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Specialist, IFRS Reporting

Case study
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Question 1
During the 2022 financial year XY Ltd, that is listed on the JSE, has restated its Interest income amount relating to
2021.

You are required to:

a) List all the repercussions this will have for the financial statements, as well as any other repercussions for
company XY Ltd.

Question 2
Scenario 1
Company P owns 60% of the shares in Company S. On 1 November 2021, P distributes its 60% interest in S to its
shareholders valued at R1050 (which is 60% of NAV) and loses control over S. The carrying amount of the net assets
of S is R1750. The amount of NCI in the consolidated financial statements of P on 1 November 2021 is R700.

Scenario 2
Company P owns 60% of the shares in Company S. On 1 November 2021, P distributes its 60% interest in S to its
shareholders valued at R2000 (i.e. at the Market Value of 60% shares held in S) and loses control over S. The carrying
amount of the net assets of S is R1,750. The amount of NCI in the consolidated financial statements of P on 1 November
2021 is R700.

Scenario 3
Company P owns 60% of the shares in Company S. On 1 November 2021, P distributes its 60% interest in S to its
shareholders valued at R900 (i.e. at the Market Value of 60% shares held in S) and loses control over S. The carrying
amount of the net assets of S is R1,750. The amount of NCI in the consolidated financial statements of P on 1 November
2021 is R700.

You are required to:

For each scenario above what would the Journal entry P would recognise at a Group level to reflect its
loss of control over S at 1 November 2021.
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Question 3
Below is the statement of Financial Performance and extract of the Statement of Financial Position of Bank ABC for
the year ended 31 December 2022 and 31 December 2021:

ABC Bank Year ended Year ended

Statement of Financial Performance December 2022 December 2021

Net interest income 1 470 009 1 265 457

Non-interest revenue 1 245 575 1 159 314
Total income 2 715 584 2 424 771
Credit impairment charges (210 962) (288 755)
Operating expenses (1 730 177) (1 566 946)
Non-trading & Capital items 1 651 (1 362)
Net income / (loss) before taxation 776 096 567 708
Indirect taxation (29 137) (43 338)
Net income before direct taxation 746 959 524 370

ABC Bank Year ended Year ended Year ended

Extract - Statement of Financial Position December 2022 December 2021 December 2020

Assets
Government listed Bonds - @cost 16 890 14 330 10 105
Government listed Bonds - Mark to Market (1 333) 1 321 4 041
Deferred tax asset 109 278

Liabilities
Bonus Provision 61 101 45 680 34 209
Provision for credit impairment - IFRS9 229 841 368 714 360 109

Additional information

1. The deferred tax asset as at 31 December 2020 was made up as follows:

Government Listed bond – Mark-to-Market (1 131) Cr

Bonus Provision 9 579 Dr
Provision for credit impairment 100 831 Dr
109 278 Dr

2. Profit before direct tax for the year include the following items:

31 December 2022 31 December 2021

Dividends received (not taxable) 109 191 90 244
Exempt interest income 2 914 11 660
Fines and Penalties (not deductible) 694 12 494
Consultancy fees (Capital in nature) 1 803 5 090

3. The Bank also pays managerial bonuses on an annual basis. The Bank will only be entitled to a tax deduction
when bonuses are paid.

4. The Bank enters into various loan arrangements with customers and has assessed the various loan books to
recognise a provision for credit impairments in line with IFRS 9. The Bank will only be entitled to a tax deduction
when the loans are written off.
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5. The Bank has invested in Government listed Bonds and has classified these bonds as held for trading. The mark-
to-market gains / losses on these investments are only taxed when realized.

6. The Minister of Finance announced in March 2022 a tax rate decrease from 28% to 27% for companies with
years of assessments ending on or after 31 March 2023.

