FIAC6212 Workbook

IIE Module Guide FIAC6212
FINANCIAL ACCOUNTING 2B
MODULE GUIDE 2023
(First Edition: 2018)
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Table of Contents
Using this Guide ...................................................................................................................... 5
Introduction ............................................................................................................................. 6
Module Resources .................................................................................................................. 7
Module Purpose ...................................................................................................................... 7
Module Outcomes ................................................................................................................... 7
Pacer and Assessment brief Applicable to Module:.......................................................... 8
Financial Accounting 2B (FIAC6212) .................................................................................. 8
Assessments ......................................................................................................................... 11
Glossary of Key Terms for this Module ................................................................................. 12
Learning Unit 1: IFRS 3 Business Combinations .................................................................. 14
1. Introduction .................................................................................................................... 14
2. Examples of group structures ........................................................................................ 15
3. Accounting for groups .................................................................................................... 17
Learning Unit 2: IFRS 10 – Consolidated financial statements (simple and complex group) 20
1.Introduction ........................................................................................................................ 20
2.Basic consolidation procedures ......................................................................................... 20
Learning Unit 3: IFRS 10 – Intragroup transactions .............................................................. 36
Learning Unit 4: IFRS 10 – Interim acquisition of a subsidiary ............................................. 54
1. Introduction ....................................................................................................................... 54
Learning Unit 5: IFRS 10 – Ordinary and Preference shares ............................................... 59
1. Introduction ....................................................................................................................... 59
2. Preference share capital and preference dividends ...................................................... 67
Learning Unit 6: Related Parties (IAS 24) ............................................................................. 78
1. Introduction .................................................................................................................... 78
2. Related party ................................................................................................................. 78
3. Disclosure ...................................................................................................................... 79
4. Identifying related parties ............................................................................................... 80
Learning Unit 7: Earnings per share (IAS 33) ....................................................................... 85
1. Introduction ....................................................................................................................... 85
2. Measurement .................................................................................................................... 85
3.Shares................................................................................................................................ 87
Learning Unit 8: IFRS for Small and Medium Enterprises .................................................... 99
1. Introduction ....................................................................................................................... 99
2.Small and medium enterprises .......................................................................................... 99
3. Characteristics of small and medium enterprises ........................................................... 100
4. Audit reporting considerations ........................................................................................ 100
5. How is IFRS for SMEs different from the full IFRS? ....................................................... 100

Using this Guide
This guide has been developed to support your use of the prescribed material for this module.
There may be occasions when the prescribed material does not provide sufficient detail
regarding a particular idea or principle. In such instances, additional detail may be included in
the guide. However, this guide should not be used as a stand-alone textbook, as the bulk of
the information you will need to engage with will be covered in the prescribed material. You
will not pass this module if you only use the module guide to study from. Various activities and
revision questions are included in the learning units of this guide. These are designed to help
you to engage with the subject matter as well as to help you prepare for your assessments.
This module guide contains further important information on what the module encompasses
and what you can expect to learn from this module. A module pacer is also provided with
guidance on what will be covered during the semester and the timing of each topic. This must
be used by you to plan for every lecture in advance by doing pre-reading on the topic to be
prepared for the lecture.

Introduction
Welcome to the second-year module Financial Accounting 2B (FIAC6212). You will find the
following information useful for your understanding of the module for this semester.
The purpose of this module is for students to prepare group financial statements in accordance
with International Financial Reporting Standards (IFRS), and to demonstrate an understanding
of selected International Financial Reporting Standards.
This module introduces students to group financial reporting, which is continued in the third
year. Earnings per share (IAS 33), related parties (IAS 24) and IFRS for Small and Medium
Enterprises (SME’s) are the other smaller topics covered in this module.
This module will focus on:
• Knowledge and understanding of group financial reporting and selected International

Financial Reporting Standards to prepare journal entries, including pro-forma
consolidation journal entries, consolidated annual financial statements, notes to the
financial statements, and other relevant disclosure.
• Knowledge and understanding of group financial reporting to prepare consolidated
financial statements.
Financial Accounting is a very important aspect of both your studying and working career and
is one of the four subjects that you will need to pass in PGDA to graduate and commence your
articles. Financial Accounting in second year forms the vital foundation to third year Financial
Accounting and ultimately PGDA, so you need to establish an excellent foundation during this
year.
Financial Accounting 2B consists of the following learning units:
• Introduction to group annual financial statements (IFRS 3; IFRS 10; IAS 27)
• Related parties (IAS 24)
• Earnings per share (IAS 33)
• IFRS for Small and Medium Enterprises (SME’s)

Module Resources
Prescribed Book for this Koppeschaar, Z.R, Rossouw, J, Sihiya, K and Wright, C. 2022.
Module Group Statements, Volume 1. 18th ed. South Africa: LexisNexis.
(PM1)
ISBN-13: 978-0-639-00964-3
Please note that this module guide is intended to support your

learning – the content of this module should be sourced from
the prescribed material. You will not succeed in this module if
you focus on this module guide only.
Recommended Additional Gripping Groups by Service, C.L. CSS Publishers.
Reading
The following titles include information related to this module and
may be consulted as additional resources.
Digital and Web Resources Some useful web links include the following:
• http://www.accountingcoach.com
• http://www.cimaglobal.com/
Module Purpose
The purpose of this module is to enable students to prepare group financial statements in
accordance with International Financial Reporting Standards (IFRS), as well as to
demonstrate an understanding of selected International Financial Reporting Standards
(IFRS).
Module Outcomes
MO1 Demonstrate an understanding of the statutory requirements in preparing group
MO2 Accurately prepare group financial statements of a business entity, which includes
the consolidated statement of profit or loss and other comprehensive income,
consolidated statement of financial position, consolidated statement of changes in
equity and the consolidated statement of cash flows.
MO3 Accurately prepare consolidated journal entries for business entities.
MO4 Demonstrate an understanding of selected International Financial Reporting
Standards (IFRS).

Pacer and Assessment brief Applicable to Module:

Financial Accounting 2B (FIAC6212)
Learning Unit 1 IFRS 3 Business Combinations Textbook reference
FIAC6212 Determine if a transaction is a business From Group
Sessions: 1–5 combination by applying the definitions of Statements:
Related Outcomes: IFRS 3. Chapters 1,2 and 3
MO1
MO3 Recognise and measure the assets acquired
and liabilities assumed in a business
combination at acquisition date.
Measure the consideration transferred in a

business combination.
Recognise and measure non- controlling

interest.
Recognise and measure goodwill or gain

from bargain purchase.
IFRS 10- Consolidated Financial

Learning Unit 2 Textbook reference
Statements (Simple and complex groups)
FIAC6212 Eliminate: Chapters 3,4 and 7
Sessions: 6 – 15 • intragroup transactions;
Related Outcomes: • balances;
MO1 • and common items
MO2
MO3 Prepare consolidated financial statements for
a simple and complex group of companies (at
and after acquisition date).
Learning Unit 3 IFRS 10- Intragroup transactions Textbook reference

FIAC6212 Calculate the unrealised profit on the disposal Chapters 5 and 6
Sessions: 16 – 25 of assets within a group.
Related Outcomes:
MO1 Prepare proforma journal entries for the
MO3 consolidation of a simple and complex group
(horizontal group).
IFRS 10 – Interim acquisition of a

Learning Unit 4 Textbook reference
subsidiary
FIAC6212 Allocate the profit of a subsidiary in the year Chapters 4 and 8
Sessions: 26 – 30 of acquisition between ‘pre’ and ‘post’
Related Outcomes: acquisition profits.
MO1
MO2
MO3

Learning Unit 5 IFRS 10 – Ordinary and preference shares Textbook reference

FIAC6212 Calculate an ordinary dividend declared or Chapter 6
Sessions: 31 - 40 paid by a subsidiary in the consolidated
Related Outcomes: financial statements of a group.
MO1
MO2 Record any ordinary dividend declared or paid
MO3 by a subsidiary in the consolidated financial
statements of a group.
Record any preference dividends declared or

paid by a subsidiary in the consolidated
financial statements of a group.
Record arrear cumulative preference

dividends payable or paid by a subsidiary in
the consolidated financial statements of a
group.
Learning Unit 6 Related parties (IAS 24) Textbook reference

FIAC6212 Define a related party.
Sessions: 41 – 43
Related Outcomes: Define a related-party transaction.
MO4
Present related-parties and related-party
transactions in the annual financial
statements;
Disclose related-parties and related- party

transactions in the annual financial
statements.
Learning Unit 7 Earnings per share (IAS 33) Textbook reference
FIAC6212 Calculate basic earnings.
Sessions: 44 – 52
Related Outcomes: Determine the (weighted average) number of
MO4 ordinary shares outstanding.
Calculate basic earnings per share.

Calculate diluted earnings.
Determine the dilutive effect of the future

changes in the capital structure on the
weighted average number of shares.
Calculate diluted earnings per share.
Identify the different types of new share

issues (without a change in resources).

Determine the weighted average number of

ordinary shares outstanding after a new issue
of shares.
Present earnings per share and diluted

earnings per share in the statement of profit
or loss and other comprehensive income.
Disclose earnings per share and diluted

earnings per share in the notes to the annual
Determine the dividends declared for the

period.
Determine the number of shares in issue for

the period.
Calculate dividends per share.
Disclose dividends per share in the notes to

the annual financial statements.
Learning Unit 8 IFRS for Small and Medium Enterprises Textbook reference
FIAC6212 Identify small and medium enterprises as
Sessions: 53 – 55 defined by the International Accounting
Standards Board (IASB).
Related Outcomes:
MO4
Identify the characteristics of small and
medium enterprises.
Identify which entities must not assert

compliance with International Financial
Reporting Standards (IFRS) for SMEs.
Explain the differences between full IFRS and

IFRS for SMEs.
REVISION
FIAC6212 All learning units
Sessions: 56 – 60
Related Outcomes:
MO1
MO2
MO3
MO4

Assessments
Integrated Curriculum Engagement (ICE)
Minimum number of ICE activities to complete 4
Weighting towards the final module mark 10%
Tests/ Examination Test 1 Test 2 Examination

Weighting 20% 20% 50%
Duration 1 hour 1 hour 3 hours
Total marks 60 60 180
Open/ closed book Closed book Closed book Closed book
Resources required Calculator Calculator Calculator
Learning Units covered 1-2 1-5 All learning units
Assessment Preparation Guidelines

Format of the Assessment Preparation Hints
(The Focus/ Approach/ (How to Prepare, Resources to Use,
Objectives) etc.)
Tests and To prepare a set of group financial To prepare effectively for Financial
examinations statements, which includes the Accounting assessments, you need to
consolidated statement of profit or understand the theory that has been
loss and other comprehensive taught and be able to apply it to a
income, consolidated statement of question.
financial position, and
consolidated statement of The best way to master this is to do as
changes in equity. A single many questions as possible under
statement may be asked, or a exam conditions.
combination of consolidated
financial statements, which will Once you have completed a question,
generally include an extract you need to mark the question and
should more than one statement identify where you went wrong and
be asked. where you have gaps in your
knowledge.
Prepare consolidated journal Once these gaps are identified, you
entries, including the elimination of need to revise that work and do more
common items, elimination of questions on that section.
intragroup transactions, and other
pro-forma journal entries Exam-type questions need to be
applicable to a business entity. practiced and mastered, as many of the
topics covered during the semester will
Application of selected be integrated into a single question.
International Financial Reporting When attempting exam questions,
Standards (IFRS), to a given students must avoid thinking in “silos”
scenario. This could include both and must be able to see the link to
theory and application-type various topics covered
questions.

Glossary of Key Terms for this Module

Term Definition My Notes
Business combination Transaction or other event in which an

acquirer obtains control of one or more
businesses.
Parent An entity that controls one or more
other entities (subsidiaries)
Subsidiary An entity that is controlled by another
entity (parent)
Sub-subsidiary A subsidiary of another
entity/subsidiary of the ultimate parent
Control An investor controls an investee when
the investor is exposed to or has rights
to, variable returns from its
involvement with the investee and can
affect those returns through its power
over the investee
Simple group A group that consists of a parent and a
subsidiary
Complex group A group which consists of a parent and
more than one subsidiary
Net asset value Value of an entity’s assets minus the
value of the liabilities
Goodwill An asset representing the future
economic benefits arising from other
assets acquired in a business
combination that are not individually
identified and separately recognised.
Gain from a bargain Acquisition date amounts of net assets
purchase acquired exceed the fair value of the
consideration transferred and the
amount of the non-controlling interest.
Non-controlling interest Equity in a subsidiary not attributable,
directly, or indirectly, to a parent
Earnings Profit/loss attributable to the ordinary
owners of the parent adjusted for the
after-tax effect of preference dividends
Earnings per share Profit attributable to each ordinary
share. Expressed in rands or cents.
Dividends per share Distributions to owners during the
reporting period divided by the number
of actual ordinary shares outstanding
at the date of declaration
Ordinary shares Equity instruments that are
subordinate to all other classes of
equity instruments.

Dilution Reduction in earnings per

share/increase in loss per share
resulting from the assumption that
convertible instruments are converted,
that options/warrants are exercised, or
that ordinary shares are issued upon
satisfaction of specified conditions.
Potential ordinary share Financial instrument or other contract
that may entitle its holder to ordinary
shares.
Related party Person/entity that is related to the
entity that is preparing its financial
statements
Related party transaction Transfer of resources, services or
obligations between a reporting entity
and a related party, regardless of
whether a price is charged.
Significant influence The power to participate in the financial
and operating policy decisions of the
investee but no or joint control of those
policies
Government Refers to government, government
agencies and similar bodies whether
local, national, or international
Compensation Includes all employee benefits
including all forms of consideration
paid/payable in exchange for services
rendered to the entity e.g., wages,
salaries, pensions
Public accountability When an entity has its securities (debt
and equity instruments) traded in a
public market/ holds its assets in a
fiduciary capacity for a group of
outsiders (e.g., banks) as its primary
business.

