Question Four

Impala plc a company listed on the Lusaka Securities Exchange entered into the following transactions in the year ended 31 May 2020.

Transaction One

On 1 June 2018 Impala plc began an arrangement to sell goods to Zebra Ltd, its customer. The price of the goods was set at K200 per unit for all sales in the two-year period ending 31 May 2020. However, if sales of the product to Zebra plc exceed 120,000 units in the two-year period ending 31 May 2020, then the selling price of all units is retrospectively set at K180 per item. Sales of the goods to Zebra Ltd in the nine-month period ending February 2019, totalled 40,000 units and this volume of sales per month was not expected to change before 31 May 2019. However, in the year ended 31 May 2020, total sales of the goods to Zebra Ltd were 70,000 and based on current orders from Zebra Ltd, the estimate was revised. The directors of Impala plc estimated that the total sales of the goods to Zebra Ltd in the two-year period ending 31 May 2020 would be more than 120,000 units. (5 marks) 8

Transaction Two

On 1 June 2019, Impala plc sold a property to Kudu plc a financial institution for its fair value of K4,500,000. The terms and conditions of the sale satisfy the sale and leaseback requirements of IFRS 15 Revenue from Contracts with Customers. The carrying amount of the property in the financial statements of Impala plc at 1 June 2019 was K3,000,000. The estimated future useful life of the property on 1 June 2019 was 20 years. On 1 June 2019, Impala entered into an agreement with entity Kudu plc under which Impala plc leased the property back. The lease term was for five years, with annual rentals of K300,000 payable in arrears. The annual rate of interest implicit in the lease was 10% and the present value of the minimum lease payments on 1 June 2019 was K1,137,300. (8 marks)

Transaction Three

On 1 June 2019 Impala plc purchased K30 million of bonds at par which were issued by Gazelle plc. The bonds are due to be redeemed at a premium on 31 May 2022, with Impala plc also receiving 5% interest annually in arrears. The effective rate of interest on the bonds is 15%. Impala often holds bonds until the redemption date, but will sell prior to maturity if investments with higher returns become available. Gazelle plcs bonds were deemed to have a low credit risk at inception. On 31 May 2020, Impala plc received the interest due on the bonds. However, there were wider concerns about the economic performance and financial stability of the industry in which Gazelle plc operates. As a result, there has been a fall in the fair value of bonds issued by Gazelle plc and similar companies. The fair value of the Impala plcs investment at 31 May 2020 was K27 million. Nonetheless, based on Gazelle plss strong financial management skills and market optimism about the entitys forthcoming products, the bonds were still deemed to have a low credit risk. Impala plc has established that at 31 May 2020, 12 month expected credit losses for the bond are estimated to be K0.6m, while Lifetime expected credit losses were estimated to be K0.12m on the same date. (7 marks)

Required: Discuss, with reference to the applicable standards, how each of the above transactions should be dealt with in Impala plcs financial statements for the year ended 31 May 2020.