Assessment 3

14 June 2024

50 marks
Writing time: 14:30 – 16:00 (90 minutes)
Upload time: 16:00 – 16:30 (30 minutes)

This assessment consists of 1 question and 8 pages.

INSTRUCTIONS:

1. Students must upload their answer scripts in a single PDF file (answer scripts must
not be password protected or uploaded as “read only” files).

2. NO emailed scripts will be accepted.

3. Students are advised to preview submissions (answer scripts) to ensure legibility and that
the correct answer script file has been uploaded.

4. Incorrect file format and uncollated answer scripts will not be considered.

5. Incorrect answer scripts and/or submissions made will not be marked and no opportunity
will be granted for resubmission.

6. Mark awarded for incomplete submission will be the student’s final mark. No opportunity for
resubmission will be granted.

7. Mark awarded for illegible scanned submission will be the student’s final mark. No
opportunity for resubmission will be granted.

8. Submissions will only be accepted from registered student accounts.

9. Students suspected of dishonest conduct during the assessment will be subjected to

disciplinary processes. UNISA has a zero tolerance for plagiarism and/or any other forms of
academic dishonesty.

10. Students are provided 30 minutes to submit their answer scripts after the official writing
time. Submissions made after the official uploading time will be rejected and will not be
marked.
 FAC3764 Assessment 3

FAC3764

Date: 14 June 2024

INSTRUCTIONS ON THE DAY OF ASSESSMENT:

 Ensure you are connected to the internet in order to log into the Invigilator App
and scan this QR code.
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be scanned as soon as possible to start the invigilation.
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allowed to minimise or leave the app.
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assessment. No internet connection is required during the assessment.
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displayed in the Invigilator App could differ from the time allocated to complete your assessment.
 You can click the "Finish Assessment" button in the app if you finish your assessment early.
 If you are performing a written or Scan-and-Upload assessment:
o The Invigilator App may request you to take a picture of every page of your answer sheet at the end
of the assessment. Unless otherwise specified by your institution, this does NOT replace the
normal upload of your script to your institutions online portal.
 After completing invigilation and following all app instructions, you must upload your Invigilation App data. If
however there is a delay in the upload of the app data at the end of the assessment, you should prioritise the
upload of your script to your university portal and you can temporarily minimise the app to do so.
 Uploading of app data is not time sensitive and you can come back and do it after you have successfully
uploaded your script to the exam portal.
 Should you encounter any technical difficulty, please WhatsApp The Invigilator Helpdesk on 073 505 8273.

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 FAC3764 Assessment 3
QUESTION (50 marks) (90 minutes)

Noupoort Energy Ltd (“Noupoort”) is a manufacturer and installer of wind turbines and related energy
generating equipment in South Africa. The company is situated in the Eastern Cape and has a
31 December year-end.

The following information relates to some of the assets and transactions of the company:

1. Licence to manufacture

Noupoort acquired a licence to manufacture wind turbine rotator blades on 15 August 2019 at a cost of
R2 755 850. The licence entitles Noupoort to be the only manufacturer and seller of wind turbine rotator
blades in South Africa for a period of 7 years. On 1 September 2019, Noupoort Energy received an
invoice for legal fees amounting to R450 000 from ZKC Attorneys. Noupoort Energy made a special
arrangement with ZKC Attorneys to only pay the amount on 28 February 2020. ZKC Attorneys’ payment
terms are normally strictly 30 days after invoice date. All legal contracts were signed and submitted, and
the licence was available for use as intended by management, on 1 September 2019. The licence was
correctly classified as a purchased intangible asset and its residual value was considered to be zero.

During the 2022 financial year, a decision was made by the minister of energy to grant similar licences
to manufacture to two other energy generating companies in South Africa to ensure better competition
in the renewable energy sector. As a result of the decision by the minister, Noupoort became one of the
three manufacturers and sellers of wind turbine rotator blades in South Africa on 31 December 2022.
The licence to manufacture was assessed to have a fair value less costs to sell and value in use,
correctly determined, of R1 400 000 and R1 458 950, respectively. The remaining useful life of the
licence remained unchanged.

As part of the 31 December 2023 financial year-end procedures, the junior accountant prepared the
following intangible asset note and supporting calculations:

Purchased
Intangible
Assets
R
Carrying amount at the beginning of the year 1 400 000
Cost (calc 1) 3 205 850
Accumulated depreciation and impairment loss (calc 2 and 3) (1 805 850)
Additions -
Depreciation (included in other expenses) (calc 4) (200 000)
Impairment loss -
Carrying amount at the end of the year 1 200 000
Cost 3 205 850
Accumulated depreciation and impairment loss (2 005 850)

The licence had a remaining useful life of 2 years and 8 months as at 31 December 2023.