Learning Unit 1: IFRS 3 Business Combinations

Learning Objectives: My notes
• Determine if a transaction is a business combination by
applying the definitions of IFRS 3.
• Recognise and measure the assets acquired and
liabilities assumed in a business combination at
acquisition date.
• Measure the consideration transferred in a business
combination.
• Recognise and measure non- controlling interest.
• Recognise and measure goodwill or gain from bargain
purchase.
Material used for this learning unit:
• Chapters 1, 2 and 3 of the prescribed textbook.
How to prepare for this learning unit:
• Study the relevant chapters in your prescribed textbook
together with the summarised notes below and the
examples.
1. Introduction
The tendency in the business world over the years has been to form bigger entities for various
reasons such as investing in suppliers to manage risks and gain easier access to resources
or gain access to required manpower/skills. This can also take place when an entity combines
with other entities. The result being the formation of larger entities and groups of companies.
A business combination is defined as a transaction or event in which an acquirer obtains
control of one or more businesses. This will result in a parent-subsidiary relationship where
the parent is the acquirer and the subsidiary is the acquiree, commonly referred to as a group.
The basic characteristic of the group is that management of the parent and subsidiary is
coordinated in such a way that they are managed on a central and unified basis in the interest
of the group. This is possible because of the control which the parent exercises over its
subsidiaries.
An investor (parent) controls an investee (subsidiary) when the investor is exposed to, or has
rights to, variable returns from its involvement with the investee and can affect those returns
through its power over the investee. A parent can obtain control over a subsidiary if the parent
holds a majority of the shares of a subsidiary.
(In FIAC6212 it will be assumed that control is obtained by the possession of 50% or more of
the shares and voting right of a company)

2. Examples of group structures

SIMPLE GROUP
Parent
P Ltd
60% of the control and 60%

of the share capital
Subsidiary
S Ltd
COMPLEX GROUP - HORIZONTAL

Parent
P Ltd

S1 Ltd S2 Ltd
Subsidiary
Subsidiary


COMPLEX GROUP - VERTICAL
P Ltd
Parent
S1 Ltd
Subsidiary

S2 Ltd
Sub-
subsidiary

3. Accounting for groups

The group is seen as a single economic entity as the parent can control the policy and
management of the subsidiary. In the statement of financial position of the parent, the
investment in its subsidiaries is reflected as a non-current asset. However, it is highly probable
that the value of the investment may have changed since the initial purchase of shares in the
subsidiary. As a result, the statement of financial position may not accurately reflect the
activities of the group.
In order for the shareholders of the parent to gain a better understanding of the assets,
liabilities, equity, income, expenses and cash flows of the group, a single set of annual
financial statements should be prepared for the group. Consolidated financial statements are
financial statements of a group presented as those of a single economic entity. All entities
under the control of the parent are included in the consolidated financial statements.
These consolidated financial statements show that the investment in the parent’s statements
is replaced by the assets and liabilities of the subsidiary (represents these investments).
However, certain adjustments are necessary in order to represent these combined amounts
as a single economic unit (will be covered later in this module).
Consolidated financial statements consist of:

• A statement of financial position
• A statement of profit or loss and other comprehensive income
• A statement of changes in equity
• A statement of cash flows
Consolidated financial statements need not be prepared

IFRS 10 allows a parent not to present consolidated financial statements if it meets ALL of the
following criteria:
• It is a wholly-owned subsidiary or it is a partially-owned subsidiary of another entity
and all its other owners (including those not otherwise entitled to vote) do not object to
the parent not preparing consolidated financial statements; and
• Its securities (debt and equity instruments) are not publicly traded; and
• It is not in the process of issuing any class of instruments to the public; and
• The ultimate or any intermediate parent publishes consolidated financial statements
available for public use that comply with International Financial Reporting Standards
(IFRS).
A parent that selects, in terms of the above-mentioned, not to present consolidated financial
statements, may present separate financial statements as its only financial statements.
Accounting provisions relating to group financial statements

• The group financial statements should be a true reflection of the state of affairs of the
parent and subsidiaries at reporting date
• Elimination of the carrying amount of the parent’s investment in the subsidiary
• Elimination of unrealised profits because of transactions within the group
• Elimination of intragroup balances

Consolidation of a wholly-owned subsidiary at the date of

acquisition
Business combinations are accounted for by applying the acquisition or purchase method.
The following steps to need to applied:
• Identify the acquirer
• Determine the acquisition date
• Recognise and measure the identifiable assets acquired, liabilities assumed and any
non-controlling interest in the acquire
• Recognise and measure goodwill or gain from a bargain purchase
When the parent obtains an interest in the subsidiary, the following situations can arise:
1. Acquisition at net asset value: the price paid by the parent for the investment in the
subsidiary is equivalent to the fair value of assets and liabilities acquired.
2. Goodwill: the price paid for the investment is higher than the fair value of assets and
liabilities acquired. This is also known as acquisition at a premium.
NB. Goodwill shall not be amortised!
3. Gain from a bargain purchase: the price paid for the investment is lower than the fair
value of assets and liabilities acquired. This is also known as acquisition at a discount
and is recognised at acquisition date in profit or loss.
Question 1
ACQUISITION OF A SUBSIDIARY AT NET ASSET VALUE
Chip Ltd acquired its interest in Dale Ltd on 31 December 2022.The following abridged
statements of financial position of Chip Ltd and its wholly owned subsidiary of Dale Ltd at 31
December 2022 are presented:
Chip Ltd Dale Ltd

R R
ASSETS
Investment in Dale Ltd 180 000 -
(cost price: R180 000)
Bank 60 000 110 000
Trade and other receivables 120 000 70 000
360 000 180 000
EQUITY AND LIABILITIES

Ordinary shares at R2 each 200 000 100 000
Retained Earnings 160 000 80 000
360 000 180 000
Required:
Journalise the elimination of shareholders’ equity in Dale Ltd at acquisition.

Question 2
ACQUISITION OF A SUBSIDIARY AT A PREMIUM
Tom Ltd acquired its interest in Jerry Ltd on 31 December 2022 for R200 000.The following
abridged statements of financial position of Tom Ltd and its wholly owned subsidiary of Jerry
Ltd at 31 December 2022 are presented:
Tom Ltd Jerry Ltd

R R
ASSETS
Investment in Jerry Ltd
(cost price: R200 000) 200 000 -
Bank 40 000 110 000
360 000 180 000

Retained earnings 160 000 80 000
360 000 180 000
Required:
1. Prepare the analysis of shareholders equity of Jerry Ltd.
2. Prepare the pro-forma consolidation journal entry at acquisition of Jerry Ltd.
ANALYSIS OF EQUITY
TOTAL
Ordinary share capital
Retained earnings
Goodwill/ Gain from

bargain purchase
Investment in subsidiary

Learning Unit 2: IFRS 10 – Consolidated financial

statements (simple and complex group)
• Eliminate:
▪ intragroup transactions;
▪ balances;
▪ and common items;
• Prepare consolidated financial statements for a simple
and complex group of companies (at and after
acquisition date)
• Chapters 3, 4 and 7 of the prescribed textbook
examples.
1.Introduction
If an entity (parent) controls another entity (subsidiary), the parent shall prepare consolidated
financial statements. The consolidation process begins with combining like items of assets,
liabilities, equity, income, and expenses, on a line-by-line basis, of the parent and subsidiary
as they appear in the separate financial statements.
S Consolidated
H Group
2.Basic consolidation procedures
Proforma
Consolidated journal
Group entries
Total
Consolidation

The procedures to follow to draft group financial statements:

1. Elimination of common items
2. Elimination of intercompany items
3. Consolidation of remaining items
Elimination of common items

The investment account in the parent’s records (asset) is a claim against the net assets of the
subsidiary represented by its equity. Therefore, the two items are mirror images of the same
item and must be eliminated in the new group. The group is regarded as one economic entity
and will not enter into transactions with itself.
Question 3
The following represent the abridged statements of the financial position of Mickey Ltd and its
wholly owned subsidiary Minnie Ltd at 31 December 2022, the date on which Mickey Ltd
acquired its interest in Minnie Ltd.
Mickey Ltd Minnie Ltd

R R
ASSETS
Investment in Minnie Ltd- at cost 100 000 -
Bank 30 000 50 000
Trade and other receivables 40 000 50 000 This is the
170 000 100 000 investment. It
EQUITY AND LIABILITIES is a common
Ordinary shares at R1 each 90 000 60 000 item.

170 000 100 000
Required:
1. Journalise the elimination of shareholders equity in Minnie Ltd at acquisition date.
2. Prepare the consolidated statement of financial position of the Mickey Ltd group as at
31 December 2022.

Question 4
The following represent the abridged statements of financial position of Donald Ltd and its
wholly owned subsidiary Daisy Ltd at 31 December 2022, the date on which Donald Ltd
acquired its interest in Daisy Ltd.
Donald Ltd Daisy Ltd

R R
ASSETS
Investment in Daisy Ltd at cost 40 000 -
Bank 10 000 35 000
50 000 35 000

Trade and other payables 15 000 2 000
50 000 35 000
Required:
1. Prepare the table of analysis of shareholders equity of Daisy Ltd.
2. Journalise the elimination of shareholders equity in Daisy Ltd at acquisition.
3. Prepare the consolidated statement of financial position of the Donald Ltd group
as at 31 December 2022.

Question 5
The following represent the abridged statements of Goofy and Pluto Ltd a wholly owned
subsidiary of Goofy Ltd at 31 December 2022, the date on which Goofy acquired its interest
in Pluto Ltd.
Goofy Ltd Pluto Ltd

R R
ASSETS
Investment in Pluto Ltd at cost 150 000 -
Bank 50 000 40 000
Inventories 10 000 80 000
210 000 120 000

210 000 120 000
Required:
1. Journalise the elimination of shareholders equity of Pluto Ltd at acquisition.
2. Prepare the consolidated statement of financial position of the Goofy Ltd group as at
31 December 2022.

Question 6
On 1 January 2022, Popeye Ltd acquired its interest in Bluto Ltd. From that date, Popeye Ltd
had control over Bluto Ltd. The following represents the abridged statements of financial
position of Popeye Ltd and its subsidiary, Bluto Ltd:
Popeye Ltd Bluto Ltd

R R
ASSETS
Investment in Bluto Ltd at cost 200 000 -
Inventory 105 000 75 000
Bank 102 000 90 000
475 000 235 000

475 000 235 000
Required:
1. Prepare the analysis of shareholders equity of Bluto Ltd.
2. Prepare the pro-forma journal entry at acquisition of Bluto Ltd.
3. Prepare the consolidated statement of financial position of the Popeye Ltd Group as
at 31 December 2022.
Consolidation of a partly-owned subsidiary at the date of

acquisition
When a parent does not acquire the entire issued share capital of the subsidiary, the other
owners of the shares are referred to as the non-controlling interests (NCI). The NCI are the
equity in a subsidiary not attributable (directly or indirectly) to the parent.
P Ltd
75%
S Ltd NCI
25%

When preparing the consolidated annual financial statements, the NCI share of net assets and
profit or loss of consolidated subsidiaries is identified separately from the parent’s interest.
A subsidiary that is partially-owned is referred to as a partially-owned subsidiary.

To make provision for the parent’s interest in the profit of a subsidiary, the percentage
calculation of the interest is as follows:
Question 7A
Calculate the percentage interest holding in the following subsidiary:
An extract of items from the statement of financial positions:
Algeria Ltd Ghana Ltd

R R
ASSETS
Investment in Ghana Ltd – 75 000 75 000 -

Ordinary shares at R1 each 100 000
Retained Earnings 2 000
Congo owns 10 000

Question 7B
shares out of the 12 500
The following represent the abridged statements of Congo Ltd and Zambia Ltd, a partly
owned subsidiary as at 31 December 2022, the date on which Congo acquired its interest in
Zambia Ltd.
% interest = Number of ordinary shares parent owns

Number of total ordinary shares of sub
Congo Ltd Zambia Ltd

R R
ASSETS
Investment in Zambia Ltd – 10 000 shares 30 000 -
Bank 10 000 37 500
40 000 37 500


40 000 37 500
Required:
1. Calculate Congo Ltd.’s interest in Zambia Ltd.
2. Prepare the analysis of shareholders equity of Zambia Ltd.
3. Prepare the pro-forma journal entry at acquisition of Zambia Ltd.
4. Prepare the consolidated statement of financial position of the Congo Ltd group as at
31 December 2022.
Question 8
Guinea Ltd acquired its interest in Togo Ltd at 30 June 2022. Each share carries one vote.
The following represent the condensed trial balances of Guinea Ltd and Togo Ltd at 30 June
2022:
Check
debentures Guinea Ltd Togo Ltd
of Togo Ltd
R R
Debits:
Property, plant, and equipment 55 000 105 000
Investment in Togo Ltd
-60 000 shares of R1 each 70 000 -
-10 000 debentures of R1 each 10 000 -
Bank 5 000 35 000
Loan to Togo Ltd 15 000 -
155 000 140 000
Credits:
Share capital – ordinary shares of R1 each 100 000 100 000
Debentures - 14 000
Loan from Guinea Ltd - 15 000
The difference
155 000 140 000
is R 4 000
which is not
common.
Required:
1. Journalise the elimination of shareholders equity of Togo Ltd and the elimination of
intercompany balances.

2. Prepare the consolidated statement of the financial position of the Guinea Ltd
group as at 30 June 2022.
224 000
280 000
Question 9
Namibia Ltd acquired 224 000 ordinary shares in Uganda Ltd on 30 June 2022. The following
represent the abridged statements of financial position of the two companies on that date:
Namibia Ltd Uganda Ltd

R R
ASSETS
Non- current assets 340 000 154 000
Investment in Uganda Ltd at cost 180 000 -
Loan – Uganda Ltd 22 500 -
Current assets 195 000 252 000

Trade and other receivables 112 500 - Then the number
Cash and cash equivalents - 63 000 of shares is
140 000 / 50c
Total assets 535 000 406 000

Total equity 431 250 210 000
Ordinary shares at 50c each 250 000 140 000
Other components of equity 31 250 14 000
TOTAL LIABILITIES 103 750 196 000

Non-current liabilities
Loan – Namibia Ltd - 22 500
Debentures 25 000 98 000
Current liabilities
Bank overdraft 28 750 -
Total equity and liabilities 535 000 406 000

Required:
1. Prepare the pro-forma consolidation journal entries for the year ended 30 June 2022.
2. Prepare the consolidated statement of financial position of the Namibia Ltd group as
at 30 June 2022.
Consolidation of a wholly-owned subsidiary after the date of

acquisition
All profits that the subsidiary makes after the date of acquisition become profits of the group
and should therefore be included in the consolidated annual financial statements. All
components of equity of a subsidiary which was formed after the date of acquisition form part
of the total equity of the group.
As consolidation takes place after the date of acquisition of the interest in the subsidiary, the
full set of financial statements must be consolidated, namely the statements of financial
position, statements of profit or loss and other comprehensive income and statements of
changes in equity of the parent and subsidiary. The basic consolidation procedures consist of
the elimination of common items, elimination of intragroup items and consolidation of
remaining non-common items on a line-by-line basis.
A consolidation worksheet referred to as the analysis of owners’ equity can be prepared to

combine the separate financial statements of the parent and its subsidiary, prepare the pro-
forma consolidation journal entries and including the remaining non-common items.
Example:
P Ltd acquired a 100% interest in S Ltd on 1 January 2019.
You are required to draft the consolidated financial statements for the year ended 31
December 2022.
The analysis of owners’ equity will be divided into three parts:
Analysis of owners’ equity of S Ltd

Total At Since
R R R
At acquisition
1 January 2019
Since acquisition to beginning of current year

2 January 2019 to 31 December 2021
Current year
1 January 2022 to 31 December 2022

Question 10
The following are the trial balances of Marks Ltd and its subsidiary Spencer Ltd at 31
December 2022:
Marks Ltd Spencer Ltd

Credits:
Ordinary share capital of R1 each 100 000 50 000

Retained earnings – 1 January 2022 50 000 180 000
Gross profit 380 000 250 000
Dividends received 20 000 -
Rental Income - 12 000
Accumulated depreciation 50 000 20 000
Bank overdraft - 10 000
610 000 530 000
Debits:
Property, plant and equipment at cost 200 000 187 000

Investment in Spencer Ltd
- 50 000 shares (cost R 150 000) 150 000 -
Staff costs 85 000 70 000
Depreciation 15 000 10 000
Dividends paid 25 000 20 000
Taxation for the year 95 000 60 000
610 000 530 000
Additional information:
Marks Ltd acquired its interest in Spencer Ltd at 2 January 2018, at which date the
retained earnings of Spencer Ltd were R 90 000.
Use this in
“AT”
Consider the carrying amount of the assets and liabilities of Spencer Ltd to be equal to the fair
value.

