Paper 1 Question 3

8/7/2019 Paper 1 Question 3

1/21

1

PAPER 1 QUESTION 3 SUGGESTED SOLUTION

(ALTERNATIVE A - IFRS 5 ONLY)

PART (a): Calculation of the goodwill or bargain purchase price on acquisition ofGamelands:

MarksAt acquisition equity (given) 530 000 1

Revaluation of buildings 40 000 1Deferred tax effect (x 28%) (11 200) 1CFavourable component of operating lease (pmt = 3 000; n = 15; i = 10% / 12) 42 137 1+1+1CDeferred tax effect (x 28%) (11 798) 1CRevaluation of equipment 60 000 1Deferred tax effect (x 28%) (16 800) 1C

Net asset value 632 339Less: Investment in subsidiary (430 000) 1Less: Settlement gain (25 000) 1Less: Non-controlling interest (given) (128 000) 1

Bargain purchase gain 49 339 1C

Available marks 13

Maximum content marks 13Presentation 1

Maximum marks 14

AWARDED

PART (b): Audit proceduresMarks

Discuss with management the policies, procedures and controls followed inrespect of the business combination, specifically in respect of the policy followedfor the valuation of non-controlling interest.

1

Obtain a schedule of the clients working papers showing the calculation of thebargain purchase gain. 1

Test the accuracy and valuation of the schedule by re-performing all casts andcalculations.

1

Inspect the purchase contract and verify the purchase price, acquisition date, in thename of Woodlands and duly signed.

1

Agree the equity balances and carrying amounts of underlying net assets to themanagement accounts of Gamelands Ltd at the date of acquisition.

1

Perform analytical procedures to prove the accuracy of the management accountsby comparing to the most recent audited financial statements.

1

Enquire of management and inspect correspondence, minutes of meetings andmanagement records to obtain evidence that all assets, liabilities, commitments,contingencies, etc at the effective date have been identified.

1

1) Agree the fair value of the NCI to an independent qualified valuers report OR2) Obtain managements calculation of the fair value of the NCI and agree the fairvalue to managements calculation OR3) Agree the fair value of the NCI to the market price per share multiplied by thenumber of shares.

1

1) Agree the valuation of the buildings of Gamelands on 1 March 2008 to anindependent qualified valuers report OR2) Obtain managements calculation of the valuation of the buildings and agree the fairvalue to managements calculation OR3) Agree the valuation of the buildings to the market price thereof.

1


2/21

2

Agree the valuation of the equipment leased to the farmer by Gamelands on1 March 2008 to an independent qualified valuers report (OR same as above).

1

Evaluate the competence and objectivity of the valuers and the scope of their workby inter alia reviewing their qualifications and valuation reports (scope sections).

1

Review the valuation reports OR managements calculations for appropriatemethodology, source data and assumptions and perform procedures to conclude ifthe auditor can place reliance on the work performed by the valuers OR management.

1

Agree the terms of the leases- and inventory agreements to the underlying signed

agreements

1

Agree the market related rates for the leases and inventory agreement to areliable independent external source for such rates.

1

Agree the discount rate for the leases to Gamelands incremental cost ofborrowings.

1

Recalculate the off market components of all agreements. 1Agree the amount paid for the acquisition to the bank statement and confirmation ofreceipt of payment.

1

Recalculate the deferred tax effects of the acquisition and compare tomanagements calculations.

1

Recalculate the goodwill/bargain purchase gain and compare to the recordedvalue.

1

Due to the bargain purchase gain, reassess the consideration transferred and thefair values of the net assets by enquiry of management if there are subsequentchanges therein. Confirm managements response by inspecting supportingdocumentation.

1

Obtain a management representation letter dealing specifically with the accuracyand valuation of amounts arising from the transaction in the consolidated financialstatements.