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 FAC3764 Assessment 3
QUESTION (continued)

Calculations:
1. 2 755 850 + 450 000 = R3 205 850
2. 3 205 850 / 84 x 40 = R1 526 595
3. Carrying amount on 31 December 2022 (3 205 850 – 1 526 595) = R1 679 255
Recoverable amount = R1 400 000
Impairment loss = 1 679 255 – 1 400 000 = R279 255
4. 1 400 000 / 7 = R200 000

2. Contract with Moya (Pty) Ltd

On 23 August 2023, Noupoort entered into a contract which met all the requirements of a valid contract
according to IFRS 15, Revenue from contracts with customers, to construct two custom-made wind
turbines for Moya (Pty) Ltd (“Moya”). Noupoort will import some of the components required to construct
the wind turbines while other components will be manufactured in-house. Should the contract be
terminated, Moya will be entitled to take ownership of all work completed to date and will be liable to
Noupoort for revenue related to such work. On 1 September 2023, Moya paid a deposit of 50% towards
the contract price of R12 000 000 and the balance is payable upon completion of the contract. By
31 December 2023, the wind turbine towers had been erected, which represents 60% of the construction
project. It is expected that the entire construction will be completed by 31 March 2024.

3. Manufacturing equipment

Energy Wise Ltd, one of the Noupoort’s clients, approached Noupoort with a lease proposal wherein
Noupoort would purchase manufacturing equipment and then subsequently lease this equipment to
Energy Wise Ltd.

After consideration Noupoort decided to enter into this lease agreement which is a lease in terms of
IFRS 16, Leases and the equipment was purchased in cash on 1 January 2023.

The following information relates to this lease:

Commencement date ............................................ 1 January 2023

Cost price of equipment (Fair value) ...................... R1 550 000
Period of lease agreement .................................... 6 years
Instalments ............................................................ R350 000 (paid annually in advance)
Market related interest rate .................................... 15%
Interest rate implicit in the lease ............................ 14.15%

On 1 January 2023, Noupoort determined the useful life of the equipment to be 7 years. The equipment
was estimated to have a residual value of R50 000 at the end of the lease term. Noupoort incurred and
paid (in cash) legal fees of R20 000 to finalise the lease agreement. At the end of the lease term,
ownership of the equipment will be transferred to Energy Wise Ltd at a guaranteed price of R35 000.
The equipment was available for use, as intended by management as well as brought into use on
1 January 2023.

The South African Revenue Service (SARS) allows a section 12C allowances on manufacturing
equipment at a rate of 40% in the first year and 20% in subsequent years, not apportioned for part of a
year.

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 FAC3764 Assessment 3
QUESTION (continued)

The junior accountant processed only the following journal entry to account for the manufacturing
equipment for the year:
Dr Cr
R R
1 January 2023
Bank (SFP) 350 000
Rental income received (P/L) 350 000
Recognition of lease payment received for the year

4. Manufacturing property

Noupoort owns a manufacturing property in Middelburg in the Eastern Cape. The property was
purchased on 1 April 2022 and was available for use as intended by management, on 1 June 2022. The
cost of the property amounted to R6 250 000 (land: R1 500 000; building: R4 750 000). Total legal fees
and property transfer cost amounting to R175 000 were paid for in cash on 1 April 2022. These legal
fees and property transfer cost are proportionally attributable to the land and building.

On acquisition date it was determined that the building had an estimated useful life of 25 years and a
residual value of R975 000 was allocated to it. The estimated useful life and residual value of the building
remained unchanged throughout the period.

On 31 December 2023, the land was revalued for the first time by an independent sworn appraiser who
determined the fair value of land to amount to R1 600 000.

SARS allows a s13(1) allowance of 5% per annum on manufacturing buildings, on the straight line
method, not apportioned for part of a year. SARS allows the legal fees of R175 000 as a deduction when
incurred and do not capitalise them to the base cost of the property.

5. Delivery trucks

Noupoort owns a specialized delivery truck which was acquired on 15 August 2021 at a cost of
R1 500 000. The delivery truck was available for use as intended by management, as well as brought
into use, on 1 September 2021. On acquisition date an estimated useful life of 800 000km and no
residual value has been allocated to the delivery truck. The estimated useful life and residual value of
the delivery truck remained unchanged throughout the period.

As a legal requirement of continuing to operate the truck, it must undergo a major service inspection
every 50 000km. The last inspection performed on the delivery truck was on 1 September 2021 by the
seller and the inspection cost was included in the purchase price. On acquisition date, the present value
of the future expected inspection cost to be incurred was estimated to amount to R150 000.