Required:
1. Calculate the profit for the year after tax for Spencer Ltd.
2. Prepare all pro-forma consolidation journal entries for the year ended 31 December
2022.
3. Prepare the consolidated statement of profit or loss and other comprehensive income
of the Marks Ltd group for the year ended 31 December 2022.
4. Prepare the consolidated statement of financial position of the Marks Ltd group as at
31 December 2022.
Consolidation of a partly-owned subsidiary after the date of

acquisition
The consolidation process referred to in the examples above are still applicable to the partly-
owned subsidiary. However, an additional separate calculation is done for the non-controlling
interest. The profit attributable to the non-controlling owners is disclosed separately on the
consolidated statement of profit or loss and other comprehensive income and in the
consolidated statement of changes in equity.
Always highlight the retained earnings balance of the subsidiary at acquisition as these profits
do not belong to the holding company and must be bought, so it’s brought into account in the
goodwill calculation. When an interest is bought at incorporation, which is when the subsidiary
started up, the retained earnings will be zero.

Question 11
The following represent the abridged trial balances of Fern Ltd and Aloe Ltd as at 31 December
2022:
Debits Fern Ltd Aloe Ltd

R R
Property at cost 1 200 000 300 000
Equipment at carrying amount 100 000 219 900
Bank 1 200 14 050
Investment in Aloe Ltd – 135 000 ordinary 400 000 -
shares at cost
Debentures 20 000 -
Investment – fixed deposit 10 000
Credits
Ordinary share capital of R2 each 1 000 000 360 000

Revaluation surplus 100 000 100 000
Profit for the year 45 000 10 500
Debentures - 30 000
Long-term borrowings-interest free 200 000 20 000
Fern Ltd acquired its interest in Aloe Ltd on the 31 December 2019, when retained earnings
were R20 000, and the property was revalued by Aloe Ltd on the same day from R200 000 to
R300 000.
Required:
1. Prepare the pro forma consolidation journal entries for the year ended
31 December 2022.
Journal narrations are not required.
2. Prepare the consolidated statement of financial position of the Fern Ltd group as at
31 December 2022.

Question 12
The following represent the abridged statements of Moss Ltd and Vine Ltd as at 28 February
2022:
Statement of profit or loss and other comprehensive income for the year ended 28 February
2022:
Moss Ltd Vine Ltd

R R
Profit before tax 110 000 88 000
Income tax expense (35 000) (26 000)
Other comprehensive income - -
Total comprehensive income for the year 75 000 62 000
Statements of changes in equity for the year ended 28 February 2022:
Share Capital Retained earnings

Moss Ltd Vine Ltd Moss Ltd Vine Ltd
Balance at 1 March 2021 200 000 100 000 310 000 275 000
Ordinary shares at R1
Dividends paid (10 000) -
Balance at 28 February 2022 200 000 100 000 375 000 337 000
Moss Ltd acquired 80 000 shares in Vine Ltd on 1 March 2018, when Vine Ltd.’s retained
earnings were R190 000. Goodwill at acquisition was nil.
Required:
1. Prepare the pro-forma consolidation journal entries for the year ended 28 February
2022.
for the Moss Ltd group for the year ended 28 February 2022.
3. Prepare the consolidated statement of changes in equity for the Moss Ltd group for
the year ended 28 February 2022.

Question 13
Fynbos Limited acquired 80 000 shares in Bulb Limited on 31 December 2022. The following
represent the abridged statement of financial positions of the two companies on 31 December
2022:
Fynbos Ltd Bulb Ltd
ASSETS
Non- current assets
Investment in Bulb Ltd – cost 264 000 -
Loan – Bulb Ltd 60 000 -
Current assets
Cash and cash equivalents - 60 000
Total assets 856 000 580 000

Total Equity
Ordinary share capital at R2 each 400 000 200 000
Non- distributable reserve 20 000 -
Non- current liabilities

Loan – Fynbos Ltd - 60 000
10% debentures 40 000 140 000
Current liabilities
Bank overdraft 98 000 -
Required:
Prepare the consolidated statement of financial position for the Fynbos Ltd group as at 31
December 2022.

Consolidation of a complex group (horizontal groups).

A parent together with its subsidiaries forms a group of entities. Complex groups can be
divided into horizontal, vertical, and mixed groups.
Horizontal groups (also known as single-level structures) are represented by the parent itself
being the only entity owning shares in two or more subsidiaries and holds that interest directly.
Consolidation process is similar to the simple group but the interests of the subsidiaries in a
horizontal group must be analysed separately in order to determine the correct goodwill for
each subsidiary as well as the non-controlling interest in that subsidiary.
Question 14
The following represents the abridged trial balances of Mars Ltd, Venus Ltd and Uranus Ltd
at 31 December 2022:
CREDITS Mars Venus Uranus
Ltd Ltd Ltd
Share capital
- 200 000 ordinary shares 200 000 - -
- 160 000 ordinary shares - 160 000 -
- 60 000 ordinary shares - - 120 000
Retained earnings (1 January 2022) 400 000 300 000 220 000
Profit before tax 690 000 440 000 190 000
1 290 000 900 000 530 000
DEBITS
Property, plant, and equipment 533 000 568 000 273 000
Investments in equity instruments:
- Investment in Venus Ltd at fair value 220 000 - -
- Investment in Uranus Ltd at fair value 200 000 - -
Trade and other receivables 70 000 120 000 130 000
Income tax expense 207 000 132 000 57 000
Dividends paid 60 000 80 000 70 000
1 290 000 900 000 530 000
1. Mars Ltd purchased 120 000 shares in Venus Ltd on 1 January 2019, when Venus Ltd.’s
retained earnings amounted to R120 000. On 1 January 2020, Mars Ltd acquired 54
000 shares in Uranus Ltd, when the retained earnings of Uranus Ltd amounted to
R80 000. On both acquisition dates, Mars Ltd acquired control over the respective
companies. The fair values of the identifiable assets, liabilities and contingent liabilities
were considered to be equal to the carrying amounts of these items.
2. Each share carries one vote.
3. The Mars Ltd group uses the partial goodwill method to recognise goodwill. The non-
controlling interests are measured at their proportionate interest in the net identifiable

assets of the acquiree. Goodwill was not considered to be impaired at the end of the
current financial year.
4. The fair values of investments in equity instruments are equal to the cost price thereof.
The equity investments are measured at fair value through other comprehensive
income.
Required:
Prepare the consolidated annual financial statements of the Mars Ltd group for the year ended
31 December 2022.
Your answer must comply with the requirements of IFRS.

No notes are required.
Ignore comparative amounts.

Learning Unit 3: IFRS 10 – Intragroup transactions

• Calculate the unrealised profit on the disposal of assets
within a group.
• Prepare pro-forma journal entries for the consolidation
of a simple and complex group (horizontal group).
• Chapters 5 and 6 of the prescribed textbook.
examples.
There are three types of intragroup sales within a group of companies:

▪ Sale of inventories
▪ Sale of non-depreciable property
▪ Sale of depreciable property, plant, and equipment
All intragroup assets, liabilities, equity, income, and expenses relating to transactions between
entities of a group must be eliminated on consolidation. These intragroup balances are as a
result of intragroup borrowings and intragroup rendering of services.
These transactions in the separate records of the parent and subsidiary represents mirror
images of the same transaction. When the financial statements of the parent and the
subsidiary are consolidated, the group is regarded as one economic and reporting entity and
these balances are set-off. From a group’s perspective, the group cannot enter into a
transaction with itself.
The assets of a subsidiary may be revalued at the date of acquisition of the interest, where
there is a difference between the carrying amount and market values of the assets. Two
situations may arise:
1. The subsidiary’s assets may be revalued for the purposes of determining the purchase
price, without a journal entry being entered in the subsidiary’s financial records.
2. The assets of the subsidiary are revalued in order to determine the purchase price and
an adjustment is subsequently made in the subsidiary’s financial records.
Intragroup transactions within a group

Sales of inventories and other assets frequently take place between entities in a group. This
is a benefit of a business combination as the group benefits from the synergies. The entity
selling the asset will record the sale and reflect the profit (if any) in its individual profit or loss.
From the perspective of the group, one cannot sell goods and make a profit out of oneself.
The profit cannot be recognised until the inventories or other assets are sold to a third party
outside the group or used. Only then is the profit realised from the perspective of the group as
an entity. Profits or losses resulting from intragroup transactions that are recognised as part
of the cost price of assets, such as fixed assets and inventories, are eliminated in full.

The profit or loss on the sale of the asset is realised once the group realises the economic
benefits associated with the asset. If trading inventory is sold within the group, the benefits will
be realised when the inventory is sold to an outside party. If fixed assets (property, plant and
equipment) are sold within the group, the benefits will be realised by using the fixed assets.
Example:
P Ltd sells inventory to S Ltd at a cost price of R3 000 plus 20% profit. S Ltd rebrands and
repackages the inventory and sells it outside the group to O Ltd for R4 500.
Two possible situations may arise:
• All the inventories have been sold to O Ltd by the end of the year – no change to the
consolidated annual financial statements as the profit is realised by selling the inventory
outside the group.
If no inventory has been sold to O Ltd, the unrealised profit of R600 should be eliminated
as the profit has not yet been realised outside the group. This implies that S Ltd.’s
inventory includes the R600 profit and P Ltd.’s profit includes this R600 as well.
Therefore, the journal entry to process is:
Dr Cost of sales (P Ltd) R600
Cr Inventory (S Ltd) R600
• If half of the inventory has been sold outside the group, R300 should be eliminated.
NB: Determine which company is selling the inventory and which company is purchasing it.
P Ltd
If P Ltd sells inventories

to S Ltd, the profit is Sells to
made by P Ltd and no
adjustment is necessary
to NCI
S Ltd

P Ltd If S Ltd sells inventories

to P Ltd, the profit is
made by S Ltd and an
adjustment is necessary
to NCI based on their %
interest in P/L.
Sells to
S Ltd
Question 15
The following is an extract from the trial balance of Chelsea Ltd on 31 December 2022:
Credits:
Ordinary share capital 400 000

Retained Earnings 100 000
Mortgage – Barklays Bank 200 000
Bank overdraft 10 000
Debits:
Property, plant and equipment 500 000

Inventories 120 000
Trade and other receivables 90 000
On 31 December 2022, as part of the preparation for selling 80% of the shares in Chelsea Ltd,
a valuator was approached, and he revalued the property at R600 000. The original cost of
this property was R280 000. This adjustment has not yet been recorded.
Required:
1. Journalise the revaluation of land and buildings.
2. Prepare the statement of financial position of Chelsea Ltd as at 31 December 2022.

Question 16
Swansea Ltd acquired 480 000 shares in Everton Ltd at 1 March 2016. Each share caries one
vote. At that date the land and buildings belonging to Everton Ltd were valued at R500 000.
No adjustment was made in the books of Everton Ltd. The retained earnings were R72 000.
At 28 February 2022 the trial balances were as follows:
Swansea Ltd Everton Ltd

R R
Credits:
Ordinary shares of R1 each 480 000 600 000
Long term loan – Swansea Ltd - 50 000
Long term loan – AB Bank - 20 000
Current liabilities 50 000 30 000
1 260 000 800 000
Debits:
Land and buildings at cost 520 000 400 000
Investment in Everton Ltd at cost 640 000 -
Equipment 40 000 360 000
Loan – Everton Ltd 50 000 -
Current assets 10 000 40 000
1 260 000 800 000
At the date of acquisition, consider the carrying amount of the assets and liabilities, except for
land, of Everton Ltd to be equal to the fair value.
Required:
1. Journalise all intercompany transactions and the elimination of shareholders equity in

Everton Ltd.
2. Prepare the consolidated statement of financial position of the Swansea Ltd group as
at 28 February 2022.

Question 17
The following represent an extract of trial balances of Watford Ltd and its subsidiary
Brighton Ltd:
Watford Ltd Brighton Ltd

Debits:
Bank – AB Bank` 80 000
Credits:
Bank overdraft – CC Bank 25 000
Brighton Ltd guarantees the overdraft of Watford Ltd
Required:
1. What amount would be shown as bank in current assets in the consolidated

statement of financial position?
2. Use the above information, but you are informed that Watford Ltd has changed banks
to AB Bank. What amount will be shown as bank in current assets in the consolidated
statement of financial position?

Question 18
Closing Mark- up Unrealised

inventory Policy Profit
1 120 000 20% on cost price 20/120 x 120 000 = 20 000
2* 480 000 25% on cost price
3 500 000 50% on selling price
4 330 000 33 1/3% on cost price
1. Calculate the unrealised profit in the following closing inventory of Leicester

Companies who are buying inventory from its subsidiary:
2. What happens to the unrealised profit from the closing balance of inventory (previous
year) in the current year?
3. How do we account for this unrealised profit at the end of a financial year in the
consolidated statement of comprehensive income?
4. Show the journal entries for 2*above if the subsidiary company is buying from the
Holding Company.
Round all amounts to the nearest Rand.

Question 19
The following trial balances have been extracted from the accounting records of Sheffield Ltd
and its subsidiary Leeds Ltd at 31 December 2022:
Sheffield Ltd Leeds Ltd

Share capital – ordinary shares 350 000 175 000
(350 000/175 000)
Investment in Leeds Ltd – 140 000 ordinary shares
at fair value (cost price: R140 000) 140 000 -
Inventory 87 500 52 500
Income tax expense 52 500 35 000
• Sheffield Ltd acquired its interest in Leeds Ltd at the time of incorporation of Leeds Ltd.
• Leeds Ltd purchased all its inventories from Sheffield Ltd at cost price plus 25%. At 1
January 2022, the inventory in Leeds Ltd’s financial records amounted to R35 000.
• Sheffield Ltd’s total sales to Leeds Ltd during the 2022 financial year amounted to
R175 000.
Required:
1. Prepare the pro-forma consolidation journal entries for the year ended 31 December
2022.
2. Prepare the consolidated statement of financial position for the Sheffield Ltd group as
at 31 December 2022.
for the Sheffield Ltd group for the year ended 31 December 2022.
4. Prepare the consolidated statement of changes in equity for the Sheffield Ltd group
for the year ended 31 December 2022.

Question 20
The following are the trial balances of Bolton Ltd and its subsidiary Liverpool Ltd at 31
December 2022:
Bolton Ltd Liverpool Ltd

Share capital – ordinary shares 500 000 250 000
(500 000/250 000)
Investment in Liverpool Ltd – 200 000 ordinary
shares at fair value (cost price: R200 000) 200 000 -
Property, plant and equipment 500 000 500 000
Inventory 125 000 75 000
• Bolton Ltd acquired its interest in Liverpool Ltd at the time of incorporation of Liverpool
Ltd.
• Bolton Ltd purchased all its inventories from Liverpool Ltd at cost price plus 25%. At 1
January 2022, the inventory in Bolton Ltd.’s financial records amounted to R100 000.
• Liverpool Ltd.’s total sales to Bolton Ltd during the 2022 financial year amounted to
R250 000.
Required:
2022.
2. Prepare the consolidated statement of financial position for the Bolton Ltd group as at
31 December 2022.
for the Bolton Ltd group for the year ended 31 December 2022.
4. Prepare the consolidated statement of changes in equity for the Sheffield Ltd group
for the year ended 31 December 2022.

