (63 325) [1]
Investment property (given) 1 550 000 [½]
Equity investment in Velvet Sheen Ltd (given) 1 050 000 [½]
Inventory (lower of cost or net realisable value) 195 000 [½]
Trade receivables (given) - [½]
Trade payables (205 000 x 40%) (82 000) [½]
Onerous contract [C1] (277 189) [½]
Carrying amount – 30 June 20.15 5 249 153
Fair value less costs to sell (5 680 000 – 150 000) 5 530 000 [1]
Gain (IFRS 5.21) 280 847
Limited to impairment loss previously recognised i.t.o IFRS 5 and
IAS 36 (IFRS 5.22): (63 325[C3] + (1 200 000/8 x 5,5 = 825 000 –
R770 000) = R55 000 + 109 333 [C2]) 227 658 [2½]
[9]
COMMENT
In terms of IFRS 5 certain assets and liabilities are scoped out of IFRS 5 measurement
principles (IFRS 5.5). Even though it does form part of the disposal group it is measured
in accordance with its own applicable IFRS standard. Therefore on 30 June 20.15 the
investment property, equity investment in Velvet Sheen Ltd, inventory trade receivables,
trade payables and the onerous contract is first measured in accordance with their own
applicable IFRS standard to determine the correct carrying amount that should be
included in the disposal group in order to determine the carrying amount of the disposal
group as a whole as at 30 June 20.15. Only then can the disposal group be remeasured
to the fair value less costs to sell as at 30 June 20.15.
C5. Share-based payment expense

R
Incorrectly accounted for as cash-settled share-based payment
(IFRS 2.43)
30 June 20.14 – Adjust retained earnings:
((9 x R72 x 0,5/3 x 4 000) - R0) 432 000 [2]
30 June 20.15 – Adjust profit after tax:
((8 x R87 x 1,5/3 x 4 000) – R432 000) 960 000 [2]
Equity-settled share-based payment

30 June 20.14 – Include in share-based payment reserve opening balance:
((9 x R45 x 0,5/3 x 6 000) – R0) 405 000 [2]
30 June 20.15 – Include in profit after tax:
Original grant – ((8 x R45 x 1,5/3 x 6 000) – R405 000) = R675 000 +
Modification to grant (IFRS 2.B43(a))
(8 x (R76 – R65) x 4/22 x 6 000) = R96 000 771 000 [4½]
[10½]
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C6. Movement in leave provision – 20.15

R
Opening balance – 30 June 20.14 (given) 1 800 000 [½]
Closing balance – 30 June 20.15
((7* x ((240 000 x 1,05)/252) x (380 x 0,90)) 2 394 000 [6½]
594 000
[7]
*Balance of leave days carried forward to 20.16
80% of employees:
0,80 x 500 x 0,95 = 380 employees [1]
5 + 20 – 18 = 7 days carried forward [1]
20% of employees:
0,20 x 500 x 0,95 = 95 employees [1]
5 + 20 – 25 = 0 days carried forward [1]
C7. Mark-to-market reserve

R
Opening balance – 1 July 20.14 (950 000 – 670 000) 280 000 [½]
Fair value adjustment on date of reclassification as IFRS 5 –
1 March 20.15 (1 130 000 – 950 000) 180 000 [½]
460 000
[1]
C8. Equity related to disposal group held for sale (IFRS 5.38)
Opening balance – 1 July 20.14 -

Transfer from mark-to-market reserve [C8] 460 000
Fair value adjustment on investment in Velvet Sheen Ltd – 30 June 20.15
(1 050 000 – 1 130 000) (80 000) [1]
Closing balance – 30 June 20.15 380 000
[1]
COMMENT
IFRS 5.38 requires that an entity should separately present any cumulative income or
expenses recognised in other comprehensive income relating to a disposal group
classified as held for sale. Therefore the mark-to-market reserve and revaluation reserve
should be transferred and presented separately in the statement of changes in equity of
Colourlux Ltd for the year ended 30 June 20.15.
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QUESTION 1 40 marks
Drumeo Ltd (Drumeo), including its subsidiaries and associates, operates as a manufacturer of
paper and plastic packaging, supplying its products to the South African market as well as to various
other countries on the African continent. Drumeo’s paper business is one of the largest paper
recyclers in Africa, with recycled paper being converted into high-quality industrial containers and
carton boards. The plastics business manufactures a range of plastic packaging products for the
food, beverage, personal care and pharmaceutical markets, primarily in South Africa.
The group is currently preparing the consolidated financial statements for the year ended
31 December 20.15. The financial director learnt of your technical expertise and approached you for
advice on specific matters relating to the financial statements. He provided you with key information
about Drumeo and extracts from the draft consolidated financial statements and notes.
The following key information pertains to Drumeo:
• The Drumeo group prepares its financial statements in accordance with International
Financial Reporting Standards (IFRS).
• Drumeo is listed on the Johannesburg Stock Exchange.
• The performance of the plastics business has been disappointing in the 20.14 and 20.15
financial years (FY20.14 and FY20.15), partly because of strike action in the sector, credit
downgrades during the period, interest rate hikes and slowing demand as more
environmentally friendly and cost effective alternatives are being sought by consumers.
• The strong economic growth in some central and west African countries, including Ghana
and Nigeria, helped Drumeo record a profit for FY20.15 in the paper business. Cash
collections from customers are, however, problematic in these countries.
• Overall Drumeo recorded a net loss before taxation of R3 million in FY20.15 (FY20.14: net
loss before taxation of R200 000).
• One of the subsidiaries of Drumeo has an assessed tax loss that arose during FY20.15.
• Goodwill relates to both the plastics and paper businesses.
• During FY20.15 Moody’s Investor Service downgraded the credit rating of Drumeo.
• Drumeo has early adopted IFRS 9 Financial Instruments.
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The following extracts from the draft consolidated financial statements and notes for the year
ended 31 December 20.15 have been provided:
DRAFT CONSOLIDATED STATEMENT OF FINANCIAL POSITION

20.15 20.14
Note R million R million
ASSETS
Non-current assets
Property, plant and equipment 374 365
Goodwill 3* 155 155
Investment in associate 4* 58 39
Loan to associate 12 25 25
Unlisted investment 5 41 41
Deferred taxation assets 6 52 –
Total non-current assets 705 625
Current assets
Inventories 7* 126 33
Trade and other receivables 8* 261 192
Cash and cash equivalents 9* 281 210
Total current assets 668 435
TOTAL ASSETS 1 373 1 060
EQUITY AND LIABILITIES

Equity
Stated capital 10* 2 2
Retained earnings 201 205
Foreign currency translation reserve 76 75
Bond equity 286 286
Non-controlling interests 96 67
Total equity 661 635
Non-current liabilities
Bond liability 64 82
Deferred taxation liabilities 6 – 38
Total non-current liabilities 64 120
Current liabilities
Trade and other payables 14* 648 305
Total current liabilities 648 305
Total liabilities 712 425
TOTAL EQUITY AND LIABILITIES 1 373 1 060
* These notes have been prepared but have been omitted from the extracts provided below and
therefore, can be accepted as being correct.
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EXTRACT FROM THE NOTES TO THE DRAFT CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting policies
1.1 Significant judgements and sources of estimation uncertainty
In preparing the financial statements, management is required to make estimates and

assumptions that affect the amounts represented in the financial statements and related
disclosures. Use of available information and the application of judgement are inherent in
the formation of estimates. Actual results in the future could differ from these
estimates and these differences may be material to the financial statements.
Management has concluded that the sources of estimation uncertainty for which
significant judgements are required relate to impairment testing. There are no other
areas of significant judgement, since all other assets and liabilities are accounted for on
the historical cost or amortised cost basis.
Impairment testing
• The recoverable amounts of cash-generating units and individual assets are

determined based on the higher of the value in use and fair value less costs of
disposal. These calculations require the use of estimates and assumptions. It is
reasonably possible that the assumptions may change, which may then have an
impact on our estimates and may in turn require a material adjustment to the carrying
amount of goodwill and tangible assets.
• In calculating the recoverable amounts of cash-generating units and individual
assets, the group’s projected cash flows for a period of seven years, are
discounted at the group’s weighted average cost (WACC) of capital of 15%
(FY20.14: 19%). The WACC calculated is net of tax.
• Management anticipated losses in the plastics business in prior years and
recorded impairment losses in prior years. No impairment tests were performed
during FY20.14 and FY20.15, as there were no indicators of impairment evident
during those years. Accordingly, no impairment losses have been recognised for
FY20.14 or FY20.15.
1.5 Financial instruments
Classification – financial assets
The group classifies financial assets into the following categories:

