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Tutorial Letter 104 (Both) for FAC4864

Applied financial accounting (University of South Africa)

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Tutorial letter 104/0/2022

APPLIED FINANCIAL ACCOUNTING II

FAC4864/NFA4864/ZFA4864

Year Module

Department of Financial Governance

IMPORTANT INFORMATION:

This tutorial letter contains important information

about your module.

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INDEX Page

Due date 3

Personnel and contact details 3

Prescribed method of study 3

Suggested working programme 4

United Nations Global Compact Principles 5

Learning unit 7 Change in degree of control 6

8 Related party disclosures 54

Self-assessment questions and suggested solutions 62

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DUE DATE
DUE DATE FOR THIS TUTORIAL LETTER: 31 MAY 2022

TEST 3 ON TUTORIAL 104: 14 JUNE 2022

PERSONNEL AND CONTACT DETAILS

Personnel Telephone
Number
Lecturers
Ms T Mahuma (course leader) 012 429 2022
Ms S Aboobaker 012 429 4373
Mr H Combrink 012 429 4792
Mr P Masha –
Mr S Mlotshwa –
Ms A Oosthuizen 012 429 8971
Ms T van Mourik 012 429 3549
Ms C Wright 012 429 2004

Please send all e-mail queries to: fac4864postgrad@unisa.ac.za

PRESCRIBED METHOD OF STUDY

1. Firstly, study the relevant chapter(s) in your prescribed textbook so that you master the basic principles
and supplement this with the additional information in the learning unit (where applicable).

2. Read the standards and interpretation(s) covered by the learning unit.

3. Do the questions in the study material and make sure you understand the principles contained in the
questions.

4. Consider whether you have achieved the specific outcomes of the learning unit.

5. After completion of all the learning units - attempt the self-assessment questions (open book, but within
the time constraint) to test whether you have mastered the contents of this tutorial letter.

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SUGGESTED WORKING PROGRAMME

MAY 2022
WEDNESDAY THURSDAY FRIDAY SATURDAY SUNDAY MONDAY TUESDAY
25 26 27 28 29 30 31
Change in Change in Change in Change in Related party Do self Do self
degree of degree of degree of degree of disclosures assessment assessment
control control control control questions questions

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THE UNITED NATIONS GLOBAL COMPACT PRINCIPLES

INTRODUCTION

The United Nations Global Compact (UNGC) is underpinned on the principle of

corporate sustainability which emphasises on the value and principles-based approach
to doing business.

It established the ten principles based on the four main values: human rights, labour
practices, environmental concerns and anti-corruption.

The summary of the principles is provided on the table below.

OBJECTIVES/OUTCOMES

After you have engaged this topic, you should be able to demonstrate an awareness of
the importance of the UNGC principles.

This topic is not examinable, but it is important that you should have a sufficient
awareness of these principle as they are applicable in practice.

The summary of the 10 UNGC principles

UNGC Human rights 1. Businesses should support and respect the protection of
Ten internationally proclaimed human rights and;
Principles 2. Make sure that they are not complicit in human rights abuses
Labour 3. Businesses should uphold the freedom of association and the
effective recognition of the right to collective bargaining
4. The elimination of all forms of forced and compulsory labour
5. The effective abolition of child labour
6. The elimination of discrimination in respect of employment and
occupation
Environment 7. Businesses should support a precautionary approach to
environmental challenges
8. Undertake initiatives to promote greater environmental
responsibility
9. Encourage the development and diffusion of environmentally
friendly technologies
Anti-Corruption 10 Businesses should work against corruption in all its forms,
including extortion and bribery

Source: Greenstone, 2014

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LEARNING UNIT 7 – CHANGE IN DEGREE OF CONTROL

INTRODUCTION

An investor may increase or decrease its existing interest in the net assets of an investee
by means of various corporate actions. This change in interest should be reflected in the
financial statements as it results in a change in interest that the investor has in the net
asset value of the investee. The objective of this learning unit is to illustrate the
circumstances under which the investor’s interest in an investee changes and how such
changes are accounted for in the separate and consolidated financial statements of the
investor.

UNGC principle 10 is applicable here, stating that businesses should work against
corruption in all its forms, including extortion and bribery.

OBJECTIVES/OUTCOMES

At the end of this learning unit, you should be able to:

1. Identify the acquirer in a business combination that involves a parent-subsidiary

relationship and determine the acquirer’s percentage ownership interest in the
subsidiary before and after an increase or decrease in holding.

2. Identify and account for acquisition of control and significant influence in the
consolidated financial statements as a result of changes in degree of control
arising from:

• acquisition of additional interest in the investee

• additional shares issued by the investee
• rights issue (only for no change in control)
• share buy-back (only for no change in control)

3. Identify and account for loss of control and significant influence in the consolidated
financial statements as a result of changes in degree of control arising from:

• additional shares issued by the investee (excluding rights issue)

• disposal of shares in the investee
• contractual arrangements

4. Account for changes in ownership interest as result of transactions between

owners that do not result in loss of control in the consolidated financial statements.

5. Account for the effect of the changes in interest in the separate financial
statements of the investor.

6. Apply consolidation procedures and prepare a set of consolidated financial

statements.

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PRESCRIBED STUDY MATERIAL

The following must be studied before you attempt the questions in this learning unit:

1. Group Statements, 17th edition, Volume 2. Relevant chapters and sections

relating to changes in degree of control, significant influence and ownership
interests.

2. The specific paragraphs dealing with change in degree of control in the following
standards:

- IFRS 10 Consolidated Financial Statements (par 25 - 26, par B96 - B99).

(Refer to learning unit 1).
- IAS 28 Investments in Associates and Joint Ventures (par 22 - 24).
(Refer to learning unit 3).
- IFRS 12 Disclosure of Interests in Other Entities (par 10, 18 and 19).
(Refer to learning unit 4).

ADDITIONAL READING

The following illustrates one of the processes followed by the IASB to continuously
assess and review the accounting standards. Please note that it is for information
purposes and is not examinable.

The IASB issued a Request for Information on the Post-implementation Review of

IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12
Disclosure of Interests in Other Entities. The purpose of the request was to obtain
information from the users, preparers and auditors of financial statements regarding
specific identified requirements contained in the standards.

The comments sought by the IASB in the Post-implementation review included

information on the following:

Accounting requirements—Change in the relationship between an investor and an

Investee:
“Some stakeholders said IFRS Standards should provide greater detail on how to
account for a transaction, event or circumstances that alter the relationship between an
investor and an investee.”

Accounting requirements—Partial acquisition of a subsidiary that does not constitute a

business:
”Some stakeholders are unsure how an investor should account for a transaction in
which an investor acquires control of a subsidiary that does not constitute a business,
as defined by IFRS 3.”

Based on the feedback received and assessment of the relevant standards, the IASB
concluded that the three standards are working as intended.

Additional information can be accessed here:

https://www.ifrs.org/projects/work-plan/pir-of-ifrs-10-12-relating-to-consolidated-
financial-statements/#current-stage

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THE REST OF LEARNING UNIT 7 IS BASED ON THE ASSUMPTION THAT YOU

HAVE ALREADY STUDIED THE RELEVANT PRESCRIBED STUDY MATERIAL.

SECTION A - SAICA’S PRINCIPLES OF EXAMINATION LEVELS

The SAICA principles of examination levels provides guidance on how the standards (or topics
within a standard) will be examined.

The principles of examination levels applicable for learning unit 7 will be as follows:

The extract of principles of examination levels for IFRS 10 are as follows:

Description Paragraph Level Notes

Accounting requirements 23 Core Non-controlling interests
(transactions with owners in their
capacity as owners)
25 – 26 Core Loss of control
Vertical Awareness I.e. The parent’s subsidiary has an
groups investment in a subsidiary/associate
Change in Depends
ownership
IFRS 5 – Excluded Subsidiaries acquired with a view to
Groups resale and subsidiaries classified as
held for sale
Application guidance B96 Core Changes in proportion held by NCI
B97 – B99 Core Loss of control
B99A Excluded Loss of control – not a business
B100 – B101 Excluded Investment entity

The extract of principles of examination levels for IAS 28 are as follows:

Description Paragraph Level Notes

Application of equity method 22 – 24 Core Discontinuing the use of equity
method
25 Excluded Change in ownership – Reduced
interest remains an associate or joint
venture
IFRS 5 – Excluded Classification as held for sale
Groups

The extract of principles of examination levels for IFRS 12 are as follows:

Description Paragraph Level Notes

Interests in subsidiaries 18 Core Changes in ownership interest that
do not result in a loss of control
19 Core Losing control of a subsidiary
Application guidance B1 Core
B2 – B6 Core Aggregation
B7 – B9 Core Interests in other entities
B10 – B17 Core Summarised financial information
B18 – B20 Core Commitments for joint ventures
B21 – B26 Core Unconsolidated structured entities

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COMMENT

Share buy-backs and rights issues that lead to loss of control or a step acquisition is
specifically excluded from the SAICA syllabus. It is also important to note that the
acquisition of an additional interest in an associate that leads to the retention of
significant influence and the disposal of an interest in an associate, but with significant
influence both before and after, is excluded.

EXAMPLES

COMMENT

It is important to note that the examples provided in this section do not cover all the
possible scenarios of changes in the interest in an investee. You are therefore reminded
to refer to the prescribed study material before attempting questions on this learning unit.

EXAMPLE 1

The example consists of the following:

Page
PART A Subsidiary becomes an IFRS 9 investment 10
PART B IFRS 9 investment becomes a subsidiary 18
PART C Subsidiary becomes an associate/joint venture 24
PART D No change in control (acquisition of a further interest in subsidiary) 29
PART E No change in control (partial disposal of interest in subsidiary) 33

Blue Ltd is a holding company that has held various investments in Red Ltd for the years ended
31 December 20.19 and 20.20. Apart from the investment in Red Ltd there were no other activities in
Blue Ltd. The abridged trial balance of Red Ltd is provided on the following different dates:

30 June 30 Nov 30 June 30 Nov 31 Dec

20.19 20.19 20.20 20.20 20.20
R R R R R
Property, plant and equipment 300 000 300 000 300 000 300 000 300 000
Inventory 55 000 60 000 75 000 80 000 90 000
Trade receivables 110 000 105 000 130 000 145 000 160 000
Cash and cash equivalents 120 000 135 000 155 000 160 000 190 000
Trade payables (185 000) (150 000) (160 000) (135 000) (140 000)
Share capital (150 000 shares) (150 000) (150 000) (150 000) (150 000) (150 000)
Retained earnings (250 000) (300 000) (350 000) (400 000) (450 000)
- - - - -

The abridged trial balance of Blue Ltd on 30 June 20.19 was as follows:
R
Cash 450 000
Share capital (ordinary shares) (200 000)
Retained earnings (1 January 20.19) (250 000)
-

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Additional information

1. Red Ltd paid a dividend of R8 000 on 31 December 20.19 and R7 500 on 31 December 20.20.
The profit of Red Ltd was earned evenly during 20.19 and 20.20.

2. Both companies have a 31 December year end.

3. Blue Ltd elected to measure non-controlling interests at the proportionate share of the
subsidiary’s net identifiable assets.

4. The current tax rate is 28% and the Capital Gains Tax inclusion rate is 80%. Ignore Dividend Tax
and Value Added Tax (VAT).

EXAMPLE 1: PART A (SUBSIDIARY BECOMES AN IFRS 9 INVESTMENT)

Blue Ltd acquired a 75% controlling interest in Red Ltd on 30 June 20.19 for R350 000 cash, which
was deemed the fair value on that date. All the assets and liabilities of Red Ltd were regarded to be
fairly valued on 30 June 20.19 and no additional assets, liabilities or contingent liabilities were
identified.

On 30 November 20.19 Blue Ltd disposed of a 65% controlling interest in Red Ltd for R552 500
resulting in a remaining 10% interest. From 30 November 20.19, Blue Ltd no longer exercised control
over Red Ltd.

The remaining interest’s fair value was as follows on the different dates:
R
30 November 20.19 85 000
31 December 20.19 105 000

Additional information

1. Blue Ltd accounts for investments in subsidiaries at cost in its separate financial statements in
terms of IAS 27.10(a).

2. On the date of disposal Blue Ltd classified this investment as a financial asset in terms of IFRS 9
Financial Instruments in its separate financial statements and irrevocably elected to present
subsequent changes in the fair value of the investment in other comprehensive income in a
mark-to-market reserve.

REQUIRED

(a) Prepare the journal entries in the separate financial statements of Blue Ltd for the year ended
31 December 20.19.

(b) Prepare the pro forma consolidation journal entries for the Blue Ltd Group for the year ended
31 December 20.19.

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EXAMPLE 1: PART A – Suggested solution

SUBSIDIARY BECOMES AN IFRS 9 INVESTMENT

It is very important to understand that there is a loss of control when a subsidiary becomes an IFRS 9
investment.

At year end, the parent is not required to consolidate the investment as control is no longer present.
In practice, the parent will start with its separate financial information only and then add the information
from the investment while it was still a subsidiary (i.e. the parent's portion of the retained earnings and
reserves, 100% of the current year profits and NCI's share therein, etc.). This is also the approach
followed by Unisa. The consolidated profit or loss is calculated using the steps set out in
IFRS 10.B98-B99. These steps are as follows:

1. Derecognise the assets (including goodwill) and liabilities of the subsidiary at their carrying
amounts when control is lost;
2. Derecognise the carrying amount of any non-controlling interests in the former subsidiary at the
date when control is lost;
3. Recognise the fair value of the consideration received, if any, from the transaction that resulted
in the loss of control;
4. Recognise any retained investment in the former subsidiary at its fair value at the date when
control is lost;
5. Reclassify to profit or loss, or transfer directly to retained earnings if required by other IFRSs, all
amounts recognised to other comprehensive income in relation to that subsidiary on the same
basis as would be required if the parent disposed of the related assets or liabilities; and
6. Recognise any resulting difference as a gain or loss in profit or loss attributable to the parent.

These steps can also be used to follow a different approach whereby the subsidiary is first recognised
and then derecognised. When a parent loses control of a subsidiary, one of the two approaches can
be followed, and no matter which approach is followed, the resulting consolidated financial statements
would be exactly the same. The two approaches are set out in more detail below:

Unisa's preferred approach

The first approach for preparing the pro forma consolidation journals would be to assume that on the
date that control was lost, the parent and subsidiary's financials were not combined (no consolidation
took place). The pro forma consolidation journals would therefore commence by journalising the
parent's share of the post-acquisition reserves of the subsidiary followed by 100% of the current year's
profit or loss and other comprehensive income whilst it was a subsidiary and recognising NCI's share
therein. It is important to note that the parent's and NCI's share in the subsidiary will only be disclosed
in the consolidated statement of profit or loss and other comprehensive income and statement of
changes in equity. The next step would be to eliminate the parent's gain or loss on disposal of the
shares recognised in its separate records followed by recognising the consolidated gain or loss with
the loss of control. The last step is the reclassification to profit or loss, or transfer directly to retained
earnings if required by other IFRSs, all amounts recognised in other comprehensive income in relation
to that subsidiary on the same basis as would be required if the parent disposed of the related assets
or liabilities.

EXAM TECHNIQUE

Although you are encouraged to follow Unisa’s preferred approach, the solutions in the
test or exam and in SAICA’s ITC allows for both methods. You must therefore use the
method that you are most comfortable with.

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Alternative approach (Approach 2)

The second possible approach that can be used to prepare the pro forma consolidation journals would
be to assume that on the date that control was lost, the parent and subsidiary's financials were first
combined as if there was no loss of control (a consolidation took place). This would entail adding the
two trial balances of the parent and subsidiary together on a line-by-line basis. When preparing the
pro forma consolidation journals, the basic consolidation procedures will be followed (i.e. eliminating
the original investment in the subsidiary against the at acquisition equity of the subsidiary, etc).
After the basic consolidation procedures, the subsidiary should be derecognised by following the six
steps described in IFRS 10.B98-B99.

Conclusion

From the above it is clear that following the Unisa preferred approach will result in fewer pro forma
consolidation journals and whereas the steps in IFRS 10.B98 is used to calculate the consolidated
gain or loss with the loss of control, these steps need to be journalised in the alternative approach
(approach 2).

When preparing the pro forma consolidation journals when control is lost, any one of the two
approaches above can be used. Both alternatives will be marked in tests and the exam and students
will not be "forced" to use a specific approach. In our tutorial letter we use the Unisa preferred approach
(parent and subsidiary's financials were not combined) as our default solution. However, the
alternative approach will be provided on myUnisa for the additional questions in section A in the
learning unit (this tutorial letter contains the solutions using the alternative approach for the self-
assessment questions).

COMMENT

It is important to note that no consolidation of the financial statements of the subsidiary

and the parent has taken place at year end. Therefore, it is important to note that the
consolidation process commences with Blue Ltd’s financial statements only and
because no consolidation has yet taken place, Red Ltd is only an investment in
Blue Ltd’s financial statements at year end (31 December 20.19).The pro forma
consolidation journal entries will therefore be to account for the relevant items of Red Ltd
in the consolidated financial statements at year end. These items will focus on the since
acquisition equity reserves and current year’s profit or loss items which consist of items
accumulated while Red Ltd was a subsidiary until date of disposal and control was lost
(remember the effect on NCI).

Based on the above, careful attention should be given to the fact that no assets and
liabilities pertaining to Red Ltd, goodwill or NCI has been recognised in the statement of
financial position in the consolidated financial statements as no consolidation of these
items has taken place (like items have not been added line for line). Therefore, no journal
will be processed in order to derecognise these items and the only pro forma
consolidation journal entries will be to account for since acquisition equity reserves and
the current year’s profit or loss of Red Ltd.

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(a) Separate financial statements of Blue Ltd (b) Consolidated financial statements of
Blue Ltd Group

Dr Cr Dr Cr
R R R R

30 June 20.19
Investment in Red Ltd (SFP) 350 000
Bank (SFP) (given) 350 000
Account for investment in
Red Ltd acquired [J1]
30 November 20.19
Investment in Red Ltd (SFP) 37 500
NCI (P/L) [C1] 12 500
Profit from 30/6/20.19
to 30/11/20.19 (P/L) 50 000
Recognition of profit for the
period while the investment
was still a subsidiary until
date of disposal [J1]
30 November 20.19
Bank (SFP) (given) 552 500 Gain on disposal
Investment (SFP) (separate) (P/L) [C3] 249 167
(350 000 x 65/75) 303 333 Investment (SFP)
Gain on disposal (P/L) (balancing) 833
[C3] 249 167 Gain on disposal
Account for disposal of inte- (group) (P/L) [C4] 250 000
rest in separate financial Recognition of consolidated
statements on gain on disposal and
30 November 20.19 [J2] elimination of the gain on
disposal recognised in the
separate financial statements
[J2]
Income tax expense (P/L) 55 813
Tax payable (SFP)
(249 167 x 28% x 80%) 55 813
Capital Gains Tax payable on
disposal of shares [J3]
Investment in Red Ltd (SFP) Day one gain (P/L) 38 333
[85 000 – (350 000 x 10/75)] 38 333 Deferred tax (SFP) 8 587
Fair value adjustment (P/L) 38 333 Investment (SFP) 38 333
Income tax expense (P/L) 8 587 Income tax expense (P/L) 8 587
Deferred tax (SFP) Reversal of fair value
(38 333 x 28% x 80%) 8 587 adjustment recognised in
Fair value of investment on separate financial statements
date of disposal of interest on date of disposal on
[J4] remaining 10% investment
[J3]

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(a) Separate financial statements of Blue Ltd (b) Consolidated financial statements of
Blue Ltd Group

Dr Cr Dr Cr
R R R R
31 December 20.19 From 30 November 20.19
Investment in Red Ltd (SFP) Red Ltd is an IFRS 9
(105 000 – 85 000) 20 000 investment in the records of
Mark-to-market (OCI) 15 520 Blue Ltd. Therefore, it is not
Deferred tax (SFP) necessary to reverse the
(20 000 x 28% x 80%) 4 480 fair value adjustments
Fair value of IFRS 9 invest- made in the separate
ment at year end [J5] financial statements of Blue
Ltd, as it is treated exactly
the same in both entities
Bank (SFP) (8 000 x 10%) 800
Dividend received (P/L) 800
Dividend received from
Red Ltd at year end [J6]

COMMENT

Note that the year end fair value adjustment on the remaining 10% investment [J5] in
Red Ltd does not have to be reversed nor the dividend received [J6] at group level
because from 30 November 20.19 Red Ltd is an IFRS 9 investment in the consolidated
financial statements of the Blue Ltd Group.

The fair value adjustment [J4] in the separate financial statements of the parent is
recognised in profit or loss and not other comprehensive income. This is in terms of IFRS
9.5.1.1 and IFRS 9.B5.1.2A.

