Solution

Question 1 Part a

Investment in associate ½ 486 ½

Retained earnings ½ 126 ½
Fair value reserves – financial assets ½ 60 ½
Retained earnings – (gain on bargain purchase) ½ 300 ½
Share of associate’s beginning retained income ½

Investment in associate ½ 604.5 ½

Share of profit of associate – P/L ½ 559,5 ½
Share of associates OCI – OCI 45 ½
Recognition of current profit share ½

Profit after tax (dividend from H) ½ 90 ½

Investment in associate ½ 90 ½
Reduction of investment with dividends received ½

10

Investment in associate (proof): 1 200 + 486 + 604.5 – 90 = 2 200,5

Question 1 Part b

Innovation Limited Group

Consolidated Statement of Profit or Loss and Other Comprehensive Income for the year ended
31 December 20.18 R’000 0.5
Share of profit of associate wksht 560 1
Profit after tax (19 000 I + 3 000 R +3 750 N – 90 H) 25 660 3.5
Profit on sale of shares in subsidiary wkg 1 14 750 3 – wkgs
Profit for the period 40 970
Other comprehensive income
Items that cannot be reclassified subsequently to profit or loss
Gain on financial assets wkg 2 900 1
Share of associate’s other comprehensive income 45 1
Total other comprehensive income 945

Total comprehensive income 41 915

Profit attributable to:

- Equity holders of the parent 38 720 1
- Non-controlling interest (750 I + 1500 N) 2 250 1
40 970
Total comprehensive income attributable to:
- Equity holders of the parent 39 665 0.5m
- Non-controlling interest 2 250 0.5m
41 915
Max 10
Innovation Limited Group
Consolidated Statement of Changes in Equity for the year ended 31 December 20.18 0.5
Non- Total
Attributable to equity holders of parent controlling TOTAL marks
Interest
Share Retained Fair Total –
capital earnings value Parent
reserve
R’000 R’000 R’000 R’000 R’000 R’000
1 January 20.18 20 000 33 486# 3 700 57 186 10 400 1 67 586 1
Acquisition of 8 000 1 8 000 1
subsidiary
Net profit for 38 720 945 1 39 665 2 250 1 41 915 3
the year 1m
Sale of shares (11 900) 1 (11 900) 1
Dividend (8 000) 1 (8 000) (8 000) 1
31 December 20 000 1 64 206 4 645 88 851 1 8 750 97 601 1 3
20.18
#30 000 I + 3 000 N + 126 H ret inc+ 300 H bargain purch max1.5
+ 60 H FV res (0.5+0.5+0.5)
Max 10

Innovation Limited Group

Consolidated statement of financial position at 31 December 20.18 0.5
ASSETS
Non-current assets R’000
Investment in associate (1 200 cost + 300 BP + 596 RE+ 105 FV
res all per wksht) 2 201 2
Financial assets – (Creative Ltd only) 2 900 1
Other net assets (36 500 I + 32 000 R + 24 000 land) 92 500 3

97 601
EQUITY
Share capital 20 000 1
Retained earnings 64 206 1m
Fair value reserves 4 645 1
Share capital and reserves attributable to parent 88 851 0.5
Non-controlling interest 8 750 1
97 601

Max 10
Analysis of Revolution Ltd
S Cap RE Land TOTAL NCI - Inv Since
25% RE
At acquisition 12 000 17 000* 24 000 53 000 8 000 #25 000
0.5 1 0.5

Profit after tax

Aug to Dec
7 200 x 5/12 3 000 1 3 000 750 0.5 2 250
0.5
12 000 20 000 24 000 56 000 8 750 25 000 2 250

Gain on Bargain Purchase = 25+8-53=20 (Expensed @ acq) 1

*12 800boy +7 200 x 7/12 1
# 5 200 previous holding + 19 800 2 Max 6

Analysis of Novelty – as subsidiary

S Cap RE TOTAL NCI - Inv GW Since
40% RI
At acquisition 10 000 11 000 1 21 000 8 400 1 15 000 (2 400)
0.5 0.5 1
Since up to boy 5 000 1 5 000 2 000 3 000 0.5
0.5
10 000 16 000 26 000 10 400 15 000 (2 400) 3 000
Profit – Jan-May
9000 x 5/12 3 750 1 3 750 1 500 2 250 0.5
0.5
10 000 19 750 29 750 11 900 15 000 (2 400) 5 250
Sold (15 000) (2 400) (5 250)
- - -
Max 6

