QUESTION 2 (48 marks)(88 minutes) ICY Ltd was founded in East London in 2010 and is one of the leading importers and distributors of skincare and makeup products in South Africa. ICY Ltd is listed on the Johannesburg Stock Exchange and recently began investing in companies that operate in the sports and entertainment industry. You have been appointed as a financial accountant to assist in the preparation for the group financial statements for the year ended 31 December 2020. All the companies in the ICY Ltd Group have a 31 December year end. The following companies form part of the ICY Ltd Group Bronzer Ltd Bronzer Ltd is a company based in Pretoria which manufactures sport equipment. It has 150 000 ordinary shares in issue, and it was incorporated in 2014. On 1 October 2020, ICY Ltd acquired 52 500 ordinary shares in Bronzer Ltd from the previous shareholders. The full consideration of R1 1500 000 was paid in cash on the same date. On the acquisition date, Bronzer Ltd's identifiable assets and liabilities were considered to be fairly valued and equal to the carrying amounts thereof except for the property (refer below) which had a carrying amount of R1 770 000. Since 1 October 2020, ICY Ltd exercised significant influence over the financial and operating policy making decisions of Bronzer Ltd. Property Bronzer Ltd owns a piece of land situated in the east of Pretoria. The land is 2 000m2 and is surrounded by several office parks. The property is zoned in the class "Business 4" which allows for the owner of the property to construct office parks on the and. Based on information obtained at the Deeds Office (which is readily available), ten similar properties were sold during the last six months in the area with the highest price of R1 812 500 and the lowest price of R1 756 000. The average price was Ri 780 000. Sales commission of 5% was payable on the transactions. Although the property is not for sale, Bronzer Ltd received a private offer for the land to the amount of R1 875 000. The buyer plans to build a factory on the property. The building of a factory is not legally permissible since the property is zoned for commercial use and the rezoning of the property is unlikely. Other properties with office parks thereon in the same area generate sufficient income to ensure market related profitability. The value of the property in its current use is R980 000. The founding documents and accounting policy of the company do not prohibit the sale of the property. Bronzer Ltd has not made any decision to sell the land and the future use of the land remains undetermined. Transactions with ICY Since 1 December 2020, Bronzer Ltd sold inventory to ICY Ltd. Total sales from Bronzer Ltd to ICY Ltd amounted to R160 000. Bronzer Ltd sells inventory at a profit mark up of 30% on the selling price. At 31 December 2020, ICY Ltd had sold 50% of the inventory purchased from Bronzer Ltd during the current financial year. 8 QUESTION 2 (continued) BRONZER LTD STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2020 Share capital R 150 000 Retained Earnings R 1 439 100 Revaluation Reserve R 2 034 079 Opening balance - 1 January 2020 Changes in equity for the year: Profit for the year Other comprehensive income Dividends paid - 31 December 2020 Closing balance at 31 December 2020 91 000 (40 000) 3433 179 150 000 91 000 Conceal Ltd On 1 September 2018, ICY Ltd acquired control of Conceal Ltd by acquiring 375 000 of the 500 000 issued ordinary shares of Conceal Ltd for a cash consideration of R1 400 000. The acquisition of the interest by ICY Ltd met the definition of a business combination in terms of IFRS 3 - Business Combinations. On the acquisition date, the retained earnings of Conceal Ltd amounted to R820 000 (credit balance). On this date, the assets and liabilities of Conceal Ltd were fairly valued except for inventory which had a fair value of R190 000 (carrying amount: R245 000). On 1 September 2018, the market value of one Conceal Ltd share was R4.00. The following are extracts of the financial statements prepared by the Conceal Ltd financial accountant. The following are extracts of the financial statements prepared by the Conceal Ltd financial accountant. CONCEAL LTD STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2020 Share Retained capital Earnings R R Opening balance - 1 January 2020 1 000 000 2 260 110 Changes in equity for the year: Profit for the year 3 258 648 Other comprehensive income Dividends paid - 31 December 2020 (65 000) Closing balance - 31 December 2020 1 000 000 5 453 758 On 1 August 2020, ICY Ltd acquired an additional 50 000 ordinary shares in Conceal Ltd from the non-controlling shareholders. The new assistant to the financial accountant of ICY Ltd prepared part of the consolidated statement of changes in equity of the ICY Ltd Group for the year ended 31 December 2020 below: 9 QUESTION 2 (continued) ICY LTD GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2020 Balance - 1 January 2020 Profit for the year Acquisition of additional interest Dividends paid Non-controlling interest R 1440 110 (2 260 110 - 820 000) 3 258 648 ?????? (65 000) 4 614 044 Transactions with ICY Ltd On 30 August 2020, Conceal Ltd sold land to ICY Ltd for R150 000. The carrying amount of the land was R120 000. ICY Ltd classified the Land as property, plant and equipment. The transaction will be settled in two equal instalments. At year end, ICY Ltd had settled 50% of the balance. Additional information 1. ICY Ltd measures its investments in Conceal Ltd and Bronzer Ltd at cost in its separate accounting records in terms of IAS 27. Separate Financial Statements. 