SKY LTD

IGNORE VAT.

1. Background information

Sky Ltd (Sky or the Company) is a key player in the agricultural sector. The Company specialises in the manufacturing of large agricultural equipment, such as tractors and harvesting equipment,1 which is sold both in South Africa, and internationally. A significant amount of steel and mechanical parts (such as engines, gearboxes, and wheels) is required to manufacture these types of equipment.

To diversify its operations, Sky recently started acquiring other businesses. The Sky group currently comprises:

Sky, the holding company.

Two subsidiaries, AB Steel (Pty) Ltd (AB Steel) and Farmy Ltd (Farmy), and

One associate, MobiFix (Pty) Ltd (MobiFix).

You are assisting Skys financial reporting team in finalising Skys separate and group financial statements for the financial year ended 28 February 2023 (FY2023).

2. Sky Ltd

2.1 Manufacturing building in Polokwane

One of Skys manufacturing buildings in Polokwane was partially damaged in a fire that broke out on 31 March 2022. The fire resulted in the damaged part of the building being unsafe. Skys management decided to discontinue all the manufacturing operations performed at this building from 1 April 2022 until a decision on the way forward was taken.

The building was insured against the devastating effects of fire and an insurance pay out was received on 2 May 2022 from Skys insurer. Skys board of directors considered using this insurance pay out in one of the following ways:

Option 1: Sell the damaged building in its current state and use sale proceeds together with the insurance pay out to buy a similar building in the area.

Option 2: Use the insurance pay out to repair the building. (On 1 April 2022, as a result of the damage to the building, the remaining useful life of the building was assessed to be seven years, with a nil residual value.)

1Harvesting equipment cuts and collects crops such as wheat, maize, and vegetables. Milpark Education

On 1 June 2022, after reviewing the projected cash flows to repair the building, Skys board of directors decided to elect Option 1 and thus sell the building in its current state. On the same date, Skys financial manager contacted estate agents to start marketing the building. The building met all the criteria of being held for sale in accordance with IFRS 5 Non-current Assets Held for Sale on 1 June 2022.

The following correctly calculated values were obtained regarding this building on the respective dates:

Manufacturing building

1 April 2022

1 June 2022

R

R

Carrying amount

Value in use

Fair value less costs to sell/costs of disposal Recoverable amount

3. AB Steel (Pty) Ltd

3.1. AB Steels business model

1 458 000 450 000 805 000

?

? 445 000 785 833 785 833

AB Steel is a steel manufacturing company with a diverse customer base across South Africa. The company manufactures an extensive range of steel products, including steel rods, pipes and sheet metal.

3.2. Acquisition of a controlling interest

On 1 March 2022, Sky acquired a 70%-controlling interest in AB Steel. AB Steels equity on 1 March 2022 consisted of share capital of R2 320 000 and retained earnings of R6 228 000.

All AB Steels assets and liabilities were fairly valued on 1 March 2022, except for the following items:

Manufacturing equipment, used in the manufacture of sheet metal, that had a carrying amount in AB Steels separate financial statements of R1 500 000 and a fair value of R1 980 000 on 1 March 2022.

o Sky agreed with AB Steels estimates that this equipment had a remaining

useful life of 10 years on 1 March 2022, with a nil residual value. These

estimates remained unchanged.

o SARS grants capital allowances of 25% per annum (not apportioned for

periods shorter than a year) on the manufacturing equipment.

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A registered patent that AB Steel owns relating to the manufacturing process of sheet metal. While AB Steel had correctly not recognised any intangible asset in its separate financial statements relating to this patent, an independent expert determined that the patent had a fair value of R1 250 000 on 1 March 2022.

o SARSdoesnotallowanydeductionsrelatingtothispatent.

o AB Steel intends recovering the patent through use over its estimated remaining useful life of four years (from 1 March 2022), with a nil

residual value. These estimates have never changed.

Sky agreed to pay the previous shareholders of AB Steel the following consideration in exchange for its 70% controlling interest in AB Steel:

Cash of R6 400 000, payable one year after acquisition date (i.e., on 1 March 2023). No interest will be charged on this amount.

