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QUESTION 3: SUGGESTED SOLUTION
PART I
Dr Cr
R R
Hlamba Ltd
J1 Share capital (SCE) (given) 100 000 (1)
Retained earnings (SCE) (given) 350 000 (1)
Equipment (SFP) (250 000 – 175 000) 75 000 (1)
Goodwill (SFP) (balancing) 60 050 (1)
Deferred tax (SFP) (75 000 x 28%) 21 000 (1)
Investment in Hlamba (SFP) [C1] 463 250 (8)
Non-controlling interests (SFP) [C7] 100 800 (1)
At-acquisition elimination journal
J2 Other expenses (depreciation) (P/L) 15 000
Accumulated depreciation (SFP) (75 000/5) OR [C3] 15 000 (1)
Depreciation on equipment revalued at acquisition
J3 Deferred tax (SFP) (15 000 x 28%) 4 200 (1)
Income tax expense (P/L) 4 200
Taxation effect of depreciation
J4 Revenue (P/L) (given) 100 000 (1)
Cost of sales (P/L) 100 000
Elimination of intragroup sales for 20.18
J5 Cost of sales (P/L) [C4] 5 500 (1)
Inventory (SFP) [C4] or (20/120 x 33 000) 5 500 (1)
Intragroup sales of inventory (SFP)
J6 Deferred tax (SFP) (5 500 x 28%) 1 540 (1)
Income tax expense (P/L) 1 540
Taxation effect of intragroup sales
J7 Non-controlling interests (P/L) ((250 000 – 15 000 [J2] + 47 840 (1)
4 200 [J3]) x 20%) or (239 200 x 20%)
Non-controlling interests (SFP) 47 840 (1)
Allocation of share of profit or loss and other comprehensive
income of non-controlling interests
Isevisi Ltd
J8 Investment in Isevisi (SFP) [C5] 35 000 (3)
Share of P/L of associate (P/L) 35 000 (1)
Recognition of excess at acquisition
J9 Investment in Isevisi (SFP) (225 000 x 40% x 6/12) 45 000 (2)
Share of P/L of associate (P/L) 45 000 (1)
Allocation of share of P/L of associate (equity method)
J10 Other income (P/L) ((25 000 – 20 000) x 40%) OR [C6] 2 000 (1)
Depreciation (P/L) (2 000/4 x 3/12) or [C6] 125 (1)
Investment in associate (SFP) (balancing) 1 875 (1)
Elimination on downstream intragroup transaction
J11 Deferred tax (SFP) 525 (1)
Income tax expense (P/L) (1 875 x 28%) 525 (1)
Taxation effect of intragroup sale
Total (34)
Maximum (29)
Communication skills: presentation and layout (1)
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COMMENT
Refer to the screencast on myUnisa for a discussion of this question. The screencast
covers the scenario, what is required and the solution and will help you develop the skills
required to attempt questions containing similar principles.
COMMENT
Good examination technique is to always provide the excess journal [J8], even if
goodwill is calculated. Since a mistake could be made in the calculation of goodwill,
providing the excess journal ensures that marks can still be earned for the journal.
CALCULATIONS
C1. Consideration paid
Cash paid on 1 March 20.17 (given) 150 000 [1]
Less: Costs that must be either expensed or capitalised (37 000)
Lawyer’s fees included in cash paid on 1 March 20.17 – expensed (15 000) [1]
Other acquisition costs included in cash paid on 1 March 20.17 – expensed (10 000) [1]
Share issue costs – capitalised against share capital (12 000) [1]
Cash payable on 28 February 20.18 [C2] 156 250 [2]
Shares issued (1 000 x 134) 134 000 [1]
Contingent consideration (given) 60 000 [1]
463 250
[8]
COMMENT
The main principle that applies to determining the consideration paid is that the fair value
must be used. Furthermore, all acquisition-related expenses, except costs for registering
and issuing debt and equity securities, must be expensed (IFRS 3.53).
It is important to determine how the parent treated these costs in its separate accounting
records to determine if any adjustment is required in the consolidated records. The
information in the question must therefore be read carefully.
