QUESTION 2 (31 MARKS, 56 MINUTES) Ignore all forms of taxation Jasper Ltd ('Jasper) is one of the top dogfood and doggy treat manufacturers in South Africa. Jasper has been in business for more than 10 years and has some of the best, high-quality dog food and has been scientifically developed in conjunction with their in-house experts for dogs that require sustained energy for an active lifestyle. This highly nutritious dog food ensures steady energy during long-lasting activity and assists with muscle and body recovery after exercise. Jasper has a 31 December financial year end. Dog food recipe The recipe called "Bark- well in large contributed to Jasper's success and reputation. The correct blend of protein, fat and dietary fibre assist in maintaining lean muscle mass, a healthy digestive system, it boosts and support the immune system, assist in maintaining a shiny coat, healthy skin, enhancing strong bones and healthy teeth. During 2009 Jasper approached the top scientists of dog food in South Africa and bought the recipe from the company which they work for. Prices were negotiated by both parties and it was established that the scientist already spend R325 000 on research cost, and a further R465 000 on development. In order to acquire the sole right to use this recipe for a period of 20 years Jasper paid them a premium on the total cost they spend of 40%. The residual value was determined to be R10 000 (present value) at the end of the asset's useful life. On 1 January 2010 Jasper registered the recipe as a trademark and started using this recipe, this was also the date on which the above negotiations were finalised and the payment was made in cash. Since then the need for a wider range of dog food became more and more asked for. Jasper asked their in-house specialist to do further research on the recipe and to ensure that they adjust it where necessary for the following type of dogs as well (this will result in three enhanced recipes, which can only be used and sold together): . Special diet for joint health - At the heart of this recipe, the right levels of essential joint health ingredients like glucosamine and chondroitin are included and these may aid in maintaining healthy joints. Optimal balance for senior dogs - Specific attention has been given to the correct mix of fresh meat protein, fats and vitamins and minerals to maintain vibrancy, mobility and radiant good health during your senior dog's golden years. Special diet Hypo Allergenic - Hypo-Allergenic has been scientifically developed by our veterinarian and animal nutritionist, to contain duck meal and potato as novel sources of protein and carbohydrates. These allow your dogs' digestive and immune systems to have a break from their battle against common food allergens. The research cost incurred was from 1 July 2014 until 31 December 2014 and amounted to R250 000, the development cost incurred was from 1 February 2015 until 31 August 2015 (equally during the period) and amounted to R600 000. The necessary recognition criteria of IAS 38 Intangible Assets, were met from 1 April 2015. The original recipe was still being used as intended while these research and development was on the way Jasper also determined that after the initial period of 20 years they will be able to sell the adjusted recipe to competitors in the market at a value of R100 000. The cost spent, enhanced the original recipe purchased on 1 January 2010, and will result in a larger target market being reached and the cash flow generated from this will increase between 15% - 25%. Jasper started using the new enhanced recipes from 1 September 2015. Plant (consisting mainly out of buildings and fixtures within the building which is immaterial to the value of the building as a whole) Jasper bought their first plant on 1 April 2010, at a value of R6 500 000. The plant had a useful life of 50 years and the residual value was determined to be R400 000 at the date of purchase. Jasper needed to equip the plant with the necessary fittings and change the floor plan to ensure that the production of their dog food meets the required health specifications and that the dog food ingredients remains fresh, and is stored at the optimum temperature. The structural changes were completed on 31 May 2010 at a cost of R1 200 000. The required health inspection that needs to be done every 3 years to be able to keep on producing dog food was conducted and completed at 31 July 2010, at a value of R35 000. The inspection was not recognised as a separate major component . Jasper started to produce dog food from this premises only from 1 September 2010 as they first used up all the inventory, which was still at their previous premises (which they leased from a 3r party). The cost to move this inventory to the new premises was too costly and Jasper decide to first use up all their old inventory and then move to the new building. A fire, due to riots in the area where the plant is situated, damaged a large part of the plant on 1 November 2018. The following values with regards to the plant were provided to Jasper by an independent valuator. Value in use Fair value 1 November 2018 R6 200 000 R6 550 000 1 March 2019 R6 175 250 R6 925 000 Date The cost to sell the plant is equal to 10% of the fair value. Jasper continued using the plant in its current condition, and made the necessary repairs, of R1 125 000 to the building and plant. Jasper also started building a new, bigger plant with a much larger capacity to produce and store dog food, from 1 December 2018. It was