FAC4863/102/0/2020

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This tutorial letter contains important information

about your module.

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On this site, you will find the following material:

‡ electronic copy of this document under as well as all your

tutorial letters under
‡ module-specific learning materials under as also contained in this
document

‡ In this brief overview, we refer to those functions of myUnisa that you may
encounter and may need on a regular basis. On the left-hand side of your myUnisa
module page, you will find a number of options as indicated below. These options
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Assignments and so forth from the top down.

MJM
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myUnisa toolbar

When you click on the myUnisa tools, there may, or may not be, a definition of the tool
at the top of the page that is opened. For example, the tool is
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Each myUnisa tool has its own function and is treated very briefly below. You can open
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MovLQJDURXQGLQP\8QLVDLVNQRZQDV³QDYLJDW

The myUnisa page of certain modules may include a longer list of tools than others. The
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The following is a brief overview of the myUnisa tools for this module, how some of
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Here you will find a welcome message (refer to page 3 of this document) from your
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The tool also contains a calendar where important events have been indicated
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you have clicked on these blocks, additional information will appear at the bottom of the
calendar, indicating the event.

Lastly, a summary of any announcement made (refer to the tool

below) will appear on the tool for at least ten days.

MJM
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View myUnisa regularly. Important announcements are issued on the

website.

The tests and their solutions, as well as Tutorial letters and important resources are
comments from the markers are posted after available on the website.
the tests.

Remember the CTA support website:

Use the FAC mailbox: [email protected]

Contact your lecturer telephonically; or

Contact the College of Accounting Sciences (CAS) at:

[email protected].

MJM
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Confirm your on myUnisa

You have to be seated before the reading
and in TUT 302.
time starts. student will be allowed after the reading
Any changes to your venue need
time has started.
to be done well in advance.

Write the correct Do not write in or

and pen.
on Only use or ink.
the script to avoid that
your script might get lost!
Ensure to write the
module.
where your test
should be remarked. No marks will be awarded if the
Your mark can incorrect module was written.
with a remark.

Read your and all the thoroughly!

MJM
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Examination technique remains the key distinguishing factor between students who
and those who .

your exam technique by answering the additional questions in each tutorial letter as
well as the questions in Tutorial Letter 107 under test or exam conditions.

Students are advised to utilise their time wisely and allocate time for
each question based on the number of marks out of which the
question counts.

Students should be aware of the tendency to spend too much time

on the first question attempted and too little time on the last ±rather
return to any incomplete answered questions after attempting all
other questions.

Marks can only be awarded for answers that were .

E.g. if disclosure was required, no marks will be awarded for

calculations that were not in the required disclosure.

MJM
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Students need to and structure their answers.

No writing in pencil will be marked.

A marker will not be able to allocate marks if it is not possible to

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Only abbreviations used in the tutorial letters will be accepted.

It is essential that students supply and reference detailed

calculations to support the figures in their answers.

Students need to ensure that their calculations are properly and

neatly to the final solution. Ensure that the
answer to your calculation is the amount that has been transferred
to the solution. If a different amount is used in your solution, your
calculation can not be marked.

Remember we mark from your solution to the calculations!

Marks are awarded for applying the theory to the content of the
question. are awarded for writing the theory from the
Accounting Standards.
Write neatly, use bullet points where possible and ensure to obtain
the presentation marks!

Students need to indicate Dr and Cr on top of the columns where

the amounts are written. Students also need to indicate whether the
statement of profit or loss (P/L), other comprehensive income (OCI)
or the statement of financial position (SFP) are debited or credited.
Also note whether the required section requires dates and journal
narrations.

Deferred tax expense 14 000

Deferred tax 14 000
Provide deferred tax for the current
financial year

MJM
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The principle of examination for Conceptual Framework for Financial Reporting is at level.

MJM
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(20 marks)

You are employed by Expert Ltd (Expert). Expert provides accounting and tax consulting services to
various clients. The International Accounting Standards Board (Board) issued the revised
Conceptual Framework for Financial Reporting (Conceptual Framework), a comprehensive set of
concepts for financial reporting in March 20.18. Your portfolio includes the following two allocated
clients who have approached you regarding the recognition of assets and liabilities in terms of the
revised Conceptual Framework.

On 13 June 20.16, Mogala Ltd (Mongala) purchased a holographic touch screen patent from
Innovation Ltd (Innovation) at a cost of R250 million. This patent will give Mogala access to all the
patents internationally and locally for the design and manufacture of holographic touch screens. Only
Mogala can utilise the patent to design and manufacture the holographic touch screens. This will
result in Mogala selling the first holographic touch screen smartphones and it will ensure that Mogala
is the only designer and manufacturer of such smartphones.

Mogala will manufacture all the other components of the smartphones and it will assemble the
holographic touch screen smartphones and it is estimated that 90 million holographic touch screen
smartphones will sell within the next financial year at a satisfactory profit margin.

Sea Homes Ltd (Sea Homes) is a new real estate agency that specialise in selling beach front
holiday homes for the upper middle class market. Sea Homes is operating in the South Coast of
Kwazulu-Natal region of South Africa. As part of its expansion strategy, a decision has been taken
by the directors of the company to open a new office in the North Coast of Kwazulu-Natal region.

Sea Homes paid R40 000 to Umhlanga News to advertise holday homes for sale in the newspaper
to appear during January 20.18. This amount was paid on 15 December 20.18.

Discuss, in terms of The Conceptual Framework for Financial Reporting 20.18, whether 18
the patent (refer to client 1) and payment to Umhlanga News (refer to client 2) may be
recognised as an asset in the financial statements of Mogala Ltd and Sea Homes Ltd for
the year ended 31 December 20.18.

Communications skills: logical argument 2

‡ Ignore any normal income tax implications.

‡ Ignore Value Added Taxation (VAT) implications.
‡ Your answer must comply with International Financial Reporting Standards (IFRS).

MJM
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±Suggested solution

An item can only be recognised if it meets the definition of an asset (Conceptual

Framework 5.6) and only if recognition of the asset provide users of financial statements
with information that is useful (Conceptual Framework 5.6 ±5.7).

