QUESTION 1

A. Prepare a memorandum to the finance director of ZFruits and advise on how the ZFruits group
initially recognise and initially measure the following, in terms of IFRS 3 Business Combination:
• Client list; [7]
• Court case [8]

MEMO
To : The Finance Director
FROM: CTA student
Date : 20 October 2017 1

RE: Initial recognition and measurement of Client List and Court Case in the ZFruits
Group financial statements in terms of IFRS 3 Business Combinations

The acquirer shall recognise, separately from goodwill, the identifiable intangible assets 1
acquired in a business combination. (IFRS 3 B31)

An intangible asset is identifiable if it is capable of being separated and sold, transferred, 1

licensed, rented or exchanged with other assets or if it meets the contractual legal
criteria.
Th customer list from Shuma is licensed as this is an industry practice, thus meets the 1
contractual legal criteria.
ZFruits also signed a confidentiality agreement which gives it the full right to sell the list to 1
third parties, thus the list can be separately transferable and identifiable from the rest of
other rights and obligations of the acquire.
Since there are no restrictions on ZFruits to sell the list, the customer list should be 1
recognized separately from goodwill as an asset.
The customer list will initially be measured at Fair Value (IFRS 3 par 18) 1
AVAILABLE 7
MAX 7

A contingent liability is:

• A possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity; 1
or
• a present obligation that arises from past events but is not recognised because it
is not probable that there will be an outflow of resources or the amount of the
obligation cannot be measured reliably. (IAS 37 par 10)
At acquisition date, Shuma has a court case instigated against her by SAZ. The case 1
resulted from alleged improper packaging practices of shuma fruits conducted during
October 2015, thus Shuma has a present legal obligation to pay penalties to SAZ.
The penalty amount is reliably estimated to reach $100 000. The lawyers are, however, 1
of the opinion that the court case will not be successful thus probability of occurrence is
low.
The penalty therefore qualifies to be recognised as a contingent liability. 1
The requirements in IAS 37 on contingent liabilities however do not apply at the 1
acquisition date. The acquirer shall recognise as of the acquisition date a contingent
 liability assumed in a business combination if it is a present obligation that arises from
past events and its fair value can be measured reliably. (IFRS 3 par 23)
Shuma has a present obligation as it failed to comply with the requirements of SAZ which 1
attracted penalties.
The fair value of the obligation can be reliably measured at $9,000.
Probability of outflow of resources embodying economic benefits is not considered at 1
acquisition date.
ZFruit must therefore recognise the contingent liability in its consolidated financial 1
statements at acquisition date at its fair value of $9,000.
Since the penalty will be deductible for tax purposes, ZFruit must also initially recognise a 1
deferred tax asset at 25.75% of the fair value as at the acquisition date.
AVAILABLE 9
MAX 9
LOGICAL FLOW 1

B. Prapare the “at acquisition” pro-forma journal entry in the ZFruits group for the investment in
Shuma Ltd. [12]

DR CR
Share Capital 100,000 1/2
Retained Earnings 12,300,000 1/2
Land 462,000 1/2
Deferred Tax 92,400 1
Contingent Liability 9,000 1
Deferred Tax 2,318 1
Customer List 500,000 1
Deferred Tax 128,750 1
Investment (C1) 13,631,570 4 1/2
NCI 2,490,000 1
AVAILABLE 12
MAX 12
C1 Investment
Investment 13,631,570
Cash 6,450,000 1
Transaction Cost 230,000 1
Financial Asset 800,000 1
Deferred Consideration (C2) 6,611,570 1 1/2

C2 Deferred Consideration
FV 8,000,000 1/2
N 2 1/2
I 10% 1/2
CMPT PV - 6,611,570
C. Advise the Accountant of ZFruits on the correct classification of the investment in Roro in the
financial statements of ZFruits as per IFRS 11. [8 marks]

