COLLEGE OF ACCOUNTING SCIENCES

TEST 3: 30 JUNE 2020

READING

PAPER 2: FAC4862/NFA4862/ZFA4862
ADVANCED FINANCIAL ACCOUNTING II
(40 Marks)

Time and Duration: 1 hour with 15 minutes reading time. Students MUST be seated by 10:00.

SECOND SESSION 10:00 10:15 Handing out of Paper 2 and answer scripts 15 minutes
and a separate REQUIRED section placed
upside down on the desk.

10:15 10:30 Reading time. 15 minutes

10:30 11:30 PAPER 2: FAC4862/NFA4862/ZFA4862 1 hour

11:30 11:45 Collection of Paper 2. 15 minutes

EXAMINATION PANEL AS APPROVED BY THE DEPARTMENT.

Please ensure that you have completed the cover of the answer book for this question in full i.e. name,
surname, address, student number, code of paper and test number.

This FAC4862/NFA4862/ZFA4862 (ADVANCED FINANCIAL ACCOUNTING II) question paper

consists of 4 pages and is out of 40 marks.

THE USE OF A NON-PROGRAMMABLE CALCULATOR IS PERMISSIBLE.

This test paper remains the property of the University of South Africa and may not be removed from
the test venue.

PLEASE NOTE:

The test is a limited open-book test: Students are allowed to take ONE COPY of the 2019/2020
version of the SAICA Handbook or any version published in one of the previous years into the
venue.
Students will be allowed to highlight and to make notes on the question paper and consult their
allowed reference books during and after the 15 minutes reading time.
The REQUIRED section must only be turned over once the invigilator announces this.
All tests and examinations should be answered in ENGLISH only.

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TEST 3

QUESTION 1 40 marks

Motlokase Ltd (Motlokase) is an investment holding company with investments predominantly in the
energy and mining sectors. The company aims to achieve consistent long term growth by investing in
sustainable projects. Motlokase is listed on the Johannesburg Stock Exchange. Motlokase and all
investment companies have a year end of 29 February.

Struggling with rolling power cuts, Eskom has stated that it requires an additional 5 000 megawatts (MW)
of capacity to carry out critical maintenance on its power plants and to decommission older power plants.

As a result, there is renewed focus on the Independent Power Producers Procurement Programme
(IPPPP), which creates opportunities for greater investment in renewable energy.

Investment in Umoya Ltd

Motlokase acquired 15% of the ordinary share capital and voting rights in Umoya Ltd (Umoya) on
1 March 2015 for a cash consideration of R100 million. Umoya operates a 120MW wind farm in the
Northern Cape and is currently in the planning phase for the construction of another wind farm in the
Eastern Cape that will have a generating capacity of 160 MW.

Motlokase acquired an additional 40% of the share capital and voting rights of Umoya on
1 September 2019. From that date, Motlokase obtained control of Umoya as defined in IFRS 10
Consolidated Financial Statements. In order to pay the consideration on 1 September 2019, Motlokase
obtained a loan from the Independent Development Corporation amounting to R350 million and funded
the remaining R50 million from its cash reserves.

Umoya had the following equity balances at the respective dates:

1 March 2019 1 March 2015

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

Ordinary share capital (1 000 000 ordinary shares) (700 000) (700 000)
Retained earnings/loss 2 500 3 000
(697 500) (697 000)

All the assets and liabilities of Umoya were deemed to be fairly valued, except for the following:

Umoya owns various pieces of land that cost R43 million. Umoya measures land in accordance
with the cost model per IAS 16 Property, Plant and Equipment. The land was independently valued
at R50 million on 1 September 2019. There was no change in the value of the land since that date.

All the other assets and liabilities of Umoya were deemed to be fairly valued at 1 September 2019 and
no additional assets, liabilities or contingent liabilities were identified.

Motlokase has been providing specialized monthly consulting services to Umoya from 1 March 2019 at
a cost of R1,5 million per month. Umoya settles each invoice strictly within seven days after month end.

Umoya made a profit of R40 million for the 2020 financial year. The price per share of Umoya amounted
to R1 000 per share on 1 September 2019.

