Reporting Q & A

ACCOUNTING STANDARDS
1 7 th E d i t i o n
PART - A
A Comprehensive Question Book on

International Financial Reporting Standards
QUESTIONS & SOLUTIONS
OPPERMANN
BOOYSEN
VAN DER MERWE
Contents
__________________________________________________________________
IN CHRONOLOGICAL ORDER
TITLE PAGE
FRW Conceptual framework for financial reporting 1
IAS 1 Presentation of financial statements 12
IAS 2 Inventories 32
IAS 7 Statement of cash flows 49
IAS 8 Accounting policies, changes in accounting estimates and 89
errors
Accounting Standards 17e without cropmarks 978148-512-111-4[9].pdf 3 05/12/2016 16:59

Framework
Conceptual framework for financial
reporting
__________________________________________________________________
 SUMMARY
Proposed approach to answering questions on the Framework
 QUESTIONS AND SOLUTIONS
FRW.1 Objective of financial statements

FRW.2 Qualitative characteristics
FRW.3 Recognition of elements of financial statements
FRW.4 Application of framework
Conceptual framework for financial reporting
PROPOSED APPROACH TO ANSWERING QUESTIONS ON THE ACCOUNTING

FRAMEWORK
The issue is normally to decide whether an item is an:
 Asset or expense – e.g. cost to plant a crop, development costs, etc.

 Liability or income – e.g. deposit received, etc.
(Bear in mind that most, if not all, transactions will influence two elements in the financial
statements due to the nature of the double entry system. We are not looking at the obvious
leg but at the less obvious one, e.g. money borrowed to purchase goods will obviously be a
liability, but will the goods be an asset or an expense?).
Approach to solving this kind of problem:
1. Classify the item according to the criteria in the Framework 4.4 – 4.35 (i.e.
asset/liability/income/expense). Pay special attention to the definitions in the
Framework 4.4 and 4.25.
2. Take note of Framework 4.5 and decide in terms of Framework 4.37 – 4.43 as well as
Framework 4.44 – 4.53 whether the item should be recognised in the financial
statements, considering:
 Probability of future economic benefits; and
 Reliability of measurement.
3. Apply the fundamental and enhancing qualitative characteristics to determine

whether the item should be disclosed, how it should be disclosed and at what amount,
e.g.:
 Materiality – whether
 Faithful representation – how
 Verifiability – amount
4. Take note of the important distinction between recognition and disclosure.
 QUESTION FRW.1
What is the objective in the preparation of financial statements as defined by the

Framework?
 Suggested solution FRW.1
To provide financial information about the reporting entity that is useful to existing and
potential investors, lenders and other creditors in making decisions about providing
resources to the entity.
 QUESTION FRW.2
Zet (Pty) Ltd has disclosed the model of motor cars driven by its directors in its financial
statements over the past few years. Explain with reference to the qualitative characteristics
of financial statements whether the information complies with the principle of usefulness.

Information in respect of the model of motor cars cannot enhance the usefulness of financial
statements. Although the information may be faithfully represented, comparable,
verifiable and understandable, it is not relevant because it will probably not influence
the economic decisions of existing and potential investors, lenders and other creditors.
Information is relevant if it has predictive value, confirmatory value or both. Disclosure of
the model of motor cars driven by directors has no predictive value and it does not confirm
any fact that is useful for decision-making.
 QUESTION FRW.3
A company's financial year ended on 30 September 20.8. On 15 October 20.8 it came to

light that a debtor who owed R45 000 and had been experiencing financial difficulties for a
number of months had been declared insolvent. The financial statements for the year ended
30 September 20.8 have not been prepared yet and the accountant does not want to account
for the R45 000 as an allowance for credit losses at 30 September 20.8, although the amount
is material. The auditors, however, insist that it should be done.
By only referring to the criteria of the Framework, explain why one should agree with the
auditors’ requirement that the valuation adjustment and expense should be reflected in the
financial statements.
On 30 September 20.8 the loss is already probable and has a value (the maximum loss)
which can be measured with reliability. Confirmation of the situation was obtained on
15 October 20.8. This confirmation improved the verifiability of this information. The
amount is also material and recognition of the expense is therefore relevant for decision-
making. Recognition of the expense will also be a faithful representation of the particular
economic phenomenon (i.e. the weakening in credit quality of the debtor).
Explanatory note:
The question requires that reference should only be made to the criteria of the Framework in
agreeing with the auditors’ requirement. It is therefore not necessary to take into account the
requirements and principles of IFRS 9, IFRS 7 and IAS 10.
 QUESTION FRW.4
Section A
‘The conceptual framework is a coherent system of interrelated objectives and fundamentals

that is expected to lead to consistent standards and that prescribes the nature, function, and
limits of financial accounting and reporting. It is expected to serve the public interest by
providing structure and direction to financial accounting and reporting to facilitate the
provision of even-handed financial and related information that is useful in assisting capital
and other markets to function efficiently in allocating scarce resources in the economy.’
(FASB – Statement of Financial Accounting Concepts No. 2.)

Required
With reference to the statement:

a. Discuss the objective of financial statements.
b. Discuss the need for the development of a conceptual (accounting) framework.
Section B
Alfa Ltd has spent R4,5 million during the financial year ended 31 December 20.1 on the
development of a new motor vehicle. The first prototype has been rejected for safety and
aesthetical reasons. Further development work over a period of six months, at a cost of
about R1 million, will be needed before the motor vehicle can be marketed. An additional
six months and further marketing costs are needed before income will be earned from the
vehicle. The project is running 10% over budget at this stage and the additional costs
(R1 million) have not been budgeted for. It is nevertheless expected that all the development
costs will be recovered from profits earned over a period of five years.
Amounts at 31 December 20.1
Total assets R20,8 million

Liabilities R12,5 million
Revenue R80,6 million
Profit for the year R10,4 million
Required
Referring only to the criteria of the Framework, fully justify how you will treat the
development costs amounting to R4,5 million in the financial statements of Alfa Ltd as at
31 December 20.1.
Section A
a. The objective of financial statements is to communicate the financial position,

financial performance and changes in the financial position of an entity over time in
order to provide useful information to users of financial statements to enable them to
make economic decisions.
b. The Framework is described as a coherent system of interrelated objectives and

fundamentals that can lead to consistent standards and that prescribes the nature,
function and limits of financial accounting and financial reporting.
Without a framework, accounting standards will contradict one another and accounting
standards will be issued without a sound theoretical base.
The Framework can also be applied in circumstances where no standard is issued on a

specific topic. It forms the underlying accounting concept for all topics. This enhances
harmonisation at international level.

Section B
Definition of an asset: A resource under the control of the entity, as a result of a past event,
from which future economic benefits are expected to flow to the entity.
The development costs comply with this definition. However, the future economic benefits
must be considered. It seems that a long period of time will pass before benefits will flow
from the costs. It is also not yet certain whether the prototype will be produced.
Recognition: An asset is recognised when it is probable that the future economic benefits
will flow to the entity and the asset has a cost/value that can be measured reliably.
The value of the development costs can be measured. The probability of future benefits is
not 100% certain, as already discussed under definition of an asset.
Definition of expense: Decreases in economic benefits in the form of outflows or depletion

of assets or incurrences of liabilities that result in a decrease in equity.
In this situation the development costs also meet this definition. Matching will result in the
expenditure being offset against income when it is earned (even though the matching
concept is not pertinently stated as a requirement in the Framework, it is a general concept
that explains the logic behind various principles in accounting standards).
Qualitative requirements:
Relevance - Materiality – Amount is material.
Faithful representation – Uncertainty of future economic benefits;

– Long period of time before benefits are expected;
– Budget overrun of 10%;
– Assets should not be ‘overstated’ and expenses not
‘understated’.
Timeliness – Frequent (annual) financial reporting.
Underlying assumption:
Going concern – Being complied with.
Other considerations:
Accrual basis – Expenses should be recognised in the period(s) to which they

relate (also see matching principle above).

Conclusion: Recognise the R4,5 million as an asset. The asset should be amortised as soon
as the motor vehicles are available for sale in the normal course of business, and the expense
should be matched against the income (revenue) to be earned from selling the motor
vehicles. The value of the asset (balance still to be amortised) should be reviewed regularly
(at least annually) and if it will not be recovered from future income, the amount should be
expensed immediately (there are already indications that the inflow of economic benefits is
not 100% certain).
Explanatory note:
The question requires that the development costs should be classified by only referring to
the criteria of the Framework, therefore no mention was made of the requirements of IAS 38
for the recognition of development costs as an asset.
 QUESTION FRW.5
Puff-Puff Farming Entities are renowned for the high-quality tobacco they produce on their
farms. During the year ended 30 June 20.5 they planted tobacco on all available land at a
cost of R1,5 million. At the financial year end it appears from projections that they will reap
a record harvest which will yield a return of about R5 million. (This was calculated by
multiplying the expected crop size by the current price of tobacco.) A further four months
will elapse after the year end before the tobacco is ready for sale.
The managing director (MD) and the financial director (FD) have a difference of opinion
regarding the treatment of the planting costs of the tobacco. In the previous year the MD
insisted that the planting costs of the crop be treated as an asset. After the financial
statements had been issued, unexpected hail and rain resulted in the loss of a substantial part
of the crop and they were unable to recover their costs.
The FD now insists that the planting costs should be treated as an expense in the 20.5
financial year. The MD does not support this approach as he argues that it will not be
consistent with the previous year, and it will also result in two years' expenses being
recognised in 20.5 with no income. He suggests that the planting costs should be treated as
an asset once again. The crop is insured this year against rain and hail damage.
A well-known cigarette manufacturer, Lucky Pakkie Ltd, contracted with Puff-Puff Farming
Entities to buy half of the current harvest for R2,5 million. The MD wants to recognise this
income at 30 June 20.5 since the contract was finalised during June 20.5. Other than a
deposit of R500 000 that was paid on the contract date, no further amount will be received
until delivery of the tobacco.
Required
Provide a well-reasoned argument, by referring only to the requirements of the Framework,

for the treatment of the above items in the financial statements of Puff-Puff Farming Entities
for the year ended 30 June 20.5.

1. Tobacco planting cost
The tobacco crop has an input cost of R1,5 million, which is material and can be
reliably measured.
Treatment as an asset
Definition of an asset
 Resource controlled by the entity;

 resulting from a past event;
 from which future economic benefits are expected to flow to the entity.
Applying it to the tobacco crop
 Under control of the entity: The crop is planted on the entity's land and is being
developed and maintained by the entity.
 The past event: The planting of the crop.
 Future economic benefits: When the crop is harvested and sold in four months’
time, future economic benefits are expected to flow to the entity. There is a
measure of uncertainty in that natural causes like hail or crop disease can result
in harvest failure.
 The market for tobacco might also crash before the crop is sold. The crop is
insured, which reduces the risk of crop failure, and there is already a sales
commitment for half of the crop for more than the total input cost, which
reduces the risk of a reduction in the market price of tobacco.
Recognition
 Probability of future economic benefits: already discussed in the paragraph

above.
 Cost/value can be measured with reliability: the cost of planting the crop can in
this case be determined with accuracy, viz. R1,5 million.
Treatment as an expense
Definition: Decrease in economic benefits in the form of the outflow of an asset that
results in a decrease in equity.
In this case the amount to plant and maintain the crop must be paid and can be seen as
the outflow of an asset. If the cost (amount) can be measured with reliability (as in this
case), it can be recognised as an expense.
The matching concept requires that the income from the crop and the expense to plant
it should be matched and accounted for in the same period, therefore the cost of
planting the crop should not be treated as an expense in 20.5 unless no future
economic benefit is expected from this crop (even though the matching concept is not
pertinently stated as a requirement in the Framework, it is a general concept that
explains the logic behind various principles in accounting standards).

Conclusion
In the absence of evidence to the contrary, it can be assumed that the crop will result in
a return in excess of the input cost. The cost of planting the crop should therefore be
treated as an asset in the 20.5 financial statements. This will be consistent with the
previous year and result in comparability from year to year. Matching will also be
achieved when the income from the crop is set off against the cost thereof.
Explanatory note:
The question requires that the planting costs should be classified by only referring to
the criteria of the Framework, therefore no mention was made of the requirements of
IAS 41 for the recognising of planting costs as an asset.
2. Revenue from sales contract
Although the revenue from the contract can be measured with reliability, there is a
problem with the probability criterion. This revenue will not be realised before
delivery of the crop (i.e. after harvest). If the harvest fails for some reason, the amount
will not accrue at all and the deposit will have to be repaid. The amount of
R2,5 million will therefore only be recognised as revenue when the crop has been
harvested and delivered to Lucky Pakkie Ltd. The recognition of revenue is therefore
restricted to those items that can be measured reliably and which have a sufficient
degree of certainty. The fact that the crop is insured is of no concern as it will be
insured at cost and not at selling price, and the insurance proceeds will only accrue
once a specific event takes place.
The deposit received of R500 000 will have to be treated as a current liability and not
as revenue.
Explanatory note:
The question requires that the income should be classified by only referring to the
criteria of the Framework, therefore no mention was made of the requirements of
IFRS 15 for the recognition of revenue.
 QUESTION FRW.6
Section A
The following questions must be answered by only referring to the accounting Framework:
Required
a. Define the term recognition in terms of financial reporting and clearly distinguish
between recognition and disclosure in your answer.
b. State the three fundamental recognition criteria that an item must meet in order for it to
be recognised in the financial statements.

Section B
Woodpecker Ltd bought a farm in the Witels Mountain area that is suitable for growing pine
trees. They paid R1 million for the farm and immediately started to develop the land. This
involved making roads to the various planting areas, dividing the farm into sections, and
creating fire and windbreaks. Holes were also dug and young trees planted and fertilised.
This was done at a cost of R100 000 per hectare.
After the trees had been planted they had to be watered and the weeds had to be controlled.
The trees also had to be pruned to ensure that they grew straight and tall. This was an
ongoing operation with costs being continually incurred.
After a period of about 10 years the trees should be ready for harvest and should yield a
return in excess of 20% per annum on the costs incurred to establish them.
During the financial year ended 31 December 20.4, Woodpecker Ltd developed 10 hectares
at a cost of R1 million and spent R300 000 on watering and maintaining the trees.
The accountant reflected the cost of R1,3 million as an expense in the statement of profit or
loss and other comprehensive income. The financial director, however, feels that there are
enough reasons to justify treating the R1,3 million as an asset in the statement of financial
position as at 31 December 20.4.
Required
Provide a well-reasoned argument by referring only to the requirements of the Framework as

to whether the cost of planting and maintaining the plantation should be treated as an
expense or an asset.
Section A
a. Recognition is the inclusion in the statement of financial position or the statement of

profit or loss and other comprehensive income of an item that meets the definition of
an element of the financial statements. This is done by way of a description and a
value, and should only be done if an item meets the recognition criteria. It should be
distinguished from disclosure, which means the furnishing of descriptive information
about any item in the financial statements.
b. Recognition criteria:
 It must meet the definition of one of the elements.
 It is probable that future economic benefits associated with the item will flow to
or from the entity (or has already flowed).
 The item has a cost or value that can be measured reliably.

