FAC3764 Assessment 3 Suggested Solution

Suggested solution

a) Write an email to the junior accountant of Noupoort Energy Ltd, where you discuss, with
reference to IFRS, any concerns you have with the intangible asset note 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.

From: FAC3764 Student

To: Junior accountant, Noupoort Energy Ltd
Date: 14 June 2024
Subject: Concerns regarding the intangible asset note and supporting calculations.

Dear Sir/Mam

I am writing this email to highlight the concerns I have regarding the intangible asset note and
supporting calculations that you prepared for the year ended 31 December 2023.

The systematic allocation of the depreciable amount of an intangible asset over its expected useful
life is defined as amortisation (IAS 38.8 (defined terms))
or
the gradual reduction in an intangible asset’s remaining future economic benefits should be reflected
as amortisation.

In your note, you incorrectly disclosed the gradual reduction in an intangible asset’s remaining future
economic benefits as depreciation and accumulated depreciation instead of amortisation and
accumulated amortisation, as is required by IAS 38.

If payment for an intangible asset is deferred beyond normal credit terms, its cost is the cash price
equivalent (IAS 38.32).

As the legal fees will only be paid after 6 months, whereas normal payment terms are 30 days after
invoice date, the payment of the legal fees is deferred beyond normal credit terms. Therefore, in your
calculation of the cost, you should have used the cash price equivalent (present value) instead of the
actual payment (future value).
or
the cost of the licence to manufacture was calculated incorrectly as it did not take into account the
interest due to the legal fees payment being deferred beyond normal credit terms. .

The correct amount for the legal fees that should have been included in the cost price calculation is
as follows:

FV = 450 000
N = 6 months
I = 10,50%; set to 12 x per year 10,5%/12 = 0.875%
PV = 427 082 or 427 553 (assuming N = 1, I = 10,5% / 2)
NB: Interest rate must match period
Based on the above, the correct cost should be: (2 755 850 + 427 082) = R3 182 932

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 FAC3764 Assessment 3 Suggested Solution

The accumulated amortisation is incorrect as a result of using the incorrect cost price. The correct
accumulated amortisation at the beginning of the year should have been 3 182 932 / (84 x 40) =
R1 515 682

According to IAS 36, the recoverable amount of an asset is the higher of the value in use and the fair
value less cost to sell.

The recoverable amount used to calculate the impairment loss in the 2022 financial year is incorrect
in terms of IAS 36 as it was based on the lower of the value in use and fair value less costs to sell
instead of using the higher of the two.

The recoverable amount of the licence to manufacture should have been R1 458 950.

The correct impairment loss should have been: (3 182 932 – 1 515 682)– 1 458 950 = R208 300.

After the recognition of an impairment loss, the depreciation (amortisation) charge for the asset shall
be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if
any), on a systematic basis over its remaining useful life (IAS 36.63)

The useful life of 7 years used to calculate current year amortisation is incorrect as the remaining
useful life of 3 years and 8 months (3.667 years/44 months) should have been used instead.

The correct current year amortisation should have been disclosed as R397 895 (R1 458 950 / 3.667
years) or (1 458 950 / 44 months x 12 months).

As a result of the above, the correct accumulated depreciation and impairment losses at the end of
the year should be: R1 515 682 + R397 895 + 208 300 = R2 121 877 or correct carrying amount
should be: R3 182 932 – R2 121 877 = R1 061 055

I trust that you will find the above in order.

Kind Regards
FAC3764 Student

Available marks (discussion): 11

Maximum marks (discussion): 9
Presentation: 1
Logical discussion: 1
Total Marks: 11

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 FAC3764 Assessment 3 Suggested Solution
b) With reference to the contract with Moya (Pty) Ltd, briefly discuss, in terms of IFRS 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.

In terms of IFRS 15, revenue must be recognized when or as performance obligations are satisfied
(i.e. over time or at a point in time).

We must first assess whether a performance obligation is satisfied over time and if it is not, then it will
be satisfied at a point in time.

For a performance obligation to be satisfied over time, one of the following requirements must be met:
 The customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity is in the process of performing its obligation.
o Moya will only be able to use the wind turbines when construction is complete and thus cannot
consume the benefits during construction. Therefore, this requirement is not met.

