QUESTION 1 (50 marks) (90 minutes) FAC3764 Assessment 10 Todo Limited ("Todo") is a listed South African media broadcasting company which offers live TV broadcasting and streaming services. Todo introduced the streaming services as a new service within the 2023 financial year. Streaming services allow customers to watch television shows on demand. Due to new entrants entering the market as well as current service providers like "Nedflax" the broadcasting industry is highly competitive in South Africa. Todo has a 31 March year end. You are a newly qualified accountant and have recently joined Todo. For the financial year ending 31 March 2023 the following matters came to your attention that need to be resolved before the financial statements can be signed off. Patent - TV antenna amplifier Todo embarked on a research and development project during the 2022 calendar year to develop a new TV antenna amplifier which will amplify the broadcasting signals to better the delivery of quality pictures to customers. At the completion of the research and development project, Todo registered a patent for this developed TV antenna amplifier with the Companies and Intellectual Property Commission (CIPC) of South Africa, for a period of 20 years. The patent was ready for use as intended by management, as well as brought into use on 1 August 2022. Below are details of the costs incurred in the in-house research and development project of the TV antenna amplifier: Phase 1 costs (Note 1) incurred 1 March 2022 to 31 March 2022 Phase 1 costs (Note 1) incurred 1 April 2022 to 30 April 2022 Phase 2 costs (Note 2) incurred 1 May 2022 to 31 July 2022. Expected value of the 20-year-old patent (Note 3 ). R 150000 170000 1400000 400000 400000 Note 1: Costs incurred in investigating the prospect of developing the TV antenna amplifier. These costs include costs incurred when performing research-related tasks. Note 2: Costs incurred in the application of the research findings to develop the TV antenna amplifier. These costs meet the requirements for recognition as per IAS38, Intangible assets. Note 3: A broadcasting expert was contacted by Todo on 1 August 2022, to estimate the value of the TV antenna amplifier patent and the end of the 20 -year patented term. There is currently no open market for this type of patent nor is there a buyer committed to purchasing the patent in 20 years' time. The previous accountant of Todo accounted for the cost incurred during the research and development project of the TV antenna amplifier within the 2022 financial year, as follows: DrRCrR Research cost (P/L) R r Bank (SFP) 150000 Recognition of research cost Subsequently within the 2023 financial year, the previous accountant accounted for the costs incurred in relation to the entire research and development project of the TV antenna amplifier, as follows: Page 3 of 10 FAC3764 Assessment 10 QUESTION 1 (continued) Streaming services The streaming services were first advertised by Todo in December of 2022 whilst streaming services were launched nationally from 1 February 2023. To obtain access to Todo's streaming services a customer signs a 12-month contract, which meets the definition of identified contracts as per IFRS 15: Revenue from contracts with customers. A customer is liable to pay a monthly streaming subscription fee of R900, in advance on the first day of each month, to gain access to the streaming services of Todo for that particular month. After signing the abovementioned contract, a customer should immediately purchase a decoder from Todo at a once-off fee of R1400. This decoder is highly specialised and is the only device that can decrypt the video stream into watchable content for the customer. In addition, it is only capable of decrypting the video stream of Todo, and not of any competitors. The decoder becomes the property of the customer once installed. To install the decoder at the customers' premises, Todo puts its customers in touch with third party technicians who perform the installation for a once off fee of R1 000 . The technicians are not part of Todo and accounts are settled directly with the technicians. The decoder has Herewith information pertaining to the number of new customer contracts signed by Todo applicable to the streaming services, during the 2023 financial year: January 2023 February 2023 March 2023 Todo activates the streaming services on the first day of the month following the signing of the 12-month contract. Todo does not sell either the decoders or the streaming service separately. The CFO was concerned that you may never know when a customer will watch a program, as such, measuring "satisfaction of a performance obligation" is not possible. The CFO thus instructed the accountant to recognise all revenue on a cash basis. Broadcasting rights Todo started negotiations with TBT Sports on 1 April 2022, to acquire the exclusive broadcasting rights to broadcast the UEFA Europa League in South Africa. The exclusive broadcasting right agreement was signed on 1 June 2022, for a period of 3 years at a cost of 700000. Legal fees amounting to R250 000 were paid immediately, in cash, on the acquisition date, to finalise this broadcasting rights agreement. Todo settled 250000 of the acquisition cost immediately on acquisition date, on 1 June 2022, in cash, whilst the remainder of the acquisition cost is payable on 30 June 2023 . Todo activates the streaming services on the first day of the month following the signing of the 12-month contract. Todo does not sell either the decoders or the streaming service separately. The CFO was concerned that you may never know when a customer will watch a program, as such, measuring "satisfaction of a performance obligation" is not possible. The CFO thus instructed the accountant to recognise all revenue on a cash basis. Broadcasting rights Todo started