Assessment 10

7 November 2023

100 marks
180 minutes writing time
30 minutes for uploading

This assessment consists of 2 questions. This assessment consists of 10 pages.

INSTRUCTIONS:

1. Students must upload their answer scripts in a single PDF file (answer scripts must not be
password protected or uploaded as “read only” files).

2. NO emailed scripts will be accepted.

3. Students are advised to preview submissions (answer scripts) to ensure legibility and that
the correct answer script file has been uploaded.

4. Incorrect file format and uncollated answer scripts will not be considered.

5. Incorrect answer scripts and/or submissions made will not be marked and no opportunity
will be granted for resubmission.

6. Mark awarded for incomplete submission will be the student’s final mark. No opportunity for
resubmission will be granted.

7. Mark awarded for illegible scanned submission will be the student’s final mark. No
opportunity for resubmission will be granted.

8. Submissions will only be accepted from registered student accounts.

9. Students suspected of dishonest conduct during the assessment will be subjected to

disciplinary processes. UNISA has a zero tolerance for plagiarism and/or any other forms of
academic dishonesty.

10. Students are provided 30 minutes to submit their answer scripts after the official assessment
time. Submissions made after the official assessment time will be rejected and will not be
marked.

Open Rubric
 FAC3764 Assessment 10

FAC3764
Date: 7 November 2023

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 FAC3764 Assessment 10
QUESTION 1 (50 marks) (90 minutes)

Todo Limited (“Todo”) is a listed South African media broadcasting company which offers live TV
broadcasting and streaming services. Todo introduced the streaming services as a new service within
the 2023 financial year. Streaming services allow customers to watch television shows on demand. Due
to new entrants entering the market as well as current service providers like “Nedflax” the broadcasting
industry is highly competitive in South Africa. Todo has a 31 March year end.

You are a newly qualified accountant and have recently joined Todo. For the financial year ending
31 March 2023 the following matters came to your attention that need to be resolved before the financial
statements can be signed off.

Patent – TV antenna amplifier

Todo embarked on a research and development project during the 2022 calendar year to develop a new
TV antenna amplifier which will amplify the broadcasting signals to better the delivery of quality pictures
to customers. At the completion of the research and development project, Todo registered a patent for
this developed TV antenna amplifier with the Companies and Intellectual Property Commission (CIPC)
of South Africa, for a period of 20 years. The patent was ready for use as intended by management, as
well as brought into use on 1 August 2022.

Below are details of the costs incurred in the in-house research and development project of the TV
antenna amplifier:
R
Phase 1 costs (Note 1) incurred 1 March 2022 to 31 March 2022 ................................... 150 000
Phase 1 costs (Note 1) incurred 1 April 2022 to 30 April 2022 ........................................ 170 000
Phase 2 costs (Note 2) incurred 1 May 2022 to 31 July 2022 .......................................... 1 400 000
Expected value of the 20-year-old patent (Note 3) ........................................................... 400 000

Note 1: Costs incurred in investigating the prospect of developing the TV antenna amplifier. These costs
include costs incurred when performing research-related tasks.
Note 2: Costs incurred in the application of the research findings to develop the TV antenna amplifier.
These costs meet the requirements for recognition as per IAS38, Intangible assets.
Note 3: A broadcasting expert was contacted by Todo on 1 August 2022, to estimate the value of the
TV antenna amplifier patent and the end of the 20-year patented term. There is currently no open market
for this type of patent nor is there a buyer committed to purchasing the patent in 20 years’ time.