Property, plant and equipment held by companies within a group

The profit realised when an asset belonging to one company in the group is sold to another
company in the group should be eliminated. The company which purchased the asset will be
providing too much depreciation as the profit is included in the cost price of the asset in its
records. This portion of the depreciation should be written back for consolidation purposes.
The unrealised profit on assets is realised by the sale of the asset to a party outside the group
or through use of the asset as the rate of depreciation.
The following situations may arise where assets are sold within a group:
• The parent sells non-depreciable assets to the subsidiary
• The parent sells depreciable assets to the subsidiary
• The subsidiary sells non-depreciable assets to the parent
• The subsidiary sells depreciable assets to the parent.
Question 21
Burnley Ltd sold a vehicle with a carrying value of R70 000 for R95 000 to its holding company,
Stoke Ltd, on 1 January 2021.The cost price of this vehicle was R87 500 and it was bought
on 1 January 2020.
Stoke Ltd owns 70% of the ordinary shares in Burnley Ltd. It acquired its interest on the
1 January 2021 when retained earnings of Burnley Ltd was R170 000.
The following represent an extract of trial balances for the two companies at 31 December
2022:
Stoke Ltd Burnley Ltd

Credits:
Retained earnings- 1 January 2022 125 000 280 000
Accumulated depreciation - vehicles 42 000 48 000
Debits:
Vehicles 195 000 200 000
It is company policy to depreciate vehicles over five years.
Required:
1. Prepare the analysis of shareholders equity of Burnley Ltd showing only the since
acquisition and current year calculations.
2. Journalise the elimination of intercompany profits and depreciation associated with

the sale of the vehicle.

QUESTION 22
The following represent the trial balances on Westham Ltd and Newcastle Ltd at
31 March 2022:
CREDITS Westham Newcastle

Ltd Ltd
5 000 14% debentures of R5 each - 25 000
Accumulated depreciation – Plant & 320 000 175 000
equipment
Administration fees received 240 000 -
Bank overdraft – Barklays Bank 60 000 -
Interest received on debentures 2 100 -
Issued share capital – ordinary shares 300 000 120 000
(R3 each)
Loan – Westham Ltd interest free - 175 000
Retained earnings – 1 April 2021 577 000 155 000
Surplus on revaluation of property – 80 000 150 000
1 April 2021
Gross profit 700 000 600 000
Taxation payable 100 000 48 000
2 646 500 1 570 000
DEBITS
Cash in bank – Barklays Bank - 20 000

Plant and equipment at cost 600 000 400 000
Property at valuation 800 000 600 000
Investments in Newcastle Ltd at fair value 440 000 -
- ordinary shares at cost 250 000 -
- debentures at cost 15 000 -
- loan 175 000 -
Administration fees paid - 240 000
Depreciation – plant & equipment 80 000 65 000
Interest paid – bank overdraft 7 500 -
Interest paid - debentures - 3 500
Other expenses 480 000 82 000
2 646 500 1 570 000
1. Westham Ltd acquired 36 000 ordinary shares and 3 000 debentures in Newcastle
Ltd on 31 January 2017 when Newcastle Ltd.’s retained earnings was R80 000. At
the date of acquisition, the property of Newcastle Ltd, which had a carrying value of
R450 000, was valued at R500 000. It is group policy to revalue property every three

years, on the 31 January. Since date of acquisition 31 January 2017, Newcastle Ltd
has not purchased or sold any property. On the date of acquisition, consider the
carrying amount of the assets and liabilities to be equal to the fair values.
2. It is group policy to show goodwill at cost in the financial statements. Goodwill was
not impaired.
3. Since 1 May 2021 Newcastle Ltd purchased all of its inventories for resale from
Westham Ltd at cost plus 25%. Intercompany sales for the period amounted to
R880 000.
Inventories on hand at 31 March 2021 were as follows: NB:

the
date
Westham Ltd………………………………..R25 000 !
Newcastle Ltd ………………………………R35 000
4. On 1 October 2019 Newcastle sold a machine to Westham Ltd at a profit of

R80 000. The group provides for depreciation on equipment at 20% per annum
according to the straight-line method.
5. Newcastle Ltd guarantees the overdraft of Westham Ltd.
Required:
1. Draft the consolidated statement of profit or loss and other comprehensive income of
Westham Ltd and its subsidiary for the year ended 31 March 2022 according to the
requirements of the Companies Act, 2008 and International Financial Reporting
Standards.
Ignore comparative figures and the taxation effect on unrealised profits and/or losses
as well as capital gains tax.
Do all calculations to the nearest Rand.
2. Calculate the following items as they appear on the consolidated statement of

financial position of Westham Ltd and its subsidiary as at 31 March 2022:
1. Property, plant, and equipment

2. Inventory
3. Retained earnings
4. Non – controlling interest

Question 23
On 1 January 2018 Bromwich Ltd purchased ordinary shares in Spurs Ltd. At that stage Spurs
Ltd shareholders interest was compiled as follows:
• R1 ordinary shares R200 000
• Retained earnings R30 000
Bromwich Ltd paid an amount of R4 000 premium (goodwill) to acquire control. There was a
revaluation of Spurs Ltd land and buildings, and it was not recorded in Spurs’ records. Assume
cost is equal to fair value.
The condensed statement of comprehensive incomes of the two companies for the year ended
30 June 2022 was as follows:
Bromwich Ltd Spurs Ltd

R R
Revenue 400 000 255 000
Cost of sales (248 000) (153 000)
Gross profit 152 000 102 000
Other operating expenses (40 000) (24 000)
Depreciation (20 000) (8 000)
Profit from operations 92 000 70 000
Finance costs (20 000) (10 000)

Income received – dividends and interest 8 000 -

PROFIT FOR THE YEAR 40 000 30 000
Bromwich Ltd Spurs Ltd Bromwich Ltd Spurs Ltd

Share Capital Retained earnings
Balance at 30 June 2021 430 000 200 000 58 000 75 000
Ordinary shares at R1
Dividends paid (8 000) (5 000)
Balance at 30 June 2022 430 000 200 000 90 000 100 000

On the 30 June 2022 the following items appeared in the statement of financial position of the
two companies:
ASSETS Bromwich Ltd Spurs Ltd
Non-current assets 540 000 298 000

• Land and buildings at Cost 210 000 150 000
• Plant at cost 160 000 180 000
• Accumulated depreciation – plant (50 000) (32 000)
Investment in Spurs Ltd –180 000 shares 220 000

Current assets
Inventory 95 000 83 000

Total assets 665 000 393 000
Total equity 520 000 300 000
Ordinary share of R1 each 430 000 200 000

Non-current liabilities
Long-term borrowings
• Loan 45 000 23 000
Current liabilities
1. Included in Bromwich Ltd.’s plant is a machine sold on 1 July 2020 by Spurs Ltd to
Bromwich Ltd. Spurs Ltd made a profit of R20 000 on this transaction. Plant is
depreciated at 10% per annum on cost price. Assume cost equals fair value.
2. Since April 2018 Bromwich Ltd purchases some of its inventories from Spurs Ltd at
the normal selling price, determined by Spurs Ltd which is cost plus 25%. In respect
of the year ended 30 June 2022 sales from Spurs Ltd to Bromwich Ltd amounted to
R200 000.
3. At the 30 June 2021 the inventories on hand of Bromwich Ltd were valued at
R60 000.
4. Opening and closing inventories of Bromwich Limited were purchased from Spurs
Limited.

Required:
1. Draft the consolidated financial statements of the Bromwich Ltd group for the year
ended 30 June 2022 according to the requirements of the Companies Act, 2008 and
International Financial Reporting Standards.
Ignore comparative figures and the taxation effect on unrealised profits and/or losses
as well as capital gains tax.
Do all calculations to the nearest Rand
2. Prepare the pro-forma consolidated journal entries at 30 June 2022 to eliminate the
transactions associated with the sale of the assets and inventory.

Question 24
The following represented the abridged statements of financial position of Oregon Ltd and its
subsidiary:
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 2022:
ASSETS Oregon Miami Ltd

Ltd
Property at valuation 450 000 140 000
Plant at carrying amount 124 000 152 000
Investment in Miami – 37 500 shares 180 000 -
Loan – Oregon Ltd - 40 000
Inventory 100 000 140 000
Bank – Vegas Bank 80 000 -
Total assets 944 000 520 000
Ordinary shares of R2 each 400 000 100 000

Revaluation of property 100 000 -
Long-term borrowings 200 000 164 000
• Loan – Miami Ltd 20 000 -
• Other 180 000 164 000
Bank overdraft- Vegas Bank - 70 000
1. Oregon Ltd acquired its interest in Miami Ltd on 1 March 2018. At that date, retained
earnings of Miami Ltd amounted to R64 000. On that date, the property of Miami Ltd
was revalued at R200 000. The books were not adjusted accordingly and no
purchases of sale of property took place since that date. Assume cost equals fair
value.
WHY ??
2. On 26 February 2022 Oregon Ltd mailed a cheque of R20 000 to Miami Ltd. Miami
Ltd received the cheque on 06 March 2022.
3. Oregon Ltd sold a machine to Miami Ltd on 31 August 2020 at a profit of R20 000.
The group provides for depreciation at 20% per annum according to the straight-line
method.
4. The companies declared and paid the following dividends during the current year:
Oregon Ltd
Ordinary dividends on 28 February 2022 - 10c per share
Ordinary dividends on 30 June 2021 – 5c per share

Miami Ltd
Ordinary dividends on 28 February 2022 - 5c per share
5. Oregon Ltd guarantees the bank overdraft of Miami Ltd for an unlimited amount.
Required:
1. Prepare the pro-forma consolidated journal entries for the year ended 28 February
2022 to eliminate the profit and depreciation associated with the sale of the machine.
2. Draft the consolidated statement of financial position of the Oregon Ltd group as at 28
February 2022 according to the requirements of the Companies Act, 2008 and

Question 25
The trial balances of Texas Ltd and Dallas Ltd at 30 June 2022 are as follows:
CREDITS Texas Dallas

Ltd Ltd
Accumulated depreciation – Plant & 105 000 60 000
equipment
Bank overdraft – Vegas Bank 22 000 -
Issued share capital – ordinary shares of R3 240 000 180 000
each
Retained earnings – opening balance 82 000 85 000
Loan from Dallas Ltd 100 000 -
Taxation payable 77 000 100 000
1 302 000 1 133 000
DEBITS
Cash in bank – Dice Bank 15 000 62 000

Plant and equipment at cost 275 000 190 000
Property at cost 386 000 220 000
Investments in Dallas Ltd at fair value
- 48 000 ordinary shares at cost 268 400 -
Investment in Houston Ltd at fair value
- 5 000 ordinary shares at cost 10 000 -
Loan to Texas Ltd – interest free - 150 000

Provisional tax paid 35 000 88 000
Interim dividends paid- 31 December 32 000 18 000
1 302 000 1 133 000
1. Texas Ltd acquired its interest in Dallas Ltd on 1 March 2018. At that date retained
earnings of Dallas Ltd amounted to R40 000. On that date the property of Dallas Ltd
was revalued at R280 000. No purchases of sale of property took place since that
date.
2. Assume each share carries one vote and value of all other assets and liabilities are
equal to fair value. Goodwill is shown at cost in the financial statements.
3. The share capital of Houston Limited consists of 200 000 ordinary shares of R2 each.

4. On 1 April 2020 Dallas Ltd bought a machine from Texas Ltd at a profit of R50 000.
Both companies provide for depreciation on machinery over five years straight – line.
5. Since 2018 Texas Ltd had purchased all its inventory from Dallas Ltd. Dallas Ltd sells
inventory to Texas Ltd at cost plus 25%. Total sales from Dallas to Texas amounted
to R250 000 for the year ended 30 June 2022.
6. On 25 June 2022 Texas Ltd repaid R50 000 of the existing loan from Dallas Ltd. This
payment was received by Dallas Ltd on the 5 July 2022.
7. On the 30 June 2022 both Texas Ltd and Dallas Ltd declared dividends of 50c per
ordinary share. No entries have been made in respect of these dividends.
Required:
Prepare the consolidated statement of financial position of the Texas Ltd group as at 30 June
2022 according to the requirements of the Companies Act, 2008 and International Financial
Reporting Standards.

Learning Unit 4: IFRS 10 – Interim acquisition of a

subsidiary
• Allocate the profit of a subsidiary in the year of
acquisition between ‘pre’ and ‘post’ acquisition profits.
• Chapters 4 and 8 of the prescribed textbook.
examples.
1. Introduction
The purchase of an interest in a subsidiary at a date other than the accounting date is known
as an interim acquisition of a subsidiary.
Income and expenditure items must be examined individually in order to determine the basis
on which each item should be apportioned between the period before acquisition and the
period since acquisition.
Dividends are only recognised when declared. Ordinary dividends declared are year-end
items and fall into the post-acquisition period.
NB: Interim dividends declared and paid during the financial year!
Preference dividends should be accounted for on a time basis. The preference dividends must
be accounted for even if it has not been declared.

Question 26
The following represents an extract of accounts from the trial balance of Beagle Ltd for the
year ended 30 September 2022:
Credits:
R
Sales 500 000
Interest received 2 400
Dividends received 25 000
Debits:
Cost of sales 300 000

Administration expenses 30 000
Depreciation 26 000
Interest paid 3 600
Income tax expense 40 400
1. Beagle Ltd was acquired by its holding company on 1 January 2022.
2. Beagle Ltd manufactures hot chocolate and therefore its sales are seasonal. 60% of
sales take place in the last four months of the financial year. The remaining sales are
spread evenly throughout the other eight months of the year.
3. Administration expenses were R10 000 a month for the months of December and
January. The remaining expense was spread evenly throughout the year.
4. Additional interest expense of R3 600 is still outstanding and must be provided for.
Required:
Prepare an allocation of statement of profit or loss and other comprehensive income Items for
Beagle Ltd the financial year ended 30 September 2022.
Round off to the nearest Rand.

Question 27
The following are the trial balances of Terrier Ltd and Basset Ltd for the year ended 31
December 2022:
Terrier Ltd Basset Ltd

Share capital - ordinary shares 400 000 177 500
(400 000/177 500 shares)
Retained earnings - 1 January 2022 240 000 60 000
Gross profit 211 350 83 100
Dividends received - 31 December 11 900 -
2022
Auditors' remuneration 4 250 2 500
Depreciation 51 000 21 000
Interest paid on bank overdraft 1 900 -
Dividends declared and paid - 40 000 17 000
31 December 2022
Property, plant and equipment- 430 800 213 100
carrying amount
Investment in Basset Ltd at fair
value – 124 250 shares purchased -
on 1 July 2022 (cost R182 350) 182 350
Cash at bank 63 350 25 900
Inventory 36 100 21 500
863 250 863 250 320 600 320 600
Basset Ltd became a subsidiary of Terrier Ltd on 1 July 2022.
The profit of Basset Ltd was earned evenly throughout the year.
Consider the carrying amount of the assets and liabilities of Basset Ltd to be equal to the fair
value thereof at the date of acquisition, with the exception of land and buildings. The excess
of the purchase price over the net carrying amount of the assets at the date of acquisition was
due to the difference between the carrying amount and the fair value of the land and buildings.
Required:
2022.
for the Terrier Ltd group for the year ended 31 December 2022.
3. Prepare the consolidated statement of changes in equity of the Terrier Ltd group for
the year ended 31 December 2022.