Section B
Treatment as an asset
Definition of an asset
 Resource under the control of the entity;

 resulting from a past event;
 from which future economic benefits are expected to flow to the entity.
Applied to the plantation
 The plantation is under the control of the company. It is on the company's land, and is
being developed and maintained by the company.
 The past event is the development of the plantation.
 Future economic benefits: When the trees are felled and the wood is sold, economic
benefits are expected to flow to the company. It can therefore be assumed that the
plantation has been developed (and the costs incurred) with probable future economic
benefits in mind.
Recognition
 Probability of future economic benefits: As the period prior to expectation of the

benefits is quite long, there is some uncertainty involved (e.g. drought, fire, market
after 10 years, etc.).
 Cost/value can be measured with reliability: The cost of developing the plantation can
in this case be determined with reliability.
 Decrease in economic benefits in the form of the outflow of an asset,

 that results in a decrease in equity.
In this case, the cost to develop and maintain the plantation must be paid and can be seen as
the outflow of an asset. If the cost can be measured with reliability (as in this case) it can be
recognised as an expense, therefore if no future economic benefit is expected from this
outflow, it must be recognised as an expense.
Conclusion
Although a long time will pass before the trees will produce any income, it is fair to assume
that they were planted with the intention of earning a return over and above the costs
incurred. There are, therefore, sufficient reasons for treating the expenditure as an asset and,
by applying the matching principle, to match the costs of developing and maintaining the
plantation against the revenue earned from the sale of the trees (even though the matching
concept is not pertinently stated as a requirement in the Framework, it is a general concept
that explains the logic behind various principles in accounting standards). At regular
intervals the recoverable amount of the plantation should be determined and if the costs
incurred are higher than the recoverable amount, the costs should be written down
(expensed) to the recoverable amount.
10

Explanatory note:
The question requires that the costs of development and maintenance should be classified by
only referring to the criteria of the Framework, therefore no mention was made of the
requirements of IAS 41 for the recognition of the costs of development and maintenance as
an asset.
 QUESTION FRW.7
Zero Ltd incurred costs amounting to R15 million during its financial year ended
31 December 20.9. The costs relate to the modification of its existing software system to
make it compliant with its new operating system. The expenditure incurred will only enable
the software system to continue to perform as it did originally.
The financial director of Zero Ltd has, however, decided that in view of the amount
involved, the amount should be capitalised as an asset at 31 December 20.9.
Required
Discuss, by referring only to the requirements of the Framework, whether or not you agree
with the financial director’s decision. Assume that the amount is material.
 Decrease in economic benefits in the form of the outflow of an asset – payment of

R15 million;
 that results in a decrease in equity.
The cost of the modification must be paid and is seen as an outflow of an asset. The cost can
be measured reliably. No future economic benefit can be expected which had not already
existed before the modification, therefore the cost of R15 million must be recognised as an
expense according to the requirements of the Framework.
11

IAS 1 & SIC 29
Presentation of financial statements
__________________________________________________________________
 SUMMARY
Illustrative example – statement of financial position

Illustrative example – statement of profit or loss and other comprehensive income
(expenses by function)
– statement of profit or loss and other comprehensive income
(expenses by nature)
Illustrative example – statement of changes in equity
IAS 1.1 Objective of IAS 1

IAS 1.2 Components of financial statements
IAS 1.3 Explanation of the term ‘material’
IAS 1.4 Non-compliance with IFRSs
IAS 1.5 General features
IAS 1.6 Identification of financial statements
IAS 1.7 Distinction between current and non-current assets and liabilities
IAS 1.8 Classification of long-term loans
IAS 1.9 Separately disclosable items
IAS 1.10 Calculation and disclosure of dividend per share
IAS 1.13 Service concession arrangements (SIC 29)
12

Illustrative example
XYZ GROUP
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.2
20.2 20.1
Rand Rand
ASSETS
Non-current assets x x
Property, plant and equipment x x
Goodwill x x
Other intangible assets x x
Investment in associates x x
Investment in equity instruments not held for trading x x
Current assets x x
Inventory x x
Trade receivables x x
Other current assets x x
Cash and cash equivalents x x
Total assets x x
EQUITY AND LIABILITIES

Total equity x x
Equity attributable to owners of the parent x x
Share capital x x
Retained earnings x x
Other components of equity x x
Non-controlling interest x x
Total liabilities x x
Non-current liabilities x x
Long-term borrowings x x
Deferred tax x x
Long-term provisions x x
Current liabilities x x
Trade and other payables x x
Short-term borrowings x x
Current portion of long-term borrowings x x
Current tax payable x x
Short-term provisions x x
Total equity and liabilities x x
13

XYZ GROUP
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.2
(Illustrating the classification of expenses by function)
20.2 20.1
Rand Rand
Revenue x x
Cost of sales (x) (x)
Gross profit x x
Other income x x
Distribution costs (x) (x)
Administrative expenses (x) (x)
Other expenses (x) (x)
Finance costs (x) (x)
Share of profit of associates x x
Profit before tax x x
Income tax expense (x) (x)
Profit for the year x x
Other comprehensive income
Items that will not be reclassified to profit or loss x x
Property revaluation x x
Gain on property revaluation x x
Tax expense (x) (x)
Investments in equity instruments not held for trading x x
Gains arising during the year x x
Tax expense (x) (x)
Cash flow hedges of transactions that will lead to
non-financial items x x
Tax expense (x) (x)
Share of other comprehensive income of associate x x
Items that may subsequently be reclassified to

profit or loss x x
financial items x x
Reclassification adjustments for gains included in
profit or loss (x) (x)
Tax expense (x) (x)
Exchange differences on translating foreign operations x x
Reclassification adjustment for gains included
in profit or loss (x) (x)
Tax expense (x) (x)
Total comprehensive income for the year x x
14

20.2 20.1
Rand Rand
Profit attributable to:
Owners of the parent x x
x x
Total comprehensive income attributable to:

x x
Basic earnings per share x x

Diluted earnings per share x x
XYZ GROUP
(Illustrating the classification of expenses by nature)
20.2 20.1
Rand Rand
Revenue x x
Other income x x
Changes in inventories of finished goods and work
in progress (x) (x)
Work performed by the entity and capitalised x x
Raw material and consumables used (x) (x)
Employee benefit expense (x) (x)
Depreciation and amortisation expense (x) (x)
Impairment of property, plant and equipment (x) (x)
Other expenses (x) (x)
Finance costs (x) (x)
Share of profit of associates x x
Profit before tax x x
Income tax expense (x) (x)
Profit for the year x x
Items that will not be reclassified to profit or loss x x
Property revaluation x x
Gain on property revaluation x x
Tax expense (x) (x)
Investments in equity instruments not held for trading x x
Tax expense (x) (x)
non-financial items x x
Tax expense (x) (x)
15

20.2 20.1
Rand Rand
Items that may subsequently be reclassified to

profit or loss x x
financial items x x
Reclassification adjustments for gains included in
profit or loss (x) (x)
Tax expense (x) (x)
Exchange difference on translating foreign operations x x
Reclassification adjustment for gains included in profit
or loss (x) (x)
Tax expense (x) (x)
Total comprehensive income for the year x x

x x
x x
Basic earnings per share x x

Diluted earnings per share x x
XYZ GROUP
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.2
Non-
Reva- Trans- control-
Share luation lation Retained ling Total
capital surplus reserve earnings Total interest equity
Rand Rand Rand Rand Rand Rand Rand
Balance at
1 January 20.1 x x (x) x x x x
Changes in
accounting policy (x) (x) (x) (x)
Restated balance x x (x) x x x x
16

Non-
Reva- Trans- control-
Share luation lation Retained ling Total
capital surplus reserve earnings Total interest equity
Rand Rand Rand Rand Rand Rand Rand
Changes in equity
for 20.1
Total comprehen-
sive income for
the year x x x x x x
Profit or loss x x x x
Other comprehen-
sive income x x x x x
Dividends
(Rx per share) (x) (x) (x) (x)
Issue of share capital x x x
Transfer to retained
earnings (x) x
Balance at
31 December 20.1 x x (x) x x x x
Changes in equity
for 20.2
Total comprehen-
sive income for
the year x x x x x x
Profit or loss x x x x
Other comprehen-
sive income x x x x x
Dividends
(Rx per share) (x) (x) (x) (x)
Issue of share capital x x x
Balance at
31 December 20.2 x x (x) x x x x
 QUESTION IAS 1.1
Explain what the objectives of IAS 1 are and how the accounting standard aims to achieve
this.
 Suggestion solution IAS 1.1
The accounting standard prescribes the basis for the presentation of general purpose
financial statements. In so doing, it ensures that the entity’s own financial statements will be
comparable from year to year, and also with those of other entities.
To achieve this objective, the accounting standard sets out overall requirements for the
presentation of financial statements, guidelines for the structure of financial statements and
minimum content requirements.
17

General purpose financial statements should provide financial information to users in

respect of financial position, performance and cash flows of an entity in order to facilitate
decision making.
According to IAS 1, what are the main components of these financial statements?
 Suggestion solution IAS 1.2
The components of the financial statements are:

 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.
 Notes, comprising a summary of significant accounting policies and other explanatory
notes.
 A statement of financial position as at the beginning of the earliest comparative period
when items are restated retrospectively or when items are reclassified.
The accounting standard, IAS 1, requires each material class of similar items to be presented
separately in the financial statements. Items of dissimilar nature or function should be
presented separately unless they are immaterial.
Explain what is meant by the term ‘material’.
 Suggested solution IAS 1.3
IAS 1 states in its definitions that an item is material if it could, individually or collectively,
influence the economic decisions of users taken on the basis of the financial statements. An
item may be material due to its size or nature. If a line item is not individually material, it is
aggregated with other items either on the face of the financial statements or in the notes. An
item that is not sufficiently material to warrant separate presentation on the face of the
statements may nevertheless be sufficiently material for it to be presented separately in the
notes.
Circumstances may arise where management of an entity is of the opinion that in complying
with an accounting standard, the financial statements of the entity will not fairly present the
financial position, financial performance and cash flows of that entity.
It will then be necessary to depart from the requirements of the accounting standard,
provided that the relevant regulatory framework requires, or otherwise does not prohibit,
such a departure.
Explain what the disclosure requirements in terms of IAS 1 would be in such circumstances.
18

An entity should disclose the following in terms of IAS1.20:
 That management has concluded that the financial statements fairly present the
entity’s financial position, financial performance and cash flows;
 The fact that the financial statements comply in all material respects with the
applicable standards and interpretations, except for the departure in question;
 The title of the IFRS or interpretation from which the entity has departed; the nature
of the departure, including the reason why compliance with the IFRS or interpretation
would be misleading; the treatment required by the IFRS or interpretation and the
treatment adopted by management instead; and
 For each period presented, the financial impact of the departure on each item in the
financial statements that would have been reported in complying with the requirement.
a. Explain, by referring to the requirements of IAS 1, what is meant by the following

terms and what their implications for the preparation of financial statements are:
 Going concern basis

 Accrual basis
b. The presentation and classification of items in the financial statements should be

consistent from one reporting period to the next. The accounting standard, IAS 1,
identifies two situations where consistency need not be applied.
List these two situations and discuss the implications for the presented comparative
amounts.
c. Discuss the standards of IAS 1 regarding ‘offsetting’. Your discussion should cover
assets, liabilities, income and expenses, and give an example to illustrate each one.
a. Going concern basis: This is the assumption that an entity will continue to operate
into the foreseeable future (which covers a period of at least 12 months from the
reporting date). Management is required to assess the entity’s ability to meet this
criterion and unless management intends to liquidate the entity or to cease trading (or
has no realistic alternative but to do so), the financial statements should be prepared on
a going concern basis. When the financial statements are not prepared on a going
concern basis, this fact should be disclosed together with the basis used, and the reason
why the entity cannot be considered to be a going concern.
19

Accrual basis: Under the accrual basis of accounting, items are recognised as assets,
liabilities, equity, income and expenses (the elements of financial statements) when
they occur and not when cash is received or paid, and when they satisfy the definitions
and recognition criteria for those elements in the Framework. Accordingly, an entity
should prepare its financial statements, other than cash flow information, under the
accrual basis of accounting.
b. The two situations according to IAS1.45 are:
 Where it is apparent, following a significant change in the nature of the entity’s

operations or a review of its financial statements, that another presentation or
classification would be more appropriate having regard to the criteria for the
selection and application of accounting policies in IAS 8.
 Where an IFRS requires a change in presentation.
Where the presentation or classification of items in the financial statements has been
changed, IAS1.41 and .42 requires:
 Comparative amounts should be reclassified unless it is impracticable to do so.

This is to ensure comparability with the items reported in the current period.
 The entity should disclose the nature, amount of and reason for any
reclassification.
 If it is impracticable to reclassify comparative amounts, the entity shall disclose
the reason for not reclassifying the amounts and the nature of the adjustments
that would have been made had the amounts been reclassified.
c. In terms of IAS1.32:
 Assets and liabilities, and income and expenses, cannot be offset against one
another unless an IFRS requires or permits it. The reporting of assets after
deduction of valuation allowances (for example in the case of inventory, an
allowance for obsolete inventory) is not seen as offsetting. A situation where
offsetting is however allowed is, for example, in terms of IFRS 16 where the
gross investment in lease contracts and unearned finance income can be offset
against each other to disclose only the net amount. Similarly, expenditure related
to a provision that is reimbursed under a contractual arrangement with a third
party (for example a supplier’s warranty agreement), may be netted in profit or
loss against the related reimbursement.
The accounting standard, IAS 1, requires that certain information concerning the structure
and contents of financial statements be clearly identified and prominently displayed on the
face of the financial statements of an entity.
List these items.
Each component of the financial statements should be clearly identified. In addition, the
following information should be displayed prominently according to IAS1.51:
20

 The name of the reporting entity or other means of identification, and any change in
that information from the preceding reporting date;
 Whether the financial statements presented relate to an individual entity or a group of
entities;
 The date of the end of the reporting period or the period covered by the set of financial
statements or notes;
 The presentation currency; and
 The level of precision of the amounts presented in the financial statements (e.g. R’000
or R’million).
A distinction is made in the accounting standard, IAS 1, between current and non-current
assets, and current and non-current liabilities.
Explain the distinctions.
According to IAS1.66:
A current asset is an asset which:
 is expected to be realised in, or is intended for sale or consumption in the entity’s
normal operating cycle;
 is held primarily for the purposes of being traded;
 is expected to be realised within 12 months after the reporting period; or
 is cash or a cash equivalent, unless it is restricted from being exchanged or used to
settle a liability for at least 12 months after the reporting period.
According to IAS1.69:
A current liability is a liability which:
 is expected to be settled in the entity’s normal operating cycle;
 is held primarily for the purpose of being traded;
 is due to be settled within 12 months after the reporting period; or
 the entity does not have an unconditional right to defer settlement of for at least 12
months after the reporting period.
All other assets and liabilities are to be classified as non-current assets or non-current
liabilities.
Long-term liabilities (borrowings) would normally be classified as current liabilities if they

are due for repayment within the next 12 months from the entity’s reporting date.
However, an entity could enter into an agreement to refinance, or to reschedule payments,

on a long-term basis, thereby changing the substance of the liability back to long term.
Explain whether the liability should be classified as current or non-current if this refinancing
agreement is completed after the reporting date and before the financial statements are
authorised for issue.
21

The refinancing of the liability occurs after year end and does not affect the entity’s liquidity
and solvency at the reporting date, therefore it is a non-adjusting event after the reporting
period, which should only be disclosed in a note. The liability would thus still be classified
as a current liability at year end.
The following balances were taken from the final trial balance of Mossie Ltd for the year
ended 31 December 20.5:
Rand
Revenue 600 000
Cost of sales 200 000
Other expenses (all tax deductible) 200 000
Gain on disposal of vehicle (taxable profit = R5 000) 5 000
Gain on disposal of land (not taxable) 40 000
Loss due to hail damage to inventories (tax deductible) 9 000
Impairment of goodwill (not tax deductible) 5 000
Loss from expropriation of land (not tax deductible) 15 000
Payment received from a supplier for breach of contract (not taxable) 4 000
Allowance for credit losses written back (taxable) 8 000
Investment (at cost) in liquidated subsidiary written off (not tax deductible) 12 000
Loss on long-term construction contract (tax deductible) 20 000
Income tax expense (1) 56 000
(1) (600 000 – 200 000 – 200 000) × 28% = 56 000
Additional information
1. Assume that all amounts are material for purposes of disclosure.
2. Assume a tax rate of 28%. Deferred tax should be ignored.
3. The following items are included in other expenses:
Rand
Lease expenses – Offices (short-term leases) 20 000
Depreciation – Machinery 10 000
– Vehicles 15 000
– Equipment 15 000
Auditors’ remuneration for audit services 40 000
4. The land that has been expropriated had a cost price of R70 000.
Required
Prepare the statement of profit or loss and other comprehensive income and profit before tax
note of Mossie Ltd from the available information for the year ended 31 December 20.5 in
accordance with the requirements of International Financial Reporting Standards (IFRS).
Comparative amounts and notes in respect of accounting policy and tax are not required
(UNISA – adapted).
22

MOSSIE LTD
Note Rand
Revenue 600 000

Cost of sales (200 000)
Gross profit 400 000
Other income (1) 57 000
Other expenses (2) (261 000)
Profit before tax 2 196 000
Income tax expense (3) (51 520)
Profit for the year 144 480
Other comprehensive income –
Total comprehensive income for the year 144 480
(1) 5 000 + 40 000 + 4 000 + 8 000 = 57 000

(2) 200 000 + 9 000 + 15 000 + 20 000 + 5 000 + 12 000 = 261 000
(3) 56 000 + [(5 000 – 9 000 + 8 000 – 20 000) × 28%] = 51 520
MOSSIE LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.5
2. Profit before tax
Profit before tax is stated after taking the following into account:
Rand
Expenses
Lease payments on short-term lease contracts (1) 20 000
Depreciation (2) 40 000
(1) Disclosure requirements of IFRS 16.53(c)

(2) IAS 1.104 disclosure requirement
Items to be disclosed separately (3)

Rand
Gain on disposal of vehicle 5 000

Compensation received for breach of contract 4 000
Provision for credit losses written back 8 000
Loss on long-term construction contract (20 000)
Gain on disposal of land 40 000
Impairment – goodwill (5 000)
Investment in subsidiary written off (12 000)
Loss due to hail damage to inventories (9 000)
Carrying amount of expropriated land (5) (70 000)
Proceeds on expropriation of land (4) (5) 55 000
Auditor’s remuneration 40 000
23