2. The ICY Ltd Group applies the fair value model in terms of IAS 40, Investment Property to its investment properties. 3. The ICY Ltd Group applies the cost model to all items of property, plant and equipment in terms of IAS 16, Property, Plant and equipment 4. The income and expenses of Conceal Ltd were earned evenly throughout the current year except for the intercompany sale of land. 5. The income and expenses of Bronzer Ltd were earned evenly throughout the current year. 6. The ICY Ltd Group measures the non-controlling interest at fair value at the acquisition date. 7. All entities in the ICY Ltd Group have a 31 December financial year end. 8. The South African normal tax rate is 28% and capital gains tax is calculated at 80% thereof. 9. Each share carries one vote and the share capital of each of the companies in the ICY Ltd Group has remained unchanged since incorporation. 10 QUESTION 2 (continued) REQUIRED: Marks 8 1 9 (a) Discuss with reference to IFRS 13, Fair Value Measurement, the initial measurement of the fair value of the property in the consolidated statement of financial position of the ICY Ltd Group at the acquisition date. Communication skills: logical argument (b) Calculate the amount that will be presented as investment in associate in the consolidated statement of financial position of the ICY Ltd Group as at 31 December 2020. You may assume that the fair value of the property is R1 775 000. (c) Prepare the related party note in terms of IAS 24, Related Parties as far as possible from the given information, to be disclosed in the separate financial statements of ICY Ltd for the year ended 31 December 2020. (d) Discuss briefly whether you agree or disagree with the measurement of the amounts presented in the non-controlling interest column of the consolidated statement of changes in equity of the ICY Ltd Group for the year ended 31 December 2020 prepared by the new assistant Your discussion should include recommendations on how to correctly calculate the amounts to be disclosed including the missing amount. Communication skills: appropriate style 7 22 1 TOTAL [48] Please note: Your answer must comply with the requirements of International Financial Reporting Standards (IFRS). Comparative figures are not required. Round off all amounts to the nearest Rand. Accounting policy notes are not required. UNISA 2021 QUESTION 2 (48 marks)(88 minutes) ICY Ltd was founded in East London in 2010 and is one of the leading importers and distributors of skincare and makeup products in South Africa. ICY Ltd is listed on the Johannesburg Stock Exchange and recently began investing in companies that operate in the sports and entertainment industry. You have been appointed as a financial accountant to assist in the preparation for the group financial statements for the year ended 31 December 2020. All the companies in the ICY Ltd Group have a 31 December year end. The following companies form part of the ICY Ltd Group Bronzer Ltd Bronzer Ltd is a company based in Pretoria which manufactures sport equipment. It has 150 000 ordinary shares in issue, and it was incorporated in 2014. On 1 October 2020, ICY Ltd acquired 52 500 ordinary shares in Bronzer Ltd from the previous shareholders. The full consideration of R1 1500 000 was paid in cash on the same date. On the acquisition date, Bronzer Ltd's identifiable assets and liabilities were considered to be fairly valued and equal to the carrying amounts thereof except for the property (refer below) which had a carrying amount of R1 770 000. Since 1 October 2020, ICY Ltd exercised significant influence over the financial and operating policy making decisions of Bronzer Ltd. Property Bronzer Ltd owns a piece of land situated in the east of Pretoria. The land is 2 000m2 and is surrounded by several office parks. The property is zoned in the class "Business 4" which allows for the owner of the property to construct office parks on the and. Based on information obtained at the Deeds Office (which is readily available), ten similar properties were sold during the last six months in the area with the highest price of R1 812 500 and the lowest price of R1 756 000. The average price was Ri 780 000. Sales commission of 5% was payable on the transactions. Although the property is not for sale, Bronzer Ltd received a private offer for the land to the amount of R1 875 000. The buyer plans to build a factory on the property. The building of a factory is not legally permissible since the property is zoned for commercial use and the rezoning of the property is unlikely. Other properties with office parks thereon in the same area generate sufficient income to ensure market related profitability. The value of the property in its current use is R980 000. The founding documents and accounting policy of the company do not prohibit the sale of the property. Bronzer Ltd has not made any decision to sell the land and the future use of the land remains undetermined. Transactions with ICY Since 1 December 2020, Bronzer Ltd sold