You are required to:

a) Prepare the current and deferred tax calculations for the years ended 31 December 2021 and 31 December
2022.
b) Prepare an effective tax rate reconciliation (numerical & percentage) for the period ended 31 December 2021 and
31 December 2022.
c) Prepare commentary explaining the movement in the effective tax rate from 31 December 2021 to 31 December
2022.
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Question 4
Statements of financial position
for the year ended 31 December 2019

GROUP COMPANY
2018 1 January 2018 1 January
2019 Restated 2018 2019 Restated 2018
Note Rm Rm Restated Rm Rm Restated
Rm Rm
Assets
Cash and balances with the
central bank 1 33 060 34 536 35 893 33 060 34 536 35 893
Derivative assets 2 66 392 50 471 73 552 66 366 50 471 73 552
Trading assets 1 186 090 161 330 131 024 183 591 161 026 131 024
Pledged assets 4 7 481 674 6 812 7 481 674 6 812
Financial investments 5 115 127 105 438 86 393 116 048 106 332 89 447
Current tax asset 301 132 122 201 132 122
Non-current assets held for 6 346 346
sale and advances
Loans 1 1 026 242 966 335 930 911 1 023 391 964 691 924 580
Other assets 8 13 436 10 914 10 632 13 402 10 885 10 368
Interests in associates, joint
ventures and subsidiaries 9 1 227 1 017 864 4 371 1 520 1 002
Property, equipment and right
of use assets2 10 12 983 10 284 8 448 12 929 10 262 8 423
Goodwill and other intangible 11 16 236 17 106 17 746 16 112 17 013 17 652
assets tax asset
Deferred 12 1 925 2 025 2 117 1 879 1 962 2 058
Total assets 1 480 846 1 360 262 1 304 514 1 479 177 1 359 504 1 300 933
Equity and liabilities
Equity 106 717 101 200 99 446 101 818 97 583 96 905
Equity attributable to the
ordinary shareholder 101 177 97 650 95 899 96 332 94 039 93 361
Ordinary share capital 13 60 60 60 60 60 60
Ordinary share premium 13 45 188 44 388 43 638 45 188 44 388 43 638
Reserves 55 929 53 202 52 201 51 084 49 591 49 663
Other equity instruments 13 5 486 3 544 3 544 5 486 3 544 3 544
Non-controlling interests 54 6 3 — — —
Liabilitities 1 374 029 1 259 062 1 205 068 1 377 359 1 261 921 1 204 028
Derivative liabilities 2 65 710 51 748 77 665 65 710 51 748 77 665
Trading liabilities 14 77 647 58 867 59 595 77 647 58 861 59 595
Current tax liability 3 726 3 758 3 411 3 943 3 736 3 403
Deposits and debt funding 15 1 184 748 1 108 799 1 031 208 1 188 208 1 112 219 1 030 653
Subordinated debt 16 20 818 18 850 17 287 20 818 18 850 17 287
Provisions and other 17 21 146 17 019 15 887 21 033 16 507 15 425
2
liabailieties
Deferred tax liability 12 34 21 15 — — 0
Total equity and liabilities 1 480 746 1 360 262 1 304 514 1 479 177 1 359 504 1 300 933

1 Restated. During the year, the group and company revised the presentation of balances with fellow SBG companies (i.e. intergroup balances) in order to ensure consistency
with the international banking sector. Refer to the restatement section on page 28 for more detail.

2 The group and company have, as permitted by IFRS 19 Leases (IFRS 19), elected not to restate its comparative annual financial statements. Comparability will therefore not
be achieved as the comparative annual financial information has been prepared on an IAS 17 Leases (IAS 17) basis. Refer to page 26 for more detail on the adoption of
IFRS 16.
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Income statements
for the year ending 31 December 2019