An is a present economic resource contolled by an entity as a result of past events

(Conceptual Framework 4.3).

An is a right that has the potential to produce economic benefits

(Conceptual Framework 4.4).

Mogala puchased the patent and has a right to use the patent (intellectual property) to
design and manufacture holographic touch screens (Conceptual Framework 4.7 (ii)). (1)

The right to design and manufacture holographic touch screens has the potential to produce
ecenomic benefits since the holographic touch screens produced will be sold to generate
revenue which rise an asset (either cash or a trade receivable) which is an economic benefit
(Conceptual Framework 4.16 (d)). (2)

The patent can only be used by Mongale, therefor, it has the ability to direct the use of the
right to manufacture holographic touch screens by using the patent (Conceptual
Framework 4.20). (1)

Mongala will obtain all the revene from the sale of the holographic touch screens
(Conceptual Framework 4.20). (1)

The patent can only be used by Mongala, it has the presents ability to prevent other entities
from directing the use of the patent in the production of touch screens
(Conceptual Framework 4.20). (1)

All revenue from the sale of holostic tough screens will be legally in the name of Mongala,
therefor, Mongala has the present ability to prevent others from obtaining the revenue ftom
the touch scrren sales (Conceptual Framework 4.20). (1)

MJM
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The past event is the acquisition of the holographic touch screen patent by Mogala from
Innovation Ltd that gives Mongala the the right to use the patent to manufacture touch
screens. (1)

The patent was acquired at a cost, therefor, no uncertainity that the patent exists
(Conceptual Framework 5.12 (a)). (1)

MJM
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1. Operating costs comprise of the following:

Depreciation 3 002 2 237

Loss on scrapping of equipment 500 -
Distribution costs 25 741 14 010
Administrative expenses 28 813 10 345
Staff costs 45 379 20 000
103 435 46 592

2. The taxation expense (assume correct) comprises of the following:

Taxation per list of balances (10 927) (6 148)

SA normal
- current (1 721) (777)
- deferred (3 900) (3 100)
Foreign tax (5 306) (2 271)

The normal income tax rate is 28% and the capital gains tax inclusion rate is 80%.

3. There were no movement in both the share capital and the share based payment reserve for
the year ended 31 December 20.11.

4. The revaluation surplus before taxation amounts to R10 000. The deferred tax relating to the
revaluation surplus amounts to R2 240.

5. Dividends amounting to R1 200 000 were paid by the subsidiary of Newsound Ltd to non-
controlling shareholders during 20.11 (20.10 ±R1 100 000).

6. The long-term borrowings are interest-bearing.

7. Newsound Ltd classifies expenses by function in a single statement of profit or loss and other
comprehensive income.

8. Tax on items of other comprehensive income should be presented on the face of the statement
of profit or loss and other comprehensive income in terms of IAS 1.91(b) (items are presented
before the related tax effects, with one amount for the total income tax relating to those items).

9. There is no credit risk associated with the customers of Newsound Ltd Group.

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Revaluation surplus 10 000 (2 240) 7 760 - - - (1)

Total (45)

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(a) Changes in the reva- IAS Property, plant May be reclassified to profit
luation surplus. 16.39 and equipment and loss.

(b) Remeasurements of de- IAS Employee May be reclassified to profit

fined benefit plans. 19.57(d) benefits and loss.

(c) Gains and losses arising IAS The effects of May be reclassified to profit and
from translating the finan- 21.32/37/ changes in loss.
cial statements of a 38.-.49 foreign exchange
foreign operation. rates

MJM
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Analysis of temporary differences:

Property, plant and equipment
- Accelerated deductions for tax purposes
((437 500[C2] + 900 000[C2]) x 27%) 361 125 (2)
Prepaid insurance (35 000[C2] x 27%) 9 450 (1)
Deferred tax liability 370 575
Total (3)

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The land is measured in terms of the cost model of IAS 16. Land cannot be depleted
through use and therefore no depreciation is allowed on land.

The carrying amount of land is assumed to be recovered through sale under the
assumption relevant to revalued land (IAS 12.51B). Therefore the tax base would then be
equal to the base cost for CGT purposes, as this amount will be allowed as a deduction
against the proceeds from the sale when calculating the capital gain on disposal.

The taxable temporary differences on the office buildings of R937 500 (as at
29 February 20.12) and R962 500 (as at 28 February 20.11) do not give rise to deferred
tax as a result of IAS 12.15(b)(ii).

IAS 12.15(b)(ii) states that a taxable temporary difference is exempt from deferred tax if
at the time of the transaction, it affected neither the accounting nor taxable profit.

At the time of the transaction, the accounting profit was not affected by the acquisition of
the office buildings, as office buildings were debited and bank/creditor was credited. The
taxable profit was not affected in the accounting period in which the initial recognition
occurs (no tax allowance is granted by the SARS). As a result, no deferred tax is raised
for the office buildings.

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Equipment (25 000 + 67 000) ? ? 92 000 (25 760) [1]

92 000 (25 760)
Unused tax loss [C1] (see comment below) - 2 000 (2 000) 560
Net deferred tax liability 90 000 (25 200)

(excluding unused tax

loss) (taxable) (92 000 - 25 000) 67 000 (18 760) [1]
Movement in unused tax loss (reversal of deductible)
((2 000) ±(25 000)) 23 000 (6 440)
Total movement in temporary differences 90 000 (25 200)

[6½]

Even though the directors did not foresee future taxable profits on 31 December 20.11,
Kam Ltd made a taxable profit of R598 000 [C1] in 20.12. However, a deferred tax asset
was recognised on only R25 000 of the 20.11 unused tax loss whilst, in the context of
20.12 results, it now appears that the recognition of a deferred tax asset on the total
unused tax loss of R600 000 would have been permissible. In situations like these,
IAS

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The purpose of this standard is to prescribe criteria for the selection of an accounting
policy, as well as for the accounting treatment and disclosure of changes in accounting
policies, changes in accounting estimates and correction of prior period errors, to ensure
consistent preparation and presentation of financial statements. The standard enhances
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financial statements of other entities.