Analysis of Halo
Since
FV
S Cap RE FV Barga RE
PPE Invent TOTAL Inv adj
Res in
purch
30% 30%
3 000 500 1200 300
At acq 900 600 5 000
0.5 1 0.5
Since up 800 (300) 126
(80) 1 420
to boy 0.5 1 0.5
200 60 0.5
FV res 200
0.5
60
3 000 1 700 300 (80) 5 620 200 300 126
700
2 105 (100) (140) 559,5
Profit 1 865
0.5 1 1 0.5
150 45 0.5
FV adj 150
0.5
Dividend (300) (300) (90) 1
3 000 3 505 850 200 (220) 7 335 200 300 595,5 105
Max 8
Wkg 1
Profit on sale of shares:
Proceeds = R35 000 000
Cost of shares sold = R15 000 000
Profit on sale (I) = R20 000 000

Group profit on sale

Profit on sale (I) = R20 000 000
Since acq reserves sold: R5 250 000
Consolidated profit = R14 750 000

Wkg 2
Creative = 2 900 – 2 400 = 500
Revolution = 5 200 (FV 1 aug 20.18) – 4 800 = 400
500 + 400 = 900 (given in TB)
Question 2

Part a

IAS 37 defines a contingent liability as inter alia a present obligation that arises from
past events but is not recognised because it is not probable that an outflow of resources 1
embodying economic benefits will be required to settle the obligation.
In the financial statements of North Star ‒
1 The pending law suit should be classified as a contingent liability – 1
1.1 as there is a present obligation based on a past event (because the lift was not 1
properly maintained as indicated by the maintenance history, pointing to
negligence by North Star);
1.2 as it is not probable that there will be an outflow of economic resources. 1
According to the legal representative the probability of a pay-out is only 15%;
and
1.3 as the probability of outflow is not remote (15% is more than remote given the 1
Warrior group accounting policy threshold of 10%).
2 Therefore a description of the nature of the matter should be disclosed in the
notes to the annual financial statements and the following details provided if 1
possible: an estimate of its financial effect, the uncertainties surrounding the
claim and the possibility of any reimbursement.
In the financial statements of the Warrior group ‒
3 Warrior acquired control of North Star effective 30 September 20.17 (acquisition 1
date), when Warrior acquired 80% of the equity of North Star.
4 North Star is a subsidiary of Warrior as of 30 September 20.17 and will be 1
consolidated in the financial statements of the Warrior group as of that date.
That is, 100% of the assets and liabilities of North Star will be included in the 1
Warrior group statement of financial position as at 30 September 20.17.
5 The acquisition of the controlling interest in North Star is a business 1
combination, which is accounted for in accordance with IFRS 3.
6 IFRS 3 needs to be applied on the date of the business combination (30 September 1
20.17). IFRS 3 par. 23 states: ‘The requirements in IAS 37 do not apply in
determining which contingent liabilities to recognise as of the acquisition date.
Instead, the acquirer shall recognise as of the acquisition date a contingent liability
assumed in a business combination if it is a present obligation that arises from
1
past events and its fair value can be measured reliably. Therefore, contrary to IAS
37, the acquirer recognises a contingent liability assumed in a business
combination at the acquisition date even if it is not probable that an outflow of 1
resources embodying economic benefits will be required to settle the obligation.’
7 The contingent liability of North Star is thus an exception to the recognition 1
principles in IFRS 3 and is recognised as a provision/liability at the acquisition
date.
8 The fair value of the liability can be determined at the acquisition date based on 1
the estimated costs provided by the lawyers and the likelihood of settlement.
9 Therefore a provision should be recognised pertaining to the pending law suit on 1
the date of the business combination, in the accounting records of the group.

10 The amount of the provision should be R1 500 000 x 15% = R225 000. 1

Available 17
Presentation 1
Maximum 12
Part b

In the financial statements of North Star ‒

IAS 37 par. 72 states that ‘A constructive obligation to restructure arises only when
an entity:
(a) has a detailed formal plan for the restructuring identifying at least:
(i) the business or part of a business concerned;
(ii) the principal locations affected;
(iii) the location, function, and approximate number of employees who will be
compensated for terminating their services;
(iv) the expenditures that will be undertaken; and
(v) when the plan will be implemented; and
(b) has raised a valid expectation in those affected that it will carry out the
restructuring by starting to implement that plan or announcing its main features 2
to those affected by it.’