decided to rather lease out the old plant and occupy the new plant on completion thereof. The total construction cost to build the new plant amounted to R7 600 000, and the purchase price of the premises amounted to R1 350 000. Jasper made use of several loans and overdraft facilities to finance the construction of the new plant. The total borrowing cost incurred amounted R179 864 and the borrowing cost that complies with the necessary requirements of IAS 23 Borrowing Cost amounted to R145 365. Construction was completed on 1 March 2019. The residual value was determined to be 10% of the value of the plant after construction was completed, and the useful life was determined to be 40 years. The following fair values was determined for the buildings and plant: Fair value - similar asset in similar Old buildings and plant Newly constructed building condition and plant 31 December 2019 R6 125 000 R9 120 000 . Accounting policies and other information Jasper accounts for Intangible asset in accordance with IAS 38 Intangible Assets Jasper will account for any change in estimates, using the reallocation method. Jasper account for impaiment of asset in accordance with IAS 36 Impairment of Assets. Repairs and maintenance cost on assets is expensed in accordance with IAS 16 Property, plant and equipment Jasper decided to account for the new plant on the revaluation method in accordance with IAS 16 Property, plant and equipment. Jasper accounts for revaluation on the gross replacement method. Jasper account for Investment property in accordance with IAS 40 Investment Property. Jasper's opening retained earnings on 1 January 2018 amounted to R13 560 875, and the profit for the year was determined to be R3 476 855, both of these amounts did not include any of the above mentioned items in the calculation of these values. . . MARKS REQUIRED: Sub- total Total 10 1 11 (a) Discuss with reference to IAS 38 Intangible Assets how the carrying amount of the recipe will be calculated for the year ended 31 December 2019. You need to state clearly the components making up the carrying amount at year end. Provide the necessary calculations to support your answer. Communication skills - logical argument (b) Calculate any reversal of impairments on 1 March 2019. You can assume that the impairment recognised on 1 November 2018 was correctly calculated and accounted for at a value of R307 667. The recoverable amount on 1 March 2019 was correctly determined as R6 232 500. (c) Prepare the Property, plant and Equipment note as well as the Investment Property Note to disclose the plant in the financial statements of Jasper for the year ended 31 December 2019. Comparative figures are not required. Communication skills - logical argument TOTAL MARKS QUESTION 2 9 9 10 1 11 31 QUESTION 2 (31 MARKS, 56 MINUTES) Ignore all forms of taxation Jasper Ltd ('Jasper) is one of the top dogfood and doggy treat manufacturers in South Africa. Jasper has been in business for more than 10 years and has some of the best, high-quality dog food and has been scientifically developed in conjunction with their in-house experts for dogs that require sustained energy for an active lifestyle. This highly nutritious dog food ensures steady energy during long-lasting activity and assists with muscle and body recovery after exercise. Jasper has a 31 December financial year end. Dog food recipe The recipe called "Bark- well in large contributed to Jasper's success and reputation. The correct blend of protein, fat and dietary fibre assist in maintaining lean muscle mass, a healthy digestive system, it boosts and support the immune system, assist in maintaining a shiny coat, healthy skin, enhancing strong bones and healthy teeth. During 2009 Jasper approached the top scientists of dog food in South Africa and bought the recipe from the company which they work for. Prices were negotiated by both parties and it was established that the scientist already spend R325 000 on research cost, and a further R465 000 on development. In order to acquire the sole right to use this recipe for a period of 20 years Jasper paid them a premium on the total cost they spend of 40%. The residual value was determined to be R10 000 (present value) at the end of the asset's useful life. On 1 January 2010 Jasper registered the recipe as a trademark and started using this recipe, this was also the date on which the above negotiations were finalised and the payment was made in cash. Since then the need for a wider range of dog food became more and more asked for. Jasper asked their in-house specialist to do further research on the recipe and to ensure that they adjust it where necessary for the following type of dogs as well (this will result in three enhanced recipes, which can only be used and sold together): . Special diet for joint health - At the heart of this recipe, the right levels of essential joint health ingredients like glucosamine and chondroitin are included and these may aid in maintaining healthy joints. Optimal balance for senior dogs - Specific attention has been given to the correct mix of fresh meat protein, fats and vitamins and minerals to maintain vibrancy, mobility and radiant good health during your senior dog's golden years. Special diet Hypo Allergenic - Hypo-Allergenic has been scientifically developed by our veterinarian and animal nutritionist, to contain duck meal and potato as novel sources of protein and carbohydrates. These allow your dogs' digestive and immune systems to have a break from their battle against common food allergens. The