After you have studied this learning unit, you should be able to do the following:

1. Identify the objective of IAS 8 and be able to apply IAS 8.

2. Provide guidance on the choice of an accounting policy regarding specific

transactions.

3. Identify, account for and disclose a change in accounting policy.

4. Identify, account for and disclose changes in accounting estimates.

5. Identify, account for and disclose errors.

The following be studied before you attempt the questions in this learning unit:

1. IAS 8 Accounting policies, changes in accounting estimates and errors.

2. Chapter on accounting policies, changes in accounting estimates and errors in

Descriptive Accounting, 21st edition.

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‡ The change in accounting policy must be applied retrospectively which means the
information must be adjusted for:
- the current year ended 31 August 20.11,
- the previous year ended 31 August 20.10, and
- the opening balance for the previous year (1 September 20.9).

‡ The valuations of inventory provided for 20.8 should not be used.

‡ The change in the accounting policy will also affect the provision for obsolete
inventory, since the provision of 8% is applied to the inventory balance that will
change as a result of the change in accounting policy.

‡ The change in the provision for obsolete inventory from 8% to 10% is a change in
accounting estimate and must be applied prospectively. A change in estimate will
always be applied from the of the financial year in which the change
occurred (refer p 64 no 2).

‡ The prior period error regarding VAT that was not claimed must be corrected in the
financial year that it occurred, being the financial year ended 31 August 20.10, since
the SARS is re-opening and amending the 20.10 VAT assessment.

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The increase in the closing inventory decreases cost of sales (which increases the profit).

Cost of sales (3 302) (33 696)

Opening inventory 38 587 4 891
Purchases xx
Closing inventory (41 889) (38 587)

Profit before tax (see part (a)) 1 147 498 935 000 [1]
There are no non-taxable/non-deductible items - -
Taxable profit before movement in temporary differences 1 147 498 935 000
Movement in temporary differences deductible/(taxable) [C6] 53 322 (24 957) [2]
Taxable profit for the year 1 200 820 910 043

Current tax at 28% 336 230 254 812 [2]

Movement in deferred tax balance [C6](see comment below) (14 930) 6 988 [2]
Income tax expense 321 300 261 800
[7]

The journals to account for the movement in the deferred tax balance are as follows:

Income tax expense (deferred tax) (P/L) 6 988

Deferred tax (SFP) 6 988

Deferred tax (SFP) 14 930

Income tax expense (deferred tax) (P/L) 14 930

MJM
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Fair value hierarchy: Level 2

Scenario: Bekele holds 1 000 shares in Defar Ltd. Defar Ltd is a company listed on the
JSE Limited. The share price of Defar Ltd according to the JSE was R250 per share on
30 June 20.12. Bekele determined that it is possible to conclude an off-market
transaction of R300 per Defar Ltd share.

An entity determines the fair value measurement with reference to the principal market
for the asset or if no principal market exists, with reference to the most advantageous
market for the asset (IFRS 13.16).

IFRS 13 defines the principal market as the market with the greatest volume and level of
activity for the asset or liability which in this case is the JSE.

Even though the most advantageous market is the off-market transaction for the listed
share of R300 per share; the principal market is the JSE, where the share price is R250
per share.

Conclusion: The fair value of the listed investment in Defar Ltd is R250 000 (1 000 x
R250).

Fair value hierarchy: Level 1

Scenario: At the beginning of the financial year, Bekele issued 1 000 debentures of R200 each,
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Bekele designated this liability, as subsequently measured at fair value through profit or
loss. There is no observable market for liabilities of this nature. At 30 June 20.12, the
instrument is trading as an asset in an active market at R195 per debenture.

Even when there is no observable market to provide pricing information about the
debentures, there is an observable market for such items if they are held by other parties
as assets.

Conclusion: The debentures will be measured at R195 000 (1 000 x 195).

Fair value hierarchy: Level 1

To determine the most advantageous market you need to take into account the exit price less
transaction cost less transport cost, but the fair value you use is only the exit price less
transport cost (refer IFRS 13 IE ±Example 6).

A Ltd has machinery that is traded in three different markets.

Volume (annual) 20 000 12 000 10 000

Price 10 000 9 800 11 000
Transport cost (5 000) (5 000) (5 500)

Transaction cost (1 000) (1 000) (1 200)

MJM
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Market A (highest volume)

Market C (R4 300)

R5 000 (Market A = Principal market)

Refer to the illustrative examples in a GUIDE THROUGH IFRS part B1 for examples
explaining various concepts of IFRS 13.

(10 marks)

Umhlanga Holdings (Pty) Ltd (Umhlanga) owns an investment property (land and a building) situated
in Tongaat, KwaZulu-Natal. The building is a warehouse that is leased to an unrelated third party
who uses the building as a distribution facility. Recently, residential development has taken place in
the area surrounding the property. This has led to substantial increases in the value of residential
properties in the area. The most recent development is that the town council has in principle
approved the rezoning of the Tongaat property owned by Umhlanga, for residential development.

Umhlanga is seriously considering the possibility of developing the land into a residential estate, in

MJM
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The fair value measurement of non-financial assets requires that one takes into account markets
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(IFRS 13.27).

The highest and best use of a non-financial asset takes into account the use of the asset that is
physically possible, legally permissible and financial feasible (IFRS 13.28).

There is an alternative use for the containers other than being used as storage units. The containers
can be disassembled and used as roof sheeting. This alternative use is physically possible as the
cost to disassemble is negligible, it is legally permissible and financially feasible. (2)

Desert has no intention to dispose of the containers in this manner but the highest and best use is
determined from the perspective of market participants (IFRS 13.29). (1)

Thus the R29 500 will be considered as an appropriate fair value. (½)

The two possible fair value amounts per container was the principle market amount of R28 000 and
the highest and best use amount of R29 500. The highest and best use for non-financial assets will
be considered as the appropriate fair value (R29 500). (2)
Total (12½)
Maximum (9)
Communication skills: logical argument (1)

MJM
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IFRS 13 provides guidance on how to measure fair value, the scope of which is summarised in the
table below:

Share-based payment N N
Business combination Y Y
Fair value less costs to sell (IFRS 5, IAS 36) Y N
Net realisable value and value-in-use N N
Leases N N
Revaluation model in PPE Y Y
Financial instruments Y Y
(many in IFRS 7 already)
Investment property Y Y
Plan assets ±IAS 19 Y N
Agriculture Y Y

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability
in an between at the measurement date.