Question 28
The following balances were obtained from the records of Collie Ltd and its subsidiary Mastiff
Ltd for the year ended 28 February 2022:
ACCOUNT Collie Ltd Mastiff Ltd

Sales 900 000 500 000
Cost of sales 600 000 350 000
Interest received - Shepherd Bank - 5 000
Profit on sale of machine - 20 000
Auditor’s remuneration 25 000 20 000
Interest paid on loans 15 000 15 600
Depreciation – machinery 20 000 12 000
Repairs 30 000 12 400
Dividends paid 40 000 -
Share capital – ordinary shares of R1 each 300 000 100 000
Retained earnings – 1 March 2021 45 000 29 000
1. Mastiff Ltd became a subsidiary of Collie Ltd on 1 December 2021 when Collie Ltd
acquired 75% of the shares and voting rights in Mastiff Ltd at a cost of R140 000.
2. It is group policy to show goodwill at cost in the financial statements. Assume the
cost of all other assets and liabilities equals to fair value.
3. The profit (income and expense items) of Mastiff Ltd was earned evenly throughout
the year except where otherwise stated.
4. Mastiff Ltd received interest on a fixed deposit. Both the investment and accrued
interest were paid out in full, on 31 March 2021, by Shepherd Bank.
5. On 31 December 2021 Mastiff Ltd sold a machine to Collie Ltd at a profit. Both
companies write off depreciation on machinery at 20% per annum according to the
reducing balance method.
6. Included in the staff cost of Mastiff Ltd are bonuses of R10 000 paid to staff on 18
December 2021.
7. An additional R5 000 was paid for audit work done by the auditors of Mastiff Ltd
during July 2021.
8. Both companies acquired loans on 1 January 2022.
9. The repairs of both companies increased by 10% during the last four months of the
financial year.

10. On 28 February 2022 Mastiff Ltd declared a dividend of R7 000. This transaction was
not yet taken into account.
11. Assume a taxation rate of 29% and that all income/expenses are taxable/tax
deductible.
Required:
1. Prepare the allocation statement of Mastiff Ltd for the year ended 28 February 2022.
2. Calculate the retained earnings of Mastiff Ltd on 1 December 2021 (acquisition date).
3. Prepare the at acquisition pro-forma consolidation journal entry of the Collie Ltd
group as at 1 December 2021.
Clearly show all calculations.

Round all amounts to the nearest Rand.
Ignore the tax implications of unrealised profits/losses.

Learning Unit 5: IFRS 10 – Ordinary and Preference

shares
• Calculate an ordinary dividend declared or paid by a
subsidiary in the consolidated financial statements of a
group.
• Record any ordinary dividend declared or paid by a
group.
• Record any preference dividends declared or paid by a
group.
• Record arrear cumulative preference dividends payable
or paid by a subsidiary in the consolidated financial
statements of a group.
• Chapter 6 of the prescribed textbook.
examples.
1. Introduction
A dividend represents a distribution of a portion of the company’s profits to its shareholders in
proportion to their shareholding (it is NOT an expense) and therefore, it is included in the
statement of changes in equity. The dividends accounted for in the statement of changes in
equity will always be the dividends paid/payable by the owners of the parent. This is in
accordance with the basic consolidation principle that consolidated annual financial
statements should be compiled after all the intragroup transactions have been eliminated.
As non-controlling shareholders’ share in the profit of the subsidiary before the payment of
dividends, and a dividend is paid by the subsidiary, the non-controlling shareholders have
realised part of their interest in the profit in the form of a dividend. This results in a reduction
in the credit balance of the non-controlling interests in the consolidated statement of financial
position, as less is now ‘owed’ to them.
There are five situations that could arise when dividends are paid/declared by the subsidiary:
1. Subsidiary has made no provision and does not wish to create any provision for
dividends
2. Subsidiary has paid a dividend
3. Subsidiary has made a provision for dividend declared and parent has made a
provision for dividend declared and receivable
4. Subsidiary has made a provision for dividend declared but parent has made no
provision for dividend declared and receivable
5. Provision must be made by the subsidiary for a dividend declared.

Question 29 (Illustrative example)
NO DIVIDENDS PAID OR DECLARED BY THE SUBSIDIARY
Colorado Ltd acquired its interest in Ohio Ltd on 1 January 2020 when the retained earnings
of Ohio Ltd amounted to R5 000. At the date of acquisition, consider the carrying amount of
the assets and liabilities of Ohio Ltd to be equal to the fair value thereof.
The following represents the abridged financial statements of Colorado Ltd and its subsidiary
Ohio Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 2022

Colorado Ohio Ltd
Ltd
ASSETS R R
Investment in Ohio Ltd – 40 000 shares at 44 000 -
fair value (cost price R44 000)
Current account: Ohio Ltd 5 000 -
Total assets 228 000 103 000

Share capital - Ordinary shares 100 000 50 000
(100 000/50 000)
Current account: Colorado Ltd - 5 000
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE

YEAR ENDED 31 DECEMBER 2022
Colorado Ohio Ltd
Ltd
R R
TOTAL COMPREHENSIVE INCOME FOR 25 500 11 500
THE YEAR

STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2022
Share capital Retained earnings Total

Colorado Ohio Colorado Ohio Colorado Ohio
R R R R R R
Balance at 100 000 50 000 42 000 7 500 142 000 57 500
1 January 2022
Changes in equity for
2021
Total comprehensive
income for the year
Profit for the year 25 500 11 500 25 500 11 500
Dividends paid: (7 500) (7 500)
Ordinary
Balance at 100 000 50 000 60 000 19 000 160 000 69 000
31 December 2022
DIVIDENDS PAID BY SUBSIDIARY
Arkansas Ltd acquired its interest in Georgia Ltd on 1 January 2020 when the retained
earnings of Georgia Ltd amounted to R5 000. At the date of acquisition, consider the carrying
amount of the assets and liabilities of Georgia Ltd to be equal to the fair value thereof.
The following represents the abridged financial statements of Arkansas Ltd and its subsidiary
Georgia Ltd:

Arkansas Georgia Ltd
Ltd
ASSETS R R
Investment in Georgia Ltd – 40 000 44 000 -
shares at fair value (cost price R44 000)
Current account: Georgia Ltd 5 000 -
Total assets 228 000 103 000

(100 000/50 000)
Current account: Arkansas Ltd - 5 000

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2022
Arkansas Georgia Ltd
Ltd
R R
Gross profit 36 500 16 500
Dividends received 4 800 -
THE YEAR

Arkansas Georgia Arkansas Georgia Arkansas Georgia
R R R R R R
Balance at 100 000 50 000 42 000 7 500 142 000 57 500
1 January 2022
Changes in equity
for 2022
Total
comprehensive
income for the year
Dividends paid: (7 500) (6 000) (7 500) (6 000)
Ordinary
Balance at 100 000 50 000 64 800 13 000 164 800 63 000
31 December 2022

PARENT MADE PROVISION FOR DIVIDEND DECLARED BY THE SUBSIDIARY
Virginia Ltd acquired its interest in Arizona Ltd on 1 January 2020 when the retained earnings
of Arizona Ltd amounted to R5 000. At the date of acquisition, consider the carrying amount
of the assets and liabilities of Arizona Ltd to be equal to the fair value thereof.
The following represents the abridged financial statements of Virginia Ltd and its subsidiary
Arizona Ltd:

Virginia Arizona Ltd
Ltd
ASSETS R R
Investment in Arizona Ltd – 40 000 shares 44 000 -
at fair value (cost price R44 000)
Current account: Arizona Ltd 9 800 -
Total assets 232 800 103 000

(100 000/50 000)
Dividends payable - 6 000
Current account: Virginia Ltd - 5 000
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR

THE YEAR ENDED 31 DECEMBER 2022
Virginia Arizona Ltd
Ltd
R R
THE YEAR


Virginia Arizona Virginia Arizona Virginia Arizona
R R R R R R
Balance at 100 000 50 000 42 000 7 500 142 000 57 500
1 January 2022
Changes in equity
for 2022
Total
comprehensive
income for the year
Dividends declared (7 500) (6 000) (7 500) (6 000)
and paid: Ordinary
Balance at 100 000 50 000 64 800 13 000 164 800 63 000
31 December 2022
NO PROVISION FOR DIVIDEND RECEIVABLE BY PARENT
Illinois Ltd acquired its interest in Michigan Ltd on 1 January 2020 when the retained earnings
of Michigan Ltd amounted to R5 000. At the date of acquisition, consider the carrying amount
of the assets and liabilities of Michigan Ltd to be equal to the fair value thereof.
The following represents the abridged financial statements of Illinois Ltd and its subsidiary
Michigan Ltd:

Illinois Michigan Ltd
Ltd
ASSETS R R
Investment in Michigan Ltd – 40 000 44 000 -
Current account: Michigan Ltd 5 000 -
Total assets 228 000 103 000

(100 000/50 000)
Dividends payable - 6 000
Current account: Illinois Ltd - 5 000


Illinois Michigan Ltd
Ltd
R R
THE YEAR

Illinois Michigan Illinois Michigan Illinois Michigan
R R R R R R
Balance at 100 000 50 000 42 000 7 500 142 000 57 500
1 January 2022
Changes in equity for
2022
Total comprehensive
income for the year
Dividends declared: (7 500) (6 000) (7 500) (6 000)
Ordinary
Balance at 100 000 50 000 60 000 13 000 160 000 63 000
31 December 2022

NO PROVISION FOR DIVIDEND PAYABLE BY SUBSIDIARY
Missouri Ltd acquired its interest in Wyoming Ltd on 1 January 2020 when the retained
earnings of Wyoming Ltd amounted to R5 000. At the date of acquisition, consider the carrying
amount of the assets and liabilities of Wyoming Ltd to be equal to the fair value thereof.
On 31 December 2022, Wyoming Ltd declared a dividend of R6 000.

Missouri Wyoming Ltd
Ltd
ASSETS R R
Investment in Wyoming Ltd – 40 000 44 000 -
Current account: Wyoming Ltd 5 000 -
Total assets 228 000 103 000

(100 000/50 000)
Current account: Missouri Ltd - 5 000

Missouri Wyoming Ltd
Ltd
R R
THE YEAR


Missouri Wyoming Missouri Wyoming Missouri Wyoming
R R R R R R
Balance at 100 000 50 000 42 000 7 500 142 000 57 500
1 January 2022
Changes in equity
for 2022
Total
comprehensive
income for the year
Dividends paid: (7 500) (7 500)
Ordinary
Balance at 100 000 50 000 60 000 19 000 160 000 69 000
31 December 2022
2. Preference share capital and preference dividends

Preference shares carry a fixed dividend percentage. When adequate profits are available,
these shares have a preference right to dividends. This means that preference shares enjoy
certain preferential rights:
• Preferential rights in respect of dividends (expressed as a percentage of the value of
the share)
• If the subsidiary is liquidated, preference owners will receive a maximum amount
• Preferential claim to the profit of the company whilst the balance is attributable to the
ordinary shares. If the preference shares are cumulative, ordinary shares may not
receive a dividend in the current reporting period unless a preference dividend is
declared.
Classification of preference shares

Non-cumulative
The preference share owners are not entitled to payment of arrear dividends.
Cumulative
If an entity does not declare a dividend in a specific reporting period, a cumulative
preferential right exists that entails a right to have preference to the arrear and current
preference dividends before a dividend may be declared on any other class of shares on the
first subsequent dividend declaration. If no formal dividend is declared to the preference
owners, a dividend will accrue and become payable based on the terms of the preference
shares. It is assumed that preference shares are cumulative where it is not expressly
stipulated.
The calculation of the non-controlling interests is affected in the consolidated statement of

profit or loss and other comprehensive income and statement of financial position if
preference shares are held in the subsidiary.

Consolidation procedures
The parent’s percentage interest in the ordinary share capital of the subsidiary is not
necessarily the same percentage as its percentage interest in the preference share capital.
(NB. It is advisable to draw up two separate analyses of owners’ equities: ordinary and
preference share capital.
CLASS EXAMPLE
A subsidiary has the following share capital:

• 50 000 10% preference shares of R1 each
• 100 000 ordinary shares of R1 each
Retained earnings at acquisition R100 000 (01/01/2019)

Retained earnings at beginning year R175 000 (01/01/2022)
Net profit for the year R 50 000 (31/12/2022)
The holding company owns:

• 30% of preference shares, purchased for R20 000
• 80% of ordinary shares, purchased for R190 000
At acquisition, preference dividends are two years in arrears and no dividends have been paid
to date.
Required:
Show the journal entries to record the preference shares and dividends during the
consolidation process.
Debit Credit Non-

controlling
interest

Treatment of preference dividends of subsidiary

Accumulated preference dividends at acquisition of subsidiary
The accumulated preference dividends are included in the calculation of the purchase price of
the preference share investment. Therefore, the payment is made for the preference share
dividend that will be declared later in the year. If the dividend is declared, the investment will
be reduced.
Question 34
ACCRUED PREFERENCE DIVIDEND ON ACQUISITION OF SUBSIDIARY
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 2022:

Hampshire Utah
ASSETS Ltd Ltd
Plant 100 000 240 000
Investment in Utah Ltd at fair value:
• 160 000 ordinary shares (cost 192 000 -
price: R192 000)
• 14 400 preference shares (cost 14 400 -
price: R14 400)
359 900 336 000

Share capital
• Ordinary shares (200 000 shares) 200 000 200 000
• 14% preference shares (36 000) - 36 000
359 900 336 000


Ordinary Share 14% Retained Total
capital Preference earnings
Share capital
Hamps Utah Ham Utah Hamps Utah Hamps Utah
hire pshi hire hire
re
R R R R R R
Balance at 200 000 200 000 - 36 000 45 900 40 000 245 900 276 000
1 January 2022
Changes in equity
for 2022:
Total
comprehensive
income for the year
Dividend paid: (5 040) - (5 040)
preference
Balance at 200 000 200 000 - 36 000 135 900 64 000 335 900 300 000
31 December 2022
Hampshire Ltd acquired 80% of the ordinary shares in Utah Ltd on 1 January 2022. On
1 January 2022 the preference dividends were not in arrears. On 1 April 2022, Hampshire
Ltd acquired 40% of the issued preference shares in Utah Ltd for R14 904. At the date of
acquisition, consider the carrying amount of the assets and liabilities of Utah Ltd to be equal
to the fair value thereof.
Arrear preference dividends
It is necessary to make provision for any arrear preference dividends in relation to cumulative
preference shares. All arrear preference dividends have to be paid before it is permissible to
pay an ordinary dividend.