The reversal of [J4] in the separate records is required in [J3] in the consolidated records
as the group has already recognised the remaining 10% interest to fair value. This is
evidenced in [C4] as the fair value of remaining interest (and therefore the fair value
adjustment) is included in the calculation of the consolidated gain on disposal of
R250 000.

COMMENT

It is important to note that no consolidation of the financial statements of the subsidiary

and the parent took place. Therefore, it is important to understand that Red Ltd is an
IFRS 9 investment of Blue Ltd at year end (31 December 20.19), and the consolidation
process commences with only Blue Ltd’s financial statements. The pro forma
consolidation journal entries will therefore focus on the inclusion of the relevant items of
Red Ltd in the consolidated financial statements. These items will be focused on the
since acquisition equity reserves and current year’s profit or loss items which consist of
items accumulated while Red Ltd was a subsidiary (remember the effect on NCI).

Based on the above, careful attention should be given to the fact that no assets and
liabilities pertaining to Red Ltd, goodwill or NCI is recognised in the statement of financial
position in the consolidated financial statements. Therefore, no journal will be processed
in order to derecognise these items.

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CALCULATIONS

C1. Analysis of the owners’ equity of Red Ltd

Blue Ltd
75% - 10% NCI
Total
At Since
At acquisition
Share capital 150 000 112 500 37 500
Retained earnings 250 000 187 500 62 500
400 000 300 000 100 000
Equity represented by goodwill 50 000 50 000 -
Consideration and NCI 450 000 350 000 100 000
Current year
Profit from 30/6/20.19 – 30/11/20.19
(300 000 – 250 000) 50 000 37 500 12 500
500 000 350 000 37 500 112 500
Loss of control over subsidiary:
Derecognition of assets and liabilities
(IFRS 10.B98) (500 000) (350 000) (37 500) (112 500)
- - - -

C2. Proof of goodwill of Red Ltd [IFRS 3.32]

Consideration transferred at acquisition date (given) 350 000

Non-controlling interests [C1] 100 000
Acquisition date fair value of previously held equity -
450 000
Fair value of identifiable net assets (400 000)
Goodwill 50 000

C3. Gain/loss on disposal in separate financial statements

Proceeds 552 500

Less: Cost (350 000 x 65/75) (303 333)
Gain in separate financial statements 249 167

C4. Consolidated gain/loss on disposal (IFRS 10.B98)

Derecognise assets and liabilities (including goodwill) (450 000 + 50 000) (500 000)
Derecognise non-controlling interests (450 000 x 25%) 112 500
Fair value of consideration 552 500
Fair value of remaining interest 85 000
Consolidated gain on disposal (including fair value adjustments) 250 000

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COMMENT

The consolidation will be performed as follows on 31 December 20.19:

Blue Ltd Red Ltd Pro- Conso-

(Note 1) (Note 2) forma lidated
consoli-
dation
entries
Gain on disposal (249 167) - (833)1 (250 000)
Day one gain (P/L) (38 333) - 38 333 -
Dividend received (800) - - (800)
Profit for the year - - (50 000) (50 000)
Non-controlling interests (P/L) - - 12 500 12 500
Income tax expense 64 400 - (8 587) 55 813
Investment in Red Ltd (Note 3) 105 000 - - 105 000
Cash and cash equivalents 653 300 - - 653 300
Share capital (200 000) - - (200 000)
Retained earnings (250 000) - - (250 000)
Mark-to-market reserve (Note 4) (15 520) - - (15 520)
Tax payable (55 813) - - (55 813)
Deferred tax (Note 4) (13 067) - 8 587 (4 480)
- - - -
1
249 167 – 250 000 [J2]

Note 1:
This is the separate financial statements of Blue Ltd on 31 December 20.19 after the
journal entries in (a) have been processed.
Note 2:
As Red Ltd is not a subsidiary at year end, no consolidation of the financial statements
of the subsidiary and the parent is done.
Note 3:
The balance of the Investment in Red Ltd would be as follows on 31 December 20.19:

Separate financial statements Consolidated financial statements

R R
Cost (30 June 20.19) [J1] 350 000 CA investment separate 105 000
Disposal [J2] (303 333) F/S
Pro-forma consolidation -
entries
Fair value adj [J4] 38 333 Profit while a subsidiary 37 500
[J1]
Balance on 30 Nov 20.19 85 000 Disposal of interest [J2] 833
Fair value adj [J5] 20 000 Reversal of FV adj [J3] (38 333)
Balance on 31 Dec 20.19 105 000 Balance on 31 Dec 20.19 105 000

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Note 4:
In the separate financial statements, the mark-to-market reserve will be the difference
between the fair value of the retained investment and the fair value of the retained
investment on disposal date:

Fair value of retained investment 105 000

Less: Fair value of retained investment (85 000)
20 000
Deferred tax (20 000 x 28% x 80%) (4 480)
15 520

Pro-forma journal entry J3 reverses the fair value adjustment on the date of disposal,
leaving only the fair value adjustment of R20 000 (before deferred tax) at year end in the
mark-to-market reserve. This is correct as the fair value of R85 000 on
30 November 20.19 will be regarded as the fair value on initial recognition of a financial
asset in accordance with IFRS 9 (IFRS 10.25(b)).

Also note that the fair value adjustment in J3 will be classified through profit or loss as
IFRS 9 indicate that financial assets must be recognised through profit or loss on initial
recognition, and then only with subsequent measurement at either amortised cost, fair
value through other comprehensive income or through profit or loss. In this example
Blue Ltd elected to present subsequent changes in fair value in other comprehensive
income in a mark-to-market reserve.

Alternative to the pro forma journals in (b) above

The alternative approach assumes that the parent consolidated the former subsidiary’s financial
statements at the date control is lost.

The alternative approach is available on myUnisa.

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EXAMPLE 1: PART B (IFRS 9 INVESTMENT BECOMES A SUBSIDIARY)

Blue Ltd acquired a 10% interest in Red Ltd on 30 November 20.19 for R85 000 cash, which was
deemed the fair value on that date.

On 30 June 20.20 Blue Ltd acquired a further 70% controlling interest in Red Ltd for R300 000.
From this date Blue Ltd had control over Red Ltd as per the definition of control in terms of IFRS 10
Consolidated Financial Statements. All the assets and liabilities of Red Ltd were regarded to be fairly
valued on 30 June 20.20. No additional assets, liabilities or contingent liabilities were identified at this
date.

The fair value of the previously held investment was as follows on the different dates: R

31 December 20.19 105 000

30 June 20.20 130 000

The fair value of the shares was R4,30 per share on 31 December 20.20.

Additional information

1. Blue Ltd classified this investment as a financial asset in terms of IFRS 9 Financial Instruments
in its separate financial statements and irrevocably elected to present subsequent changes in
the fair value of the investment in other comprehensive income in a mark-to-market reserve
(before and after the additional shares were acquired).

2. Blue Ltd elected to transfer any cumulative gains/losses within equity in terms of IFRS 9.B5.7.1.

3. Blue Ltd accounts for investments in subsidiaries at cost in its separate financial statements in
terms of IAS 27.10(a).

REQUIRED

(a) Prepare the journal entries in the separate financial statements of Blue Ltd for the year ended
31 December 20.19 and 31 December 20.20.

(b) Prepare the pro forma consolidation journal entries for the Blue Ltd Group for the year ended
31 December 20.20.

EXAMPLE 1: PART B – Suggested solution

IFRS 9 INVESTMENT BECOMES A SUBSIDIARY

In terms of IAS 27.10 an entity shall account for investments in subsidiaries, joint ventures and
associates in their separate financial statements either:

(a) at cost,
(b) in accordance with IFRS 9 (excluded from syllabus), or
(c) using the equity method as described in IAS 28 (excluded from syllabus).

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The entity has two options to measures its IFRS 9 investment

Measure the investment in terms of IFRS 9 Measure the investment in terms of IFRS 9
paragraph B5.7.5 that presents changes in fair paragraph 4.1.5 that presents changes in fair
value in other comprehensive income (note value through profit or loss
that the investment should not be held for
trading and is an irrevocable decision made by
the investor)

Remeasure initial investment to fair value at Remeasure initial investment to fair value at
date of acquisition in terms of IFRS 3.42 in the date of acquisition in terms of IFRS 3.42 in the
parent’s separate financial statements parent’s separate financial statements
(recognise resulting profit or loss on (recognise the resulting profit or loss on the
remeasurement in other comprehensive remeasurement in profit or loss)
income)

If the entity has made the election in terms of No transfer is required as the fair value
IFRS 9.B5.7.1 to transfer the cumulative adjustments were already recognised in profit
profit/loss within equity - transfer all cumulative or loss (retained earnings)
fair value adjustments from date of initial
investment acquired to date of control
obtained, if an investment, to retained
earnings

AND AND

The investment in subsidiary is now accounted The investment in subsidiary is now accounted
for at cost in the separate financial statements for at cost in the separate financial statements
(fair value of existing shareholding plus fair (fair value of existing shareholding plus fair
value of consideration of additional interest) value of consideration of additional interest)
per IAS 27.10(a). per IAS 27.10(a).

COMMENT

Before any pro forma consolidation journal entries are processed, it is very important to
determine what the starting point of the consolidation process is. From 30 November
20.19 to 30 June 20.20 Red Ltd is an IFRS 9 investment in terms of IFRS 9 Financial
Instruments, in the separate financial statements of Blue Ltd (10% x 150 000 = 15 000
shares) and measured at FV through OCI. On 30 June 20.20 Blue Ltd acquired a further
70% interest in Red Ltd and thus obtained control over Red Ltd. In the separate financial
statements of Blue Ltd this investment will be measured at cost. In the consolidated
financial statements at 31 December 20.20 (the reporting date) Red Ltd is accounted for
as a subsidiary of Blue Ltd with an 80% interest. The first step in the consolidation
process will be to combine like items in the financial statements of the parent (Blue Ltd)
and the subsidiary (Red Ltd) on a line-by-line basis in accordance with IFRS 10.B86 and
the second step will be to process the pro forma consolidation journals as a result of the
first step.

As the starting point of the consolidation, it is ALWAYS assumed that the line-items of
Blue Ltd and Red Ltd have been combined. As a result, the following pro forma
consolidation journals should be processed.

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(a) Separate financial statements of Blue Ltd (b) Consolidated financial statements of
Blue Ltd Group

Dr Cr Dr Cr
R R R R

30 November 20.19
Investment in Red Ltd (SFP) 85 000
Bank (SFP) (given) 85 000
Account for investment
acquired in Red Ltd [J1]
31 December 20.19
Investment in Red Ltd (SFP)
(105 000 – 85 000) 20 000
Mark-to-market (SCE) 15 520
Deferred tax (SFP)
(20 000 x 28% x 80%) 4 480
Fair value of IFRS 9
investment at year end [J2]
30 June 20.20 31 December 20.20
Investment in Red Ltd (SFP) Mark-to-market (SCE)
(130 000 – 105 000) 25 000 [130 000 – 85 000 –
Mark-to-market (OCI) 19 400 (45 000 x 28% x 80%)] 34 920
Deferred tax (SFP) Retained earnings
(25 000 x 28% x 80%) 5 600 (SCE) 34 920
Record fair value adjustment Transfer of fair value ad-
of investment on date of justments previously re-
acquisition of additional cognised in mark-to-
interest [J3] market reserve to retained
earnings with
measurement of equity
interest previously held, at
group level in accordance
with IFRS 9.B5.7.1
(19 400 [J3] + 15 520 [J2]
(separate)) [J1]
Investment in Red Ltd (SFP) 300 000 Share capital (SCE) 150 000
Bank (SFP) 300 000 Retained earnings (SCE) 350 000
Goodwill (SFP) [C1] 30 000
NCI (SFP/SCE) [C1] 100 000
Investment (SFP)
(130 000 + 300 000) 430 000
Account for further 70% Elimination of owners’
interest acquired [J4] equity at acquisition [J2]

COMMENT

[J1] in consolidated financial statements is all the previously recognised fair value
adjustments, that will be transferred to retained earnings in terms of IFRS 9.B5.7.1 on the
date the IFRS 9 investment became a subsidiary, due to Blue Ltd electing to transfer any
cumulative gains or losses within equity in terms of IFRS 9.B5.7.1.

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(a) Separate financial statements of Blue Ltd (b) Consolidated financial statements of
Blue Ltd Group

Dr Cr Dr Cr
R R R R
NCI (P/L) [C1] 21 500
NCI (SFP/SCE) 21 500
Non-controlling interests in
profit for the year from
30/6/20.20 to 31/12/20.20
[J3]
Bank (SFP) (7 500 x 80%) 6 000 Dividend received (P/L) 6 000
Other income (P/L) 6 000 NCI (SFP/SCE) [C1] 1 500
Dividends paid (SCE) 7 500
Dividend received from Elimination of intragroup
Red Ltd at year end [J5] dividends and recording of
non-controlling interests
therein [J4]

COMMENT

In terms of IFRS 3.42, Blue Ltd should first remeasure its previous investment of 15 000
shares to the fair value of R130 000 at the date of acquisition. Furthermore, Blue Ltd
already recognised the resulting fair value adjustments with the remeasurement in other
comprehensive income under IFRS 9 in the separate records. For the group, the
cumulative fair value adjustments previously recognised in the mark-to-market reserve
is transferred to retained earnings on the date of acquisition.

The cost of the original investment was R85 000. The fair value of this investment on
30 June 20.20 was R130 000, which resulted in the cumulative gain of R45 000 before
tax. The after-tax amount of R34 920 is transferred within equity.

30/11/20.19 31/12/20.19 30/6/20.20 31/12/20.20

Transfer fair value adjustments to Subsidiary at cost [J3]

retained earnings on date of acquisition
of control [J1]

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CALCULATIONS

C1. Analysis of the owners’ equity of Red Ltd

Blue Ltd
Total 80%
NCI
At Since
At acquisition
Share capital 150 000 120 000 30 000
Retained earnings 350 000 280 000 70 000
500 000 400 000 100 000
Equity represented by goodwill 30 000 30 000 -
Consideration and NCI 530 000 430 000 100 000
[R130 000(FV) + R300 000]
Current year
Profit from 30/6/20.20 - 31/12/20.20
[(450 000 – 350 000) + 7 500] 107 500 86 000 21 500
Dividend paid (7 500) (6 000) (1 500)
630 000 80 000 120 000

C2. Proof of goodwill of Red Ltd [IFRS 3.32]

Consideration transferred at acquisition date (given) 300 000

Non-controlling interests [C1] 100 000
Acquisition date fair value of previously held equity (given) 130 000
530 000
Fair value of identifiable net assets (500 000)
Goodwill 30 000

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COMMENT

The consolidation will be performed as follows on 31 December 20.20:

Pro-forma
consoli- Conso-
Blue Ltd Red Ltd dation lidated
(Note 1) (Note 2) entries (Note 5)

Dividend received (6 000) - 6 000 -

Profit for the year - (107 500)1 - (107 500)
Non-controlling interests (P/L) - - 21 500 21 500
Investment in Red Ltd (Note 3) 430 000 - (430 000) -
Property, plant and equipment - 300 000 - 300 000
Goodwill - - 30 000 30 000
Inventory - 90 000 - 90 000
Trade receivables - 160 000 - 160 000
Cash and cash equivalents 71 000 190 000 - 261 000
Share capital (200 000) (150 000) 150 000 (200 000)
Retained earnings (250 000) (350 000) 315 0802 (284 920)
Dividend paid - 7 500 (7 500) -
Mark-to-market reserve (34 920) - 34 9203 -
Non-controlling interests (SFP) - - (120 000)4 (120 000)
Trade payables - (140 000) - (140 000)
Deferred tax (Note 4) (10 080) - - (10 080)
- - - -

1
Profit from 30 June 20.20 when control was obtained (see [C1])
2
-34 920 [J1] + 350 000 [J2]
3
34 920 [J1]
4
-100 000 [J2] – 21 500 [J3] + 1 500 [J4]

Note 1:
This is the separate financial statements of Blue Ltd after the journal entries in (a) have
been processed

Note 2:
As Red Ltd is a subsidiary at year end, the trial balance on 31 December 20.20 will be
used for the consolidation

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COMMENT

Note 3:
The balance of the Investment in Red Ltd would be as follows on 31 December 20.20:

Separate financial statements Consolidated financial statements

R R

Balance on 31 Dec 20.19 CA investment separate

[J1] + [J2] 105 000 F/S 430 000
Fair value adj [J3] 25 000 Eliminate cost [J2] (430 000)
Further acquisition [J4] 300 000
Balance on 31 Dec 20.20 430 000 Balance on 31 Dec 20.20 -

Note 4:
The remaining balance on deferred tax relates to the transfer to retained earnings
R45 000 – R34 920 (after tax transfer) = R10 080 or 45 000 x 28% x 80% = R10 080.

EXAMPLE 1: PART C (SUBSIDIARY BECOMES AN ASSOCIATE/JOINT VENTURE)

COMMENT

Please note that the scenario where control is lost, and significant influence is retained is
assessed at level 1 awareness.

Blue Ltd acquired an 80% interest in Red Ltd on 30 June 20.20 for R430 000. From this date Blue Ltd
had control over Red Ltd as per the definition of control in terms of IFRS 10 Consolidated Financial
Statements. All the assets and liabilities of Red Ltd were regarded to be fairly valued on 30 June 20.20.
No additional assets, liabilities or contingent liabilities were identified on this date.

Blue Ltd disposed of 60 000 of its shares in Red Ltd for R390 000 on 30 November 20.20. Blue Ltd
has exercised significant influence over the financial and operating policy decisions of Red Ltd since
that date. All the assets and liabilities of Red Ltd were regarded to be fairly valued and no additional
assets, liabilities or contingent liabilities were identified at this date.

The fair value of the investment in Red Ltd was deemed to be R6,50 per share at the date of the
disposal of the shares.

For Part C you can assume that the fair value for the remaining 40% interest remained unchanged on
31 December 20.20 from the date of disposal.

Additional information

1. Blue Ltd accounts for investments in subsidiaries and associates at cost in its separate financial
statements in terms of IAS 27.10(a).

REQUIRED

(a) Prepare the journal entries in the separate financial statements of Blue Ltd for the year ended
31 December 20.20.

(b) Prepare the pro forma consolidation journal entries for the Blue Ltd Group for the year ended
31 December 20.20 (you do not have to show the at acquisition elimination journal).

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EXAMPLE 1: PART C – Suggested solution

SUBSIDIARY BECOMES AN ASSOCIATE/JOINT VENTURE

COMMENT

On 30 November 20.20 Blue Ltd lost control of Red Ltd and the same principles as
applied in Part A of example 1 (IFRS 10.25-26 and B97-B99) will be applicable.

From 30 November 20.20 Blue Ltd exercises significant influence over the financial and
operating policy decisions of Red Ltd and Red Ltd should be accounted for as an
associate in the group financial statements in terms of IAS 28 Investments in associates
and joint ventures.

Any investment retained in the former subsidiary should be recognised at fair value on
30 November 20.20 (date control was lost). This implies that a remeasurement gain or
loss should be recognised as part of the profit or loss recognised on the disposal of the
interest of the subsidiary.

In the solution below it is assumed that no consolidation has taken place at year end
(Unisa’s preferred approach, refer to Part A).

(a) Separate financial statements of Blue Ltd (b) Consolidated financial statements of
Blue Ltd Group
Dr Cr Dr Cr
R R R R
30 June 20.20 31 December 20.20
Investment in Red Ltd (SFP) Investment in
(given) 430 000 Red Ltd (SFP) 40 000
Bank (SFP) 430 000 NCI (P/L) [C1] 10 000
Profit from
30/6/20.20 to
30/11/20.20 50 000
Account for investment Recognition of profit
acquired in Red Ltd [J1] for the period while the
investment was still a
subsidiary [J1]
30 November 20.20 Gain on disposal
Bank (SFP) (given) 390 000 (separate) (P/L) 175 000
Investment in Red Ltd Investment in
(SFP) (430 000 x 40/80) 215 000 associate (SFP) 390 000
Gain on disposal (P/L) 175 000 Investment in
Red Ltd (SFP)
((430 000 x 40/80)
+ 40 000) 255 000
Gain on disposal
(group) (P/L) [C4] 310 000
Account for disposal of Recognition of consoli-
interest in separate financial dated gain on disposal
statements [J2] and investment in
associate [J2]

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(a) Separate financial statements of Blue Ltd (b) Consolidated financial statements of
Blue Ltd Group
Dr Cr Dr Cr
R R R R
Income tax expense (P/L) 39 200 No reversal of capital
Tax payable (SFP) gains tax, as group still
(175 000 x 28% x 80%) 39 200 needs to pay the CGT
Capital gains tax payable on to SARS
disposal of shares [J3]
Investment in
associate (SFP) [C1] 23 000
Share of profit of
associate (P/L) 23 000
Recognition of share of
profit of associate from
30/11/20.20 –
31/12/20.20 [J3]
Bank (SFP) (7 500 x 40%) 3 000 Dividend received
Dividend received (P/L) 3 000 (P/L) 3 000
Investment in
associate (SFP) 3 000
Dividend received from Elimination of dividend
Red Ltd at year end [J4] received from
associate [J4]

EXAM TECHNIQUE

Always read the required carefully. Required (b) specifically states that the at-acquisition
journal is not required. Do not waste unnecessary time providing journals not required.