negotiations with TBT Sports on 1 April 2022, to acquire the exclusive broadcasting rights to broadcast the UEFA Europa League in South Africa. The exclusive broadcasting right agreement was signed on 1 June 2022, for a period of 3 years at a cost of 700000. Legal fees amounting to R250 000 were paid immediately, in cash, on the acquisition date, to finalise this broadcasting rights agreement. Todo settled 250000 of the acquisition cost immediately on acquisition date, on 1 June 2022, in cash, whilst the remainder of the acquisition cost is payable on 30 June 2023. The broadcasting rights were available for use, as intended by management, as well as brought into use on 1 June 2022. On acquisition date, a residual value of Rnil was allocated to the broadcasting rights. Page 4 of 10 FAC3764 Assessment 10 QUESTION 1 (continued) The Broadcasting Authority held public hearings during latter part of the 2023 financial year to investigate anti-competitive conduct in the broadcasting sector. After months of deliberation the Broadcasting Authority decided to introduce legislation that will require companies to share broadcasting rights and to shorten exclusive broadcasting rights contract periods, with the aim to encourage competition and new entrants into the market. The promulgation of the legislation affected Todo Ltd negatively and on 31 March 2023 the fair value less costs to sell and the value in use of the broadcasting rights were estimated to be R7 300000 and R7 500 000, respectively. An applicable pre-tax discount rate of 11% per annum was applied in the calculation of value in use. Additional information: - Todo Ltd accounts for intangible assets in accordance with the cost model. Amortisation is provided for on the straight-line method over the estimated useful life of the asset. Taxation: - The South-African normal tax rate is 27%. The capital gains tax inclusion rate is 80%. You may assume that both the tax rates have been effective and remained unchanged since 28 February 2021. - Deferred tax is provided for on all temporary differences using the statement of financial position approach. There are no items causing temporary or exempt differences except those identified in the question. The company will have sufficient profit in future against which any unused tax losses can be utilised. - The research and development project pertaining to the TV antenna amplifier was not approved by the Minister of Science and Technology and thus Todo will not receive any tax deduction on the developed patent in terms of section 11D of the Income Tax Act. - The South African Revenue Service allows a tax allowance on the broadcasting right in accordance with section 11(f) of the Income Tax Act, over the period of the broadcasting right agreement, apportioned for periods shorter than a year. Assumptions: - All amounts are material. - You may ignore the implications of Value-Added Tax (VAT). FAC3764 Assessment 10 QUESTION 1 (50 marks) (90 minutes) FAC3764 Assessment 10 Todo Limited ("Todo") is a listed South African media broadcasting company which offers live TV broadcasting and streaming services. Todo introduced the streaming services as a new service within the 2023 financial year. Streaming services allow customers to watch television shows on demand. Due to new entrants entering the market as well as current service providers like "Nedflax" the broadcasting industry is highly competitive in South Africa. Todo has a 31 March year end. You are a newly qualified accountant and have recently joined Todo. For the financial year ending 31 March 2023 the following matters came to your attention that need to be resolved before the financial statements can be signed off. Patent - TV antenna amplifier Todo embarked on a research and development project during the 2022 calendar year to develop a new TV antenna amplifier which will amplify the broadcasting signals to better the delivery of quality pictures to customers. At the completion of the research and development project, Todo registered a patent for this developed TV antenna amplifier with the Companies and Intellectual Property Commission (CIPC) of South Africa, for a period of 20 years. The patent was ready for use as intended by management, as well as brought into use on 1 August 2022. Below are details of the costs incurred in the in-house research and development project of the TV antenna amplifier: Phase 1 costs (Note 1) incurred 1 March 2022 to 31 March 2022 Phase 1 costs (Note 1) incurred 1 April 2022 to 30 April 2022 Phase 2 costs (Note 2) incurred 1 May 2022 to 31 July 2022. Expected value of the 20-year-old patent (Note 3 ). R 150000 170000 1400000 400000 400000 Note 1: Costs incurred in investigating the prospect of developing the TV antenna amplifier. These costs include costs incurred when performing research-related tasks. Note 2: Costs incurred in the application of the research findings to develop the TV antenna amplifier. These costs meet the requirements for recognition as per IAS38, Intangible assets. Note 3: A broadcasting expert was contacted by Todo on 1 August 2022, to estimate the value of the TV antenna amplifier patent and the end of the 20 -year patented term. There is currently no open market for this type of patent nor is there a buyer committed to purchasing the patent in 20 years' time. The previous accountant of Todo accounted for the cost incurred during the research and development project of the TV antenna amplifier within the 2022 financial year, as follows: DrRCrR Research cost (P/L) R r Bank (SFP) 150000 Recognition of research cost Subsequently within the 2023 financial year, the previous accountant accounted for the costs incurred in relation to the entire research and development project of the TV antenna amplifier, as follows: Page 3 of 10 FAC3764 Assessment 10 QUESTION 1 (continued) Streaming services The