Question 35
PREFERENCE DIVIDEND OUTSTANDING AT ACCOUNTING DATE
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 2022:
ASSETS Hawaii Jersey

Ltd Ltd
Plant 75 000 180 000
Investment in Jersey Ltd:
price: R129 375)
• 6 000 preference shares (cost 6 000 -
price: R6 000)
Trade and other receivables
40 125 72 000
250 500 252 000
Share capital
• Ordinary shares (150 000 shares) 150 000 150 000
• 12% preference shares
(30 000/15 000) 30 000 15 000
250 500 252 000

Ordinary Share 12% Preference Retained Total
capital Share capital earnings
Hawaii Jersey Hawaii Jersey Hawaii Jersey Hawaii Jersey
R R R R R R
Balance at 150 000 150 000 30 000 15 000 21 000 42 000 201 000 207 000
1 January 2022
Changes in
equity for 2022
Total
comprehensive
income for the
year
Profit for the 31 500 18 000 31 500 18 000
year
Balance at 150 000 150 000 30 000 15 000 52 500 60 000 232 500 225 000
31 December
2022
Hawaii Ltd acquired its interest in Jersey Ltd on 1 January 2019. At that date retained
earnings of Jersey Ltd amounted to R22 500. On 1 January 2019 no preference dividends

were in arrears. Provision must still be made for the 2022 preference dividend. At the date of
acquisition, consider the carrying amount of the assets and liabilities of Jersey Ltd to be
equal to the fair value thereof.
Question 36
ARREAR PREFERENCE DIVIDEND AT ACQUISITION – STILL IN ARREARS
STATEMENTS OF FINANCIAL POSITION AS AT 28 FEBRUARY 2022:

ASSETS Alaska Indiana
Ltd Ltd
Land and buildings 1 189 975 771 750
Investment in Indiana Ltd at fair value:
price: R350 000)
• 25 000 12% cumulative 31 250 -
preference shares (cost price:
R31 250)
10% debentures (cost price: R10 000) 10 000 -
Loan account – Alaska Ltd - 52 500
1 672 750 969 450

Share capital
• Ordinary shares (625 000/250 000 1 250 000 500 000
shares)
• 250 000 12% cumulative
preference shares - 250 000
Revaluation surplus 50 000 37 500
Bank overdraft 27 225 8 200
10% debentures - 25 000
Loan account – Indiana Ltd 52 500 -
1 672 750 969 450
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE

INCOME FOR THE YEAR ENDED 28 FEBRUARY 2022
Alaska Ltd Indiana Ltd
R R
THE YEAR

STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY 2022
Ordinary Share 12% Cumulative Preference Revaluation Retained Total

capital Share capital surplus earnings
Alaska Indiana Alaska Indiana Alaska Indiana Alaska Indiana Alaska Indiana
R R R R R R
Balance at 1 250 000 500 000 - 250 000 50 000 37 500 233 500 44 500 1 533 832 000
1 March 2021 500
Changes in equity for 2021
Total comprehensive income
for the year:
Balance at 28 February 2022 1 250 00 500 000 - 250 00 50 000 37 500 281 500 71 000 1 581 858 500
500
1. Alaska Ltd acquired its interest in Indiana Ltd at 1 March 2019 when the other components of equity were as follows:
Alaska Indiana
Ltd Ltd
R R
Revaluation surplus 50 000 -
Each share carries one vote. At the date of acquisition, consider the carrying amount of the assets and liabilities of Indiana Ltd to be equal to the
fair value thereof.
2. At 1 March 2019 the preference dividends for the previous two years were in arrears. No dividends have since been paid.
3. Land and buildings of Indiana Ltd were revalued on 31 January 2021.
4. At 28 February 2022 there was no arrear interest on debentures.

Question 37
Carolina Ltd acquired its total shareholding in Idaho Ltd on 1 March 2020. On that date Idaho
Ltd.’s reserve were as follows:
R
Retained earnings………………………………………………………… 40 000
General reserve…………………………………………………………….. 30 000
The following are the trial balances of the companies at 28 February 2022:
Carolina Idaho
Limited Limited
Dr/(Cr) Dr/(Cr)
R R
Inventory………………………………………………………. 54 000 86 000
……………………………………….......
Auditors’ remuneration……………………………………….. 3 500 2 400
Loan to Idaho Ltd……………………………………….. 200 000 -
Income tax expense………………………………………........ 28 000 18 000
Transfer to general reserve……………………………………. 20 000 10 000
Ordinary dividends paid………………………………………. - 50 000
Machinery at cost……………………………………………… 540 000 496 000
Depreciation…………………………………………………… 124 000 78 000
Interest paid………………………………………………........ 24 000 30 000
Investment at cost in Idaho Ltd – 160 000 ordinary shares… 396 000 -
Property……………………………………………………….. 1 000 000 600 000
Other operating expenses…………………………………… 220 000 57 000
Issued capital
Ordinary shares of R2 each……………………….. (1 000 000) (400 000)
12% cumulative preference shares of R1 each…… (420 000) (100 000)
Retained earnings – 1 March 2021………………………….. (77 200) (265 000)
Gross profit…………………………………………………….. (375 000) (187 500)
Trade and other (208 500) (222 900)
payables……………………………………………….
Ordinary dividends received…………………………………… (40 000) -
Loan from Carolina Ltd……………………………………. - (200 000)
Interest received from Idaho Ltd…………………………. (20 000) -
General reserve………………………………………………… (90 000) (60 000)
Profit on sale of machine………………………………………. (30 000) -
Profit on sale of property………………………………………. - (40 000)
Accumulated depreciation – machinery……………………….. (368 000) (166 000)
Preference dividends declared - 36 000
Dividends payable – Preference shares….……….. (100 800) (36 000)

1. Idaho Ltd sold land to Carolina Ltd on 13 August 2021 at a profit of R40 000.
2. Carolina Ltd sold a machine to Idaho Ltd on 1 March 2021 at a profit of R30 000. The
group provides for depreciation at 25% per annum according to the straight-line method.
3. Idaho Ltd purchases some of its inventory from Carolina Ltd. Carolina Ltd normally
invoices clients at a profit of 50% on cost. Idaho Ltd is however invoiced at a profit of 33,
33% on cost. The total sales from Carolina Ltd to Idaho Ltd amounted to R200 000 for the
year ended 28 February 2022.
Idaho Ltd had the following inventory, purchased from Carolina Ltd, at:
R
28 February 2021……………………………………………………… 66 000
28 February 2022…………………………………………………….. 36 000
4. The sales for year were as follows:

R
Carolina Ltd……………………………………………………….. 1 250 000
Idaho Ltd ……………………………………………………….. 750 000
5. Goodwill was tested for impairment and found not to be impaired.
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income,
consolidated statement of changes in equity and consolidated statement of financial position
of Carolina Limited and its subsidiary for the year ended 28 February 2022 in compliance with
the requirements of the Companies Act, 2008 and International Financial Reporting
Standards.
Ignore tax implications on unrealised profits and/or losses, comparative figures, and journal
entries.
Do calculations to the nearest Rand.

Question 38
The following represent the abridged statement of financial position of Dakota Ltd and its
subsidiary Vermont Ltd:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 2021:
ASSETS Dakota Vermont

Ltd Ltd
Property at cost/ valuation 750 000 400 000
Machinery 340 000 190 000
• at cost 500 000 240 000
• accumulated depreciation (160 000) (50 000)
Plant at carrying amount 680 000 370 000
Investments in Vermont Ltd:
• 80 000 ordinary shares at fair 650 000 -
value
• 25 000 12% cumulative 40 000 -
preference shares at fair value
• unsecured loan at fair value 80 000 -
• 9% debentures (since 2018)
50 000 -
Current account – Dakota Ltd - 75 000
Bank – Vegas Bank 30 000 -
Inventory 170 000 150 000
3 030 000 1 425 000
Ordinary shares of R5 each - 500 000

Ordinary shares of R2 each 900 000
12% cumulative preference shares of 75c - 75 000
each
Revaluation of property 150 000
Retained earnings 1 816 750 306 000
Interest bearing borrowings
• Loan – Dakota Ltd 70 000
• Current account – Vermont Ltd 64 750 -
• 9% debentures - 100 000
Shareholders for dividends
• ordinary shares 28 500 10 000
• preference shares (current year) - 9 000
Bank overdraft- Vegas Bank - 60 000
3 030 000 1 425 000

1. Dakota Ltd acquired its interest in Vermont Ltd on 1 July 2017. At that date retained
earnings of Vermont Ltd amounted to R120 000. On the same day the property of
Vermont Ltd, which had a carrying value of R250 000, was revalued at R350 000.
It is company policy to revalue Vermont Ltd.’s property on 30 June every second year.
Since 1 July 2017 Vermont Ltd has not purchased or sold any property. At the date of
acquisition, consider the carrying amount of all the other assets and liabilities of
Vermont Limited to be equal to the fair value thereof.
2. No dividend was declared or paid by Vermont Ltd during the period 1 July 2016 and
30 June 2017.
3. Assume each ordinary share carries one vote.
4. It is group policy to show goodwill at cost in the financial statements. Assume the
cost of all other assets and liabilities to equal their respective fair value.
5. Since September 2017, Vermont Ltd purchases all its inventories from Dakota Ltd at
the normal selling price, which is cost plus 20%.
6. Vermont Ltd sold a machine to Dakota Ltd on 1 January 2019 at a profit of R25 000.
The group provides for depreciation at 20% per annum according to the reducing
balance method.
7. On 29 June 2021 Vermont Limited repaid R10 000 of the existing loan from Dakota
Ltd. Dakota Ltd received the payment on 7 July 2021.
8. The parent guarantees the overdraft of the subsidiary’s bank account.
Required:
1. Prepare the consolidated statement of financial position of the Dakota Ltd group as at
30 June 2021 according to the requirements of the Companies Act, 2008 and
2. Prepare the pro-forma consolidation journal entries to account for the elimination of
shareholder’s equity in Vermont Ltd and the elimination of the current accounts.

Learning Unit 6: Related Parties (IAS 24)

• Define a related-party and a related party transaction
• Present related-parties and related-party transactions in
the annual financial statements.
• Disclose related-parties and related-party transactions
in the annual financial statements.
• Study notes
• Study the following notes (below) and related examples
1. Introduction
Transactions between related parties are a common phenomenon in the business world e.g.
a parent company having dealings with its subsidiaries and subsidiaries doing business with
each other. Furthermore, management and their close family members frequently deal with
their own entity.
Related-party transactions could influence the profit or loss and the financial position of an
entity. Related parties may enter into transactions that unrelated parties would not enter into
e.g., a subsidiary that sells inventory to its parent at cost might not sell on the same terms to
another customer. Knowledge of these relationships and transactions may affect the economic
decisions of the users of financial statements. Therefore, in order for financial statements to
meet fair presentation, it is necessary to disclose the transactions involving the related parties
in order for users to be aware of the interrelationships between related parties.
2. Related party
A related party is a person or entity that is related to the entity that is preparing its financial
statements (reporting entity). Consideration of each possible related party transaction takes
into account the substance of the relationship and not merely the legal form.
IAS 24 determines that a person is related to an entity if that person has control or joint control
of or has significant influence over the reporting entity.
A close family member of a person that controls, jointly controls or significantly influences the
reporting entity is also regarded as a related party. These may include:
• That person’s spouse or domestic partner and children;
• Children of that person’s spouse or domestic partner; and
• Dependents of that person, or dependents of that person’s spouse or domestic partner
IAS 24 also defines that a person is related to an entity if that person is a member of the key
management personnel of the reporting entity or of the reporting entity’s parent. A close family
member of key management personnel of the reporting entity, as well as a close family

member of key management personnel of the reporting entity’s parent, is also regarded as a
related party of the reporting entity.
3. Disclosure
Disclosure of related-party relationships
IAS 24 requires that all relationships between a parent and subsidiary must be disclosed
irrespective of whether a transaction had occurred or not. An entity should disclose the name
of its parent and, if different, the ultimate controlling party. If neither the parent nor the ultimate
controlling company produce consolidated financial statements for public use, the name of the
next most senior parent who does so, should be disclosed.
Disclosure of key management personnel compensation

An entity should disclose key management personnel compensation in total and for each of
the following categories:
• Short-term employee benefits;
• Post-employment benefits;
• Other long-term benefits;
• Termination benefits; and
• Share-based payments
Disclosure of related-party transactions

A related party transaction is a transfer of resources, services, or obligations between related
parties, regardless of whether a price is charged. Examples include:
• Purchases or sales of goods (finished or unfinished) or other assets
• Rendering or receiving services
• Leases
• Provision of finance
Any information regarding the related-party transaction as well as any outstanding balances
for an understanding of the potential effect of the relationship must be disclosed. At a
minimum, disclosures should include;
• Nature of the relationships between the related parties,
• Amount of the transactions,
• Amount of any outstanding balances (payables and receivables must be clearly
distinguished):
- The terms and conditions, any security provided and method of settlement, and
- Details of guarantees given or received,
• Provision for doubtful debts relating to the outstanding balances,
• The expense recognised in respect of bad or doubtful debts due during the period.
These disclosures should be made separately for each of the following categories:
• Parent,
• Entities with joint control of or significant influence over the entity,
• Subsidiaries,
• Associates,
• Joint ventures in which the entity is a venturer,

• Key management personnel of the entity or its parent, and

• Other related parties
Items of a similar nature must be disclosed in total except when separate disclosure is
necessary for an understanding of the related-party transaction that has occurred.
Government-related entities
A government-related entity is exempt from the disclosure requirements of IAS 24 if:
• A government has control, joint control, or significant influence over the reporting entity,
or
• Transactions with another entity that is a related party due to a common government
having control, joint control, or significant influence over both the other entity and
reporting entity.
If the exemption is applied, the entity must disclose the following:
• The name of the government and the nature of its relationship with the reporting entity
(i.e. control, joint control or significant influence); and
• The following information detailed enough to enable users of the entity’s financial
statements to understand the effect of related-party transactions on the entity:
- The nature and amount of each individually significant transaction, and
- For all transactions that are collectively, but not individually significant, a qualitative
or quantitative indication of their extent.
4. Identifying related parties

In considering each possible related-party relationship, attention is directed to the substance
of the relationship and not merely its legal form.
4.1 The entity and the reporting entity are members of the same group
P Ltd
80% 70%
S1 Ltd S2 Ltd
In the separate financial statements of holding company P Ltd, both subsidiaries, S1 Ltd and
S2 Ltd will be disclosed as related parties as they are controlled by P Ltd.
In the separate financial statements of S1 Ltd, holding company P Ltd will be a related party
as P Ltd controls S1 Ltd. S2 Ltd will also be disclosed as a related party in the separate
financial statements of S1 Ltd as it is under common control, P Ltd. Similarly, P Ltd and S1
Ltd will be related parties in the separate financial statements of S2 Ltd.