IFRS 13 requires that the principal market is used to measure fair value. Should the principal market
not be determinable, the most advantageous market is used.

Fair value is determined based on the unit of account in terms of the relevant standard that the asset
or liability is accounted for. Therefore, control or liquidity premiums or discounts are not taken into
account when determining fair value.

The fair value of non-ILQDQFLDO DVVHWV LV GHWHUPLQHG E\ UHIHU

irrespective of its current use. The highest and best use of an asset must be physically
possible, legally permissible and financially feasible.

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The following valuation techniques may be used to determine fair value:

Market approach Prices and other relevant information are used to value the asset. The prices
are obtained from market transactions involving identical or comparable assets
or groups of assets and liabilities.

Income approach Future amounts (for example cash flows and income or expenses) are
converted to a single current discounted amount.

Cost approach Reflects the amount that would be required currently to replace the service
capacity of an asset (current replacement cost).

Each of the valuation techniques will require the use of inputs in order to determine the fair value.
IFRS 13 requires that the inputs are classified in the following categories. This classification will
affect the disclosure required.

Level 1 Quoted (unadjusted) prices in active markets for identical assets or liabilities
that the entity can access at the measurement date.

Level 2 Inputs other than quoted prices included within level 1 that are observable for
the asset or liability either directly or indirectly.

Level 3 Unobservable inputs.

The valuation method used to determine the fair value should maximize the use of relevant
observable inputs and minimizing the use of unobservable inputs.

(Source: Accountancy SA, June 2013 p 24-25: SAICA)

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6$,&$LVDGYDQFLQJWKHDVVHVVPHQWRIVWXGHQW
provided in case study-format questions and, combined with a sound knowledge of
International Financial Reporting Standards (IFRS), requires of students to mostly supply
their solution in a discussion format.

With reference to the above SAICA changes, students need to note that tests and exams
will now require solutions mostly in a discussion format (theory). In the past, only 25% of
a test or exam paper required a discussion format solution. Going forward, test and
exams will require 50% or more of the solution to be in a discussion format.

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You are a student studying towards your Certificate in the Theory of Accountancy (CTA)
qualification. As part of your preparation for your final accounting examination, you assisted an audit
firm with the following independent client queries:

Alebrew has established itself as the leading distributor of ale beer in South Africa and supplies a
wide range of customers from the hospitality sector. Alebrew was incorporated in South Africa and
has been listed on the Johannesburg Stock Exchange since 19.98 and has a 31 December year
end.

Alebrew purchases the ale beer from various breweries across South Africa. After purchase, the ale
beer is stored by Alebrew in bulk tanks at their facilities. The ale beer which is stored and measured
in litres, is then bottled and marketed in 50 litre casks.

Alebrew's current selling price for ale beer amounts to R50 per litre, which includes a 10% deposit
for the returnable ale cask. Thus Alebrew collects a deposit for each cask delivered to the customer
and is required to refund the deposit when the casks are returned by customers. Disruptions in
production of ale beer from breweries during the summer months resulted in Alebrew only selling
and distributing 1 200 000 litres of ale beer to customers in the 20. ILQDQFLDO \HDU
bottling facilities bottle approximately 1 250 000 litres of ale beer per annum.

The following expenses were incurred by Alebrew during the 20.18 financial year:

Depreciation - returnable casks 1 2 500 000

Storage costs 2
- Filled casks 1 800 000
- Ale beer in bulk tanks 2 200 000
Depreciation on vehicles 3
- Depreciation on tankers 8 500 000
- Depreciation on delivery trucks 2 800 000
Bottling overhead costs 12 800 000
Raw material 4 ?

1. Returnable casks in circulation are recorded as part of property, plant and equipment at cost,
net of accumulated depreciation. Returnable casks are not derecognised upon the sale of
goods. The cost of the casks are depreciated to their residual values over their estimated
useful lives.

2. Storage costs comprises of the cost to store filled casks and ale beer in bulk tanks.

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The ale beer is stored in bulk tanks before being bottled

and distributed to customers. The tanks merely house
finished product and therefore these cost should not be
allocated to the cost of ale beer inventory. These cost are
selling cost and therefore excluded from the cost of
inventory (IAS 2.16(d)). -

These cost are selling costs and therefore excluded from

the cost of inventory (IAS 2.16(d)). -

The ale beer is stored in bulk tanks before being bottled

and distributed to customers. Therefore the ale beer does
undergoes further processing (IAS 2.16(b)) before it is
ready for sale. Therefore these storage cost should be
allocated to the cost of ale beer inventory. 2 200 000

(1)
(1)

Depreciation on delivery tucks is a selling cost and

therefore excluded from the cost of inventory (IAS - (2)
2.16(d)).

Depreciation on tankers would qualify as this cost is

necessary to bring the ale beer to its present location and
condition ready for sale (IAS 2.10). 8 500 000 (2)

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 87 FAC4863/102
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These cost are selling cost and therefore excluded from the
cost of inventory (IAS 2.16(d)). -

This relates to production and therefore necessary to

getting inventory in the location and condition necessary
for sale and should be included (IAS 12.10). 12 800 000

(1)
(1)

- depending on
alternatives 1 ±2 xxxx

The overhead cost should be allocated on the normal

capacity of 1 250 000 litres (IAS2.13) per year. (1)

The overhead allocation rate - Alternative 1 ±2

(XXXX/1 250 000) x (1)

The raw material cost of the ale beer is a cost of purchase

and should be included within the cost of inventory
(IAS 2.11). (1)

- Abnormal amounts of waste should not be included in

the cost of inventory, which implies that normal amounts
of waste should be included in the cost of inventory
(IAS 2.16(a). (1)

- Input cost: 300 000 litres x R35/litre =

10 500 000 (1)
1 400 000 litres x R18 litre =
25 200 000 (1)
35 700 000
Cost per unit = R35 700 000/1 658 000 (1 700 000 ±
42 000 normal loss (1 400 000 x 3%) (2)
R21,53/litre (weighted average cost) 21,53
Total cost per litre x

(total cost per litre x 458 000 litres) xx (1)

Consider of NRV - inventory can only be sold for R45
(R50 - 10%) (1)
Total (20)
Maximum (11)

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The company changed its accounting policy in respect of the valuation of inventory from
the weighted average method to the first-in-first-out method. This change was effected to
ensure a more relevant and reliable presentation. (1)

The change in policy was accounted for retrospectively and comparative amounts have
been appropriately restated. The effect of this change is as follows: (1)

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You are an IFRS expert who is employed by Jsauhm Consultants. The following independent and
unrelated issues were brought to your attention for your expert advice and opinion.

