FAC3764/2024/Mock Assessment

QUESTION 1 (50 MARKS) (90 MINUTES)

ICY Ltd was founded in East London in 20X10 and is one of the leading importers and distributors of
skincare and makeup products in South Africa. ICY Ltd is listed on the Johannesburg Stock Exchange
and recently began investing in companies that operate in the sports and entertainment industry. You
have been appointed as a financial accountant to assist in the preparation for the group financial
statements for the year ended 31 December 20X20. All the companies in the ICY Ltd Group have a
31 December year end. The following companies form part of the ICY Ltd Group.

Bronzer Ltd

Bronzer Ltd is a company based in Pretoria which manufactures sport equipment. It has 150 000 ordinary
shares in issue, and it was incorporated in 20X14. On 1 October 20X20, ICY Ltd acquired 52 500
ordinary shares in Bronzer Ltd from the previous shareholders. The full consideration of R1 500 000
was paid in cash on the same date. On the acquisition date, Bronzer Ltd’s identifiable assets and
liabilities were considered to be fairly valued and equal to the carrying amounts thereof except for
the property (refer below) which had a carrying amount of R1 775 000. Since 1 October 20X20,
ICY Ltd exercised significant influence over the financial and operating policy making decisions of
Bronzer Ltd.

Property
2
Bronzer Ltd owns a piece of land situated in the east of Pretoria. The land is 2 000m and is
surrounded by several office parks.

The property is zoned in the class “Business 4” which allows for the owner of the property to construct
office parks on the land. Based on information obtained at the Deeds Office (which is readily available),
ten similar properties were sold during the last six months in the area with the highest price of
R1 812 500 and the lowest price of R1 756 000. The average price was R1 780 000. Sales
commission of 5% was payable on the transactions.

Although the property is not for sale, Bronzer Ltd received a private offer for the land to the amount of
R1 875 000. The buyer plans to build a factory on the property. The building of a factory is not legally
permissible since the property is zoned for commercial use and the rezoning of the property is unlikely.
Other properties with office parks thereon in the same area generate sufficient income to ensure market
related profitability. The value of the property in its current use is R980 000. The founding documents and
accounting policy of the company do not prohibit the sale of the property. Bronzer Ltd has not made any
decision to sell the land and the future use of the land remains undetermined.

Transactions with ICY

Since 1 December 20X20, Bronzer Ltd sold inventory to ICY Ltd. Total sales from Bronzer Ltd to ICY Ltd
amounted to R160 000. Bronzer Ltd sells inventory at a profit mark up of 30% on the selling price. At
31 December 20X20, ICY Ltd had sold 50% of the inventory purchased from Bronzer Ltd during the
current financial year.

BRONZER LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20X20
Share capital Retained Revaluation
earnings reserve
R R R
Opening balance – 1 January 20X20 150 000 1 439 100 -
Changes in equity for the year
Profit for the year - 2 034 079 -
Other comprehensive income 91 000
Dividends paid – 31 December 20X20 - (40 000) -
Closing balance at 31 December 20X20 150 000 3 433 179 91 000
 FAC3764/2024/Mock Assessment

QUESTION 1 (continued)

Conceal Ltd

On 1 September 20X18, ICY Ltd acquired control of Conceal Ltd by acquiring 375 000 of the
500 000 issued ordinary shares of Conceal Ltd for a cash consideration of R1 400 000.The acquisition
of the interest by ICY Ltd met the definition of a business combination in terms of IFRS 3 – Business
Combinations. On the acquisition date, the retained earnings of Conceal Ltd amounted to R820 000
(credit balance). On this date, the assets and liabilities of Conceal Ltd were fairly valued except for
inventory which had a fair value of R190 000 (carrying amount: R245 000). On 1 September 20X18, the
market value of one Conceal Ltd share was R4,00.

The following are extracts of the financial statements prepared by the Conceal Ltd financial accountant.

CONCEAL LTD
STATEMENT OF CHANGES IN EQUITY FOR TH EYEAR ENDED 31 DECEMBER 20X20

Share Retained
capital earnings
R R
Opening balance – 1 January 20X20 1 000 000 2 260 110
Changes in equity for the year:
Profit for the year - 3 258 648
Other comprehensive income - -
Dividends paid – 31 December 20X20 (65 000)
Closing balance – 31 December 20X20 1 000 000 5 453 758

On 1 August 20X20, ICY Ltd acquired an additional 50 000 ordinary shares in Conceal Ltd from the non-
controlling shareholders. The new assistant to the financial accountant of ICY Ltd prepared part of the
consolidated statement of changes in equity of the ICY Ltd Group for the year ended
31 December 20X20 below:

ICY LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20X20
Non-controlling interest
R
Balance 1 January 20X20 (2 260 110 – 820 000) 1 440 110
Profit for the year 3 258 648
Acquisition of additional interest ?
Dividends paid (65 000)
4 614 044

Transactions with ICY Ltd

On 30 August 20X20, Conceal Ltd sold land to ICY Ltd for R150 000. The carrying amount of the land
was R120 000. ICY Ltd classified the Land as property, plant and equipment. The transaction will be
settled in two equal instalments. At year end, ICY Ltd had settled 50% of the balance.