At the end of the 2022 and 2023 financial years, the delivery truck had an odometer reading of 32 450km
and 58 500km, respectively. The truck went for its first major inspection on 1 September 2023 at a cost
of R165 000, when the odometer reading was 50 000km.

The South African Revenue Service (SARS) allows a section 11(e) tax allowance on the cost price of
delivery trucks over 4 years, apportioned for a part of the year. SARS allows major inspection costs to
be deducted in full when incurred.

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 FAC3764 Assessment 3
QUESTION (continued)

6. Advance payment

During the 2023 financial year Noupoort signed a non-cancellable contract with a client for the sale of
two wind turbine gearboxes. The contract met all the requirements of a valid contract according to IFRS
15, Revenue from contracts with customers. According to the contract, Noupoort Energy Ltd needs to
deliver two wind turbine gearboxes to the client on 30 June 2024. The client paid a 50% deposit on
30 November 2023. In terms of IFRS 15, Revenue from contracts with customers, no performance
obligation was satisfied at 30 June 2024 and thus no revenue should be recognised. The CFO, who is
a CA(SA), has indicated that he is aware of this but he would like revenue on this contract to be
recognized in order to boost the company’s sales figures for the year.

Additional information:

 A pre-tax discount rate of 10,50% per annum is applicable.

 Owner occupied land is accounted for using the revaluation model. It is the policy of the company to
realise any revaluation surplus upon disposal of the underlying asset. It is company policy that
revaluations will be made with sufficient regularity to ensure that carrying amounts do not differ
materially from the fair values at the end of the reporting period.
 Owner occupied buildings, delivery trucks and equipment are accounted for using the cost model.
Depreciation on buildings and equipment is accounted for according to the straight-line method over
the estimated useful life of the asset. Depreciation on delivery trucks is accounted for according to
the units of production method.
 Intangible assets are accounted for using the cost model. Amortisation is provided for on the straight-
line method over the estimated useful life of the asset.

Taxation:
 The South-African normal tax rate is 27%. The capital gains tax inclusion rate is 80%. You may
assume that both the tax rates have been effective and remained unchanged since 1 January 2021.
 Deferred tax is provided for on all temporary differences using the statement of financial position
approach. There are no items causing temporary or exempt differences except those identified in
the question. The company will have sufficient taxable income in future against which any unused
tax losses can be utilised.

Assumptions:

 All amounts are material.

 You may ignore the implications of Value-Added Tax (VAT).

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 FAC3764 Assessment 3
REQUIRED:

Marks
a) Write an email to the junior accountant of Noupoort Energy Ltd, where you 9
discuss, with reference to IFRS, any concerns you have with the intangible asset
note as well as supporting calculations prepared for the year ended
31 December 2023.

 Your discussion should be supported by relevant calculations where

necessary. Calculations will only be marked within the context of a
discussion.
 Ignore comparative information.

Communication mark: Presentation 1

Communication mark: Logical argument 1

b) With reference to the contract with Moya (Pty) Ltd, briefly discuss, in terms of IFRS 6
15, Revenue from contracts with customers, when the performance obligations
will be satisfied and calculate the amount of revenue (if any) that should be
recognised in the financial statements of Noupoort Energy Ltd for the year ended
31 December 2023.

c) Prepare the correcting journal entries to correctly account for the purchase and 11
lease of the manufacturing equipment to Energy Wise Ltd in the financial
statements of Noupoort Energy Ltd for the year ended 31 December 2023,
according to the requirements of IFRS 16, Leases.

Please note:
 The journal entries should be prepared using the gross method
 Dates and journal narrations are required. 2
 Ignore any tax implications.

d) Prepare the deferred tax note as it would be disclosed in the financial statements 17
of Noupoort Energy Ltd as at 31 December 2023.

Please note:

 Ignore any deferred tax implications on the licence to manufacture, the

contract with Moya (Pty) Ltd and advance payment.
 Indicate within your deferred tax note, if your net deferred tax balance is a
deferred tax asset or deferred tax liability.
 Your deferred tax note does not have to include any qualitative disclosures. A
reconciliation of the deferred tax opening and closing balances is thus not
required.
 Ignore comparative information.

e) Discuss, with reasons, the ethical concerns regarding the CFO’s request to 3
account for the advance payment received as revenue in the financial records of
Noupoort Energy Ltd for the year ended 31 December 2023.

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 FAC3764 Assessment 3
Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Accounting policy notes are not required.
Comparative information is not required.
All calculations must be shown.
Calculations are to be done to the nearest Rand.
[50]

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UNISA 2024

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