1

Available marks 21Maximum marks 10

AWARDED


3/21

3

PART (c): Consolidated statement of comprehensive incomeR Marks

Profit for the year (calc 1) 1 298 496 45T

Attributable to:- Owners of the parent (balancing figure) 1 373 077 1C- Non-controlling interest (calc 7) (74 581) 3T

1 298 496

Other comprehensive income:Property revaluation 1 759 240- Gain on property revaluation (calc 3) 2 270 334 4T- Tax expense (calc 3) (635 694) 2T- Tax adjustment on building held for sale (calc 5) 124 600 3T

Total comprehensive income for the year 3 057 736

Attributable to:- Owners of the parent (balancing figure) 3 113 837 1C- Non-controlling interest (74 581+ Gamelands= 128 334 x 72% x 20%) (56 101) 2C

3 057 736

Available marks 61Maximum content marks 49Discontinued operation 2

Presentation 3Maximum marks 52

AWARDED

CALCULATIONS FOR PART (c)

1. Profit for the year

R MarksWoodlands 1 795 153Profit of Woodlands Limited given 2 500 000Adjustment on depreciation for December: assets held for sale- Buildings [(120 000 / 12) x 72%] 7 200 1- Plant [(25 000 / 12) x 72%] 1 500 1Impairment loss: (calc 2) 17T- Land [(105 107 + 2 805) x 86%] (92 804) 1C- Buildings [(355 261 + 9 482) x 86%] (313 679) 2C- Plant [(26 715 + 713) x 72%] (19 748) 1COperating lease head office building (manufacturing)- Provision for onerous contract (calc 4) (361 655) 6TSettlement gain on pre-existing relationship 25 000 1


Gamelands Limited (606 657)Profit earned from 1 March to 31 December (380 000 250 000) 130 000 1Additional depreciation: buildings [(40 000 / 20 x 10 / 12) x 72%] (1 200) 2Amortisation intangible asset: favourable operating lease [(42 137 / 15 x 10) x 72%] (20 226) 2Depreciation adjustment: equipment (calc 6) a decrease in depreciation 7 649 4TProvision for termination benefits [(20 x 25 000) + (40 x 70% x 18 000) x 72%] (722 880) 3

Rockwood Limited 110 000


4/21

4

R Marks- Profit for the year (390 000 280 000) 110 000 1- Bargain purchase gain 1

Total profit for the year 1 298 496Total marks transferred to SoCI 45

2. Impairment loss on disposal groupR Marks

1/12/2008 (initial measurement)Carrying amount 1/12/2008:- Land 500 000- Buildings (1 680 000 + 10 000) 1 690 000 1P- Plant (125 000 + 2 083) 127 083 1P- Inventory 110 000 1- Derivatives 90 000 1

2 517 083Fair value less cost to sell (2 030 000)

Impairment loss (1/12/2008) 487 083 1CAllocated to:

- Land (487 083 x 500 000 / 2 317 083) 105 107 1P- Buildings (487 083 x 1 690 000 / 2 317 083) 355 261 1P- Plant (487 083 x 127 083 / 2 317 083) 26 715 1P

487 083

31/12/2008 (subsequent measurement)Carrying amount 31/12/2008:- Land (500 000 105 107) 394 893 1P- Buildings (1 690 000 355 261) 1 334 739 1P- Plant (127 083 26 715) 100 368 1P- Inventory 123 000 1- Derivatives 95 000 1

2 048 000

Fair value less cost to sell (2 035 000)Impairment loss (31/12/2008) 13 000 1CAllocated to:- Land (13 000 x 394 893 / 1 830 000) 2 805 1P- Buildings (13 000 x 1 334 739 / 1 830 000) 9 482 1P- Plant (13 000 x 100 368 / 1 830 000) 713 1P

13 000Marks transferred to calc 1 17


5/21

5

3. Property revaluationR Marks

Woodlands Limited 2 142 000- Manufacturing given 1 120 000 1- Eco-tourism given 1 022 000 1Gamelands Limited additional surplus for group 128 334- Pre-tax revaluation (120 000 / 72%) 166 667 1- Accounted for at acquisition (40 000 1 667) (38 333) 1

2 270 334Marks transferred to SoCI 4

Tax on property revaluation- Woodlands [(1 120 000 + 1 022 000) x 28%] (599 760) 1C- Gamelands (128 334 x 28%) (35 934) 1C

(635 694)

Marks transferred to SoCI 2

4. Provision for onerous contractCosts exceeds benefits from 31 March 2009, but contract alreadyonerous

R MarksPV of provision on 31/3/2009

(pmt = 23 000; n = 32; i = 10% / 12; PV = ? 643 700)80% x 643 700 514 960 3PV of provision on 31/12/2008 502 298 2(FV = 514 960; n = 3; i = 10%/12)After tax (502 298 x 72%) 361 655 1C