GROUP
2019 2017
Note Rm Rm
Net interest income 41 581 39 831
Interest income 25 104 842 102 255
Interest expense1 26 (63 261) (62 424)
Non-interest revenue 29 922 29 987
Net fee and commission revenue 20 991 21 185
Feet and commission revenue 27 26 617 26 603
Fee and commission expense 28 (5 626) (5 418)
Trading revenue 29 5 331 5 358
Other revenue 30 3 151 2 922
Other gains and losses on financial instruments 31 449 522
Total income 71 503 69 818
Credit impairment charges 32 (5 724) (5 557)
Revenue sharing agreements 40 (614) (722)
Net income before operating expenses 65 165 63 539
Operating expenses1 33 42 644 41 660
Net income before capital items and equity
accounted earnings 22 521 21 879
Non-trading and capital related items 34 (341) (383)
Share of post-tax profit from associates and joint
ventures 9 40 129
Net income before indirect taxation 22 220 21 625
Indirect taxation 35 (1 345) (1 418)
Profit before direct taxation 20 875 20 207
Direct taxation 35 (4 015) (4 190)
Profit for the year 16 860 16 017
Attributable to the ordinary shareholder 16 398 15 695
Attributable to other equity instrument holders 458 322
Attributable to non-controlling interests 4 0
Basic and diluted earnings per ordinary share 36 27 331 26 160
1 The group and company have, as permitted by IFRS 19, elected not to restate its comparative annual financial statements. Comparability will therefore not be achieved
(cents)
as the comparative annual financial information has been prepared on an IAS 17 basis. Refer to page 26 for more detail on the adoption of IFRS 19.

You are required to:

a) Scrutinise the above SOFP and I/S and point out any concerns/errors.
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Question 5
Customer enters into a contract with a freight carrier (Supplier) whereby the Supplier provides Customer with the use
of 10 rail cars of a particular type for five years. The contract specifies the rail cars; which are owned by Supplier.
Customer determines when, where and which goods are to be transported using the cars. When the cars are not in
use, they are kept at Customer’s premises. Customer can use the cars for another purpose (for example, storage) if
it so chooses. However, the contract specifies that Customer cannot transport particular types of cargo (for example,
explosives). If a particular car needs to be serviced or repaired, Supplier is required to substitute a car of the same
type. Otherwise, and other than on default by Customer, Supplier cannot retrieve the cars during the five-year period.
The contract also requires Supplier to provide a train and a driver when requested by Customer. Supplier keeps the
train at its premises and provides instructions to the driver detailing Customer’s requests to transport goods. Supplier
can choose to use any one of a number of trains to fulfil each of Customer’s requests. One train could be used to
transport not only Customer’s goods, but also the goods of other customers (i.e. if other customers require the
transportation of goods to destinations close to the destination requested by Customer and within a similar timeframe,
Supplier can choose to attach up to 100 rail cars to the train). The contract between Customer and Supplier requires
Supplier to transport a specified quantity of goods by using a specified type of rail car in accordance with a stated
timetable for a period of five years. The timetable and quantity of goods specified are equivalent to Customer having
the use of 10 rail cars for five years. Supplier provides the rail cars, driver and train as part of the contract. The
contract states the nature and quantity of the goods to be transported (and the type of rail car to be used to transport
the goods). Supplier has a large pool of similar cars that can be used to fulfil the requirements of the contract. Similarly,
Supplier can choose to use any one of a number of trains to fulfil each of Customer’s requests, and one train could
be used to transport not only Customer’s goods, but also the goods of other customers. The cars and trains are stored
at Supplier’s premises when not being used to transport goods.

You are required to:

Provide the new CFO of the Bank with your opinion on whether or not the above contract is or contains a lease in
term of IFRS 16.
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Question 6
Classification of assets and liabilities
Accounting classifications and fair values of assets and liabilities
The tables that follow set out the group and company classification of assets and liabilities, and their fair values.