The previous accountant of Todo accounted for the cost incurred during the research and development
project of the TV antenna amplifier within the 2022 financial year, as follows:
Dr Cr
R R
Research cost (P/L) ................................................................................... 150 000
Bank (SFP) ......................................................................................... 150 000
Recognition of research cost

Subsequently within the 2023 financial year, the previous accountant accounted for the costs incurred
in relation to the entire research and development project of the TV antenna amplifier, as follows:
Dr Cr
R R
Intangible assets – Patent (SFP) ............................................................. 1 720 000
Bank (SFP) ......................................................................................... 1 570 000
Gain on capitalisation of previously expensed research cost (P/L) 150 000
Recognition of internally generated intangible asset

Depreciation expense (P/L) ..................................................................... 66 000

Accumulated amortisation – Patent (SFP) .......................................... 66 000
Recognition of amortisation for the 2023 financial year
(R1 720 000 - R400 000) / 20
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 FAC3764 Assessment 10
QUESTION 1 (continued)

Streaming services

The streaming services were first advertised by Todo in December of 2022 whilst streaming services
were launched nationally from 1 February 2023. To obtain access to Todo’s streaming services a
customer signs a 12-month contract, which meets the definition of identified contracts as per IFRS 15:
Revenue from contracts with customers. A customer is liable to pay a monthly streaming subscription
fee of R900, in advance on the first day of each month, to gain access to the streaming services of Todo
for that particular month.

After signing the abovementioned contract, a customer should immediately purchase a decoder from
Todo at a once-off fee of R1400. This decoder is highly specialised and is the only device that can
decrypt the video stream into watchable content for the customer. In addition, it is only capable of
decrypting the video stream of Todo, and not of any competitors. The decoder becomes the property of
the customer once installed. To install the decoder at the customers’ premises, Todo puts its customers
in touch with third party technicians who perform the installation for a once off fee of R1 000. The
technicians are not part of Todo and accounts are settled directly with the technicians. The decoder has
a negligible resale value for the customer. Todo manufactures these decoders at a cost of R1 200, each.

Herewith information pertaining to the number of new customer contracts signed by Todo applicable to
the streaming services, during the 2023 financial year:
January 2023 ...................................................................................................................... 200
February 2023 .................................................................................................................... 280
March 2023 ......................................................................................................................... 310
790
Todo activates the streaming services on the first day of the month following the signing of the 12-month
contract. Todo does not sell either the decoders or the streaming service separately.

The CFO was concerned that you may never know when a customer will watch a program, as such,
measuring “satisfaction of a performance obligation” is not possible. The CFO thus instructed the
accountant to recognise all revenue on a cash basis.

Broadcasting rights
Todo started negotiations with TBT Sports on 1 April 2022, to acquire the exclusive broadcasting rights
to broadcast the UEFA Europa League in South Africa. The exclusive broadcasting right agreement was
signed on 1 June 2022, for a period of 3 years at a cost of €700 000. Legal fees amounting to R250 000
were paid immediately, in cash, on the acquisition date, to finalise this broadcasting rights agreement.
Todo settled €250 000 of the acquisition cost immediately on acquisition date, on 1 June 2022, in cash,
whilst the remainder of the acquisition cost is payable on 30 June 2023.

The broadcasting rights were available for use, as intended by management, as well as brought into
use on 1 June 2022. On acquisition date, a residual value of Rnil was allocated to the broadcasting
rights.

The following dates and exchange rates are applicable:

Spot rate
Date €1 = R
1 April 2022................................................................................................................... 16,12
1 June 2022 .................................................................................................................. 16,62
31 March 2023 .............................................................................................................. 19,34
Average exchange rate for the 2023 financial year ...................................................... 17,20

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 FAC3764 Assessment 10
QUESTION 1 (continued)

The Broadcasting Authority held public hearings during latter part of the 2023 financial year to
investigate anti-competitive conduct in the broadcasting sector. After months of deliberation the
Broadcasting Authority decided to introduce legislation that will require companies to share broadcasting
rights and to shorten exclusive broadcasting rights contract periods, with the aim to encourage
competition and new entrants into the market. The promulgation of the legislation affected Todo Ltd
negatively and on 31 March 2023 the fair value less costs to sell and the value in use of the broadcasting
rights were estimated to be R7 300 000 and R7 500 000, respectively. An applicable pre-tax discount
rate of 11% per annum was applied in the calculation of value in use.