inventory to ICY Ltd. Total sales from Bronzer Ltd to ICY Ltd amounted to R160 000. Bronzer Ltd sells inventory at a profit mark up of 30% on the selling price. At 31 December 2020, ICY Ltd had sold 50% of the inventory purchased from Bronzer Ltd during the current financial year. 8 QUESTION 2 (continued) BRONZER LTD STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2020 Share capital R 150 000 Retained Earnings R 1 439 100 Revaluation Reserve R 2 034 079 Opening balance - 1 January 2020 Changes in equity for the year: Profit for the year Other comprehensive income Dividends paid - 31 December 2020 Closing balance at 31 December 2020 91 000 (40 000) 3433 179 150 000 91 000 Conceal Ltd On 1 September 2018, ICY Ltd acquired control of Conceal Ltd by acquiring 375 000 of the 500 000 issued ordinary shares of Conceal Ltd for a cash consideration of R1 400 000. The acquisition of the interest by ICY Ltd met the definition of a business combination in terms of IFRS 3 - Business Combinations. On the acquisition date, the retained earnings of Conceal Ltd amounted to R820 000 (credit balance). On this date, the assets and liabilities of Conceal Ltd were fairly valued except for inventory which had a fair value of R190 000 (carrying amount: R245 000). On 1 September 2018, the market value of one Conceal Ltd share was R4.00. The following are extracts of the financial statements prepared by the Conceal Ltd financial accountant. The following are extracts of the financial statements prepared by the Conceal Ltd financial accountant. CONCEAL LTD STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2020 Share Retained capital Earnings R R Opening balance - 1 January 2020 1 000 000 2 260 110 Changes in equity for the year: Profit for the year 3 258 648 Other comprehensive income Dividends paid - 31 December 2020 (65 000) Closing balance - 31 December 2020 1 000 000 5 453 758 On 1 August 2020, ICY Ltd acquired an additional 50 000 ordinary shares in Conceal Ltd from the non-controlling shareholders. The new assistant to the financial accountant of ICY Ltd prepared part of the consolidated statement of changes in equity of the ICY Ltd Group for the year ended 31 December 2020 below: 9 QUESTION 2 (continued) ICY LTD GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2020 Balance - 1 January 2020 Profit for the year Acquisition of additional interest Dividends paid Non-controlling interest R 1440 110 (2 260 110 - 820 000) 3 258 648 ?????? (65 000) 4 614 044 Transactions with ICY Ltd On 30 August 2020, Conceal Ltd sold land to ICY Ltd for R150 000. The carrying amount of the land was R120 000. ICY Ltd classified the Land as property, plant and equipment. The transaction will be settled in two equal instalments. At year end, ICY Ltd had settled 50% of the balance. Additional information 1. ICY Ltd measures its investments in Conceal Ltd and Bronzer Ltd at cost in its separate accounting records in terms of IAS 27. Separate Financial Statements. 2. The ICY Ltd Group applies the fair value model in terms of IAS 40, Investment Property to its investment properties. 3. The ICY Ltd Group applies the cost model to all items of property, plant and equipment in terms of IAS 16, Property, Plant and equipment 4. The income and expenses of Conceal Ltd were earned evenly throughout the current year except for the intercompany sale of land. 5. The income and expenses of Bronzer Ltd were earned evenly throughout the current year. 6. The ICY Ltd Group measures the non-controlling interest at fair value at the acquisition date. 7. All entities in the ICY Ltd Group have a 31 December financial year end. 8. The South African normal tax rate is 28% and capital gains tax is calculated at 80% thereof. 9. Each share carries one vote and the share capital of each of the companies in the ICY Ltd Group has remained unchanged since incorporation. 10 QUESTION 2 (continued) REQUIRED: Marks 8 1 9 (a) Discuss with reference to IFRS 13, Fair Value Measurement, the initial measurement of the fair value of the property in the consolidated statement of financial position of the ICY Ltd Group at the acquisition date. Communication skills: logical argument (b) Calculate the amount that will be presented as investment in associate in the consolidated statement of financial position of the ICY Ltd Group as at 31 December 2020. You may assume that the fair value of the property is R1 775 000. (c) Prepare the related party note in terms of IAS 24, Related Parties as far as possible from the given information, to be disclosed in the separate financial statements of ICY Ltd for the year ended 31 December 2020. (d) Discuss briefly whether you agree or disagree with the measurement of the amounts presented in the non-controlling interest column of the consolidated statement of changes in equity of the ICY Ltd Group for the year ended 31 December 2020 prepared by the new assistant Your discussion should include recommendations on how to correctly calculate the amounts to be disclosed including the missing amount. Communication skills: appropriate style 7 22 1 TOTAL [48] Please note: Your answer must comply with the requirements of International Financial Reporting Standards (IFRS). Comparative figures are not required. Round off all amounts to the nearest Rand. Accounting policy notes are not required. UNISA 2021