TUTORIAL 2.

3 (90 MARKS)

Musk Ltd (“Musk”) is an unlisted public holding company which invests in various companies that are
developing disruptive technologies that make the world a better place, while simultaneously adding
value for all stakeholders. Musk is currently preparing group financial statements for the year ended 30
June 20x7, which are prepared in accordance with IFRS Accounting Standards.

Musk has investments in the following entities:

1. Tesla Ltd

Musk acquired 60% of the ordinary share capital and control of Tesla Ltd (“Tesla”) on 1 January 20x4, a
company which develops and manufactures electric cars. On the date of acquisition, all assets and
liabilities were fairly valued and the non-controlling interest was measured at fair value. Goodwill of
R70 million (correctly calculated) arose in the group financial statements of Musk on the date of
acquisition and had a recoverable amount of R48 million on 30 June 20x7 (30 June 20x6: R56 million; 30
June 20x5: R75 million).

Tax position

Tesla has been making losses since inception, as it has been investing heavily in the research and
development of electric motors, and has not yet ramped up manufacturing to achieve sufficient scale.
As such, Tesla had an assessed tax loss at 30 June 20x7 of R28 million (30 June 20x6: R22 million). As at
30 June 20x6, Tesla did not expect sufficient taxable profits to be available in the future against which
the tax loss could be utilised. However, in 20x7 Tesla ramped up production of their new Model 3 sedan,
leading them to forecast that future taxable profits will be available against which this full tax loss can
be utilised.

SARS has allowed Tesla to claim allowances in terms of Section 11D of the Income Tax Act for their
research and development into electric engines. Section 11D allows a tax deduction of 150% of the
expenditure incurred directly for research and development, in the year in which the expenditure
occured. Expenditure on research and development amounted to R2.3 million during 20x7 (20x6: R1.8
million). The allowances have been correctly included in the calculation of the tax loss of Tesla at each
reporting date.

Tesla had taxable temporary differences (excluding those relating to Tesla’s investment in SF) of R20.4
million as at 30 June 20x7 (30 June 20x6: R16 million). All of these taxable temporary differences attract
deferred tax at the standard tax rate and are before considering the effects (if any) of the assessed
losses.

2. SolarFarm (Pty) Ltd

On 1 July 20x6, Tesla purchased 25% of the ordinary shares of SolarFarm (Pty) Ltd (“SF”) for R47 million.
On the date of acquisition, all assets and liabilities were considered fairly valued with the exception of
machine S, which had a carrying amount of R1.8 million and a fair value of R2.6 million. No bargain
purchase gain arose on the date of acquisition. All parties agreed that the remaining useful life
ofmachine S was 4 years and it had a residual value of nil on 1 July 20x6.

Tesla’s investment in SF had a fair value of R52 million on 30 June 20x7.

Preference shares

On 31 December 20x6, SF issued 500 000 cumulative non-redeemable non-voting preference shares to
fund the construction of a new factory. These preference shares each pay a dividend of R5 every six
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months. On that date, Musk acquired 200 000 of these preference shares for their fair value of R23
million. The first dividend of R2.5 million was declared and paid on 30 June 20x7.

Machine X

On 1 January 20x7, SF acquired machine X from an unrelated party for R560 000 and sold the machine
to Musk on the same date for R800 000. SARS considered this transaction to be revenue in nature. Musk
immediately brought the machine into use and considered the machine to have a useful life of 5 years
and a residual value of R50 000. SARS allowed Musk to claim a tax allowance for the machine over a
period of 4 years, apportioned for partial years. Machine X was not revalued in 20x7.

Equity investments

SF owns equity investments which are classified as fair value through other comprehensive income (over
which neither Musk, Tesla nor SF have any influence), as follows:

Cost: Fair value: Fair value:

1 March 20x3 1 July 20x6 30 June 20x7
Equity investments R200 000 R380 000 R420 000

3. FlightX Ltd

On 1 April 20x5, Musk purchased 12% of the ordinary share capital of FlightX Ltd (“FX”) for R1.2 million.

On 1 October 20x6, Musk acquired control of FX when Musk acquired an additional 76% of the ordinary
share capital of FX for R9.4 million, bringing Musk’s holding in FX to 88%. On this date, the share capital
and retained earnings of FX amounted to R1 million and R7 047 200 respectively and land with a carrying
amount of R500 000 was considered undervalued by R400 000. This land was sold on 1 June 20x7 for R1
million to an unrelated party. The non-controlling interest was measured at fair value on the acquisition
date.