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CALCULATIONS

C1. Analysis of the owners’ equity of Red Ltd

Blue Ltd
80% - 40%
Total NCI
At Since
At acquisition
Share capital 150 000 120 000 30 000
Retained earnings 350 000 280 000 70 000
500 000 400 000 100 000
Equity represented by goodwill 30 000 30 000 -
Consideration and NCI 530 000 430 000 100 000
Current year
Profit from 30/6/20.20 - 30/11/20.20
(400 000 – 350 000) 50 000 40 000 10 000
580 000 430 000 40 000 110 000
Loss of control over subsidiary:
Derecognition of assets and liabilities
(IFRS 10.B98) (580 000) (430 000) (40 000) (110 000)
- - - -
Accounting for associate:
Recognise remaining interest at fair value
(60 000 x 6,50) 390 000 390 000 - n/a
Profit from 30/11/20.20 – 31/12/20.20
[(450 000 – 400 000) + 7 500] 57 500 23 000 n/a
Dividend paid (7 500) (3 000) n/a
440 000 390 000 20 000 n/a

From 30 November 20.20 NCI was derecognised and does not exist, therefore no allocation of
profit or dividends to NCI.

C2. Proof of goodwill of Red Ltd [IFRS 3.32]

Consideration transferred at acquisition date (430 000 – 130 000(fair value)) 300 000
Non-controlling interests [C1] 100 000
Acquisition date fair value of previously held equity 130 000
530 000
Fair value of identifiable net assets (500 000)
Goodwill 30 000

C3. Remeasurement of investment retained [IFRS 10.25]

Fair value of retained 40% investment (60 000 x R6,50) 390 000
Consolidated carrying amount of retained 40% investment
(215 000 + 20 000 (40 000 share of profit x 60 000/120 000)) (235 000)
Remeasurement gain to be recognised in profit or loss 155 000

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COMMENT

Note that this remeasurement gain of R155 000 [C3] above is already included in the
consolidated gain recognised in profit or loss [C4] on disposal and was not recognised
separately.

C4. Consolidated gain/loss on disposal (IFRS 10.B98)

Derecognise assets and liabilities (including goodwill) (550 000 + 30 000) (580 000)
Derecognise non-controlling interests (550 000 x 20%) 110 000
Fair value of consideration 390 000
Fair value of remaining interest 390 000
Consolidated gain on disposal (including fair value adjustments) 310 000

COMMENT

The accounting treatment is as follows on 31 December 20.20:

Blue Ltd Red Ltd Pro-forma

Group
(Note 1) (Note 2) entries
Gain on disposal (175 000) - (135 000)1 (310 000)
Dividend received (3 000) - 3 000 -
Profit for the year - - (50 000) (50 000)
Income from associate - - (23 000) (23 000)
Non-controlling interests (P/L) - - 10 000 10 000
Income tax expense 39 200 - - 39 200
Investment in Red Ltd (Note 3) 215 000 - (215 000)2 -
Investment in associate - - 410 0003 410 000
Cash and cash equivalents 413 000 - - 413 000
Share capital (200 000) - - (200 000)
Retained earnings (250 000) - - (250 000)
Tax payable (39 200) - - (39 200)
- - - -
1
175 000 [J2] – 310 000 [J2]
2
40 000 [J1] – 255 000 [J2]
3
390 000 [J2] + 23 000 [J3] – R3 000 [J4]

Note 1:
This is the separate financial statements of Blue Ltd after the journal entries in (a) have
been processed.

Note 2:
As Red Ltd is not a subsidiary at year end, no consolidation of the financial statements
of the subsidiary and the parent is done.

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COMMENT

Note 3:
The balance of the Investment in Red Ltd would be as follows on 31 December 20.20:

Separate financial statements Consolidated financial statements

R R
Cost (30 June 20.20) [J1] 430 000 CA investment separate 215 000
Disposal of investment [J2] (215 000) F/S 40 000
Balance on 31 Dec 20.20 215 000 Profit until 30/11/20.20 [J1]
Derecognition of (255 000)
investment [J2]
Recognition of investment 390 000
in associate [J2]
Recognition of share of
profit of associate [J4] 23 000
Elimination of dividend [J5] (3 000)
Balance on 31 Dec 20.20 410 000

PART D (NO CHANGE IN CONTROL – ACQUISITION OF A FURTHER INTEREST IN

SUBSIDIARY)

On 30 June 20.20 Blue Ltd acquired a 60% controlling interest in Red Ltd for R320 000.

Blue Ltd acquired a further 10% interest in Red Ltd on 30 November 20.20 for R60 000. All the assets
and liabilities of Red Ltd were regarded to be fairly valued on 30 November 20.20. No additional assets,
liabilities or contingent liabilities were identified at this date.

Additional information

Investments in subsidiaries are accounted for at cost in terms of IAS 27.10(a).

REQUIRED

(a) Prepare the journal entries in the separate financial statements of Blue Ltd on
30 November 20.20 and 31 December 20.20.

(b) Prepare the pro forma consolidation journal entries for the Blue Ltd Group for the year ended
31 December 20.20 (you do not have to show the at acquisition elimination journal).

EXAM TECHNIQUE

Always read the required carefully. Required (b) specifically states that the at-acquisition
journal is not required. Do not waste unnecessary time providing journals not required.

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PART D – Suggested solution

NO CHANGE IN CONTROL – ACQUISITION OF A FURTHER INTEREST IN SUBSIDIARY

When there is a change in the parent’s ownership interest in a subsidiary that do not result in a loss of
control (% holding increase or decrease but do not result in a loss of control) it should be accounted
for as an equity transaction in accordance with IFRS 10.23. Equity transactions are transactions with
owners of the subsidiary in their capacity as owners. Non-controlling interest is classified as equity in
accordance with IFRS 10.22 and thus any transaction with NCI where there is no loss of control should
be accounted for as an equity transaction.

Students should note the following with regards to equity transactions:

1. Carrying amounts of the parent and NCI’s interests in the subsidiary should reflect the change
in interests in the consolidated financial statements;
2. This change should be recognised directly in equity and thus no gain or loss is recognised in
profit or loss;
3. The acquisition of additional shares where there is no change in control is not deemed a
business combination and thus there is no change in the carrying amount of the subsidiary’s
assets (including goodwill) and liabilities recognised in the consolidated financial statements as
it is already included at 100%;
4. IFRS 10.B96 states that the amount recognised directly in equity as a result of the change in
ownership should be determined as the difference between:
1) the amount by which NCI is adjusted (difference between NCI before and after the change
in ownership) and
2) the fair value of the consideration paid or received.

Note that this amount is affected by the group’s policy whether to measure NCI either at the
proportionate share of the subsidiary’s net identifiable assets or at fair value.

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(a) Separate financial statements of Blue Ltd (b) Consolidated financial statements

Dr Cr Dr Cr
R R R R

31 December 20.20
NCI (P/L) [C1] 20 000
NCI (SFP/SCE) 20 000

Non-controlling interests in
profit for the year from
30/6/20.20 to 30/11/20.20
[J1]
30 November 20.20
Investment in Red Ltd (SFP) 60 000 Change in ownership
Bank (SFP) 60 000 (equity) (SCE) [C3] 5 000
NCI (SFP/SCE) [C1] 55 000
Investment in Red Ltd
(SFP) 60 000

Account for further 10% Acquisition of a further 10%

interest acquired in Red Ltd interest in Red Ltd [J2]
[J1]
NCI (P/L) [C1] 17 250
NCI (SFP/SCE) 17 250

Non-controlling interests in
profit for the year from
30/11/20.20 to 31/12/20.20
[J3]
31 December 20.20
Bank (SFP) 5 250 Dividend received (P/L) 5 250
Dividend received (P/L) 5 250 NCI (SFP/SCE) [C1] 2 250
(7 500 x 70%) Dividends paid (SCE) 7 500

Account for dividend re- Elimination of intragroup

ceived from Red Ltd [J2] dividends and recording of
non-controlling interests
therein [J4]

COMMENT

There was no change in control when the additional 10% interest was purchased on
30 November 20.20. Blue Ltd already obtained control of Red Ltd on 30 June 20.20
when Blue Ltd acquired the 60% interest in Red Ltd. The additional 10% acquired on
30 November 20.20 does not result in a change in control and thus it is deemed an
equity transaction and recognised directly in equity.

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CALCULATIONS

C1. Analysis of the owners’ equity of Red Ltd

Blue Ltd
Total 60% - 70% NCI
At Since
At acquisition
Share capital 150 000 90 000 60 000
Retained earnings 350 000 210 000 140 000
500 000 300 000 200 000
Equity represented by goodwill 20 000 20 000 -
Consideration and NCI 520 000 320 000 200 000

Current year
Profit (30/6/20.20 – 30/11/20.20)
(400 000 – 350 000) 50 000 30 000 20 000
570 000 30 000 220 000
Further 10% acquisition
(220 000 x 10/40) or [(570 000 – 20 000
goodwill) x 10%] 55 000 (55 000)
Changes in ownership (equity)
(IFRS 10.23) 5 000 5 000
Consideration and NCI 60 000 165 000
Profit (1/12/20.20 – 31/12/20.20)
(450 000 – 400 000 + 7 500) 57 500 40 250 17 250
Dividend (7 500) (5 250) (2 250)
625 000 65 000 180 000

C2. Proof of goodwill of Red Ltd [IFRS 3.32]

Consideration transferred at acquisition date (given) 320 000

Non-controlling interests [C1] 200 000
520 000
Fair value of identifiable net assets (500 000)
Goodwill 20 000

C3. Change in ownership recognised in equity [IFRS 10.B96]

Fair value of consideration received by NCI (given) 60 000

Amount by which NCI are adjusted (220 000 x 10/40) (55 000)
NCI after transaction on 30/11/20.20 [(570 000 – 20 000) x 30%] 165 000
NCI before transaction on 30/11/20.20 [(570 000 – 20 000) x 40%] (220 000)

Amount to be recognised directly in equity 5 000

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COMMENT

The balance of the Investment in Red Ltd would be as follows on 31 December 20.20:

Separate financial statements Consolidated financial statements

R R
Cost on 30 June 20.20 320 000 Investment in separate F/S 380 000
Acquisition of 10% [J1] 60 000 Eliminate cost (320 000)
Balance on 31 Dec 20.20 380 000 Acquisition of 10%
eliminated [J2] (60 000)
Balance on 31 Dec 20.20 -

PART E (NO CHANGE IN CONTROL – PARTIAL DISPOSAL OF INTEREST IN SUBSIDIARY)

Please note that Part E follows on from Part D of the example

Assume that, instead of acquiring a further 10% interest (Part C above), Blue Ltd disposed of a 10%
interest in Red Ltd on 30 November 20.20 for R65 000 (this was also the fair value of the shares on
this date). Blue Ltd still had control over Red Ltd as per the definition of control in terms of IFRS 10
Consolidated Financial Statements.

You can assume that the cost of the 10% interest disposed of was R53 333 and according to the
SARS this also represents the base cost of these shares.

Additional information

Investments in subsidiaries are accounted for at cost in terms of IAS 27.10(a).

REQUIRED

(a) Prepare the journal entries in the separate financial statements of Blue Ltd on
30 November 20.20 and 31 December 20.20.

(b) Prepare the pro forma consolidation journal entries for the Blue Ltd Group for the year ended
31 December 20.20 (you do not have to show the at acquisition elimination journal).

EXAM TECHNIQUE

Always read the required carefully. Required (b) specifically states that the at-acquisition
journal is not required. Do not waste unnecessary time providing journals not required.

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PART E – Suggested solution

NO CHANGE IN CONTROL – PARTIAL DISPOSAL OF INTEREST IN SUBSIDIARY

COMMENT

Changes in a parent’s ownership interest in a subsidiary that do not result in the parent
losing control of the subsidiary are equity transactions (IFRS 10.23). When the
proportion of the equity held by non-controlling interest changes, an entity shall adjust
the carrying amounts of the controlling and non-controlling interest to reflect the changes
in their relative interests in the subsidiary. The entity shall recognise directly in equity
any difference between the amount by which the non-controlling interest is adjusted and
the fair value of the consideration paid or received, and attribute it to the owners of the
parent (IFRS 10.B96).

(a) Separate financial statements of Blue Ltd (b) Consolidated financial statements

Dr Cr Dr Cr
R R R R

Bank (SFP) 65 000

Investment (SFP)
(320 000 x 10/60) 53 333
Profit on disposal (P/L) 11 667

Account for 10% interest

disposed of in Red Ltd [J1]
Income tax expense (P/L) 2 613
Tax payable (SFP)
((65 000 – 53 333) x
28% x 80%) 2 613

Capital Gains Tax payable

on disposal of shares (65 000
(proceeds) less 53 333
(cost)) [J2]
NCI (P/L) [C1] 20 000
NCI (SFP/SCE) 20 000

Non-controlling interests in
profit for the year from
30/6/20.20 to 30/11/20.20
[J1]
Investment in Red Ltd 53 333
(SFP)
Change in ownership 10 000
(equity) (SCE) [C2] 55 000
NCI (SFP/SCE) 11 667
Profit on disposal (P/L)

Pro forma correction of

group gain on disposal to
separate equity category
[IFRS 10.23] [J2]

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(a) Separate financial statements of Blue Ltd (b) Consolidated financial statements

Dr Cr Dr Cr
R R R R
NCI (P/L) [C1] 28 750
NCI (SFP/SCE) 28 750

Non-controlling interests in
profit for the year from
1/12/20.20 to 31/12/20.20
[J3]
30/11/20.20 – 31/12/20.20
Bank (SFP) (7 500 x 50%) 3 750 Dividend received (P/L) 3 750
Dividend received (P/L) 3 750 NCI (SFP/SCE) [C1] 3 750
Dividends paid (SCE) 7 500

Account for dividend re- Elimination of intragroup

ceived from Red Ltd [J3] dividends and recording of
non-controlling interests
therein [J4]

CALCULATIONS

C1. Analysis of the owners’ equity of Red Ltd

Blue Ltd
Total 60% - 50% NCI
At Since
At acquisition
Share capital 150 000 90 000 60 000
Retained earnings 350 000 210 000 140 000
500 000 300 000 200 000
Equity represented by goodwill 20 000 20 000 -
Consideration and NCI 520 000 320 000 200 000

Current year
Profit (30/6/20.20 – 30/11/20.20)
(400 000 – 350 000) 50 000 30 000 20 000
570 000 30 000 220 000
Disposed of 10%
(300 000 x 10/60); (30 000 x 10/60);
(220 000 x 10/40) (50 000) (5 000) 55 000
570 000 25 000 275 000
Profit (1/12/20.20 – 31/12/20.20)
(450 000 – 400 000 + 7 500) 57 500 28 750 28 750
Dividend (7 500) (3 750) (3 750)
620 000 50 000 300 000

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C2. Change in ownership recognised in equity [IFRS 10.B96]

Fair value of consideration received (given) 65 000

Amount by which NCI are adjusted (220 000 x 10/40) (55 000)
NCI after transaction on 30/11/20.20 [(570 000 – 20 000) x 50%] (275 000)
NCI before transaction on 30/11/20.20 [(570 000 – 20 000) x 40%] 220 000
Amount to be recognised directly in equity 10 000

COMMENT

The balance of the Investment in Red Ltd would be as follows on 31 December 20.20:

Separate financial statements Consolidated financial statements

R R
Balance on 30 June 20.20
(Part D) 320 000 Investment in separate F/S 266 667
Dispose of 10% [J1] (53 333) Eliminate cost
Balance on 31 Dec 20.20 266 667 (Part B – [J3]) (320 000)
Dispose of 10% [J2] 53 333
Balance on 31 Dec 20.20 -

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EXAMPLE 2

This example consists of the following:

Page
PART A IFRS 9 investment becomes an associate/joint venture 38
PART B Associate/Joint venture becomes an IFRS 9 investment 41
PART C Associate/Joint venture becomes a subsidiary 45

The following information is applicable to all the different parts of this example:

Blue Ltd has an investment in Red Ltd. The following information relates to Red Ltd at the various
dates:

1 March 1 September
20.19 20.19
R
Share capital (100 000 ordinary shares) 100 000 100 000
Retained earnings 250 000 300 000
350 000 400 000

Red Ltd made a profit of R67 500 for the period 1 September 20.19 to 28 February 20.20 and paid a
dividend of R7 500 on 28 February 20.20. The profit of Red Ltd was earned evenly during the 20.20
financial year.

Additional information

1. Blue Ltd classified its investment as a financial asset in terms of IFRS 9 Financial Instruments
in its separate financial statements and irrevocably elected to present subsequent changes in
the fair value of the investment in other comprehensive income in a mark-to-market reserve.
Blue Ltd is not considered a share trader for income tax purposes or an investment entity as
defined in IFRS 10 Consolidated Financial Statements.

2. Blue Ltd accounts for investments in subsidiaries, associates and joint ventures at cost in its
separate financial statements in terms of IAS 27.10(a).

3. Blue Ltd elected to measure non-controlling interests at the proportionate share of the
subsidiary’s net identifiable assets.

4. Both companies have a 28 February year end.

5. The current tax rate is 28% and the Capital Gains Tax inclusion rate is 80%. Ignore Dividend
Tax and Value Added Tax (VAT).

6. All assets and liabilities were deemed to be fairly valued at each acquisition or disposal date and
no additional assets, liabilities or contingent liabilities were identified.

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EXAMPLE 2: PART A (IFRS 9 INVESTMENT BECOMES AN ASSOCIATE/JOINT VENTURE)

On 1 March 20.19, Blue Ltd purchased 10 000 of the ordinary share capital of Red Ltd for R50 000
cash. On 1 September 20.19, Blue Ltd purchased an additional 20 000 ordinary shares in Red Ltd for
R100 000. From that date Blue Ltd exercised significant influence over the financial and operating
policy decisions of Red Ltd.

The investment in Red Ltd had the following fair values in the records of Blue Ltd at the respective
dates:
R
31 August 20.19 55 000
28 February 20.20 170 000

Blue Ltd did not have any other investments in associates or subsidiaries at 28 February 20.20.

REQUIRED

(a) Prepare the journal entries in the separate financial statements of Blue Ltd for the year ended
28 February 20.20.

(b) Prepare the pro forma journal entries for the Blue Ltd Group for the year ended
28 February 20.20.

EXAMPLE 2: PART A – Suggested solution

IFRS 9 INVESTMENT BECOMES AN ASSOCIATE/JOINT VENTURE

The equity method (IAS 28.10) is applied when significant influence / joint control is obtained (for
example by purchasing additional shares resulting in an increase from a 10% interest to a
25% interest).

Steps to follow in equity accounting:

(a) The investment in the associate / joint venture is recognised at cost on the date when significant
influence / joint control is obtained. This cost consists of two components namely the cost of the
original investment plus the cost of the additional investment whereby significant influence is
obtained. IAS 28 does not provide clear guidance to the measurement of the original investment
(for example the 10% interest). Even though IAS 28.10 requires an investment recognised under
the equity method to be measured at cost, IAS 28.26 states that many of the procedures that
are appropriate for the application of the equity method are similar to the consolidation
procedures described in IFRS 10. Furthermore, the concepts underlying the procedures used in
accounting for the acquisition of a subsidiary are also adopted in accounting for the acquisition
of an investment in an associate or a joint venture.

It is therefore our view as lecturers that the same principles prescribed in IFRS 3 that are
applicable to a step acquisition of a subsidiary are also applicable to a step acquisition of an
associate or joint venture. The existing shareholding will therefore be measured at fair value at
the date that significant influence or joint control is obtained, and the resulting gain or loss will
be recognised in profit or loss or other comprehensive income as appropriate. If in prior reporting
periods the purchaser recognised changes in the value of its equity interest (not yet an
investment in associate or joint venture) in other comprehensive income, the amount that was
recognised in other comprehensive income shall be recognised on the same basis as would be
required if the purchaser had disposed directly of the previously held equity interest.

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(b) The investor’s share of the profit or loss and other comprehensive income of the associate / joint
venture, from the date on which the investee becomes an associate / joint venture, is included
in the current period’s profit or loss and other comprehensive income in the investor’s financial
statements as share of profit of associate / joint venture and share of other comprehensive
income of associate / joint venture.

