Question 2 (35) Old Office Building Karas Investments owns a small office building in Windhoek, from which the company operates. The Windhoek office was purchased on 1 March 2019. Karas Investments decided to move its offices to Swakopmund on 1 November 2019. Karas Investments held the Windhoek office building for capital appreciation purposes from 1 November 2019. The following information with regards to the Windhoek office is available: Land Building R R Purchase price (1 March 2019) 500 000 900 000 Market value (28 February 2019) 530 000 1 200 000 Market value (1 November 2019) 525 000 1 150 000 Market value (28 February 2020) 550 000 1 160 000 Depreciation rate (straight-line method) - 2% Karas Investments has revalued its land and buildings on 28 February 2019 to ensure that the carrying amount does not differ materially from the amount that would be determined using the fair value at the reporting date. Karas Investments engages J&J surveyors, an accredited independent valuator, to determine the fair value of its land and buildings. The market values are determined with reference to prices in an active market. Depreciation for the year is based on the most recent valuations as at the end of that specific year. Accumulated depreciation at the date of revaluation are eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset. Revaluation surpluses will only be realized when the related assets are derecognized. Investment properties are accounted for by means of the fair value model. It is the policy of the company to disclose land and buildings as separate classes. Walvis Bay warehouse Page 11 of 26 Karas Investments owns a warehouse that is used as a workshop and also to store spare parts as well as idle machinery and vehicles. The piece of land on which the warehouse is situated is leased under an operating lease. The warehouse was obtained on 1 July 2020 at a cost of N$ 1 200 000. The warehouse is depreciated on a straight-line basis over 15 years and is subsequently measured according to the revaluation model. The first revaluation of the warehouse to its fair value was performed on 30 June 2020. Karas Investments decided to rent their warehouse to a company in need of storage space at an annual rental of N$120 000 from 1 May 2021, since Karas Investments had to move all their operations to Swakopmund. The following fair values were determined by Karas Investments: Entity-specific measurement Market-based measurement R R 30 June 2020 1 300 000 1 400 000 1 May 2021 1 500 000 1 600 000 30 June 2021 1 350 000 1 400 000 Windhoek Northern Industry office Karas Investments acquired the Rustenburg office on 1 July 2010 at a total cost of N$7 500 000 (land N$1 500 000 and buildings N$6 000 000). The administration and finance departments of Karas Investments occupy this office building. The office building is depreciated on a straight-line basis over 20 years and the land and buildings are subsequently measured according to the revaluation model. The residual values were determined as immaterial. Karas Investments revalued their land and buildings to its market value for the first time on 30 June 2020. The board of directors decided to acquire an office building in the Swakopmund area and therefore decided on 31 December 2020 to dispose of the Windhoek Northern Industry office. On this date all the classification criteria per IFRS 5 Non-current assets held for sale and discontinued operations have been complied with. The following market values were determined by Karas Investments on 30 June 2020: Land N$1 700 000 Buildings N$6 500 000 Page 12 of 26 The fair values less costs to sell of the disposal group was as follows: 31 December 2020 N$8 000 000 30 June 2021 N$8 000 000 Accounting policies It is Karas Investments accounting policy to realize revaluation surpluses as the assets are used except if transferred to investment property after which it will only be realized, when the investment property is sold. It is the policy of Karas Investments to eliminate the accumulated depreciation against the gross carrying amount of the asset on the date of revaluation. Revaluations are performed at the end of the financial year and depreciation for the current year is based on the most recent values determined with the revaluation at year end. Karas Investments uses the fair value model for investment property. Land and buildings are disclosed as two separate classes of assets. Required: a) Discuss the recognition criteria of IFRS 5 and explain whether the Windhoek Northern Industry office