(3) Disclosure requirements of IAS 1.97 – material items

(4) 70 000 – 15 000 = 55 000
(5) The carrying amount and proceeds should be accounted for separately in terms of
IAS 16.71 and IAS 16.74(d).
Ape Ltd was incorporated on 1 January 20.1, and profit for the year ended
31 December 20.1 amounted to R90 000.
There were 100 000 ordinary shares in issue throughout the year and the issued non-
cumulative preference share capital has remained unchanged during the year. All shares
were issued on 1 January 20.1.
Ape Ltd had the following transactions, relating to dividends, for the year ended
31 December 20.1:
 Paid an interim ordinary dividend of R10 000 on 30 June 20.1.
 Paid an interim preference dividend of R15 000 on 30 June 20.1.
 The directors proposed a final ordinary dividend of R20 000 and a final preference
dividend of R15 000 on 31 December 20.1.
Required
Calculate and disclose dividends paid and dividend per share for Ape Ltd for the year ended
31 December 20.1 in accordance with the requirements of IAS 1.
APE LTD
31 DECEMBER 20.1
Retained
earnings
Rand
Balance at 1 January 20.1 x

Changes in equity for 20.1
Dividends paid – ordinary (10 000)
– preference (15 000)
Balance at 31 December 20.1 x
Dividend per ordinary share 20.1 (1) 0,10
APE LTD
15. Dividends not recognised as a distribution to owners
A final ordinary dividend of R20 000 (R0,20 per share (2)) was proposed on
31 December 20.1.
24

(1) 10 000/100 000 = 0,10

(2) 20 000/100 000 = 0,20
Use the information provided in the previous question and consider the following additional
information:
The issued share capital of Ape Ltd remained unchanged during the year ended
31 December 20.2.
The dividends proposed by the directors on 31 December 20.1 were approved by the
shareholders at the annual general meeting held on 31 March 20.2. These dividends were
paid on 8 May 20.2.
Interim dividends of R15 000 each were paid to both classes of shareholders on
30 June 20.2.
On 31 December 20.2 the directors proposed a final ordinary dividend of R25 000 and a
final preference dividend of R15 000.
Required
Calculate and disclose dividends paid and dividend per share for Ape Ltd for the year ended
31 December 20.2 in accordance with the requirements of International Financial Reporting
Standards (IFRS).
APE LTD
31 DECEMBER 20.2
Retained
earnings
Rand
Balance 1 January 20.1 x

Balance 31 December 20.1 x
Total comprehensive income for the year x
Balance 31 December 20.2 x
20.2 20.1
Rand Rand
Dividend per ordinary share (1) (2) 0,35 0,10
25

APE LTD
31 December 20.2.
(1) 10 000/100 000 = 0,10

(2) (20 000 + 15 000)/100 000 = 0,35
(3) 25 000/100 000 = 0,25
Roux Ltd had 700 000 ordinary shares in issue on 1 March 20.5. On 1 September 20.5,
Roux Ltd issued 500 000 ordinary shares for cash at R4,50 each. On 31 May 20.6, Roux Ltd
issued 750 000 ordinary shares in terms of a rights issue at fair value and then had a
capitalisation issue on 30 November 20.6 in terms of which one ordinary share was issued
for every 100 ordinary shares in issue on this date.
The following information relates to dividends for the year ended:
 28 February 20.6
 An interim ordinary dividend was paid on 31 August 20.5 amounting to R350 000 to
all shareholders registered as such on 15 August 20.5; and
 The directors proposed a final ordinary dividend on 28 February 20.6 amounting to
R420 000.
 28 February 20.7
 The dividend of R420 000 proposed by the directors on 28 February 20.6 was
approved at the shareholders’ annual general meeting and was paid on 31 May 20.6;
 An interim ordinary dividend of R390 000 was paid on 31 August 20.6 to all
shareholders registered as such on 15 August 20.6; and
 The directors proposed a final ordinary dividend on 28 February 20.7 amounting to
R787 800.
Required
In accordance with the requirements of IAS 1, calculate and disclose dividends paid and
dividend per share of Roux Ltd for the year ended:
a. 28 February 20.6; and
b. 28 February 20.7.
26

a. 28 February 20.6
ROUX LTD
28 FEBRUARY 20.6
Retained
earnings
Rand
Balance 1 March 20.5 x
Dividends paid (350 000)
Balance 28 February 20.6 x
Dividend per ordinary share 20.6 (1) 0,50
ROUX LTD
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.6
28 February 20.6.
(1) 350 000/700 000 = 0,50

(2) 420 000/(700 000 + 500 000) = 0,35
b. 28 February 20.7
ROUX LTD
28 FEBRUARY 20.7
Retained
earnings
Rand
Balance 1 March 20.5 x
Note 20.7 20.6

Rand Rand
Dividend per ordinary share (1) 15 0,55 0,50
27

ROUX LTD
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.7
A final ordinary dividend of R787 800 (0,40 per share (1)) (20.6: R420 000 (R0,35 per
share)) was proposed on 28 February 20.7.
(1) Calculation of dividend per ordinary share as adjusted for the capitalisation issue:
Paid or Adjusted
proposed
Rand Rand
20.6
Interim
(R350 000/700 000 shares) 0,50
(R350 000/[700 000 + 700 000/100]) 0,50
Final
(R420 000/1 200 000 shares) 0,35
(R420 000/[1 200 000 + 1 200 000/100]) 0,35
20.7
Interim
(R390 000/1 950 000 shares) 0,20
(R390 000/[1 950 000 + 1 950 000/100]) 0,20
Final
(R787 800/1 969 500 shares) 0,40
(R787 800/1 969 500) 0,40
Paid in 20.6: R0,50

Paid in 20.7: R0,35 + R0,20 = R0,55
Industrial Ltd is a company that specialises in different industrial services.
The financial director of the company is concerned about the accounting implications of two
contracts entered into during the current 20.1 financial year. He has asked you, the audit
partner, to write a detailed report in this regard.
The contracts are as follows:
1. Arrangement with local municipality: removal of wastage
 Industrial Ltd has the right to deliver a wastage removal service to the local
community for a 10-year period.
 Two Nissan 1600 vehicles, to the value of R150 000 each, must be acquired on
1 February 20.1. These vehicles will become the property of the local
municipality after the 10-year period has expired. If the vehicles travel more
than 400 000 km during the 10-year period, an amount of R50 000 must be paid
to the municipality for every 10 000 km travelled in excess of the 400 000 km.
28

 The removal service must be provided at a maximum charge of R120 per month
to residential owners and R200 per month to industrial owners. These maximum
amounts will be reviewed on 1 January 20.5.
 The municipality may not enter into a similar arrangement with any other party
before the 10-year period has elapsed.
 The arrangement is renewable after the 10-year period for a further two-year
period if Industrial Ltd so chooses.
2. Outsourcing of IT department
The IT department of Industrial Ltd was fully outsourced to Outsource Ltd at a

monthly cost of R20 000.
Required
Prepare the report as required by the financial director. Refer to the requirements of
International Financial Reporting Standards (IFRS) which may be applicable and list the
specific disclosure requirements applicable to service concession arrangements in your
report.
REPORT
To: The Financial Director: Industrial Ltd

From: Audit Partner
Re: Accounting implications of contracts entered into
Financial Director,
Herewith the information as required:
1. Arrangement with local municipality: removal of wastage
If the contract is a service concession arrangement, the requirements of SIC 29

Disclosure – Service concession arrangements must be met.
SIC 29 describes a service concession arrangement as an arrangement where the

concession operator acquires the right from the concession provider to provide
services that give the public access to major economic and social facilities.
In exchange for the concession provider’s commitment, the concession operator has to
deliver these services for a specified period and, under specific terms and when
applicable, the concession operator must return at the end of the concession period
those rights received at the beginning of the concession period.
The common characteristic of the above is that the concession operator both receives a
right and incurs an obligation to provide public services.
The arrangement you concluded with the local municipality meets the above definition
as your entity both received a right and incurred a liability to deliver the wastage
removal service to the local community. This right and liability originates from the
contract.
29

Apart from the disclosure requirements in SIC 29, the requirements of IAS 16 must
also be adhered to in respect of the purchased vehicles. If this is an onerous contract,
IAS 37 is also applicable.
The following disclosure, applicable to concession service arrangements, will be

required:
 A description of the arrangement:
 A contract was entered into by Industrial Ltd and the local municipality
whereby Industrial Ltd will deliver a wastage removal service for a period
of 10 years to the local community.
 Significant terms of the arrangement that may affect the amount, timing and
certainty of future cash flows:
 Two Nissan 1600 vehicles, to the value of R150 000 each, must be
acquired on 1 February 20.1. These vehicles will become the property of
the local municipality once the 10-year period has expired. If the vehicles
travel more than 400 000 km during the 10-year period, an amount of
R50 000 must be paid to the municipality for every 10 000 km travelled in
excess of the 400 000 km.
 The service must be provided at a maximum charge of R120 per month to

residential owners and R200 per month to industrial owners. These
maximum amounts will be reviewed on 1 January 20.5.
 The nature and extent of:
 Rights and obligations with regard to the services:
Industrial Ltd has the right to deliver a wastage removal service for a 10-
year period. This right is associated with an equal but opposite liability to
deliver this service. The service must be provided at a maximum charge of
R120 per month to residential owners and R200 per month to industrial
owners. These maximum amounts will be reviewed on 1 January 20.5.
 Obligations to acquire items of property, plant and equipment:
Two Nissan 1600 vehicles, to the value of R150 000 each, must be acquired
on 1 February 20.1.
 Renewal option:
The arrangement is renewable after the 10-year period by choice of

Industrial Ltd for a further two-year period.
 Other rights and/or obligations:
The municipality may not enter into a similar arrangement with any other
party before the end of the concession term.
30

 Changes in the arrangement:
 Since the arrangement was entered into, no changes in the arrangement

have taken place.
2. Outsourcing of IT department
This is not a service concession arrangement as described in SIC 29, since SIC 29 is
not applicable to the outsourcing of internal services.
The normal principles of International Financial Reporting Standards (IFRS) will be

applicable.
The R20 000 will be recognised as a monthly expense.
Please contact me if you have any queries.
Audit partner
31

IAS 2
Inventories
__________________________________________________________________
IAS 2.1 Measurement of inventories – cost of conversion

IAS 2.2 Measurement of inventories – net realisable value
IAS 2.3 Cost formulas
IAS 2.4 Measurement of inventories – allocation of production overheads
IAS 2.5 Disclosure
IAS 2.6 Use of different valuation methods for inventories
IAS 2.7 Joint products and by-products
IAS 2.8 Inventory valuation and disclosure
IAS 2.9 Cash discount and settlement discount
32

Inventories
Bata Ltd manufactures takkies. The normal production capacity of the plant is 500 000 pairs
of takkies per annum. Owing to an increase in local demand, abnormally high production
volumes were reached for the financial year ended 31 December 20.2 with the manufacture
of 550 000 pairs of takkies.
There were 20 000 pairs of takkies on hand at 1 January 20.2, and 540 000 pairs of takkies
were sold during the year. No raw material inventory is maintained as purchases are
matched to production demand.
The following information is available for the year ended 31 December 20.2:
Rand
Opening inventory (pairs of takkies in rand value) 160 000

Raw material purchased 1 375 000
Auditors’ remuneration 120 000
Directors’ remuneration 125 000
Telephone 70 000
Advertising 220 000
Depreciation
Plant 143 000
Equipment (20% factory; 80% administration) 42 000
Delivery vehicles 112 000
Furniture (20% factory; 80% administration) 31 000
Electricity and water – plant 50 000
Repairs and maintenance
Plant (60% fixed) 150 000
Delivery vehicles 25 000
Cost of factory management 120 000
Consumable inventory used in production process 165 000
Wages 2 420 000
Salaries 300 000
Pension fund contributions 55 000
Medical aid fund contributions 35 000
Unemployment insurance fund contributions (UIF) 30 000
It is estimated that 60% of salaries and related contributions to pension fund, medical aid
fund and UIF are attributable to the management of the manufacturing activities. Wages
represent direct labour costs incurred in the production of takkies.
The estimated net realisable value exceeds the cost of the unsold inventory.
Required
Calculate the value of the closing inventory of Bata Ltd at 31 December 20.2 in compliance
with the requirements of International Financial Reporting Standards (IFRS).
33

Inventories
Closing inventory Pairs of

takkies
Opening inventory 20 000

Manufactured 550 000
Sold (540 000)
30 000
Allocation of fixed production overheads Rand
Total fixed production overheads 619 600

Depreciation – plant 143 000
Depreciation – equipment (1) 8 400
Depreciation – furniture (2) 6 200
Repairs and maintenance – plant (3) 90 000
Cost of factory management 120 000
Salaries (4) 180 000
Unemployment insurance contributions (5) 18 000
Pension fund contributions (6) 33 000
Medical aid fund contributions (7) 21 000
(1) 42 000 × 20% = 8 400

(2) 31 000 × 20% = 6 200
(3) 150 000 × 60% = 90 000
(4) 300 000 × 60% = 180 000
(5) 30 000 × 60% = 18 000
(6) 55 000 × 60% = 33 000
(7) 35 000 × 60% = 21 000
Allocation of variable production overheads Rand
Total variable production overheads 275 000

Electricity and water 50 000
Repairs and maintenance – plant (1) 60 000
Consumable inventory used in production process 165 000
(1) 150 000 × 40% = 60 000
Unit cost of finished goods Rand
Raw materials (1) 2,50

Labour cost (2) 4,40
Fixed production overheads (3) 1,13
Variable production overheads (4) 0,50
8,53
(1) 1 375 000/550 000 = 2,50

(2) 2 420 000/550 000 = 4,40
(3) 619 600/550 000 = 1,13
(4) 275 000/550 000 = 0,50
34

Inventories
According to IAS 2.13, in periods of abnormally high production the amount of fixed
production overheads allocated to each unit of production is reduced so that inventory is not
measured above cost, therefore the allocation of fixed production overheads was based on
actual production of 550 000 pairs of takkies and not on normal capacity of 500 000 pairs.
Inventory valuation Rand
Closing inventory (1) 255 900
(1) 30 000 × 8,53 = 255 900
Rascall Ltd is a diversified entity whose reporting date is 31 December. The following
information, relating to inventory, is available:
Telebunken radios
Units manufactured 10 000

Production cost per unit R500
Selling price per unit R600
Units on hand – 31 December 20.2 6 000
– 31 December 20.3 5 700
On 31 December 20.3 the Minister of Finance announced the scrapping of import duties on
imported radios. According to the marketing director, this announcement will enable the
company to import a similar product at R380 per unit which could be sold at an estimated
selling price of R450 per unit.
Product ‘Blush’
Rascall Ltd concluded a contract with Group Six Ltd to deliver 10 000 units of product
Blush at a fixed price of R1 600 per unit. Delivery of the units took place evenly over the
negotiated delivery period. Rascall Ltd manufactured 12 000 units. The production cost per
unit of Blush is R1 000. The units produced in excess of the contract requirements (more
than 10 000) are sold at R800 per unit.
On 31 December 20.3, inventory on hand of Blush was as follows:
Selling price
per unit
Units Rand
Units contracted for 6 800 1 600

Units not contracted for 1 400 800
35

Inventories
Product ‘Jax’
On 31 December 20.2, 2 000 units of Jax were on hand. The cost per unit of Jax is R3 000
and the selling price is R5 000. On 31 December 20.2 the marketing director informed the
board of directors that a competitor would introduce a similar product to the market on
1 January 20.3 at a selling price of R2 000 per unit. The board decided to reduce the selling
price of Jax to R2 000 per unit as from 1 January 20.3 in order to be able to compete in the
marketplace.
On 31 December 20.3 the competitor was liquidated and Rascall Ltd increased the selling
price of Jax to R5 000 per unit. On 31 December 20.3, 1 200 units of Jax were on hand.
Raw material ‘Dol’
Raw material Dol is used in the production of Kosp. Dol was originally purchased at R120
per unit but purchases of raw material are now made from a new foreign supplier, which
resulted in a reduction of the unit cost to R30. On 31 December 20.3, 20 000 units of Dol
were on hand (purchased at a unit cost of R120). The cost of production of a unit Kosp is
R1 000. The drop in cost price per unit of Dol (due to the new supplier) resulted in the
selling price of Kosp being reduced to R940 per unit. Three units of Dol are used to produce
one unit of Kosp.
Required
a. Calculate the value of inventory of Rascall Ltd at 31 December 20.3.

b. Calculate the amount written off or written back (in profit or loss) in terms of
inventory during the year ended 31 December 20.3 in accordance with the
requirements of International Financial Reporting Standards (IFRS).
Rascall Ltd
a. Inventory valuation Rand
Telebunken radios (1) 2 565 000

Product Blush (2) 7 920 000
Product Jax (3) 3 600 000
Raw material Dol (4) 2 000 000
16 085 000
(1) 450 × 5 700 = 2 565 000

(2) (6 800 × 1 000) + (1 400 × 800) = 7 920 000
(3) 1 200 × 3 000 = 3 600 000
(4) 20 000 × (120 – [1 000 – 940]/3) = 2 000 000
b. Amounts written off Rand
Telebunken radios (1) 285 000

Product Blush (2) 280 000
Raw material Dol (3) 400 000
965 000
36

Inventories
(1) 5 700 × (500 – 450) = 285 000

(2) 1 400 × (1 000 – 800) = 280 000
(3) 20 000 × 60/3 = 400 000; the write-off on raw material Dol is limited to the loss
made on the finished product Kosp, since each finished product is manufactured
using three units of raw material.
Amounts written back Rand
Product Jax (1) 1 200 000
(1) 1 200 × [3 000 – 2 000] = 1 200 000
Unique Ltd entered into the following inventory transactions during April 20.6:
April
1 Inventory on hand: 20 units – 14 at R1,80 each