Lallana is a company operating in the manufacturing and maintenance industry. Lallana is listed on
the Johannesburg Stock Exchange and has a 31 December financial year end.

You are currently reviewing the financial statements of Lallana. Your assistant has presented the
following schedule of information relating to the year ended 31 December 20.17:

Lallana's accounting profit for the year ended 31 December 20.17 after correctly
accounted for all items: 5 750 000
Dividends received: 74 500
Dividends received are exempt from normal tax in terms of s 10(1)(k).
Foreign income received (after deduction of R5 000 relating to foreign taxes): 35 000
The foreign income is not taxable in South Africa.
Gain on disposal of land: 350 000
Lallana puchased land for the future development of a new factory building on
31 March 20.16. Due to the recent availability of factory buildings in the area, Lallana
sold the land at an amount of R1 550 000 on 1 January 20.17. The original cost of the
land amounted to R1 200 000. Land is measured according to the cost model in terms
of IAS 16 Property, Plant and Equipment. The proceeds from the sale of land is a
receipt of a capital nature for tax purposes.
Depreciation on plant and equipment: 876 000
The tax allowances on the plant and equipment amounted to R900 000. On
31 December 20.17 the carrying amount of the plant and equipment amounted to
R3 168 000 while the tax base was R2 500 000.
Correction of prior period error: 300 000
On 30 November 20.16 Lallana received an amount of R300 000 from a customer for
services that were rendered during February 20.17. The accountant recognised the
R300 000 as revenue in November 20.16. For tax purposes, the R300 000 was taxed in
the financial year ended 31 December 20.16.
Assessed tax loss on 31 December 20.17: -
Lallana suffered operating losses during the previous financial year and had an
assessed tax loss of R900 000 on 31 December 20.16. The company correctly utilised
R344 000 of the assessed tax loss by recognising a deferred tax asset of R96 320
relating to the assessed loss on 31 December 20.17.

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1. There are no temporary differences other than those that are apparent from the information
contained in the question.

2. The only non-taxable and non-deductible items included in the accounting profit or loss are
those that are apparent from the information provided.

3. The normal income tax rate is 28% and the capital gains tax inclusion rate is 80%.

4. You may assume that all amounts are material.

Juice is one of the larges fruit juice producers in South Africa. The company has a 31 December
financial year end and is listed on the Johannesburg Stock Exchange.

Juice purchases their fruit from the various farmers and only the best quality fruit are selected to
enter the production process. Any substandard fruit that do not enter the production process are sold
to surrounding farmers as animal feed.

7KH SUHYLRXV \HDU¶V ILQDQFLDO VWDWHPHQWV LQGLFDWH

R2 800 000 (carried at cost) and for finished products of R3 500 000 (carried at cost). Since Juice
closes for the December holidays, there are no work-in-process at financial year end. The fruit juice
is ready to be sold once it has been packaged.

Juice purchased fruit to the value of R3 755  GXULQJ WKH FXUUHQW ILQDQF
regular suppliers, Mr Golden, had an exceptional harvest and sold R600 000 worth of apples to Juice
which is included in the R3 755 000. Due to early payment, Juice received a 5% on R600 000
discount that was allocated to the discount received account under other income. Upon receipt of the
abovementioned apples, two crates of apples amounting to R5 000 (before discount) each, were
only half full. Juice was refunded for the loss in apples.

A normal spillage, amounting to R0,25 per liter of the quantity that entered the production process,
occurs with the packaging of the fruit juice.

The inventory count at the financial year end indicated the following:

‡ R500 000 worth of fruit was identified as substandard and will be sold for R150 000 as animal
feed early in the following financial year; and
‡ the closing balance for raw materials amounted to R1 197 050; and
‡ 50% of the finished products manufactured in the current financial year were the only finished
products on hand at the financial year end.

At year end Juice pledged R500 000 worth of inventory as security for a short-term loan.

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Other information relating to the year ended 31 December 20.17:

Income received from the sale of substandard fruit (cost: R430 000) to surrounding 185 000
farmers during the year.
Delivery cost: Fruit collected from farmers 230 000
Delivery cost: Finished products (fruit juice) delivered to customers 485 000
Fixed costs:
‡ Finished product storage cost 925 000
‡ Depreciation: Property, plant and equipment: Manufacturing
850 000
Property, plant and equipment:
250Other
000
Normal capacity: 600 000 liters of fruit juice per annum
Actual capacity: 450 000 liters for the current financial year
Other variable cost R2 per liter
Actual spillage at the end of production process (with the packaging of the fruit R0,45 per liter
juice)
Sales commission paid during the year R330 000

The financial manager, Mr Matlala, prepared the statement of financial position of Maiweather as at
31 December 20.17 and sent you a copy for a final review. You have assisted Mr Matlala with the
previous year's financial statements and he awaits your feedback to finalise the financial statements
for the year ended 31 December 20.17 before he sends it to the chief financial officer for approval.
Mr Matlala provided you with notes regarding the matters that he is unsure of.