• Financial assets at fair value through profit or loss
• Financial assets at amortised cost
• Debt instruments at fair value through other comprehensive income
• Equity instruments at fair value through other comprehensive income.
The group classifies financial assets depending on the group’s business model for
managing its financial instruments and the contractual cash flow characteristics of the
instrument. A financial asset is classified at amortised cost only if both the following
criteria are met:
• The objective of the group’s business model is to hold the asset to collect the
contractual cash flows; and
• The contractual terms give rise on specified dates to cash flows that are solely
payments of the principal and interest on the principal outstanding.
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If the group holds the asset in a business model with an intention to both hold the asset
to collect contractual cash flows and sell the asset, and the payments comprise solely of
principal and interest payments (i.e. debt instruments), the financial instrument is
classified and measured at fair value through other comprehensive income. If either one
of the two criteria above is not met, the financial instrument is classified as fair value
through profit or loss. All equity investments are measured at fair value. Equity
investments that are held for trading are measured at fair value through profit or loss.
For all other equity investments, the group makes an irrevocable election at initial
recognition to recognise changes in fair value through other comprehensive income
rather than profit or loss.
Classification – financial liabilities
Financial liabilities comprise of bonds, loans from associates, short-term loans and bank
overdrafts. All financial liabilities are measured at amortised cost.
5. Unlisted investment
The unlisted investment is a share investment held in a private company. This investment is
measured at fair value through profit or loss. No shares were bought or sold during the year.
There were no fair value adjustments during the year as the fair value was the same as that
determined at 31 December 20.14. The fair value of R41 million was determined by a
qualified share valuer as follows:
Carrying Fair value Valuation technique(s) and key input(s)

amount at hierarchy
31 December level
20.15
Unlisted R41 000 000 2 PE method – the fair value of the investment was
investment estimated using the company’s audited earnings
figures, making significant adjustments for non-recurring
items. An observable PE multiple of a similar listed
company was used as the multiple, with significant
adjustments for risk specific to the unlisted investment.
6. Deferred tax assets and liabilities
Deferred tax assets and liabilities are offset when the group intends to settle its tax assets and
liabilities on a net basis. The deferred tax asset at year end represents unused tax losses.
The following additional disclosures have been included in the draft consolidated financial
statements, but have been omitted from these extracts. These are the only other disclosures
relating to deferred tax:
• Major components of tax expense/income (IAS 12.79 – 12.80).

• Tax rate reconciliation (IAS 12.81(c)).
• Analysis of deferred tax balances at year end and reconciliation of the opening and
closing deferred tax balances (IAS 12.81(a) and (g)).
12. Loan to associate
The loan of R25 million was provided three years ago to Mondeo (Pty) Ltd (Mondeo). The loan
bears no interest and is repayable on demand. In view of the zero interest on the loan, the
loan to Mondeo is accounted for at historical cost.
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15. Financial risk disclosure
The only financial risk to which the group is exposed to, is liquidity risk. The group manages
this risk by managing the maturities of its assets and liabilities to ensure there are no
significant timing mismatches.
A maturity analysis of all financial assets and liabilities is provided below:
Financial assets and Up to One to Four to More

liabilities: Maturities as at one three twelve than 12 Total
31 December 20.15 month months months months
R million R million R million R million R million
Assets
Loan to associate 25 – – – 25
Unlisted investment – – – 41 41
Trade and other receivables 203 21 37 – 261
Cash and cash equivalents 281 – – – 281
Liabilities
Bond liability – – – 64 64
Trade and other payables 103 134 83 328 648
16. Contingent liability – events after the reporting period
On 15 January 20.16 the Competition Commission concluded an on-going investigation

regarding alleged price collusion in the paper and plastics packaging segment. Several large
role players had been cited for allegedly forming cartels to control prices in the industry.
Drumeo reached a settlement and agreed to pay the Competition Commission an amount of
R20 million on 31 January 20.16.
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QUESTION 2 40 marks
The soft drink, Kola was invented in May 18.86 by Dr John Pemberton, a pharmacist from Atlanta in
the United States. The soft drink was named Kola by Dr Pemberton’s creative bookkeeper. He also
registered the formula for the soft drink with the patent office and designed the distinct script of the
brand name. In 18.87 Dr Pemberton decided to sell the majority interest in his soft drink business to
the businessman, Asa Candler, for $2,300. Asa Candler became the first president of the Kola
company and under his leadership the Kola soft drink brand reached new heights. Since then Kola
soft drinks have become the world’s most popular soft drink.
South Africa is the largest consumer of Kola on the African continent. In order to meet this demand,
South African Bottlers (SAB) Ltd produces and distributes Kola soft drinks to all types of outlets
throughout South Africa, from tuck shops to supermarket groups and wholesalers.
You have been asked to assist Mr Goodwill, the accountant of SAB Ltd, in finalising the financial
statements of SAB Ltd for the year ended 30 June 20.14. The outstanding issues on which he
requires your assistance is explained below:
1. Expansion project
On 2 July 20.13 SAB Ltd announced a R50 million investment in a new plant in Alrode, Gauteng, as
part of its continued efforts to support the local economy by expanding its manufacturing capabilities.
SAB Ltd currently has two plants, one at Caledon in the Western Cape which produces about
20 million units of Kola a year and an existing plant at Alrode which produces 10 million units of Kola
a year. The existing Alrode plant is about 40 years old and coming towards the end of its economic
life. It will be decommissioned once the new plant is completed in May 20.20.
SAB Ltd funded the R50 million expansion project as follows:
- R30 million of the project was funded by SAB Ltd’s existing cash reserves.
- On 1 August 20.13 SAB Ltd issued 180 000 convertible cumulative preference shares to a
local investment bank at an issue price of R50 per preference share. The maturity date of the
preference shares is 1 August 20.20. The investment bank has the option to convert each
preference share into five ordinary shares at any time until maturity date. If the preference
shares are not converted into ordinary shares before maturity date, SAB Ltd will redeem the
preference shares in cash on 1 August 20.20. The dividend rate is an 8% cumulative
preference dividend per annum calculated on the issue price. It is the intention of management
to declare preference dividends annually. All unpaid dividends accumulate until conversion
date or maturity date. On 1 August 20.13 the prevailing market yield for similar preference
shares without conversion rights was 8,36% per annum. A loan of $1 100 000 was obtained on
1 July 20.13 from the Kola company in the United States. Interest on the loan is repayable in
arrears at 8% per annum, which is a market related interest rate. Interest is payable bi-
annually on 31 December and 30 June, commencing on 31 December 20.13. The capital
amount of the loan is only repayable on 1 July 20.23.
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Due to the weakening of the Rand, SAB Ltd entered into a foreign exchange contract (FEC) on
31 December 20.13 to hedge itself against unfavourable foreign exchange movements in the foreign
loan of $1 100 000. SAB Ltd entered into a six month FEC on 31 December 20.13 at a forward rate
of R9,85. On 30 June 20.14 the FEC was extended for a further six months at a rate of $1 = R10,28.
1 July 20.13 $1 = 10,10

31 December 20.13 $1 = 10,05
30 June 20.14 $1 = 10,30
The average exchange rates applicable for this period were as follows:
1 July 20.13 – 31 December 20.13 $1 = 9,80

1 January 20.14 – 30 June 20.14 $1 = 10,28
SAB does not apply hedge accounting in terms of IFRS 9.
SAB Ltd did not undertake any construction activities or incurred any expenditure in respect of the
new Alrode plant during the year ended 30 June 20.14. This was due to a delay in the local
municipality’s approval process for the construction of the plant. Approval for the construction of the
plant was received from the municipality on 30 July 20.14.
2. Share option
Since 20.12, the management of SAB Ltd has considered ordinary shares in a local brewery,
Carlton Beer Ltd (Carlton), to be a viable investment for speculative purposes. On 15 May 20.14
SAB Ltd acquired a share option to purchase 200 000 ordinary shares in Carlton at R10,75 per
share, when Carlton’s shares were trading at that price. SAB Ltd paid R85 000 for the option on
17 May 20.14. SAB Ltd also had to pay a commission of 5% of the purchase price of the option to
the broker who negotiated the deal. The option will expire on 15 July 20.14. On 30 June 20.14 the
fair value of the share option was R98 000, at which date Carlton’s shares traded at R9,97 each. The
fair value of the option is based on market information (quotes) for similar instruments and is tested
for reasonableness by discounting estimated future cash flows using the market rate for similar
instruments at measurement date.
The normal income tax rate is 28% and the capital gains tax inclusion rate is 80%.
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CASE STUDY 10
REQUIRED
QUESTION 1
REQUIRED
Marks
Critically review the extracts of the draft consolidated statement of financial position and 38
notes provided for apparent inaccuracies, inconsistencies, errors in the application and non-
compliance with IFRS.
Please note:
• Limit your discussion to the issues for which there is evidence of inaccuracies,
inconsistencies, errors in the application and non-compliance with IFRS in the extracts
provided.
• Detailed disclosure requirements or sample disclosure are not required.
• Calculations are not required.
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QUESTION 2
Marks
(a) Discuss the correct classification of the convertible preference shares in issue 1 in 8
the financial statements of SAB Ltd for the year ended 30 June 20.14 in accordance
with IAS 32 Financial Instruments: Presentation.
(b) Calculate the deferred tax balance relating to the convertible preference shares 4
issued in issue 1 in the accounting records of SAB Ltd for the year ended
30 June 20.14. Clearly indicate a deferred tax asset or liability.
(c) Prepare the journal entries to account for the transactions relating to the loan from 14
the Kola company in the United States in the financial statements of SAB Ltd for the
Please note:
• Ignore journal narrations.
• Ignore the time value of money.
(d) Discuss the correct classification, recognition and measurement of the share option 8
(issue 2) in the financial statements of SAB Ltd for the year ended 30 June 20.14 in
accordance with IFRS 9 Financial Instruments. Support your discussion with
calculations, if appropriate.
(e) With reference to the share option acquired (issue 2) prepare the note that is 4
required by IFRS 7 Financial Instruments: Disclosure and IFRS 13 Fair Value
Measurement which will accompany the financial statements of SAB Ltd for the year
Please note:
• Accounting policies are not required.
• Disclosure of risk in accordance with IFRS 7.31-.42 is not required.
• Disclosure accordance with IFRS 7.11 is also not required.
• If the entity has a choice to disclose information on the face of the financial
statements or in the notes, disclosure is done in the notes.
Please note:

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CASE STUDY 10
QUESTION 1
Issue Reason/explanation
General comment
There are no note disclosures IAS 16 and IFRS 7 require specific detailed disclosures in
for specific material line items. respect of these items, should they be regarded as being
For example: material. This appears to be the case given the size of
• Property, plant and and nature of the balances. (1)
equipment
• Bond liability. (1) (2)
Significant judgements and sources of estimation uncertainty
The statement that ‘there are no The issue is not whether the historical cost or amortised
other areas of significant cost basis is applied, but rather whether there is a
judgement, since all other significant risk that the assumptions applied to the
assets and liabilities are recognition and measurement of assets and liabilities
accounted for on a historical could result in a material adjustment to the carrying
cost or amortised cost basis’ is amount of the assets and liabilities in the next financial
inappropriate. (1) year. (1)
In addition, the statement is not true as there are financial
assets that are measured at fair value (e.g. investment in
an unlisted entity). (1) (3)
The recognition of deferred tax The recognition of deferred tax assets for assessed
assets is missing from key losses is dependent on significant assumptions of future
sources of estimation uncer- taxable temporary differences. (1)
tainty. (1) These assumptions have a significant risk of resulting in a
material adjustment to the carrying amount of the
deferred tax asset in the next financial year. (½) (2½)
Unlisted investments should be They are carried at fair value, they are material, and the
in the fair value estimation note. fair value has been estimated, with a significant risk of
(1) resulting in a material adjustment in the next financial
year (1) (2)
Impairment of trade and other Customer collections have been problematic from the
receivables is missing from key West Africa regions. (1)
sources of estimation uncer- Assumptions about determining significant increases in
tainty. (1) credit risk have a significant risk of resulting in a material
adjustment to the carrying amount of the trade and other
receivables asset in the next financial year. (½) (2½)
Impairment testing
The forecast period of seven Cash flow projections shall cover a maximum period of
years is problematic. (½) five years, unless a longer period can be justified. (1) (1½)
WACC, which is an after-tax, The discount rate should be a pre-tax discount rate. (½)
discount rate, has been used.
(½) (1)
A uniform discount rate (WACC) There are two major business lines with different risks.
has been used to discount The discount rate should reflect the risks specific to the
different cash-generating units. assets being valued. (1)
(1) (2)
The discount rate has Given that the risks of the business have increased and
decreased from 19% to 15% there was a credit rating downgrade by Moody’s, one
which is problematic. (1) would expect the discount rate to increase, unless the
asset specific factors are unaffected by the overall
business rating downgrade. (1) (2)
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No impairment tests were An impairment test must be performed annually for
performed in 20.14 and 20.15 goodwill. (1)
because there were no There are also several indicators of impairment
indicators of impairment is - Credit downgrades (½)
incorrect. (1) - Interest rate hikes (½)
- Slowing demand and poor performance. (½) (3½)
Financial instruments – accounting policy
There is evidence of irrelevant There are no apparent debt instruments and equity
disclosure, or disclosure that instruments at fair value through other comprehensive
has been reused without income, short-term loans and bank overdraft. (1)
change. (1) There is excessive and irrelevant disclosure of the
accounting basis for debt instruments, which is redundant
given that there is none and that this is a manufacturing
company. (½) (2½)
Insufficient disclosures for trade Trade and other receivables is a significant balance of
and other receivables, specifi- financial assets. (½)
cally with regard to measure- The accounting policy (measurement basis – initial and
ment of expected credit losses. subsequent measurement basis) should be provided for
(1) trade and other receivables i.e.
- Classification as amortised cost
- Initial measurement at fair value
- Impairment basis. (1) (2½)
Unlisted investment
The classification as level 2 is The significant adjustments to observables inputs result
incorrect. (1) in a level 3 classification. (1)
There is also an issue with regard to the adequacy of the
disclosure requirements in terms of IFRS13. (1) (3)
Deferred tax assets and liabilities
Deferred tax assets (assessed Deferred tax assets and liabilities should only be offset
losses) are offset against when the entity has a legally enforceable right to set off
deferred tax liabilities in the current tax assets and liabilities, and relate to the income
group. (1) tax levied by the same tax authority on the same taxable
entity. (1)
The assessed loss mostly relates to the losses in one of
the subsidiaries in the plastics business. As this is a
separate legal entity, it is unlikely that this can be offset
against taxable profits and temporary differences in other
entities in the group. (1) (3)
As one is specifically told which The deferred tax relates to tax losses, therefore one
disclosures are provided with would have expected disclosure supporting the
regard to deferred tax assets, it recognition of deferred tax assets as well as any amounts
appears that there is insufficient of tax losses for which a deferred tax asset has not been
disclosure for the deferred tax recognised. (1)
asset. (1) (2)
Loan to associate company
The accounting for the loan at While the loan might be held in a business model to
historic cost is incorrect. (1) collect contractual cash flows, the loan is interest free
and therefore does not reflect cash flows that are
payments of principle and interest. (1)
The initial fair value of the instrument (PV of FCFs at a
market rate) will most likely differ from the nominal
amount of the loan. (1) (3)
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The classification of the loan as The loan is repayable on demand and as such the entity
non-current is potentially should assess and disclose its assumptions on whether it
incorrect. (1) will demand payment in the foreseeable future and
therefore, this could be classified as current. (1) (2)
Financial risk disclosure
Liquidity risk is not the only The group is also exposed to –
financial risk to which the group • market risks
is exposed. (1) - currency risk (operations outside SA) (½)
- interest rate risk (on loans) (½)
- price risk (on unlisted investment) (½)
• credit risk
- customers in Africa – problematic customer
collections. (½) (3)
IFRS7 requires a maturity These should be the undiscounted values, (½)
analysis, but amounts included as these amounts equal the SoFP amounts, (½)
in the maturity analysis appear it is unlikely that they are discounted.
to be discounted values. (1) (2)
The classification of a The maturity analysis reflects a significant balance of
significant balance of trade trade and other payables beyond 12 months. (½)
and other payables as current
seems incorrect. (1) (1½)
The bond liability is reflected as Given that there appears to have been a repayment of
non-current. (1) R18m during FY20.15, it is unlikely that the full amount is
non-current. The short-term portion of the bond liability is
not shown as a current liability and a cash outflow within
12 months is not in the liquidity analysis. (1) (2)
Contingent liability
The classification of the A provision should have been recognised at the
settlement as a contingent 31 December 20.15 year end as – (½)
liability at the reporting date is - the condition existed at year end (½)
incorrect. (1) - the settlement after year end confirms that Drumeo
had a present obligation at the year end. (½) (2½)
Total (51)
Maximum (38)
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QUESTION 2
(a) SAB Ltd should evaluate the terms of the financial instrument to determine whether it
contains both a liability and an equity component (IAS 32.28). (1)
Preference dividends
Since all accumulated (unpaid) dividends will roll up until conversion date or maturity
date, SAB Ltd has a contractual obligation to deliver cash in the form of preference
dividends to the investment bank on or before 1 August 20.20. (1)
The obligation to pay preference dividends to the investment bank is therefore a
financial liability (IAS 32.11). (1)
Embedded option (½)

The investment bank has a call option (the right to exchange the preference shares
for ordinary shares) exercisable at any time before maturity date. (1)
However, a contract is not an equity instrument solely because it may result in the
delivery of the entity’s own equity instruments (IAS 32.21). (½)
The investment bank holds the right to convert preference shares into a fixed number
of ordinary shares in SAB Ltd (IAS 32.22). (1)
The embedded call option is therefore classified as an equity instrument. (1)
Principle amount
If the investment bank (holder) does not exercise its option to convert to ordinary
shares, SAB Ltd will have to redeem the preference shares on 1 August 20.20. (1)
SAB Ltd therefore has a contractual obligation to deliver cash until it is extinguished
through conversion or maturity of the preference shares (IAS 32.30) (1)
Therefore this obligation to redeem the preference shares is a financial liability. (1)
Conclusion
The convertible preference shares should be classified as a compound financial
instrument in the financial statements of SAB Ltd for the year ended 30 June 20.14. (1)
Total (11)
Maximum (8)
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(b) Deferred tax