– 6 at R2,00 each
5 Purchased 60 units at R3,00 each
11 Sold 30 units
19 Sold 50 units
30 Sold 60 units
The selling price during April amounted to R6,00 per unit.
Unique Ltd uses a perpetual inventory system. On 30 April 20.6 it was determined that the
normal selling price of the units had dropped to R5,00 per unit because a competitor had
entered the market. Normal selling expenses amount to R1,00 per unit.
Required
a. Calculate the cost of sales in the statement of profit or loss and other comprehensive
income for April and the value of inventory on hand at 30 April 20.6 using each of the
following cost formulas:
i. FIFO (first-in, first-out); and
ii. Weighted average cost method.
b. Disclose the above information in the statement of profit or loss and other
comprehensive income of Unique Ltd for April 20.6 in compliance with the
37

Inventories
a. Cost of inventory and inventory on hand
i. FIFO method
Cost of sales (calc 1) Rand
Cost of inventory sold 482,20

11 April 20.6 67,20
19 April 20.6 150,00
30 April 20.6 265,00
Inventory written down to net realisable value (2) 15,00
Cost of inventory 497,20
Closing inventory Rand
Net realisable value (1) 460,00
(1) 115 × (5,00 – 1,00) = 460,00

(2) 475,00 (calc 1) – 460,00 = 15,00
ii. Weighted average cost method
Cost of sales (calc 2) Rand
11 April 20.6 93,30

19 April 20.6 185,50
30 April 20.6 232,80
Cost of inventory sold 511,60
Rand
Closing inventory
Cost price (calc 2) 445,60
b. Disclosure
UNIQUE LTD
EXTRACT FROM THE STATEMENT OF PROFIT/LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE MONTH ENDED 30 APRIL 20.6
FIFO Weighted
average
Rand Rand
Revenue (1) 840,00 840,00

Cost of sales (497,20) (511,60)
Gross profit 342,80 328,40
(1) (30 + 50 + 60) × 6 = 840
38

Inventories
Calculations
1. FIFO cost formula Number of Price p.u. Total

units Rand Rand
1 April Balance 14 1,80 25,20

Balance 6 2,00 12,00
5 April Purchases 60 3,00 180,00
11 April Sales (30) (67,20)
Sales 14 1,80 25,20
Sales 6 2,00 12,00
Sales 10 3,00 30,00
19 April Sales (50) 3,00 (150,00)
30 April Sales (60) (265,00)
Sales 35 4,00 140,00
Sales 25 5,00 125,00
Total 115 475,00
2. Weighted average cost formula Number of Price p.u. Total

units Rand Rand
1 April Balance 14 1,80 25,20

Balance 6 2,00 12,00
Balance (1) 115 3,11 357,20
11 April Sales (30) 3,11 (93,30)
Balance 85 263,90
Balance (2) 125 3,71 463,90
19 April Sales (50) 3,71 (185,50)
Balance 75 278,40
Balance (3) 175 3,88 678,40
30 April Sales (60) 3,88 (232,80)
115 445,60
(1) 357,20/115 = 3,11

(2) 463,90/125 = 3,71
(3) 678,40/175 = 3,88
Action Ltd, which was incorporated on 1 January 20.3, manufactures product ‘Power’ for
the building industry. Action Ltd has a reporting date of 31 December.
The following information is provided:

 Normal capacity of plant – 25 000 units
39

Inventories
 Market demand per annum – 18 000 units
 Various fixed costs incurred:
Year 20.5
Rand
Total 136 000
Insurance – factory plant and equipment 6 000
Selling expenses 18 000
Depreciation – factory 80 000
Depreciation – offices 10 000
Auditors’ remuneration 16 000
Insurance – delivery vehicles 6 000
 Fixed production overheads have increased annually at the same rate as variable costs.
 Variable costs are as follows at 31 December:
Year 20.5 20.4 20.3

Variable costs R87 120 R77 000 R60 000
 The following inventory was on hand at 31 December:
Year 20.5 20.4 20.3

Units 6 600 7 000 6 000
 All sales are on credit.
Required
Calculate the value of inventory of Action Ltd for the reporting dates 31 December 20.3 to
20.5 in accordance with the requirements of International Financial Reporting Standards
(IFRS).
Fixed production overheads – 20.5 Rand
Insurance – factory plant and equipment 6 000

Depreciation – factory 80 000
86 000
Increase in variable costs 20.5 20.4 20.3
Variable cost per unit (1) R13,20 R11,00 R10,00

% increase (2) 20% 10% –
(1) 87 120/6 600 = 13,20; 77 000/7 000 = 11,00; 60 000/6 000 = 10,00
(2) (11,00 – 10,00)/10,00 × 100 = 10%; (13,20 – 11,00)/11,00 × 100 = 20%
40

Inventories
Units produced 20.5 20.4 20.3
Opening inventory (7 000) (6 000) –

Sales 18 000 18 000 18 000
Closing inventory 6 600 7 000 6 000
Production 17 600 19 000 24 000
Fixed production overheads for 20.3 to 20.5 Rand
20.5 (as calculated) 86 000

20.4 (20% increase – 86 000/120 × 100) 71 667
20.3 (10% increase – 71 667/110 × 100) 65 152
Fixed production overheads to be included for 20.3 to 20.5 Rand
20.5 (86 000/25 000) × 6 600 22 704

20.4 (71 667/25 000) × 7 000 20 067
20.3 (65 152/25 000) × 6 000 15 636
Value of inventory, including fixed production overheads at 31 December
20.5 20.4 20.3

Rand Rand Rand
Variable costs allocated 87 120 77 000 60 000

Fixed production overheads allocated 22 704 20 067 15 636
Total 109 824 97 067 75 636
The following information has been extracted from the trial balance of Tech Ltd, a
manufacturer with a reporting date of 31 December 20.6:
Rand
Dr/(Cr)
Sales (800 000)

Opening inventory
Finished goods 80 000
Work in progress 30 000
Raw materials 50 000
Purchase of raw materials 180 000
Variable production costs
Labour and overheads 120 000
Fixed production overheads 100 000
1. During the year there was an abnormal spillage of raw materials of R20 000.
2. Fixed production overheads are allocated at R2 per unit based on a normal capacity of
50 000 units. The actual production for 20.6 was 40 000 units.
41

Inventories
3. Closing inventory is as follows: Cost Net

realisable
value
Rand Rand
Raw materials 30 000 30 000

Work in progress 50 000 40 000
Finished goods 40 000 60 000
4. Other closing inventory is as follows: Cost

Rand
Stationery 10 000
Packaging materials 15 000
The net realisable value of the above is more than cost.
Tech Ltd uses the first-in, first-out method to value inventory.
Required
Prepare the disclosure related to all matters of inventories in the financial statements of Tech
Ltd for the reporting date 31 December 20.6 in compliance with the requirements of
International Financial Reporting Standards (IFRS).
Disclosure
TECH LTD
EXTRACT FROM THE STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER 20.6
Note Rand
ASSETS
Current assets
Inventory 2 145 000
TECH LTD
EXTRACT FROM THE STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER
20.6
Rand
Revenue 800 000

Cost of sales (calc 4) (440 000)
42

Inventories
TECH LTD
1. Accounting policy
1.1 Inventory
Inventory is valued at the lower of cost and net realisable value. Cost is assigned using
the first-in, first-out cost formula.
2. Inventory Rand
Consumable goods 25 000

Work in progress (calc 2) 50 000
145 000
Calculations
1. Raw materials Rand

Purchases 180 000
Write off of abnormal spillage (20 000)
Closing inventory (30 000)
Transferred to work in progress 180 000
2. Work in progress Rand

Raw materials (calc 1) 180 000
Variable production overheads 120 000
Fixed production overheads (1) 80 000
Closing inventory (2) (50 000)
Transferred to finished goods 360 000
(1) 40 000 × 2,00 = 80 000

(2) No adjustment is made for the net realisable value of work in progress as the
finished goods in which they will be incorporated are expected to be sold at or
above cost based on the comparison of cost and net realisable value of finished
goods at 31 December 20.6. Refer to IAS 2.32.
3. Finished goods Rand

Transferred from work in progress 360 000
Closing inventory (40 000)
Cost of finished goods 400 000
43

Inventories
4. Cost of sales Rand
Cost of finished goods (calc 3) 400 000

Raw material abnormal spillage 20 000
Under recovery of fixed production overheads (3) 20 000
440 000
(3) 100 000 – 80 000 = 20 000
Dumela Ltd purchases computer equipment. Some of this equipment is sold to customers as
part of stand-alone computer installations, while the other computer equipment is installed
by Dumela Ltd in a specific manufacturing plant.
Dumela Ltd currently uses the same cost formulas to value its entire computer inventory.
Required
Discuss, in terms of IAS 2, whether it will be allowed to value the stand-alone computer
equipment differently from the computer equipment used in the manufacturing plant.
Paragraph 25 of IAS 2 requires that either one of two cost formulas (FIFO or weighted
average) may be used to value inventories which have a similar nature and use to an entity.
Paragraphs 25 and 26 of IAS 2 state that where items of inventory have a different nature or
use to the entity, different cost formulas may be justified. However, a difference in
geographical location of inventories is, by itself, not sufficient to justify the use of different
cost formulas.
Dumela Ltd, therefore, could apply one cost formula to the computer equipment sold as
stand-alone computer equipment to customers and another cost formula to the computer
equipment installed in the manufacturing plant. This treatment is allowed since the computer
equipment has a different use in each case.
Zela Ltd was incorporated on 3 January 20.2.
The following information was extracted from the financial records of Zela Ltd for the
reporting date 31 December 20.2:
 Joint products
Total manufacturing cost (material, labour and overheads) to produce 15 000 kg of

finished goods Joint Product 1 (JP1) and Joint Product 2 (JP2) amounted to R150 000.
44

Inventories
The 15 000 kg of finished goods represents 5 000 kg of JP1 and 10 000 kg of JP2. The
net realisable value of both products is in excess of their cost.
At 31 December 20.2, there are 1 000 kg of JP1 and 2 000 kg of JP2 on hand.
 By-product
Product Y and by-product YY are produced during the manufacturing process of

Product Y.
By-product YY can be sold for R3 per unit while Product Y can be sold for R30 per
unit.
The total cost of manufacture of Product Y is R25 per unit.
At 31 December 20.2, there are 10 000 units of Product Y and 100 units of by-product
YY on hand.
Required
Calculate the value of the inventory items on hand as at 31 December 20.2 of Zela Ltd in
accordance with the requirements of International Financial Reporting Standards (IFRS).
Joint products Rand
JP1 (1) 10 000

JP2 (2) 20 000
30 000
(1) (5 000/15 000 × 150 000) × 1 000/5 000 = 10 000

(2) (10 000/15 000 × 150 000) × 2 000/10 000 = 20 000
Primary product Rand
Y (1) 249 700
(1) 10 000 × 25 = 250 000 – (100 × 3) = 249 700
By-product Rand
YY (1) 300
(1) 100 × 3 = 300
Babe Ltd began operations on 5 January 20.4. The following costs were incurred during the
year ended 31 December 20.4:
45

Inventories
Rand
Raw materials purchased 125 000

Direct labour 300 000
Variable production overheads (administrative: 20%; manufacturing: 80%) 250 000
Fixed production overheads 500 000
The level of normal production was expected to be 100 000 units for the year ended
31 December 20.4, whereas the actual level of production was 80 000 units for this period.
Of the raw materials, 80% have been used in the manufacturing process during the year.
Work in progress represents 20% of the total manufacturing costs at 31 December 20.4.
As at 31 December 20.4, 60% of those goods that were finished were sold at cost plus a
10% mark-up.
At year end it was apparent that the entire balance of finished goods could be sold for
R400 000, the entire balance of work in progress could be sold for R220 000 (assuming that
the work in progress will be completed at a further cost of R50 000 and selling costs of
R5 000 will be incurred), and the entire inventory of raw materials could be sold ‘as is’ for
R26 000 (no further costs will be incurred).
Required
a. Calculate the cost per classification of inventory at 31 December 20.4 so as to comply

with the requirements of International Financial Reporting Standards (IFRS).
b. Calculate the net realisable values per classification of inventory at 31 December 20.4
so as to comply with the requirements of International Financial Reporting Standards
(IFRS).
c. Prepare the notes related to all matters of inventories in the financial statements of
Babe Ltd for the year ended 31 December 20.4 so as to comply with the requirements
of International Financial Reporting Standards (IFRS).
a. Cost per classification of inventory Rand
Raw materials at 31 December 20.4

Raw material purchased 125 000
Transfer to work in progress (1) (100 000)
Closing inventory 25 000
Total cost of manufacturing at 31 December 20.4

Raw materials used 100 000
Direct labour 300 000
Variable production overheads (2) 200 000
Fixed production overheads (3) 400 000
Total cost of manufacturing 1 000 000
46

Inventories
Rand
Work in progress at 31 December 20.4
Closing inventory (4) 200 000
Finished goods at 31 December 20.4

Goods finished during 20.4 (5) 800 000
Goods already sold (6) (480 000)
Closing inventory 320 000
(1) 125 000 × 80% = 100 000

(2) 250 000 × 80% = 200 000
(3) 500 000/100 000 × 80 000 = 400 000
(4) 1 000 000 × 20% = 200 000
(5) 1 000 000 × 80% = 800 000
(6) 800 000 × 60% = 480 000
b. Net realisable value per inventory classification Rand

Work in progress (1) 165 000
(1) 220 000 – 50 000 – 5 000 = 165 000
c. BABE LTD
1. Accounting policies
1.1 Inventories
Inventory is measured at the lower of cost and net realisable value using the weighted
average cost formula.
2. Inventories 20.4
Rand

Work in progress (1) 165 000
510 000
(1) Work in progress is valued at net replacement value.
Pices Ltd has the sole right to distribute a certain product in Gauteng. The product is
purchased from the manufacturer and sold at a mark-up of 25% on the cost of the purchase
before any discounts are taken into account.
47

Inventories
Pices Ltd always pays the manufacturer 10 days after the receipt of the product, because
they are then entitled to a 5% settlement discount.
A large customer placed an order for products to the value of R100 000 (sales price) with
Pices Ltd. Pices Ltd purchased the products from the manufacturer and delivered them to
the customer.
Required
a. Prepare the journal entries for the purchase and sale transactions in the records of
Pices Ltd if the customer pays cash on the date of delivery and a cash discount of 10%
is given.
b. Prepare the journal entries for the sale transaction in the records of Pices Ltd if the
customer usually pays 10 days after the product is delivered to the customer and a
settlement discount of 10% is given.
a. Purchase transaction Rand

Dr/(Cr)
Inventory (P or L) (1) 76 000
Creditor (80 000)
Settlement discount allowance account 4 000
Creditor 80 000
Bank (76 000)
Settlement discount allowance account (4 000)
(1) 100 000 × 100/125 = 80 000
80 000 × 95% = 76 000
Sale transaction Rand

Dr/(Cr)
Bank (2) 90 000
Sales (90 000)
Cost of sales (P or L) 76 000

Inventory (76 000)
(2) 100 000 × 90% = 90 000
b. Sale transaction Rand

Dr/(Cr)
Debtor (3) 100 000
Sales (90 000)
Settlement discount allowance account (10 000)
Bank 90 000
Debtor (100 000)
Settlement discount allowance account 10 000
Cost of sales (P or L) 76 000

Inventory (76 000)
(3) 100 000 × 90% = 90 000
48

IAS 7
Statement of cash flows
__________________________________________________________________
IAS 7.1 Statement of cash flows – revaluation of assets and share transactions
IAS 7.2 Consolidated statement of cash flows – indirect method
IAS 7.3 Consolidated statement of cash flows with purchase of subsidiary
IAS 7.4 Consolidated statement of cash flows with equity accounting
IAS 7.5 Statement of cash flows – sundry transactions
IAS 7.6 Statement of cash flows – financial instruments
Note: In all consolidation questions in this chapter, it is assumed that non-controlling

interest is measured at the non-controlling interest’s proportionate share of the
acquiree’s identifiable net assets.
49

You are provided with the following information in respect of Hagar Ltd:
HAGAR LTD
Note 20.5 20.4

Rand Rand
ASSETS
Non-current assets 521 000 258 000
Property, plant and equipment 5 500 000 250 000
Intangible assets 11 000 –
Financial asset at fair value through other
comprehensive income – unlisted shares 6 000 4 000
Investment in subsidiary at cost 4 000 4 000
Current assets 399 500 308 000
Inventories 170 000 140 000
Trade and other receivables 214 000 150 000
Financial assets at fair value through profit
or loss – held for trading 10 500 8 000
Cash and cash equivalents 5 000 10 000
Total assets 920 500 566 000