Additional information:

 Todo Ltd accounts for intangible assets in accordance with the cost model. Amortisation is provided
for on the straight-line method over the estimated useful life of the asset.

Taxation:
 The South-African normal tax rate is 27%. The capital gains tax inclusion rate is 80%. You may
assume that both the tax rates have been effective and remained unchanged since
28 February 2021.
 Deferred tax is provided for on all temporary differences using the statement of financial position
approach. There are no items causing temporary or exempt differences except those identified in
the question. The company will have sufficient profit in future against which any unused tax losses
can be utilised.
 The research and development project pertaining to the TV antenna amplifier was not approved by
the Minister of Science and Technology and thus Todo will not receive any tax deduction on the
developed patent in terms of section 11D of the Income Tax Act.
 The South African Revenue Service allows a tax allowance on the broadcasting right in accordance
with section 11(f) of the Income Tax Act, over the period of the broadcasting right agreement,
apportioned for periods shorter than a year.

Assumptions:

 All amounts are material.

 You may ignore the implications of Value-Added Tax (VAT).

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 FAC3764 Assessment 10
QUESTION 1 (continued)

REQUIRED:

Marks
a) Prepare the correcting journal entry/entries (if any), in accordance with IAS 38: 7½
Intangible assets to account for the costs incurred in relation to the patent for the
financial year ended 31 March 2023.

Please note:
 Journal narrations are not required.
 You do not need to indicate any dates for the correcting journal entry/entries.
b) Discuss how the revenue recognition and measurement principles stipulated in 26½
IFRS 15: Revenue from contracts with customers will affect the revenue amount
accounted for on the streaming services contracts for the financial year ended
31 March 2023.

Please note:
 Calculations are required. No marks will be awarded for calculations if the
calculations are not supported by relevant discussions.
Communication mark – logical argument 1
c) Disclose the following notes to the annual financial statements of Todo Ltd for the 15
financial year ended 31 March 2023:
 Intangible assets
 Deferred tax (Excluding the patent)

Please note:
 Include any impairment loss disclosure within your intangible asset note that
might be applicable.
 Indicate in your deferred tax note, whether the deferred tax balance per item
is a deferred tax asset or a deferred tax liability.
 Your deferred tax note does not have to include any qualitative disclosures.
Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Accounting policy notes are not required.
Comparative information is not required.
All calculations must be shown.
Calculations are to be done to the nearest Rand.
[50]

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 FAC3764 Assessment 10
QUESTION 2 (50 marks) (90 minutes)

Diapers Corp Ltd (Diapers Corp) is a company that manufactures and distributes disposable baby
diapers across the African continent. The company was founded in the year 2010 and is currently the
largest supplier of baby diapers within the South African market. Diapers Corp is listed on the
Johannesburg Stock Exchange (JSE) and currently owns shares in two other companies that are in the
same industry. All companies within the group have a 30 September financial year end.

Below are the trial balances for Diapers Corp, Napkins Corp and Nappies R Us for the year ended
30 September 2023:

Diapers Napkins Nappies

Corp Corp R Us
R R R
Credits:
Share capital:
- 200 000 ordinary shares ......................................... 200 000 - -
- 100 000 ordinary shares ......................................... - 100 000 -
- 100 000 ordinary shares ......................................... - - 100 000
Retained earnings – 1 October 2022......................... 1 240 000 420 000 205 000
Deferred Tax ............................................................ 190 400 95 000 15 000
Trade and other payables ......................................... 275 000 160 000 16 000
Revenue .................................................................... 950 000 455 000 280 000
Other income ............................................................. 159 600 150 000 9 000
3 015 000 1 380 000 625 000
Debits:
Property, plant and equipment at carrying amount.... 450 000 150 000 100 000
Investments in equity instruments:
- Investment in Napkins Corp at cost price ................ 320 000 - -
- Investment in Nappies R us at cost price ................ 150 000 - -
Trade and other receivables ...................................... 575 000 200 000 60 000
Cash and cash equivalents ....................................... 285 000 220 000 95 000
Inventories ................................................................. 380 000 245 000 120 000
Cost of sales .............................................................. 425 000 345 000 180 000
Other expenses ......................................................... 80 000 45 000 25 000
Income tax expense .................................................. 280 000 170 000 20 000
Dividends paid – 31 March 2023 ............................... 70 000 5 000 25 000
3 015 000 1 380 000 625 000