Marks transferred to calc 1 65. Deferred tax adjustment on buildings classified as held for sale: 1/12/2008

R MarksDeferred tax balance: recovery through use 277 200 1C(1 690 000 700 000) x 28%Deferred tax balance: recovery through sale (152 600) 1C + 1[(1 690 000 800 000) x 14% + (800 000 700 000) x 28%]

Tax adjustment 124 600Marks transferred to SoCI 36. Depreciation adjustment: equipment subject to operating lease

R MarksDepreciation include in profit of Gamelands 35 416 1(170 000 / 4 x 10 / 12)Depreciation from a group perspective: (24 792)- Unfavourable component [66 600 / 18 x 10] = (37 000) 1- Fair value of equipment [296 600 / 4 x 10 / 12] = 61 792 1

Decrease in depreciation 10 624After tax increase in profit (10 624 x 72%) 7 649 1C

Marks transferred to calc 1 4

7. Profit for the year attributable to non-controlling interestR Marks

Gamelands Limited (-606 657 x 20%) (121 331) 1CRockwood Limited: 1st 7 months [(335 000 280 000) x 40%] 22 000 1Rockwood Limited: 2nd 5 months [(390 000 335 000) x 45%] 24 750 1

(74 581)Marks transferred to calc 1 3

PART (d): Consolidated statement of changes in equity


6/21

6

Woodlands GroupConsolidated Statement of Changes in Equity for the year ended 31 December 2008

Revaluation NCIsurplus Marks Marks

Opening balance - -Total comprehensive income 1 740 760 (56 101) 1C- Profit for the year - (74 581)- Other comprehensive income 1 740 760 1C 18 480

Acquisition of Gamelands Ltd 128 000 1Acquisition of Rockwood Ltd (calc 3) 178 880 3TShares issued by subsidiary (calc 2) 81 740 4TTransfers- To retained earnings (calc 1) (154 400) 4TClosing balance 1 586 360 332 519Analysed as:- Equity relating to assets held for sale

[(1 120 000 x 72%) 49 280 + 124 600)] 881 720 1- Closing balance: revaluation surplus 704 640

Available marks 6 9Maximum content marks 5 7

Presentation (layout) 1 1Maximum marks 6 8

AWARDED

CALCULATIONS FOR PART (d)

1. Transfer of revaluation surplus to retained earningsR Marks

Woodlands Limited- Manufacturing [(110 000 41 556 {680 000 / 15 x 11 / 12}) x 72%] 49 280 1 + 1C- Eco-tourism [(1 022 000 x 72%) / 7] 105 120 1 + 1C

Gamelands Limited(No transfer as revaluation takes place at year end) -

154 400Marks transferred to SoCE 4

2. Shares issued by subsidiaryR Marks

Increase in non-controlling interestInterest in net asset value after share issue 282 240 2(610 000 + 17 200) x 45%Interest in net asset value before share issue (200 880) 1(485 000 + 17 200) x 40%

81 360Plus:Portion of goodwill transferred 380 181 740

Marks transferred to SoCE 4


7/21

7

OR

Alternative calculation for shares issued by subsidiary (would be done in an analysis ofequity)

R MarksAllocation of share capital 30 000Allocation of share premium 33 750 1Transfer of at reserves [(280 000 + 17 200) x 5%] 14 860 1

Transfer of since reserves (55 000 x 5%) 2 750 181 360

Plus:Portion of goodwill transferred 380 181 740


3. NCI on Rockwood LtdR Marks

Net asset value 430 000Revaluation of land 20 000 1Deferred tax on land (20 000 x 14%) (2 800) 1C

447 200

40% 178 880 1CMarks transferred to SoCE 3


8/21

8

(ALTERNATIVE B - IAS 36 individual before IFRS 5)PART (a): Calculation of the goodwill or bargain purchase price on acquisition ofGamelands:

MarksAt acquisition equity (given) 530 000 1Revaluation of buildings 40 000 1Deferred tax effect (x 28%) (11 200) 1CFavourable component of operating lease (pmt = 3 000; n = 15; i = 10% / 12) 42 137 1+1+1CDeferred tax effect (x 28%) (11 798) 1CRevaluation of equipment 60 000 1Deferred tax effect (x 28%) (16 800) 1C



Available marks 13Maximum content marks 13


AWARDED



1

Obtain a schedule of the clients working papers showing the calculation of thebargain purchase gain.