Total equity 488 080 240 000
Share capital 2 300 000 150 000
Retained earnings 172 760 85 000
Other components of equity 15 320 5 000
Total liabilities 432 420 326 000
Non-current liabilities 251 820 235 000
Long-term borrowings 4 250 000 235 000
Deferred tax 1 820 –
Current liabilities 180 600 91 000
Trade and other payables 103 000 71 000
Current portion of long-term borrowings 10 000 10 000
Current tax payable 47 600 –
Bank overdraft 20 000 10 000
Total equity and liabilities 920 500 566 000
50

HAGAR LTD
Note Rand
Revenue 1 500 000

Cost of sales (1 000 000)
Other income 8 5 500
Other expenses (300 000)
Finance costs (30 000)
Income tax expense 9 (47 740)
Items that will not be reclassified to profit or loss
Property revaluation 8 600
Gain on property valuation 10 000
Tax expense (1 400)
Share investment at fair value through other comprehensive
income 1 720
Gains arising during the year 2 000
Tax expense (280)
HAGAR LTD
31 DECEMBER 20.5
A B C D E
Rand Rand Rand Rand Rand
Balance at 1 January 20.5 150 000 5 000 – 85 000 240 000

Total comprehensive income
for the year – 8 600 1 720 127 760 138 080
Profit for the year – – – 127 760 127 760
Other comprehensive income – 8 600 1 720 – 10 320
Dividends – – – (40 000) (40 000)
Issue of share capital 150 000 – – – 150 000
Balance 31 December 20.5 300 000 13 600 1 720 172 760 488 080
A = Share capital
B = Revaluation surplus
C = Mark-to-market reserve
D = Retained earnings
E = Total equity
51

HAGAR LTD
EXTRACT FROM THE NOTES FOR THE YEAR ENDED
31 DECEMBER 20.5
2. Share capital 20.5 20.4

Rand Rand
Ordinary shares
Authorised and issued – 200 000 shares 300 000 150 000
300 000 150 000
4. Long-term borrowings 20.5 20.4

Rand Rand
B Bank – secured by a first bond over land and

buildings – repayable at R10 000 per annum 150 000 160 000
X Bank – unsecured – repayable on 1 January 20.8 100 000 75 000
250 000 235 000
5. Property, plant and Land Machinery Vehicles Total

equipment and
equipment
Rand Rand Rand Rand
Carrying amount at
1 January 20.5 150 000 50 000 50 000 250 000
Gross carrying amount / cost 150 000 80 000 75 000 305 000
Accumulated depreciation – (30 000) (25 000) (55 000)
Depreciation for the year – (38 000) (5 000) (43 000)
Revaluation 10 000 – – 10 000
Additions 105 000 163 000 – 268 000
Replacements – 20 000 – 20 000
Scrapping of assets – (5 000) – (5 000)
Carrying amount at
31 December 20.5 265 000 190 000 45 000 500 000
Gross carrying amount/cost 265 000 255 000 75 000 595 000
Accumulated depreciation – (65 000) (30 000) (95 000)
7. Profit before tax 20.5

Rand
Profit before tax is shown after taking the following into account:
Depreciation 43 000
Loss on scrapping of machinery 5 000
8. Other income 20.5

Rand
Included in other income are the following:
Investment income – dividends received 5 000
Fair value adjustment – held for trading investment 500
52

9. Income tax expense 20.5

Rand
The income tax expense comprises the following:
Current tax 47 600
Deferred tax 140
1. Included in trade and other payables is an amount of R2 000 (20.4: R2 000) being
dividends payable to shareholders. This is the outstanding amount in respect of
ordinary dividends.
2. The company purchased additional land and machinery during the year thereby
increasing the capacity of the company. A machine with a carrying amount of R5 000,
on which R3 000 depreciation has been written off, was scrapped during the year and
replaced by a similar machine at a cost of R20 000.
3. A patent to manufacture equipment for aircrafts was acquired on 30 December 20.5 and
therefore no amortisation was necessary.
4. Included in trade and other receivables is an amount of R4 000 (20.4: Rnil) related to
prepaid expenses.
5. A normal SA tax rate of 28% and a CGT rate of 14% are assumed.
6. The bank overdraft is repayable on demand and forms an integral part of Hagar Ltd’s
cash management activities. The bank balance often fluctuates from being positive to
overdrawn.
Required
Prepare the statement of cash flows, using the direct method, of Hagar Ltd for the year
ended 31 December 20.5 in accordance with the requirements of International Financial
Reporting Standards (IFRS). Ignore comparative amounts.
HAGAR LTD
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED
31 DECEMBER 20.5
Note Rand
Cash flows from operating activities 119 000

Cash receipts from customers (calc 1) 1 440 000
Cash paid to suppliers and employees (calc 2) (1 254 000)
Cash generated from operations 1 186 000
Dividends received* 5 000
Interest paid (30 000)
Dividends paid** (calc 3) (40 000)
Purchase of shares held at fair value through profit or loss***
(calc 4) (2 000)
53

Note Rand
Cash flows from investing activities (299 000)

Purchase of property, plant and equipment 2 (288 000)
Additions to property, plant and equipment (268 000)
Replacement of property, plant and equipment (20 000)
Purchase of patents and trademarks (1) (11 000)
Cash flows from financing activities 165 000

Proceeds from long-term borrowings (calc 6) 3, 5 25 000
Repayment of long-term borrowings (calc 6) 3, 5 (10 000)
Proceeds from issue of shares (calc 5) 150 000
Net decrease in cash and cash equivalents (15 000)
Cash and cash equivalents at beginning of year 4 –
Cash and cash equivalents at end of year 4 (15 000)
* Could also be classified as investing activities, but is classified consistently as

operating activities in this chapter.
** Could also be classified as financing activities, but is classified consistently as
operating activities in this chapter.
*** In compliance with IAS 7.14(g) and .15 and .16(d).
(1) 11 000 – 0 = 11 000
HAGAR LTD
1. Reconciliation of cash generated from operations and profit before tax (not
required by IAS 7)
Rand
Profit before tax 175 500

Adjustments
Investment income (5 000)
Fair value adjustment – Held for trading investment (500)
Interest paid 30 000
Loss on scrapping of assets 5 000
Depreciation 43 000
Profit before changes in working capital 248 000
Changes in working capital (62 000)
Increase in trade and other receivables (1) (64 000)
Increase in inventories (calc 2) (30 000)
Increase in trade and other payables (calc 2) 32 000
Cash generated from operations 186 000
(1) 214 000 – 150 000 = 64 000
54

2. Purchases of property, plant and equipment Rand
Additions to land and buildings 105 000

Additions to machinery and equipment 163 000
Replacement of machinery and equipment 20 000
288 000
3. Increase in long-term borrowings Rand
Loans raised (calc 6) 25 000

Loans repaid (calc 6) (10 000)
15 000
4. Reconciliation of liabilities arising from financing and other activities
20.4 Cash Non-cash 20.5

flows changes*
Rand Rand Rand Rand
Financing activities
Long-term borrowings 235 000 250 000
Current portion of long-term
borrowings 10 000 10 000
Total long-term borrowings (1) 245 000 15 000 – 260 000
Other activities
Cash and cash equivalents (other
than bank overdraft) (10 000) 5 000 (5 000)
Bank overdraft (IAS 7.8) (2) 10 000 10 000 – 20 000
Cash and cash equivalents – 15 000 – 15 000
* Included for illustration purposes only
(1) See note 3.

(2) IAS 7.44E requires separate disclosure of changes in assets and liabilities
classified in financing activities (i.e. long-term borrowings) from changes in other
assets and liabilities included in other categories (i.e. bank overdraft).
Calculations
1. Cash receipts from customers Rand
Revenue 1 500 000

1 440 000
(1) (214 000 – 4 000) – 150 000 = 60 000
55

2. Cash paid to suppliers and employees Rand
Cost of sales 1 000 000

Increase in inventories (1) 30 000
Increase in trade and other payables (2) (32 000)
Other costs paid in cash 256 000
Other expenses per statement of profit or loss and other
comprehensive income 300 000
Non-cash items:
Loss on scrapping of assets (5 000)
Depreciation (3) (43 000)
Prepaid expenses (4) 4 000
1 254 000
(1) 170 000 – 140 000 = 30 000

(2) (103 000 – 2 000) – (71 000 – 2 000) = 32 000
(3) 38 000 + 5 000 = 43 000
(4) 4 000 – 0 = 4 000
3. Dividends paid Rand
Amounts unpaid at beginning of year 2 000

Amounts debited against retained earnings 40 000
Amounts unpaid at end of year (2 000)
40 000
4. Purchase of shares held at fair value through profit or Rand

loss – listed
Opening balance 8 000

Fair value adjustment 500
Closing balance (10 500)
Purchases 2 000
Purchase of shares at fair value through other comprehensive Rand

income – unlisted
Opening balance 4 000

Mark-to-market reserve 2 000
Closing balance (6 000)
Purchases –
5. Proceeds on issue of shares Rand
Shares issued (1) 150 000
(1) 300 000 – 150 000 = 150 000
56

6. Movement in long-term borrowings Rand

Opening balance (1) 245 000
Movements 15 000
Loans raised (2) 25 000
Loans repaid (3) (10 000)
Closing balance (4) 260 000
(1) 235 000 + 10 000 = 245 000

(2) 100 000 – 75 000 = 25 000
(3) 160 000 – 150 000 = 10 000
(4) 250 000 + 10 000 = 260 000
The following information is obtained from Strike It Rich Ltd at 31 December 20.14:
STRIKE IT RICH LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER 20.14
20.14 20.13
Rand Rand
ASSETS
Non-current assets 234 995 000 216 580 000
Property, plant and equipment 234 995 000 216 580 000
Current assets 112 870 000 89 444 000
Inventories 41 000 000 45 000 000
Trade and other receivables 38 020 000 28 000 000
Financial assets held at fair value through profit or
loss – held for trading 750 000 340 000
Cash and cash equivalents 33 100 000 16 104 000
Total assets 347 865 000 306 024 000

Total equity 190 321 000 145 600 000
Equity attributable to owners of the parent 185 821 000 142 100 000
Share capital 100 000 000 100 000 000
Retained earnings 84 696 000 41 000 000
Other components of equity 1 125 000 1 100 000
Non-controlling interest 4 500 000 3 500 000
Total liabilities 157 544 000 160 424 000
Non-current liabilities 112 169 000 113 354 000
Long-term borrowings 112 140 000 113 354 000
Current liabilities 45 375 000 47 070 000
Trade and other payables 23 361 000 28 626 000
Current tax payable 18 800 000 15 030 000
Shareholders for dividends 2 000 000 2 200 000
Current portion of long-term borrowings 1 214 000 1 214 000
Total equity and liabilities 347 865 000 306 024 000
57


CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND
OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED
31 DECEMBER 20.14
Rand
Revenue 438 580 000

Gross profit 180 430 000
Other income 315 000
Other expenses (115 360 000)
Income tax expense (18 829 000)
Profit for the year 46 246 000
Total comprehensive income for the year 46 246 000
Owners of the parent 45 021 000
Non-controlling interest 1 225 000
46 246 000
46 246 000

EXCERPT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN
EQUITY FOR THE YEAR ENDED 31 DECEMBER 20.14
A B C D E
Balance at
1 Jan 20.14 100 000 000 1 100 000 41 000 000 3 500 000 145 600 000
Changes in
equity for 20.14
Total compre-
hensive income
for the year – – 45 021 000 1 225 000 46 246 000
Dividends –
ordinary
shares – – (1 300 000) (225 000) (1 525 000)
Transfer to
asset replace-
ment reserve – 25 000 (25 000) – –
Balance at
31 Dec 20.14 100 000 000 1 125 000 84 696 000 4 500 000 190 321 000
A = Share capital
B = Asset replacement reserve
C = Retained earnings
D = Non-controlling interest
E = Total equity
58

1. Included in profit before tax is the profit made on the expropriation of land of a
subsidiary in which Strike It Rich Ltd has an 80% interest. This land had a cost
(carrying amount) of R100 000 at 1 January 20.14. The other investment in land was
made in order to expand future operations.
2. The carrying amount of motor vehicles sold during the year was R10 000 at
1 January 20.14.
3. The carrying amount of equipment sold during the year was R750 000. Plant and
equipment was only acquired to maintain present production capacity.
4. Other expenses consist of the following: Rand
Depreciation – vehicles 1 314 000

– plant and equipment 13 996 000
Sundry expenses 100 000 000
Loss on sale of equipment 50 000
5. Other income consists of the following: Rand
Fair value adjustment – held for trading investments 100 000

Investment income – listed investment – dividends received 85 000
Profit on sale of vehicle 5 000
Profit on expropriation of land 125 000
6. Property, plant and equipment is made up as follows:
20.14 20.13
Rand Rand
Land and buildings 180 000 000 150 000 000

Plant and equipment 49 739 000 60 000 000
Vehicles 5 256 000 6 580 000
The tax bases are equal to the carrying amounts of the property, plant and equipment.
7. The income tax expense in the statement of profit or loss and other comprehensive
income consists of the following:
Rand
Current tax 18 800 000

Deferred tax 29 000
18 829 000
A tax rate of 29% is assumed.
Required
Prepare the consolidated statement of cash flows, using the indirect method, of the Strike It
Rich Ltd Group as it would appear in the published consolidated financial statements at
31 December 20.14. Ignore comparative amounts. Your answer must comply with the
59


CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR
ENDED 31 DECEMBER 20.14
Note Rand
Cash flows from operating activities 51 855 000
Adjustments
Profit on expropriation of land (125 000)
Depreciation (7) 15 310 000
Loss on sale of equipment 50 000
Fair value adjustment – held for trading investment (100 000)
Dividends received (85 000)
Profit on sale of vehicle (5 000)
80 430 000
Decrease in inventories (1) 4 000 000
Increase in trade and other receivables (2) (10 020 000)
Decrease in trade and other payables (3) (5 265 000)
Dividends received 85 000
Income taxes paid (calc 4) (15 030 000)
Dividends paid (8) (1 725 000)
Purchases of financial assets held at fair value through profit
or loss (6) (310 000)
Cash flows from investing activities (33 645 000)
Purchase of property, plant and equipment (34 585 000)
Replacement of plant and equipment (calc 2) (4 485 000)
Additions to land and buildings (calc 1) (30 100 000)
Proceeds on sale of property, plant and equipment (4) 940 000
Cash flows from financing activities
Payment of long-term borrowings (5) 1 (1 214 000)
Net increase in cash and cash equivalents 16 996 000
Cash and cash equivalents at beginning of year 16 104 000
Cash and cash equivalents at end of year 33 100 000
(1) 45 000 000 – 41 000 000 = 4 000 000

(2) 38 020 000 – 28 000 000 = 10 020 000
(3) 23 361 000 – 28 626 000 = 5 265 000
(4) 700 000 (calc 2) + 15 000 (calc 3) + 225 000 (calc 1) = 940 000
(5) (112 140 000 + 1 214 000) – (113 354 000 + 1 214 000) = 1 214 000
(6) 750 000 – 340 000 – 100 000 = 310 000
(7) 1 314 000 + 13 996 000 = 15 310 000
(8) 1 500 000 (calc 5) + 225 000 (calc 6) = 1 725 000
60


1. Reconciliation of liabilities arising from financing activities
20.13 Cash Non-cash 20.14

flows changes*
Rand Rand Rand Rand

Current portion of long-
term borrowings 1 214 000 1 214 000
Total long-term
borrowings 114 568 000 (1 214 000) – 113 354 000
* Included for illustration purposes only.
Calculations
1. Land Rand
Balance 1 January 20.14 150 000 000

Carrying amount of land expropriated (100 000)
149 900 000
Balance 31 December 20.14 (180 000 000)
Land purchased for expansion (30 100 000)
Proceeds on expropriation of land (1) 225 000
(1) 100 000 + 125 000 = 225 000
2. Plant and equipment Rand

Carrying amount of equipment sold (750 000)
59 250 000
Depreciation (13 996 000)
45 254 000
Purchased for purposes of replacement (4 485 000)
Proceeds on sale (1) 700 000
(1) 750 000 – 50 000 = 700 000

Rand
3. Vehicles

Carrying amount of vehicles sold (10 000)
Balance 31 December 20.14 5 256 000
61

Rand
Proceeds on sale (1) 15 000
(1) 10 000 + 5 000 = 15 000
4. Income taxes paid Rand
Amounts unpaid at beginning of year 15 030 000

Amounts debited to the statement of profit or loss and other
comprehensive income – current tax 18 829 000
Amounts unpaid at end of year (1) (18 829 000)
Cash amounts paid 15 030 000
(1) 18 800 000 + 29 000 = 18 829 000
Amounts unpaid at beginning of year 2 200 000

Amounts debited against retained earnings 1 300 000
Amounts unpaid at end of year (2 000 000)
6. Dividend paid to non-controlling shareholders Rand

Share of profit 1 225 000
4 725 000
Dividend paid to non-controlling shareholders 225 000
Dukki Ltd acquired 80% of the shares in Pompies Ltd for R420 000 on 31 March 20.5 when
Pompies Ltd's assets and liabilities, fairly valued, were as follows:
Rand
Land and buildings 400 000