4.2 The reporting entity is an associate of the other entity
H Ltd
25%
A Ltd
The 25% interest of H Ltd in A Ltd constitutes a significant influence. In A Ltd.’s financial
statements, H Ltd will be a related party.
4.3 The reporting entity is a joint venture of the other entity
H Ltd
40%
J Ltd
(joint venture)
H Ltd has a 40% interest in J Ltd and exercises joint control over J Ltd in terms of a contractual
arrangement with another party. In J Ltd.’s financial statements H Ltd will be a related party.
4.4 One entity is an associate of the reporting entity
Example 1
H Ltd
25%
A Ltd
(associate)
The 25% interest of H Ltd in A Ltd, constitutes significant influence. In H Ltd.’s financial
statements, A Ltd will be a related party.
Although this is the same as 4.2 it should be noted that it does not always lead to reciprocal
disclosures in the financial statements of the relevant reporting entities.
Example 2
P Ltd
75% 30%
S Ltd A Ltd
(subsidiary) (associate)
The following related parties will have to be disclosed in the financial statements of P Ltd:
▪ S Ltd is a related party as it is controlled by P Ltd.
▪ A Ltd is a related party as it is an associate of P Ltd.
Therefore, P Ltd must disclose all transactions between P Ltd and S Ltd and between P Ltd
and A Ltd in the financial statements. The following related parties’ transactions will have to
be disclosed in the financial statements of P Ltd:
▪ P Ltd is a related party as it exercises significant influence over A Ltd. Therefore, A Ltd
must disclose all transactions between P Ltd and A Ltd.
▪ S Ltd is a related party of A Ltd, as S Ltd is a member of the group of which A Ltd is
also a member.
4.5 One entity is a joint venture of the reporting entity
H Ltd
40%
J Ltd
(joint venture)

H Ltd has a 40% interest in J Ltd and exercises joint control over J Ltd in terms of a contractual
arrangement with another party. In J Ltd.’s financial statements H Ltd will be a related party.
In H Ltd.’s financial statements, J Ltd will be a related party.
4.6 One entity is a joint venture of the reporting entity
P Ltd
40% 30%
C Ltd E Ltd
▪ C Ltd is a related party of E Ltd

▪ E Ltd is a related party of C Ltd

Question 1
Mr. Paper is the senior manager in charge of the purchasing department of Pencil Ltd, a
company that manufactures stationery for schools and universities. Mr. Paper arranges the
purchases of a material amount of inventory from Pen Ltd, a company which he controls.
Required:
Discuss whether Mr. Paper and Pen Ltd are related parties of Pencil Ltd.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).

Learning Unit 7: Earnings per share (IAS 33)

• Calculate, present and disclose basic earnings per
share and diluted earnings per share for a company.
• Identify situations where new issue of shares during the
year result in the calculation of weighted average
number of shares.
• Calculate, present and disclose dividends per share for
a company.
• Study notes
1. Introduction
Earnings per share and dividends per share are two of the ratios that are most widely used by
investors and analysts of financial statements when evaluating the profitability of a company.
The earnings per share figure is a more reliable basis for measuring performance as the
earnings are measured in relation to the capital employed to generate them. Investors can
determine the approximate value for the shares of a company by looking at the company’s
earnings and dividends per share. This enables them to assess whether the shares should be
included in their portfolio.
When an entity prepares consolidated financial statements, the earnings per share need only
be presented on the basis of consolidated financial information. If an entity chooses to disclose
earnings per share based on its own separated financial statements, it shall present such
earnings per share information only on the face of its separate statement of profit or loss and
other comprehensive income, and not in the consolidated financial statements.
2. Measurement
Basic earnings per share
Basic earnings per share refers to the profit attributable to each ordinary share. A company
should calculate basic earnings per share for profit or loss attributable to ordinary equity
holders of the parent company and, if presented, profit or loss from continuing operations
attributable to those equity holders.
Basic earnings per share is calculated as follows:

Profit or loss attributable to ordinary equity holders of the parent company (“earnings”)
Weighted average number of ordinary shares outstanding during the period

Earnings
For the purpose of calculating basic earnings per share, the profit or loss attributable to
ordinary equity holders of the parent company (referred to as "earnings") must be adjusted
for:
• the effect of preference dividends,
• gains and losses on the settlement of preference shares, and
• other similar effects of preference shares classified as equity.
All items of income and expenses that are recognised in the period, including tax expenses
and non-controlling interest, are included in the determination of "earnings".
Note: Dividends on preference shares classified as a liability are included in the determination
of "earnings".
Preference dividends
The amount of preference dividends to be deducted from profit or loss for the period is:
• The amount of any preference dividends declared during the period on non-cumulative
preference shares, and
• The amount of the annual preference dividends on cumulative preference shares,
regardless of whether these dividends have been declared.
In terms of common law, preference dividends are deemed to be cumulative unless the
contrary is explicitly stated.
Question 1
The following is an extract from the statement of profit or loss and other comprehensive
income for Triangle Ltd:
R
Profit from activities 167 000
Finance costs (7 000)
Share of profits of associates 8 000
Profit before tax 168 000
Income tax expense (84 000)
PROFIT FOR THE YEAR 84 000
Other comprehensive income for the year 0
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 84 000
Attributable to:
Owners of the parent 64 000
Non-controlling interest 20 000
84 000

The following information was obtained from the statement of changes in equity for Triangle
Ltd:
Retained Total
earnings
R R
Total comprehensive income for the year:
Dividends – preference shares (24 000) (24 000)
Dividends – ordinary shares (20 000) (20 000)
Balance at end of year 20 000 20 000
Required:
Calculate the basic earnings for Triangle Ltd
Question 2
The following information was extracted from the accounting records of Square Ltd at
31 December:
2022 2021
R R
Profit/(loss) for the year 28 000 (4 000)
Dividends – preference shares 4 000 0
Dividends – non-cumulative preference shares 6 000 0
Dividends – ordinary shares 12 000 0
The capital structure of Square Ltd at 31 December:

2022 2021
R R
400 000 ordinary shares 400 000 400 000
10 000 10% preference shares 20 000 20 000
60 000 20% non-cumulative preference shares 30 000 30 000
Required:
Calculate the basic earnings per share for Square Ltd for the financial years ending 31
December 2022 and 2021.
3.Shares
Weighted average number of shares
IAS 33 defines weighted average number of shares as "the number of ordinary shares
outstanding at the beginning of the period, adjusted by the number of ordinary shares bought
back or issued during the period multiplied by a time-weighting factor".

"Shares outstanding" is equivalent to "shares issued"

The time weighting factor is the number of days that the specific shares are outstanding as a
proportion of the total number of days in the period. A reasonable approximation of the
weighted average is adequate in many circumstances.
In most cases shares are included in the weighted average number of shares from the date
consideration is receivable (which is generally the date of their issue), for example:
• ordinary shares issued in exchange for cash are included when cash is receivable, and
• ordinary shares issued as part of the purchase consideration of a business combination is
included in the weighted average number of shares as of the date of acquisition of the
business.
Question 3
Circle Ltd has a 31 December financial year end and has 200 000 ordinary shares in issue at
the beginning of 2021. On 1 April 2021, a further 100 000 ordinary shares were issued. The
shares issued on 1 April 2021 are only entitled to the share in profits from this date onwards.
Therefore, the weighted average number of shares for December 2021 will be 275 000.
Original number of shares 200 000

Shares issued 1 April 2021 (100 000 x 9/12) 75 000
275 000
Question 4
RHOMBUS LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 2021
R
Revenue 15 000 000
Cost of sales (7 500 000)
Gross profit 7 500 000
Other expenses (1 500 000)
Share of profit of associates 150 000
Profit before tax 6 150 000
Income tax expense (2 025 000)
Current tax 1 762 500
Deferred tax 262 500
Profit for the year 4 125 000
Attributable to:
Owners of the parent 3 900 000
Non-controlling interest 225 000
4 125 000

RHOMBUS LTD GROUP

EXTRACT FROM THE STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 2021
Retained
earnings
R
Balance at 31 December 2020 750 000
Changes in equity for 2021:
Dividends paid (900 000)
Preference shares 150 000
Ordinary shares 750 000
Balance at 31 December 2021 3 750 000
Since incorporation the issued share capital of Rhombus Ltd is 750 000 ordinary shares
amounting to R750 000 and 1 500 000 10% cumulative preference shares amounting to
R1 500 000.
Required:
Calculate the basic earnings per share of Rhombus Ltd Group for the year ended 31
December 2021 in accordance with IFRS.
3.1
New share issues – with a change in resources (issue for value)
If shares are issued during the financial year, it would be incorrect to assume that they had
been in issue throughout the year when calculating earnings per share. Shares are included
in the weighted average number of shares from the date that the consideration is receivable
(generally the date of their issue). The number of shares in issue in the previous year must
not be weighted: the reason being that the consideration for the additional shares is received
in the current year and does not influence the calculation of the number of shares of the
previous year.
Question 5
Since incorporation, Octagon Ltd has had the following authorised share capital:
4 000 000 ordinary shares amounting to R6 000 000
500 000 8% non-cumulative preference shares amounting to R700 000
The issued share capital was as follows:

Ordinary shares
Issued on incorporation 2 000 000 amounting to R3 600 000
30 June 2020 1 000 000 amounting to R2 000 000
31 December 2021 500 000 amounting to R1 500 000
Preference shares

Issued on incorporation 300 000 amounting to R360 000

31 December 2021 100 000 amounting to R200 000
Profit/ (loss) after tax amounted to R1 000 000 and (R240 000) respectively for the years
ending 30 June 2022 and 30 June 2021. Since incorporation Octagon Ltd has paid a
preference dividend every year, except for the year ended 30 June 2021.
Required:
Disclose the basic earnings per share in the annual financial statements of Octagon Ltd for
the year ended 30 June 2022 to comply with the requirements of IFRS.
3.2
New share issues – without a change in resources (issue for no value)
The number of shares outstanding may be reduced, or ordinary shares may be issued without
a corresponding change in resources i.e., even though the number of shares outstanding
changed during the year, no consideration was paid or received. This means that the earnings
capacity of the company did not change. This will include, for example:
• A capitalisation or bonus issue
• Share split
• Share consolidation
• Bonus element in a rights issue to existing shareholders at less than fair value
When these types of shares are issued, the weighted average number of shares outstanding
during the period, and for all periods presented, should be adjusted for the basic EPS.
3.3
Capitalisation or bonus issue
Ordinary shares are issued to existing shareholders for no additional consideration. No

new cash resources are contributed to the company as existing reserves are capitalised. The
number of ordinary shares outstanding before the event is adjusted for the proportionate
change in the number of ordinary shares outstanding as if the event had occurred at the
beginning of the earliest period presented.
Question 6
Ellipse Ltd had the following number of issued shares at 31 August:
2022 2021
Ordinary shares – R1 250 000 (2021 – R500 000) 5 000 000 2 000 000
10% cumulative preference shares – R250 000 250 000 250 000
(2021 – R250 000)
During the 2022 financial year, the following changes took place in the capital structure of
Ellipse Ltd:
• On 1 March 2022 Ellipse Ltd issued 500 000 ordinary shares at R1 per share for full
value.

• On 1 June 2022 Ellipse Ltd issued 2 500 000 ordinary shares by way of a capitalisation
of reserves in the ratio of 1 share for every 1 share held.
The profit for the year amounted to R300 000 for 2022 (R225 000 for 2021). There were no
dividends in arrears at 31 August 2022 and 2021.
Required:
Disclose the basic earnings per share in the annual financial statements of Ellipse Ltd for the
year ended 31 August 2022 to comply with IFRS.
3.4
Rights Issue
Rights issues can take place at either fair value or below fair value. If an issue takes place at
fair value, it is treated as a normal new share issue. When a rights issue takes place at less
than fair value, it involves two components:
• An issue of shares for full value, and (issue for value)
• A bonus issue (issue for no value)
The number of ordinary shares to be used in calculating basic earnings per share for all
periods prior to the rights issue is the number of ordinary shares outstanding prior to the issue,
multiplied by the following adjustment factor:
𝑭𝒂𝒊𝒓 𝒗𝒂𝒍𝒖𝒆 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆 𝒊𝒎𝒎𝒆𝒅𝒊𝒕𝒆𝒍𝒚 𝒑𝒓𝒊𝒐𝒓 𝒕𝒐 𝒕𝒉𝒆 𝒆𝒙𝒆𝒓𝒄𝒊𝒔𝒆 𝒐𝒇 𝒓𝒊𝒈𝒉𝒕𝒔

𝑻𝒉𝒆𝒐𝒓𝒆𝒕𝒊𝒄𝒂𝒍 𝒆𝒙 − 𝒓𝒊𝒈𝒉𝒕𝒔 𝒇𝒂𝒊𝒓 𝒗𝒂𝒍𝒖𝒆 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆
The following formula can be used to calculate the theoretical ex-rights fair value per share:
𝑭𝒂𝒊𝒓 𝒗𝒂𝒍𝒖𝒆 𝒐𝒇 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 𝒔𝒉𝒂𝒓𝒆𝒔 (𝒃𝒆𝒇𝒐𝒓𝒆 𝒆𝒙𝒆𝒓𝒄𝒊𝒔𝒆 𝒐𝒇 𝒓𝒊𝒈𝒉𝒕𝒔) +

𝒕𝒐𝒕𝒂𝒍 𝒂𝒎𝒐𝒖𝒏𝒕 𝒓𝒆𝒄𝒆𝒊𝒗𝒆𝒅 𝒇𝒓𝒐𝒎 𝒓𝒊𝒈𝒉𝒕𝒔 𝒊𝒔𝒔𝒖𝒆
𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒔𝒉𝒂𝒓𝒆𝒔 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 𝒃𝒆𝒇𝒐𝒓𝒆 𝒓𝒊𝒈𝒉𝒕𝒔 𝒊𝒔𝒔𝒖𝒆 +
𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒔𝒉𝒂𝒓𝒆𝒔 𝒊𝒔𝒔𝒖𝒆𝒅 𝒘𝒊𝒕𝒉 𝒓𝒊𝒈𝒉𝒕𝒔 𝒊𝒔𝒔𝒖𝒆
Where the rights are to be publicly traded separately from the shares prior to the exercise
date, fair value for the purposes of this calculation is established at the close of business on
the last day on which the shares are traded together with the rights.