Carrying Temporary Deferred
Tax base tax asset/
amount difference
(liability)
R R R R
Convertible preference shares
Liability component [C1] (8 833 371) (8 833 371) - - (2½)
Equity component (166 629) (166 629) - -
Subsequent amortisation
[(9 000 000 x 8% x 11/12) –
676 931 [C1] or Amort 1
(Interest) x 11/12] (16 931) (16 931) - - (1½)
Deferred tax liability (8 850 302) (8 850 302) - -
Total (5)
COMMENT
The above table illustrates the subsequent amortisation separately. It is also acceptable
to combine the initial liability and subsequent amortisation into one line item called
convertable preference share.
IAS 12.23 refer to jurisdictions where the tax base = liability + equity. In South Africa that
is not applicable and the tax base is calculated in terms of IAS 12.8.
CALCULATIONS
C1. Calculation of present value of liability component
N = 7 [½]
I = 8,36% (market interest rate) [½]
PMT = 720 000 (9 000 000 x 8%) [½]
FV = 9 000 000 (180 000 x R50) [½]
PV = 8 833 371
R
Financial liability 8 833 371
Equity component (balancing figure) 166 629
Proceeds on the preference shares (180 000 x R50) 9 000 000
Finance cost for 20.14 (8 833 371 x 8,36% x 11/12) 676 931 [1]
[3]
(c) Journal entries
Dr Cr
R R
1 July 20.13
J1 Bank (SFP) ($1 100 000 x 10,10) 11 110 000 (1)
Long-term loan (SFP) 11 110 000 (½)
Receipt of long-term loan
31 December 20.13
J2 Finance costs (P/L)
[($1 100 000 x 8% x 6/12) x 9,80] 431 200 (2)
Foreign exchange difference (P/L) 11 000 (½)
Bank (SFP) [($1 100 000 x 8% x 6/12) x 10,05] 442 200 (1)
Interest paid for the six months ending
31 December 2013
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Dr Cr
R R
30 June 20.14
J3 Finance costs (P/L)
[($1 100 000 x 8% x 6/12) x 10,28] 452 320 (2)
Foreign exchange difference (P/L) 880 Accrued expenses
(½) (SFP)
Bank (SFP) [($1 100 000 x 8% x 6/12) x 10,30] 453 200 (1)
Interest paid for the six months ending 30 June 20.14
J4 Foreign exchange difference (P/L) 220 000 (½)
Long-term loan (SFP)
[($1 100 000 x (10,30 - 10,10)] 220 000 (1½)
Remeasure outstanding loan to closing rate at year end
J5 FEC asset (SFP) ([($1 100 000 x (10,30 – 9,85)] 495 000 (1½)
Fair value gain (P/L) 495 000 (½)
Remeasurement of the FEC on settlement date
J6 Bank (SFP) [J5] 495 000 (½)
FEC asset (SFP) 495 000 (1)
Cash profit on settlement of FEC ___
Total (14)
(d) SAB Ltd’s business model for the share option (derivative) is to manage the
instruments’ fair value due to the following: (½)
- SAB Ltd cannot collect contractual cash flows as there are none; and (½)
- The share option is held for speculative purposes. (½)
The share option therefore is classified as fair value through P/L. (½)
The share option is recognised as a financial asset when SAB Ltd became a party to
the contractual provisions of the option (IFRS 9.3.1.1). (½)
SAB Ltd became party to the option contract on 15 May 20.14 and not on the day of
actually transferring the cash. (1)
The share option is initially measured at its fair value (amount paid) of R85 000
(IFRS 9.5.1.1). (1)
The direct incremental transaction costs (commission of 5%) of R4 250 are immediately
expensed in profit or loss as the investment is classified as measured at fair value
through profit or loss (IFRS 9.5.1.1). (1)
The share option is re-measured at the reporting date (30 June 20.14) to its fair value of (1)
R98 000.
The fair value gain of R13 000 (R98 000 – R85 000) is recognised in profit or loss
(IFRS 9.5.7.1). (1)
A derivative such as the share option meets the definition of ‘held for trading’ (IFRS 9,
Appendix A). (½)
The share option therefore cannot be reclassified to fair value through other
comprehensive income as it is held for trading (IFRS 9.5.7.5). (1)
Total (9)
Maximum (8)
Communications skills: Logical argument (1)
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(e) SAB LTD
2. Financial assets 20.14 20.14

R R
Carrying Fair
amount value
Current assets
At fair value through profit and loss (IFRS 7.8) (½)
Derivative financial instrument – share options 98 000 98 000 (1)
The following table analyses recurring fair value measurements of financial assets
(IFRS 13.91(a)): (½)
Fair value hierarchy (IFRS 13.93(b))

At 30 June 20.14 Level 1 Level 2 Level 3 Total
Financial assets at fair value (½)
through profit and loss
Derivative financial instrument –
share options R98 000 R98 000 (1)
Level 2: The fair value of the derivative financial instrument is based on market
information (quotes) for similar instruments and is tested for reasonableness by
discounting estimated future cash flows using the market rate for similar instruments at
measurement date (IFRS 13.93(d)) (½)
Total (4)
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QUESTION 1 40 marks
King Flowers Ltd (King Flowers) is the leading supplier of dried flowers in South Africa. Any flowers
not used in the drying process are sold at the fresh produce market. King Flowers also
exportsindigenous dried flowers, including dried proteas and fynbos, and decorative plant
material around the globe. The company has a 30 June financial year end and it is listed on the
Johannesburg Stock Exchange.
The following transactions relating to King Flowers occurred during the current financial year:
Land
The company owns 900 hectare of land, of which 300 hectare has been set aside to create a
nature reserve. The remaining land continues to be developed for cultivation and at present there
are more than 80 hectares planted with different species, partially under irrigation to achieve a
higher quality product. The revalued carrying amount of the land on 1 July 20.13 was R32 million
and the original cost was R12 million.
On 1 April 20.14, the board of directors decided to propose a dividend to shareholders. The
dividend payment comprises o f a distribution of land to its shareholders in line with the
company's strategy with regards to corporate social development. The land that will be distributed
was purchased a number of years ago for R1 million. The fair value of the land on 1 July 20.13
and 1 April 20.14 was R1,3 million and R900 000 respectively and the distribution cost amounted
to R100 000 on 1 April 20.14. The proposed dividend was approved by the shareholders on
1 April 20.14. The land met all the requirements to be classified as held for distribution on
1 April 20.14. The settlement of the dividend will take place early in the new financial year. The
fair value of the land on 30 June 20.14 was R890 000 and the distribution cost R105 000.
The fair value of the remaining land owned by King Flowers was R29 million on 30 June 20.14.
Ship
King Flowers transports their dried flowers globally via sea travel. On 1 August 20.13, Diaz ship
builders commenced with the construction of King Flowers’s own specialised ship for the
transportation of their dried flower products. This is the only ship owned by King Flowers.
The costs and completion dates of the ship are as follows:
ZAR Completion date

Phase 1 3 million 30 November 20.13
Phase 2 6 million 31 December 20.13
9 million
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The project will be financed as follows:
• An overdraft facility will be made available from Protea Bank on 1 August 20.13 bearing
interest at a market-related rate.
• The total borrowing cost amount related to the project is R110 504.
Expenses are incurred evenly and paid immediately within each phase.
On 31 December 20.13 (at the end of phase 2), substantially all of the activities necessary to
prepare the ship for its intended use had been completed. However the ship was required to be
transferred to Richard's Bay harbour for a once off technical and safety test to approve the new
ship as sea-worthy. The test was completed and the ship was available for use on 1 May 20.14
(the ship has a useful life of 30 years from that date).
Buildings
Details of King Flowers’ buildings on 30 June 20.14 were as follows:

• Cost – 1 July 20.13 R4,5 million
• Total useful life 30 years
• Remaining useful life 23 years
• Residual value Rnil
Vehicles
Type of vehicle Refrigerator truck Delivery trucks

Description Mainly used to transport Used to transport dried
fresh flowers to fresh flowers to the harbour for
produce market. exportation
and also to local distributors.
Quantity 1 3
Refrigerator truck
The refrigerator truck was purchased on 1 October 20.11 at a total amount of R980 000.
King Flowers expects the useful life of the refrigerator truck to be 350 000 kilometres (km) and the
residual value to be immaterial. Below is a summary of the logbook of the refrigerator truck:
Monthly km Cumulative total km