1


1


1


1


1


1

1) Agree the fair value of the NCI to an independent qualified valuers report OR2) Obtain managements calculation of the fair value of the NCI and agree the fair

value to managements calculation OR3) Agree the fair value of the NCI to the market price per share multiplied by thenumber of shares.

1


1


1


9/21

9


1


1

Agree the terms of the leases- and inventory agreements to the underlying signedagreements

1

Agree the market related rates for the leases and inventory agreement to a

reliable independent external source for such rates.

1


1


1


1


1

Due to the bargain purchase gain, reassess the consideration transferred and thefair values of the net assets by enquiry of management if there are subsequent

changes therein. Confirm managements response by inspecting supportingdocumentation.

1


1


AWARDED


10/21

10




1 437 027




3 032 867



AWARDED



R MarksWoodlands 1 933 684Profit of Woodlands Limited given 2 500 000Adjustment on depreciation for December: assets held for sale- Buildings [(120 000 / 12) x 72%] 7 200 1- Plant [(25 000 / 12) x 72%] 1 500 1Impairment loss ito IAS 36:- Land [(500 000 230 000) x 86%] (232 200) 1+1C- Buildings [zero, all recognised in OCI] -- Plant [(127 083 50 000) x 72%] (55 500) 1C+1CImpairment loss ito IFRS5: (calc 2) - 12TOperating lease head office building (manufacturing)- Provision for onerous contract (calc 4) (361 655) 6T

Settlement gain on pre-existing relationship 25 000 1Bargain purchase gain 49 339 1C



11/21

11

R MarksRockwood Limited 110 000- Profit for the year (390 000 280 000) 110 000 1- Bargain purchase gain 1



1/12/2008 (initial measurement)Carrying amount 1/12/2008:- Land 230 000 1P- Buildings 1 500 000 1P- Plant 50 000 1P- Inventory 110 000 1- Derivatives 90 000 1


No IFRS5 impairment - 1C

31/12/2008 (subsequent measurement)Carrying amount 31/12/2008:- Land 230 000 1P- Buildings 1 500 000 1P- Plant 50 000 1P- Inventory 123 000 1- Derivatives 95 000 1


No IFRS5 impairment - 1CMarks transferred to calc 1 12


12/21

12


Woodlands Limited 1 952 000- Manufacturing given 1 120 000 1- Eco-tourism given 1 022 000 1- Manufacturing impairment loss (1 690 000 1 500 000) (190 000) 1Gamelands Limited additional surplus for group 128 334- Pre-tax revaluation (120 000 / 72%) 166 667 1

- Accounted for at acquisition (40 000 1 667) (38 333) 12 080 334

Marks transferred to SoCI 5Tax on property revaluation- Woodlands [(1 120 000 + 1 022 000 190 000) x 28%] (546 560) 1C- Gamelands (128 334 x 28%) (35 934) 1C

(582 494)Marks transferred to SoCI 2


R Marks

PV of provision on 31/3/2009(pmt = 23 000; n = 32; i = 10% / 12; PV = ? 643 700)80% x 643 700 514 960 3PV of provision on 31/12/2008 502 298 2(FV = 514 960; n = 3; i = 10%/12)After tax (502 298 x 72%) 361 655 1C


R MarksDeferred tax balance: recovery through use 224 000 1C(1 500 000 700 000) x 28%Deferred tax balance: recovery through sale (126 000) 1C + 1[(1 500 000 800 000) x 14% + (800 000 700 000) x 28%]Tax adjustment 98 000

Marks transferred to SoCI 313. Depreciation adjustment: equipment subject to operating lease



Marks transferred to calc 1 414. Profit for the year attributable to non-controlling interest

R MarksGamelands Limited (-606 657 x 20%) (121 331) 1CRockwood Limited: 1st 7 months [(335 000 280 000) x 40%] 22 000 1Rockwood Limited: 2nd 5 months [(390 000 335 000) x 45%] 24 750 1



