FAC 3704 LEARNING UNIT 1 & 2 LECTURE EXAMPLES

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1 FAC 3704 LEANING UNIT 1 & 2 LECTUE EXAMPLES COPYIGHT NOTICE Copyright Prepared by BIANCA NEL CA (SA) These notes enjoy copyright under the Berne Convention. In terms of the Copyright Act, no 98 of 1978, no part of this material may be reprinted or reproduced, in any form whatsoever, either in whole or in part or by any electronic or other means including the making of photocopies thereof, without the express prior written consent of the proprietor, CA Campus. No individual may share any CA Campus content or material with any other person. The proprietor will not hesitate to prosecute any such offenders to the fullest extent of the law and to report their details to: UNISA The South African Institute of Chartered Accountants (SAICA) for purposes of barring such persons from registering as chartered accountants (SA), as such actions constitute a gross transgression of ethical principles, which is a violation of the code of professional conduct of SAICA South African Police Service Any other relevant professional body / organisation, including any employer

2 1 FO USE BY CA CAMPUS STUDENTS ONLY NB! When you attempt these examples, ensure you have your Lecture notes open. ead through the principle first and then DO the example. IFS 10 LECTUE EXAMPLES WEEK 1 ecording on ColCampus Example 1 Control Scenario 1 ENTITY A INVESTMENT ENTITY 1. Will Entity A Consolidate? If yes, what will be consolidated? The parent entity shall consolidate all entities that it controls, including those controlled through an investment entity subsidiary. Therefore, the investment entity, Entity B and C = Consolidated ENTITY B ENTITY C 2. Assuming Entity B and C are manufacturing ceramic tiles: Will investment entity consolidate? If yes, what will be consolidated? The investment entity will NOT consolidate Entity B and C, but would rather account for investments at fair value - IFS 9 3. Assuming Entity B is providing investment advisory services to Investment entity and Entity C is manufacturing ceramic tiles: Will Investment entity consolidate? If yes, what will be consolidated? If Entity B provided investment advisory services to Investment entities then Investment entity will consolidate Entity B as it provides services that related to the Investment entity's activities. Entity C will not be consolidated but the investment entity would account for the Investment at fair value - IFS 9 Scenario 2 If an entity can control the administrative activities of another entity, does that constitute control as defined in IFS10? No, there needs to be a relationship between the CONTOL and the activities to generate ETUN (element of Control).

3 2 FO USE BY CA CAMPUS STUDENTS ONLY Scenario 3 When is Control assessed? Is control determined once-off or should it be re-assessed? When FS are prepared. Control should be assessed annually. When relevant activities changes, control might be affected. Scenario 4 [IFS 10.B43] An investor acquires 48% of the voting rights of an investee. The remaining voting rights are held by thousands of shareholders, none individually holding more than 1% of the voting rights. None of the shareholders had any arrangements to consult any of the others or make collective decisions. When assessing the proportion of voting rights to acquire, on the basis of relative size of the other shareholdings, the investor determined that a 48% interest would be sufficient to give it control. In this case, on the basis of absolute size of its holdings and the relative size of the other shareholdings, the investor concludes that it has a SUFFICIENTLY DOMINANT voting interest to meet the power criterion without the need to consider any other evidence of power. Scenario 5 [IFS 10.B43] Investor A holds 40% of the V of an investee and 12 other investors each holds 5%. A shareholder agreement grants investor A the right to appoint, remove and set the remuneration of management responsible for directing the relevant activities. To change the agreement, a two-thirds majority vote of the shareholders if required. Investor A concludes that the absolute size of the investor's holding and the relative size of the other shareholders alone are not conclusive in determining whether the investor has rights sufficient to give it power. However, investor A determines that its contractual right to appoint, remove and set remuneration of management is sufficient to conclude that it has power over the investee. The fact that investor A might not have exercised this right or the likelihood of exercising its rights to shall not be considered when assessing whether A has power.