1 July 20.13 74 500
31 July 20.13 3 500 78 000
31 August 20.13 4 100 82 100
30 September 20.13 3 600 85 700
31 October 20.13 3 400 89 100
30 November 20.13 4 200 93 300
31 December 20.13 4 500 97 800
31 January 20.14 3 200 101 000
28 February 20.14 3 100 104 100
31 March 20.14 3 400 107 500
30 April 20.14 3 500 111 000
10 May 20.14 1 200 112 200
30 June 20.14 3 700 115 900
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On 10 May 20.14 the refrigerator unit and box of the truck was damaged in an accident and could
not be repaired. There was no damage done to the truck itself. The insurance company paid an
amount of R105 000 for damages relating to the refrigerator unit and box. The refrigerator unit
and box were replaced at a total cost of R225 000 during May and the refrigerator truck was
ready for use on 1 June 20.14. Although the refrigerator unit and box form a significant part of the
truck, they were not depreciated separately. It is expected that the refrigerator unit and box will be
replaced after 30 000 working hours. The refrigerator unit and box worked approximately 210 hours
during June 20.14.
Delivery trucks
On 1 January 20.13 King Flowers purchased three delivery trucks for R1 200 000 each.
King Flowers expects the useful life of one delivery truck to be 400 000 km and the residual
value to be immaterial. On 30 June 20.14 management revised the residual value of the delivery
trucks to R250 000 each and the total expected useful life of each delivery truck to 320 000
km. The total kilometres of the delivery trucks were as follows:
Year ended Total kilometres per year for 3 delivery trucks Cumulative total
30 June 20.13 130 000 130 000
30 June 20.14 280 500 410 500
Packaging business
On 1 December 20.12, King Flowers purchased the operating assets of a packaging business
for R3 million. The acquired assets meet the definition of a business. At the date of acquisition,
the plant and equipment of the business had a carrying amount of R1,2 million (fair value of
R2,2 million) with a remaining useful life of four years and a residual value of R100 000. Apart
from plant and equipment, the only other identifiable asset acquired was an internally
generated patent that relates to a design. The patent had a fair value of R300 000 on
1 December 20.12 and R50 000 of the costs incurred in developing the patent had been
capitalised prior to the acquisition of the business. The patent is only useful if it is used in
conjunction with the plant and equipment in the packaging business and contractually may not be
sold by King Flowers. On 1 December 20.12, the patent had a remaining useful life of three years.
During 20.14 Numpack Ltd, the largest packaging company in Africa, opened a branch in
Cape Town. On 30 June 20.14, a decision was taken to discontinue the acquired business and to
modify the plant and equipment so that it could be used in a different line of business. If
R250 000 were spent converting the plant and equipment to make it compatible with a
profitable production line within King Flowers, the value in use of the plant and equipment would be
R3,5 million. The fair value less costs to sell of the plant and equipment at 30 June 20.14 was
R1 million and the value in use excluding modification was R850 000. Management spent the
R250 000 conversion costs during November 20.14, prior to the finalisation of the 20.14 financial
statements. King Flowers did not acquire any other plant and equipment during the 20.14 financial
year.
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Accounting policies
• King Flowers accounts for land according to the revaluation model in terms of lAS 16,
Property, Plant and Equipment. All other assets are carried at the cost model in terms of lAS
16, Property, Plant and Equipment.
• King Flowers realise the revaluation surplus when the land is sold.
• Vehicles and vehicle components are depreciated on the units of production method.
• King Flowers tests non-current assets held for sale or distribution for impairment in terms of
lAS 36 Impairment of Assets before applying IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations.
• Land and buildings are disclosed as two separate classes of assets.
Taxation
• The normal income tax rate is 28% and the capital gains tax inclusion rate is 80%.
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QUESTION 2 30 marks
Topwood Ltd (“Topwood”) is a proudly South African company that manufactures furniture, mainly
for office use. The company purchases the raw timber, leather and other items necessary to
manufacture the furniture from various suppliers in South Africa. Topwood’s products are very
popular throughout South-Africa. Topwood also only uses indigenous wood from forests in South
Africa.
Topwood has a 30 June year end.
1. Share-based payments
The following is an extract of the policies and procedures manual of Topwood:
Share-based payment scheme to strategic managers
Purpose To retain strategic expertise in the company.

Scope To each of our 350 managers, employed as at
1 July 20.8, we grant 150 share options (one share
per option) on the condition that they remain in
service of the company for the next four years.
Fair value of option on 1 July 20.8 R26
Vesting date 30 June 20.12
Additional information regarding the above mentioned share-based payment scheme
• On 1 July 20.8 Topwood estimated that 130 managers will leave the service of the
company over the next four years and therefore, forfeit their rights to the share options.
• For the year ended 30 June 20.9, 40 managers left the service of the company and
Topwood estimated that another 90 will leave over the next three years.
Topwood estimated that another 60 will leave over the next two years.
Topwood estimated that another 10 will leave during 20.12.
The share price of Topwood decreased during the 20.9 financial year and the company
decided to re-price the share options on 1 July 20.9. Vesting will still take place on
30 June 20.12. Topwood estimated the fair value of each of the original share options to be
R22 at the date of the re-pricing, while the fair value of each re-priced share option was
estimated to be R23.
On 30 June 20.11 Topwood’s directors decided to cancel the share-based payment scheme in
exchange for a cash settlement of R30 per option. The market value of Topwood’s shares was
R28 at 30 June 20.11.
2. Employee benefits
Topwood has different levels of employees in the company. The accountant is unfamiliar with
IAS 19 Employee Benefits and does not know how to calculate the leave provision at
30 June 20.11.
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The following information is available on 1 July 20.10 (as per employee):
Maximum Leave taken

Gross Maximum accumulated in current
Level of salary per Number of leave leave allowed year per
employee year employees allowed per to carry employee
R year (days) forward (days)
(days)
Directors 570 000 4 28 15 12
Sales personnel 356 500 8 25 15 20
Factory workers 120 500 60 15 5 14
• The company’s policy indicates that all unused leave balances that are not utilised within
twelve months will be forfeited; and
• Unused leave balances may not be paid out in cash when an employee leaves the
service of Topwood.
• When leave is taken, it is first taken from the previous year‘s entitlement and then from
the current year’s entitlement.
• Topwood expects that directors will take 14 days leave in the 20.12 financial year, while
sales personnel will take 22 days leave and factory workers 15 days leave.
• There was no unused leave at 30 June 20.10.
• On 1 March 20.11 two of the sales personnel resigned. No other employees are
expected to resign during the 20.12 financial year.
• You may assume that there were 260 work days during the current financial year.
3. Inventories
Topwood values raw material and work in progress (WIP) on a first-in-first-out (FIFO) basis.
The following are information regarding their manufacturing process:
Raw material
Raw material on hand on 30 June 20.10 (at cost) R532 800

Raw material on hand on 30 June 20.11 ?
Raw material purchased during the year 105 000 kg
The following costs relating to the purchasing of raw material were incurred during the current
financial year:
R
Purchase price 5 728 500
Transport costs 56 000
Handling costs 32 000
Storage (not part of production process) 48 000
Administrative expenses 29 600
5 894 100
The inventory count at year end indicated that only 28% of the total raw material purchased
was on hand at 30 June 20.11.
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The normal raw material wastage is 15%, which takes place at the beginning of the production
process.
The net realisable value of raw material amounts to R50 per kilogram on 30 June 20.11.
Work in progress
R
Work in progress on hand on 30 June 20.10, at cost 428 400
The cost of work in progress at 30 June 20.11 has not yet been calculated. Detailed production
records indicate that 15% of this year’s allocated production expenditure and material used
relate to furniture that were still under production at year end.
Overhead costs
Topwood uses normal capacity for the allocation of the fixed production overhead during the
year.
The following overheads occurred during the year ended 30 June 20.11:
R
Variable production overheads (fully productive) 752 800
Fixed production overheads 1 250 300
Normal capacity equals 15 000 units per year. Due to various problems, Topwood only
produced 13 800 units for the year.
Labour
The following information is available for the year ended 30 June 20.11:
Direct labour R12,60 per hour