research cost incurred was from 1 July 2014 until 31 December 2014 and amounted to R250 000, the development cost incurred was from 1 February 2015 until 31 August 2015 (equally during the period) and amounted to R600 000. The necessary recognition criteria of IAS 38 Intangible Assets, were met from 1 April 2015. The original recipe was still being used as intended while these research and development was on the way Jasper also determined that after the initial period of 20 years they will be able to sell the adjusted recipe to competitors in the market at a value of R100 000. The cost spent, enhanced the original recipe purchased on 1 January 2010, and will result in a larger target market being reached and the cash flow generated from this will increase between 15% - 25%. Jasper started using the new enhanced recipes from 1 September 2015. Plant (consisting mainly out of buildings and fixtures within the building which is immaterial to the value of the building as a whole) Jasper bought their first plant on 1 April 2010, at a value of R6 500 000. The plant had a useful life of 50 years and the residual value was determined to be R400 000 at the date of purchase. Jasper needed to equip the plant with the necessary fittings and change the floor plan to ensure that the production of their dog food meets the required health specifications and that the dog food ingredients remains fresh, and is stored at the optimum temperature. The structural changes were completed on 31 May 2010 at a cost of R1 200 000. The required health inspection that needs to be done every 3 years to be able to keep on producing dog food was conducted and completed at 31 July 2010, at a value of R35 000. The inspection was not recognised as a separate major component . Jasper started to produce dog food from this premises only from 1 September 2010 as they first used up all the inventory, which was still at their previous premises (which they leased from a 3r party). The cost to move this inventory to the new premises was too costly and Jasper decide to first use up all their old inventory and then move to the new building. A fire, due to riots in the area where the plant is situated, damaged a large part of the plant on 1 November 2018. The following values with regards to the plant were provided to Jasper by an independent valuator. Value in use Fair value 1 November 2018 R6 200 000 R6 550 000 1 March 2019 R6 175 250 R6 925 000 Date The cost to sell the plant is equal to 10% of the fair value. Jasper continued using the plant in its current condition, and made the necessary repairs, of R1 125 000 to the building and plant. Jasper also started building a new, bigger plant with a much larger capacity to produce and store dog food, from 1 December 2018. It was decided to rather lease out the old plant and occupy the new plant on completion thereof. The total construction cost to build the new plant amounted to R7 600 000, and the purchase price of the premises amounted to R1 350 000. Jasper made use of several loans and overdraft facilities to finance the construction of the new plant. The total borrowing cost incurred amounted R179 864 and the borrowing cost that complies with the necessary requirements of IAS 23 Borrowing Cost amounted to R145 365. Construction was completed on 1 March 2019. The residual value was determined to be 10% of the value of the plant after construction was completed, and the useful life was determined to be 40 years. The following fair values was determined for the buildings and plant: Fair value - similar asset in similar Old buildings and plant Newly constructed building condition and plant 31 December 2019 R6 125 000 R9 120 000 . Accounting policies and other information Jasper accounts for Intangible asset in accordance with IAS 38 Intangible Assets Jasper will account for any change in estimates, using the reallocation method. Jasper account for impaiment of asset in accordance with IAS 36 Impairment of Assets. Repairs and maintenance cost on assets is expensed in accordance with IAS 16 Property, plant and equipment Jasper decided to account for the new plant on the revaluation method in accordance with IAS 16 Property, plant and equipment. Jasper accounts for revaluation on the gross replacement method. Jasper account for Investment property in accordance with IAS 40 Investment Property. Jasper's opening retained earnings on 1 January 2018 amounted to R13 560 875, and the profit for the year was determined to be R3 476 855, both of these amounts did not include any of the above mentioned items in the calculation of these values. . . MARKS REQUIRED: Sub- total Total 10 1 11 (a) Discuss with reference to IAS 38 Intangible Assets how the carrying amount of the recipe will be calculated for the year ended 31 December 2019. You need to state clearly the components making up the carrying amount at year end. Provide the necessary calculations to support your answer. Communication skills - logical argument (b) Calculate any reversal of impairments on 1 March 2019. You can assume that the impairment recognised on 1 November 2018 was correctly calculated and accounted for at a value of R307 667. The recoverable amount on 1 March 2019 was correctly determined as R6 232 500. (c) Prepare the Property, plant and Equipment note as well as the Investment Property Note to disclose the plant in the financial statements of Jasper for the year ended 31 December 2019. Comparative figures are not required. Communication skills - logical argument TOTAL MARKS QUESTION 2 9 9 10 1 11 31