Question 1 40 Marks

IGNORE ANY NORMAL INCOME TAX IMPLICATIONS

Satoshi Ltd (Satoshi) is a Namibian company and has a 31 December year end. Satoshi sells rock drilling machinesthat are used in quarries and open pit mines throughout Namibia.

After a successful exhibition at the Electra Mining Africa show during 2021 Satoshi received various queries from companiesoperating in Botswanarelating to the rock drillingmachines. Satoshi importsmachines that can withstand extremetemperatures from South Korea.

The profit before tax for the year ended 31 December 2021 is N$ 32 560 000 before processing the necessary journals to account for the transactions below in the 2021 financial year. The balance of share capital and retained earnings at 1 January 2021 is N$ 243 678 000 and N$ 56 780 000 respectively.

Satoshi early adoptedIFRS 9 Financial Instruments, IFRS 15 Revenue from Contract with Customers

and IFRS 16 Leases.

1. Rock drilling machinesimported

In order to ensure that Satoshi will be able to meet the increased demand of the rock drilling machinesthat can withstand extreme temperatures, Satoshi decided on 1 September 2021 to import three of the rock drilling machines at a cost of KRW 204 000 000 each. The official currency of South Korea is South Korean Won (KRW). The machines were delivered to Satoshi on 1 October2021. Control of the machines passed to Satoshi on delivery date.

The foreign creditor was payable as follows:

KRW01-Dec-21408 000 00001-Feb-22204 000 000 612 000 000

The above repayment terms are normalcredit terms.

On 1 October 2021 Satoshientered into a five-month forwardexchange contract (FEC) for the KRW 204 000 000 payable on 1 February 2022 in order to hedge itself against foreign currency risk at a forward rate of KRW 1 = N$0,01. Satoshi does not apply hedge accounting in terms of IFRS 9 Financial Instruments.

The applicable exchange rates were as follows:

Spot rateForward rate N$1 = KRWN$1 = KRW1 September 2021110 1 October 2021102 1 December 20219590 (2 months)31 December 20219085 (1 month)1 February 202298

One of the machines was sold to a new Botswana client on 1 December 2021 for N$ 2 500 000 and the other two machines were sold in March 2022.

1. Disposal of investment

Satoshi holds an investment in Nakamoti Ltd bonds with an amortisedcost of N$ 5 600 000 on 31 December 2020. These bonds were held within a portfolio of investments that Satoshi manages in order to collect contractual cash flows of interest and principal. The bonds have an effective interest rate of 10% per annum, interest is payable annually and the bonds areredeemable at par value on 31 December 2024. On 1 July 2022, Satoshi decided to sell the bonds for N$ 5 950 000 to finance capital expenditure. The bonds were never credit-impaired and no credit losses were expected throughout the life of the financial asset.

1. Investment in debt instrument

On 1 January 2021, Satoshi acquired an investment in Redid Ltd bonds at a fair value of N$ 3 000 000. No transaction costs were paid. The bonds pay coupon interest of N$ 400 000 on 31 December of each year and will be redeemedon 31 December 2023 at a face value of N$ 2

500 000. Satoshi holds these bonds to collect the contractual cash flows and, when an opportunity arises,it will sell the bondsto re-invest the cash in other financial assets at a higher return. Therefore, both collecting contractual cash flows and selling the bonds are integral in achieving the business models objective. On 1 January 2021, the bonds were not creditimpaired and no credit losses were expected. However, on 31 December 2021 the credit risk had increased significantly since initial recognition but the bonds were not credit impaired. The fair value of the bonds on 31 December 2021 is N$ 2 500 000.

The financial manager of Satoshi, provided you with the following schedule of the assessed credit risk and estimated expected credit lossesof its investment in the Redid Ltd bonds:

DateAssessed creditrisk

12-

month expected credit losses R

Lifetime expected credit losses

R

31 December 2021

High (not credit-

impaired)

32 000500 000

PART B 13 marks

GreenBottles Ltd is a manufacturer of water bottles and jugs that are made with economic-friendly fibre. The company was incorporated in 2011 and has a 31 December year end. You are the newly appointed financial manager of GreenBottles Ltd. The financial director sent you an extract of the statement of financial position, the accounting policies and notes relating to the financial assets of GreenBottles Ltd.

GreenBottlesLtd

Extract from the statement of financial positionas at 31 December 2021

Non-current assetsNotesN$Financial assetsmeasured at fairvalue through OCI4500 000

Financial assets measured at amortised cost

Extract from the notes for the yearended 31 December 2021

5600 000

1. Accounting policies

5. Financial assetsmeasured at amortised cost

The investments in financial instruments comprise of the following:

Type of instrumentR1000 Bonds in Morning Ltd247 000800 Bonds in Flowers Ltd

190

000

100 Bonds in Rose Ltd

163

000

Total600 000

The contractual cash flows received from bonds consists solely of payments of principle and interest on the principle amount outstanding. The funding needs of GreenBottles Ltd are predictable and the maturity of the investments in bonds is matched to the estimated funding needs of GreenBottles Ltd. As per the policy of the portfolio, if the bonds go below the F1 rating in terms of Fitch Ratings, the risk of collecting contractual cash flows will become high. In such circumstances, the bonds will be disposed of. The bonds in Flowers Ltd were disposed of during the year as their ratings dipped below F1.

REQUIREDMarks

PART A

1. Provide the journal entries to account for the investment in Nakamoti Ltd bonds (refer to note 2) in the financial statements of Satoshi Ltd for the year ended 31 December 2021.

Please note:

• Journal narrations are not required.

6

(b) Calculate the profit before tax in the financial statements of Satoshi Ltd for the year ended 31 December 2021.

14

(c) Present the information providedof Satoshi Ltd in the statement of changes in equity forthe year ended 31December 2021.

Communication skills: Presentation and layout

Please note:

• Total columns arenot required.
• Comparative amountsare not required, but opening balances at 1 January2021 are required.

6

1

PART B

(a) Discuss in terms of IFRS 9 Financial Instruments, if the portfolio of bonds (refer to disclosure note 5) should be reclassified as financial assets measured at fair valuethrough other comprehensive income.

Communication skills: Layoutand conclusion

12

1