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Raw materials 1 197 050 (½)

Finished products 3 110 350 (10)
4 307 400

The cost of inventories recognised as an expense and included in cost of sales

amounted to RXXX.
Inventories held at net realisable value amounted to R350 000. The write-down of
inventories to net realisable value amounted to R150 000. (1)
Inventory to the value of R500 000 was pledged as security for a short-time loan. (½)
Total (12)
Communication skills: presentation and layout (1)

Opening balance 2 800 000 - 3 500 000 (1)

Purchases 3 755 000 (½)

Less: Discount (R600 000 x 5%) (30 000) (1)
Less: Refund (R5 000/2 x 2) x 95% (4 750) (1)
OR:Less: [(R600 000 ±R5 000) x 5% +
R5 000 = R34 750]
Transport costs 230 000 (½)
Transferred 4 773 200 6 220 700
'HSUHFLDWLRQ¶/¶/[5 637 500 (1)
Abnormal spillage
(450 000L x (R0,45 - R0,25)) (90 000) (1½)
Fruit sold as animal feed during the year (430 000) (½)
Write-down to nett realisable value
(R500 000 ±R150 000) (350 000) (½)
Variable cost (450 000L x R2) 900 000 (1)
Closing balance
(Given) (1 197 050) (½)
(R6 220 700 x 50%) (3 110 350) (1)
Transferred 4 773 200 6 220 700 6 610 350

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 99 FAC4863/102
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According to IAS 1.38 an entity shall present comparative information in respect of the
preceding period for all amounts reported in the current period's financial statements.

IAS 1.38A stipulates that a minimum of two statements of financial position shall be
presented.
Maiweather Ltd needs to present comparative information in respect of the preceding
financial period ended 31 December 2016, this will also ensure there is a minimum of

MJM
 103 FAC4863/102
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The following additional information is contained in your working papers:

Raw materials
Purchases R1 200 000
Discount on purchases 3%
Total import taxes (70% was recovered from taxing authorities) R3 800
Transport R8 300
Work in process
Normal spillage occurs at the beginning of the production process 5%
Salary cost: Administration staff R450 000
Labour cost R25 per hour
Production capacity 8 650 hours
Normal production hours 7 250 hours
Normal idle hours (included are 200 hours due to a strike action) 1 500 hours
Variable cost R30 per unit
Actual fixed cost (allocated based on units produced) R1 500 000
Normal production capacity 80 000 units
Actual production 75 000 units

MJM
 104 FAC4863/102
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(a) Prepare a corrected tax rate reconciliation of Firmino Ltd for the year ended 16
31 December 2016. Provide a brief explanation for each reconciling item included in
your tax reconciliation and for each tax reconciling item in Mr Origi's tax
reconciliation that has been excluded from your reconciliation.

‡ Present the tax reconciliation in accordance with IAS 12.81(c)(i).

‡ Comparative figures are NOT required.

Communication skills: presentation and layout 1

(b) Provide the journal entries, including current and deferred tax, on to 9
correct the material error that occurred in the prior periods in the books of Milner Ltd.
Journal narrations are not required.

In order to complete the inventory note, calculate the cost of inventories recognised as an 14
expense and included in cost of sales (IAS2.38) in the financial statements of Gabby Ltd
for the financial year ended 28 February 20.17.

‡ Ignore any Value Added Taxation (VAT) implications.

‡ Your answer must comply with International Financial Reporting Standards (IFRS).

MJM
 105 FAC4863/102
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±Suggested solution

Accounting profit 29 100 000 (1)

Tax at 28% 8 148 000 (1)

Tax effect of non-taxable/non-deductible items:

Capital gain on sale of land not taxable (R700 000 x 20% x 28%) (39 200) (2)

The portion of the gain above original cost price (base cost) of the asset
represents a capital gain of which only 80% is taxable. (1)
20% of the R700 000 included in accounting profit is not taxable and
represents a reconciling item (or a permanent difference). (1)

Unused tax loss utilised that was not previously recognised (63 000) (1)
((R925 000 - R700 000) x 28%)

Deferred tax had to be recognised in 2015 for the assessed loss up to

the taxable temporary differences amounting to R700 000. (1)
A deductible temporary difference of R225 000 (925 000 ±700 000) was
therefore not raised in 2015 due to uncertainty of future profitability. (1)
However, the assessed loss was utilised in full in 2016, which indicates
that it would be recognised in 2016. (1)
The recognition of the unrecognised deferred tax asset in 2016 will
decrease the tax expense above the movement in temporary differences
and will therefore be a reconciling item. (1)

Underprovision for current tax relating to prior period 300 000 (1)

The income tax expense in the statement of profit or loss includes an

underprovision of income tax for a prior period and not reflected in the
tax on the accounting profit of R8 148

MJM
 109 FAC4863/102
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On 1 December 20.15 Venus entered into a contract with a customer to transfer five watches
to the customer on 5 January 20.16. The contract requires the customer to pay a consideration
of R350 000 in advance to Venus on 2 December 20.15. The customer paid the consideration
on 2 December 20.15 and the assistant accountant recognised the amount of R350 000 as
revenue in the financial statements of Venus for the year ended 31 December 20.15.

The assistant accountant was not aware that, according to IFRS 15, this revenue will only be
recognised when the entity has satisfied the performance obligation of transferring the ordered
watches to the customer. The customer obtained control of these watches on 5 January 20.16.

Venus made a profit with the sale of a foreign property in the United Kingdom amounting to
R120 000 (after deduction of R30 000 foreign tax). This amount is included in other income
and is not subject to South African tax.

The SARS made an adjustment to the 20.13 assessment after the review of a deductible
expense which Venus claimed during the tax year ending 31 December 20.13. The SARS
issued an additional 20.13 assessment on 15 December 20.15 to include the additional
amount of R15 000 (including interest of R4 500) for the expense which was not allowed as a
deduction by the SARS. Venus decided not to lodge an objection regarding this additional
assessment. The amount payable in terms of the additional assessment was not recorded in
the financial statements for the year ended 31 December 20.15.

Venus provided you with the following calculation of the deferred tax balance as at
31 December 20.14:

Land 1 800 000 1 500 000 240 000 (67 200)

Unused tax loss - 1 628 360 (240 000) 67 200
- -

Movements 20.14 financial year - unused tax loss (deductible) (240 000) 67 200

You may assume that the deferred tax calculation for the year ended 31 December 20.14 was
calculated correctly and takes all information into account.