FVTPL FVOCI Other

Amortised Total
Designated Equity Total fair carrying
non-
Held-for- at fair FVTPL - Debt instruments value cost1 amount
financial Fair value2
trading value default instruments
assets/-
GROUP Note Rm Rm Rm Rm Rm Rm Rm Rm Rm

2019 liabilities
Assets
Rm
Cash and balances with the central 1 — — 33 060 — — 33 060 — — 33 060 33 060
bank
Derivative assets 2 — — — — — — 66 392 — 66 392 —
Trading assets 3 — — — — — — 186 090 — 186 090 —
Pledged assets 4 7 424 — — — — 7 424 57 — 7 481 7 482
Financial investments 5 — 21 377 3 503 283 924 26 087 89 040 — 115 127 114 606
Loans and advances 7 — — 161 — — 161 1 026 081 — 1 026 242 1 025 403
Other financial assets3 8 — — — — — — 9 529 — 9 529 —
Other non-financial assets — — — — — — — 36 825 36 825 —
Total assets 259 906 21 377 36 724 283 924 319 214 1 124 707 36 825 1 480 746
Liabilities
Derivative liabilities 2 65 710 — — — — 65 710 — — 65 710 65 710
Trading liabilities 14 77 647 — — — — 77 647 — — 77 647 77 647
Deposits and debt funding 15 — 5 335 — — — 5 335 1 179 413 — 1 184 748 1 185 992
Subordinated debt 16 — — — — — — 20 818 — 20 818 20 852
Other financial liabilities3 17 — — — — — — 9 325 — 9 325 —
Other non-financial liabilities — — — — — — — 15 781 15 781 —
Total liabilities 143 357 5 335 — — — 148 692 1 209 556 15 781 1 374 029
1 Includes financial assets and financial liabilities for which the carrying value has been adjusted for changes in fair value due to designated hedged risks.

2 Carrying value has been used where it closely approximates fair values, excluding non-financial instruments. Refer to the fair value section in accounting policy 4 - Fair value and key management assumptions for a description on how fair values are determined.

3 The fair value of other financial assets and liabilities approximates the carrying value due to their short-term nature.
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19. Assets and liabilities at fair value

19.1 Financial assets and liabilities measured at fair value
The table below sets out the financial assets and liabilities measured at fair value for the group:

2019
GROUP Level 1 Level 2 Level 3 Total

Rm Rm Rm Rm
Financial assets

Measured on a recurring basis

Cash and balances with the central
bank — — 33 060 33 060
Pledged assets 7 424 — — 7 424
Financial investments 20 148 2 599 3 340 26 087
Loans and advances — — 1 026 08 1 026 0
Total 27 572 2 599 1 0621 81
1 092
Financial liabilities 481 652

Measured on a recurring basis

Derivative liabilities 42 60 066 5 602 65 710
Trading liabilities 12 842 61 606 3 199 77 647
Deposits and debt funding — 5 335 — 5 335
Total 12 884 127 007 8 801 148 692
1 Restated. During the year, the group and company revised the presentation of balances with fellow SBG companies (i.e.
intergroup balances) in order to ensure consistency with the international banking sector. Refer to the restatement section on
page 28 for more detail. Included in the prior year financial assets and liabilities measured at fair value was intergroup other
financial assets of R770 million whose fair value levelling is not disclosed above as the fair value of other financial assets and
liabilities approximates the carrying value due to their short-term nature.

19.1.1 Reconciliation of level 3 financial assets measured at fair value on a recurring basis
The table below sets out the reconciliation of financial assets that are measured at fair value based on
inputs that are not based on observable market data (level 3):

Financial
investments

Rm
GROUP AND COMPANY
Balance at 1 January 2019 3 846
Total gains/(losses) included in
profit or loss (94)
Trading revenue 0
Other revenue (94)
Total gains included in OCI 12
Originations and purchases 1 073
Sales and settlements (1 497)
Transfers into level 31 0
Transfers out of level 32 0
Balance at 31 December 2019 3 340
1 The valuation inputs of certain financial assets became unobservable during
the year. The fair value of these financial assets was transferred into level 3.

