Tutorlal 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. YB was established by Mr Armstrong and is one of the leading suppliers of lowcost bicycles to the Southem 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 Lrd. Relevant details of these investments are as follows: DESIGNER HELMETS LTD (DH) YJB acquired 60% of the shares in DH on 1 October 2009 at a cost of R1 020000 . DH had the following equity balances in its separate financial statements: The identifiable assets and llabilities of DH were fairly valued at thelr 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 intemally generated customer list that contains the names and demographic information of its clients. At the date of acqulsition, YB requested professional valuers to perform a formal valuation of the customer list. The valuers used a diseounted 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 inpits required for the customer list valuation, the valuation was not available in time for the preparation of the consolidated financial statements of YJ 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 accountiog. The final valuation, which was recelved on 31 July 2010 , placed a falr value of 8800000 on the customer list at the acqulsition date and 8780000 on 31 July 2010 - On 1 October 2009DH had an exclusbiliy contract with a suppller of a major portion of its Imventory, 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 Februay 2012 and wos tainty valued-at-200-000 on 1 October 2009 . However, as a result of changes in fashions during 2010, the recoverable aimount of the contrect had dedinsd to R60 000 on 28 February 2011. - The falr value of the non-controlling lnterest was A680 000 on 1 October 2009. TERRIFC TYRES LTD (IT) Y1B acquired 60% of the shares in or 3 March 2009 A shareholder agreement allowed yB to appoint 70\% or he dicectors to the Board of Directors of T and enabled Yis to govern TTs relevant activities. is a world leader in the manufacturing of high quality rubber tyres at minimai cost. had the following equity balances in its accounting records on the relevant dates: The following matters were identified to be taken into account in calculating the fair value of the identfiable net assets on 1 March 2009: 1. On 1 March 2009 the net assets of were fairly valued at their carrying amounts in the financial statements of , with the exception of a manufacturing bullding that constitutes investment property. The investment property had a carning value of R720 000 on 1 March 2009. accounts for investment property using the cost model and recognises a depreclation expense of B120 000 per annum. The original cost of the asset was R1 200000 which 15 also the base cost for capital gains tax purposes. + pe? The fair value of the investment property is as follows: 2. An employee fled a claim asainst TI on 12 March 2009 for 8250000 for injurles sustained whilst on duty. The injuries were sustained on 24 February 2009 . The lawyers of are of the opinion that the employee is entitied to compensation, but that the compensation must be claimed from the Compensation Fund (in terms of the Compensation for Occupetional Injuries and Diseoses Act ) and not from Tr. The Compensation Fund is administered by the Department of Labour. ". The shareholders of agree with this opinion but have guaranteed that, should become liable for this claim in the future, they will reimburse T for 75% of the actual payment, The fair 1 A value of TT's potential liabitity to the employee is R180 000 on 1 March 2009. Any amount that Tr may be required to pay would not be tax deductible. CL On 28february 2010 , the caim was submitted to the Compensation Fund. The fair value of the potential liabllity was Rs0 000 on that date. The Compensation Fund settled the clalm of the employee in full on 14 December 2010. 3. Details of the consideration transferred to the shareholders of are as follows: - Cash of R955000 was paid. - Y3 issued 30000 ordina Y shares on 17 Mareh 2009 when the shares had a fair value of 13 each. The fair value of the shares was R12 each on 1March2009. - Y is required to make an additional cash payment of R250000 on 1 September 2011 if the share price of increase by more than 20%. The fair value of the contingent consideration was estimated to be R165 000 on 1 March 2009, R200 000 on 28 February 2010 and R225 000 on 28 February 2011. The share price of Tt had increased by 32% by 28 february 2011. po sment wi be due 4. Yi incurred legal costs of 835000 in infting the shareholders agreement and corts of 800000 with the issuing of the shares. These amounts were included in the k9s5 000 cash consideration. 5. The acquisition of enables Yis to control a critical part of its value chain as is its sole supplier of tyres. VB entered into a 5 yesr sugoly contract with T on 1 March 2008, with price increases linked to the price of the raw materials. The contract can be terminated by YB by pre-ecisty paying a penalty of R145000. On 1 March 2009, it was determined that YB pays more for its rintith Inventory in terms of the supply contract with T compared to makket related prices of competitors. Included in the far value of TT is an amount of 2200000 that represents the fair value of the controt. The portionthat relates to market related prices pald by VB is R165 000 . The difference represents the portion that is unfavourable to YiB 6. The falr value of the non-controlling interests was 8940000 on 1 March 2009 , 7. IT classified a plant with a cost of k 300000 a held for sale on 1 lanuary 2009 when it had a carryleg amount of k200 000. The plant was sold in a forced sale for R155 000 on 31 August 2009. The following information is applicable: Addiclanel informetion 1. It is the groud's policy to measure account for investment property on the fair value model. 7 2. There are no intangible assets in any group companies other than those referred to above. 3. Intang ble assets are accounted for using oncost model. 4. It is the polcy of Y to value the non-controlling interest in subsidlaries at eir valy NCi 5. There were no movements in reatained eamings other than an increase arlsing from profit for the year. The profit accrued evenly throughout the year. 6. Investments in subsidiaries are accounted for using the cogt method in terms of IFAs 10 . 7. The company tax rate is 28% and 50% of capital gains tax are included in taxable income. 