Productive hours 125 000 hours
Normal idle hours 3 400 hours
Finished products
R
Finished products on hand on 30 June 2010, at cost 1 569 000
Of the finished products, 25% of the units transferred from WIP in the current year were still on
hand on 30 June 20.11.
The selling price of the finished products was R750 on 30 June 20.11. The delivery cost per
product amounts to R50, while the sales commission amounts to 2,5%.
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QUESTION 3 9 marks
Livpool Ltd (Livpool) is listed on the Johannesburg Stock Exchange and manufactures soccer balls
used by the Premier league in South Africa and the United Kingdom. Soccer balls are manufactured
at different factories located in the Western Cape and Gauteng provinces. Livpool’s financial year
end is 31 December.
You are busy assisting the financial accountant in resolving a few outstanding issues in order to
complete the annual financial statements for the financial year ended 31 December 20.13. These
outstanding matters are as follows:
Deferred tax asset
The financial accountant of Livpool recognised a deferred tax asset of R425 000 for the financial
year ended 31 December 20.13 (you may assume the deferred tax asset amount was correctly
calculated). The deferred tax asset originated due to an assessed tax loss in the 20.13 financial
year. The assistant accountant informed the financial director that he must reverse the deferred tax
asset since the South African Revenue Service (SARS) will definitely not reimburse the deferred tax
asset to Livpool. The financial accountant raised this issue with you and asked you to discuss this
matter with the assistant accountant. He also indicated that Livpool Ltd will have sufficient future
taxable profits since Livpool is expected to become profitable within the next six months and
presented a detailed budget indicating a high likelihood that the company will become profitable
within the next six months.
Expansion project
In order to expand its operations Livpool had to expand its storage facilities. Livpool decided to issue
debentures to raise the required funds for this expansion project. On 1 January 20.12, Livpool issued
debentures at fair value to a local investor, Kapitek Ltd, under the following terms and conditions:
Number of debentures 100 000

Maturity date 31 December 20.14
Redemption value Redemption at a 5% premium on the nominal value
Nominal value of one debenture R180
Coupon interest rate 9% per annum on the nominal value
Market interest rate of similar instruments 8,5% per annum
Transactions costs paid by Kapitek on R20 000
1 January 20.12
Livpool did not elect to irrevocably designate its financial liabilities in terms of IFRS 9.4.2.2 to be
measured at fair value through profit or loss.
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CASE STUDY 11
REQUIRED
QUESTION 1
REQUIRED
Marks
(a) Prepare the journal entries which King Flowers Ltd will have to process in order to 5
account for the dividends approved by the shareholders, in terms of IFRIC 17
Distributions of Non-cash Assets to Owners for the year ended 30 June 20.14.
Please note:
• Please include the date of each journal entry.
• Ignore any impairment journals at initial classification.
(b) Prepare the property, plant and equipment note to the statement of financial 23
position of King Flowers Ltd as at 30 June 20.14, according to the disclosure
requirements of IAS 16.73(d) and IAS 16.73(e).
Please note:
• The total column and comparative figures are not required.
• Do NOT disclose plant and equipment of the packaging business in the
above property, plant and equipment note.
Communications skills: presentation 2
(c) Prepare a reconciliation of the balance of the revaluation surplus of 5

King Flowers Ltd at the beginning and end of the current financial year
(30 June 20.14). Start your reconciliation with the opening balance on 1 July 20.13.
(d) Prepare the impairment journal for the assets associated with the packaging 5
business on 30 June 20.14.
Please note:
Please note:

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QUESTION 2
REQUIRED
Marks
(a) Prepare the journal entries to account for the share-based payment scheme for the 10
Please note:
(b) Prepare the journal entry to record the leave pay accrual for the year ended 5
30 June 20.11.
Please note:
• Ignore any normal income tax implications
(c) Calculate the amount (Rand) of work in progress Topwood Ltd transferred to finished 7
products during the 30 June 20.11 financial year.
(d) Calculate the cost of sales that should be included in the financial statements of 3
Topwood Ltd for the year ended 30 June 20.11.
(e) Discuss whether the raw materials needs to be written down to their net realisable 4
value at 30 June 20.11.
Please note:
• • Comparative figures are not required

• • Round off all calculated amounts to the nearest Rand
• • Your answer must comply with International Financial Reporting Standards (IFRS).
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QUESTION 3
REQUIRED
Marks
Discuss the classification and measurement of the debentures in the financial statements of 8
Livpool Ltd for the year ended 31 December 20.13 in terms of IAS 32 Financial Instruments:
Presentation and IFRS 9 Financial Instruments. Your discussion should include
calculations.
Please note:
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CASE STUDY 11
(a) Journal entries
Dr Cr
R R
1 April 20.14
J1 Dividends paid (SCE) 900 000 (½)
Dividend liability (SFP) 900 000 (½)
Recognition of dividend liability
J2 Non-current assets held for distribution (SFP) 800 000 (½)
PPE (Land) (SFP) (R900 000 – R100 000) 800 000 (½)
Reclassification of assets
30 June 20.14
J3 Dividend liability (SFP) (R900 000 – R890 000) 10 000 (1)
Dividends paid (SCE) 10 000 (½)
Remeasurement of dividend liability
J4 Impairment loss/Fair value adjustment (P/L) 15 000 (1)
Non-current assets held for distribution (SFP) 15 000 (½)
((R890 000 – R105 000) – R800 000)
Remeasurement of assets
Total (5)
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(b) KING FLOWERS LTD
PROPERTY, PLANT AND EQUIPMENT
Vehicles Ships Land Buildings

R R R R
Carrying amount at
1 July 20.13 3 981 400 [C1] - 32 000 000 3 600 0009 (½)
Gross carrying amount or cost 4 580 000 [C1] (1) - 32 000 0003 (½) 4 500 0003 (1)
impairment losses (598 600)[C1] (2) - - (900 000)8 (1)
Movements for 20.14
Additions 225 000 (½) 9 000 000 (½) - -
Borrowing costs - 110 504 (1) - -

De/Revaluations - - (1 700 000)4 (1)
Impairment losses: - - (200 000)5 (1) -

through profit or loss
(included in other
expenses)
Impairment losses: - - (300 000)5 (1) -
through other compre-
hensive income
Depreciation for the year (946 477)1 (5) (50 614)2 (1) - (150 000)7 (½)
De-recognition (152 871)[C1] (1½) - - -
Transfer to IFRS 5 - - (800 000)6 (1) -
Carrying amount at
30 June 20.14 3 107 052 9 059 890 (½) 29 000 000 (½) 3 450 000
Gross carrying amount or cost 4 580 0001 (½) 9 110 504 29 000 000 4 500 0003 (½)
impairment losses (1 472 948)1 (½) (50 614) - (1 050 000)3 (½)
Total (23)
1
R105 560 [C1] + R840 917 [C1] = R946 477
R4 580 000 + R225 000 – R225 000 = R4 580 000
R598 600 [C1] + R946 477 – R72 129 [C1] = R1 472 948
2
R9 110 504/30 years [½] x 2/12 [½] = R50 614
3
Given or balancing
4
R32 000 000 – R1 300 000 [½] – R29 000 000 [½] = R1 700 000
5
Non-current assets held for distribution: R1 300 000 [½] – R800 000 (from a) = R500 000
(R1 300 000 – R1 000 000 = R300 000 [1] revaluation surplus and R500 000 – R300 000
= R200 000 [½] P/L)
6
From (a)
7
R4 500 000/30 [½] = R150 000
8
R4 500 000/30 x 6 = R900 000 [1]
9
R4 500 0003 – R900 0008 = R3 600 000
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(c) Reconciliation of revaluation surplus

Revaluation
Surplus
R
Opening balance 1 July 20.13 15 520 0001 (2)
Devaluation land (R1 700 000 (from (b)) – (R1 700 000 x 80% x 28%) (1 319 200) (2)
Impairment – dividend in specie
(R300 000 (from (b)) – (R300 000 x 80% x 28%) (232 800) (1)
Closing balance 30 June 20.14 13 968 000
Total (5)
1 Land: (R32 000 000 – R12 000 000) = R20 000 000 [1] – (R20 000 000 x 80% x 28% =
R4 480 000 [1]) = R15 520 000
(d) Impairment journal

Dr Cr
R R
Impairment loss (P/L) [C2] 1 010 417 (4)
Goodwill (SFP) 500 000 (1)
Plant and equipment accumulated depreciation (SFP) *368 750 (1)
Patent accumulated depreciation (SFP) 141 667 (1)
* The plant and equipment cannot be written down below its recoverable amount.
Total (7)
Maximum (5)
CALCULATIONS
C1. Vehicles
Refrigerator Delivery
truck trucks Total
R R R
1 Jul 20.13 CA 771 400 3 210 000 3 981 400
Cost 980 000 [½] 3 600 0006 [½] 4 580 000
Acc depr (208 600)1 [1] (390 000)7 [1] (598 600)
May 20.14 Depreciation (105 560)2 [1] (105 560)
Derecognition (152 871)3 [1½] (152 871)
512 969 3 210 000 3 722 969
Additions 225 000 [½] 225 000
June 20.14 Depreciation (9 556) (831 361)10 [2] (840 917)
Truck (7 981)4 [1½]
Cooling unit (1 575)5 [½]
30 June 20.14 728 413 2 378 639 3 107 052