Plant and equipment 50 000
Vehicles 30 000
Current assets 100 000
Trade and other receivables 50 000
Inventories 40 000
Cash 10 000
Trade payables (45 000)
Long-term borrowings – X Bank (105 000)
Net assets at acquisition 430 000
After the consolidated financial statements for the year ended 31 December 20.5 had been
prepared, you were approached to assist the company in preparing the consolidated
statement of cash flows.
62

The following abridged information was presented to you:
DUKKI LTD GROUP

31 DECEMBER 20.5
20.5 20.4
Rand Rand
ASSETS
Goodwill 76 000 –
Share investment at fair value through other
comprehensive income 10 000 000 15 000 000
Deferred tax 3 000 000 –
Current assets 184 390 000 116 400 000

Inventories 52 310 000 64 104 000
Total assets 456 292 000 357 380 000

Total equity 236 505 000 178 590 000
Share capital 50 000 000 50 000 000
Other components of equity – 4 250 000
Non-controlling interest 367 000 –
Deferred tax – 750 000
Short-term borrowings 3 000 000 4 000 000
DUKKI LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED
31 DECEMBER 20.5
Rand
Revenue 471 270 000

63

Rand

Other comprehensive loss
Items that will not be reclassified to profit or loss
Share investment at fair value through other comprehensive income (4 250 000)
Loss made during the year (5 000 000)
Tax saving 750 000
Non-controlling interest 281 000
62 079 000
Non-controlling interest 281 000
57 829 000
DUKKI LTD GROUP

EXCERPT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN
EQUITY FOR THE YEAR ENDED 31 DECEMBER 20.5
A B C D E
Balance at
1 Jan 20.5 50 000 000 4 250 000 124 340 000 – 177 590 000
Changes in
equity for 20.5
Total compre-
hensive
income for
the year – (4 250 000) 61 798 000 281 000 57 829 000
Profit for the year – – 61 798 000 281 000 62 079 000
Other compre-
hensive loss – (4 250 000) – – (4 250 000)
Non-controlling
interest at
acquisition – – – 86 000 86 000
Balance at
31 Dec 20.5 50 000 000 – 186 138 000 367 000 236 505 000
A = Share capital
B = Mark-to-market reserve
D = Non-controlling interest
E = Total equity
64

1. Depreciation for the year 20.5
Rand
Plant and equipment 12 000 000
Vehicles 234 000
12 234 000
2. Other expenses
Interest paid of R5 200 000 is included in other expenses. An unrealised foreign

exchange loss of R10 000 000 on the loan from X Bank is also included in other
expenses.
3. No dividends were declared or paid during the past two years.
4. Land and buildings were acquired to facilitate growth.
5. Long-term borrowings consist of the following:

20.5 20.4
Rand Rand
X Bank (including subsidiary) 109 990 000 –

Y Bank 40 000 000 120 000 000
6. The current portion of long-term borrowings consist of the following:
20.5 20.4
Rand Rand
X Bank 1 000 000 –

Y Bank 40 000 000 40 000 000
7. Property, plant and equipment are made up as follows:

20.5 20.4
Rand Rand
Land and buildings 210 000 000 165 000 000

Plant and equipment 48 050 000 60 000 000
Vehicles 776 000 980 000
8. The fair value of the share investment at fair value through other comprehensive
income decreased by R5 000 000 on 31 December 20.5.
9. Assume a tax rate of 30% and a CGT rate of 15%.
10. Other income consists of rent received.
11. Income tax expense consists of:

20.5
Rand

Deferred tax (3 000 000)
26 605 000
65

Required
Prepare the consolidated statement of cash flows, using the direct method, of the Dukki Ltd
Group for the year ended 31 December 20.5 in accordance with the requirements of
International Financial Reporting Standards (IFRS). Ignore comparative amounts.
DUKKI LTD GROUP

ENDED 31 DECEMBER 20.5
Note Rand

Cash generated from operations 1 102 734 000
Interest paid (5 200 000)

Additions to property, plant and equipment (calc 1) 3 (44 600 000)
Acquisition of interest in subsidiary 2 (410 000)
Cash flows from financing activities 19 885 000

Proceeds from long-term borrowings (calc 3) 4 100 885 000
Repayment of long-term borrowings (calc 3) 4 (80 000 000)
Payment of short-term borrowings (calc 7) 4 (1 000 000)
Net increase in cash and cash equivalents 38 504 000
DUKKI LTD GROUP

1. Reconciliation of cash generated from operations and profit before tax

(not required by IAS 7)
Rand

Adjustments
Depreciation 12 234 000
Unrealised currency loss 10 000 000
Interest paid 5 200 000
Profit before changes in working capital 116 118 000
Changes in working capital (13 384 000)
Decrease in inventories (calc 6) 11 834 000
Increase in trade and other receivables (calc 5) (41 230 000)
Increase in trade and other payables (calc 6) 16 012 000
66

2. Acquisition of interest in subsidiary Rand
During the year the group acquired an 80% interest in subsidiary

Pompies Ltd. The fair value of assets acquired and liabilities
assumed were as follows:
Property, plant and equipment 480 000

Inventories 40 000
Trade and other receivables 50 000
Cash and cash equivalents 10 000
Trade and other payables (45 000)
Long-term borrowings (105 000)
Net assets acquired 430 000
Non-controlling interest (20%) (86 000)
Goodwill at acquisition (1) 76 000
Total consideration 420 000
Less: Cash and cash equivalents of subsidiary (10 000)
Net cash outflow 410 000
(1) 420 000 – (430 000 × 80%) = 76 000

3. Purchase of property, plant and equipment Rand
Additions to land and buildings (calc 1) 44 600 000
20.4 Cash flows Non-cash changes 20.5

A B
Long-term 120 000 000 149 990 000

borrowings
Current portion
of long-term
borrowings 40 000 000 41 000 000
Total long-term
borrowings 160 000 000 20 885 000 105 000 10 000 000 190 990 000
Short-term
borrowings 4 000 000 (1 000 000) – – 3 000 000
164 000 000 19 885 000 105 000 10 000 000 193 990 000
A = Acquisition
B = Exchange differences
Calculations
1. Land and buildings Rand

Acquisition of Pompies Ltd 400 000
165 400 000
Purchase of land and buildings 44 600 000
67

2. Other assets A B
Rand Rand
Balance 1 January 20.5 60 000 000 980 000

Acquisition of Pompies Ltd 50 000 30 000
60 050 000 1 010 000
Depreciation (12 000 000) (234 000)
Balance 31 December 20.5 48 050 000 776 000
A = Plant and equipment

B = Vehicles
3. Long-term borrowings X Bank Y Bank

Rand Rand
Balance 1 January 20.5 (1) – 160 000 000

Acquisition of Pompies Ltd 105 000 –
Loans acquired 100 885 000 –
Loans repaid – (80 000 000)
Unrealised exchange loss 10 000 000 –
Balance 31 December 20.5 (2) (3) 110 990 000 80 000 000
(1) 120 000 000 + 40 000 000 = 160 000 000

(2) 40 000 000 + 40 000 000 = 80 000 000
(3) 109 990 000 + 1 000 000 = 110 990 000
Amounts unpaid at beginning of year (1) 8 050 000

comprehensive income (2) 25 855 000
Amounts unpaid at end of year (3) –
(1) 7 300 000 + 750 000 = 8 050 000

(2) 26 605 000 – 750 000 = 25 855 000
(3) 3 000 000 – 3 000 000 = 0
Revenue 471 270 000

Increase in trade and other receivables (1) (41 230 000)
Other income – rent received 406 000
430 446 000
(1) (83 410 000 – 50 000) – 42 130 000 = 41 230 000
68


Decrease in inventory (1) (11 834 000)
Increase in trade and other payables (2) (16 012 000)
Other costs paid in cash 188 014 000
comprehensive income 215 448 000
Non-cash items
Foreign exchange loss (10 000 000)
Interest paid shown separately (5 200 000)
327 712 000
(1) (52 310 000 – 40 000) – 64 104 000 = 11 834 000

(2) (22 797 000 – 45 000) – 6 740 000 = 16 012 000
7. Short-term borrowings Rand

Loans repaid (1 000 000)
8. Share investment at fair value through other Rand

comprehensive income
Fair value adjustment (5 000 000)

Rocval Ltd approached you to assist in the preparation of a statement of cash flows for the
group. The following abridged information was obtained from the group's financial
statements at 30 June 20.5:
ROCVAL LTD GROUP

30 JUNE 20.5
20.5 20.4
Rand Rand
ASSETS
Investments in associates 30 543 000 28 403 000
Current assets 85 410 000 132 400 000
Inventories 43 210 000 50 300 000
Total assets 298 953 000 323 803 000
69

20.5 20.4
Rand Rand
Total equity 144 961 000 126 811 000
Share capital 45 000 000 45 000 000
Non-controlling interest 8 205 000 6 503 000
Deferred tax 15 301 000 13 405 000
Shareholders for dividends 3 193 000 –
Short-term borrowings 2 844 000 2 454 000
ROCVAL LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 20.5
Rand
Revenue 376 000 000

Share of profit of associates 2 270 000
Retained equity profit of associates 2 140 000
25 295 000
25 295 000
70

ROCVAL LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE
YEAR ENDED 30 JUNE 20.5
A B C D
Rand Rand Rand Rand
Balance at 1 July 20.4 45 000 000 75 308 000 6 503 000 126 811 000
Profit/total comprehensive
income for the year – 23 361 000 1 934 000 25 295 000
Dividends – (6 913 000) (232 000) (7 145 000)
Balance at 30 June 20.5 45 000 000 91 756 000 8 205 000 144 961 000
A = Share capital
B = Retained earnings
C = Non-controlling interest
D = Total equity
1. Property, plant and equipment consist only of plant and equipment. The proceeds on
disposal of plant and equipment amounted to R43 000. It is estimated that
R31 000 000 of the plant and equipment purchased was done so for the expansion of
operations.
2. Depreciation for the year amounted to R34 050 000 and the profit on sale of plant and
equipment was R11 000. Both amounts have been included in other expenses.
3. Interest paid for the year amounted to R11 000 and are included in other expenses.
4. The income tax expense in the consolidated statement of profit or loss and other
comprehensive income consists of the following:
20.5
Rand
Deferred tax 1 896 000
5. Other income consists of interest received from the bank and debtors.
Required
Prepare the consolidated statement of cash flows, using the direct method, of the Rocval Ltd
Group for the year ended 30 June 20.5 in accordance with the requirements of International
Financial Reporting Standards (IFRS). Ignore comparative amounts.
71

ROCVAL LTD GROUP

ENDED 30 JUNE 20.5
Note Rand
Cash generated from operations 1 79 218 000
Interest received 134 000
Dividends paid (calc 3) (3 952 000)

Purchase of property, plant and equipment (calc 1) (54 082 000)
Replacements of property, plant and equipment (23 082 000)
Additions to property, plant and equipment (31 000 000)
Proceeds on sale of property, plant and equipment 43 000
Cash flows from financing activities (4 106 000)

Repayment of long-term borrowings (calc 6) 2 (4 496 000)
Proceeds from short-term borrowings (calc 7) 2 390 000
Net decrease in cash and cash equivalents (13 600 000)
ROCVAL LTD GROUP

NOTES FOR THE YEAR ENDED 30 JUNE 20.5
1. Reconciliation of cash generated from operations and profit before tax (not
required by IAS 7)
Rand

Adjustments
Depreciation 34 050 000
Gain on sale of property, plant and equipment (11 000)
Interest received (134 000)
Retained equity profit of associate (2 140 000)
Profit before changes in working capital 67 726 000
Changes in working capital 11 492 000
Decrease in inventories (calc 5) 7 090 000
Decrease in trade and other receivables (calc 4) 26 300 000
Decrease in trade and other payables (calc 5) (21 898 000)
72

20.4 Cash flows Non-cash 20.5

changes*
Rand Rand Rand Rand

Current portion of long-
term borrowings 4 496 000 4 496 000
Total long-term
borrowings 116 898 000 (4 496 000) – 112 402 000
Short-term borrowings 2 454 000 390 000 – 2 844 000
119 352 000 (4 106 000) – 115 246 000
* Included for illustration purposes only
Calculations
1. Property, plant and equipment purchased Rand
Carrying amount 1 July 20.4 163 000 000

Carrying amount of property, plant and equipment sold (1) (32 000)
128 918 000
Carrying amount 30 June 20.5 (183 000 000)
Increase in property, plant and equipment (54 082 000)
For expansion of activities 31 000 000
Replacement of property, plant and equipment (23 082 000)
(1) 43 000 – 11 000 = 32 000
Amounts unpaid at beginning of year (1) 43 540 000

Amounts unpaid at end of year (2) (23 351 000)
(1) 30 135 000 + 13 405 000 = 43 540 000

(2) 8 050 000 + 15 301 000 = 23 351 000
Amounts unpaid at beginning of year –

Amounts debited to retained earnings 6 913 000
Amounts unpaid at end of year (3 193 000)
Dividend paid to non-controlling interest (1) 232 000
Total dividends paid 3 952 000
(1) 6 503 000 + 1 934 000 – 8 205 000 = 232 000
73

Revenue 376 000 000

Decrease in trade and other receivables (1) 26 300 000
402 300 000
(1) 47 700 000 – 21 400 000 = 26 300 000

Decrease in inventories (1) (7 090 000)
Decrease in trade and other payables (2) 21 898 000
Other costs paid in cash 108 274 000
Non-cash items
Gain on sale of plant and equipment 11 000
Interest paid shown separately (11 000)
323 082 000
(1) 43 210 000 – 50 300 000 = 7 090 000

(2) 34 100 000 – 12 202 000 = 21 898 000
6. Long-term borrowings Rand
Balance 1 July 20.4 (1) 116 898 000

Loans repaid (4 496 000)
Balance 30 June 20.5 (2) 112 402 000
(1) 112 402 000 + 4 496 000 = 116 898 000

(2) 107 906 000 + 4 496 000 = 112 402 000
7. Short-term borrowings Rand
Balance 1 July 20.4 2 454 000

Loans raised 390 000
Balance 30 June 20.5 2 844 000
You are provided with the following abridged financial statements:
74

MIRAGE LTD
20.9 20.8
Rand Rand
ASSETS
Non-current assets 514 000 369 550
Property, plant and equipment 514 000 310 000
Deferred tax – 15 500
Investment in subsidiary at cost – 44 050
Current assets 474 660 309 400
Inventories 16 900 4 000
Trade and other receivables 386 000 175 000
Financial asset held at fair value through profit or loss –
Held for trading 16 400 39 400
Cash and cash equivalents 55 360 91 000
Total assets 988 660 678 950

Total equity 626 910 248 500
Share capital 200 000 100 000
Retained earnings 326 910 78 500
Other components of equity 100 000 70 000
Total liabilities 361 750 430 450
Non-current liabilities 204 500 310 000
Current liabilities 157 250 120 450
Trade and other payables 29 090 73 620
Dividends payable 50 000 30 000
Current portion of long-term borrowings 50 460 –
Current tax payable 27 700 16 830
Total equity and liabilities 988 660 678 950
MIRAGE LTD
Rand
Revenue 665 000

Cost of sales (276 000)
Other expenses (73 000)
Income tax expense (121 840)
75

MIRAGE LTD
31 DECEMBER 20.9
A B C D
Rand Rand Rand Rand
Balance at 1 January 20.9 100 000 70 000 78 500 248 500

Profit/total comprehensive income
for the year – – 328 410 328 410
Dividends – – (50 000) (50 000)
Redeemable debentures converted
into shares 100 000 – – 100 000
Transfer to asset replacement
reserve – 30 000 (30 000) –
Balance at 31 December 20.9 200 000 100 000 326 910 626 910
A = Share capital – ordinary

B = Asset replacement reserve
D = Total equity
1. Mirage Ltd makes deliveries on behalf of customers, and its property, plant and
equipment consists only of delivery vehicles.
2. No delivery vehicles were disposed of during the past year. The delivery vehicles that
were bought for replacement purposes were bought at the end of the current year in
terms of an instalment credit agreement. A deposit of R55 000 was paid in cash and
the remaining amount will be paid with interest over a period of 4 years.
3. The current portion of long-term borrowings relates to the current portion of the
instalment credit agreement.
4. Debentures of R200 000 were redeemed at par and the remainder was converted into
ordinary share capital.
5. Cost of sales includes an amount of R68 000 in respect of depreciation on the delivery
vehicles.
6. Included in profit before tax are the following income and expenses:
Rand
Investment income – dividends received 44 100

Gain on sale of subsidiary 178 810
Other costs paid in cash (50 000)
76

7. The income tax expense in the statement of profit or loss and other comprehensive
income consists of the following:
Rand
Current tax 101 840

Deferred tax 20 000
8. Long-term borrowings are made up as follows:

20.9 20.8
Rand Rand
Instalment credit agreement liability 125 000 –

Bank loan 75 000 10 000
Redeemable debentures – 300 000
Required
Prepare the statement of cash flows of Mirage Ltd, using the direct method, for the year
ended 31 December 20.9 in accordance with the requirements of International Financial
Reporting Standards (IFRS). Ignore comparative amounts.
MIRAGE LTD
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED
31 DECEMBER 20.9
Note Rand
Cash flows from operating activities (26 960)