The classification of joint arrangements first depends on the structure of the joint 1
arrangement. The joint arrangement that ZFruits entered into is structured
through a separate vehicle being Roro (Pvt) Ltd, thus can either be a joint venture
or a joint operation. (IFRS 11 B19)
Since Roro is a legal persona, all the assets and liabilities therefore are registered 1
in Roro’s name and not in the names of the partners. The partners therefore
legally have rights to the net assets of Roro.
This can therefore potentially result in the arrangement being a joint venture 1
unless if the rights are changed through a contractual agreement. (IFRS 11 B26).
An assessment of the rights relayed by the contractual agreement must therefore
be assessed.
ZFruits need to assess if the terms of the contractual arrangement give: 1
(a) rights to the assets, and obligations for the liabilities, relating to the
arrangement (joint operation); or
(b) rights to the net assets of the arrangement (ie the arrangement is a joint
venture).
As per the contract, all parties have rights to the individual assets and obligation to 1
individual liabilities of Roro based on their shareholding. The contract therefore
seem to override the legal rights. (IFRS 11 B26)
The parties to the arrangement also seem to have sole rights to the output of ½
Roro.
When the activities of an arrangement are primarily designed for the provision of 1
output to the parties, this indicates that the parties have rights to
substantially all the economic benefits of the assets of the arrangement. (IFRS 11
B31)

The effect of an arrangement with such a design and purpose is that the liabilities 1
incurred by the arrangement are, in substance, satisfied by the cash flows received
from the parties through their purchases of the output.

When the parties are substantially the only source of cash flows contributing to
the continuity of the operations of the arrangement, this indicates that the parties
have an obligation for the liabilities relating to the arrangement (IFRS 11 B32)
The partners to Roro therefore have rights to the assets and obligations to the 1
liabilities of Roro based on their shareholding structure, thus ZFruits should classify
their investment in Roro as a joint operation.
AVAILABLE 8½
MAX 8
LOGICAL FLOW 1
D. Prepare the journal entries to record the financial effects of Roro in ZFruits financial
statements. Assume that the investments in Roro should be classified as investment in a
joint operation as defined by IFRS 11. [15 Marks]

"000" "000"
DR CR
J1 PPE (25%*12750) 3,188 1
Trade and Other Receivables (25%*1920) 480 1
Cash and Bank 1,474 1
Investment (SFP) 2,500 1
Retained Earnings (25%*3225) 806 1
Profit for the period (25%*5247) 1,312 1
ZIMRA (25%*375) 94 1
Trade and Other Payables (25%*1750) 438 1

J2 Revenue (P/L) 875 1

Cost of Sales (P/L) 875 1
25%*3,500,000
Reversal of sales within the entity

J3 COS
Inventory 26 1.5
25/125*520,000*25% 26 0.5
Unrealised profit

J4 Deferred Tax (SFP) 7 1.5

Tax expense (P/L) 7 0.5

J5 Trade Payables 125 0.5

Trade Receivables 125 0.5
25%*500,000
Intercompany transaction
AVAILABLE 15
MAX 15
PRESENTATION 1
E. Calculate the carrying amount of investment in Damba in the ZFruits group financial
statements using the equity methods as per IAS 28. [12 Marks]

Investment in Associate
Cost 1,942,500 1
Bargain on Purchase - 2
Share of Retained Earnings since acquisition 262,500 1 1/2
(7,950,000-6,200,000)*15%
Share of Profit for the priod (15%*1,567,000) 235,050 1
Unrealised profit inventory - 5,123 4
- 14,400 3
Dividends received (600,000*15%) - 90,000 1
Investment in Associate CA 2,420,527
Unrealised profit land
AVAILABLE 13
MAX 13

Intragroup Transaction
C1 Unrealised profit in inventory
Inventory closing balance 230,000 1/2
Mark up (25/125*23000) 46,000 1
Unrealised profit (15%*46,000) 6,900 1
Tax Impact - 1,777 1
After tax unrealised profit 5,123

C2 Unrealised profit on Land

Selling Price 620,000 1/2
CA at time of sale 500,000 1/2
Gain on disposal 120,000
CGT tax impact (20%*120,000) - 24,000 1
Unrealised profit 96,000
Portinon of unrealised profit reversed 14,400 1
(15%*96,000)

C.3 Bargain on Purchase Test

Consideration 1,942,500 1/2

FVIDNA 11,200,000 1
Portion FVIDNA acquired (15%*11,200,000) 1,680,000 1/2
Goodwill (already embedded in cost) 262,500