QUESTIONS

1.1) Discuss whether the calculation of goodwill by the new investors was correct in terms of IFRS. Wherever necessary, your answer should include any relevant calculations. (15)

1.2) Based on the complaint of the shareholders, prepare a report in which you discuss the limitations in accounting data which may have led to the incorrect decision being made by the new investors. (10)

QUESTION 1 Flash (Pty) Limited (FL) is a company that specialises in the manufacturing of various chemicals used in the mining industry. Your accounting firm, DCH (Pty) Ltd (DCH) prepared the financial statements for Caracal for the year ended 28 February 2022. FL was acquired by Green Lantern (Pty) Ltd (GL) on 15 April 2022. The shareholders of FL are in the process of dealing with complaints from GL shareholders regarding the financial statements DCH prepared. Their complaints range from the accounting policies selected and how the asset value was manipulated to inflate the net asset value to the calculation of goodwill. Below is the goodwill calculation GL performed over FL: Description Notes Amount (R) Net Assets PPE 1 100 000 Intangible Assets 2 33 000 Accounts Receivable 3 100 000 Accounts Payable 4 (22 500) Deferred Tax (12 500) Total Net Assets 198 000 2 times profit after tax 112 000 Total Value Acquired 310 000 Purchase Price 200 000 Goodwill 110 000 Notes: 1 - The fair value of property, plant and equipment at the acquisition date is R125 000. 2 - At acquisition there was research and development costs that had not been capitalised of R35 000. The reason for the acquisition was for GL to take advantage of the research project and potential for further development of the intellectual property. 3 - The provision for doubtful debts has not been accounted for above. It amounts to R15 000 4 - There is a contingent liability that has not been recognised but only disclosed of R45 000. The attorneys are of the opinion that FL will be obligated to pay damages of R40 000 Additional information: The tax rate that should be used is 28%. The useful life of intangible assets is 20 years. All the share capital of FL was acquired by GL for cash. QUESTION 1 Flash (Pty) Limited (FL) is a company that specialises in the manufacturing of various chemicals used in the mining industry. Your accounting firm, DCH (Pty) Ltd (DCH) prepared the financial statements for Caracal for the year ended 28 February 2022. FL was acquired by Green Lantern (Pty) Ltd (GL) on 15 April 2022. The shareholders of FL are in the process of dealing with complaints from GL shareholders regarding the financial statements DCH prepared. Their complaints range from the accounting policies selected and how the asset value was manipulated to inflate the net asset value to the calculation of goodwill. Below is the goodwill calculation GL performed over FL: Description Notes Amount (R) Net Assets PPE 1 100 000 Intangible Assets 2 33 000 Accounts Receivable 3 100 000 Accounts Payable 4 (22 500) Deferred Tax (12 500) Total Net Assets 198 000 2 times profit after tax 112 000 Total Value Acquired 310 000 Purchase Price 200 000 Goodwill 110 000 Notes: 1 - The fair value of property, plant and equipment at the acquisition date is R125 000. 2 - At acquisition there was research and development costs that had not been capitalised of R35 000. The reason for the acquisition was for GL to take advantage of the research project and potential for further development of the intellectual property. 3 - The provision for doubtful debts has not been accounted for above. It amounts to R15 000 4 - There is a contingent liability that has not been recognised but only disclosed of R45 000. The attorneys are of the opinion that FL will be obligated to pay damages of R40 000 Additional information: The tax rate that should be used is 28%. The useful life of intangible assets is 20 years. All the share capital of FL was acquired by GL for cash