Par. 80 states that ‘A restructuring provision shall include only the direct expenditures
arising from the restructuring, which are those that are both:
(a) necessarily entailed by the restructuring; and
(b) not associated with the ongoing activities of the entity’. 1

Par. 81 states ‘A restructuring provision does not include such costs as retraining or
relocating continuing staff.’ 1
In the financial statements of North Star ‒
1 The restructuring provisions should not include the ZAR500 000 relocation and 1
retraining costs and these costs should only be recognised as an expense when
actually incurred (which is expected to be in 20.18).
1.1 The retrenchment packages offered to employees as part of the restructure of 1
R125 000 are termination benefits in terms of IAS 19 that are directly related to
the restructure and should be recognised at 15 September 20.17.
1.2 As at this date affected employees and branches and closure dates had been 1
specified, the affected employees had been informed and North Star is unable to
withdraw the offer.
1.3 North Star should measure the termination benefit provision at the best estimate 1
of the amount it will pay to settle the obligation at the end of the reporting period
(parr. 16 and 169 of IAS 19).
1.4 Accordingly, an amount of ZAR2 250 000 (60 employee’s x 30% x R125 000) 1
should be recognised.
1.5 No discounting is necessary as IAS 19 explicitly stipulates that the termination 1
benefits should not be discounted if payable within 12 months, and in this case the
year end is six months before expected payment date of 30 June 20.18.
1.6 At the reporting date, the provision is re-measured for changes in estimates. 1
In the financial statements of the Warrior group ‒
In the consolidated financial statements, the amount of the provision for restructuring 1
initially and subsequently would remained unchanged to that recognised by North
Star in terms of IA 19 Employee Benefits. Note that IFRS 3 requires that IAS 19
should be applied to applied in the measurement of employee benefits.
Available 12
Presentation 1
Maximum 10
Part c
R
Consideration transferred 1
9 643 347
Fair value of identifiable assets and liabilities 9 000 000 1
Contingent customer claim (from part (a)) (225 000) 1
Restructuring provision (from part (b)) (2 250 000) 1
Customer lists (legal OR separable, management intention 2
irrelevant) 2 500 000
Total 9 025 000
Non-controlling interest present ownership interests @ 20% of 1
identifiable NAV (
1 805 000)
Net fair NAV 7 220 000

Goodwill 2 423 347 1

8

Part d
Unpaid sick leave
Employee benefits expense – sick leave compensation 136 800 1
Provision for sick leave (SOFP) 136 800 1
To reflect increase in entitlement to sick leave
Calculations for journal
• average unused entitlement 500 employees at 7 days each
• average unused entitlement expected to be paid for sick leave:
- 270 employees x 3 days x R280 = 2 R226 800
- therefore adjustments to ‘Provision for sick leave’ account
226 800 – 90 000 (beginning bal) 1 R136 800
5
 Part e
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires all 1
material prior period errors to be corrected retrospectively. Mrs Streep is correct in insisting
that the R3 million under-estimation of the provision should not affect the 20.17 profit or
loss of Warrior.

IAS 8 paragraph 5 defines prior period errors as “omissions from, and misstatements in, the
entity’s financial statements for one or more prior periods arising from a failure to use, or 2
misuse of, reliable information that:
• was available when financial statements for those periods were authorised for issue
(1 April 20.17); and
• could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.”

Since the provision at 31 December 20.16 would have been determined at R3 000 000 had it
been properly determined based on all available information at that date, an error has
occurred and in accordance with IAS 8, the 20.16 financial statements must be restated
together with the comparatives and beginning retained earnings etc. 2

In respect of each correction of an error, an entity shall disclose (paragraph 49):

• the nature of the prior period error;
• for each prior period presented, to the extent practicable, the amount of the correction
(R3 000 000):
- for each financial statement line item affected; and
- if IAS 33 applies to the entity, for basic and diluted earnings per share;
• the amount of the correction at the beginning of the earliest prior period presented

Available 7
Maximum 5