(c) During the period in which the investment is not yet an associate (thus no significant influence),
it is carried at fair value in terms of IFRS 9 in the separate financial statements of the investor.
Whilst the investment is not an associate / joint venture, the measurement at fair value in the
separate financial statements corresponds with the measurement at fair value in the group
financial statements (if applicable). As soon as significant influence / joint control is acquired and
the investment becomes an associate / joint venture, the investment will be carried at cost in the
group financial statements. This is consistent with the manner in which subsidiaries are
consolidated (IAS 28.26).

COMMENT

It is important to note that when an entity only has an interest in an associate or joint
venture, GROUP financial statements are prepared. A consolidation can only be
performed if an entity has an interest in a subsidiary.

The journal entries required to account for the investment in associate / joint venture in
the group financial statements are referred to as pro forma journal entries.

(a) Separate financial statements of Blue Ltd (b) Group financial statements

Dr Cr Dr Cr
R R R R

1 March 20.19 1 March 20.19

Investment in Red Ltd (SFP) 50 000 No entry required as no
Bank (SFP) (given) 50 000 group exist. Only IFRS 9
Account for investment in investment.
Red Ltd acquired [J1]
31 August 20.19
Investment in Red Ltd (SFP)
(55 000 – 50 000) 5 000
Mark-to-market (OCI) 3 880
Deferred tax (SFP)
(5 000 x 28% x 80%) 1 120
Fair value adjustment on
date when additional 20% is
acquired in Red Ltd [J2]
1 September 20.19 1 September 20.19
Investment in Red Ltd (SFP) 100 000 No entry required. Cost
Bank (SFP) 100 000 per IAS 28 is R155 000
Account for additional invest- (R55 000 + R100 000)
ment in Red Ltd acquired [J3]

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(a) Separate financial statements of Blue Ltd (b) Group financial statements

Dr Cr Dr Cr
R R R R
28 February 20.20 28 February 20.20
Bank (SFP) 2 250 Other income (P/L) 2 250
Other income (P/L) [C1] 2 250 Investment in Red Ltd
(SFP) 18 000
Share of profit of
associate (P/L) [C1] 20 250
Dividend received on Recognise share of P/L
investment [J4] of associate and
eliminate intragroup
dividend received [J1]

COMMENT

Please refer to TL 102 (subsidiaries, associates and joint ventures).

Also note that no transfer of previously recognised fair value adjustments are done from
the mark-to-market reserve to retained earnings as the Group did not elect this transfer
in terms of IFRS 9.B5.7.1.

CALCULATIONS

C1. Analysis of the owners’ equity of Red Ltd

Blue Ltd
10% - 30%
Total
At Since
At acquisition (1 September 20.19)
Share capital 100 000 30 000
Retained earnings 300 000 90 000
400 000 120 000
Goodwill 35 000
Consideration (55 000 + 100 000) 155 000
Current year
Profit from 1/09/20.19 – 28/02/20.20 67 500 20 250
Dividend paid (7 500) (2 250)
460 000 18 000

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COMMENT

The balance of the Investment in Red Ltd are as follows on 28 February 20.20:

Separate financial statements Group financial statements

R R
Cost [J1] 50 000 Cost (100 000 + 55 000) 155 000
Fair value adjustment [J2] 5 000 Share of P/L of associate
Additional acquisition [J3] 100 000 [J2] 20 250
Balance on 28 Feb 20.20 155 000 Dividends received [J2] (2 250)
Balance on 28 Feb 20.20 173 000

EXAMPLE 2: PART B (ASSOCIATE/JOINT VENTURE BECOMES AN IFRS 9 INVESTMENT)

On 1 March 20.19, Blue Ltd purchased 30 000 of the ordinary share capital of Red Ltd for R110 000
cash. Blue Ltd exercises significant influence over the operating and financial policy decisions of
Red Ltd from 1 March 20.19. On 1 September 20.19, Blue Ltd disposed of 25 000 shares of Red Ltd
at the fair value of R102 000. Blue Ltd lost the ability to exercise significant influence over the
operating and financial policy decisions of Red Ltd after the disposal.

The share price of Red Ltd was as follows at the respective dates:

R
1 September 20.19 4,08
28 February 20.20 5,40

Blue Ltd did not have any other investments in associates or subsidiaries at 28 February 20.20.

REQUIRED

(a) Prepare the journal entries in the separate financial statements of Blue Ltd for the year ended
28 February 20.20.

(b) Prepare the pro forma journal entries for the Blue Ltd Group for the year ended
28 February 20.20.

EXAMPLE 2: PART B – Suggested solution

ASSOCIATE/JOINT VENTURE BECOMES AN IFRS 9 INVESTMENT

From the disposal date and the loss of significant influence, the investor discontinues the use of the
equity method (IAS 28.22). The entity shall recognise in profit or loss any difference between the fair
value of the retained interest plus consideration received less the carrying amount of the investment
at the date that the equity method is discontinued [IAS 28.22(b)].

The investor measures the remaining investment in terms of IFRS 9 Financial Instruments, at either
fair value through profit or loss or fair value through other comprehensive income (subject to certain
requirements).

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(a) Separate financial statements of Blue Ltd (b) Group financial statements

Dr Cr Dr Cr
R R R R

1 March 20.19 1 March 20.19

Investment in Red Ltd (SFP) 110 000 No entry required as
Bank (SFP) (given) 110 000 cost of investment is
Account for investment in the same for equity
Red Ltd acquired [J1] accounting in group.
31 August 20.19
Investment Red Ltd 15 000
(SFP)
Share of profit of 15 000
associate (P/L) [C1]
Recognise share of P/L
of associate [J1]
1 September 20.19 1 September 20.19
Bank (SFP) (given) 102 000 Gain on sale of shares
Investment in Red Ltd (P/L) 10 333
(SFP) Loss on disposal
(25 000/30 000 x 110 000) 91 667 (group) (P/L) [C2] 2 600
Gain on disposal (P/L) 10 333 Investment in Red Ltd
(SFP) [C2] 12 933
Account for disposal of Account for disposal of
investment in Red Ltd [J2] investment in Red Ltd
[J2]
Income tax expense (P/L) 2 315
Taxation payable (SFP)
(10 333 x 28% x 80%) 2 315
Provision of capital gains tax
now payable on disposal of
shares [102 000 – (110 000
x 25/30)] [J3]
Investment in Red Ltd (SFP) Day one gain (P/L) 2 067
[(5 000 x 4,08) – 110 000 x Deferred tax (SFP) 463
5/30] 2 067 Investment Red Ltd
Income tax expense (P/L) 463 (SFP) 2 067
Fair value adjustment (P/L) 2 067 Income tax expense
Deferred tax (SFP) (P/L) 463
(2 067 x 28% x 80%) 463
Fair value of remaining Reverse FV adjustment
investment on date of
in separate records [J3]
disposal of interest [J4]
28 February 20.20 28 February 20.20
Financial asset (SFP) No entry required as
[(5,40 – 4,08) x 5 000] 6 600 there is no group
Mark-to-market (OCI) 5 122 financial statements.
Deferred tax (SFP) (No investment in
(6 600 x 28% x 80%) 1 478 associate or subsidiary).
Fair value of investment at
year end [J5]

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(a) Separate financial statements of Blue Ltd (b) Group financial statements
Dr Cr Dr Cr
R R R R
28 February 20.20
Bank (SFP) (7 500 x 5%) 375
Other income (P/L) 375
Dividend received on
investment [J6]

CALCULATIONS

C1. Analysis of the owners’ equity of Red Ltd

Blue Ltd
30% - 5%
Total
At Since
At acquisition (1 March 20.19)
Share capital 100 000 30 000
Retained earnings 250 000 75 000
350 000 105 000
Goodwill 5 000
Consideration 110 000
Current year
Profit from 1/03/20.19 – 31/08/20.19 50 000 15 000
400 000 15 000
Dispose of 25% interest (25/30) [C3] (91 667) (12 500)
400 000 18 333 2 500

C2. Gain on disposal in group records

Cost of 30 000 shares 110 000

Share of P/L of assocate [C1] 15 000
Carrying amount 31 August 20.19 125 000

Carrying value of investment at date the equity method was discontinued (125 000)
Fair value at 1 September 20.19 (5 000 x 4,08) 20 400
Consideration received 102 000
Loss on disposal calculated ito IAS 28.22(b) (2 600)

C3. Tax payable

Base cost of original investment (110 000 x 25/30) disposed (91 667)
Proceeds (given) 102 000
Gain for tax purposes 10 333

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COMMENT

The balance of the Investment in Red Ltd are as follows on 28 February 20.20:

Separate financial statements Group financial statements

R R
Carrying amount in separate
Cost [J1] 110 000 financial statements 27 000
Fair value adjustment Share of P/L of associate
[J4] 2 067 [J1] 15 000
Disposal of interest [J2] (91 667) Fair value reversal [J2] (2 067)
Fair value adjustment [J5] 6 600 Loss on disposal [J3] (12 933)
Balance on 28 Feb 20.20 27 000 Balance on 28 Feb 20.20 27 000

COMMENT

Please note that you only have to disclose the group gain or loss as a single figure per
[C2] above. The single figure consists of the profit or loss on disposal AND the fair value
adjustment on the remaining interest to fair value.

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EXAMPLE 2: PART C (ASSOCIATE/JOINT VENTURE BECOMES A SUBSIDIARY)

COMMENT

Please note that the scenario where significant influence/joint control was exercised, and
control is now obtained over the investee, is assessed at level 1 awareness.

On 1 March 20.19, Blue Ltd purchased 30 000 of the ordinary share capital of Red Ltd for R110 000
cash. Blue Ltd exercises significant influence over the operating and financial policy decisions of
Red Ltd from 1 March 20.19. On 1 September 20.19, Blue Ltd acquired a further 45 000 shares of
Red Ltd for R250 000. From this date Blue Ltd exercised control over Red Ltd in terms of IFRS 10
Consolidated Financial Statements.

The investment in Red Ltd had the following fair values in the records of Blue Ltd at the respective
dates:

R
31 August 20.19 115 000

Blue Ltd did not have any other investments in associates or subsidiaries at 28 February 20.20.

REQUIRED

(a) Prepare the journal entries in the separate financial statements of Blue Ltd for the year ended
28 February 20.20.

(b) Prepare the pro forma journal entries for the Blue Ltd Group for the year ended
28 February 20.20.

EXAMPLE 2: PART C – Suggested solution

ASSOCIATE/JOINT VENTURE BECOMES A SUBSIDIARY

(a) Separate financial statements of (b) Consolidated financial statements

Blue Ltd

Dr Cr Dr Cr
R R R R
1 March 20.19 1 March 20.19
Investment in Red Ltd No entry required as cost
(SFP) 110 000 of investment is the
Bank (SFP) 110 000 same for equity
Account for investment in accounting in group.
Red Ltd acquired [J1]
31 August 20.19
Investment Red Ltd (SFP) 15 000
Share of profit of
associate (P/L) [C1] 15 000
Recognise share of P/L of
associate [J1]

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(a) Separate financial statements of (b) Consolidated financial statements

Blue Ltd

Dr Cr Dr Cr
R R R R
1 September 20.19 1 September 20.19
Investment in Red Ltd Remeasurement loss
(SFP) 250 000 (P/L) (115 000 – 110 000
Bank (SFP) 250 000 – 15 000) 10 000
Investment in Red Ltd
(SFP) 10 000
Account for acquisition of Recognising fair value
investment in Red Ltd [J2] adjustment on previously
held equity per IFRS 3.42
[J2]
1 September 20.19
Share capital (SCE) 100 000
Retained earnings
(SCE) 300 000
Goodwill (SFP) 65 000
NCI (SFP/SCE) 100 000
Investment in Red Ltd
(SFP) 365 000
Elimination of at acquisi-
tion equity reserves and
cost of investment [J3]
28 February 20.20
NCI (P/L) 16 875
NCI (SFP/SCE) 16 875
Non-controlling interests
share of P/L for last 6
months [J4]
28 February 20.20 28 February 20.20
Bank (SFP) 5 625 NCI (SFP/SCE) 1 875
Other income (P/L) 5 625 Other income (P/L) 5 625
Dividend paid (SCE) 7 500
Dividend received on Eliminate intragroup
investment [J3] dividend [J5]

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CALCULATIONS

C1. Analysis of the owners’ equity of Red Ltd

Blue Ltd
30% - 75% NCI
Total
At Since
At acquisition (1 March 20.19)
Share capital 100 000 30 000
Retained earnings 250 000 75 000
350 000 105 000
Goodwill 5 000
Consideration 110 000
Current year
Profit from 1/03/20.19 – 31/08/20.19 50 000 15 000
Total equity 400 000
Acquisition of 45 000 shares (400 000 x 75%) 300 000 100 000
Equity represented by goodwill 65 000 65 000 -
Consideration and NCI (250 000 + 115 000) 465 000 365 000 100 000
Current year
Profit from 1/09/20.19 – 28/02/20.20 67 500 50 625 16 875
Dividend paid (7 500) (5 625) (1 875)
525 000 45 000 115 000

C2. Proof of goodwill of Red Ltd [IFRS 3.32]

Consideration transferred at acquisition date 250 000

Non-controlling interests [C1] 100 000
Acquisition date fair value of previously held equity 115 000
465 000
Fair value of identifiable net assets (400 000)
Goodwill 65 000

COMMENT

The balance of the Investment in Red Ltd are as follows on 28 February 20.20:

Separate financial statements Consolidated financial statements

R R
Cost [J1] 110 000 CA investment separate 360 000
Acquisition of interest [J3] 250 000 Share of profit of associate
Balance on 28 Feb 20.20 360 000 [J2] 15 000
Fair value adjustment acq
[J3] (10 000)
Eliminate cost [J4] (365 000)
-

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SECTION B - QUESTION ON CHANGE IN DEGREE OF CONTROL

QUESTION 7.1 (31 marks – 47 minutes)

Garden Escapes Ltd (Garden Escapes) is a company that provides landscaping design services.
On 1 August 20.14, Garden Escapes purchased a 25% interest in The Three Trees Ltd (TTT), a
nursery that sells trees, plants and decorative lawn ornaments, for R200 000. All the assets and
liabilities were deemed to be fairly valued at that date. Garden Escapes exercised significant influence
over the financial and operating policy decisions of TTT from that date.

The following was extracted from the statements of profit or loss and other comprehensive income of
Garden Escapes and TTT respectively:

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR
ENDED 31 DECEMBER 20.20

Garden TTT
Escapes
R R
Revenue 2 685 000 1 532 000
Cost of sales (2 148 000) (1 225 600)
Gross profit 537 000 306 400
Other income - fair value adjustments 8 000 8 500
Other income - gain on disposal of associate ? -
Other income - dividends received 6 250 14 300
Other expenses (344 000) (192 000)
Profit before tax ? 137 200
Income tax expense (55 958) (35 672)
PROFIT FOR THE YEAR ? 101 528
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Revaluation surplus (on land) 64 800 22 320
Other comprehensive income for the year, net of tax 64 800 22 320
TOTAL COMPREHENSIVE INCOME FOR THE YEAR ? 123 848

The following balances were presented in the statement of changes in equity for TTT at the different
dates:

1/08/20.14 1/01/20.20 1/08/20.20 31/12/20.20

Carrying
amount Carrying Carrying Carrying
and fair amount amount amount
value
R R R R
Share capital (150 000 ordinary shares) 150 000 150 000 150 000 150 000
Retained earnings 405 300 802 500 ? 879 028
Revaluation surplus (on land) 204 200 209 000 231 320 231 320
759 500 1 161 500 ? 1 260 348

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The following information relates to the investment held in TTT in the records of Garden Escapes:

1/08/20.20 31/12/20.20
Fair value Fair value
(25%) (10%)
R R
Investment in TTT 570 000 127 500

Additional information

1. Garden Escapes did not own any other investments in other companies.

2. Both companies have a 31 December year end.

3. Garden Escapes accounts for investments in associates and joint ventures at cost in its separate
financial statements in terms of IAS 27.10(a).

4. Garden Escapes classifies its investment in financial assets, at fair value through profit or loss
in terms of IFRS 9 Financial Instruments in its separate financial statements.

5. TTT declared and paid a dividend amounting to R25 000 on 31 May 20.20.

6. During the Rand Easter Show in April 20.16, TTT had an exhibition in the "Gardens &
Landscaping" category. In order to design the exhibition appropriately, TTT appointed
Garden Escapes for landscaping design. Garden Escapes charged a fee of R12 000 for this
service. TTT classified this fee as other expenses.

7. On 1 August 20.20, Garden Escapes disposed of 15% of their interest in TTT for an amount of
R342 000. From this date Garden Escapes ceased to exercise significant influence over TTT.
The remaining interest held in TTT had a fair value of R120 700 on 1 August 20.20.

8. TTT earned its profits evenly throughout the year, with the exception of the dividends received
in September 20.20 and the revaluation surplus arising in May 20.16. The income tax expense
amounted to R15 435 in the first seven months and the balance in the last five months.

9. Assume an income tax rate of 28% and a Capital Gains Tax inclusion rate of 80%.

REQUIRED

Marks
Prepare the pro forma journals for the Garden Escapes Ltd Group for the year ended 24
31 December 20.20. Journal entries relating to deferred taxation are also required.

Please note:

• Your answer must comply with International Financial Reporting Standards (IFRS).
• Comparative amounts are not required.
• Round off all amounts to the nearest Rand.

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QUESTION 7.1 – Suggested solution

Note: All the calculations are included in [C1] and are also repeated in the journals for the
students who do not make use of the analysis of owners’ equity.

Dr Cr
Pro forma journals R R
J1 Investment in TTT (SFP) (99 300 + 1 200) 100 500 (1)
Retained earnings (SCE) (beginning of year)
[(802 500 - 405 300) x 25%] 99 300 (2)
Revaluation surplus (SCE) (beginning of year)
[(209 000 - 204 200) x 25%] 1 200 (1)
Recognition of the opening since acquisition reserves relating to
the associate

COMMENT

Although Garden Escapes did not have significant influence over TTT at year end,
Garden Escapes still had significant influence over TTT at the beginning of the year and
group financial statements for Garden Escapes still need to be prepared. This journal
accounts for the opening reserves related to the associate and to align the opening
balances with the previous year's closing balances.

Dr Cr
R R
J2 Investment in TTT (SFP) (14 064 + 5 580) 19 644 (1)
Share of profit of associate (P/L)
[56 257 [C2] x 25%] 14 064 (4)
Share of other comprehensive income of associate (OCI)
[(231 320 - 209 000) x 25%] 5 580 (1)
Recognition of the profit and other comprehensive income for
the period while the investment was still an associate

COMMENT

The intragroup transaction that took place regarding the landscaping design services
rendered to TTT by Garden Escapes is not taken into account when the profit of the
associate is calculated. The transaction is not eliminated as the separate line items of
the associate are not reflected in the equity accounted financial statements. This
represents an intragroup transaction, but not an intragroup profit, of which the latter must
be eliminated according to IAS 28.28. The intragroup transaction still constitutes a
related party transaction which must be disclosed in the separate and group financial
statements in terms of IAS 24 Related Party Disclosures.

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Dr Cr
R R
J3 Dividend received (P/L) (25 000 x 25%) 6 250 (1)
Investment in TTT (SFP) 6 250 (1)
Elimination of the dividend attributable to the 25% interest

COMMENT

The dividend was received when Garden Escapes still had a 25% interest. The dividend
received represents an intragroup transaction and has to be eliminated. The dividend is
a distribution and reduces the carrying amount of the investment under the equity
accounting method according to IAS 28.10.

Dr Cr
R R
J4 Remeasurement gain/loss (P/L) (120 700 – 80 000) 40 700 (1)
Investment in TTT (SFP) 40 700 (1)
Reversal of fair value adjustment on separate records on date
of disposal of associate
J5 Deferred tax (SFP) (40 700 x 28% x 80%) 9 117 (1)
Income tax expense (P/L) 9 117 (1)
Reversal of deferred tax on fair value adjustment recognised in
separate financial statements

COMMENT

In this question, the investor loses significant influence and the associate becomes an
IFRS 9 investment. Equity accounting procedures are thus only applied up to the date
of loss of significant influence. After the disposal date, the investment is measured at fair
value in accordance with IFRS 9 Financial Instruments. The parent will first revalue the
investment to fair value in its separate accounting records on the date of disposal after
derecognising the carrying amount and then again at year end.

Dr Cr
R R
J6 Gain on disposal of shares (P/L) [C3] 222 000 (2)
Investment in TTT (SFP) 73 194 (1)
Gain on sale of associate (consolidated) (P/L) [C3] 148 806 (3)
Recognition of consolidated gain on disposal of associate
J7 Revaluation surplus (SCE)
[1 200 (J1) + 5 580 (J2) = 6 780] 6 780 (1)
Retained earnings (SCE) 6 780 (1)
Transfer of revaluation surplus to retained earnings on the loss
of significant influence

COMMENT

Garden Escapes is required to transfer the revaluation surplus of TTT to retained

earnings. This is because Garden Escapes would have transferred the amount to
retained earnings if it disposed directly of the land (IAS 28.23).