Additional information

1. ICY Ltd measures its investments in Conceal Ltd and Bronzer Ltd at cost in its separate
accounting records in terms of IAS 27, Separate Financial Statements.

2. The ICY Ltd Group applies the fair value model in terms of IAS 40, Investment Property to its
investment properties.
 FAC3764/2024/Mock Assessment

QUESTION 1 (continued)

3. The ICY Ltd Group applies the cost model to all items of property, plant and equipment in terms of
IAS 16, Property, Plant and equipment.

4. The income and expenses of Conceal Ltd were earned evenly throughout the current year except
for the intercompany sale of land.

5. The income and expenses of Bronzer Ltd were earned evenly throughout the current year.

6. The ICY Ltd Group measures the non-controlling interest at fair value at the acquisition date.

7. All entities in the ICY Ltd Group have a 31 December financial year end.

8. The South African normal tax rate is 27% and capital gains tax is calculated at 80% thereof.

9. Each share carries one vote and the share capital of each of the companies in the ICY Ltd Group
has remained unchanged since incorporation.

REQUIRED:

Marks
a) Discuss with reference to IFRS 13, Fair Value Measurement, the initial measurement of 8
the fair value of the property in the consolidated statement of financial position of the ICY
Ltd Group at the acquisition date.
Communication skills: logical argument 1
b) Calculate the amount that will be presented as investment in associate in the 10
consolidated statement of financial position of the ICY Ltd Group as at
31 December 20X20.
You may assume that the fair value of the property is R1 775 000.
c) Prepare the related party note in terms of IAS 24, Related Parties as far as possible from 7
the given information, to be disclosed in the separate financial statements of ICY Ltd for
the year ended 31 December 20X20.
d) Discuss briefly whether you agree or disagree with the measurement of the amounts 23
presented in the non-controlling interest column of the consolidated statement of
changes in equity of the ICY Ltd Group for the year ended 31 December 20X20 prepared
by the new assistant.

Your discussion should include recommendations on how to correctly calculate the

amounts to be disclosed including the missing amount.
Please note:

Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Accounting policy notes are not required.
Comparative amounts are not required.
Show all calculations.
Round all amounts to the nearest Rand.

48
 FAC3764/2024/Mock Assessment

QUESTION 2 (50 marks) (90 minutes)

Khoro Limited (“Khoro”) is a South African based company that specialises in the designing,
manufacturing, installation, and servicing of wind turbines. The company is primary listed on the
Johannesburg Stock Exchange as well as dually listed on the Lusaka Stock Exchange (LuSE) in
Zambia. Khoro has a 30 September year end.

1. Manufacturing plant in Kalkfontein

On 1 February 2021, Khoro acquired a vacant piece of land for R3 500 000, with the intention of
constructing a manufacturing plant. Construction of the manufacturing plant commenced on 1 May 2021
and was completed on 1 July 2022 at a total cost of R8 800 000 (excluding the health and safety
compliance costs below) which were paid in cash. Management considered the land portion of the
manufacturing plant to be significant.

To comply with the health and safety standards, an inspection was conducted at a cost of R250 000 on
1 August 2022. The inspector issued a compliance certificate which confirmed that the plant complies
with all health and safety standard regulations of South Africa.

The plant was available for use as intended by management on 1 August 2022 and was brought into
use on the same date. On 1 August 2022, the plant was estimated to have a 15-year useful life and an
estimated residual value of R950 000 was allocated to it.

During the 2022 financial year, the manufacturing plant did not operate due to the stringent Covid-19
restrictions which affected the cash generation capabilities of the manufacturing plant. On
30 September 2022, Khoro estimated that the fair value less cost to sell and value in use of the plant
amounted to R8 500 000 and R8 200 000, respectively.

On 1 May 2023, Khoro’s management decided to lease out the manufacturing plant to Gole Ltd. The
lease agreement contains a lease in terms of IFRS 16, Leases.

The terms of the lease agreement were as follows:

Commencement date .............................................................................................. 1 May 2023
Monthly instalment (Paid in arrears at the end of each month) .............................. R150 000
Yearly increases ...................................................................................................... 10% annually
 The lease term is for 3 years.
 Ownership of the manufacturing plant will not transfer to Gole Ltd at the end of the lease period.
 Gole Ltd does not have an option to buy the manufacturing plant from Khoro Ltd at the end of the
lease term.
 At inception of the lease, the present value of the lease payments does not amount to the fair
value of the manufacturing plant.

On 30 September 2023, the fair value less cost to sell and value in use of the plant was determined to
be R8 150 000 and R8 480 000, respectively.

The estimated useful life and residual value of the plant remained unchanged throughout the period.