13/21

13

PART (d): Consolidated statement of changes in equityWoodlands GroupConsolidated Statement of Changes in Equity for the year ended 31 December 2008


Opening balance - -Total comprehensive income 1 577 360 (56 101) 1C- Profit for the year - (74 581)

- Other comprehensive income 1 577 360 1C 18 480Acquisition of Gamelands Ltd 128 000 1Acquisition of Rockwood Ltd (calc 3) 178 880 3TShares issued by subsidiary (calc 2) 81 740 4TTransfers- To retained earnings (calc 1) (154 400) 4TClosing balance 1 422 960 332 519Analysed as:- Equity relating to assets held for sale[((1 120 000 190 000) x 72%) 49 280 + 98 000)] 718 320 1- Closing balance: revaluation surplus 704 640

Available marks 6 9

Maximum content marks 5 7Presentation (layout) 1 1Maximum marks 6 8

AWARDED



Woodlands Limited- Manufacturing [(110 000 41 556 {680 000 / 15 x 11 / 12}) x 72%] 49 280 1 + 1C

- Eco-tourism [(1 022 000 x 72%) / 7] 105 120 1 + 1CGamelands Limited(No transfer as revaluation takes place at year end) -



Increase in non-controlling interestInterest in net asset value after share issue 282 240 2(610 000 + 17 200) x 45%Interest in net asset value before share issue (200 880) 1(485 000 + 17 200) x 40%

81 360Plus:Portion of goodwill transferred 380 1



14/21

14

OR








447 200



15/21

15

(ALTERNATIVE C - IAS 36 CGU before IFRS 5)PART (a): Calculation of the goodwill or bargain purchase price on acquisition ofGamelands:

MarksAt acquisition equity (given) 530 000 1Revaluation of buildings 40 000 1Deferred tax effect (x 28%) (11 200) 1CFavourable component of operating lease (pmt = 3 000; n = 15; i = 10% / 12) 42 137 1+1+1CDeferred tax effect (x 28%) (11 798) 1CRevaluation of equipment 60 000 1Deferred tax effect (x 28%) (16 800) 1C



Available marks 13Maximum content marks 13


AWARDED



1

Obtain a schedule of the clients working papers showing the calculation of thebargain purchase gain.

1


1


1


1


1


1

1) Agree the fair value of the NCI to an independent qualified valuers report OR2) Obtain managements calculation of the fair value of the NCI and agree the fair

value to managements calculation OR3) Agree the fair value of the NCI to the market price per share multiplied by thenumber of shares.

1


1


1


16/21

16


1


1

Agree the terms of the leases- and inventory agreements to the underlying signedagreements

1

Agree the market related rates for the leases and inventory agreement to a

reliable independent external source for such rates.

1


1


1


1


1

Due to the bargain purchase gain, reassess the consideration transferred and thefair values of the net assets by enquiry of management if there are subsequent

changes therein. Confirm managements response by inspecting supportingdocumentation.

1


1


AWARDED


17/21

17




1 466 551




3 062 391



AWARDED



R MarksWoodlands 1 963 208Profit of Woodlands Limited given 2 500 000Adjustment on depreciation for December: assets held for sale- Buildings [(120 000 / 12) x 72%] 7 200 1- Plant [(25 000 / 12) x 72%] 1 500 1Impairment loss: (calc 2) 19T- Land [(105 107 + 1 869 + 131 770) x 86%] (205 322) 1C- Buildings (10 656 x 86%) (9 164) 1C- Plant [(26 715 + 475 + 33 491) x 72%] (43 690) 1COperating lease head office building (manufacturing)- Provision for onerous contract (calc 4) (361 655) 6TSettlement gain on pre-existing relationship 25 000 1



Rockwood Limited 110 000


18/21

18

R Marks- Profit for the year (390 000 280 000) 110 000 1- Bargain purchase gain 1



1/12/2008 (application ito IAS 36)Carrying amount 1/12/2008:- Land 500 000- Buildings (1 680 000 + 10 000) 1 690 000 1P- Plant (125 000 + 2 083) 127 083 1P- Inventory 110 000 1- Derivatives 90 000 1


Impairment loss (1/12/2008) 487 083 1CAllocated to:

- Land (487 083 x 500 000 / 2 317 083) 105 107 1P- Buildings (487 083 x 1 690 000 / 2 317 083) [Ltd to R190 000] 355 261 1P- Plant (487 083 x 127 083 / 2 317 083) 26 715 1P

487 083Reallocated (Building = R165 261) to:- Land (165 261 x 500 000 / 627 083) 131 770 1P- Plant (165 261 x 127 083 / 627 083) 33 491 1P

31/12/2008 (subsequent measurement)Carrying amount 31/12/2008:- Land (500 000 105 107 131 770) 263 123 1P- Buildings (1 690 000 190 000) 1 500 000 1P- Plant (127 083 26 715 33 491) 66 877 1P

- Inventory 123 000 1- Derivatives 95 000 1


Impairment loss (31/12/2008) 13 000 1CAllocated to:- Land (13 000 x 263 123 / 1 830 000) 1 869 1P- Buildings (13 000 x 1 500 000 / 1 830 000) 10 656 1P- Plant (13 000 x 66 877 / 1 830 000) 475 1P

13 000Marks transferred to calc 1 19


19/21

19


Woodlands Limited 1 952 000- Manufacturing given 1 120 000 1- Eco-tourism given 1 022 000 1- Manufacturing building impairment loss (190 000) 1Gamelands Limited additional surplus for group 128 334- Pre-tax revaluation (120 000 / 72%) 166 667 1

- Accounted for at acquisition (40 000 1 667) (38 333) 12 080 334

Marks transferred to SoCI 5Tax on property revaluation- Woodlands [(1 120 000 + 1 022 000 190 000) x 28%] (546 560) 1C- Gamelands (128 334 x 28%) (35 934) 1C

(582 494)Marks transferred to SoCI 2


R Marks

PV of provision on 31/3/2009(pmt = 23 000; n = 32; i = 10% / 12; PV = ? 643 700)80% x 643 700 514 960 3PV of provision on 31/12/2008 502 298 2(FV = 514 960; n = 3; i = 10%/12)After tax (502 298 x 72%) 361 655 1C


R MarksDeferred tax balance: recovery through use 224 000 1C(1 500 000 700 000) x 28%Deferred tax balance: recovery through sale (126 000) 1C + 1[(1 500 000 800 000) x 14% + (800 000 700 000) x 28%]Tax adjustment 98 000

Marks transferred to SoCI 320. Depreciation adjustment: equipment subject to operating lease



Marks transferred to calc 1 421. Profit for the year attributable to non-controlling interest

R MarksGamelands Limited (-606 657 x 20%) (121 331) 1CRockwood Limited: 1st 7 months [(335 000 280 000) x 40%] 22 000 1Rockwood Limited: 2nd 5 months [(390 000 335 000) x 45%] 24 750 1



20/21

20

PART (d): Consolidated statement of changes in equityWoodlands GroupConsolidated Statement of Changes in Equity for the year ended 31 December 2008


Opening balance - -Total comprehensive income 1 577 360 (56 101) 1C- Profit for the year - (74 581)

- Other comprehensive income 1 577 360 1C 18 480Acquisition of Gamelands Ltd 128 000 1Acquisition of Rockwood Ltd (calc 3) 178 880 3TShares issued by subsidiary (calc 2) 81 740 4TTransfers- To retained earnings (calc 1) (154 400) 4TClosing balance 1 422 960 332 519Analysed as:- Equity relating to assets held for sale

[({1 120 000 190 000} x 72%) 49 280 +98 000)]

718 320 1

- Closing balance: revaluation surplus 704 640

Available marks 6 9Maximum content marks 5 7Presentation (layout) 1 1

Maximum marks 6 8

AWARDED



Woodlands Limited

- Manufacturing [(110 000 41 556 {680 000 / 15 x 11 / 12}) x 72%] 49 280 1 + 1C- Eco-tourism [(1 022 000 x 72%) / 7] 105 120 1 + 1CGamelands Limited(No transfer as revaluation takes place at year end) -



Increase in non-controlling interestInterest in net asset value after share issue 282 240 2(610 000 + 17 200) x 45%

Interest in net asset value before share issue (200 880) 1(485 000 + 17 200) x 40%81 360




21/21

21

OR








447 200


Documents

Paper 1 Question 3