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CALCULATIONS

C1. Analysis of owners’ equity of TTT Ltd

Garden Escapes Ltd

Total (25% - 10%)
At Since
At acquisition
Share capital 150 000 37 500
Retained earnings 405 300 101 325
Revaluation surplus 204 200 51 050
759 500 189 875
Goodwill 10 125
Consideration transferred 200 000
Since acquisition until
beginning of year
Retained earnings (802 500 - 405 300) 397 200 99 300 RE
Revaluation surplus (209 000 - 204 200) 4 800 1 200 RS

Current year
Profit for the period
1 January 20.20 to 31 July 20.20 [C2] 56 257 14 064 RE
Dividend for the period
1 January 20.20 to 31 July 20.20 (25 000) (6 250) RE
Other comprehensive income for
the period 1 January 20.20 to
31 July 20.20 (231 320 - 209 000) 22 320 5 580 RS
Net asset value 1 215 077 200 000 107 114 RE
6 780 RS
Disposal of 15%
- at acquisition equity (200 000 x 15/25) (120 000)
- since acquisition retained earnings [C3]
(107 114 x 15/25) (64 268) RE
- since acquisition revaluation surplus
transferred to retained earnings
(6 780 x 15/25) (4 068) RS
Remainder of compulsory transfer of
revaluation surplus to retained earnings
(6 780 – 4 068) (2 712) RS
Transfer to retained earnings (4 068 + 2 712) 6 780 RE
1 215 077 80 000 49 626 RE
- RS

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C2. Calculation of share of profit of associate

7 months 5 months
to to
Total
31 July 31 December
20.20 20.20
Profit before tax excluding dividends
received [(137 200 - 14 300) = 122 900 x
7/12]; (122 900 x 5/12) 71 692 51 208 122 900 [2]
Other income - dividends received
(September 20.20) - 14 300 14 300 [1]
Income tax expense (15 435 given);
(35 672 - 15 435) (15 435) (20 237) (35 672) [1]
Profit for the year 56 257 45 271 101 528
[4]

C3. Calculation of disposal of 15% interest in associate

In separate financial statements of Garden Escapes

Proceeds 342 000 [1]

Less: Cost (200 000 x 15/25) (120 000) [1]
Gain on disposal of associate/joint venture - separate F/S 222 000 [2]

In group financial statements of Garden Escapes Group

[IAS 28.22(b)]

Derecognise carrying amount of investment in associate on date of

disposal of associate
(200 000 (cost) + 100 500 [J1] + 19 644 [J2] – 6 250 [J3]) (313 894) [1]
Recognise consideration received 342 000 [1]
Recognise fair value of remaining interest (given) 120 700 [1]
148 806
[3]

C4. Calculation of fair value adjustment of remaining 10% interest (for completeness only)

In separate financial statements of Garden Escapes on 31 December 20.20

Cost at 1 August 20.20 (200 000 x 10/25) 80 000

Plus: Fair value adjustment on 1 August 20.20 (120 700 (given) – 80 000) 40 700
Total fair value adjustment through profit or loss on 31 December 20.20 6 800
Fair value on 31 December 20.20 127 500

In separate financial statements of Garden Escapes on 31 December 20.20

Fair value at end of the year 127 500

Fair value of investment on 1 August 20.20 120 700
Fair value adjustment through profit or loss on 31 December 20.20 6 800

COMMENT

The calculation of the fair value through profit or loss on 31 December 20.20 of R6 800
is the fair value adjustment in the separate records and does not need to be reversed at
group level as it is now an IFRS 9 investment.

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LEARNING UNIT 8 – RELATED PARTY DISCLOSURES

INTRODUCTION

IAS 24 deals with the identification of related party relationships and the disclosure
requirements of related party relationships, transactions and outstanding balances,
including commitments, in the consolidated financial statements.

UNGC principle 10 is applicable here, stating that businesses should work against
corruption in all its forms, including extortion and bribery.

OBJECTIVES/OUTCOMES

At the end of this learning unit, you should be able to:

1. Define the following terms:

• Related party
• Related party transaction
• Key management personnel
• Close member of the family of a person
• Control, joint control and significant influence
• Compensation
• Government
• Government-related entity
• Investment entity

2. Identify a related party.

3. Identify related party transactions.

4. Disclose relationships between related parties.

5. Disclose transactions and outstanding balances, including commitments, with

related parties other than key management personnel.

6. Disclose key management personnel compensation.

7. Disclose related party information for government-related entities.

PRESCRIBED STUDY MATERIAL

The following must be studied before you attempt the questions in this learning unit:

1. IAS 24 Related Party Disclosures.

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THE REST OF LEARNING UNIT 8 IS BASED ON THE ASSUMPTION THAT YOU

HAVE ALREADY STUDIED THE RELEVANT PRESCRIBED STUDY MATERIAL.

SECTION A - SAICA’s PRINCIPLES OF EXAMINATION LEVELS

The SAICA principles of examination levels provides guidance on how the standards (or topics
within a standard) will be examined.

The principles of examination levels for IAS 24 are as follows:

Description Paragraph Level Notes

Objective 1 Core
Scope 2-4 Core
Purpose of related party disclosures 5-8 Core
Definitions 7 – 12 Core
Disclosures 13 - 24 Core All entities
25 - 27 Core Government-related entities
Effective date and transition 28 Excluded

EXAMPLE

The following example illustrates the method required to identify related parties.

1. Identify related parties

The following information is available regarding A Ltd:

• A Ltd purchase 80% of its raw materials from B Ltd. A Ltd does not have any other transactions
with B Ltd.

• Mr Booysen holds 5% of the issued ordinary shares and voting rights of A Ltd. His 16-year-old
son holds 30% of the voting rights in A Ltd which he inherited from his grandfather.

• The majority of A Ltd’s issued ordinary shares and voting rights are held by the South African
Government. A Ltd is the sole provider of specialist advice concerning the development of roads
to the Tshwane City Council.

Discussion of related parties of A Ltd

Mr Booysen’s son is a related party of A Ltd, as he has more than 20% interest, which is presumed to
be significant influence (IAS 24.9(a)(ii)).

Mr Booysen is a related party of A Ltd, as he is a close member of his son’s family, and his son has
significant influence (IAS 24.9(a)(ii)).

The South African Government is a related party of A Ltd, as A Ltd is controlled by the government.
This relates to the definition of a government-related entity (IAS 24.9).

B Ltd is not a related party of A Ltd, as a single supplier with whom the reporting entity has conducted
transactions of a material extent, merely because of their economic dependence, is excluded from the
definition (IAS 24.11(d)).

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SECTION B - QUESTIONS ON RELATED PARTY DISCLOSURES

QUESTION 8.1 (12 marks - 18 minutes)

The following information relates to House Ltd and its two wholly owned subsidiaries Brut Ltd and
Stud Ltd for the year ended 30 June 20.20:

1. Brut Ltd bought property, plant and equipment at a cost of R11 million from House Ltd during
the year under review which was paid in full.

2. All scrap materials from production processes of House Ltd are sold to Stud Ltd at 25% of the
original cost. These sales amounted to R1,39 million for the year with no outstanding balance
at year end.

3. House Ltd buys 5% of the production of Stud Ltd at cost plus 10%. Stud Ltd’s total production
cost amounted to R15 million for the year under review. At year end R250 000 was outstanding
on this account.

4. All intragroup transactions are made at terms equivalent to those that prevail in arms’ length
transactions.

5. The following employee benefits were paid to the employees during the year:

Non-
executive Executive
Employees directors directors
R R R
Salaries 1 000 000 500 000 200 000
Pensions 300 000 200 000 300 000
Provision long-service leave 100 000 80 000 70 000
Retrenchment payments 50 000 20 000 30 000

REQUIRED

Marks
Prepare the related parties note to the separate financial statements of House Ltd for the 12
year ended 30 June 20.20.

Please note:

• Your answer must comply with International Financial Reporting Standards (IFRS).
• Comparative figures are not required.

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QUESTION 8.1 - Suggested solution

HOUSE LTD

NOTES FOR THE YEAR ENDED 30 JUNE 20.20

4. Related parties

Relationships between parents and subsidiaries

The following represents a list of the significant subsidiaries of the group:

Ownership
interest
20.20

Brut Ltd 100% (1)

Stud Ltd 100% (1)

Transactions with related parties other than key management personnel

20.20
R
Sale of goods to:
Stud Ltd 1 390 000 (1)

Sale of property, plant and equipment to:

Brut Ltd 11 000 000 (1)

Purchases of goods from:

Stud Ltd (15 000 000 x 5% = 750 000 x 110/100) 825 000 (2)

Amounts owed to related parties:

Stud Ltd 250 000 (1)

All the above-mentioned transactions were made on terms equivalent to

those that prevail in arm's length transactions. (1)

Transactions with key management personnel

20.20
R

Short term-employee benefits (500 000 + 200 000) 700 000 (1)
Post-employment benefits (200 000 + 300 000) 500 000 (1)
Other long-term benefits (80 000 + 70 000) 150 000 (1)
Termination benefits (20 000 + 30 000) 50 000 (1)
1 400 000
(12)
Key management personnel compensation is included as part of the employee benefit expense.

COMMENT

Compensation of key management personnel has to be disclosed in total per category

[IAS 24.17].

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QUESTION 8.2 (20 marks – 30 minutes)

Senty Ltd provides administration services to clients. Below is an extract from the debtors age analysis
of Senty Ltd as at 31 December 20.20, the financial year end:

Account 30 60 90 120+
Client name Current Total
number days days days days

AluFacts Ltd 1 001 200 000 221 990 302 450 - - 724 440
A Andy 1 781 30 000 - - - - 30 000
Beauflex Ltd 1 625 150 000 120 000 180 000 300 000 100 000 850 000
Durable Ltd 785 - - 280 000 60 000 520 000 860 000
Extra Fluids Ltd 2 651 90 000 - 120 000 98 640 - 308 640
Total 470 000 341 990 882 450 458 640 620 000 2 773 080

Senty Ltd owns 60% of Durable Ltd and has control of Durable Ltd. Durable Ltd owns 25% of
Beauflex Ltd and has significant influence over Beauflex Ltd. Mr D Andy owns 51% of AluFacts Ltd
and has control of AluFacts Ltd and is a non-executive director of Senty Ltd. Ms A Andy, the daughter
of Mr D Andy, is an executive director of Extra Fluids Ltd.

The accounting policy of Senty Ltd relating to debtors is as follows:

• An allowance for credit losses is calculated at 25% of debtors outstanding between 90 days and
120 days.

• Debtors that are outstanding for 120+ days and longer are written off as bad debt.

Assume that all the transactions took place in the current financial period at terms equivalent to those
that prevail in arm’s length transactions and that none of the debtors have been recovered during the
year.

REQUIRED

Marks

(a) Identify, with reasons, the parties related to Senty Ltd. 10

(b) Prepare the related parties note to the consolidated financial statements of the 9
Senty Ltd Group for the year ended 31 December 20.20, only in terms of IAS 24
Related Party Disclosures.

Communication skills: Presentation and disclosure 1

Please note:

• Your answer must comply with International Financial Reporting Standards (IFRS).
• Comparative figures are not required.

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QUESTION 8.2 - Suggested solution

(a) The following are the parties related to Senty Ltd:

• Durable Ltd, which is a subsidiary of Senty Ltd; it is controlled by Senty Ltd

(IAS 24.9(b)(i)). (2)

• Beauflex Ltd, which is an associate of Durable Ltd, which is controlled by Senty Ltd.
Therefore Senty Ltd has indirect significant influence over Beauflex Ltd
(IAS 24.9(b)(ii)). (2)

• Mr D Andy, a member of the key management personnel of Senty Ltd

(IAS 24.9(a)(iii)). (2)

• AluFacts Ltd, which is controlled by a person who is a member of the key

management personnel of Senty Ltd, Mr D Andy (IAS 24.9(b)(vi)). (2)

• Ms A Andy is a close family member of a key member of the management personnel,

in that she is the daughter of Mr D Andy (IAS 24.9(a)(iii)) - definition of close member
of the family of a person. (2)
(10)

(b) SENTY LTD GROUP

NOTES FOR THE YEAR ENDED 31 DECEMBER 20.20

27. Related parties

Relationships between parents and subsidiaries

The following represents a list of the significant subsidiaries of the group:

Ownership
interest
20.20
Durable Ltd 60% (1)

Transactions with related parties other than key management personnel

20.20
R
Income from services rendered to:

Beauflex Ltd (given) 850 000 (1)

A Andy [C3] 30 000 (1)
AluFacts Ltd [C3] 724 440 (1)
1 604 440

Amounts owed by related parties:

Beauflex Ltd [C2] 718 750 (4)

A Andy [C3] 30 000 (1)
AluFacts Ltd [C3] 724 440 (1)
1 473 190

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An amount of R56 250 [C2] owed by Beauflex Ltd has been included
within the allowance for credit losses and has been recognised as an
expense during the current year. (1)

An amount of R100 000 (given) owed by Beauflex Ltd has been written
off as bad debt during the current year. (1)

All the above-mentioned transactions were made on terms equivalent to

those that prevail in arm's length transactions. (1)

Transactions with key management personnel

No compensation was paid to key management personnel during the

current year. (1)
Total (14)
Maximum (9)
Communication skills: Presentation and disclosure (1)

COMMENT

It was required to disclose the related parties’ note of Sentry Ltd Group. Intragroup
transactions with subsidiaries and associates are eliminated in group financial
statements and hence no subsidiary transactions and balances, and only other investors’
share of unrealised profit or losses for the associate are disclosed.

CALCULATIONS

C1. Subsidiary information

Revenue 860 000

Balance (860 000 – 15 000 – 520 000) 325 000
Allowance account for credit losses (60 000 x 25%) 15 000
Bad debts 520 000

C2. Amount owed by associate

Revenue (given) 850 000 [1]

Allowance account for credit losses [(300 000 x 25%) x 75%] (56 250) [2]
Bad debts (given) (100 000 x 75%) (75 000) [1]
718 750
[4]

COMMENT

In accordance IAS 28.28 gains and losses resulting from ‘upstream’ and ‘downstream’
transactions between an entity and its associate are recognised in the entity’s financial
statements only to the extent of unrelated investors’ interests in the associate or joint
venture. When the bad debt is therefore recognised, we recognise the loss only to the
extent of the unrelated investor’s share.

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C3. Other: A Andy

Revenue 30 000
Balance 30 000
Allowance account for credit losses -
Bad debts - [1]

Other: AluFacts Ltd

Revenue 724 440

Balance 724 440
Allowance account for credit losses -
Bad debts - [1]

[2]

COMMENT

Included in IAS 24 is six illustrative examples. These examples should be studied,

together with the Standard. This will enhance the understanding of the requirements of
the standards and ensure that it can be applied in a practical manner.

EXAMINATION TECHNIQUE

A good examination technique with the identification of related parties is to start by

drawing a group structure with the relationship of each party to the reporting entity.
Thereafter, start evaluating each relationship against the definition of a related party in
accordance with IAS 24.9.

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SELF ASSESSMENT QUESTIONS AND SUGGESTED SOLUTIONS

Question Question name Source Marks Topics covered Page

1 Aronkel Ltd FAC4864 40 • Consolidation journal 63
Test 3 of entries including change in
2018 degree of ownership
journals: associate to
subsidiary
• Consolidation statement of
changes in equity including
rights issue, no change in
control
2 Lex Ltd FAC4864 40 • Consolidation journal 71
Test 3 of entries subsidiary to
2019 associate
• Extract of consolidated
statement of changes in
equity
• Related parties
3 HlukileWena Ltd SAICA ITC 6 • Discuss and provide 80
June 2019 disclosures with regards to
the related party
4 Fortnight Ltd FAC4864 40 • Discussion of presentation 83
Test 3 of requirements for additional
2020 share purchase in the
consolidated statement of
changes in equity (equity
transaction).
• Pro-forma journal entries for
investment in associate.
• Calculation of consolidated
gain or loss on disposal of
an interest.
5 Bojanala FAC4864 40 •Discussion and presentation 92
Marketing Ltd Test 3 of of related parties & IAS 37
2021 • Pro-forma journal entries for
IFRS 9 investment to
subsidiary.
• Calculation and pro-forma
journal entry of
consolidated gain or loss
on disposal of an interest.

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QUESTION 1 40 marks

YOU HAVE 15 MINUTES TO READ THIS QUESTION

Aronkel Ltd (Aronkel) is a nursery located in Gauteng which is listed on the Johannesburg Stock
Exchange. Aronkel invested in two companies namely Rose Ltd (Rose) and Violet Ltd (Violet).

1. Investment in Rose

In order to expand their wide selection of plants, Aronkel acquired 25 000 ordinary shares in
Rose for a cash consideration of R200 000. The purchase agreement for the 25 000 ordinary
shares in Rose was signed on 1 March 20.15. From that date, Aronkel exercised significant
influence over the financial and operating policy decisions of Rose.

As Rose had a steady growth profile for the past five years and their forward profit projection
looked exceptionally good, Aronkel decided to increase their holding in Rose.
On 1 August 20.17, the acquisition of a further 40% interest in Rose was approved by a majority
vote. On 31 August 20.17, Aronkel purchased an additional 40% interest in Rose for a cash
amount of R570 000, inclusive of legal fees amounting to R20 000. From that date, Aronkel had
control over Rose as per the definition of control in accordance with IFRS 10
Consolidated Financial Statements.

All the assets and liabilities of Rose were deemed to be fairly valued on 31 August 20.17, except
for land that was undervalued by R128 866.

The following represents the equity of Rose on the various dates:

1/3/20.15 28/2/20.17 31/8/20.17 28/2/20.18

R R R R
Share capital
(100 000 ordinary shares) 200 000 200 000 200 000 200 000
Retained earnings 560 000 750 200 930 600 1 250 500

The fair value of Rose’s shares amounted to the following on the various dates:

28/2/20.17 31/8/20.17
R R

Share price 12,50 12,80

Rose declared and paid a dividend of R150 000 on 28 February 20.18.

2. Investment in Violet

The demand for garden décor grew exponentially in recent years. It made strategic sense for
Aronkel to enter this unique market and expand their footprint in the décor and flora environment.
On 1 November 20.13, Aronkel acquired a 60% interest in Violet for a cash consideration of
R470 000. From that date, Aronkel had control over Violet as per the definition of control in
accordance with IFRS 10 Consolidated Financial Statements.

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All the assets and liabilities of Violet were deemed to be fairly valued and no additional assets,
liabilities or contingent liabilities were identified on the acquisition date.

On 1 November 20.17, Violet had a rights issue of one share for every four shares held at R3,00
per share. Of the rights issued, 20 000 were taken up by Aronkel. Aronkel sold the remainder of
its rights to the non-controlling shareholders for R2 per right. Aronkel still had control, as per the
definition of control in accordance with IFRS 10 Consolidated Financial Statements, over Violet
after the rights issue.

The following represents the equity of Violet on the various dates:

1/11/20.13 28/2/20.17 1/11/20.17 28/2/20.18

R R R R

Share capital
(200 000 ordinary shares) 400 000 400 000 400 000
Share capital
(250 000 ordinary shares) 550 000
Retained earnings 256 000 810 000 1 080 000 1 150 000
Mark-to-market reserve 83 000 203 000 233 000 245 000

The fair value of Violet’s shares amounted to the following on the various dates:

1/11/20.13 1/11/20.17
R R

Share price 3,90 4,30

Violet declared and paid a dividend of R100 000 on 28 February 20.18.

3. Intragroup transactions

Aronkel has been purchasing inventory from Rose since 20.15 at a gross profit percentage of
33,33%. Intragroup sales were as follows:

For the year ended 28 February 20.17 R280 000

Aronkel had the following inventory purchased from Rose on hand at:

28 February 20.17 R50 000

All these inventory on hand on 28 February 20.17 were sold on 31 July 20.17. There was no
inventory purchased from Rose on hand at 28 February 20.18.

4. Additional information

• It is the accounting policy of Aronkel to account for investments in subsidiaries and

associates at cost in accordance with IAS 27.10(a) in its separate financial statements.

• It is the accounting policy of Rose to account for property, plant and equipment according
to the cost model in terms of IAS 16 Property, Plant and Equipment.

• Aronkel elected to transfer any cumulative gains or losses within equity in terms of
IFRS 9.B5.7.1.

• Aronkel elected to measure non-controlling interests at fair value at the acquisition date
for all acquisitions.

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• All the companies in the Aronkel Group have a 28 February year end.