1
R980 000 x R74 500/350 000km = R208 600 [1]
2
R980 000 x (112 200 km – 74 500 km)/R350 000 = R105 560 [1]
3
Deemed component: R225 000 [½] – (R225 000 x 112 200 km [½]/350 000 km [½] =
R72 129) = R152 871
4
Truck: R512 969 [½] x 3 700 km [½]/(350 000 km – 112 200 km = R237 800 (remaining km)
[½]) = R7 981
5
Cooling unit: 225 000 x 210 hours/30 000 [½] hours = 1 575
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6
R1 200 000 x 3 = R3 600 000 [½]
7
R3 600 000 x 130 000 km/(400 000 km x 3) = R390 000 [1]
8
Depreciable amount: R3 210 000 – (R250 000 x 3) = R2 460 000 [½]
9
New useful life: 320 000 km x 3 = 960 000; remaining km: 960 000 km [½] – 130 000 km
[½] = 830 000 km
10
Depreciation: R2 460 0008 x 280 500 km [½]/830 0009 = 831 361
C2. Packaging business
Carrying amount of assets before impairment
R
Plant and equipment
(R2 200 000 – ((R2 200 000 – R100 000) x 19/48 = R831 250 Acc depr) 1 368 750 [1]
Patent (R300 000 – (R300 000 x 19/36 = R158 333 Acc depr) 141 667 [1]
Goodwill (R3 000 000 – (R2 200 000 + R300 000)) 500 000 [1]
Carrying amount of CGU 2 010 417
Recoverable amount* (1 000 000) [½]
Impairment 1 010 417
[3½]
* The plant and equipment are not to be used in current form any longer and no consideration
can be given to future cash inflows from the enhancement of the assets’ performance that
has not already taken place, therefore the recoverable amount is R1 000 000. The
recoverable amount of the patent is close to nil as King Flowers cannot transfer the patent
and the patent will cease to exist if the plant and equipment is modified.
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QUESTION 2 - Suggested solution
(a) Share based payment journal
Dr Cr
R R
20.11
J1 Employee benefit cost (P/L) [C1] 572 750 (½)
Equity-settled share-based payment reserve
(equity) 572 750 (6½)
Acccelerated vesting in respect of year 3 and 4 done
in year 3
J2 Retained earnings (equity)
[(R28 x 150 x 255) – R1 032 750)] 38 250 (1)
Equity-settled share-based payment reserve
(equity) [C1] 1 032 750 (½)
Employee benefit cost (P/L)
(255 x 150 x (R30 – R28)) 76 500 (1½)
Bank (SFP) (255 x R30 x 150) 1 147 500 (1)
Repurchase of equity interest
Total (11)
Maximum (10)
(b) Journal entry for leave pay accrual
Dr Cr
R R
J1 Staff cost (P/L) [C2] 191 712 (4)
Leave pay accrual (SFP) 191 712 (½)
Accrual for the leave pay for the non-vesting unused
accumulated leave for 20.11 (½)
(5)
(c) Work in Progress transferred to finished products
R
Raw material
- Opening balance at 1 July 20.10 532 800 (½)
- Purchases (R5 728 500 + R56 000 + R32 000) 5 816 500 (1)
- Closing balance (R5 816 500 x 28%) (1 628 620) (1)
Transferred to WIP 4 720 680
Work in progress
- Opening balance at 1 July 20.10 428 400 (½)
- Raw material 4 720 680 (½)
- Direct labour (125 000 hours + 3 400 hours) x R12,60 1 617 840 (1)
- Fixed production overheads [C3] 1 150 276 (1)
- Variable production overheads 752 800 (½)
- Closing balance (8 241 596 x 15%) (1 236 239) (1)
Transferred to finished products 7 433 757
Total (7)
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(d) Cost of sales

R
Cost of products sold [C4] 7 144 318 (2)
Unallocated fixed production overhead costs [C3] 100 024 (1)
Cost of sales 7 244 342
(3)
(e) Discussion if raw materials need to be written-down to its NRV
COMMENT
The general rule of IAS 2 is that inventories should be reflected at the lower of cost or net
realisable value.
However raw materials or supplies that will be incorporated in the finished product are not
written-down below cost if the finished product is expected to be sold at or above cost
(IAS 2.32).
Selling price of finished products (750 – 50 – (750 x 2.5%)) 681,25 (1)

Cost price of finished products (1 858 439 / (13 800 x 25%)) 538,68 (1)
Cost per kilogram of raw material purchased during the year
(5 816 500 / 105 000) 55,39 (1)
Net realisable value per kilogram (given) 50,00 (½)
The net realisable value of the finished products is above the cost price, the raw
material should not be written down to its net realisable value. This is because raw
materials or supplies that have been incorporated in the finished product are not written-
down below cost if the finished product is expected to be sold at or above cost. (2)
Total (8½)
Maximum (4)
CALCULATIONS
C1. Share based payment reserve balance 30 June 20.10
R
Original options (350 – 40 – 20 – 60) x R26 per option x 150 option per
manager x 2/4 years 448 500 [1½]
Modification (230 x 150 x 1/3 x (R23 – R22)) 11 500 [1½]
Balance 30 June 20.10 460 000
Accelerated vesting at 30 June 20.11
R
Original options (350 – 40 – 20 – 35) x R26 x 150 994 500 [1½]
Modification (255 x 150 x (R23 – R22)) 38 250 [1]
Balance as at 30 June 20.11 1 032 750
Less: Share based payment reserve (460 000) [½]
Total to be expensed for the year ended 30 June 20.11 572 750
Total [6]
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C2. Leave provision
R
Directors R570 000 / 260 x 4 x 14# 122 769 [1½]
Sales personnel R356 500 / 260 x (8 – 2) x 5 41 135 [1½]
Factory personnel R120 500 / 260 x 60 x 1 27 808 [½]
191 712
[3½]
# 28 – 12 = 16 days, but limited to 15 days that are allowed to be carried over, but
expected only to take 14 days in 20.12
C3. Fixed production overheads
Fixed overheads / Normal capacity units (R1 250 300/15 000) 83,35 per unit [½]
Per unit x actual units produced (R83,35 x 13 800) R1 150 276 [½]
Under-recovery of fixed production overheads (1 250 300 – 1 150 276) R 100 024 [1]
C4. Finished products
R
Opening balance 1 569 000 [½]
Work in progress 7 433 757 [½]
Closing balance (25% x R7 433 757) (1 858 439) [1]
Products sold, i.e. cost of sales 7 144 318 [2]
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Classification and measurement of the debentures in the financial statements of Livpool Ltd
Classification
COMMENT
A financial liability is any liability that is a contractual obligation to deliver cash or another
financial asset to an entity (IAS 32.11(a)(i)).
• Livpool has a contractual obligation to deliver cash to Kapitek Ltd in the form of annual
coupon payments and the redemption amount. (1)
• Hence the debentures issued are classified in the financial statements of Livpool as a
financial liability in terms of IAS 32. (1)
Measurement
COMMENT
Financial liabilities are initially measured at fair value minus transaction costs, in the case
of a financial liability not measured at fair value through profit or loss (IFRS 9.5.1.1).
• The debentures issued by Livpool should be measured at a fair value of R18 934 479
[C1] on initial recognition. The impact of transaction costs on the initial measurement
may be ignored by Livpool since the transaction costs were paid by the investor
(Kapitek Ltd). (3)
COMMENT
All financial liabilities are subsequently measured at amortised cost except for those
financial liabilities mentioned in IFRS 9.4.2.1(a) – (e).
• Since the debentures issued are not those financial liabilities mentioned in
IFRS 9.4.2.1(a)–(e) the debentures should be subsequently measured at amortised cost. (1)
COMMENT
The amortised cost of the financial liability is the amount at initial recognition minus the
principal repayments, plus or minus the cumulative amortisation using the effective
interest method of any difference between the initial amount and the maturity amount
(IFRS 9 Appendix A).
• The effective interest rate on the debentures is the market interest rate on similar
instrument of 8,5% per annum. (1)
• The amortised cost of the debentures on 31 December 20.13 amounts to
R18 912 442 [C2]. (1)
Total (8)
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CALCULATIONS
C1. Present value of the bonds issued on 1 January 20.12

2. I/Y 8,50% 2. I/YR 8,50% [½]
3. N 3 3. N 3 [½]
4. FV R18 900 0001 4. FV R18 900 0001 [½]
5. PMT R1 620 0002 5. PMT R1 620 0002 [½]
6. COMP PV R18 934 479 6. PV R18 934 479
1 100 000 x R180 x 1,05 = R18 900 000

2 100 000 x R180 x 9% = R1 620 000
C2. Amortised cost of the bonds issued on 31 December 20.13