The SARS assessment for 20.14 reflects an assessed tax loss of R1 628 360. Venus was of
the opinion that future taxable profits will not be available in 20.15 against which the unused
tax loss can be utilised.

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 110 FAC4863/102
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There were no non-taxable or non-deductible items included in the accounting profit or loss for
the financial years ended 31 December 20.14 and 31 December 20.15 except for those that
are apparent from the information provided.

The income tax rate is 28% and has remained unchanged for the past seven years. The
inclusion rate for capital gains tax is 80%.

The deferred tax liability at 31 December 20.13 amounted to R55 944, which represents the
temporary difference on the revaluation of land.

You may assume that all amounts are material.

Jayson Ltd (Jayson) is a large manufacturing company of electric cables with operations throughout
South Africa. Electric cables are the only product manufactured by Jayson and the production
thereof commenced on 1 March 20.15. The company is listed on the JSE Limited and has a 31
December year end.

The following information is applicable to the manufacturing of inventory for the period 1 March 2015
to 31 December 20.15:

1. Jayson purchased 450 000 meters of raw material on 25 February 20.15 at a purchase price of
R6 per meter. The supplier grants a volume discount of 10% if purchases exceeds 200 000
meters per annum and a settlement discount of 5% of the purchase price of raw materials if
the amount is settled within 60 days from the date of purchase. Jayson settles within 60 days
of purchase.
2. Transport and handling cost attributable to the acquisition of raw material during 2015
amounted to R576 200.

1. Raw materials are used in the manufacturing process on a first-in first-out (FIFO) basis and
320 000 meters of raw material was put into the production process on 1 March 20.15.
2. On 2 March 2015, material quantities of raw material issued to the production process were
stolen from the production plant. Jayson did not replace the stolen raw material with raw
material from the storage warehouse. None of the raw materials kept in the storage warehouse
(closing raw materials) were stolen.
3. Normal raw material wastage due to trimmings throughout the production process amounts to
5%.
4. There was no work-in-process inventory at 31 December 20.15.

1. Storage cost for finished products amounted to R32 000.

2. During 20.15 120 000 finished products were manufactured.
3. For each unit of finished product, two meters (after normal wastage) of raw material are used.

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4. Included in the manufacturing cost of finished products for the period is the cost of a by-
product that resulted from the manufacturing of products. This by-product can be sold for
R240 000 in total and Jayson discloses by-products in a separate category in the notes to the
financial statements.
5. At 31 December 20.15, 30% of finished products were still on hand.
6. On 31 December 20.15, the selling price of one finished product amounted to R2 000 and the
delivery cost to customers amounted to R250 per unit.

1. Direct labour:
Cost per hour R60
Productive hours for the year ended 31 December 20.15 370 000 hours
Idle hours for the year ended 31 December 20.15 30 000 hours

2. Variable factory overheads and fixed factory overheads amounted to R5 000 000 and
R7 600 000 respectively for the year ended 31 December 20.15.

3. Normal capacity is based on labour hours and amounts to 40 000 hours per month. Included in
the idle hours for the 20.15 financial year were 10 000 hours which were lost due to an
unexpected strike. The remaining idle hours were normal idle time.

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 115 FAC4863/102
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Invoice cost (450 000 x 6) 2 700 000 (½)

Volume discount (10% x 2 700 000) (270 000) (½)
Settlement discount [5% x (2 700 000 x 90%)] (121 500) (1)
Transport and handling cost 576 200 (½)
2 884 700

Closing inventories in SFP - (2 884 700/450 000 = R6 x (450 000 ±320 000) 780 000 (2)

Cost per meter (2 884 700/450 000) R6

Raw Materials - order (120 000 x 2m/0,95) x R6 1 515 789 (1½)

Direct Labour (370 000 + 30 000 -10 000) x R60 per hour 23 400 000 (2)
Variable factory overheads (given) 5 000 000 (½)
Fixed factory o/heads (7 600 000/(40 000 x 10 mnths) x 390 000 hrs 7 410 000 (1½)
By-products at NRV - separately disclosed (240 000) (½)
37 085 789

Cost per product (37 085 789/120 000) 309 (1)

NRV (R2 000 - R250) 1 750 (½)

Inventories valued at the lower of cost or NRV (120 000 x 30%) x R309 11 124 000 (1)
Total (13)
Maximum (12)

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 116 FAC4863/102
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You are the audit clerk responsible for the finalisation of the financial statements for the financial
year ended 31 December 20.4 for two audit clients.

Bucaneers Ltd (Bucaneers) is a company incorporated in South Africa on 1 January 20.6 and is
listed on the Johannesburg Stock Exchange (JSE) Limited. The company manufactures navigation
equipment which is used in aircrafts.

The financial accountant presented you with the following draft trial balance and additional
information:

Land 1 5 200 000

Machinery 2 1 600 000
Inventory 1 700 000
Development cost 210 000
Cash and cash equivalents 216 000
Trade receivables 345 000
Deferred tax asset (at 31 December 20.13) 3 70 000
Share capital 500 000
Retained income 7 284 700
Profit before tax 4 1 250 000
Revaluation surplus 1 200 000
Provisions for guarantees 4.3 180 000
Trade payables 52 000
SARS account 5 125 700
9 466 700 9 466 700

After initial recognition Bucaneers measures land according to the revaluation model. The land
was acquired on 1 January 20.14 and the base cost of the land in terms of paragraph 20 of the
Eighth Schedule of the Income Tax Act is equal to the purchase price of the land. The opening
and closing balances for 20.14 are reconciled as follows:

MJM
 117 FAC4863/102
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Opening balance -
Acquisition of land: 1 January 20.14 5 000 000
Revaluation of land: 31 December 20.14 200 000
Closing balance 5 200 000

The revaluation must be recognised in other comprehensive income and

accumulated in equity under the heading of revaluation surplus.

Bucaneers subsequently measures machinery according to the cost model. The opening and
closing balances for 20.14 are reconciled as follows:

Opening balance 1 850 000

Depreciation (250 000)
Closing balance 1 600 000
The tax base of the machinery amounted to R1 000 000 on 31 December 20.14.