2 The valuation inputs of certain level 3 financial assets became observable

during the year. The fair value of these financial assets was transferred into
level 2.
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19.1.2 Reconciliation of level 3 financial liabilities measured on a recurring basis

The following tables provide a reconciliation of the opening to closing balance for all financial liabilities
that are measured at fair value based on inputs that are not based on observable market data (level 3):

Derivative Trading
liabilities liabilities Total

Rm Rm Rm

GROUP AND COMPANY

Balance at 1 January 2019 6 151 2 757 8 908
Total losses/(gains) included in profit or loss – trading revenue 255 (264) (9)
Issuances 347 1 050 1 397
Sales and settlements (959) (459) (1 418)
Transfers out of level 31 20 115 135
Transfers in to level 32 (212) 0 (212)
Balance at 31 December 2019 5 602 3 199 8 801
1 The valuation inputs of certain financial liabilities became unobservable during the year. The fair value of these financial liabilities was transferred into level
3.
2 The valuation inputs of certain level 3 financial liabilities became observable during the year. The fair value of these financial liabilities was transferred into
level 2.

19.1.5 Sensitivity and interrelationships of inputs

The behaviour of the unobservable parameters used to fair value level 3 assets and liabilities is not
necessarily independent and may often hold a relationship with other observable and unobservable
market parameters. Where material and possible, such relationships are captured in the valuation by way
of correlation factors, though these factors are, themselves, frequently unobservable. In such instances,
the range of possible and reasonable fair value estimates is taken into account when determining
appropriate model adjustments.

The table that follows indicates the valuation techniques and main assumptions used in the determination
of the fair value of the level 3 assets and liabilities measured and disclosed at fair value. The table further
indicates the effect that a significant change in one or more of the inputs to a reasonable possible
alternative assumption would have on profit or loss at the reporting date (where the change in the
unobservable input would change the fair value of the asset or liability significantly). The interrelationship
between these significant unobservable inputs (which mainly include discount rates, spot prices of the
underlying, correlation factors, volatilities, dividend yields, earning yields and valuation multiplies) and the
fair value measurement could be favourable/(unfavourable), if these inputs were higher (lower). The
changes in the inputs that have been used in the analysis have been determined taking into account
several considerations such as the nature of the asset or liability and the market within which the asset
or liability is transacted.

Effect on profit or loss

Change in
significant Favourable (Unfavourable)
unobservable
GROUP AND COMPANY input Rm Rm

2019
Derivative liabilities From (1%) to 1% 249 (249)
Financial investments From (1%) to 1% 156 (46)
Trading liabilities From (1%) to 1% 29 (9)
Total 434 (304)
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19.2 Assets and liabilities not measured at fair value for which fair value is disclosed

2019

Level 1 Level 2 Level 3 Total

Rm Rm Rm Rm

GROUP
Assets
Pledged
assets2 — — 58 58

Financial
investments2 76 363 11 462 694 88 519
Loans and
advances — — 161 161
Total 76 363 11 462 913 88 738
Liabilities
Subordinated
debt — 20 852 — 20 852
Total — 20 852 — 20 852

1 Restated. During the year, the group and company revised the presentation of balances with fellow
SBG companies (i.e. intergroup balances) in order to ensure consistency with the international banking
sector. Refer to the restatement section on page 28 for more detail. Included in the prior year financial
assets and liabilities disclosed at fair value was intergroup other financial assets of R2 417 million for
the group and R3 130 million for the company and other financial liabilities of R2 320 million for the
group and R2 498 million for the company whose fair value levelling is not disclosed above as the fair
value of other financial assets and liabilities approximates the carrying value due to their short-term
nature.

2 The pledged assets and financial investments include a bond position which was disclosed as level
2 as at 31 December 2018, however, due to deterioration of trading liquidity, the bond position has
been disclosed as level 3 as at 31 December 2019.

19.3 Third-party credit enhancements

There were no significant liabilities measured at fair value that existed during the year which had been
issued with inseparable third-party credit enhancements.

You are required to:

a) Scrutinise the above fair value disclosures extracts and point out any concerns/errors.