Cash receipts from customers (calc 1) 454 000
Cash paid to suppliers and employees (calc 2) (315 430)
Income taxes paid (calc 3) (90 970)
Dividends paid (calc 4) (30 000)
Cash flows from investing activities 167 860

Proceeds on sale of subsidiary (1) 222 860
Purchase of vehicles
Replacement of vehicles (55 000)
Cash flows from financing activities (176 540)

Redemption of debentures 3 (200 000)
Proceeds from long-term borrowings (2) 3 65 000
Repayment of long-term borrowings (calc 6) 3 (41 540)
Net decrease in cash and cash equivalents (35 640)
Cash and cash equivalents at beginning of year 91 000
Cash and cash equivalents at end of year 55 360
(1) 44 050 + 178 810 = 222 860

(2) 75 000 – 10 000 = 65 000
77

MIRAGE LTD
1. Reconciliation of cash generated from operations and profit before tax

(not required by IAS 7)
Rand

Adjustments
Fair value adjustment – held for trading investment 23 000
Gain on sale of subsidiary (178 810)
Depreciation 68 000
Profit before changes in working capital 407 000
Changes in working capital (268 430)
Increase in trade and other receivables (calc 1) (211 000)
Increase in inventories (calc 2) (12 900)
Decrease in trade and other payables (calc 2) (44 530)
Cash generated from operations 138 570
2. Non-cash investments and financing activities

 At the end of the current year, delivery vehicles to the value of R272 000 were
purchased in terms of an instalment credit agreement of which R217 000 was
financed.
 During the year, debentures to the value of R100 000 were converted at par into
ordinary share capital.
20.8 Cash flows Non-cash changes 20.9

A B

Current portion of
long-term borrowings – 50 460
Total long-term
borrowings (1) 310 000 (176 540) 217 000 (100 000) 250 460
A = New instalment credit agreement

B = Conversion of debentures
(1) See calculation 6 for the amount of R217 000.
Calculations
Revenue 665 000

454 000
(1) 386 000 – 175 000 = 211 000
78

2. Cash paid to suppliers and employees

Rand
Cost of sales 276 000

Non-cash item – depreciation (68 000)
Increase in inventories (1) 12 900
Decrease in trade and other payables (2) 44 530
Other costs paid in cash 50 000
Other income per statement of profit or loss and other
comprehensive income (222 910)
Non-cash items:
Investing activity:
Gain on sale of subsidiary 178 810
Disclosed separately:
315 430
(1) 16 900 – 4 000 = 12 900
(2) 73 620 – 29 090 = 44 530
Amounts unpaid at beginning of year (1) 1 330

Amounts unpaid at end of year (2) (32 200)
Cash amounts paid 90 970
(1) 16 830 – 15 500 = 1 330

(2) 27 700 + 4 500 = 32 200
Amounts unpaid at beginning of year 30 000

Amounts debited against retained earnings 50 000
Amounts unpaid at end of year (50 000)
Cash amounts paid 30 000
5. Delivery vehicles Rand
Carrying amount
Opening balance (given) 310 000
Depreciation (given) (68 000)
Purchases 272 000
Closing balance (given) 514 000
79

6. Repayment of long-term borrowings Rand
Gross purchases 272 000

Cash deposit (55 000)
Total liability in respect of instalment credit agreement 217 000
Outstanding liability in respect of instalment credit agreement
Short-term (50 460)
Long-term (125 000)
Capital amount redeemed in cash 41 540
The following transactions pertain to Alpha Ltd:
Transaction 1
On 1 January 20.0 Alpha Ltd purchased 6 000 10% R200 debentures at R190 each.
Transaction costs amounted to R5 000. Interest is payable annually on 31 December. The
debentures are accounted for as financial assets at amortised cost and are redeemable at par
on 31 December 20.2.
Transaction 2
On 1 January 20.0 Alpha Ltd acquired 5 000 ordinary shares on the JSE Ltd for R50 000
with related transaction costs of R2 000. The fair value of the investment is R70 000 at
31 December 20.0. The shares are accounted for as financial assets at fair value through
other comprehensive income.
Transaction 3
On 2 January 20.0 Alpha Ltd purchased 40 all share index (ALSI) futures for speculative
purposes when the ALSI was 2 400. Transaction costs amounted to R1 000 and the margin
deposit was R50 000. Alpha Ltd sold the futures on 15 August 20.1. The mark-to-market
ALSI is 2 650 at 31 December 20.0 and 2 740 at 15 August 20.1. Each index point trades at
R10. The mark-to-market adjustment is settled on a daily basis. The futures are accounted
for as financial assets at fair value through profit or loss.
Transaction 4
On 1 February 20.0 Alpha Ltd purchased 200 options to purchase shares in Beta Ltd for
R10 per option. Transaction costs amounted to R100. The options will mature on
30 April 20.1 and the exercise price to purchase the shares is R350 per share. The value of
an option was R30 on 30 April 20.1 and that of a share R380. At 31 December 20.0 the
value of an option was R18. The options were designated as the hedging instrument in a
cash flow hedge and you may assume that all hedging criteria in terms of IFRS 9.6.4.1 were
met.
Transaction 5
On 1 August 20.0 Alpha Ltd purchased inventories of $100 000 from a US supplier. The
inventory was shipped free on board (FOB) on the same day. On the same day Alpha Ltd
took out a three-month forward exchange contract (FEC). On 1 November 20.0 Alpha Ltd
80

took out a new three-month FEC. The creditor was settled on 31 January 20.1. The
following exchange rates apply:
Spot rate Forward rate

1 August 20.0 $1 = R4,68 $1 = R5,00
1 November 20.0 $1 = R5,45 $1 = R6,00
31 December 20.0 $1 = R6,25 $1 = R6,50*
31 January 20.1 $1 = R6,10
* One month forward rate
Transaction 6
On 1 October 20.0 Alpha Ltd ordered inventory of $100 000 from a USA supplier. On the
same day Alpha Ltd took out a six-month FEC. The inventory was shipped FOB on
31 January 20.1 and the creditor was settled on 31 March 20.1. The following exchange
rates apply:
Spot rate Forward rate
1 October 20.0 $1 = R5,45 $1 = R6,00
31 December 20.0 $1 = R6,25 $1 = R6,50*
31 January 20.1 $1 = R6,10 $1 = R6,70**
31 March 20.1 $1 = R6,15
None of the inventory had been sold by 31 December 20.1.

* Three months’ forward rate
** Two months’ forward rate
Required
In accordance with the requirements of International Financial Reporting Standards (IFRS),

discuss how each of the above-mentioned transactions will be treated in Alpha Ltd’s
statement of cash flows for all financial years concerned. Alpha Ltd’s year end is
31 December. Assume that all the hedging criteria apply where applicable.
Recommendation: First perform the journal entries of complex transactions for all
years concerned to establish what the transactions’ impact on the
statement of cash flows will be.
Rand
Dr/(Cr)
Transaction 1
1 January 20.0
Investment – debentures (at amortised cost) (SFPos) (1) 1 145 000
Bank (1 145 000)
31 December 20.0
Investment – debentures (at amortised cost) (SFPos) 16 314
Bank (2) 120 000
Interest received (P or L) (3) (136 314)
31 December 20.1
81

Rand
Dr/(Cr)
Bank (2) 120 000
31 December 20.2
Bank (2) 120 000
Bank (6) 1 200 000

Investment – debentures (at amortised cost) (SFPos) (1 200 000)
(1) (6 000 × 190) + 5 000 = 1 145 000

(2) 6 000 × 200 × 10% = 120 000
(3) n = 3, FV = 1 200 000, PV = – 1 145 000, PMT = 120 000. Thus i = 11,90515686
1 145 000 × 11,90515686% = 136 314
(4) (1 145 000 + 16 314) × 11,90515686% = 138 256
(5) (1 145 000 + 16 314 + 18 256) × 11,90515686% = 140 430
(6) 6 000 × 200 = 1 200 000
Discussion of influence on the statement of cash flows
Financial year ended 31 December 20.0
 An investment in debentures of R1 145 000 will be shown as a cash outflow in the

cash flows from investing activities section.
 Interest received (cash inflow) of R120 000 will be shown after a non-cash adjustment
of R16 314, as part of cash flows from operating activities or investing activities
provided that the classification is consistent from one period to the next.
 Remember to adjust for the non-cash movement of R16 314 in the ‘Investment –
debentures’ account when this statement of financial position account is analysed for
purposes of identifying other cash movements in debentures.
 Interest received of R120 000 will be shown as a cash inflow, after a non-cash
adjustment of R18 256, as part of cash flows from operating activities or investing
activities as determined in 20.0.
 Interest received of R120 000 will be shown as a cash inflow, after a non-cash
adjustment of R20 430, as part of cash flows from operating activities or investing
activities as determined in 20.0.
 Redemption of debentures will be shown in the cash flows from investing activities
section of the statement of cash flows to the value of R1 200 000 (cash inflow).
82

Transaction 2 Rand
Dr/(Cr)
1 January 20.0
Investment – shares (at fair value through OCI) (1) 52 000
Bank (52 000)
31 December 20.0
Investment – shares (at fair value through OCI) (2) 18 000
Fair value adjustment* (OCI) (18 000)
* Before closing off to mark-to-market reserve in equity.
(1) 50 000 + 2 000 = 52 000

(2) 70 000 – 52 000 = 18 000
Discussion of influence on statement of cash flows
 An investment in shares of R52 000 (cash outflow) will be shown as part of cash flows
from investing activities.
 The fair value adjustment of R18 000 will not affect the calculation of cash generated
from operations, as it is not included in net profit or loss for the year but is included in
other comprehensive income.
 Remember the non-cash movement of R18 000 in the ‘Investment – shares’ account
when this statement of financial position account is analysed for purposes of
identifying other cash movements in shares.
Transaction 3
Rand
Dr/(Cr)
2 January 20.0
Margin deposit (SFPos) 50 000
Transaction costs / Loss on futures (P or L) 1 000
Bank (51 000)
31 December 20.0
Bank (1) 100 000
Profit on futures (P or L) (100 000)
15 August 20.1
Bank (2) 36 000
Profit on futures (P or L) (36 000)
Bank 50 000
Margin deposit (SFPos) (50 000)
(1) (2 650 – 2 400) × R10 × 40 = 100 000

(2) (2 740 – 2 650) × R10 × 40 = 36 000
Note: Cash flows on SAFEX take place on a daily basis – each day’s profit/(loss) on the
mark-to-market index is settled the next day. A debtor/creditor will therefore be
created at 31 December 20.0 (year end) for the amount payable on the next day.
83

 The margin deposit of R50 000 will be shown as a cash outflow from operating
activities as part of changes in debtors in the ‘cash receipts from customers’ line item
(IAS 7.15).
 Since the net profit on futures of R99 000 (R100 000 – R1 000) is of a cash nature, no
adjustment for non-cash items is necessary to profit before tax for this item.
 The profit/(loss) on the last day’s trading for which a debtor/creditor has been created
(see the note above) shall be shown as a non-cash adjustment to profit before tax,
while the amount will also be included in the normal working capital adjustments.
 The repayment of the margin deposit of R50 000 must be shown as a cash inflow from
operating activities as part of changes in debtors in the ‘cash receipts from customers’
line item (IAS 7.15).
 Profit before tax is not adjusted for the non-cash items, since the total profit on futures
of R36 000 is of a cash nature.
Transaction 4
The question does not specify whether the options are exercised or not – both scenarios are
therefore illustrated.
Scenario 1 – Options are not exercised

Rand
Dr/(Cr)
1 February 20.0
Options (SFPos) (1) 2 100
Bank (2 100)
31 December 20.0
Deferred hedging gain (OCI) (1 500)
30 April 20.1
Deferred hedging gain (OCI) (4) 3 900

Hedging gain (P or L) (3 900)
Options written off (P or L) (5) 6 000

Options (SFPos) (6 000)
84

(1) (200 × 10) + 100 = 2 100

(2) (200 × 18) – 2 100 = 1 500
(3) (200 × 30) – 2 100 – 1 500 = 2 400
(4) 1 500 + 2 400 = 3 900
(5) 2 100 + 1 500 + 2 400 = 6 000
 An investment in options of R2 100 (cash outflow) will be shown as part of cash flows
 Remember to adjust for the non-cash movement of R1 500 in the ‘Options’ account
when this statement of financial position account is analysed for purposes of
identifying other cash movements in options. Also remember that the deferred hedging
gain (OCI) is entirely of a non-cash nature and does not form part of net profit or loss
for the year.
 Remember to adjust for the non-cash movements of R2 400 and R6 000 in the
‘Options’ account when this statement of financial position account is analysed for
purposes of identifying other cash movements in options. Also remember that the
deferred hedging gain (OCI) is entirely of a non-cash nature.
 Adjust profit before tax for the following two non-cash items: hedging gain R3 900
and option write-off R6 000.
Scenario 2 – Options are exercised

Rand
Dr/(Cr)
1 February 20.0
Bank (2 100)
31 December 20.0
30 April 20.1
Investment – shares (9) 6 000

Options (SFPos) (6 000)
Investment – shares (10) 70 000

Bank (70 000)
(6) (200 × 10) + 100 = 2 100
(7) (200 × 18) – 2 100 = 1 500
(8) (200 × 30) – 2 100 – 1 500 = 2 400
(9) 2 100 + 1 500 + 2 400 = 6 000
(10) 200 × 350 = 70 000
85

Note: Although the question does not provide the information, the investment in shares
must be shown at fair value at 31 December 20.1 and a fair value adjustment must
be made accordingly.
 An investment in options of R2 100 (cash outflow) will be shown as a cash flow from
investing activities.
 Remember to adjust for the non-cash movement of R1 500 in the ‘Options’ account
(investment) when this statement of financial position account is analysed for purposes
of identifying other cash movements in options. Also remember that the deferred
hedging gain (OCI) is entirely of a non-cash nature and does not form part of net profit
or loss for the year.
 Remember to adjust for the non-cash movements of R2 400 and R6 000 in the
‘Options’ account (investment) when this statement of financial position account is
analysed for purposes of identifying other cash movements in options.
 Remember to adjust for the non-cash movement of R6 000 in the ‘Investment – shares’
account when this statement of financial position account is analysed for purposes of
identifying other cash movements in this account.
 An investment in shares of R70 000 (cash outflow) will be shown as part of cash flows
 Disclose the conversion of the options into an investment in shares in the notes to the
statement of cash flows as a non-cash investment activity.
Transaction 5
Rand
Dr/(Cr)
1 August 20.0
Inventory (SFPos) (1) 468 000
Trade and other payables (SFPos) (468 000)
1 November 20.0
Bank (2) 45 000
Foreign exchange gain (P or L) (45 000)
31 December 20.0
Foreign exchange loss (P or L) (3) 157 000
FEC asset (SFPos) (4) 50 000

31 January 20.1
Trade and other payables (SFPos) (5) 15 000

FEC asset (SFPos) (50 000)
Bank (7) (600 000)
86

(1) 100 000 × 4,68 = 468 000

(2) 100 000 × (5,45 – 5,00) = 45 000
(3) 100 000 × (6,25 – 4,68) = 157 000
(4) 100 000 × (6,50 – 6,00) = 50 000
(5) 100 000 × (6,25 – 6,10) = 15 000
(6) 100 000 × 6,10 = 610 000
(7) 100 000 × 6,00 = 600 000
(8) 100 000 × (6,50 – 6,10) = 40 000

 The purchase of the inventory and the related creditor will form part of the normal
working capital movements.
 Profit before tax will be adjusted for a non-cash item: a foreign exchange loss of
R157 000. No adjustment is needed for the foreign exchange gain of R45 000, since it
is entirely of a cash nature.
 The FEC asset is of a non-cash nature and will be disclosed separately in the notes to
the statement of cash flows. Profit before tax will be adjusted for a non-cash item: a
foreign exchange gain of R50 000.

 The creditor will form part of the normal working capital movements. The creditor is
paid an amount of R610 000 in cash (R6,10 × R100 000). Remember to adjust for the
non-cash movement of R15 000 in the ‘Creditors’ account when this statement of
financial position account is analysed for purposes of identifying other cash
movements in ‘Creditors’.
 Profit before tax will be adjusted for two non-cash items: foreign exchange gain of
R15 000 and a foreign exchange loss of R40 000.
 The net gain on the FEC of R10 000 [(6,10 – 6,00) × R100 000] will be reflected as
part of working capital movements and represents cash inflow.
 The total cash flow for the year is therefore R600 000 and will be included as part of
cash generated from operations.
Transaction 6
Rand
Dr/(Cr)
1 October 20.0
No entry
31 December 20.0
31 January 20.1
Inventory (SFPos) (3) 610 000

Deferred hedging gain (equity) (9) 70 000

Inventory (SFPos) (70 000)
87

Rand
Dr/(Cr)
31 March 20.1

FEC asset (SFPos) (7) (70 000)
Bank (5) (600 000)
(1) 100 000 × (6,50 – 6,00) = 50 000

(2) 100 000 × (6,70 – 6,50) = 20 000
(3) 100 000 × 6,10 = 610 000
(4) 100 000 × 6,15 = 615 000
(5) 100 000 × 6,00 = 600 000
(6) 100 000 × (6,70 – 6,15) = 55 000
(7) 50 000 + 20 000 = 70 000
(8) 100 000 × (6,15 – 6,10) = 5 000
(9) 50 000 + 20 000 = 70 000
Notes: In accordance with IFRS 9.6.5.11(d)(i) the deferred hedging gain balance in
equity will be removed from equity and set off against the cost of the underlying
asset (inventory).
As none of the inventory has been sold, the cost of sales for the year ended
31 December 20.1 is not affected.