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 FAC3764 Assessment 10
QUESTION 2 (continued)

Investment in Napkins Corp

On 1 October 2020, during the period of the COVID-19 Pandemic, the board of directors of Diapers Corp
resolved to purchase 65% of the share capital in Napkins Corp in line with the company strategy to
further expand their market share. As from 1 October 2020, Diapers Corp had control over Napkins Corp
as per the definition of control in terms of IFRS 10: Consolidated Financial Statements. On this date, the
retained earnings of Napkins Corp were R311 000 (credit).

The purchase consideration was settled immediately as follows:

 40 000 ordinary shares in Diapers Corp were issued to the seller. The issue price of the shares
was R2,00 each and the fair value of the shares was R2,50 each on 1 October 2020; and
 Cash amounting R220 000.

On 1 July 2020, Napkins Corp began a research and development project for new diaper technology
that will allow for the creation of a thinner and more flexible range of diapers without sacrificing
absorbency. On 1 October 2020, the project met the definition of an intangible asset in accordance with
IAS 38: Intangible assets but could not be recognised in the separate financial statements of Napkins
Corp as the probability of future economic benefits could not be demonstrated. As of 1 October 2020,
Napkins Corp had expensed development costs to the value of R45 000 in its separate financial
statements. The fair value of the development costs on 1 October 2020 was R50 000. The diaper
technology is regarded to have an indefinite useful life.

All the other assets and liabilities of Napkins Corp were fairly valued on 1 October 2020.

Napkins Corp had been struggling during the pandemic, but the directors of Diapers Corp were adamant
that the company had potential to improve, especially given the synergies from the other companies
within the group. Despite the efforts that were put into place by the board of directors to improve the
performance of Napkins Corp post the pandemic, the company still struggled to yield good returns.

The board chairperson suggested that, to limit the company’s exposure to risk, some of the shares in
Napkins Corp should be sold. On 1 June 2023, Diapers Corp sold 55 000 of their shares in Napkins
Corp for an amount of R350 000. On this day, Diapers Corp lost control of Napkins Corp and the
remaining investment was held as a financial asset in accordance with IFRS 9: Financial instruments.

The fair value of the remaining interest in Napkins Corp was R150 000 on 1 June 2023 and R155 000
on 30 September 2023.

The above disposal has not yet been accounted for in the separate accounting records of Diapers Corp
and therefore the investment on the trial balance still reflects the cost of the original 65% interest held
in Napkins Corp.

Investment in Nappies R Us

On 1 April 2022, Diapers Corp purchased 40 000 of the ordinary shares in Nappies R Us for an amount
of R150 000 and the full consideration was immediately paid for in cash. On this date, all the identifiable
assets and liabilities of Nappies R Us were fairly valued and equal to their carrying amounts. From
1 April 2022, Diapers Corp has exercised significant influence over the financial and operating decisions
of Nappies R Us. The retained earnings of Nappies R Us on 1 April 2022 was R180 000.

Since 1 April 2022, Diapers Corp has sold inventory to Nappies R Us at a gross-profit percentage of
30% on the selling price. On 30 September 2022 Nappies R Us had R60 000 of inventory bought from
Diapers Corp that was still on hand but managed to sell all this inventory by October 2022. In the current
financial year, Nappies R Us bought further stock from Diapers Corp for a total amount of R620 000. As
at 30 September 2023, R30 000 of this stock was still on hand.