4 3 FO USE BY CA CAMPUS STUDENTS ONLY IFS 3 LECTUE EXAMPLES WEEK 2 ecording on ColCampus Example 2.1 Investments in Equity instruments ABC Ltd paid for a 90% investment in XYZ Ltd on 1 January The share capital and retained earnings on this date were and ABC Ltd has control over XYZ Ltd. At the acquisition date of XYZ Ltd, there were no unidentified assets, liabilities or contingent liabilities in existence, and the fair values of all assets, liabilities and contingent liabilities of XYZ Ltd were equal to the carrying amounts thereof. The company tax rate is 28% and CGT is calculated at 80% thereof. NCI measured at proportionate share. The fair value of the Investment in XYZ Ltd in the accounting records of ABC Ltd was as follow: 31 December December etained earnings of XYZ Ltd at the end of 31 December = Profit for the year ended 31 December = Ignore tax implications Prepare the pro forma journal entries for consolidation purposes for the year end 31 December 20.16: SCENAIO 1 ABC Ltd measures its equity investments at fair value through profit and loss. Dr. Investment in Sub (SFP) Jnl in the Parents Cr. Fair Value adjustment (P/L) records Fair value adjustment in the Parent records 31 December Dr. Investment in Sub (SFP) Jnl in the Parents Cr. Fair Value adjustment (P/L) records Fair value adjustment in the Parent records 31 December Pro forma journals: Dr. etained earnings (SCE) Cr. Investment in Sub (SFP) eversal of fair value adjustments in Separate records of Parent for consolidation purposes Dr. Fair value adjustments (P/L) Cr. Investment in Sub (SFP) eversal of fair value adjustments in Separate records of Parent for consolidation purposes

5 4 FO USE BY CA CAMPUS STUDENTS ONLY SCENAIO 2 ABC Ltd measures its equity investments at fair value through other comprehensive income. Dr. Investment in Sub (SFP) Jnl in the Parents Cr. Mark-to-market eserve (SCE) records Fair value adjustment in the Parent records 31 December Dr. Investment in Sub (SFP) Jnl in the Parents Cr. Mark-to-market eserve (OCI) records Fair value adjustment in the Parent records 31 December Pro forma journals: Dr. Mark-to-market eserve (SCE) Cr. Investment in Sub (SFP) eversal of fair value adjustments in Separate records of Parent for consolidation purposes Dr. Mark-to-market eserve (OCI) Cr. Investment in Sub (SFP) eversal of fair value adjustments in Separate records of Parent for consolidation purposes JOUNAL ENTIES SIMILA IN BOTH SCENAIOS Share Capital (SFP) 80,000 etained earnings (SFP) 22,000 Goodwill (SFP) 8,200 NCI (SFP) 10,200 Investment in Subsidiary (SFP) 100,000 Elimination of owners' equity in Subsidiary at acquisition NCI (P/L) 1,800 NCI (SFP) 1,800 ecording of NCI in E for the year of SUB NCI (P/L) 2,000 NCI (SFP) 2,000 ecording of NCI in profit for the year of SUB

6 5 FO USE BY CA CAMPUS STUDENTS ONLY Example 2.2 Consideration for business combination (Group Statements) On 1 January 20.19, P Ltd acquired a 90% interest in S Ltd. P Ltd acquired the shares from Mr Controlall, the former owner. From that date P Ltd had control over S Ltd as per the definition of control in terms in terms of IFS 10. The consideration is to be settled as follows: A cash payment of Transfer of a vehicle to Mr Controlall. The fair value of the vehicle is and the carrying amount in the records of P Ltd was P Ltd will settle an outstanding liability of on behalf of M Controlall. P Ltd will issue shares to Mr Controlall. P Ltd's shares had a market price of 10 per share on 1 January and 11 per share at the end of the financial period. The total consideration is therefore ( (3 000 x 10)). P Ltd shall account for the transaction in its own records as follows: Dr Cr 1 January Investment in S Ltd (SFP) Bank (SFP) Property, plant and equipment (SFP) (carrying amount) Gain on transfer of vehicle (P/L) Sundry liabilities (SFP) Share capital (SCE) ecognition of the consideration for the business combination of S Ltd

7 6 FO USE BY CA CAMPUS STUDENTS ONLY Example 2.3 Business combination achieved in stages (10% 60%) (Group Statements) The issued share capital of S Ltd consists of shares. On 1 January P Ltd acquired shares in S Ltd at fair value for (transaction costs are immaterial). The investment was classified as a financial asset subsequently measured at fair value through other comprehensive income (OCI). On 31 December the fair value of the investment was On 1 January 20.19, P Ltd acquired shares in S Ltd at market value of 13 per share (transaction costs are immaterial). From that date P Ltd had control over S Ltd as per the definition of control in terms of IFS 10. The acquisition date is 1 January when P Ltd gained control over S Ltd through its 60% interest The fair value of the consideration is calculated as follows: Fair value of consideration transferred ( shares x 13) Fair value of previously held equity interest Total consideration for the business combination P Ltd shall account for the transaction in its own records as follows: Dr Cr 1 January 20.1 Financial asset (SFP) Bank (SFP) ecognition of investment made in S Ltd Dr Cr 31 December Financial asset (SFP) ( ) Mark-to-market reserve (OCI) ecognition of the fair value adjustment on the investment Dr Cr 1 January J1 Investment in S Ltd (SFP) Bank (SFP) ( x 13) Financial asset (SFP) ecognition of the consideration for the business combination of S Ltd J2 Mark-to-market reserve (SCE) etained earnings (SCE) ecognition of fair value adjustments within equity

