CASE STUDY 2 SOLUTION - Unisa

[Pages:12]CASE STUDY 2 ? SOLUTION

QUESTION 3

PART A

HORSES LTD GROUP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016

10. Investment in subsidiary

Name of investment in subsidiary: Principle place of business:

Proportion of ownership interest and voting rights held by non-controlling interests: Profit allocated to non-controlling interests during the current reporting period (525 500 x 20%):

Saddle Ltd Northern Cape Province South Africa

20%

R105 100

Summarised financial information of Saddle Ltd for the year ended 30 June 2016:

Current assets Non-current assets Current liabilities Non-current liabilities Revenue Profit for the year Dividends paid to non-controlling interests (325 000 x 20%)

Dr/(Cr) R

530 000 4 110 400 (370 100) (1 310 000) (1 753 000) (525 500)

65 000

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Case Study 2

PART B

From: To: Subject:

Nani, Grace (Fedora Ltd)

Sent: Fri 2016/10/14 09:15

Mabutla, Lebo (Fedora Ltd)

RE: Translation of Heti Ltd from USD to ZAR

Dear Lebo

Please find my answers to your questions regarding the acquisition and translation of Heti Ltd in the consolidated financial statements of the Fedora Ltd Group for the year ended 30 June 2016 below:

Accounting for the fair value adjustment to the plant at acquisition date

The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values [IFRS 3.18].

Even though the Fedora Ltd Group makes use of the cost model for the measurement of property, plant and equipment, the fair value of the plant must still be applied according to IFRS 3.

Fedora Ltd should thus measure the plant at $59 000 (or $59 000 x R14,73 = R869 070) on 1 April 2016.

The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a) over (b) below: (a) the aggregate of:

(i) the consideration transferred measured in accordance with this IFRS... (ii) the amount of any non-controlling interests in the acquiree measured in

accordance with this IFRS; and (iii) in a business combination achieved in stages..., the acquisition-date fair value of

the acquirer's previously held equity interest in the acquiree. (b) the net of the acquisition-date amounts of the identifiable assets acquired and the

liabilities assumed measured in accordance with this IFRS [IFRS 3.32].

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the foreign operation. Thus they shall be expressed in the functional currency of the foreign operation and shall be translated at the closing rate in accordance with paragraphs 39 and 42 [IAS 21.47].

The increase in the carrying amount of plant of $6 000 ($59 000 - $53 000) will thus be absorbed into goodwill of $10 000 on 1 April 2016, resulting in a decrease or credit of goodwill amounting to $5 400 ($6 000 x 90%) at a closing rate of R14,73 on 1 April 2016 = R79 542.

Subsequent accounting treatment

In general, an acquirer shall subsequently measure and account for assets acquired, liabilities assumed or incurred and equity instruments issued in a business combination in accordance with other applicable IFRSs for those items, depending on their nature [IFRS 3.54].

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Case Study 2

The increase in the fair value of the plant should thus be depreciated in accordance with IAS 16.

The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures: (a) assets and liabilities for each statement of financial position presented (ie including

comparatives) shall be translated at the closing rate at the date of that statement of financial position; (b) income and expenses for each statement presenting profit or loss and other comprehensive income (ie including comparatives) shall be translated at exchange rates at the dates of the transactions; and (c) all resulting exchange differences shall be recognised in other comprehensive income [IAS 21.39].

For practical reasons, a rate that approximates the exchange rates at the dates of the transactions, for example an average rate for the period, is often used to translate income and expense items. However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate [IAS 21.40].

The additional depreciation expense recognised in profit or loss should thus be translated at the average rate for the period 1 April 2016 to 30 June 2016.

$6 000/50 x 3 = $360 that must be translated at R15,25 for a total expense of R5 490.

The accumulated depreciation recognised in the statement of financial position should be translated at the closing rate on 30 June 2016.

Thus $360 x R15,62 = R5 623.

The difference between the depreciation at the average rate and the accumulated depreciation at the closing rate will be allocated to a foreign currency translation reserve in other comprehensive income.

OR

The difference of R133 between the depreciation of R5 490 and the accumulated depreciation of R5 623 will be allocated to a foreign currency translation reserve in other comprehensive income.

You are welcome to contact me should you require any further information.

Kind regards Grace

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Case Study 2

PART C

An entity shall apply IFRS 5 to an investment, or a portion of an investment, in an associate or a joint venture that meets the criteria to be classified as held for sale [IAS 28.20].