Investment in Amalahle Ltd

Motlokase acquired 75% of the share capital and voting rights of Amalahle Ltd (Amalahle) on
1 January 2015 for a cash consideration of R22 million. From that date, Motlokase obtained control over
Amalahle as defined in IFRS 10 Consolidated Financial Statements. Amalahle is a coal exploration and
mining company.

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TEST 3

Amalahle acquisition consisted of the following:

Dr/(Cr)
R

Ordinary share capital (100 000 ordinary shares) (1 000)

Retained earnings (12 120)
Revaluation surplus (land) (1 850)
(14 970)

All of Amalahle assets and liabilities were deemed to be fairly valued on 1 January 2015, except for
the following:

Specialized machinery is used in the mining operations. Due to various factors, including an
increased demand and limited manufacturers of the machinery, the fair value of the machinery
used by Amalahle had a fair value of R4 million higher than its carrying amount. The specialized
machinery used by Amalahle has a remaining useful life of eight years from 1 January 2015.

Amalahle owns land which was undervalued by R3 million.

No additional assets, liabilities or contingent liabilities were identified by Motlokase on the date of
acquisition. The fair value of the non-controlling interests amounted to R5 million on that date.

Motlokase took a drastic decision to exit the coal mining industry and sold all of its shares in Amalahle
to an independent third party on 31 January 2020 for a cash consideration of R25 million.

The following information relating to Amalahle is relevant to the transaction:

The retained earnings balance on 1 March 2019 amounted to R16,5 million;
The cumulative fair value adjustments on land since its original purchase up to 31 January 2020
amounted to R9 million. It is the accounting policy of Amalahle to account for land in accordance
the revaluation model in accordance with IAS 16 Property, Plant and Equipment. These
adjustments were correctly processed in its separate financial records; and
The loss after tax for the 2020 financial year is R1,1 million.

Investment in Ilanga Ltd

Motlokase acquired a 51% controlling interest in Ilanga Ltd (Ilanga) on 1 July 2016. Ilanga operates a
successful solar farm in the Garden Route. Ilanga was founded by Mr Bavuma, who owns 40% of the
issued share capital and voting rights of Ilanga. This shareholding provides Mr Bavuma with significant
influence over the financial and operating policy decisions of Ilanga Ltd.

Mr Bavuma is married to Mrs Bavuma, who holds the remaining 9% interest. She is a director and
shareholder of an events company named Tembi Ltd. She exercises significant influence over the
financial and operating policy decisions of Tembi Ltd.

The following information for Ilanga for the 2020 financial year is presented:

Dr/(Cr)
R

Ordinary share capital (1 000 000 ordinary shares) (5 000)

Retained earnings 1 July 2016 (500)
Retained earnings 1 March 2019 (9 850)
Profit for the year (7 000)
Dividend declared and paid on 30 October 2019 1 000

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TEST 3

Motlokase acquired the 40% shareholding of Mr Bavuma on 31 October 2019 at its fair value.

The price per share of Ilanga was as follows at the respective dates:

31 October 2019 1 March 2019 1 July 2016

Fair value R37,50 R30,00 R18,00

Additional information

1. It is the accounting policy of the Motlokase Group to account for land in accordance with the
revaluation model in the consolidated financial statements in accordance with IAS 16 Property,
Plant and Equipment.

2. There were no other share transactions, apart from those specifically stated in the scenario.

3. Investments other than investments in subsidiaries are measured in terms of IFRS 9 Financial
Instruments. Motlokase irrevocably elected to present subsequent changes in the fair value of the
investments in other comprehensive income in a mark-to-market reserve.

4. Motlokase elected to transfer any cumulative gains or losses within equity in terms of
IFRS 9.B5.7.1.

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

6. Motlokase elected to measure non-controlling interests at their fair value at the acquisition date
for all its acquisitions.

7. The profit for the year accrued evenly throughout the year for Motlokase and all the companies in
the group.

8. There were no changes in the issued share capital of any of the companies since their respective
incorporation dates.

9. Assume a normal income tax rate of 28% and a capital gains tax inclusion rate of 80%. Ignore
Value Added Tax (VAT) and Dividend Tax.

©
UNISA 2020

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