Question 7 (Rights issue at less than FV) (Need to split the shares issued between an
issue for value and an issue for no value)
The following is an extract from the statement of profit or loss and other comprehensive
income of Prism Ltd for the year ended 31 August 2022:
2022 2021
R R
Revenue 3 750 000 3 450 000
Cost of sales (2 250 000) (1 500 000)
Gross profit 1 500 000 1 950 000
Other expenses (555 000) (825 000)
Profit before tax 945 000 1 125 000
Other comprehensive income for the year 0 0
Total comprehensive income for the year 630 000 675 000
PRISM LTD
31 AUGUST 2022
Retained
earnings
R
Balance at 31 August 2020 225 000
Profit for the year 675 000
Balance at 31 August 2021 900 000
Profit for the year 630 000
Dividends paid (90 000)
- Non-cumulative preference shares 15 000
- Cumulative preference shares 30 000
- Ordinary shares 45 000
Balance at 31 August 2022 1 440 000
The capital structure on 31 August 2022 was as follows:

2022 2021
20% non-cumulative preference shares amounting to R75 000 75 000 75 000
10% cumulative preference shares amounting to R150 000 150 000 150 000
Ordinary shares amounting to R1 200 000 (2022 – R750 000) 1 200 000 750 000

1. On 30 December 2021 Prism Ltd had a rights issue of one ordinary share for every
five ordinary share held, at R3 per share for cash. The market price prior to the
announcement of the rights issue was R5.25 per share. Management considered that
for the issue to be successful, they could have issued the shares at R4.50, which
was their fair value.
2. On 28 February 2022 Prism Ltd had a capitalisation issue of one ordinary share for
every three ordinary shares held.
Required:
Calculate and disclose basic earnings per share in the annual financial statements of
Prism Ltd for the year ended 31 August 2022 in accordance with IFRS.
3.5
Share splits
A share split does not affect the net asset value of the company. This arises when a
company increases the number of issued shares while the overall capital amount remains
the same. For example, 2 000 ordinary shares to the value of R2 000 may be split into 8 000
ordinary shares. The share capital remains R2 000 but the number of shares changed.
A reason for a share split is to improve the marketability of shares by making the share price
more accessible to the public.
Question 8
Sphere Ltd was incorporated in 2000 with an authorised share capital of 4 000 000 ordinary
shares amounting to R4 000 000 and 1 000 000 10% cumulative preference shares
amounting to R2 000 000. The authorised share capital was fully issued at the time of
incorporation.
On 1 June 2022 the ordinary shares were doubled without any cash inflows and on
1 September 2022 a further 1 800 000 ordinary shares were issued for cash at R1 080 000
and all the legal requirements had been met.
The following information was taken from the statement of profit or loss and other
comprehensive income of Sphere Ltd for the year ended 31 December 2022:
2022 2021
R R
Income 2 760 000 2 630 000
Income from investments 114 000 48 000
Profit before tax 2 874 000 2 678 000
Income tax expense (1 000 000) (980 000)
Profit for the year 1 874 000 1 698 000
Other comprehensive income for the year 0 0
Total comprehensive income for the year 1 874 000 1 698 000

SPHERE LTD
31 DECEMBER 2022
Retained
earnings
R
Dividends paid
- Ordinary shares (480 000)
- Preference shares (200 000)
Dividends paid
- Ordinary shares (800 000)
- Preference shares (200 000)
Required:
Disclose basic earnings per share and dividends per share in the annual financial
statements of Sphere Ltd for the year ended 31 December 2022 to comply with the
requirements of IFRS.
Diluted earnings per share
Diluted earnings per share assist the users of financial statements to evaluate the sensitivity
of basic earnings per share regarding future changes in the capital structure of the company.
These future changes in the capital structure may either have a dilutive (decreasing earnings
per share) or anti-dilutive (increasing earnings per share) effect on future earnings per share.
For the purpose of calculating diluted earnings per share, the net profit attributable to ordinary
shareholders and the weighted average number of shares outstanding should be adjusted for
the effects of all dilutive potential ordinary shares.
The effects of potential anti-dilutive ordinary shares are ignored in calculating diluted
earnings per share. The reason for this is that the objective is to determine the maximum
possible dilution; if the increase in earnings per share is included, then an average dilution
will be determined.
The sequence in which potential ordinary shares are considered may affect whether or not
they are dilutive. In order to maximise the dilution of basic earnings per share, each issue or
series of issues of potential ordinary shares must be considered in sequence. This results in
the most dilutive effect.
Diluted earnings
The earnings should be adjusted with the after-tax amount of:
• Dividends on dilutive potential ordinary shares (e.g., preference dividends on
convertible preference shares),
• Interest recognised for dilutive potential ordinary shares (e.g., convertible
debentures), and
• Any other changes in income or expense that would result from the conversion of the
dilutive potential ordinary shares.
Diluted earnings per share

The number of ordinary shares should be the weighted average number of ordinary shares
used for the calculation of basic earnings per share plus the weighted average number of
ordinary shares which would be issued on the conversion of all the dilutive potential ordinary
shares into ordinary shares.
Potential ordinary shares should be deemed to have been converted into ordinary shares at
the beginning of the period or, if the potential ordinary shares were issued later, the date of
the issue of the potential ordinary shares. Potential ordinary shares that have been
converted into ordinary shares during the reporting period are included in the calculation of
diluted earnings per share from the beginning of the period to the date of conversion. From
the date of conversion, the resulting ordinary shares are included in both basic and diluted
earnings per share.
Convertible instruments
Convertible preference shares or convertible debentures are dilutive whenever the basic
earnings per share exceeds the amount of dividend (net of tax) and interest (net of tax), per
ordinary share obtainable on conversion.
The following adjustments need to be made when calculating diluted earnings per share:
• The earnings should be increased with the after-tax effect of interest and dividends
that will be saved in the future when the debentures/shares will be converted, and
• The weighted average number of shares should be increased with the expected
future increase in ordinary shares resulting from the conversion.
Question 9
Circle Ltd issued the following on 1 July 2021:

• 1 000 000 ordinary shares
• 50 000 15% cumulative preference shares amounting to R500 000, which are
convertible in 2022 into 4 ordinary shares for each convertible preference share held.
Basic earnings for the year ended 30 June 2022 was R925 000.
Required:
Calculate and disclose basic earnings, earnings per share and diluted earnings per share for
the year ended 30 June 2022 in accordance with IFRS.

Question 10
Crescent Limited had the following number of issued shares at 31 December 2022 and
2021:
2022 2021
Ordinary shares amounting to R1 500 000 6 000 000 6 000 000
10% cumulative preference shares amounting to R750 000 750 000 750 000
On 1 September 2021, Crescent Limited issued 3 000 000 debentures amounting to R3 000
000 which bear interest at 7% per annum. The debentures may be converted on 30 June
2024 into ordinary shares at a price of R1.50 per share for every debenture converted.
The profit for the period for 2022 amounted to R825 000 (2021: R675 000). An ordinary
dividend of R300 000 for 2022 (2021: R225 000) was paid.
Assume a tax rate of 28%.
Required:
Calculate basic earnings per share and diluted earnings per share in the annual financial
statements of Crescent Ltd for the year ended 31 December 2022 in accordance with IFRS.
Presentation and disclosure
Basic EPS and diluted EPS must be presented on the face of the statement of profit or loss
and other comprehensive income for each class of ordinary share. An entity shall present
basic EPS and diluted EPS with equal prominence for all periods presented. Basic and
diluted EPS are disclosed even if the amounts represent losses per share.
An entity shall disclose the following:

• The amounts used as the numerators in calculating basic and diluted earnings per
share.
• A reconciliation of the basic and diluted earnings to profit or loss attributable to the
parent for the year.
• The weighted average number of ordinary shares used as the denominator in
calculating basic and diluted earnings per share and a reconciliation of these
denominators to each other.
• Instruments (including contingently issuable shares) that could potentially dilute basic
EPS in the future but were not included in the calculation of diluted EPS because they
are anti-dilutive for the period(s) presented.
• A description of ordinary share transactions or potential ordinary share transactions
other than those accounted for in accordance with IAS 33 that occur after the statement
of financial position date and that would have significantly changed the number of
ordinary shares or potential ordinary shares outstanding at the end of the period if
those transactions had occurred before the end of the period.
For example: shares issued for cash, redemption of ordinary shares outstanding, an
issue of options, etc.

Dividends per share
IAS1, Presentation of Financial Statements deals with the disclosure of dividends per share.
The calculation and disclosure of dividends per share is not addressed in IAS33.
In terms of IAS1, an entity must disclose the amount of dividends recognised as distribution
to the shareholders together with the related amount per share relating to the financial period
being reported. This is disclosed either on the face of the statement of changes in equity or
in the notes.
The dividends per share are calculated by dividing dividends declared for the period by the
number of shares issued (not on the weighted average number of issued shares) on the date
of the dividend declaration. Where dividends are declared more than once during the year, a
separate dividend per share must be calculated for each dividend payment. The sum of the
separate dividends per share can be disclosed in the statement of comprehensive income or
the dividends per share for each declaration can be disclosed.
Dividends declared/proposed after year-end but before authorisation of financial statements

must be disclosed in the notes together with the related amount per share. Furthermore, this
may not be recognised as a liability at the reporting date under review as there is no present
obligation.
Dividends per share must be disclosed in cents for each class of equity shares for the
reporting period under review and the corresponding prior period on the face of the
statement of changes in equity or in the notes to the financial statements.
Question 11
Trapezoid Ltd had the following number of shares in issue at 31 December 2022 and 31
December 2021:
2022 2021
Ordinary shares R5 000 000 (2021: R2 000 000) 20 000 000 8 000 000
10% cumulative preference shares R1 000 000 1 000 000 1 000 000
During 2022, the following changes in the capital structure of Trapezoid Ltd took place:
a) On 1 July 2022 the company issued 2 000 000 ordinary shares at R2 per share for
the full value.
b) On 1 October 2022 the company issued 10 000 000 ordinary shares by way of a
capitalisation of reserves in the ratio of 1 share for every 1 share held.
The profit after tax amounted to R1 200 000 for 2022 (2021: R900 000).
On 30 June 2022 Trapezoid Ltd paid an interim ordinary dividend of R160 000 (30 June
2021: R140 000) and on 31 December 2022 a final ordinary dividend of R240 000 (31
December 2021: R160 000).

Required:
Disclose the earnings per share and dividends per share in the annual financial statements
of Trapezoid Ltd for the year ended 31 December 2022 in accordance with IFRS.

Learning Unit 8: IFRS for Small and Medium Enterprises

• Identify small and medium enterprises as defined by the
IASB.
• Identify the characteristics of small and medium
enterprises.
• Identify which entities must not assert compliance with
IFRS for SMEs.
• Explain the differences between full IFRS and IFRS for
SMEs.
• Prescribed notes

1. Introduction
Small entities globally may be operated in different formats e.g., sole traders, private
companies, partnerships etc. These small entities are usually run by one/more
shareholders/partners who along with the tax or other government authorities and financial
institutions, are the main users of financial statements produced by these entities. This means
the financial statements are prepared for limited purposes. As a result, small companies do
not have the same financial reporting needs as large companies.
The problem with applying present accounting standards to smaller entities stems from the
nature of these small entities and partly from the onerous requirements and complexity of the
existing IFRS. The IFRS for SMEs is designed for entities that are required/choose to produce
general-purpose financial statements (directed to the general financial information needs of a
wide range of users including lenders, investors, employees, and others outside the company).
2.Small and medium enterprises

Any company of any size is eligible to use the IFRS for SMEs provided it does not have public
accountability and publishes general-purpose financial statements for external users such as
creditors and the government. Although there is no size test in the IFRS for SMEs, the local
authorities in a jurisdiction can add one if it wishes to do so. It is intended for use by small and
medium entities.
All entities apart from public companies, state-owned entities and certain non-profit entities
are allowed to apply IFRS for SMEs, subject to meeting the scope requirements of the
standard.

3. Characteristics of small and medium enterprises

Small and medium-size enterprises can be defined as any enterprise with the following
characteristics:
• Fewer than 200 employees
• Annual turnover of less than R64 million
• Capital assets of less than R10 million
• Direct managerial involvement by owners
Basset Africa was one of the first countries in the world to adopt IFRS for SMEs. According to
the Companies Act 71 of 2008, companies with a public interest score of below 350 which are
eligible to use IFSR for SMEs according to the scope requirements may use IFRS for SMEs
as their financial reporting framework.
A subsidiary that is part of a consolidated group that uses full IFRS is not prohibited from using
IFRS for SMEs in its own separate financial statements provided that the subsidiary does not
have public accountability.
A parent company assesses its eligibility to use IFRS for SMEs in its separate financial
statements on the basis of its own status, without consideration to whether other group entities
have public accountability.
4. Audit reporting considerations

A precondition for the execution of an audit is that management of an entity to be audited must
determine an acceptable financial reporting framework for the entity. It is the responsibility of
the auditor to assess whether the framework applied is appropriate.
The IFRS for SMEs may constitute an acceptable financial reporting framework for entities
within the scope of the IFRS for SMEs as issued by the APB. It is also a fair presentation
framework. Therefore, an auditor can express an opinion that financial statements are
presented fairly, in all material respects, in accordance with the IFRS for SMEs.
5. How is IFRS for SMEs different from the full IFRS?

IFRS for SMEs is simpler and shorter than the full IFRS. IFRS for SMEs is also different to the
full IFRS due to the following:
• Standards that are not relevant to smaller SMEs are omitted e.g., earnings per share,
interim financial reporting and segment reporting;
• The recognition and measurement principles for assets, liabilities, expenses and
income are simplified and
• The disclosure requirements are significantly less.
Question 1
Global financial reporting standards, applied consistently, enhance the comparability of

financial information. High quality global financial reporting standards improve the efficiency
of allocation and the pricing of capital. These standards also improve consistency in audit
quality and facilitate education and training.
Therefore, the benefits of global financial reporting standards are not limited to entities
whose securities are traded in public capital markets, but the judgement of the IASB state
that SMEs and those who use their financial statements can benefit from a common set of
accounting standards.
Required:
What are the reasons that SMEs prepare and present financial statements that are
comparable from one country to the next?
Question 2
The IFRS for SMEs is intended for non-publicly accountable entities that publish general
purpose financial statements for external users.
Required:
Who are the main groups of external users?
Question 3
Select any 2 of the following IFRS and compare it to the IFRS for SMEs making note of the
key differences between the standards:
IAS 1; IAS 2; IAS 16; IAS 23; IAS 36, IAS 38; IAS 40;

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IIE Module Guide FIAC6212

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DID YOU KNOW?

Module Discussion Forum

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IIE Library Online Databases

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Using this Guide

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This module will focus on:

• Knowledge and understanding of group financial reporting and selected International

Financial Accounting 2B consists of the following learning units:

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Please note that this module guide is intended to support your

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Pacer and Assessment brief Applicable to Module:

Measure the consideration transferred in a

Recognise and measure non- controlling

Recognise and measure goodwill or gain

IFRS 10- Consolidated Financial

Learning Unit 3 IFRS 10- Intragroup transactions Textbook reference

IFRS 10 – Interim acquisition of a

© The Independent Institute of Education (Pty) Ltd 2023 Page 8 of 101

Learning Unit 5 IFRS 10 – Ordinary and preference shares Textbook reference

Record any preference dividends declared or

Record arrear cumulative preference

Learning Unit 6 Related parties (IAS 24) Textbook reference

Disclose related-parties and related- party

Calculate basic earnings per share.

Determine the dilutive effect of the future

Calculate diluted earnings per share.

Identify the different types of new share

© The Independent Institute of Education (Pty) Ltd 2023 Page 9 of 101

Determine the weighted average number of

Present earnings per share and diluted

Disclose earnings per share and diluted

Determine the dividends declared for the

Determine the number of shares in issue for

Calculate dividends per share.

Disclose dividends per share in the notes to

Identify which entities must not assert

Explain the differences between full IFRS and

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Tests/ Examination Test 1 Test 2 Examination

Assessment Preparation Guidelines

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Glossary of Key Terms for this Module

Business combination Transaction or other event in which an

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Dilution Reduction in earnings per

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Learning Unit 1: IFRS 3 Business Combinations

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2. Examples of group structures

60% of the control and 60%

COMPLEX GROUP - HORIZONTAL

60% of the control and 60%

75% of the control and 75%

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COMPLEX GROUP - VERTICAL

75% of the control and 75%

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