On 30 June 20x7, Musk sold 12% of the ordinary shares in FX to an unrelated party for fair value, bringing
Musk’s holding in FX down to 76%. However, Musk retained control of FX.

A 12% shareholding in FX had the following fair values on the following dates:

Date Fair value

30 June 20x6/1 July 20x6 R1.8 million
1 October 20x6 R2.2 million
30 June 20x7 R2.7 million

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Tutorial 2.3 continued

Equity investments

FX owns equity investments, purchased in 20x4, which are classified as fair value through other
comprehensive income (over which neither Musk nor FX have any influence), as follows:

Cost: Fair value: Fair value:

1 October 20x6 30 June 20x7
Equity investments R520 000 R820 000 R890 000

Extracts from companies financial statements:

Musk Tesla SolarFarm FlightX

Profit/(Loss) before tax 118 000 000 (3 200 000) 15 600 000 28 000 000
Tax expense (25 000 000) ? (4 400 000) (4 000 000)
Profit/(Loss) after tax 93 000 000 ? 11 200 000 24 000 000
Ordinary dividend declared
and paid on 30 June 20x7 40 000 000 - 4 200 000 16 000 000*
*Declared after Musk reduced their shareholding in FlightX to 76%.

Other information

• A tax rate of 27% and an effective CGT rate of 21.6% have always applied.
• Tesla and Musk account for associates, joint ventures and subsidiaries at cost in their separate
financial statements.
• Tesla and Musk has irrevocably designated all other equity investments as instruments at fair
value through other comprehensive income in their separate and group financial statements.
• Tesla does not prepare group financial statements, as it has applied the exemption to
consolidation and the equity method in accordance with IFRS 10.4(a) and IAS 28.17 respectively.
• The Musk group uses the revaluation model for items of property, plant and equipment and the
cost model for land. Accumulated depreciation is eliminated against the gross carrying amount
of the asset on the date of revaluation. Revaluation surplus is released to retained earnings
when the asset is sold.
• The only items of property, plant and equipment are those that are relevant from the
information provided to you.
• Depreciation for the year is based on the carrying amount at the beginning of the year (or the
cost, if acquired in the current year).
• Assume all companies’ profit or loss has been earned evenly over the year.
• All equity investments are considered to be capital in nature for tax purposes.

...//Required

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Tutorial 2.3 continued

REQUIRED Marks
1. Prepare a reconciliation of the opening and closing amounts of goodwill, as 12
required by IFRS 3.B67(d), as it would appear in the notes to the group financial
statements of Musk Ltd.
• Comparatives are required.
• Ignore separate disclosure of the gross amount and accumulated
impairment losses.
2. Prepare the tax rate reconciliation as it would appear in the notes to the financial 9
statements of Tesla Ltd (separate company).
• Tesla presents their tax rate reconciliation using numerical values (as
required by IAS 12.81(c)(i)).
• You are required to reconcile from accounting profit/(loss) before tax
multiplied by the applicable tax rate to total tax expense.
• As you have not been given the total tax expense, you are required to
use this reconciliation to calculate it (as the final number). Do not
attempt to calculate tax expense separately.
• Comparatives are not required.

X1(c): Communication skills 1

3. Draft a brief memorandum to the financial director of Musk Ltd in which you 12
discuss the following relating to the group financial statements of Musk Ltd for
the year ending 30 June 20x7:
• how machine X should be measured;
• how the deferred tax balance related to machine X should be measured;
• where any movements related to the above should be presented for the
year ended 30 June 20x7.
• Amounts and calculations are required.
X1(c): Communication skills 1
Y4(c): Judgement and decision-making 1
4. Calculate the earnings from associate line item as it should appear in the Musk 11
Group Statement of profit or loss for the year ending 30 June 20x7.
5. Calculate the group profit after tax as it should appear in the Musk Group 21
Statement of profit or loss for the year ending 30 June 20x7.
• Attribution of profit to parent equity-holders and non-controlling
interest is not required.
6. Prepare the Musk Group Statement of profit or loss and other comprehensive 21
income for the year ending 30 June 20x7.
• The Musk group presents their Statement of profit or loss and other
comprehensive income using a two-statement approach, and has
already prepared a Statement of profit or loss.
• Items of other comprehensive income are presented gross of tax, with
the related tax presented separately on one line.
• Ignore comparatives and note disclosure.
X1(c): Communication skills 1
TOTAL FOR TUTORIAL 2.3 90

Source: FRIII, Oct 2017 (amended)

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