8. YIB applies IFBS 3 in its eroug financial statements only Tutorlal 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. YB was established by Mr Armstrong and is one of the leading suppliers of lowcost bicycles to the Southem 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 Lrd. Relevant details of these investments are as follows: DESIGNER HELMETS LTD (DH) YJB acquired 60% of the shares in DH on 1 October 2009 at a cost of R1 020000 . DH had the following equity balances in its separate financial statements: The identifiable assets and llabilities of DH were fairly valued at thelr 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 intemally generated customer list that contains the names and demographic information of its clients. At the date of acqulsition, YB requested professional valuers to perform a formal valuation of the customer list. The valuers used a diseounted 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 inpits required for the customer list valuation, the valuation was not available in time for the preparation of the consolidated financial statements of YJ 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 accountiog. The final valuation, which was recelved on 31 July 2010 , placed a falr value of 8800000 on the customer list at the acqulsition date and 8780000 on 31 July 2010 - On 1 October 2009DH had an exclusbiliy contract with a suppller of a major portion of its Imventory, 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 Februay 2012 and wos tainty valued-at-200-000 on 1 October 2009 . However, as a result of changes in fashions during 2010, the recoverable aimount of the contrect had dedinsd to R60 000 on 28 February 2011. - The falr value of the non-controlling lnterest was A680 000 on 1 October 2009. TERRIFC TYRES LTD (IT) Y1B acquired 60% of the shares in or 3 March 2009 A shareholder agreement allowed yB to appoint 70\% or he dicectors to the Board of Directors of T and enabled Yis to govern TTs relevant activities. is a world leader in the manufacturing of high quality rubber tyres at minimai cost. had the following equity balances in its accounting records on the relevant dates: The following matters were identified to be taken into account in calculating the fair value of the identfiable net assets on 1 March 2009: 1. On 1 March 2009 the net assets of were fairly valued at their carrying amounts in the financial statements of , with the exception of a manufacturing bullding that constitutes investment property. The investment property had a carning value of R720 000 on 1 March 2009. accounts for investment property using the cost model and recognises a depreclation expense of B120 000 per annum. The original cost of the asset was R1 200000 which 15 also the base cost for capital gains tax purposes. + pe? The fair value of the investment property is as follows: 2. An employee fled a claim asainst TI on 12 March 2009 for 8250000 for injurles sustained whilst on duty. The injuries were sustained on 24 February 2009 . The lawyers of are of the opinion that the employee is entitied to compensation, but that the compensation must be claimed from the Compensation Fund (in terms of the Compensation for Occupetional Injuries and Diseoses Act ) and not from Tr. The Compensation Fund is administered by the Department of Labour. ". The shareholders of agree with this opinion but have guaranteed that, should become liable for this claim in the future, they will reimburse T for 75% of the actual payment, The fair 1 A value of TT's potential liabitity to the employee is R180 000 on 1 March 2009. Any amount that Tr may be required to pay would not be tax deductible. CL On 28february 2010 , the caim was submitted to the Compensation Fund. The fair value of the potential liabllity was Rs0 000 on that date. The Compensation Fund settled the clalm of the employee in full on 14 December 2010. 3. Details of the consideration transferred to the shareholders of are as follows: - Cash of R955000 was paid. - Y3 issued 30000 ordina Y shares on 17 Mareh 2009 when the shares had a fair value of 13 each. The fair value of the shares was R12 each on 1March2009. - Y is required to make an additional cash payment of R250000 on 1 September 2011 if the share price of increase by more than 20%. The fair value of the contingent consideration was estimated to be R165 000 on 1 March 2009, R200 000 on 28 February 2010 and R225 000 on 28 February 2011. The share price of Tt had increased by 32% by 28 february 2011. po sment wi be due 4. Yi incurred legal costs of 835000 in infting the shareholders agreement and corts of 800000 with the issuing of the shares. These amounts were included in the k9s5 000 cash consideration. 5. The acquisition of enables Yis to control a critical part of its value chain as is its sole supplier of tyres. VB entered into a 5 yesr sugoly contract with T on 1 March 2008, with price increases linked to the price of the raw materials. The contract can be terminated by YB by pre-ecisty paying a penalty of R145000. On 1 March 2009, it was determined that YB pays more for its rintith Inventory in terms of the supply contract with T compared to makket related prices of competitors. Included in the far value of TT is an amount of 2200000 that represents the fair value of the controt. The portionthat relates to market related prices pald by VB is R165 000 . The difference represents the portion that is unfavourable to YiB 6. The falr value of the non-controlling interests was 8940000 on 1 March 2009 , 7. IT classified a plant with a cost of k 300000 a held for sale on 1 lanuary 2009 when it had a carryleg amount of k200 000. The plant was sold in a forced sale for R155 000 on 31 August 2009. The following information is applicable: Addiclanel informetion 1. It is the groud's policy to measure account for investment property on the fair value model. 7 2. There are no intangible assets in any group companies other than those referred to above. 3. Intang ble assets are accounted for using oncost model. 4. It is the polcy of Y to value the non-controlling interest in subsidlaries at eir valy NCi 5. There were no movements in reatained eamings other than an increase arlsing from profit for the year. The profit accrued evenly throughout the year. 6. Investments in subsidiaries are accounted for using the cogt method in terms of IFAs 10 . 7. The company tax rate is 28% and 50% of capital gains tax are included in taxable income. 8. YIB applies IFBS 3 in its eroug financial statements only