Tutorial 1.10.2 (50 Marks; 75 Minutes) You have commenced with the audit of Yellow Jersey Bicycles Ltd (YB) for the year ended 28 February 2011. YJB was established by Mr Armstrong and is one of the leading suppliers of low- cost bicycles to the Southern African market. In recent years the company has experienced growth in its financial performance. This is due to increased awareness of the health benefits of cycling and a drastic increase in fuel prices with more commuters riding bicycles to work. The Board of Directors are aware of the need to continuously sustain this growth rates and, at a board meeting in 2008, it was decided to embark on an acquisition strategy. In addition to other equity investments (all less than 20% interests), YJB owned shares in 2 other companies at 28 February 2011, namely Designer Helmets Ltd and Terrific Tyres Ltd. Relevant details of these investments are as follows: DESIGNER HELMETS LTD (DH) YIB acquired 60% of the shares in DH on 1 October 2009 at a cost of R1 020 000. DH had the following equity balances in its separate financial statements: Share capital Retained earnings Total 1 October 2009 30 000 694 000 28 February 2010 30 000 830 000 28 February 2011 30 000 970 000 724 000 860 000 1000 000 The identifiable assets and liabilities of DH were fairly valued at their carrying amounts in the separate financial statements at 1 October 2009, except for the following: DH has not recognised any intangible assets in its statement of financial position. DH has an internally generated customer list that contains the names and demographic information of its clients. At the date of acquisition, YJB requested professional valuers to perform a formal valuation of the customer list. The valuers used a discounted cash flow model based on an estimated useful life of 10 years, an assessment period with which the directors of DH concurred. As a result of the complexity of all the inputs required for the customer list valuation, the valuation was not available in time for the preparation of the consolidated financial statements of YJB for the year ended 28 February 2010. In the financial statements the notes appropriately disclosed that the initial accounting was provisional and none of the cost of acquisition was allocated to the customer list in the initial accounting. The final valuation, which was received on 31 July 2010, placed a fair value of R800 000 on the customer list at the acquisition date and R780 000 on 31 July 2010, On 1 October 2009 DH had an exclusivity.contract with a supplier of a major portion of its inventory, in terms of which the supplier would not supply inventory to any of the competitors of DH. The contract is expected to last until 28 February 2012 and was fairly valued-at-R200-000 on 1 October 2009. However, as a result of changes in fashions during 2010, the recoverable amount of the contract had declined to R60 000 on 28 February 2011. The fair value of the non-controlling interest was R680 000 on 1 October 2009