Any retained portion of an investment in an associate or a joint venture that has not been classified as held for sale shall be accounted for using the equity method until disposal of the portion that is classified as held for sale takes place [IAS 28.20].

After the disposal takes place, an entity shall account for any retained interest in the associate or joint venture in accordance with IFRS 9 unless the retained interest continues to be an associate or a joint venture, in which case the entity uses the equity method [IAS 28.20].

The requirements to account for the investment in associate in terms of IFRS 5 were met on 30 November 2015.

A 20% interest in the investment in associate will be classified as held for sale in terms of IFRS 5.

An entity shall measure a non-current asset (or disposal group) classified as held for sale at the lower of its carrying amount and fair value less costs to sell [IFRS 5.15].

The 20% interest will thus no longer be equity accounted from 30 November 2015, but will be measured at the lower of the carrying amount of R134 708 and the fair value less costs to sell of R180 000, thus the R134 708.

No impairment loss will therefore be recognised in profit or loss.

An entity shall present separately any cumulative income or expense recognised in other comprehensive income relating to a non-current asset (or disposal group) classified as held for sale [IFRS 5.38].

The share of revaluation surplus amounting to R2 802 (R4 212 x 20/30) must be transferred from revaluation surplus in the statement of changes in equity into the column "Equity associated with non-current assets held for sale".

The remaining 10% interest will continue to be equity accounted until the 20% interest is sold. Share of profit of associate amounting to R4 900 (R49 000 x 10%) will be recognised in profit or loss.

The 20% interest will be derecognised on 30 April 2016 when it was sold for R180 000.

The R2 802 "Equity associated with non-current assets held for sale" balance and the R1 410 balance in the revaluation surplus will be transferred to retained earnings on 30 April 2016.

The remaining 10% interest will then be accounted for in accordance with IFRS 9 Financial Instruments and must be measured at fair value through profit or loss or at fair value through other comprehensive income at year end.

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Case Study 2

QUESTION 4

PART A

(a) Pro forma consolidation journal entries - intragroup transaction

J1 Retained earnings (SCE) (balancing) or (1 230 x 72%) Deferred tax (SFP) (1 230 x 28%)

Investment in joint venture (SFP) [16 000 x 25/125 x 45% = 1 440 ? (1 440 / 4 x 7/12)]

Elimination of unrealised profit in property, plant and equipment of joint venture at beginning of year J2 Investment in joint venture (SFP) (1 440 / 4)

Depreciation (P/L) Correction of depreciation in current year J3 Income tax expense (P/L) (360 x 28%)

Deferred tax (SFP) Deferred tax effect of depreciation correction

Dr R 886 344

Cr R

1 230

360 360

101 101

(b) ARABICA LTD GROUP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016

x. Schedule of changes in ownership in subsidiary

During the current year, Arabica Ltd sold a 15% interest in Roasting Bean Ltd, an existing subsidiary without losing control of Roasting Bean Ltd. This resulted in an amount of R11 170 being recognised in equity as presented in the consolidated statement of changes in equity. Details of the transaction between the equity participants are as follows:

Fair value of the consideration received Increase in the non-controlling interests [C1] Adjustment to equity attributable to owners of the parent

R 185 000 (173 828)

11 172

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(c) ARABICA LTD GROUP

EXTRACT FROM THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2016

PROFIT FOR THE YEAR (779 656 [C4] + 686 845 [C9] + 291 932 [C2/C10]+ 164 413 [C11]) Other comprehensive income: Items that will not be reclassified to profit or loss: Gain on revaluation of property [C2]

Mark-to-market reserve fair value gain on investments (81 480 + 14 744 + 13 192 - 62 856 [C12]) Share of other comprehensive income of associate (10 800 x 40%) [C5] Other comprehensive income for the year, net of tax

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

R

1 922 846

164 880

46 560 4 320

215 760 2 138 606

CALCULATIONS

C1. Increase in non-controlling interests

NCI after transaction [(1 132 851 [C2] x 40%) + (11 500 initial GW of NCI [C3]) + (19 500 GW of parent [C3] x 15/75) relinquished to NCI]

NCI before transaction [(1 132 851 [C2] x 25%) + (11 500 initial GW of NCI [C3])]

468 540

(294 713) 173 828

OR = (1 132 851 x 15%) + (19 500 x 15/75) = 169 928 + 3 900 = 173 828

C2. Net asset value of Roasting Bean Ltd

Equity at acquisition

Retained earnings since acquisition until beginning of year [(146 000 / 12) - (1 100 000 / 50 x 1/12 x 72%)]

