Financial Reporting 4 – April Test

SUGGESTED SOLUTION

(a)

Note to students:
The solution below is a suggested solution. There are several ways that one could
tackle this question. Your solution was marked on the merits of yours arguments in
accordance with IFRS, specifically using the Conceptual Framework (including the
measurement principles), the IAS 8 hierarchy, and standards that dealt with similar
issues such as the investment property (or alternatively financial instruments)
standards.

It is clear in the scenario that the palladium meets the definition of an asset, therefore
this is not a concern. The recognition criteria are met, since this is clear that the asset 1
exists, and the inflow of benefits are not low, considering that palladium is widely in
demand around the world. Furthermore, measurement uncertainty is not an issue, as 1
there are clear, industry accepted ways of measuring the value of the commodity.
There is no IFRS standard that deals with the accounting for an investment in a 1
commodity, such as palladium, for investment purposes:
 Palladium does not meet the definition of financial instrument. A financial 1
instrument arises from a contractual arrangement and there is no contractual
arrangement when it comes to investing in palladium.
 Palladium also does not meet the definition of investment property, because the 1
definition of investment property is either land or buildings, or which palladium
is neither.
 Palladium does not meet the definition of PPE, since it is not being held for 1
production or supply of goods or services or administration purposes, but rather
for investment purposes.
 Furthermore, the definitions of biological assets and intangible assets would not 1
apply here.
The palladium is also not inventory, as it is not held for sale in the ordinary course of 1
business. It may be sold at a later date, but this is for the realisation of investment
returns and not as part of the ordinary business operations of the company. IAS 2
indicates that commodity brokers may classify commodities (such as palladium) as 1
inventories (IAS2.3) but that the measurement requirements of IAS 2 would not apply.
However, Whistler is not a commodity broker, and as such, this does not apply.
Therefore, Whistler should develop its own accounting policy for its investment in 1
commodities. IAS 8.10-12 indicates that the company should first use IFRS for similar
issues, followed by general concepts in the Conceptual Framework.
It appears that Whistler’s investment in palladium has the following relevant properties:
 It has an indefinite useful life 1
 Its fair value expected to increase over time. 1
 The main purpose is to store value and benefit from capital appreciation over 1
time.
The asset that has most of the properties listed above, for which there is an IFRS 1
standard, is land which is classified as investment property under IAS 40.
IAS 40 gives the option for investment property to be accounted for at cost or at fair
value.
However, the fair value model would be more appropriate for the following reasons:
1

1
  Other investments, which are classified as financial instruments, can only be
measured at fair value. Cost is not an option for financial instruments which are 1
held for capital appreciation.
 Changes in the fair value of the investment provides relevant information to the
users of the financial statements. It’s likely that the investment will be sold for 1
fair value in the future, and therefore user would find this information relevant.
 The Conceptual Framework indicates that where an asset would normally be sold
for fair value, then it should be measured at fair value in the financial statements
(CF6.36). 1
 If investment property is measured at cost, then the fair value has to be
disclosed anyway, indicating that the IAS 40 requires the fair value to be
presented to the users of the financial statements.
Therefore, the most appropriate accounting treatment would be to recognise the 1
palladium at fair value (for the reasons discussed above) with changes going through
profit or loss (as this is what is done in IAS 40).
The investment in palladium should not be depreciated as the company is not ‘using’ this 1
asset in its business.
The company should use the fair value provided and multiply this by the exchange rate at 1
the date that the fair value was determined (IAS21.23). The full gain or loss on the fair
value measurement of the palladium should be presented as one line item in profit or
loss, including the portion related to the exchange adjustment.
In addition to the principles above, marks were also awarded for quality discussion on the
following:
 Measurement principles in the Conceptual Framework;
 IAS 21 foreign transaction principles (combining the fair value and forex
adjustments as one line item);
 IFRS 13 principles of determination of fair value (limited to 2 marks);
 Calculations of the relevant amounts at initial recognition and at the reporting
date.;
 Other relevant principles.

Total 18

2
(b)
Journal entries in parent company separate financial statements.
Dr Loan account/Receivable 360 000 1

Cr Dividends earned/other income (p/l) 360 000 1

Receipt of dividend income from Clear Capital Ltd

Dr Receivable ($160 000 x R12.20) 1 952 000 2

Cr Investment (R2 600 000 x 26%/75%) 901 333 1

Cr Profit on sale of shares (p/l) 1 050 667 1

Sale of shares and recognition of profit in respect of 26%/75% of shareholding.

Dr Loan account/Receivable ($5 000 x R12.50 x 30 625 1

49%)

Cr Dividends earned/other income (p/l) 30 625 1

Receipt of dividend income from Clear Capital Ltd

Dr Receivable ($160 000 x (R12.50 – R12.20)) 48 000 1

Cr Exchange gain (p/l) 48 000 1

Restatement of foreign currency receivable to year end exchange rate.

