CD 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. CD 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.

AD Ltd

On 1 February 2016, CD Ltd acquired a 15% interest in (AD Ltd) for a cash consideration of R950 000. CD Ltd did not exercise joint control or significant influence over the financial and operating policy decisions of CD Ltd at that date.

On 1 October 2020, CD 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 AD Ltd were deemed to be fairly valued on 1 October 2020 apart from the following:

• At acquisition AD Ltd had a trademark that was formally registered and relates to an internally generated brand that was developed by AD Ltd over the past few years. The fair value of the trademark on 1 October 2020 is R400 000. The trade mark has an indefinite useful life.

• AD 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 2020.

• AD 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 2019 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 AD Ltd will not be deductible for tax purposes. AD Ltd’s legal advisors concluded that AD Ltd has a present obligation, however it is probable that AD 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 2020 and on 31 March 2021.

The fair value of the 15% investment in AD Ltd, amounted to R1 416 750 on 1 October 2020. The share capital retained earnings and mark-to-market reserve of AD Ltd amounted to R1 000 000 (100 000 shares), R5 550 000 and R650 000 respectively on 1 April 2020. AD 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 2021.

MAL Ltd

On 1 July 2018, CD Ltd acquired 70% of the shares in (MAL 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 CD Ltd exercised control over MAL Ltd as per the definition of control in terms of IFRS 10 Consolidated Financial Statements. The equity of MAL 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 MAL Ltd were considered to be fairly valued on 1 July 2018 and no additional assets, liabilities or contingent assets and liabilities were identified at that date. The MAL Ltd’s shares were trading in the market at R100 per share on 1 July 2018.

 

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 Cat, and the Chief Financial Officer (CFO), Mr Minn, 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 CD Ltd that selling the investment was the best way forward for the business. On 31 March 2021, CD Ltd disposed of 45% of its shares in MAL Ltd for a cash consideration of R2 105 000. From this date, CD Ltd exercised significant influence over the financial and operating policy decisions of MAL Ltd. The equity of MAL Ltd at the date of disposal was as follows: R
Issued ordinary share capital (50 000 shares)	1 550 000
Retained earnings – 1 April 2020	3 220 000
Loss for the year	(700 000)
Mark-to-market reserve – 1 April 2020	1 290 625
OCI – Mark-to-market reserve (equity instruments)	335 000
5 695 625

 

QUESTION

(a) Provide the pro forma consolidation journal entries to account for the investment in AD Ltd in the consolidated financial statements of the CD Ltd Group for the year ended 31 March 2021.

Communication skills: presentation and layout

(b) (i) Discuss in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets if and how AD 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 2021.

(ii) Assume that the legal advisers found that in the following year, it is probable that AD Ltd will be found liable and be obligated to pay damages. Discuss the recognition and disclosure of the claim in AD Ltd’s separate financial statements for the year ended 31 March 2022 in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

(c) Identify, with reasons, the parties related to CD from the information provided in the scenario for the year ended 31 March 2021.

(d) Prepare the profit/loss pro forma consolidation journal entry to account for the profit/loss made on the disposal of the investment in MAL Ltd in the consolidated financial statements of the CD Ltd Group for the year ended 31 March 2021