 The entity’s performance creates or enhances an asset that the customer controls as the asset
is created or enhanced.

o The essence of this requirement is that the customer must obtain control of the asset over
time (during creation/construction) rather than at a point in time (upon completion). To assess
whether this requirement has been met, we have to consider the definition of control (when
the customer will be able to direct the use of the asset and obtain the benefits thereof) as well
as the indicators of control in IFRS 15.38:
 The entity has a present right to payment for the asset.
 The customer has legal title to the asset.
 The entity has transferred physical possession of the asset.
 The customer has the significant risks and rewards of ownership of the asset.
 The customer has accepted the asset.
o As the wind turbines are constructed at the premises of the customer (Moya), Moya obtains
physical possession of the asset as it being constructed and will be able to direct the use
thereof and obtain all of its benefits (or restrict others from directing the use and obtaining the
benefits) while it is being created.

o Moya has legal title of the asset as it is the legal owner of the work in progress.

o As 50% of the deposit had to be paid in advance and payment can be enforced for work
performed to date, it can also be argued that the entity has a present right to payment
(although partially).

o Therefore this requirement is met (i.e. the customer controls the asset as it is created).
 The entity’s performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date.

o As the wind turbines are custom-made, it is unlikely that Noupoort will have an alternative use
for them. In terms of the contract, Noupoort can enforce payment for work completed to date,
thus this requirement is met.

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 FAC3764 Assessment 3 Suggested Solution
As one of the above requirements has been met, the performance obligation is satisfied over time.
Accordingly, revenue should be recognised over time as the construction progresses.

As at 31 December 2023, 60% of the work had been completed, so only R7 200 000 (R12 000 000 x
60%) should be recognised as revenue in the 2023 financial year.
Available marks: 9
Maximum marks: 6

c) Prepare the correcting journal entries to correctly account for the purchase and 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.
 The journal entries should be prepared using the gross method
 Dates and journal narrations are required.
 Ignore any tax implications.

Dr Cr
R R
1/1/23 Equipment (SFP) 1 550 000
Bank(SFP) 1 550 000
(Purchase of manufacturing equipment)

1/1/23 Finance lease receivable: Gross investment (SFP) 2 150 000 1

Bank (SFP) 20 000
Finance lease receivable: Unearned finance 580 000
income (SFP)
Equipment (SFP) 1 550 000
Sale of equipment under finance lease

1/1/23 Rental income received (P/L) 350 000

Finance lease receivable: Gross investment 350 000
(SFP)
(Correction of lease payments received)

31/12/23 Finance lease receivable: Unearned finance 172 5732

income (SFP)
Lease finance income (P/L) 172 573
(Finance income earned)

Calculations:

1. Leased manufacturing equipment

Gross investment: (350 000 x 6 + 35 000) + 15 000 = 2 150 000

2. Finance income earned

(2 150 000 – 580 000 – 350 000) x 14.15% = 172 573
or
Set begin; N = 6; PMT = 350 000; FV = 50 000; PV = 1 570 000; N = 14.15%
Amort 2 Interest = 172 573 / 172 630

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 FAC3764 Assessment 3 Suggested Solution
Amortisation schedule (not required):

Set begin; N = 6; PMT = 350 000; FV = 50 000; PV = 1 550 000 + 20 000 = 1 570 000; 1 = 14.15%
Opening Interest
Balance @ 14.15% Payment Closing Balance Capital
1 Jan 2023 1 570 000 - 350 000 1 220 000 350 000
1 Jan 2024 1 220 000 172 573 350 000 1 042 573 177 427
1 Jan 2025 1 042 573 147 475 350 000 840 048 202 525
1 Jan 2026 840 048 118 827 350 000 608 875 231 173
1 Jan 2027 608 875 86 127 350 000 345 002 263 873
1 Jan 2028 345 002 48 802 350 000 43 804 301 198
31 Jan 2028 43 804 6 196 50 000 0 43 804
580 000 2 150 000 1 570 000
Marks: 11
Dates: 1
Narrations: 1
Total: 13

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 FAC3764 Assessment 3 Suggested Solution
d) Prepare the deferred tax note as it would be disclosed in the financial statements of Noupoort
Energy Ltd as at 31 December 2023.
 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.