(dates and narration 1 bonus)

3
(c)

Calculation of group profit

Profit as prepared in the income statement 94 000 000

Reversal of impairment of Maitland building 1 000 000 2

(10m x 18/20) – 8m. (balance of movement through OCI)

Fair value gain of Maitland building whilst investment property 426 800 2

(10.15m – 9.6m) x (1 – 22.4%)

Inclusion of Clear Capital profit attributable to group while a subsidiary 690 000 1
(w1)

Elimination of dividends received while subsidiary (w1) (360 000) 1

Elimination of dividends received while associate (w2) (30 625) 1

Inclusion of equity accounted amount of profit – March 2022 (w2) 91 140 1

Inclusion of profit on loss of control ($320 000 + $160 000 = $480 000 x 1 414 000 5
12.2 = R5 856 000 – (R5 856 000 net assets – R1 414 000 NCI))

Reclassification of FCTR resulting from loss of control (285 000 + 717 000 1
432 000)

(1) Any (1) correct % and includes current year and prior year
Restated profit 97 948 315l

Inclusion of any gains or losses related to palladium (OCI) -1

4
Workings 1 – AoE of Clear Capital while an subsidiary

100% $ 1$:R 100% R 75% R 25% R

NAV 300 000
Goodwill 40 000
Consideration 340 000 10.00 3 400 000 2 550 000 850 000
Profit FY2021 100 000 10.60 1 060 000 795 000 265 000
FCTR 380 000 285 000 95 000 1
Balance 31 March 2021 440 000 11.00 4 840 000 3 630 000 1 210 000 1
Profit to 28.02.22 80 000 11.50 920 000 690 000 230 000 2
Dividends paid 31 Jan -40 000 12.00 -480 000 -360 000 -120 000 1
FCTR 576 000 432 000 144 000 1
Balance 28 Feb 2022 480 000 12.20 5 856 000 4 392 000 1 464 000 1

Summary of marks:
FCTR FY2021 (1)
FY2022 Profit to PEH (1)
FY2022 Profit to NCI (1)
FY2022 Dividends (both PEH and NCI) (1)
FCTR FY2022 (1)
NCI o/b for FY2022 (1)
NCI c/b for FY2022 (1)

Workings 2 – AoE of Clear Capital while an associate

$ Exch Rate Rand

‘Cost’ i.e. fair value when control lost 320 000 12.20 R3 904 000 1

Profit - $15 000 x 49% 7 350 12.40 91 140 1

Dividends $5 000 x 49% (2 450) 12.50 (30 625) 1

FCTR 96 735 1

Balance 324 900 12.50 R4 061 250

Marks:
Investment o/b and c/b (1)
Profit (1)
Dividends (1)
FCTR (1)

5
(d)
Extracts from Group statement of changes in equity:

Date Description FCTR NCI

01.07.14 Opening balance 285 000 1 210 000 1

Comprehensive income

Profit 230 000 1

Other comprehensive income

-Foreign currency gains 432 000 144 000 2

-Equity accounted OCI that can be reclassified 96 735 1

-Reclassification (717 000) 1

Transactions with shareholders

Dividends paid (120 000) 1

Loss of control (1 414 000) 1

30.6.15 Balance at end of year 96 735 0 1

Layout (bonus) 1

1 mark deducted for each item that incorrectly included.

6
(e)

The investment property was fair valued using the discounted cash flow method 1

(valuation technique required in terms of :91(a)),

which gave rise to a fair value gain in profit or loss of R550 000 1

(impact of recurring fair value measurement on profit or loss as required in terms of :91(b))

The fair value is a level 3 valuation as the inputs are determined by management 1

(requirement to disclose the level of the fair value hierarchy :93(b) -

In determining the fair value of the investment property using a discounted cash flow 1
model, Whistler used income and costs and assumed an increase in rental income of 5%
per year.

(Disclosure of inputs used in the determination of fair values :93(d))

The reconciliation of the fair value of the machinery (i.e. measured at level 3) is:

R’000

Opening balance 0 1

Transfer in from Property, plant and equipment 9 600 1

Fair value gain 550 1

Balance at the end of the year 10 150 1

(:93(e) requires reconciliation from opening balance to closing balance, disclosing

separately changes recognised in profit or loss.)

The investment property was fair valued using the discounted cash flow method – 1B
(Additional information should be provided on the policies and techniques)

(a description of the valuation process used :93(g))

7
(f)

Items in tax rate reconciliation (only description and items required – amounts not required but
included for learning purposes)

Description Calculation Amount Incr/Decr

FV gains on investment (R10.15m – R9.6m) x (28% - R30 800 Decr 1

property 22.4%)

Fair value gains on the investment property are taxed at the CGT rate, as investment 1
property is assumed to be recovered through sale, and CGT would apply. Therefore,
difference between the gain at 28% and the actual inclusion of 22.4% is a reconciling item.

Foreign Profits R920 000/75% x (28% - 25%) R36 800 Decr 1

Clear Capital Ltd profits taxed at lower tax rate which is included in taxable income. 1
Therefore, difference between 28% and 25% foreign tax rate is included as a reconciling
item. (Profit grossed up to get pre-tax profit (/75% - no reconciling items) and adjusted for
difference in tax rate).

Profit recognised on loss of R1 404 000 x 28% - R1 050 667 x R196 160 Decr 1
control 22.4%

Only tax on profit recognised on loss of control is current tax payable at CGT rate on profit 1
based on cost i.e. as recognised in separate accounts (R1 050 667). Reconciling item for
difference between tax at 28% on the accounting profit and the actual CGT payable by
parent as current tax.

FCTR reclassification R717 000 (part 3) x 28% R200 760 Decr 1

Gain from reclassification not taxed. Therefore, entire amount is included as a reconciling 1
item.

Foreign dividends taxed (R360 000 + R30 625) x 20% R78 125 Incr 1

Tax payable at 20% on foreign dividends that are not recognised in group profit (as 1
eliminated). Therefore, reconciling item to reconcile to the actual tax paid in current tax)

Equity accounted profits R91 140 x 28% R25 519 Decr 1

No tax recognised in respect of equity accounted profits (which is after tax, but included in 1
profit before tax in this income statement).