 ===
[BAL]: R18 912 442 [INT]: R40 566 [½]
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QUESTION 1 20 marks
You are employed by Expert Ltd (Expert). Expert provides accounting and tax consulting services to
various clients. The International Accounting Standards Board (IASB) issued the revised Conceptual
Framework for Financial Reporting (Conceptual Framework), a comprehensive set of concepts for
financial reporting in March 20.18. Your portfolio includes the following two allocated clients who
have approached you regarding the recognition of assets and liabilities in terms of the revised
Conceptual Framework.
Client 1: Mogale Ltd
On 13 June 20.18, Mogala Ltd (Mogala) purchased a holographic touch screen patent from
Innovation Ltd (Innovation) at a cost of R250 million. This patent grants Mogala sole access to all
international and local patents with regard to the design and manufacture of holographic touch
screens. Therefore, only Mogala can utilise the patent to design and manufacture the holographic
touch screens. This will result in Mogala being the only supplier (seller) of holographic touch screen
smartphones and it will also ensure that Mogala is the only designer and manufacturer of such
smartphones.
Mogala will manufacture all the other components of the smartphones and it will assemble the
holographic touch screen smartphones and it is estimated that 90 million holographic touch screen
smartphones will sell within the next financial year at a satisfactory profit margin.
Client 2: Sea Homes Ltd
Sea Homes Ltd (Sea Homes) is a new real estate agency which specialises in the selling of beach
front holiday homes. Sea Homes operates in the south coast of the Kwazulu-Natal region in South
Africa. As part of its expansion strategy, a decision has been taken by the directors of the company
to open a new office on the northen coast within the of Kwazulu-Natal region.
Sea Homes paid R40 000 to Umhlanga News to advertise holday homes, which are for sale, in its
newspaper during January 20.18. This amount was paid on 15 December 20.18.
MJM
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CASE STUDY 12
REQUIRED
QUESTION 1
Marks
Discuss, in terms of The Conceptual Framework for Financial Reporting 20.18, whether 18
the patent (refer to client 1) and payment to Umhlanga News (refer to client 2) may be
recognised as an asset in the financial statements of Mogale Ltd and Sea Homes Ltd for
the financial years ended 31 December 20.18.
Please note:

• Ignore Value Added Taxation (VAT) implications.
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CASE STUDY 12
Discuss, in terms of The Conceptual Framework for Financial Reporting 20.18, whether the
patent (refer to client 1) and the payment to Umhlanga News (refer to client 2) may be
recognised as an asset.
An item can only be recognised as an asset if it meets the definition of an asset (Conceptual
Framework 5.6) and only if recognition of the asset provides users of financial statements
with information that is useful (Conceptual Framework 5.6 – 5.7).
An asset is a present economic resource contolled by an entity as a result of past events

(Conceptual Framework 4.3).
An economic resource is a right that has the potential to produce economic benefits
MOGALA LTD - Client 1

Definition of an asset
Right
Since Mogala acquired (purchased) the patent, Mogala has the sole right to use the patent
(intellectual property) for the design and manufacture holographic touch screens (1)
(Conceptual Framework 4.6 (b)(ii)).
Potential to produce economic benefits (economic resource)
The right to design and manufacture holographic touch screens has the potential to produce
economic benefits since the holographic touch screen smartphones produced will be sold to
generate revenue which will give rise to an asset (either cash or a trade receivable) which is
an economic resource (Conceptual Framework 4.16 (d)). (2)
Control
The patent can be used by Mogala only, therefore, Mongala has the ability to direct the use
of the right to manufacture holographic touch screen smartphones by having the exclusive
use of the patent (Conceptual Framework 4.20). (1)
Only Mogala will obtain any revenue derived from the sale of the holographic touch screen
smartphones (Conceptual Framework 4.20). (1)
Since the patent may only be used by Mogala, Mogala has the present ability to prevent
other entities from directing the use of the patent, to design and manufacture these
holographic touch screens in the production of the holographic touch screen smartphones
(Conceptual Framework 4.20). (1)
Revenue received from the sale of holographic touch screen smartphones will accrue to
Mogala only (be legally in the name of Mogala). Mogala therefore has the present ability to
prevent others from obtaining the revenue generated from the sale of the holographic touch (1)
screen smartphones (Conceptual Framework 4.20).
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Past event
The past event is the acquisition of the holographic touch screen patent by Mogala from
Innovation Ltd which gives Mogala the the right to use the patent to manufacture touch
screens. (1)
Recognition criteria
Relevant information
• The patent was acquired at a cost, therefore, there is no uncertainity whether the
patent exists (Conceptual Framework 5.12 (a)), nor is (1)
• the probability of the inflow of future economic benefits is low as the analysis of the
current customer base and target customer forecast that 90 million holographic touch
screens smartphones will sell in the first year, at a satisfactory profit (Conceptual
Framework 5.12 (a)). (1)
Faithful representation
The holographic touch screen patent was acquired by Mogala at a cost of R250 million,
therefore, there is no measurement uncertainity associated with the patent (Conceptual
Framework 5.18). (1)
Conclusion
The patent will be recognised as an asset in terms of the Conceptual Framework for
Financial Reporting in the financial statements for the year ended 31 December 20.18. (1)
Total (12)
Maximum (10)
Communication skills: logical argument and clarity (1)
SEA HOMES LTD - Client 2

Definition of an asset
Right
Sea Homes Ltd has the right for the advertisements to appear in the Umhlanga News paper
in the following financial year (January 20.19), due to the payment which has been made on
15 December 20.18 (Conceptual Framework 4.7 (ii)). (1)
Potential to produce economic benefits
This right has the potential to produce economic benefits to Sea Homes Ltd, in the form of
both:
• cash inflows through potential clients who might buy a home which is advertised for
sale, and
• in the form of reduced future cash outflows since the cash payment for the newspaper
advertisements have already been made (a prepayment) (Conceptual
Framework 4.16 (d)). (2)
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Control
The control arises through the underlying contract with the newspaper (Conceptual
Framework 4.20) (1)
Past event
The past event is the prepayment for the advertisement on 15 December 20.18, before the
end of the reporting period. (1)
Recognition criteria
The right has two potential economic benefits:
• The potential to produce economic benefits through cash inflows from any future home
sales has such a high level of measurement uncertainty (i.e. we cannot quantify the
number or value of the sales that will occur as a direct result of the newspaper
advertisement) that, if we were to recognise such a benefit, we would not achieve
faithful representation (Conceptual Framework 5.18). (2)
• However, the second potential economic benefit identified, being the reduced future
cash outflow (i.e. reduced advertising cash outflows), has no measurement uncertainty
at all (we know the amount that has been prepaid) and thus faithful representation is not
adversely affected and this benefit may therefore be recognised as an asset (2)
Conclusion
The payment will be recognised as an asset in terms of the Conceptual Framework for
Financial Reporting in the financial statements for the year ended 31 December 20.18. (1)
Total (10)
Maximum (8)
Comminication skills: Logical argument and clarity (1)
MJM

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Tutorial letter 107/0/2020

APPLIED FINANCIAL ACCOUNTING I

Department of Financial Governance

This tutorial letter contains important information

Case study 7 102

Case study 8 119

Case study 9 138

Case study 10 151

Case study 11 167

Case study 12 187

Please send all e-mail queries to: fac2postgrad@unisa.ac.za

Contact number for this tutorial letter:

012 429 4184

2 1. Mining Ltd 40 The Conceptual Framework for Financial 22

2. Furn Décor Ltd 60 IFRS 9: Financial instruments 27

3 1. Tyger 40 IFRS 16: Leases 42

5 1. CurWool Ltd 42 IAS 36: Impairment of assets 76

2. Colourlux Ltd 60 IAS 32: Financial Instruments: Presentation 139

2. Kola Ltd 40 IAS 32: Financial instruments: 156

CASE STUDY 1 100 marks

QUESTION 1 100 marks

IGNORE VALUE ADDED TAXATION

CHONGHONG LTD – SUPPLY OF HARD DRAWN COPPER WIRE (HDCW)

CHONGHONG LTD – LOAN

Assume the following exchange rates are applicable:

1 March 20.18 12,95

POWER CHINA INTERNATIONAL ENERGY PROJECT

Note Cost Carrying amount

1. Land and buildings

The following information relates to Property A:

Included in inventory is fibre optic cable to the value of R875 000.

Ordinary shares 5 000 000

The following information relates to each property:

Original cost price:1 March 20.16 R2 000 000

Assume the cost to distribute the properties are negligible.

Details of bonus scheme:

Commencement date of bonus scheme: 1 March 20.18

Projected share values

Share price Fair value* of shares

YOU NOW HAVE 150 MINUTES TO COMPLETE THE CASE STUDY.

Communication skills: presentation and layout 1

Your document had to be comprehensive in order to be distributed to members of the

Communication skills: logical argument 1

Communication skills: presentation and layout 1

• Round off all amounts to the nearest rand.

QUESTION 1 – Suggested solution

(a) Journal entries – Foreign loan

(b) CABLE LTD

NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.19

1. Property, plant and equipment

Land Buildings Plant

4 750 000 4 750 000

Annual inspection 60 000 (1)

Safety equipment & spares

Recoverable amount 8 500 000 (1)

Revised dismantling provision (refer below) (184 703) (1½)

SHARP EL 738 Hp 10B11

SHARP EL 738 Hp 10B11

(c) Journal entries

J3 Non-current assets held for distribution (SFP)

(d) Bonus scheme

Accounting of Proposed New Bonus Scheme