• The consolidated retained earnings balance on 1 March 20.17 amounted to R826 950.
Aronkel’s profit after tax for the current financial year amounted to R475 500. Aronkel did
not declare or pay any dividends during the current financial year.

• Assume a normal income tax rate of 28% and a Capital Gains Tax inclusion rate of 80%.
Ignore the effects of Dividend Tax and Value Added Tax (VAT).

QUESTION 1

YOU HAVE 60 MINUTES TO ANSWER THIS QUESTION

REQUIRED

Marks

(a) Prepare the pro forma consolidation journal entries to account for the investment 19
in Rose Ltd in the consolidated financial statements of the Aronkel Ltd Group for the
year ended 28 February 20.18.

Communication skills: presentation and layout 1

Please note:
• Journal narrations are required.
• The elimination of intragroup dividends journal is not required.
• Journals relating to deferred taxation are required.

(b) Prepare the consolidated statement of changes in equity of the Aronkel Ltd Group 19
for the year ended 28 February 20.18.

Communication skills: presentation and layout 1

Please note:
• The following columns are not required:
- Share capital;
- Mark-to-market reserve;
- Total and total equity.
• Comparative figures are not required.
• Notes to the consolidated statement of changes in equity are not required.

Please note:

• Round off all amounts to the nearest Rand.

• Your answer must comply with International Financial Reporting Standards (IFRS).

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QUESTION 1 - Suggested solution

(a) Pro forma journal entries

Dr Cr
R R

J1 Retained earnings (SCE)(50 000 x 33,33% x 25% x 72%) 3 000 (2)

Share of profit of associate (P/L) 3 000 (1)
Elimination of unrealised profit in opening inventories of
Aronkel
J2 Investment in Rose (SFP) 92 650 (1)
Retained earnings (SCE) [C2] 47 550 (1)
Share of profit of associate (P/L) [C2] 45 100 (1)
Aronkel’s share of opening retained earnings and profit
for the first 6 months
J3 Investment in Rose (SFP) [C1] 27 350 (1)
Other income (remeasurement gain) (P/L) 27 350 (3)
Adjustment of investment to fair value ito IFRS 3.42
J4 Share capital (SCE) 200 000
Retained earnings (SCE) 750 200
Profit for the year (P/L) (930 600 – 750 200) 180 400 (1)
Land (SFP) 128 866 (1)
Deferred tax (SFP) (128 866 x 28% x 80%) 28 866 (1)
Goodwill (SFP) (balancing) 87 400 (1)
Non-controlling interests (SFP)
(100 000 x 35% x R12,80) 448 000 (2)
Investment in Rose (SFP)
[(25 000 x 12,80) + (570 000 – 20 000)] 870 000 (1)
At acquisition date elimination journal entry
J5 Non-controlling interests (P/L) [C2] 164 465 (1)
Non-controlling interests (SFP) 164 465 (1)
Allocation of current year profit to non-controlling
interests
Total (20)
Maximum (19)
Communication skills: presentation and layout (1)

OR Alternative for J1

Dr Cr
R R

J1 Retained earnings (SCE) 3 000

Deferred tax (SFP) 1 166
Inventories (SFP) (50 000 x 33,33% x 25%) 4 166
Unrealised profit opening inventories
J2 Inventories (SFP) (J1) 4 166
Share of profit of associate (P/L) 3 000
Deferred tax (SFP) 1 166
Realisation of profit in opening inventories

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EXAM TECHNIQUE

Ensure that you understand the concept and application of deferred tax. There are
instances where students incorrectly calculate deferred tax on all profits, retained
earning-movements and even dividends. Deferred tax is even calculated on the share
of profit of associate, which demonstrates a lack of understanding of deferred tax as well
as the fact the profit is already after tax.

Read the required carefully and only provide the journals for the entity specified.
Valuable time is wasted if the journals for Violet are also provided.

Intragroup transactions can be a source of easy marks. In this question, the gross profit
percentage for the unrealised profit in opening inventories of Aronkel is calculated as
33.33% (and not 33%/133%).

The basis of the consolidation is the adding of 100% of the trial balance of the subsidiary
to 100% of the trial balance of the parent on a line-by-line basis. It is therefore incorrect
to include only 65% of the subsidiary to share capital, retained earnings, etc.

(b) ARONKEL LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED

28 FEBRUARY 20.18

Change Non-
Retained in controlling
earnings owner- interests
ship
R R R
Balance at 1/3/20.17
[C4, C3] 826 950 (1) - 581 600 (4)
Change in equity for 20.18
Total comprehensive income 960 085 - 364 545
Profit for the year [C5, C7] 960 085 (5) - 347 265 (2)
Other comprehensive income
[C3, C8] - - 17 280 (2)
Issue of shares by subsidiary
[C3, C6] (26 293) (2) 136 293 (3)
Dividends [C3] - - (96 500) (1)
Transfer to retained earnings
[(233 000 – 83 000) x 60% x
4/60] 6 000 (2) - -
Acquisition of subsidiary [C2] - - 448 000 (1)
Balance at 28 February 20.18 1 793 035 (26 293)
1 433 938
Total (23)
Maximum (19)
Communication skills: Presentation and layout (1)

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EXAM TECHNIQUE

Part (b) can appear a bit challenging and difficult to attempt but it is at a CTA level.
Although the question seems difficult, there is a lot of easy marks to score either in the
form of mark through marks or showing and using all calculations.

CALCULATIONS

C1. Remeasurement gain on investment at 31 August 20.17

Cost 200 000 [1]

Since acquisition profit [C2] 47 550
Current year profit [C2] 45 100 [1]
292 650
Fair value at 31 August 20.17 (R12,80 x 25 000) 320 000 [1]
Remeasurement gain 27 350
[3]

C2. Analysis of owners’ equity of Rose Ltd

25%-65%
Total NCI
At Since
R R R R
At acquisition
Share capital 200 000
Retained earnings 560 000
760 000 190 000
Goodwill 10 000
Consideration 200 000

Since acquisition
Retained earnings
(750 200 – 560 000) 190 200 47 550 [1]

Current year to 31/8/20.17

Profit (930 600 – 750 200) 180 400 45 100 [1]
31/8/20.18 1 130 600 92 650
Revaluation surplus (land)
[128 866 – (128 866 x 80% x 28%)] 100 000
1 230 600 799 890 430 710
Goodwill 87 400 70 110 17 290
1
Consideration (320 000 + 550 000) 1 318 000 870 000 448 000 [1]

Current year
(31/8/20.17 – 28/2/20.18)
Profit
((1 250 500 + 150 000) – 930 600) 469 900 305 435 164 465 [1]
Dividends paid (150 000) (97 500) (52 500)
1 637 900 207 935 559 965

1
(100 000 x 35% x R12,80)

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C3. Analysis of owners’ equity of Violet Ltd

60%-56%
Total NCI
At Since
R R R R
At acquisition
Share capital 400 000
Retained earnings 256 000
Revaluation surplus 83 000
739 000 443 400 295 600
Goodwill 43 000 26 600 16 400
1
Consideration 782 000 470 000 312 000 [2]

Since acquisition
Retained earnings
(810 000 – 256 000) 554 000 332 400 221 600 [1]
Mark-to-market reserve
(203 000 – 83 000) 120 000 72 000 48 000 [1]
1 456 000 404 400 581 600 [4]

Current year to 1/11/20.17

Profit (1 080 000 – 810 000) 270 000 162 000 108 000 [1]
Mark-to-market (233 000 – 203 000) 30 000 18 000 12 000 [1]
1 756 000 584 400 701 600

Change in ownership 136 293 [3]

Share capital 150 000 40 000 110 000
Change in equity [C6] (26 293) 26 293 [2]

Transfer to retained earnings

(72 000 + 18 000) x 4/60 6 000
Transfer from mark-to-market (6 000)

Current year 1/11/20.17 –

28/2/20.18
Profit
((1 150 000 + 100 000) – 1 080 000) 170 000 95 200 74 800 [1]
Mark-to-market (245 000 – 233 000) 12 000 6 720 5 280 [1]
Dividends paid (100 000) (56 000) (44 000) [1]
1 988 000 604 027 873 973

1
(200 000 x 40% x R3,90)

C4. Retained earnings beginning of year

Consolidated retained earnings (given) 826 950 [1]

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C5. Profit for the year

Aronkel (given) 475 500

Violet (170 000 + 270 000 – 108 000 – 74 800 – 56 000 (div)) OR
(162 000 [C3] + 95 200 [C3] – 56 000 (div) [C3]) 201 200 [3]
Rose (305 435 + 45 100 + 3 000 + 27 350 – 97 500 (div) [C2]) 283 385 [2]
960 085
[5]

C6. Change in ownership (IFRS 10.B96)

From the perspective of the NCI

Consideration paid [(30 000 x R3) + (10 000 x R2)] 110 000 [2]
Amount by which NCI is adjusted (136 293)
NCI before rights issue [((1 756 000 – 43 000) x 40%) + 16 400] 701 600 [1]
NCI after rights issue
[((1 756 000 + (50 000 x 3) – 43 000) x 44%) + 16 400 + (26 600 x 4/60)] (837 893) [2]

(26 293)
[5]

OR

From the perspective of the parent

Consideration paid [(20 000 x R3) – (10 000 x R2)] 40 000
Increase in ownership (13 707)
Owners’ equity before [((1 756 000 – 43 000) x 60%) + 26 600] (1 054 400)
Owner’s equity after [((1 756 000 + 150 000 – 43 000) x 56%) +
(26 600 x 56/60)] 1 068 107

26 293

C7. Non-controlling interests in profit

Violet (74 800 [C5] + 108 000 [C5]) 182 800 [1]
Rose 164 465 [1]
347 265
[2]

C8. Non-controlling interests in OCI

Violet (12 000 [C3] + 5 280 [C3]) 17 280 [2]

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QUESTION 2 40 marks

YOU HAVE 15 MINUTES TO READ THIS QUESTION

The question consists of two independent parts.

PART I 32 marks

Lex Ltd (Lex) is a wholesaler of tobacco products in South Africa. Lex was founded in 19.80 and has
since become the largest wholesaler of tobacco products in Southern Africa. The company has several
investments in other companies.

Investment in Chewy Ltd (Chewy)

After a strategic meeting held in March 20.15, the directors of Lex made a decision to expand their
business further by investing in manufacturers of smokeless tobacco. On 1 July 20.15 Lex purchased
a 55% interest in Chewy, a manufacturer of chewing tobacco, snuff and snus (moist powder tobacco)
for a cash consideration of R860 000. Lex obtained control over Chewy as per IFRS 10 Consolidated
Financial Statements from 1 July 20.15. The assets and liabilities of Chewy were considered to be
fairly valued at that date and no additional assets, liabilities or contingent liabilities were identified.
The fair value of the non-controlling interests was R684 000 on 1 July 20.15.

Due to current legislation around tobacco products in general, the board of directors of Lex decided to
sell their controlling shareholding in Chewy and to explore other options. On 1 October 20.18, Lex sold
35 000 shares in Chewy at R30 per share (this is also the fair value per share). Lex exercised
significant influence over the financial and operating policy decisions of Chewy from 1 October 20.18.

The following balances were presented in the statement of changes in equity of Chewy on the
respective dates:

1 July 20.15 31 March 20.18 1 October 20.18 31 March 20.19

R R R R
Share capital
(100 000 ordinary shares) 100 000 100 000 100 000 100 000
Retained earnings 1 400 000 1 900 000 1 700 000 1 950 000
Revaluation surplus - - 144 000 184 000
1 500 000 2 000 000 1 944 000 2 234 000

Investment in Vapour Ltd (Vap)

The management of Lex decided to expand their footprint in the electronic cigarette market.
On 1 March 20.17, Lex bought a 20% IFRS 9 investment in Vap, a manufacturer of electronic
cigarettes, for a cash consideration of R350 000.

On 1 August 20.18, Lex increased their shareholding in Vap by purchasing an additional 40% interest
in ordinary shares at market value. From that date, Lex obtained control over Vap as per the definition
of control in accordance with IFRS 10 Consolidated Financial Statements.

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All the assets and liabilities of Vap were deemed to be fairly valued on 1 August 20.18, with the
exception of land. Land with a carrying value of R400 000 on 1 August 20.18, had a fair value of
R550 000 on the same date. Land is classified as property, plant and equipment. Vap did not
remeasure the land in its separate financial statements. This land was sold on 31 January 20.19 for a
cash consideration of R610 000, which equalled the fair value at that date.

The following represents the equity of Vap on the various dates:

1 March 20.15 31 March 20.18 1 August 20.18 31 March 20.19

R R R R
Share capital
(150 000 ordinary shares) 200 000 200 000 200 000 200 000
Retained earnings 560 000 1 250 200 1 430 600 1 650 500
Mark-to-market reserve 75 000 125 000 100 000 145 000

The fair value of Vap’s shares amounted to the following on the various dates:

1 March 20.17 31 March 20.18 1 August 20.18

R R R

Share price 11,67 12,50 12,00

Vap declared and paid a dividend of R50 000 on 28 February 20.19.

Additional information

1. All companies have a 31 March year end.

2. Lex elected to measure non-controlling interests at fair value for all acquisitions.

3. It is the accounting policy of Lex to account for investments in subsidiaries and associates at
cost in accordance with IAS 27.10(a).

4. It is the accounting policy of Lex to account for equity investments in accordance with
IFRS 9 Financial Instruments in its separate financial statements. Lex irrevocably elected to
present subsequent changes in the fair value of the investments in other comprehensive income
in a mark-to-market reserve. Any cumulative gain or loss on equity instruments previously
recognised in other comprehensive income will be transferred to retained earnings on disposal
of the instruments.

5. Chewy revalued its land in June 20.18.

6. Chewy paid an interim dividend of R30 000 on 30 September 20.18.

7. Assume a normal income tax rate of 28% and a Capital Gains Tax inclusion rate of 80%.
Ignore the effects of Dividend Tax and Value Added Tax (VAT).

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PART II 8 marks

You are busy with the audit of ALL Materials Ltd for the financial year ended 30 April 20.19. The audit
partner Mr Phi asked you to identify all the parties that might be related parties to ALL Material Ltd.

The following information was submitted to you:

• Floral Design has a 100% investment in Curtain Ltd. Curtain Ltd design and supply readymade
curtains to corporates and the general public. Curtain Ltd has a 80% investment in
ALL Material Ltd, a wholesaler of curtain and dressmaking materials.

• Mr Closet is the financial director of All Material Ltd. Mr Closet has a 75% controlling interest in
Fashion Design Ltd, a boutique retailer of bridal and bridesmaids’ dresses.

• Mrs Closet, the wife of Mr Closet has a 20% interest in Stitches Ltd. She exercises significant
influence over the operating and financial policy decisions of Stitches Ltd.

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QUESTION 2

YOU HAVE 60 MINUTES TO ANSWER THIS QUESTION

REQUIRED

Marks

PART I

(a) Prepare the pro forma consolidation journal entries to account for the investment in 22
Chewy Ltd in the consolidated financial statements of the Lex Ltd Group for the year
ended 31 March 20.19. Journal entries relating to deferred taxation are also required.
The pro forma journal for dividends paid is not required.

(b) Disclose only the retained earnings movement for the current year in the consolidated 9
statement of changes in equity of the Lex Ltd Group for the year ended
31 March 20.19, to account for the transaction between Vapour Ltd and Lex Ltd.

Communication skills: presentation 1

Please note:
• Round off all amounts to the nearest Rand and any percentage ownership
interest to two decimal points.
• Journal narrations are not required.

PART II

Discuss, with reasons whether the identified parties are related parties or not in the separate 7
financial statements of ALL Material Ltd for the year ended 30 April 20.19.

Communication skills: logical argument 1

Please note:

• Your answer must comply with International Financial Reporting Standards (IFRS).

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QUESTION 2 - Suggested solution

PART I

(a) LEX LTD GROUP

PRO FORMA CONSOLIDATED JOURNALS

Dr Cr
R R

J1 Investment in Chewy Ltd (SFP) 275 000 (1)

Retained earnings (SCE) [(1 900 000 – 1 400 000) x 55%] 275 000 (2)
Recognise retained earnings at beginning of year while still
a subsidiary
J2 Investment in Chewy Ltd (SFP) (93 500 – 79 200)
(balancing) 14 300
Non-controlling interests (P/L) (170 000 x 45%) 76 500 (1)
Loss for the period (P/L) (1 700 000 – 1 900 000 + 30 000) 170 000 (2)
Revaluation surplus (OCI) 144 000 (1)
Non-controlling interests (OCI) (144 000 x 45%) 64 800 (1)
Recognise profit and non-controlling interests for the
current year
J3 Gain on disposal separate (P/L) [C1] 502 727 (3)
Investment in associate (SFP) (20 000 x R30) 600 000 (1)
Investment in Chewy Ltd (SFP) (balancing)
(860 000 x 20/55) = 312 727 + 275 000 – 14 300 – 16 500 556 927 (1)
Gain on disposal in group (P/L) [C2] 545 800 (7)
Recognise gain on disposal for group
J4 Revaluation surplus (SCE) 79 200 (1)
Retained earnings (SCE) (144 000 x 55%) 79 200 (1)
Reclassification of reserve on date control is lost
J5 Investment in Chewy Ltd (SFP) 58 000
Share of profit of associate (P/L)
(1 950 000 – 1 700 000) x 20% 50 000 (2)
Share of OCI of associate (OCI)
(184 000 – 144 000) x 20% 8 000 (1)
Accounting for share of equity of associate

Total (25)
Maximum (22)

NOT REQUIRED

Dr Cr
R R

J3 Other income (dividend received) (P/L) 16 500

Investment in Chewy Ltd (SFP) (30 000 x 55%) 16 500
Elimination of intragroup dividend for the year

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ALTERNATIVE JOURNALS

Dr Cr
R R

J1 Share capital (SFP) 100 000 (1)

Retained earnings (SFP) 1 400 000 (1)
Non-controlling interests (SFP) 684 000 (1)
Investment in Chewy (SFP) 860 000 (1)
Goodwill (SFP) (balancing) 44 000 (1)
Elimination of owners’ equity of acquisition
J2 Retained earnings (SCE) 225 000 (1)
Non-controlling interests (SCE) 225 000 (1)
Non-controlling interests share in profit in previous year
J3 Non-controlling interests (OCI) 64 800 (1)
Non-controlling interests (SCE) 11 700 (1)
Non-controlling interests (P/L) 76 500 (1)
Non-controlling interests share of loss and revaluation
J4 Other income (P/L) 16 500
Non-controlling interests (SFP) 13 500
Dividend declared (SCE) 30 000
Dividends paid while still a subsidiary
J5 Gain on disposal of shares (separate) [C1] 502 727 (3)
Gain on disposal of shares (consolidated) (P/L)
[balancing] 545 800 (2)
Investment in associates (SFP) 600 000 (1)
Investment in subsidiary (SFP) 547 273 (1)
Net asset value (SFP) 1 944 000 (1)
Goodwill (SFP) 44 000 (2)
Non-controlling interests (SFP) 883 800 (1)
Derecognising assets and liabilities on loss of control
J6 Revaluation surplus (SCE) 79 200 (1)
Retained earnings (SCE) 79 200 (1)
Transfer of revaluation surplus to retained earnings on
loss of control
J7 Investment in associates (SFP) 58 000
Share of profit of associate (P/L) 50 000 (1)
Share of OCI of associate (OCI) 8 000 (1)
Share of profit and OCI of associate for the current year
Total (25)
Maximum (22)

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(b) LEX LTD GROUP

EXTRACT OF CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR

ENDED 31 MARCH 20.19

Retained
earnings
R
Total comprehensive income
Profit for the year [C8] 139 100 (7)
Transfer from mark-to-market reserve [C6] 7 760 (2)
(9)
Communication skills: presentation (1)

CALCULATIONS

C1. Profit in separate financial statements

Cost (860 000 x 35/55) 547 273 [1]

Cash consideration (35 000 x R30) 1 050 000 [1]
Profit on sale of shares 502 727
[2]

C2. Consolidated profit

Net asset value including goodwill [C3] (1 988 000) [3]

Non-controlling interest [C5] 883 800 [2]
Fair value of consideration received (35 000 x R30) 1 050 000 [1]
Fair value of remaining interest (20 000 x R30) 600 000 [1]
545 800
[7]

C3. Net asset value

Given 1 944 000 [1]

Goodwill [C4] 44 000 [2]
1 988 000
[3]

C4. Goodwill

Net asset value (1 July 20.15) 1 500 000 [1]

Non-controlling interests (given) (684 000) [1]
Consideration paid (860 000) [1]
44 000
Total [3]
Max [2]

C5. Non-controlling interest

Net asset value before goodwill (1 944 000 x 45%) 874 800 [1]
Goodwill (684 000 – (1 500 000 x 45%)) 9 000 [1]
883 800
[2]