streaming services were first advertised by Todo in December of 2022 whilst streaming services were launched nationally from 1 February 2023. To obtain access to Todo's streaming services a customer signs a 12-month contract, which meets the definition of identified contracts as per IFRS 15: Revenue from contracts with customers. A customer is liable to pay a monthly streaming subscription fee of R900, in advance on the first day of each month, to gain access to the streaming services of Todo for that particular month. After signing the abovementioned contract, a customer should immediately purchase a decoder from Todo at a once-off fee of R1400. This decoder is highly specialised and is the only device that can decrypt the video stream into watchable content for the customer. In addition, it is only capable of decrypting the video stream of Todo, and not of any competitors. The decoder becomes the property of the customer once installed. To install the decoder at the customers' premises, Todo puts its customers in touch with third party technicians who perform the installation for a once off fee of R1 000 . The technicians are not part of Todo and accounts are settled directly with the technicians. The decoder has Herewith information pertaining to the number of new customer contracts signed by Todo applicable to the streaming services, during the 2023 financial year: January 2023 February 2023 March 2023 Todo activates the streaming services on the first day of the month following the signing of the 12-month contract. Todo does not sell either the decoders or the streaming service separately. The CFO was concerned that you may never know when a customer will watch a program, as such, measuring "satisfaction of a performance obligation" is not possible. The CFO thus instructed the accountant to recognise all revenue on a cash basis. Broadcasting rights Todo started negotiations with TBT Sports on 1 April 2022, to acquire the exclusive broadcasting rights to broadcast the UEFA Europa League in South Africa. The exclusive broadcasting right agreement was signed on 1 June 2022, for a period of 3 years at a cost of 700000. Legal fees amounting to R250 000 were paid immediately, in cash, on the acquisition date, to finalise this broadcasting rights agreement. Todo settled 250000 of the acquisition cost immediately on acquisition date, on 1 June 2022, in cash, whilst the remainder of the acquisition cost is payable on 30 June 2023 . Todo activates the streaming services on the first day of the month following the signing of the 12-month contract. Todo does not sell either the decoders or the streaming service separately. The CFO was concerned that you may never know when a customer will watch a program, as such, measuring "satisfaction of a performance obligation" is not possible. The CFO thus instructed the accountant to recognise all revenue on a cash basis. Broadcasting rights Todo started negotiations with TBT Sports on 1 April 2022, to acquire the exclusive broadcasting rights to broadcast the UEFA Europa League in South Africa. The exclusive broadcasting right agreement was signed on 1 June 2022, for a period of 3 years at a cost of 700000. Legal fees amounting to R250 000 were paid immediately, in cash, on the acquisition date, to finalise this broadcasting rights agreement. Todo settled 250000 of the acquisition cost immediately on acquisition date, on 1 June 2022, in cash, whilst the remainder of the acquisition cost is payable on 30 June 2023. The broadcasting rights were available for use, as intended by management, as well as brought into use on 1 June 2022. On acquisition date, a residual value of Rnil was allocated to the broadcasting rights. Page 4 of 10 FAC3764 Assessment 10 QUESTION 1 (continued) The Broadcasting Authority held public hearings during latter part of the 2023 financial year to investigate anti-competitive conduct in the broadcasting sector. After months of deliberation the Broadcasting Authority decided to introduce legislation that will require companies to share broadcasting rights and to shorten exclusive broadcasting rights contract periods, with the aim to encourage competition and new entrants into the market. The promulgation of the legislation affected Todo Ltd negatively and on 31 March 2023 the fair value less costs to sell and the value in use of the broadcasting rights were estimated to be R7 300000 and R7 500 000, respectively. An applicable pre-tax discount rate of 11% per annum was applied in the calculation of value in use. Additional information: - Todo Ltd accounts for intangible assets in accordance with the cost model. Amortisation is provided for on the straight-line method over the estimated useful life of the asset. Taxation: - The South-African normal tax rate is 27%. The capital gains tax inclusion rate is 80%. You may assume that both the tax rates have been effective and remained unchanged since 28 February 2021. - Deferred tax is provided for on all temporary differences using the statement of financial position approach. There are no items causing temporary or exempt differences except those identified in the question. The company will have sufficient profit in future against which any unused tax losses can be utilised. - The research and development project pertaining to the TV antenna amplifier was not approved by the Minister of Science and Technology and thus Todo will not receive any tax deduction on the developed patent in terms of section 11D of the Income Tax Act. - The South African Revenue Service allows a tax allowance on the broadcasting right in accordance with section 11(f) of the Income Tax Act, over the period of the broadcasting right agreement, apportioned for periods shorter than a year. Assumptions: - All amounts are material. - You may ignore the implications of Value-Added Tax (VAT). FAC3764 Assessment 10