qualifies as a non-current asset held for sale. (10) b) Prepare the statement of financial position (10) c) Prepare the disclosure notes to the financial statements of the transactions above (15) Question 3 (30) TRIAL BALANCE FOR THE YEAR ENDED 30 June 2020 Note Dr R Cr R Revenue 300 000 000 Cost of sales 150 000 000 Page 13 of 26 Other expenses 1 400 000 Salaries assembly technicians (excluding June 2020) 1 200 000 Salaries administrative staff 1 200 000 Finance costs 850 000 Transaction costs 200 000 Distribution costs 400 000 Inventory (opening inventory as at 1 July 2019) 6 200 000 Share capital 1 000 000 Land at cost 25 000 000 Plant and machinery at cost 5 000 000 Accumulated depreciation on plant and machinery (as at 30 June 2020) 2 250 000 Bank 7 500 000 Trade and other receivables 2 000 000 Trade and other payables 2 800 500 Retained earnings 5 100 500 The tires of all the models of Speedcar Namibia cc are handmade from rubber wastes in Namibia by the Namibian clean waste re-use division of Speeds Are Us (Pty) Ltd. The tire division has its own operational manager and financial accounts. The cash flows and operations of the seat division can be clearly distinguished from the rest of Speeds Are Us (Pty) Ltd. The board of directors of Speeds Are Us (Pty) Ltd decided on 28 February 2020 on a director meeting to implement a formal plan to close down the seat division. The company decided to import tires from South Africa, to help in the fight of air pollution, in the tire production process. A task team was appointed on 28 February 2020 to begin with an active marketing program to close the tire division. The minutes of the meeting clearly indicate that the business operations must be suspended before 30 June 2020. The minutes also indicate that it is unlikely that a significant amendment to the plan will be made or that the plan will be withdrawn as the ministry of environment had put in a request for court intervention, should the tire production process continue. On 28 February 20.11 the closure of the seat division qualified as a discontinued operation in terms of IFRS 5 Non-current assets held for sale and discontinued operations. Page 14 of 26 The following are the actual results of the tire division for the year ended 30 June 2020 01/07/202019- 28/02/2020 01/03/2020- 30/06/202 R R Revenue 2 240 000 1 000 000 Cost of sales Operating costs (including depreciation of the tire 1 101 000 600 600 manufacturing machinery) 200 000 101000 Finance costs 182 000 56 500 The following information regarding the tire division is not included in the trial balance of the tire division. 1. The closing of the tire division necessitates the dismissal of five employees. The termination benefits of these employees are estimated at N$150 000 and will be paid on 30 June 20.20. 2. One of the tire manufacturing machines is leased. Due to the closing of the seat division, it is necessary to end the lease agreement prematurely and consequently an estimated fine of N$10 000 is payable on 30 June 20.20. 3. The actual direct cost of the discontinuance for the year ended 30 June 2020 amounts to N$14 000 and the estimated direct cost of the discontinuance to be paid during May 2020 is N$57 000. 4. The following information relates to the sale of the assets of the discontinued operation: N$ Land - cost and tax base as at 28 February 20.20 and 30 June 20.20 (which is equal to the base cost for capital gains tax) 200 000 Land - contract price as per sale agreement 200 000 Factory buildings - cost on 1 November 20.18 600 000 Factory buildings - carrying amount on 28 February 20.11 540 000 Factory buildings - contract price per sale agreement 520 000 Page 15 of 26 All other assets and liabilities will be transferred at their carrying amounts and no temporary differences arise from the other assets and liabilities of the tire division for the year ended 30 June 20.20. It is Speeds Are Us (Pty) Ltd accounting policy to present the analysis of the discontinued operation in the notes to the financial statements Required (a) Discuss whether the closure of the tire division qualified as a discontinued operation in terms of IFRS 5 Non-current assets held for sale and discontinued operations. (10) (b) After taking into account all the above information, prepare the statement of profit or loss and other comprehensive income for the year ended 30 June for Speeds Are Us (Pty) Ltd (5) (c) Prepare the notes to the financial statements of 30 June for Speeds Are Us (Pty) Ltd for the year ended Discontinued operation; (15)