Land that was transferred to the previous shareholders of AB Steel on 1 March 2022. This land, which was owner-occupied, had a carrying amount in Skys separate financial statements on 1 March 2022 and a fair value on the same date of R1 000 000 and R1 200 000, respectively.

Sky elected to measure the non-controlling interests relating to this business combination at their proportionate share of the identifiable net assets.

4. Farmy Ltd

4.1. Farmys business model

Farmy is an entity involved in the processing and packaging of agricultural produce. It focuses on helping small farms effectively process and package their agricultural produce in a way that protects it from damage and contamination.

4.2. Acquisition of a controlling interest

Sky purchased a 40%-controlling interest in Farmy on 1 April 2018 for an amount of R2 600 000 which was paid in cash on the same date. Farmys retained earnings balance on 1 April 2018 was correctly calculated as R1 090 000.

Sky elected to measure the non-controlling interests relating to this business combination at its fair value on 1 April 2018 of R465 000.

4.3. Transactions during the year

Sky sold a tractor to Farmy on 1 August 2022. Sky manufactured the tractor at a cost of R806 000 and sold it for R950 000 to Farmy. Farmy correctly classified the tractor as property, plant and equipment in its separate financial statements.

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On 1 August 2022, the useful life of the tractor was assessed to be 10 years, with a nil residual value. These estimates have remained unchanged.

5. MobiFix (Pty) Ltd

5.1. MobiFix (Pty) Ltd business model

MobiFix specialises in the repair of agricultural equipment. It has a footprint across most farms in Northern Gauteng and the Limpopo province.

5.2. Acquisition of significant influence

On 1 April 2021, Sky purchased a 25% equity interest in MobiFix for R750 000, paid in cash on the same date, and thereby obtained significant influence over the financial and operating policy decisions of MobiFix in accordance with IAS 28 Investments in Associates and Joint Ventures. All MobiFixs assets and liabilities were fairly valued on 1 April 2021. There was no gain on bargain purchase on this acquisition.

5.3. Transactions during the year

From 1 June 2022, Sky began supplying steel to MobiFix which it used when repairing its customers agricultural equipment. Sky sold the steel to MobiFix at a 35% mark-up on cost.

The inventory balance on hand on 28 February 2023 in MobiFixs separate financial statements relating to steel purchases from Sky, was R760 000.

6. Extracts of separate financial statements and dividend declarations

The following amounts from each entitys separate financial statements within the Sky group, which are correct in all respects and includes the effects of all transactions noted above, have been provided to you:

Retained earnings (1 March 2022) 8 700 6 228 3 450 2 053 Profit for the period (FY2023) 6 580 5 588 2 450 1 650

AB Steel declared a dividend of R950 000 on 24 February 2023. This dividend was subsequently paid on 31 March 2023.

Sky declared and paid a dividend of R350 000 on 26 February 2023, while Farmy and MobiFix did not declare or pay any dividends in FY2023.

Sky

AB Steel

Farmy

MobiFix

R000

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7. Additional information

Unless otherwise stated in the scenario:

All profits for FY2023 were earned evenly.

An interest rate of 9% per annum before tax (compounded annually) applies.

All items of property, plant and equipment are accounted for on the cost model in

accordance with IAS 16 Property, Plant and Equipment by all entities in the Sky group. Buildings and equipment are depreciated on a straight-line basis.

Assume that an income tax rate of 28% and a capital gains inclusion rate of 80% have always applied.

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REQUIRED a.

Marks

Sub- Total Total

For this part (Part (a)(i) and Part (a)(ii)):

Calculationsarerequired.

Ignore tax.

Disclosureandpresentationissuesshouldnotbeconsidered.

Related to Skys separate financial statements and the manufacturing building in Polokwane:

(i) Briefly discuss the accounting considerations that Skys management should have considered on 1 April 2022 as a result of the damage caused by the fire to this building.

(ii) Briefly discuss the accounting treatment of this building on 1 June 2022.

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