QUESTION 3 Section 1 Whitebirk has met the definition of a SME in its jurisdiction and wishes to comply with the IFRS for SMEs. The entity wishes to seek advice on how it will deal with the following accounting issues in its financial statements for the year ended 30 November 2021. The entity already prepares its financial statements under full IFRS. (i) Whitebirk purchased 90% of Close, an SME, on 1 December 2020 The purchase consideration was $5.7 million and the value of Close's identifiable assets was $6 million. The value of the non-controlling interest at 1 December 2020 was measured at $0.7 million. Whitebirk has used the full goodwill method to account for business combinations and the life of goodwill cannot be estimated with any accuracy. Whitebirk wishes to know how to account for goodwill under the IFRS for SMEs. (ii) Whitebirk has incurred $1 million of research expenditure to develop a new product in the year to 30 November 2021. Additionally, it incurred $500,000 of development expenditure to bring another product to a stage where it is ready to be marketed and sold. (iii) Whitebirk purchased some properties for $1.7 million on 1 December 2020 and designated them as investment properties under the cost model. No depreciation was charged as a real estate agent valued the properties at $1.9 million at the year end. (iv) Whitebirk has an intangible asset valued at $1 million on 1 December 2020. The asset has an indefinite useful life, and in previous years had been reviewed for impairment. As at 30 November 2021, there are no indications that the asset is impaired. Section 2 Ignore value-added tax and dividend tax NamPaper Ltd (NamPaper) is a company that manufactures paper, specifically for newspapers and magazines. NamPaper is the sole supplier of the papers used in newspapers around the Khomas region. NamNews Ltd (NamNews) is a company that prints newspapers and magazines for different newspaper and magazine companies and is one of the largest printing companies in the Khomas region. NamNews is the holding company in the NamNews Ltd Group (NamNews Group). The financial year end of both NamPaper and NamNews is 28 February. NamPaper has been the supplier of NamNews for a number of years and they have created a very good customer/supplier relationship. During January 2020, management of NamNews was considering diversifying their operations to the manufacturing industry. After long discussions with the majority shareholders of NamPaper, it was agreed that NamNews will purchase a controlling interest in NamPaper. Refund policy and legal claim You have been asked to do vacation work during the April 2021 Easter holidays at NamPaper. One of the tasks that you have been assigned to by the financial director, Mr Danny Dipolelo, is to make a formal presentation on the recognition, measurement, presentation and disclosure of the two issues detailed below. The details of the issues are as follows: FACULTY OF COMMERCE, MANAGEMENT AND LAW Page 19 of 30 1. Refund policy NamPapers mission is to attain customer loyalty by providing the highest standards of quality products and their vision is to excel in serving the demand of paper around the world. Although NamPaper has invested in advanced technology to ensure quality of all products, the type of product which NamPaper sells, is of such a nature that it is not practical to always go through each and every individual paper to check for quality. During the first years of the companys incorporation, a few customers returned some of the inventory purchased, and that has created a pattern throughout the following years. Therefore, NamPaper has since created an official refund policy to ensure customer satisfaction. As a result, this has created a good customer loyalty and their client base has been increasing. The refund policy (printed at the back of all invoices) states that goods may be returned for a full refund if a customer is not satisfied with the product and that the customer may upon providing the receipt as well as all the inventory purchased together with the packaging, be refunded. Based on past experiences, 6% of sales were returned which met all the requirements of the refund policy. Refer to the additional information for the amount of sales made during the year. 2. Legal claim NamPaper purchases its raw materials from Wood Works (Pty) Ltd (Wood Works). In terms of the agreement NamPaper pays Wood Works a storage fee and in return Wood Works ensures that all the raw materials stored, are kept safe in the storage facility which keeps the raw materials fresh before they are collected by NamPaper. During September 2020, the store room caught fire, which destroyed all the inventory in the storage facility worth N$1 000 000 of which N$200 000 relates to NamPapers inventory. During the discussion with Wood Works management, they concluded that the fire was not their fault therefore they will not reimburse NamPaper as they did not insure their building or the storage facility. NamPaper then filed a claim against Wood Works on 15 October 2020 and asked the court to force Wood Works to reimburse them or to supply them with the raw materials destroyed. On 30 January 2021, NamPapers lawyers were of the opinion that the claim would be successful. They estimated that N$180 000 will have to be paid for the inventory destroyed. At year end, the case was still ongoing as Wood Works lawyer had asked the court for an extension because he needed to perform a detailed investigation into the cause of the fire, as well as the terms and conditions of contracts with customers. Additional information NamNews sold a plant to NamPaper on 2 December 2020 for N$90 000. NamPaper intends on using the plant for its remaining useful life. This will help the company to generate more revenue and save for a more technologically advanced plant in the future. The plant was originally purchased by NamNews on 1 January 2011 for N$200 000 when the useful life was estimated to be ten years and the residual value was considered to be insignificant. These estimates remained unchanged ever since. Management of NamPaper agreed with NamNewss estimated useful life of the plant. NamNews and NamPaper accounts for its plant using the cost model in accordance with IAS 16 Property, Plant and Equipment. FACULTY OF COMMERCE, MANAGEMENT AND LAW Page 20 of 30 NamNews purchased all of its inventory from NamPaper at a mark-up of 15% on the cost price. The inventory on hand in the records of NamNews on 28 February 2020 amounted to N$35 000. All inventory on hand as at 28 February 2021 was from the inventory purchased during January 2021. The sales of NamPaper which relates to inventory sold to NamNews amounted to N$100 000 for the year ended 28 February 2021.The total sales of NamPaper for the year amounted to N$200 000. NamPaper declared and paid an interim dividend on 18 August 2020. NamPaper further declared a dividend of 20 cents per ordinary share on 28 February 2021. The final dividend will be paid on 25 March 2021. Both NamNews and NamPaper measure buildings using revaluation model using the net replacement method in accordance with IAS 16. All revaluations are performed at the end of the year. Assume a normal tax rate of 28% and that capital gains are not taxed hence an effective capital gains tax rate of 0% during all financial years under consideration for all the companies in the NamNews Group. The issued share capital of NamPaper consists of 200 000 ordinary shares. REQUIRED: MARKS Sub- total Total (a) Discuss how the above transactions should be dealt with in the financial statements of Whitebirk, with reference to the IFRS for SMEs. 11 11 (b) Write a memorandum to the financial director of NamPaper, advising him on the recognition, measurement and presentation and disclosure of the following items in the separate financial statements of NamPaper for the year ended 28 February 2021, in terms of IAS 37 Provisions, Contingent Liabilities and Contingent Assets: i. The refund policy; and ii. The legal claim. With regards to the refund policy you are not required to discuss disclosure.