Profit for the year [471 000 - (210 000 - (210 000 x 28% x 80%)) ? (1 100 000 / 50 x 72%) ? (210 000 / 49 x 1/12 x 72%)]

Other comprehensive income for the year - revaluation surplus [13 680 + (210 000 x 72%)] Other comprehensive income for the year - mark-to-market reserve Dividend

714 000

10 847

291 932

164 880 13 192 (62 000)

1 132 851

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C3. Proof of calculation of goodwill of Roasting Bean Ltd in terms of IFRS 3.32

Consideration transferred at acquisition date Non-controlling interests

Fair value of identifiable net assets Goodwill

555 000 190 000 745 000 (714 000)

31 000

Goodwill allocated to parent [555 000 - (714 000 x 75%)] Goodwill allocated to non-controlling interests [190 000 - (714 000 x 25%)]

19 500

11 500 31 000

C4. Profit for the year of Arabica Ltd

Profit for the year Share of profit of Kofi Ltd while an associate (218 000 x 3/12 x 40%) Reverse profit made on sale of interest in Roasting Bean Ltd in separate financial statements [(185 000 ? (555 000 x 15/75)) x (1 ? (28% x 80%))] Fair value adjustment on investment in associate becoming a subsidiary [C5] Gain on bargain purchase on associate becoming a subsidiary [C7] Impairment loss on non-current asset held for sale [(142 000 - 138 000) x 72%] Elimination of intragroup dividend received from Grind/Roast Ltd (31 000 x 80%) Elimination of intragroup dividend received from Roasting Bean Ltd (62 000 x 75%) Elimination of intragroup dividend received from Kofi Ltd (39 000 x 55%1)

1 40% x 90 000 shares = 36 000 + (90 000 / 3) = 66 000 / (90 000 + 30 000) = 55%

849 390 21 800

(57 424)

23 813 37 707

(2 880)

(24 800)

(46 500)

(21 450) 779 656

C5. Fair value adjustment on associate becoming subsidiary

Fair value of investment in associate on date of becoming subsidiary

Carrying amount of associate on date of becoming subsidiary Cost price Excess [C6] Retained earnings [((164 000 / 12) + 15 000 - 4 200) = 24 467 x 40%] Profit for the period [(218 000 x 3/12) = 54 500 x 40%] [C4] Other comprehensive income for the period - revaluation surplus (10 800 x 40%)

Fair value adjustment

200 000

(176 187) 130 000

10 280 9 787

21 800

4 320 23 813

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C6. Excess on acquisition of investment in associate Cost price of investment in associate Fair value of identifiable net assets acquired Equity at acquisition date Allowance for credit losses fair value adjustment Deferred tax on fair value adjustment (15 000 x 28%)

40% interest in identifiable net assets acquired Excess

FAC4864/NFA4864/ZFA4864 Case Study 2

350 700 361 500 (15 000)

4 200

130 000

(140 280) (10 280)

C7. Gain on bargain purchase on associate becoming a subsidiary [IFRS 3.32]

Consideration transferred at acquisition date (90 000/3 x R1,50)

45 000

Non-controlling interests

215 000

Fair value of previously held interest

200 000

460 000

Fair value of identifiable net assets [C8]

(497 707)

Gain on bargain purchase

(37 707)

C8. Fair value of identifiable net assets Equity at acquisition [C6] Retained earnings since acquisition until beginning of year [C5] Profit for the period before rights issue [C5] Other comprehensive income for the period before the rights issue

OR 176 187/40% Shares issued in terms of rights issue [C7] Non-current asset held for sale adjustment (142 000 - 125 000) Deferred tax on non-current asset held for sale (17 000 x 28%)

350 700 24 467 54 500 10 800

440 467

440 467 45 000 17 000 (4 760)

497 707

C9. Profit for the year of the Grind/Roast Ltd Group

Profit for the year of Grind/Roast Ltd Share of profit of Latte Ltd (240 120 x 45%) Elimination of intragroup dividend received from Latte Ltd (14 000 x 45%) Elimination of intragroup unrealised profit (depreciation) by Grind/Roast Ltd to Latte Ltd [360 (J2 Part (a)) - 101 (J3 Part (a))] Elimination of intragroup unrealised profit (depreciation) by Grind/Roast Ltd to Arabica Ltd [(107 000 x 25/125 = 21 400/4) x 72%]

580 980 108 054

(6 300)

259

3 852 686 845

C10. Profit for the year of Roasting Bean Ltd Profit for the year [C2]

291 932

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