Bucaneers provided you with the following calculation of the deferred tax balance as at
31 December 20.13:

31 December 20.13
Machinery 1 850 000 1 300 000 550 000 (154 000)
Unused tax loss - 800 000 (800 000) 224 000
(250 000) 70 000
You may assume that the deferred tax asset for the year ending 31 December 20.13 was
calculated correctly and takes all information into account.

The SARS assessment for 20.13 reflected an assessed tax loss of R800 000. Bucaneers were of
the opinion that sufficient

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 121 FAC4863/102
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- Suggested solution

SA normal tax
Current tax 159 480
- Current year [C1] 144 480 (5)
- Underprovision for prior years (17 800 -2 800) 15 000 (2)
Deferred tax 181 160
- Movement in temporary differences [C2] (42 840) (7½)
- Unused tax loss utilised [C2] 224 000 (1)
340 640

Accounting profit [C1] 1 224 200 (½)

Tax at 28% 342 776 (½)
Tax effect of:
- Interest not deductible (2 800 x 28%) 784 (½)
- Dividends received (64 000 x 28%) (17 920) (½)
Under-provision of current tax for prior years 15 000 (½)
Income tax expense 340 640
Total (18)
Communication skills: presentation and layout (1)

Profit before tax (given) 1 250 000

Adjustments:
Rebate receivable on inventory sold [(300 000 + 100 000) x 5%] x 85% 17 000 [1½]
Interest paid on tax payments for 20.12 (2 800) [½]
Rent received in advance (40 000) [½]
Profit before tax (adjusted) 1 224 200

Dividends received not taxable (64 000) [½]

Interest paid not deductible 2 800 [½]
Taxable profit before temporary differences 1 163 000
Movement in temporary differences [C2] (153 000) [½]
Taxable profit before unused tax loss 1 316 000
Unused tax loss of prior year (given) (800 000) [½]
Taxable profit for the year 516 000
Tax at 28% 144 480 [½]
[5]

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 122 FAC4863/102
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Machinery 1 850 000 1 300 000 550 000 (154 000)

Unused tax loss - 800 000 (800 000) 224 000
(250 000) 70 000

Machinery 1 600 000 1 000 000 600 000 (168 000) [1]
Rebate receivable (400 000 x 5%) 20 000 - 20 000 (5 600) [1½]
Inventory
[1 700 000 - (400 000 x 5% x 15%)] 1 697 000 1 700 000 (3 000) 840 [3]
Provision for guarantees (180 000) - (180 000) 50 400 [1]
Rent received in advance (40 000) - (40 000) 11 200 [1]
397 000 (111 160) [7½]
Land (given) 5 200 000 5 000 000 160 000 (44 800)
557 000 (155 960)
Movement through P/L (397 000 - 550 000) (153 000) (42 840)
Movement through OCI 160 000 (44 800)
Movement in unused tax loss 800 000 (224 000) [½]
807 000 (225 960)

Inventories with a to the entity should be accounted for at the

. (IAS 2.25)

Sporti Ltd may therefore for gym equipment by the weighted average
method for imported gym equipment and the first-in, first-out method for manufactured gym
equipment, since these inventories are (both are gym equipment) and
to Sporti Ltd (both used in the same operating segment).

A
to the initial recognition thereof (IAS 2.33).

A previous write-down of inventory

so that the new carrying amount is the lower of cost and the revised net realisable
value (IAS 2.33). (½)

MJM
 127 FAC4863/102
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(a) Calculate the carrying amount of both the finished product Westeros and the raw 6
material Essos in the accounting record of Stark Ltd as at 31 December 20.13.

(b) Calculate the amount that should be disclosed as current tax in the income tax 6
expense note of Kalisi Ltd for the year ended 31 December 20.13.

(c) Show the separate components of the tax expense that should be disclosed under 3
deferred tax in the income tax expense note of Kalisi Limited for the year ended
31 December 20.13. Indicate clearly whether the amounts should be added or
subtracted in the note.
Communication skills: presentation and layout 1

(d) Disclose the prior period error in the notes to the financial statements of Stanza Ltd 4
for the year ended 31 December 20.13.

Communication skills: presentation and layout 1

‡ Round off all amounts to the nearest Rand.

‡ Comparative figures are not required.
‡ Journal narrations are not required.
‡ Ignore any Value-Added Tax (VAT) implications.
‡ Your answer must comply with International Financial Reporting Standards (IFRS).

MJM
 128 FAC4863/102
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- Suggested solution

Contract with Snow Ltd (600 x R53) 31 800 (1)

Write down per raw material used in production:

(R55 ±R53) / 2 (units raw material used) = R1 per product
Number used in production: (1½)
(800 per contract ±600 on hand) x 2 raw materials per finished product =
400 (1)

Used in production (400 units x (R20 ±R1)) 7 600 (1½)

Remaining raw material (700 ± 400) x R20 (will be sold, product
discontinued) 6 000 (1)
13 600
Total (6)

Profit before tax 2 600 000 (½)

Foreign income ±not taxable in RSA ((80 000 + 4 000) / 28%) (300 000) (1½)
Non-taxable items (28 000/28%) (100 000) (1)
Non-deductible items (8 400/28%) 30 000 (1)
Taxable temporary differences (90 000 ±40 000) (50 000) (1)
2 180 000
Unused tax loss of prior year (550 000) (½)
Taxable profit 1 630 000
Tax at 28% 456 400 (½)
Total (6)

Tax on accounting profit (given) 728 000 (½)

Tax on non-taxable items (given) (28 000) (1)
Tax on non-deductible items (given) 8 400 (1)
Foreign tax (80 000 + 4 000) (84 000) (1)
Tax on movement in taxable temporary difference
(90 000 ±40 000) x 28% or (25 200 ±11 200) (14 000) (1½)
Tax on assessed loss utilised (550 000 x 28%) (154 000) (1)
456 400

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 129 FAC4863/102
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Movement in temporary differences ((90 000 ±40 000) x 28%) 14 000 (1)
Recognition of unused tax loss previously not recognised
((550 000 ±40 000) = 510 000 x 28%) (142 800) (1)
Unused tax loss utilised (550 000 x 28%)

MJM