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C6. Transfer of fair value adjustments (IFRS 9 Investment)

Fair value at 1 August 20.18 (150 000 x 20% = 30 000 x R12,00) 360 000 [1]
Cost on acquisition 350 000 [½]
10 000
Deferred tax (10 000 x 80% x 28%) (2 240) [½]
Transfer to retained earnings from mark-to-market reserve 7 760
[2]

C7. Bargain purchase: Vapour Ltd

Share capital 200 000 [½]

Retained earnings 1 430 600 [½]
Mark-to-market reserve 100 000 [½]
Fair value adjustment – Land (550 000 – 400 000) x 77,6% 116 400 [1½]
1 847 000
Non-controlling interest (150 000 x 40% x R12) (720 000) [1]
Consideration transferred ((20% x 150 000 x 12) + 720 000) or
(60% x 150 000 x 12) (1 080 000) [1]
(47 000)
[5]

C8. Profit for the year: Vapour Ltd

Current year (1 650 500 – 1 430 600 + 50 000 – 116 400 [C7]) x 60% 92 100 [2]
Bargain purchase [C7] 47 000 [5]
139 100
[7]

Analysis of owners’ interest of Chewy Ltd (for completeness)

(55% - 20%)
Total NCI
At Since

Share capital 100 000 55 000 45 000

Retained earnings 1 400 000 770 000 630 000
1 500 000 825 000 675 000
Goodwill 44 000 35 000 9 000
1 544 000 860 000 684 000
Since acquisition
To beginning of current year 500 000 275 000 225 000
Current year to 1 October
Loss
(1 700 000 – 1 900 000 + 30 000) (170 000) (93 500) (76 500)
Revaluation surplus 144 000 79 200 64 800
Dividends paid (30 000) (16 500) (13 500)
Loss of control over subsidiary 1 988 000 244 200 883 800
Transfer of revaluation surplus (79 200)
79 200
Derecognise assets and liabilities (1 988 000) (244 200) (883 800)

Account for associate

Remaining interest (20 000 x R30) 600 000 600 000

Profit (1 950 000 – 1 700 000) 250 000 50 000

Revaluation (184 000 – 144 000) 40 000 8 000
290 000 58 000

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Analysis of owners’ interest of Vap Ltd (for completeness)

(20% - 60%)
Total NCI
At Since
1 August 20.18
Share capital 200 000
Retained earnings 1 430 600
Mark-to-market reserve 100 000
Land fair value adjustment
(550 000 – 400 000) x 28% x 80% 116 400
1 847 000 1 108 200 738 800
Bargain purchase (47 000) (28 200) (18 800)
a b
Consideration paid 1 800 000 1 080 000 720 000

Current year
Profit for the year (1 650 500 –
1 430 600 + 50 000 – 116 400) 153 500 92 100 61 400
Mark-to-market reserve 45 000 27 000 18 000
Dividends paid (50 000) (30 000) (20 000)
1 948 500 89 100 779 400

a
150 000 x 60% x R12
b
150 000 x 40% x R12

PART II

A related party is a person or entity that is related to the reporting entity

Curtain Ltd is a related party because it controls ALL Material Ltd (IAS 24.9(b)(i)). (1)

Floral Design Ltd as the ultimate controlling party is a related party of ALL Material Ltd
(IAS 24.9(b)(i)). (1)

Mr Closet is a related party to ALL Material Ltd as he is the financial director and therefore a
member of key management personnel (IAS 24.9(a)(iii)). (1)

Fashion Design Ltd is a related party to ALL Material Ltd because Mr Closet controls
Fashion Design Ltd (IAS 24.9(a)(vi)). (1)

Mrs Closet is a related party to ALL Material Ltd as she is married to Mr Closet a member of
key management personnel of ALL Material Ltd (IAS 24.9(a)(i) - .9(b)(vii)). (1)

Stitches Ltd is not a related party to ALL Material Ltd because Mrs Closet only has significant
influence over Stitches Ltd and Mr Closet does not control ALL Materials Ltd. (2)
(7)
Communication skills: logical argument (1)

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QUESTION 3 6 marks

YOU HAVE 2 MINUTES TO READ THIS QUESTION

You are a recently qualified CA(SA) and have been approached by Ms Samira Kahn CA(SA), the Audit
Committee Chairperson of HlukileWena Ltd (HW) about financial reporting matters relating to the
company. Samira has provided you with the following information:

• Detailed list of directors and shareholders (not included in the draft consolidated financial
statements)

Percentage
Shareholders held Directors
HlukileWena Ltd GrayAllan 11%
Public Investment 9% C Ramoka
Corporation T Radebe
YoungMutual 5% R Ismail
Various investors all holding CS van Tonder*
less than 1% each 75% M Mathebula*
V Ismail^
Retail Investments Ltd HlukileWena Ltd 19% J Kotze*
L Rokho*

* Non-executive director.
^ V Ismail is the wife of R Ismail.

• Retail Investments (Pty) Ltd

The group has a 19% interest in an unconsolidated structured entity, Retail Investments Ltd
(Retail). Retail is controlled by V Ismail who not only makes all investment decisions but also
decides how profits should be distributed.

The maximum exposure of HW is equal to the carrying amount of its investment in Retail.
This investment is included in the non-current assets line on the statement of financial position.
At 31 December 20.18 the carrying amount of the investment in Retail was R2 million.

During the year HW invested an amount of R400 000 with Retail, while a dividend of R600 000
was paid by Retail to HW.

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QUESTION 3

YOU HAVE 9 MINUTES TO ANSWER THIS QUESTION

REQUIRED

Marks

Discuss whether Retail Investments Ltd is a related party to HlukileWena Ltd and, where 6
relevant, provide the disclosures required in terms of IAS 24 Related Parties in
HlukileWena Ltd’s consolidated financial statements for 20.18.

Please note:

• Your answer must comply with International Financial Reporting Standards (IFRS).
• Ignore any taxes

(Source: SAICA ITC June 2019)

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QUESTION 3 – Suggested solution

Discuss whether Retail Investments Ltd is a related party to HlukileWena Ltd and, where
relevant, provide the disclosures required in terms of IAS 24 Related Parties in
HlukileWena Ltd’s consolidated financial statements for 20.18

1 It is stated that V Ismail controls Retail and that she is the wife of R Ismail, who is a
director of HW. (1)

2 As a director of HW R Ismail is a member of the key management personnel of HW,

making him a related party to HW. (1)

3 IAS 24.9(a) defines a person or a close member of that person’s family to be related to
a reporting entity if that person is a close member of the key management personnel of
the reporting entity or of a parent of the reporting entity.

4 IAS 24.9 further states that a spouse or domestic partner of an individual is a close
member of that person.

5 Accordingly, V Ismail is a close member in relation to R Ismail as the scenario

states that she is his wife and therefore a related party of HW. (1)

6 Therefore, Retail is a related party to HW as it is controlled by a close person (V Ismail)

who is a member of the key management personnel of HW (R Ismail). (1)

7 Because of this HW should also disclose any transactions and balances with Retail in
the related party note. The additional disclosure required is detailed below: (1)

Amount of Amounts due

transaction by/(to) related (2)
party
R’000 R’000
Dividends receiver
Retail Investments Ltd 600 -
Additional investments made
Retail Investments Ltd 400 2 000
Total (7)
Maximum (6)

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QUESTION 4 40 marks

YOU HAVE 15 MINUTES TO READ THIS QUESTION

You are a third-year trainee accountant at ABC Auditors. You are currently busy with the year end
audit of Fortnight Ltd (Fortnight).

Fortnight is a computer game developer and retailer based in South Africa and listed on the
Johannesburg Stock Exchange. The company has several investments in other companies and all
companies in the group have a 31 March year end.

The following trial balance extracts, for the year ended 31 March 20.20, were provided to you by the
Fortnight group accountant, Mr S Trooper:

Omega Raven Peely

Ltd Ltd Ltd
R R R
Credits
Share capital:
- 200 000 ordinary shares 600 000 - -
- 100 000 ordinary shares - 100 000 -
- 150 000 ordinary shares - - 150 000
Retained earnings – 1 April 20.19 360 000 660 000 155 000
Revaluation surplus – 1 April 20.19 180 000 - -
Profit after tax 120 000 150 000 210 000
Other comprehensive income:
- Revaluation of land 30 000 - -
- Cash flow hedge - - 18 000
Dividends paid (30 June 20.19) (25 000) - -
1 265 000 910 000 533 000

Omega Ltd

Fortnight acquired 40% of the issued share capital of Omega Ltd (Omega) on 1 January 20.15 for a
cash amount of R350 000. Fortnight exercised significant influence over the financial and operating
policy decisions of Omega from that date. On 1 January 20.15 Omega’s equity consisted of share
capital and retained earnings amounting to R600 000 and R200 000 respectively. All the assets and
liabilities of Omega were regarded to be fairly valued on 1 January 20.15.

On 30 September 20.19, Fortnight disposed of a 35% interest in Omega for R460 000. The remaining
5% interest had a fair value of R63 250 on 30 September 20.19 and R70 000 on 31 March 20.20.
Fortnight classified the remaining investment as a financial asset at fair value through other
comprehensive income.

Raven Ltd

Fortnight acquired 70 000 ordinary shares in Raven Ltd (Raven) on 1 July 20.11 for a cash amount of
R100 000. From that date Fortnight had control over Raven as per the definition of control in terms of
IFRS 10 Consolidated Financial Statements. On 1 July 20.11 Raven’s equity consisted of share capital
and retained earnings amounting to R100 000 and R20 000 respectively.

All the assets and liabilities of Raven were regarded to be fairly valued on 1 July 20.11. No additional
assets, liabilities or contingent liabilities were identified by Fortnight on the date of the acquisition.

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On 1 July 20.11 the fair value of the non-controlling interests was R45 000.

From the date of acquisition, Fortnight purchased computer games from Raven at a mark-up of 20%
on cost. You can assume that inventory on hand at month end are sold in the following month.

The following information relates to these purchases:

31 March 1 December 31 March

20.20 20.19 20.19
R R R

Sales from Raven to Fortnight for the financial year 50 000 - 47 500
Inventory on hand at Fortnight 18 500 21 000 14 250

On 1 December 20.19 Fortnight acquired an additional 10 000 ordinary shares in Raven from the non-
controlling interests. The purchase was settled by cash of R110 000 as well as the transfer of office
equipment with a fair value of R30 000 and a carrying value of R10 000 to the non-controlling interests.

Peely Ltd

Fortnight acquired a 60% controlling interest in Peely Ltd (Peely) for a cash amount of R225 000 on
1 April 20.19.

All assets and liabilities of Peely were regarded to be fairly valued on 1 April 20.19, except for land
which was undervalued by R75 000. No additional assets, liabilities or contingent liabilities were
identified by Fortnight on the date of acquisition.

On 31 March 20.20 Fortnight disposed of a 45% controlling interest in Peely for R245 000, resulting
in a remaining 15% interest. Fortnight classified the remaining investment as a financial asset at fair
value through other comprehensive income.

The fair value of Peely’s share price was as follows on the different dates:

31 March 1 April
20.20 20.19
R R

Price per share 3,40 2,40

Additional information

1. All group companies’ income and expenses (including other comprehensive income) accrued
evenly during the current financial year.

2. The Fortnight Group elected to measure non-controlling interests at fair value on the acquisition
date for all acquisitions.

3. It is the accounting policy of Fortnight to account for investments in subsidiaries and associates
at cost in accordance with IAS 27.10(a).

4. It is the policy of the Fortnight Group to realise the revaluation surplus on the disposal of the
underlying asset.

5. Assume a normal income tax rate of 28% and a Capital Gains Tax inclusion rate of 80%.
Ignore the effects of Dividend Tax and Value Added Tax (VAT).

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QUESTION 4

YOU HAVE 60 MINUTES TO ANSWER THIS QUESTION

REQUIRED

Marks

(a) The group accountant of the Fortnight Ltd Group, Mr S Trooper, requested your 13
assistance with the following matter:

Mr Trooper vaguely remembers from his university studies that the additional share
purchase in Raven Ltd should be presented in a “change in ownership reserve” in the
statement of changes in equity. However, when he consulted his SAICA handbook he
could not find any reference to a “change in ownership reserve”.

Write an email to Mr Trooper to explain, in terms of the International Financial Reporting

Standards, how the additional share purchase in Raven Ltd should be presented in the
consolidated statement of changes in equity of the Fortnight Ltd Group. Please note,
your discussion should also include calculations.

Communication skills: format and logical argument 1

(b) Prepare the pro forma consolidation journal entries to account for the investment in 16
Omega Ltd in the consolidated financial statements of the Fortnight Ltd Group for the
year ended 31 March 20.20. Journal entries relating to taxation are not required.

Communication skills: presentation and layout 1

(c) Calculate, in accordance with IFRS 10.B98, the consolidated gain or loss on disposal 9
of Fortnight Ltd's interest in Peely Ltd that should be recognised in profit or loss in the
consolidated statement of profit or loss and other comprehensive income of the
Fortnight Ltd Group for the year ended 31 March 20.20.

Please note:

• Round all amounts to the nearest Rand.

• Your answer must comply with International Financial Reporting Standards (IFRS).

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QUESTION 4 – Suggested solution

(a)
TO: Mr S Trooper
FROM: CTA Student
SUBJECT: How the additional share purchase in Raven Ltd should be accounted for in the
consolidated financial statements of the Fortnight Ltd Group

Dear Mr Trooper

Kindly see my proposed accounting treatment for the additional shares purchased below.

Should you have any further questions, please let me know.

Kind regards,
CTA Student

Fortnight Ltd acquired an additional 10 000 shares in Raven Ltd during the current financial
year. Fortnight Ltd already had control over Raven Ltd, in accordance with IFRS 10, before
this transaction. Therefore, this share purchase qualifies as a transaction with owners in
their capacity as owners. (1)

According to IFRS 10.23 changes in a parent’s ownership interest in a subsidiary that do

not result in the parent losing control of the subsidiary are equity transactions. These
transactions should be dealt with in terms of IFRS 10.B96. B96 states: “When the
proportion of the equity held by non-controlling interests changes, an entity shall adjust the
carrying amounts of the controlling and non-controlling interests to reflect the changes in
their relative interests in the subsidiary. The entity shall recognise directly in equity any
difference between the amount by which the non-controlling interests are adjusted and the
fair value.” (1)

Non-controlling interests (NCI) decreased from 30% to 20% as a result of the additional
shares purchased by Fortnight Ltd (30 000/100 000 and 20 000/100 000). (1)

Firstly, the adjustment to NCI should be calculated:

R
NCI at acquisition 45 000 (1)
NCI share of retained earnings [(660 000 – 20 000) x 30%] Note 1 192 000 (1)
NCI share of current year profit after tax
[((150 000 x 8/12) – 2 520 Note 2) x 30%] Note 1 29 244 (1)
NCI before the share purchase 266 244

NCI after the share purchase can be calculated as follows:

266 244 x 20/30 177 496 (1)

Adjustment to NCI (266 244 – 177 496) or (266 244 x 10/30) 88 748 (1)
Note 1:
The intragroup unrealised profit of 20.19 does not need to be considered as the
elimination of the 20.19 unrealised profit would have realised in August 20.19 and therefore
would have been reversed in the current year’s profit, before the transaction to acquire
additional shares. (1)
Note 2:
Unrealised profit on sale of inventory [(21 000 x 20/120) - (3 500 x 28%)] (1)
Secondly, the fair value of the consideration should be determined. The fair value of the
cash consideration is R110 000 and the fair value of the office equipment is R30 000.
Resulting in a total consideration of R140 000. (1)

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The difference between the consideration of R140 000 and the adjustment to NCI of
R88 748 amounts to R51 252. This amount should be recognised in equity. (1)

The presentation in the statement of changes in equity can be summarised as follows:

Reduce (debit) the NCI with R88 748 and decrease (debit) retained earnings or another
newly created reserve with R51 252, in the line-item “purchase of additional shares in
subsidiary”. (1)

The newly created reserve is commonly referred to as the “change in ownership reserve”.
However, any name can be given as the name is not prescribed by the International
Financial Reporting Standards. (1)
Total (14)
Maximum (13)
Communication skills: format and logical argument (1)

EXAM TECHNIQUE

Do not information dump the IFRS theory as it counts no marks. The key is to apply the
applicable theory to the information in the scenario. Do not only provide theory and
calculations.

(b)

Dr Cr
R R
J1 Investment in Omega Ltd (SFP) 156 000
Retained earnings (SCE) [(360 000 - 200 000) x 40%] 64 000 (2)
Revaluation surplus (SCE) (180 000 x 40%) 72 000 (1)
Share of profit of associate (P/L) (120 000/2 x 40%) 24 000 (1)
Share of other comprehensive income of associate
(OCI) (30 000/2 x 40%) 6 000 (1)
Dividend income (P/L) (25 000 x 40%) 10 000 (1)
Recognition of associate
J2 Gain on sale of shares (separate) (P/L)
[460 000 - (350 000 x 35/40)] 153 750 (2)
Gain on sale of shares (consolidated) (P/L) (C1) 17 250 (4)
Investment in Omega Ltd (SFP) 136 500 (1)
Recognition of consolidated gain on disposal of 35%
interest in associate
J3 Revaluation surplus (SCE) (72 000 + 6 000) [J1] 78 000 (1)
Retained earnings (SCE) 78 000 (1)
Transfer to retained earnings on date of disposal
J4 Day one gain/Fair value gain (P/L)
[63 250 - (350 000 x 5/40)] 19 500 (2)
Investment in Omega Ltd (SFP) 19 500 (1)
Reversal of fair value adjustment in separate accounting
records
Total (18)
Maximum (16)
Communication skills: presentation and layout (1)

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EXAM TECHNIQUE

Ensure that you have a clear understanding of the journals that are required when equity
accounting an associate in terms of IAS 28. Remember to indicate the account
classifications e.g. P&L, SFP or OCI and to provide the journal narrations. It seems basic
but remember that there will be no NCI journals when an associate is equity accounted.
(IFRS 10 principles versus IAS 28).

(c)
R
Derecognise assets and liabilities (given) (533 000) (1)
Fair value adjustment on land [75 000 – (75 000 x 80% x 28%)] (58 200) (1)
Derecognise goodwill (C4) (5 800) (3)
Derecognise non-controlling interests
[144 000 (C4) + ((210 000 + 18 000) x 40%)] 235 200 (1)
Recognise fair value of consideration received (given) 245 000 (1)
Recognise fair value of remaining interest (150 000 x 15% x 3,40) 76 500 (1)
Reclassification parent's share of the cash flow hedge to profit or loss
(18 000 x 60%) 10 800 (1)
Consolidated loss on disposal (29 500)
(9)

CALCULATIONS

C1. Gain on sale of shares (consolidated) – Omega Ltd

Loss of significant influence IAS28.22

Proceeds on disposal of interest 460 000

Derecognise carrying amount of investment in associate on date of [1]
(476 000)
disposal of associate (1 190 000 (C2) x 40%)
Goodwill (30 000 (C3)) (30 000) [1]
Recognise fair value of remaining interest (given) 63 250 [1]
17 250
OR [3]

Proceeds on disposal of interest 460 000

Consolidated net asset value (1 190 000 (C2) × 35%) (416 500) [2]
Goodwill (30 000 (C3) × 35/40) (26 250) [1]
Gain on disposal of interest (group context) 17 250
[3]
OR

Proceeds on disposal of interest 460 000

Cost of interest disposed of (350 000 × 35/40) (306 250)
Gain on disposal in Fortnight Ltd’s separate records 153 750 [2]
Less: Since acquisition reserves disposed of
((1 190 000 (C2) – 800 000) × 35%) (136 500) [1]
Gain on disposal of interest (group context) 17 250
[3]

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EXAM TECHNIQUE

IAS28.22 - If the retained interest in the former associate or joint venture is a financial
asset, the entity shall measure the retained interest at fair value. The fair value of the
retained interest shall be regarded as its fair value on initial recognition as a financial
asset in accordance with IFRS 9. The entity shall recognise in profit or loss any difference
between:
(i) the fair value of any retained interest and any proceeds from disposing of a part
interest in the associate or joint venture; and
(ii) the carrying amount of the investment at the date the equity method was
discontinued.