2. Property in Matatiele
On 1 January 2021, Khoro acquired a property in Matatiele for R4 500 000 (Land: R850 000; Building:
R3 650 000). The property was purchased with the intention to be rented out. A rental agreement was
signed with Toekoms Ltd, a distributor and wholesaler of inverters and solar panels. On acquisition date,
the building had an estimated useful life of 20 years and an insignificant residual value. The building
was ready for use as intended by management, as well as brought into use, on acquisition date.

During the 2023 financial year, the board of directors of Khoro decided to change the investment
property accounting policy from the cost model to the fair value model to present users of financial
statements with a more realistic market value of the investment property.
 FAC3764/2024/Mock Assessment

QUESTION 2 (continued)
The following fair values of the property in Matatiele were received from an independent sworn appraiser
for the respective years:
Land Building Total
R R R
30 September 2021……………………………………………… 900 000 3 770 000 4 670 000
30 September 2022……………………………………………… 910 000 3 870 000 4 780 000
30 September 2023……………………………………………… 950 000 4 100 000 5 050 000

3. Zwanga division
The Zwanga division of Khoro provides consultation services within the South-African market. During
the 2023 financial year, Khoro’s board of directors took a strategic decision to sell the Zwanga division,
within a single transaction. On 1 July 2023, the division met all the criteria to be classified as a disposal
group held for sale in accordance with the requirements of IFRS 5, Non-current assets held for sale and
discontinued operations.

The disposal group consisted of the following assets:

Inventory .................................................................................................................. Note 1
Windy trademark ..................................................................................................... Note 2
Vehicle ..................................................................................................................... Note 3

The fair value less cost to sell of the Zwanga division was determined to amount to R2 087 500 and
R2 037 500 on 1 July 2023 and 30 September 2023, respectively.

Note 1
The inventory was acquired at a cost of R300 000 and had the following net realisable values at each
respective date:
01 July 2023…………………………………………………………………………………. R310 000
30 September 2023……………………………………………………………................... R250 000

Note 2
The Windy trademark was acquired from Gadgets Galore Innovators for R1 100 000 on
31 October 2022. On acquisition date, an indefinite useful life together with a residual value of Rnil was
allocated to the trademark. On 1 July 2023 and 30 September 2023, the Windy trademark had a
recoverable amount of R1 025 000 and R999 000, respectively.

Note 3
The vehicle was acquired on 1 October 2021, for R1 250 000. The vehicle was available for use as
intended by management, as well as brough into use, on acquisition date. On acquisition date, the useful
life of the vehicle was estimated to be 5 years with an insignificant residual value allocated to it. On
1 July 2023 and 30 September 2023, the recoverable amount of the vehicle was determined to amount
to R820 000 and R810 000, respectively.

Accounting policies
 Khoro accounts for inventory at the lower of cost and net realisable value.
 Khoro accounts for property, plant and equipment using the cost model. Depreciation on property,
plant and equipment is accounted for in accordance with the straight-line method over the
estimated useful life of the asset.
 Khoro accounts for intangible assets in accordance with the cost model. Amortisation on
intangible assets is accounted for in accordance with the straight-line method over the estimated
useful life of the asset.
 Before the change in accounting policy, Khoro accounted for investment property according to the
cost model whilst depreciation on investment property, was accounted for using the straight-line
method over the estimated useful life of the asset. After the change in accounting policy, Khoro
accounts for investment property according to the fair value model.
 FAC3764/2024/Mock Assessment

QUESTION 2 (continued)
Taxation
 The South African Revenue Service allows an annual building allowance of 5% on the Property in
Matatiele, according to section 13(1) of the Income Tax Act, on a straight-line method, not
apportioned for part of the year.
 The change in accounting policy on the Property in Matatiele, has no impact on tax legislation.
 The South-African normal tax rate is 27%. The capital gains tax inclusion rate is 80%.
 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.

Assumptions
 All amounts are material.
 Ignore the implications of Value-Added Tax (VAT).

REQUIRED:

Marks
a) Prepare all relevant general journal entries to correctly account for the 14
manufacturing plant in Kalkfontein, in the accounting records of Khoro Limited for
the year ended 30 September 2023.

 Journal narrations are required.

 Dates are not required.
 Tax consequences can be ignored.
Communication mark – presentation 1
b) Disclose the Property in Matatiele in the accounting records of Khoro Limited for 18
the year ended 30 September 2023, in accordance with the requirements of only
IAS 8, Accounting policies, changes in estimates and errors.

c) Advise the Chief Financial Officer (CFO) on the accounting implications (including 16
measurement) of the decision to sell the Zwanga division in the accounting records
of Khoro Limited on 1 July 2023.

 Limit your measurement discussion to 1 July 2023.

 Support your discussion with calculations, where applicable,
 Do not include any tax related discussions or calculations.
Communication mark - Logical argument 1
Please note:

Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).

Round off all calculations to the nearest Rand.

Comparative amounts are not required.
Accounting policy notes are not required.
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