Noupoort Energy Ltd

Notes to the financial statements for the year ended 31 December 2023
R
1. Deferred tax asset/(liability)

The closing balance is constituted by the effects of:

 Land (21 600)
 Building (97 533)
 Delivery truck (206 072)
 Finance lease receivable (375 995)
 Leased asset 251 100
Deferred tax liability at the end of the year (450 100)

Calculations:
Carrying Tax base Temporary Tax rate Deferred tax
amount difference Asset /
(liability)
Land 1 600 0001 1 500 0001 (100 000) 27% x 80% (21 600)
Building 4 635 4932 4 275 0002 (360 493) 27% (97 333)
Delivery truck 1 388 2313 625 0003 (763 231) 27% (206 072)
Leased asset - 930 0004 930 000 27% 251 100
Lease receivable 1 392 5735 - (1 392 573) 27% (375 995)

1. Land:
Cost: 1 500 000 + 175 000 x 1 500 000/6 250 000 = 1 542 000
Revaluation: 1 600 000 – 1 542 000 = 58 000

2. Building:
Cost: 4 750 000 + 175 000 x 4 750 000/6 250 000 = 4 883 000

Carrying amount (31 Dec 2023): 4 883 000 – (4 883 000 – 975 000) / 25 x 19/12 = 4 635 493
or
Depreciation (2022): (4 883 000 – 975 000)/25 x 7/12 = 91 187
Depreciation (2023): (4 883 000 – 975 000)/25 = 156 320 or 91 187 / 7 x 12
Carrying amount (2023): 4 883 000 – 91 187 – 156 320 = 4 635 493

Tax base:
4 750 000 – 4 750 000 x 5% x 2 = 4 275 000 or 4 750 000 x 90% = 4 275 000

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 FAC3764 Assessment 3 Suggested Solution
3. Delivery truck:
Tax base: 1 500 000 – (1 500 000 / 4 years x 28/12) = 625 000

Carrying amount:
Major inspection: 165 000 x (165 000 – (58 500 - 50 000) ) / 50 000 = 136 950
Rest of truck: (1 500 000 – 150 000) x (800 000 – 58 500) / 800 000 = 1 251 281
or
Rest of truck: 1 350 000 – 1 350 000/800 000 x 58 500 = 1 251 281
Total carrying amount of truck: 136 950 + 1 251 281 = 1 388 231;
or
Carrying amount: 1 500 000 – 150 000 + 165 000 – 1 28 050 – 1.5 98 718 = 1 388 232

Reconciliation of opening and closing carrying amount (truck): This is not required.
Carrying Major Truck cost
amount inspection
Carrying amount: 1 Jan 2023 1 347 891 52 650 1 295 241
Cost 1 500 000 150 000 1 350 000
Accumulated depreciation 152 109 (97 350)2 (54 759)1

Additions: 165 000 165 000 -

Depreciation:
Major inspection (old): (52 650) (52 650)2
Major inspection(new): 165 000 / 50 000km x (28 050) (28 050) -
8 500km
Truck: 1 350 000 / 800 000km x (58 500 – 32 450) (43 959) - (43 959)1
Carrying amount: 31 Dec 2023 1 388 232 136 950 1 251 282
Cost 1 515 000 165 000 1 350 000
Accumulated depreciation (126 768) (28 050) (98 718)

1. Truck:
Opening acc. depr: 1 350 000/800 000 x 32 450 = 54 759
Current year depreciation: 1 350 000/800 000 x (58 500 – 32 450) = 43 959

2. Major inspection fee (R150 000):

Opening acc depr: 150 000/50 000 x 32 450 = 97 350
Current year depreciation: 150 000/50 000 x (50 000 – 32 450) = 52 650

4. Leased asset (Manufacturing equipment):

Tax base (31 Dec 2023): 1 550 000 x 60% = 930 000
or
1 550 000 – (1 550 000 x 40%) = 930 000

5. Net investment in lease:

(2 150 000 – 350 000) – 580 000 + 172 573 = 1 392 573
or
1 042 573^ (from amortisation table) + 350 000^ = 1 392 573
Total marks: [17]

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 FAC3764 Assessment 3 Suggested Solution
e) Discuss, with reasons the ethical concerns regarding the CFO’s request to account for the
advance payment received as revenue in the financial records of Noupoort Energy Ltd for
the year ended 31 December 2023.

The CFO is a CA(SA) and therefore must adhere to the SAICA code of professional conduct.

The SAICA CPC requires a CA(SA) to be honest/act with integrity and to comply with all laws and
regulations.

The CFO lacks honesty/integrity because he is aware that the deposit does not qualify for recognition
as revenue but still wants it to be recognised as such.

The CFO’s suggestion is also not compliant with laws and regulations as it goes against the
requirements of IFRS 15.

The CEO’s suggestion is therefore unethical and against the SAICA Code of Professional Conduct.

Available marks: 4.5

Maximum marks: 3

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