C2. Consolidated net asset value – Omega Ltd

Net asset value as per trial balance (given) 1 265 000

Profit earned after the sale of the associate (120 000/2) (60 000) [1]
Other comprehensive income earned after the sale of the associate
(30 000/2) (15 000) [1]
1 190 000
Total [2]
Maximum [1]
OR
Share capital 600 000
Retained earnings – 1 April 20.19 360 000
Revaluation surplus – 1 April 20.19 180 000
Profit after tax (120 000/2) 60 000
Other comprehensive income (30 000/2) 15 000
Dividends paid (30 June 20.19) (25 000)
1 190 000
Maximum [1]

C3. Goodwill – Omega Ltd

Net asset value at date of acquisition (600 000 + 200 000) 800 000

Fortnight Ltd’s share (800 000 x 40%) (320 000)

Consideration paid 350 000
30 000 [1]

C4. Goodwill – Peely Ltd

Consideration paid (given) 225 000

Non-controlling interests (fair value) (150 000 x 40% x 2,40) 144 000 [1]
369 000

Fair value of identifiable net assets:

Net asset value at date of acquisition (150 000 + 155 000) 305 000
Fair value adjustment to land 75 000 [1]
Deferred tax on fair value adjustment (75 000 x 28% x 80%) (16 800) [1]
363 200
5 800
[3]

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C5. Analysis of owners’ equity of Omega Ltd (for completeness only)

Fortnight Ltd
(40% - 5%)
Total At Since Since
R/E R/S
At acquisition
Share capital 600 000
Retained earnings 200 000
800 000 320 000
Goodwill 30 000
Consideration 350 000

Since acquisition
Retained earnings
(360 000 – 200 000) 160 000 64 000
Revaluation surplus 180 000 72 000

Current year
Profit for six months (120 000/2) 60 000 24 000
Dividends paid (25 000) (10 000)
OCI: Revaluation of land (30 000/2) 15 000 6 000
1 190 000 78 000 78 000

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C6. Analysis of owners’ equity of Raven Ltd (for completeness only)

Fortnight Ltd
(70% - 80%)
Total At Since NCI
At acquisition
Share capital 100 000
Retained earnings 20 000
120 000 84 000 36 000
Equity represented by goodwill 25 000 16 000 9 000
Consideration and NCI 145 000 100 000 45 000

Since acquisition
Retained earnings (660 000 – 20 000) 640 000 448 000 192 000
Unrealised profit on sale of inventory [(14 250
x 20/120) - (2 375 x 28%)] (1 710) (1 197) (513)

Current year
Profit for the period (8 months)
(150 000 x 8/12) 100 000 70 000 30 000
Reversal: Unrealised profit on sale of inventory 1 710 1 197 513
Unrealised profit on sale of inventory [(21 000
x 20/120) - (3 500 x 28%)] (2 520) (1 764) (756)
882 480 516 236 266 244
Further acquisition (266 244 x 10/30) 88 748 (88 748)
Change in ownership (equity) 51 252
140 000 177 496
Profit for the period (4 months)
(150 000 x 4/12) 50 000 40 000 10 000
Reversal: Unrealised profit on sale of inventory 2 520 2 016 504
Unrealised profit on sale of inventory
[(18 500 x 20/120) - (3 083 x 28%)] (2 220) (1 776) (444)
932 780 556 476 187 556

C7. Analysis of owners’ equity of Peely Ltd (for completeness only)

Fortnight Ltd
(60% - 15%)
Total At Since NCI
At acquisition
Net asset value 305 000
Revaluation of land
[75 000 – (75 000 x 80% x 28%)] 58 200
363 200 217 920 145 280
Equity represented by goodwill 5 800 7 080 (1 280)
Consideration and NCI
(150 000 x 40% x 2,40) 369 000 225 000 144 000

Current year
Profit for the year 210 000 126 000 84 000
OCI: Cash flow hedge 18 000 10 800 7 200
597 000 136 800 235 200
Loss of control over subsidiary:
Derecognition of assets and liabilities
(597 000) (225 000) (136 800) (235 200)
- - - -

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QUESTION 5 40 marks

YOU HAVE 15 MINUTES TO READ THIS QUESTION

Bojanala Marketing Ltd (BM Ltd) is a JSE listed company specialising in marketing and advertising.
They provide a wide range of marketing services to help businesses grow by expanding brand
awareness, increasing online presence and improving customer experience. BM Ltd has a 31 March
year end.

The current challenges that faced the world due to COVID-19 pandemic has forced the company to
undergo some restructuring in terms of their service offerings. This included selling some of their
investments as well as a number of acquisitions due to increased demand from clients for solid digital
marketing and advertising campaigns.

Agile Digital Ltd

On 1 February 20.16, BM Ltd acquired a 15% interest in Agile Digital Ltd (Agile Ltd) for a cash
consideration of R950 000. BM Ltd did not exercise joint control or significant influence over the
financial and operating policy decisions of Agile Ltd at that date.

On 1 October 20.20, BM Ltd obtained control, as defined in IFRS 10 Consolidated Financial

Statements, by acquiring an additional 60% interest for a cash consideration of R5 817 000. The cash
payment includes professional fees paid for legal services and other transaction costs amounting to
R150 000. All the assets and liabilities of Agile Ltd were deemed to be fairly valued on 1 October 20.20
apart from the following:

• At acquisition Agile Ltd had a trademark that was formally registered and relates to an internally
generated brand that was developed by Agile Ltd over the past few years. The fair value of the
trademark on 1 October 20.20 is R400 000. The trademark has an indefinite useful life.

• Agile Ltd has an internally generated client list which consists of the clients to which they provide
advertising and social media management services. This client list is contingent on a privacy
agreement and cannot be sold. The client list has a fair value of R350 000 on 1 October 20.20.

• Agile Ltd had a fall out with one of their clients due to an advertisement that was televised
nationwide which received a lot of backlash due to the public finding it offensive. A contingent
liability arose on 30 June 20.19 amounting to R250 000 due to losses in revenue that the said
client claimed to have lost. Should the claim be successful, any amount paid by Agile Ltd will not
be deductible for tax purposes. Agile Ltd’s legal advisors concluded that Agile Ltd has a present
obligation, however it is probable that Agile Ltd will not be found liable and therefore the
likelihood of a successful claim is remote. The fair value of the claim was reliably estimated at
R225 500 on 1 October 20.20 and on 31 March 20.21.

The fair value of the 15% investment in Agile Ltd, amounted to R1 416 750 on 1 October 20.20.
The share capital retained earnings and mark-to-market reserve of Agile Ltd amounted to R1 000 000
(100 000 shares), R5 550 000 and R650 000 respectively on 1 April 20.20. Agile Ltd had a profit after
tax and other comprehensive income relating to the mark-to-market reserve of R2 750 000 and
R250 000 respectively for the year ended 31 March 20.21.

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Ads for Mags Ltd

On 1 July 20.18, BM Ltd acquired 70% of the shares in Ads for Mags Ltd (AFM Ltd), a company
specialising in print media, for a cash consideration equal to the fair value of the shares on that date.
From that date BM Ltd exercised control over AFM Ltd as per the definition of control in terms of
IFRS 10 Consolidated Financial Statements. The equity of AFM Ltd on that date consisted of ordinary
share capital amounting to R1 550 000 (50 000 shares), retained earnings of R2 250 000 and a mark-
to-market reserve of R925 000. The assets and liabilities of AFM Ltd were considered to be fairly
valued on 1 July 20.18 and no additional assets, liabilities or contingent assets and liabilities were
identified at that date. AFM Ltd’s shares were trading in the market at R100 per share on 1 July 20.18.

Due to the pandemic, print media was adversely affected, as most businesses opted for digital and
online advertising campaigns as opposed to printed flyers and pamphlets. The Chief Executive Officer
(CEO), Ms Robben, and the Chief Financial Officer (CFO), Mr Kosmin, were both of the opinion that
the investment was no longer viable given the current market demand. They were able to convince
the rest of the board members of BM Ltd that selling the investment was the best way forward for the
business. On 31 March 20.21, BM Ltd disposed of 45% of its shares in AFM Ltd for a cash
consideration of R2 105 000. From this date, BM Ltd exercised significant influence over the financial
and operating policy decisions of AFM Ltd. The equity of AFM Ltd at the date of disposal was as
follows:

R
Dr/(Cr)

Issued ordinary share capital (50 000 shares) 1 550 000

Retained earnings – 1 April 20.20 3 220 000
Loss for the year (700 000)
Mark-to-market reserve – 1 April 20.20 1 290 625
OCI – Mark-to-market reserve (equity instruments) 335 000
5 695 625

The share price of AFM Ltd on 31 March 20.20 and 31 March 20.21 were trading at R98,00 and R94,50
respectively.

Mr Khadim, who is a member of the board of directors of BM Ltd was not necessarily in agreement
with the decision to sell and made it clear that he will personally invest in AFM Ltd. Mrs Khadim, wife
to Mr Khadim therefore bought a significant number of shares in AFM Ltd as per Mr Khadim’s request.
This acquisition gave her significant influence over AFM Ltd.

Mr Khadim mentioned to Mrs Khadim that he did not envision that the buying of shares in AFM Ltd by
Mrs Khadim would cause any issues as the CFO’s daughter, Miss Kosmin, exercised significant
influence over Agile Ltd, and therefore does not foresee any objection to the transaction. Mrs Khadim
is an active investor and currently has a controlling interest in Weather Ltd. Furthermore, Miss Kosmin
is a controlling shareholder of Legacy Ltd.

Additional information

1. It is the accounting policy of BM Ltd to account for investments in subsidiaries, joint ventures
and associates at cost in its separate financial statements in accordance with IAS 27.10(a).

2. It is the accounting policy of BM Ltd to account for investments in equity instruments, other than
investments in subsidiaries, joint ventures and associates, in accordance with IFRS 9
Financial Instruments at fair value through other comprehensive income.

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3. BM Ltd elected to transfer all cumulative gains or losses within equity in terms of IFRS 9.B5.7.1.

4. BM Ltd elected to measure non-controlling interests at fair value at the acquisition date for all
acquisitions.

5. All the companies in the group have a 31 March year end.

6. There were no changes in the issued ordinary share capital of any of the companies in the group.

7. The profit and loss and other comprehensive income of the companies accrued evenly
throughout the year.

8. Assume a normal income tax rate of 28% and a Capital Gains Tax inclusion rate of 80%.
Ignore Value Added Tax (VAT) and Dividend Tax.

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QUESTION 5

YOU HAVE 60 MINUTES TO ANSWER THIS QUESTION

Marks

(a) Provide the pro forma consolidation journal entries to account for the investment in Agile 15
Digital Ltd in the consolidated financial statements of the Bojanala Marketing Ltd Group
for the year ended 31 March 20.21.

Communication skills: presentation and layout 1

(b) (i) Discuss in accordance with IAS 37 Provisions, Contingent Liabilities and 3
Contingent Assets if and how Agile Digital Ltd should recognise and disclose, in
its separate financial statements, the claim relating to the advertisement that was
televised nationwide which received a lot of backlash due to the public finding it
offensive for the year ending 31 March 20.21.

(ii) Assume that the legal advisers found that in the following year, it is probable that 3
Agile Digital Ltd will be found liable and be obligated to pay damages. Discuss
the recognition and disclosure of the claim in Agile Digital Ltd’s separate financial
statements for the year ended 31 March 20.22 in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets.

(c) Identify, with reasons, the parties related to Bojanala Marketing Ltd from the information 6
provided in the scenario for the year ended 31 March 20.21.

(d) Prepare the profit/loss pro forma consolidation journal entry to account for the profit/loss 12
made on the disposal of the investment in Ads for Mags Ltd in the consolidated financial
statements of the Bojanala Marketing Ltd Group for the year ended 31 March 20.21.

Please note:

• Journal narrations are required.

• The individual accounts affected must be mentioned in cases where the information is
provided.
• Round off all amounts to the nearest Rand.
• Your answer must comply with International Financial Reporting Standards (IFRS).

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QUESTION 5 – Suggested solution

PART I

(a) Pro forma consolidation journal entries (Agile Ltd)

Dr Cr
R R
J1 Mark-to-market reserve (SCE) 362 198 (1)
Retained earnings (SCE)
[(1 416 750 - 950 000) x 0,776] 362 198 (2)
Transfer of fair value adjustments previously
recognised in mark-to-market reserve to retained
earnings with measurement of equity interest
previously held, at group level in accordance with
IFRS 9.B5.7.1
J2 Ordinary share capital (SCE) 1 000 000
Retained earnings (SCE) 5 550 000 (1)
Mark-to-market reserve (SCE) 650 000
Profit for the year (P/L) (2 750 000 x 6/12) 1 375 000 (1)
Mark-to-market reserve (OCI) (250 000 x 6/12) 125 000 (1)
Intangible asset (SFP) 400 000 (1)
Contingent liability (SFP) 225 500 (1)
Deferred tax (SFP) (400 000 x 28% x 80%) 89 600 (1)
Goodwill (SFP) (balancing) [C2] 660 100 (1)
NCI (SFP) [(1 416 750/15%) x 25%] 2 361 250 (1)
Investment in Agile Ltd (SFP)
(5 817 000 + 1 416 750 –150 000) or [C2] 7 083 750 (2)
At acquisition elimination journal
J3 Non-controlling interests (P/L)
[(2 750 000 x 6/12) x 25%] 343 750 (1)
Non-controlling interest (OCI)
[(250 000 X 6/12) x 25%] 31 250 (1)
Non-controlling interests (SFP) 375 000 (1)
Account for NCI’s share in profit and OCI
Total (16)
Maximum (15)
Communication skills: presentation and layout (1)

EXAM TECHNIQUE

Ensure that you have a clear understanding of the journals that are required when
accounting for a step acquisition. Remember to indicate the account classifications e.g.,
P&L, SFP or OCI and to provide the journal narrations.

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(b) Discuss, in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent
Assets, if and how Agile Ltd should recognise and disclose, in its separate financial
statements, the claim relating to the advertisement

(i) For the year ended 31 March 20.21

Agile Ltd shall not recognise the contingent liability in relation to the claim relating
to the advertisement but should disclose the contingent liability [IAS 37.27 -28]. (1)

The claim meets the definition of contingent liability as it is a present obligation

arising from the airing of the advert (past event) but not recognised because the
probability of the outflow of resources is unlikely. (1)

Agile Ltd should however consider the requirements in paragraph 86 of IAS 37

which requires an entity to disclose the contingent liability, unless the possibility
of any outflow in settlement is remote. (1)

For the year ended 31 March 20.21, Agile Ltd should not recognise nor disclose
the contingent liability in its separate financial statements since the likelihood of a
successful claim is remote as per the legal advisors. (1)
Total (4)
Maximum (3)

(ii) For the year ended 31 March 20.22

In the following year, there is evidence that Agile Ltd will be obligated to pay for
the amount that is being claimed by the client. (1)

Agile Ltd will therefore have a present obligation as a result of the advert. It is also
probable that there will be an outflow of resources and the amount can be reliably
estimated. (1)

A provision will therefore have to be recognised and disclosed in the separate

financial statements of Agile Ltd on 31 March 20.22. (1)
Total (3)

(c) Identify, with reasons, the parties related to Bojanala Marketing Ltd from the information
provided in the scenario.

A related party is a person or entity that is related to the entity that is preparing its
financial statements (referred to as the ‘reporting entity’) (IAS 24.9). The reporting entity
in this instance is Bojanala Marketing Ltd as it is entity that is preparing its financial
statements.

The following entities or persons are related parties to BM Ltd:

Agile Digital Ltd is a related party to BM Ltd – Agile Ltd is a subsidiary to the BM Ltd,
being the reporting entity (IAS 24.9(b)(i)) (1)

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Ads for Mags Ltd is a related party to BM Ltd – BM Ltd has significant influence over
AFM Ltd (IAS 24.9(b)(ii)) (1)

Ms Robben (CFO), Mr Kosmin (CEO) and Mr Khadim (board member) are all related
parties to BM Ltd – they are all members of key management personnel of BM Ltd
(IAS 24.9(a)(iii). (1)

Mrs Khadim is a related party to BM Ltd – she is a close member of family to key
management personnel as she is wife to Mr Khadim (IAS 24.9(a)(iii). (1)

Miss Kosmin, daughter to CFO, is a related party - she is a close member of family to
key management personnel as she is close family member to Mr Kosmin (IAS 24.9(a)(iii)
and also has significant influence over Agile Ltd. (1)

Legacy Ltd is a related party – controlled by Miss Kosmin who also has significant
influence over subsidiary of BM Ltd (IAS 24.9(b)(vi)) (1)
Total (6)

EXAMINATION TECHNIQUE

A good examination technique with the identification of related parties is to start by

drawing a group structure with the relationship of each party to the reporting entity.
Thereafter, start evaluating each relationship against the definition of a related party in
accordance with IAS 24.9.

(d) Pro forma consolidation journal entries (AFM Ltd)

Dr Cr
R R
Loss on disposal in separate (P/L) [C4] 145 000 (3)
Investment in associate (SFP) (50 000 x 25% x R94,50) 1 181 250 (1)
Investment in AFM Ltd - balancing (SFP) 1 929 438 (1)
Loss on disposal in group (P/L) [C5] 893 188 (8)
Recognise loss on disposal for group
Total (13)
Maximum (12)

CALCULATIONS

C1. Net asset value on date of acquisition

Share capital 1 000 000

Retained earnings 5 550 000
Mark-to-market reserve 650 000
Profit for 6 months (2 750 000 x 6/12) 1 375 000
OCI for 6 months (250 000 x 6/12) 125 000
Intangible asset (trade mark) 400 000
Deferred tax (IA) (400’ x 80% x 28%) (89 600)
Client list -
Contingent liability (225 500)
8 784 900

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C2. Proof of goodwill [IFRS 3.32]

Consideration transferred at acquisition date (given) 5 817 000

Less: acquisition related costs / professional fees (150 000)
Plus: Fair value of existing investment 1 416 750
7 083 750
Plus: NCI (1 416 750 x 25%/15%) 2 361 250
9 445 000
Less: Net Asset Value [C1] (8 784 900)
Goodwill 660 100

C3. Analysis of owners' equity of Agile Ltd (for completeness):

BM Ltd 15% - 75%

Total NCI
At Since
Share capital 1 000 000
Retained earnings 5 550 000
Mark-to-market reserve 650 000
Profit for 6 months
(2 750 000 x 6/12) 1 375 000
OCI for 6 months
(250 000 x 6/12) 125 000
Intangible asset (trade mark) 400 000
Deferred tax (IA)
(400’ x 80% x 28%) (89 600)
Client list -
Contingent liability (225 500)

8 784 900 6 588 675 2 196 225

Goodwill 660 100 495 075 165 025

Consideration and NCI 9 445 000 7 083 750 2 361 250

Current year
Profit after tax (2 750 000 x 6/12) 1 375 000 1 031 250 343 750
OCI: Mark-to-mark reserve
(250 000 x 6/12) 125 000 93 750 31 250
10 945 000 1 125 000 2 736 250

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C4. Profit in separate financial statements

Cost [(R100 x 35 000) x 45/70] 2 250 000 [1]

Cash consideration 2 105 000 [1]
Loss on disposal 145 000
[2]

C5. Consolidated gain or loss, in terms of IFRS 10.B98 – B99

Derecognise net asset value on date of sale including goodwill [C6] (5 970 625) [4]
Derecognise non-controlling interests (5 970 625 x 30%) 1 791 187 [1]
Recognise the fair value of the consideration received (given) 2 105 000 [1]
Recognise the fair value of the remaining interest
(50 000 x 25% x R94,50) 1 181 250 [2]
Loss on disposal 893 188
[8]

C6. Net asset value on date of sale

Net asset value at acquisition (given) 4 725 000

Since acquisition: Retained earnings (3 220 000 – 2 250 000) 970 000
Since acquisition: Mark-to-market reserve (1 290 625 – 925 000) 365 625
Less: current year loss (700 000)
Plus: current year OCI (M2M) 335 000
Net asset value on date of disposal (given) 5 695 625 [1]
Goodwill [C7] 275 000 [3]
Net asset value on date of disposal 5 970 625
[4]

C7. Goodwill

Consideration transferred at acquisition date [ (70% x 50 000) x R100] 3 500 000 [1]
Plus: NCI (3 500 000 x 30/70) 1 500 000 [1]
5 000 000
Less: Net Asset Value at acquisition (1 500 000 + 2 250 000 + 925 000) (4 725 000) [1]
Goodwill 275 000
[3]

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C8. Analysis of owners' equity of AFM Ltd (for completeness):

AFM Ltd 70% - 25%

Total NCI
At Since
Share capital 1 550 000
Retained earnings 2 250 000
Mark-to-market reserve 925 000
4 725 000 3 307 500 1 417 500

Goodwill 275 000 192 500 82 500

Consideration and NCI 5 000 000 3 500 000 1 500 000

Since acquisition
Retained earnings (3 220 000 –
2 250 000) 970 000 679 000 291 000
Mark-to-market reserve (1 290 625
– 925 000) 365 625 255 938 109 687
6 335 625 934 938 1 900 687

Current year

Loss for the year (700 000) (490 000) (210 000)
OCI: Mark-to-mark reserve 335 000 234 500 100 500
5 970 625 3 500 000 679 438 1 791 187

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