C2. Cash payable on 28 February 20.18
HP 10 B11 Sharp EL 733A Sharp EL 738
• 2nd F C (Clear All) • 2nd F [Link] (Clear All) • 2nd F MODE (Clear All)
• 1 N • 1 n • 1 N [1]
• R0 PMT • R0 PMT • R0 PMT
• 175 000 FV • 175 000 FV • 175 000 FV [1]
• 12% I/YR • 12% i • 12% I/Y [1]
• PV ⇒ 156 250 • COMP PV ⇒156 250 • COMP PV ⇒156 250
[2]
C3. Depreciation on equipment revalued at acquisition
Remaining useful life 5 years
Revaluation at acquisition date (250 000 – 175 000) 75 000
Additional depreciation for 20.18 (75 000/5) 15 000 [1]
Taxation expense (15 000 x 28%) (4 200) [1]
Adjustment for 20.18 10 800
[2]
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C4. Unrealised profit in inventory – 20.18
Inventory – closing balance 28 February 20.18 33 000
Unrealised profit (20/120 x 33 000) 5 500 [1]
Deferred tax expense (5 500 x 28%) (1 540) [1]
Adjustment for 20.18 3 960
[2]
C5. Excess at acquisition of Isevisi
Share capital (given) 100 000
Retained earnings (given) 400 000
500 000 [½]
Ncwaba’s share of 40% (500 000 x 40%) 200 000 [½]
Consideration paid: (165 000)
Cash paid (given) 150 000 [½]
Lawyer’s fees (given) 10 000 [½]
Other acquisition-related costs (given) 5 000 [½]
Excess at acquisition 35 000
[2½]
C6. Profit on sale of equipment – 20.18
Profit on sale of equipment ((25 000 – 20 000) x 40%) 2 000 [1]
Profit realised in 20.18 (2 000/4 x 3/12) (125) [1]
Net effect on group profit or loss 1 875
Deferred tax expense (4 687 x 28%) (525) [1]
Adjustment for 20.18 1 350
[3]
C7. Analysis of owner’s equity of Hlamba Ltd (for the sake of completeness)
Ncwaba Ltd 80%
Total At Since NCI
At acquisition
Share capital 100 000
Retained earnings 350 000
Equipment (250 000 – 175 000) 75 000
Deferred tax (75 000 x 28%) (21 000)
504 000 403 200 100 800
Equity represented by goodwill
(balancing) 60 050 60 050 –
Consideration and NCI [C1] 564 050 463 250 100 800
Since acquisition
Current year
Profit for the year 239 200 191 360 47 840
Profit (given) 250 000
Depreciation (75 000/5 x 72%) (10 800)
803 250 191 360 148 640
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C8. Analysis of owner’s equity of Isevisi Ltd (for the sake of completeness)
Ncwaba Ltd 40%
Total At Since
At acquisition
Share capital 100 000
Retained earnings 400 000
500 000 200 000
Excess (balancing) 35 000
Consideration [C5] 165 000
Current year
Profit for the year (225 000 x 6/12) 112 500 45 000
612 500 45 000
PART II
Discussion of whether CashCow Ltd should consolidate Beyond Ltd or not
An entity that is a parent must present consolidated financial statements (IFRS 10.4).
An investor determines whether it is a parent by assessing whether it controls an investee
(IFRS 10.5).
Control
An investor controls an investee when it is exposed, or has rights, to variable returns from
its involvement with the investee and has the ability to affect those returns through its power
over the investee (IFRS 10.6–7).
1A. Power over the investee (IFRS 10.7(a))
To have power over an investee, an investor must have existing rights that gives it a current
ability to direct the relevant activities (IFRS 10.B9).
Existing rights
The right to direct an investee to enter into transactions or to veto any changes to
transactions for the benefit of the investor (IFRS 10.B15(d)):
CashCow Ltd only has 45% of the shareholding of Beyond Ltd but can still have power even
if it holds less than a majority of the voting rights of an investee (IFRS 10.B38). (2)
According to the shareholders’ agreement, CashCow Ltd has the right to veto any decisions
about transactions that will not benefit Beyond Ltd’s business in general. This also indicates
that CashCow Ltd has the right to direct the relevant activities of Beyond Ltd. (2)
Direct relevant activities
The right to appoint and remunerate an investee’s key management personnel or service
providers and to terminate their services or employment (IFRS 10.B12(b)):
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The relevant activities of Beyond Ltd are the selling and buying of items and services. (1)
According to the shareholders’ agreement, CashCow Ltd has the right to appoint service
providers and to terminate their services. This indicates that CashCow Ltd has the ability to
direct the relevant activities. (2)
CashCow Ltd does not hold the majority of the shares but it does have power over Beyond Ltd. (1)
1B. Exposure/rights to variable returns (IFRS 10.7(b))
CashCow Ltd has rights to variable returns in the form of dividends due to its 45%
shareholding in Beyond Ltd. (1)
1C. Link between power and returns (IFRS 10.7(c))
Since it has the right to appoint and terminate service providers and to veto transactions,
CashCow Ltd can use its power to affect its returns from its involvement with Beyond Ltd. (2)
Conclusion
CashCow Ltd is required to consolidate Beyond Ltd in its consolidated financial statements (1)
for the year ended 28 February 20.18.
Total (12)
Maximum (9)
Communication skills: logical flow and conclusion (1)
MJM