8 7 FO USE BY CA CAMPUS STUDENTS ONLY Example 2.4 Fair value adjustment at acquisition ABC Ltd paid for a 90% investment in XYZ Ltd on 1 January The share capital and retained earnings on this date were and ABC Ltd has control over XYZ Ltd. At the acquisition date of XYZ Ltd, XYZ Ltd had land with a carrying amount of and fair value of as well as a Manufacturing plant with a carrying amount of and fair value of The remaining useful life on the plant was 10 years on acquisition date. There were no other unidentified assets, liabilities or contingent liabilities in existence, and the fair values of all assets, liabilities and contingent liabilities of XYZ Ltd were equal to the carrying amounts thereof. The company tax rate is 28% and CGT is calculated at 80% thereof. NCI measured at proportionate share. The fair value of the Investment in XYZ Ltd in the accounting records of ABC Ltd did not increase from acquisition date. etained earnings of XYZ Ltd at the end of 31 December = Profit for the year ended 31 December = XYZ Ltd declared dividends of at year end (31 December 20.16). Prepare the pro forma journal entries for 31 December 20.16

9 8 FO USE BY CA CAMPUS STUDENTS ONLY Analysis of owners equity: Parent 90% NCI 10% Total At Since At acquisition: Share capital 80,000 etained earnings 22,000 Fair value adjustment: Land [100k - 90k] 10,000 Deferred tax: Land [10k x 80% x 28%] (2,240) Fair value adjustment: Plant 20,000 Deferred tax: Plant [20k x 28%] (5,600) 124, ,744 12,416 Equity represented by goodwill 8,256 Consideration paid and NCI 120,000 Since acquisition: etained earnings 28,000 25,200 2,800 2,656 - Depreciation on plant [20k/10] (2,000) (1,800) (200) - Tax [2 000 x 0.28] Current year: Profit for the period 20,000 18,000 2,000 1,856 - Depreciation on plant [20k/10] (2,000) (1,800) (200) - Tax [2 000 x 0.28] Dividends paid (10,000) (9,000) (1,000) 120,000 41,904 17,072 Share Capital (SFP) 80,000 etained earnings (SFP) 22,000 Land (SFP) 10,000 Plant (SFP) [Property, plant and equipment] 20,000 Goodwill (SFP) 8,256 Deferred tax (SFP) 7,840 NCI (SFP) 12,416 Investment in Subsidiary (SFP) 120,000 Elimination of owners' equity in Subsidiary at acquisition

10 9 FO USE BY CA CAMPUS STUDENTS ONLY NCI (P/L) NCI (SFP) ecording of NCI in E for the year of SUB NCI (P/L) NCI (SFP) ecording of NCI in profit for the year of SUB Other Income (Div Income) (P/L) 9,000 NCI (SFP) 1,000 Dividends paid 10,000 Elimination of intragroup dividend and recording portion of NCI interest therein Example 2.5 Intra group dividends SCENAIO 1 Both companies yearend: 31 December On 30 June the parent purchased an investment in the subsidiary for The subsidiary proposed and declared an ordinary dividend on 15 June 20.16, payable to shareholders registered on 5 July The parent received a dividend of At the acquisition date (30 June 20.16) the subsidiary's shares traded cum div and the parent effectively also paid for the dividend to be received as the dividend had already been declared. Dividends on investments are recognised in profit or loss in accordance with IFS 9, unless the dividend clearly represents a recovery of part of the cost of the investment. (IFS 9 B5.7.1). Dr Investment in Sub (SFP) Dr Debtors (dividend receivable) Cr Bank Dr Bank Cr Debtors (dividend receivable)

11 10 FO USE BY CA CAMPUS STUDENTS ONLY SCENAIO 2 Both companies yearend: 31 December On 1 July the parent purchased , 10% cumulative non-redeemable nonconvertible preference shares of a subsidiary for On 31 December 2016 the parent received a dividend of Dr Investment in Sub - Preference shares Dr Debtors (Dividend receivable) [ x 5 x 10% x (6/12)] Cr Bank Dr Bank Cr Debtors (Dividend receivable) Cr Dividend income (P/L) Source: Unisa FAC Study guide