The net profit of Nappies R Us for the financial year ended 30 September 2023 is R64 000.

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 FAC3764 Assessment 10

QUESTION 2 (continued)

New Entrants to the market

Of recent, the South African diaper industry faces a threat of new entrants. The increased level of
globalisation in the last few years has allowed for smaller businesses to source diapers directly from
Chinese suppliers and resell them locally at market related prices. The CEO of Diapers Corp, a qualified
CA(SA), has recommended to the board that the entity should reach out to Dampers Limited, the second
largest manufacturer of disposable baby diapers in South Africa, to come up with a plan that will stop
new entrants from dominating the market. This plan would involve the two companies agreeing to keep
the prices of diapers the same for the next two years, regardless of any inflationary increases. Since the
two companies already have a larger market share, keeping the prices constant would not have material
impact on their profits. However, the new entrants would struggle to match their prices and as a result
they could be easily eliminated.

Additional information

1. Diapers Corp measures its investments in Napkins Corp and Nappies R Us Ltd at cost in its separate
accounting records in terms of IAS 27: Separate Financial Statements.
2. Diapers Corp Group accounts for associates and Joint Ventures using the equity method, in
accordance with IAS 28: Investments in Associates and Joint Ventures.
3. Diapers Corp Group elected to measure non-controlling interests in an acquiree at the proportionate
share of the net assets.
4. The disposal of the subsidiary does not comply with the criteria of IFRS 5: Non-Current assets held
for sale and discontinued operations until the date of disposal.
5. Other investments are measured in terms of IFRS 9: Financial Instruments. Diapers Corp irrevocably
elected to present subsequent changes in the fair value of the investments in other comprehensive
income in a mark-to-market reserve.
6. All entities within the Diapers Corp Group accounts for property, plant and equipment and intangible
assets according to the cost model.
7. You may assume that profits in all companies were earned evenly throughout the period.
8. The South African normal tax rate is 27% and capital gains tax is calculated at 80% thereof. You may
assume that both the tax rates have been effective and remained unchanged since
28 February 2021.
9. All entities in the Diapers Corp Group have a 30 September year end.
10.Each share carries one vote and the share capital of each of the companies in the Diapers Corp Ltd
Group has remained unchanged since incorporation.

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 FAC3764 Assessment 10
QUESTION 2 (continued)

REQUIRED:

Marks
a) Draft a report to the Board of Directors of Diapers Corp Ltd to discuss the correct 12
accounting treatment to record the initial acquisition of Napkins Corp in the
Consolidated Financial Statements of the Diapers Corp Group, in terms of IFRS
3: Business Combinations.

Please note:
 Calculations are required. No marks will be awarded for calculations if the
calculations are not supported by relevant discussions.
Communication mark: Presentation 1
b) Prepare the pro forma journal entries to eliminate the inter group sale of inventory 10
between Diapers Corp and Nappies R Us in the Consolidated Financial
Statements of the Diapers Corp Group for the financial year ended
30 September 2023.

Please note:
 Journal narrations are required.
c) Calculate the consolidated gain or loss on the disposal of the interest in Napkins 8½
Corp that will be disclosed in the Consolidated Financial Statements of the Diapers
Corp Group for the financial year ended 30 September 2023.
d) Prepare the Consolidated Statement of Changes in Equity for the Diapers Corp 15
Group for the financial year ended 30 September 2023.

Please note:
 The total column of the Consolidated Statement of Changes in Equity is not
required.
e) Discuss with reasons the ethical concerns arising from the recommendations 3½
made by the Diapers Corp CEO in relation to the new entrants to the baby diaper
industry.
Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).

Accounting policy notes are not required.

All calculations must be shown, and amounts must be rounded off to the nearest rand.
All percentages calculated should be rounded to the nearest four decimals.
Show all data input into your financial calculator, where applicable.
Notes to the annual financial statements and comparative figures are not required.
Ignore Value added tax (VAT) and Dividend tax.
[50]

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UNISA 2023

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