 The deferred hedging gain (OCI) is of a non-cash nature and does not affect net profit
or loss for the year.
 The FEC asset is of a non-cash nature and will be disclosed separately in the notes to
the statement of cash flows.

 The deferred hedging gain is of a non-cash nature and does not affect net profit or loss
for the year or working capital movements for the year.
 The purchase of the inventory and the related creditor will form part of the normal
working capital movements.
 Profit before tax will be adjusted for non-cash items: a foreign exchange loss of
R55 000 on the FEC and a foreign exchange loss of R5 000 on the translation of the
foreign creditor.
 The net cash outflow for the year is R600 000. This consists of a cash payment of
R615 000 to the creditor and a net gain of R15 000 on the FEC. The cash flow will be
reflected as part of cash generated from operations.
88

IAS 8
Accounting policies, changes in accounting
estimates and errors
__________________________________________________________________
IAS 8.1 Evaluation of accounting policy notes

IAS 8.2 Change in accounting estimate – method of depreciation, without tax
IAS 8.3 Change in accounting estimate – method of depreciation, with tax
IAS 8.4 Prior period error
IAS 8.5 Change in accounting estimate (residual value) and prior period error
IAS 8.6 Change in accounting policy (prospectively and retrospectively) (voluntary)
89

Accounting policies, changes in accounting estimates and errors
The following notes regarding accounting policy were prepared for inclusion in the financial
statements of a company:
1. Investment property
Investment property is accounted for on the fair value model.
2. Revenue
Revenue consists of goods invoiced to customers.
3. Leased assets
Lease agreements are capitalised.
4. Unlisted investments
The unlisted investments of the company represent long-term investments and are
carried at fair value.
5. Finance charges on instalment credit purchases
Finance charges on instalment credit purchases of plant and equipment are written off
over the period of the agreement on a straight-line basis.
Required
Suggest improvements to the proposed accounting policy notes in the interest of good
disclosure and reporting practice according to the requirements of IAS 8. You are not
required to rewrite the notes.
1. Investment property
 Suggested improvements:
– Mention the fact that investment property consists of land and buildings held
to earn rental income or for capital appreciation, or both.
– Fair value gains or losses are recognised in profit or loss.
– The fair value is determined at reporting date by an independent sworn
appraiser based on market evidence of the most recent prices obtained in
arm’s-length transactions of similar properties in the same area.
2. Revenue
 Main suggested improvements:
– Mention that revenue is measured at the consideration the entity is expected
to be entitled to.
– The fact that VAT is excluded.
– The fact that revenue is recognised when control of the goods is transferred
to the buyer.
– Any other relevant principles in IFRS 15 applicable to the entity should be
mentioned.
90

3. Leased assets
 Suggested improvements:
– Indication of the treatment of short-term leases and leases for which the
underlying assets are of low value.
– That the asset is capitalised at the present value of the future lease payments,
and a corresponding liability is raised.
– The method which is used for recognition of finance costs over the term of
the lease agreement (effective interest method).
– Indication of methods and rates of depreciation applied to allocate the cost
of such assets (this could, however, be included under the property, plant
and equipment accounting policy note).
4. Unlisted investments
 Suggested improvement:
– Also indicate how gains/losses on fair value adjustments should be treated
(e.g. mark-to-market reserve).
5. Finance charges on instalment credit purchases
 The straight-line write-off of finance costs is not related to the capital balance of
the outstanding liability and is therefore not in accordance with the matching
concept.
 Suggested improvement:
– The policy should state that finance charges are recognised according to the
effective interest method.
After the financial statements for 20.4 had been prepared, Vink Ltd changed its method of
depreciating machinery. The previous pattern of depreciation differed from the actual
pattern of economic benefits derived from the depreciable assets. As a result, the reducing
balance method at 20% p.a. will be applied in future instead of the straight-line method over
five years as in the past.
A summary of the machinery account at 30 June 20.3, the previous financial year end of the
company, is as follows:
Rand
Carrying amount of machinery 400 000

Cost 800 000
Accumulated depreciation (400 000)
No machinery has been purchased or disposed of during the year ended 30 June 20.4.
91

Required
a. Calculate the following amounts resulting from the change in accounting estimate for
inclusion in the financial statements of Vink Ltd for the year ended 30 June 20.4:
 Depreciation for the current year.
 Depreciation for 20.5 and 20.6.
b. Journalise all necessary adjustments to account for the change in accounting estimate
in 20.4.
c. Assume the amounts involved in the change in accounting estimate to be material, and
disclose these in terms of the requirements of International Financial Reporting
Standards (IFRS). Accounting policy notes are not required.

In terms of IAS 16.61, a change in the depreciation method for property, plant and
equipment resulting from a change in the expected pattern of economic benefits from these
assets is not classified as a change in accounting policy, but as a change in accounting
estimate.
a. Depreciation
Rand
Carrying amount – 30 June 20.3 400 000

Depreciation 20.4 – new (1) (80 000)
(1) 400 000 × 20% = 80 000

(2) 320 000 × 20% = 64 000
(3) 256 000 × 20% = 51 200
 Current year’s depreciation = R80 000

 Depreciation for 20.5 = R64 000
 Depreciation for 20.6 = R51 200
b. Correcting journal entries
Correcting journal entries is necessary as the depreciation for 20.4 was calculated by
applying the straight-line method instead of the reducing balance method. The
correcting journal is as follows:
Rand
Dr/(Cr)
Accumulated depreciation – machinery (SFPos) 80 000

Depreciation (P or L) (1) (80 000)
Adjustment of depreciation written off in 20.4
(1) (800 000 × 20%) – (400 000 × 20%) = 80 000
92

c. Disclosure
VINK LTD
Profit before tax is stated after taking into account the following:
Rand
Expenses:
Depreciation 80 000
Change in accounting estimate:

The depreciation method of machinery changed from the straight-line method to the
reducing balance method. This resulted in a decrease in depreciation for the current
year of R80 000 (1) and a cumulative increase in future periods of R80 000 (2).
(1) [(800 000 × 20%) (old method) – 80 000 (new method)] = 80 000 decrease
(2) Future depreciation (old method) 240 000 – future depreciation (new method)
320 000 = 80 000 increase
Records of the property, plant and equipment of Reier Ltd showed the following at
1 July 20.6:
Rand
Machinery at cost 600 000

Accumulated depreciation (292 800)
307 200
In the past the company accounted for depreciation at 20% per annum using the reducing
balance method. However, at a meeting of the board of directors during 20.7 it was decided
that from the beginning of the year ending 30 June 20.7, machinery would be depreciated on
the straight-line method as it better reflects the economic benefits from the machinery. The
total useful life of the machinery had originally been estimated as seven years. (It may be
assumed that this estimate is still correct.) No depreciation charge has been accounted for in
the current year.
The South African Revenue Service allows a wear-and-tear allowance of 20% using the
reducing balance method. Tax rates for the past five years have remained unchanged at 28%.
The company will earn sufficient taxable income in future to justify the creation of a debit
balance on the deferred tax account should it be necessary.
Required
a. Calculate the following amounts for inclusion in the financial statements of Reier Ltd
for the year ended 30 June:
 Depreciation for the current year (20.7).
 Depreciation for 20.8 and 20.9.
93

b. Journalise all necessary adjustments to account for the change in accounting estimate
in 20.7.
c. Discuss the disclosure requirements relating to the above change in accounting
estimate so as to comply with the requirements of International Financial Reporting
Standards (IFRS).
Calculations
Carrying Tax Temporary Deferred Profit or
amount base difference tax loss
Reducing balance method –
old
Cost – 1 July 20.3 600 000 600 000
Depreciation 20.4 (1) (120 000) –
Wear-and-tear allowance (1) – (120 000)
30 June 20.4 480 000 480 000
Depreciation 20.5 (2) (96 000) –
30 June 20.5 384 000 384 000
Depreciation 20.6 (3) (76 800) –
30 June 20.6 307 200 307 200
Straight-line method – new

Depreciation 20.7 (4) (76 800) –
30 June 20.7 230 400 245 760 (15 360) (4 301) 4 301 cr
Depreciation 20.8 (6) (76 800) –
30 June 20.8 153 600 196 608 (43 008) (12 042) 7 741 cr (8)
(1) 600 000 × 20% = 120 000

(2) 480 000 × 20% = 96 000
(3) 384 000 × 20% = 76 800
(4) 307 200/(7 – 3) = 76 800
(5) 307 200 × 20% = 61 440
(6) 307 200/4 = 76 800
(7) 245 760 × 20% = 49 152
(8) 12 042 – 4 301 = 7 741
a. Depreciation
Rand
 Depreciation for current year (20.7) 76 800

 Depreciation per year for 20.8 to 20.9 76 800
b. Journal entries
Rand
Dr/(Cr)
20.7
Depreciation (P or L) 76 800
Accumulated depreciation – machinery (SFPos) (76 800)
94

Rand
Dr/(Cr)
Deferred tax (SFPos) (9) 4 301

Income tax expense (P or L) (4 301)
20.8 (only for illustrative purposes)

Depreciation (P or L) 76 800
Accumulated depreciation – machinery (SFPos) (76 800)
Deferred tax (SFPos) (10) 7 741

(9) 15 360 × 28% = 4 301

(10) (43 008 – 15 360) × 28% = 7 741
c. Disclosure requirements
In terms of IAS 8.39 the nature (change in depreciation method) and amount (increase
in depreciation in current year of R15 360) of a change in an accounting estimate
should be disclosed, including the effect of the change on future periods (decrease in
depreciation in future periods of R15 360).
The following are the statements of comprehensive income of Aaskamp Ltd for the years
ended 31 December:
20.8 20.7
Rand Rand
Revenue 79 500 52 400
Cost of sales (39 000) (26 000)
Gross profit 40 500 26 400
Other expenses (500) (400)
Profit before tax 40 000 26 000
Income tax expense (current tax only) (12 000) (7 800)
Profit for the year 28 000 18 200
Other comprehensive income – –
Total comprehensive income for the year 28 000 18 200
Included in profit before tax for 20.8 is an amount of R7 500 (20.7 – R10 000), which
represents the profit before tax of a division of Aaskamp Ltd.
When Aaskamp Ltd’s tax calculations for 20.8 and 20.7 were prepared, the inexperienced
accountant did not take into account any temporary differences and non-taxable/non-
deductible differences relating to the division. However, after the statement of profit or loss
and other comprehensive income for 20.8 had been prepared, it came to light that the
taxable temporary differences of the division amounted to R17 000 (20.7 – R14 000) and
non-taxable items of the division amounted to R12 500 (20.7 – R14 000).
Apart from the above it was also established that temporary differences occurred for the first
time in 20.7.
95

The South African Revenue Service had already assessed the company on R26 000 for 20.7.
The company applied for a reassessment, which was granted. The tax rate for the past two
years has remained constant at 30%.
Aaskamp Ltd paid a dividend of R10 000 for 20.8 and for 20.7. The retained earnings on
1 January 20.7 amounted to R17 000.
Required
Prepare the statement of profit or loss and other comprehensive income and statement of
changes in equity (retained earnings only) of Aaskamp Ltd for the year ended
31 December 20.8 in accordance with the requirements of International Financial Reporting
Standards (IFRS). The only notes required are those concerning the rectification of the prior
period error and tax.
AASKAMP LTD
Note 20.8 20.7

Rand Rand
Revenue 79 500 52 400
Cost of sales (39 000) (26 000)
Gross profit 40 500 26 400
Other expenses (500) (400)
Income tax expense 1 (8 250) (3 600)
AASKAMP LTD
31 DECEMBER 20.8
Note Retained
earnings
Rand
Balance at 1 January 20.7 17 000
Total comprehensive income for the year – restated 2 22 400
Profit for the year – restated 22 400
Dividends (10 000)
Balance at 31 December 20.7 – restated 29 400
Balance at 31 December 20.8 51 150
96

AASKAMP LTD
1. Income tax expense 20.8 20.7

Rand Rand
Major components of tax expense
Current tax expense: current year 2 550 –
Deferred tax expense: current year 5 700 3 600
Tax expense 8 250 3 600
Tax rate reconciliation % %
Statutory tax rate 30 30

Decrease attributable to:
Non-taxable items (1) (9) (16)
Effective tax rate (2) 21 14
(1) (12 500 × 30%)/40 000 × 100 = 9; (14 000 × 30%)/26 000 × 100 = 16
(2) 8 250/40 000 × 100 = 21; 3 600/26 000 × 100 = 14
2. Correction of prior period error

A correction of the tax calculation in respect of 20.7 was made due to the fact that
temporary differences and non-taxable income were previously ignored in the tax
calculation. Comparative amounts have been appropriately restated. The effect of the
adjustment on the 20.7 results is as follows:
20.7
Rand
Decrease in income tax expense 4 200

Increase in profit for the year 4 200
Increase in deferred tax liability 3 600

Decrease in current tax payable to the South African Revenue Service (7 800)
Increase in equity 4 200
Increase in basic earnings per share xx

Increase in diluted earnings per share xx
Calculations
Current tax of Aaskamp Ltd after correction 20.8 20.7

Rand Rand
Taxable temporary differences (17 000) (14 000)
Non-taxable items (12 500) (14 000)
Taxable income/(tax loss) 10 500 (2 000)
Tax loss brought forward (2 000) –
Taxable income/(tax loss) 8 500 (2 000)
Current tax @ 30% 2 550 Nil
97

Temporary differences after correction 20.8 20.7

Rand Rand
Cumulative taxable temporary differences (1) 31 000 14 000

Tax loss – (2 000)
31 000 12 000
Deferred tax liability (30%) 9 300 3 600
Movement in profit or loss (2) 5 700 3 600
(1) 17 000 + 14 000 = 31 000

(2) 9 300 – 3 600 = 5 700
Total income tax expense after correction

20.8 20.7
Rand Rand
Current tax 2 550 –

Deferred tax – current year 5 700 3 600
Total income tax expense 8 250 3 600
Correcting journal entries

Rand
Dr/(Cr)
20.7
Current tax payable to SARS (SFPos) 7 800
Income tax expense (P or L) 3 600

Deferred tax (SFPos) (3 600)
Correction of error
Rand
Current tax as shown previously (20.7) 7 800

Current tax as revised –
Current tax written back (credit income tax expense) 7 800
Deferred tax (debit income tax expense) (3 600)
Net credit against income tax expense in profit or loss 4 200
98

The following are the abridged trial balances of Stressed Eric Ltd for the years ended
30 June 20.5 and 20.6:
20.6 20.5
Rand Rand
Dr/(Cr) Dr/(Cr)
Share capital (10 000) (10 000)

Net current assets 40 000 6 000
Other expenses 80 000 50 000
Depreciation (straight-line method @ 20% per annum) 16 000 16 000
Electricity expense 15 000 –
Machinery
Cost 90 000 90 000
Accumulated depreciation (56 000) (40 000)
Income tax expense 15 600 9 600
Dividends paid 5 000 5 000
Retained earnings at beginning of year (54 400) (35 000)
Profit on disposal of land (not taxable) (10 000) –
Gross profit (150 000) (100 000)
After the trial balance had been prepared as at 30 June 20.6, the board of directors re-
estimated the residual value of machinery to be R7 000. The original residual value was
R10 000. No machinery has been purchased or disposed of since 20.4. The South African
Revenue Service allows a wear-and-tear deduction of 20% per annum, straight-line, not
allocated on a pro rata basis for parts of the year.
The electricity expense of R15 000 per the trial balance was paid during 20.6, and arose in
20.6 only after the auditors found an underpayment of electricity expense relating to 20.5.
Assume that the amount is material. The South African Revenue Service agreed to reopen
the 20.5 tax assessment.
The following information is available:
20.6 20.5
Revenue (excluding VAT) R300 000 R200 000

Gross profit percentage on sales 50% 50%
The tax rate has remained unchanged at 30% for the past three years. Ignore capital gains
tax.
Required
Prepare the statement of profit or loss and other comprehensive income and statement of
changes in equity (retained earnings only) of Stressed Eric Ltd for the year ended
30 June 20.6 in accordance with the requirements of International Financial Reporting
Standards (IFRS). The only notes required are those relating to the change in accounting
estimate and the prior period error.
99

STRESSED ERIC LTD

INCOME FOR THE YEAR ENDED 30 JUNE 20.6
Note 20.6 20.5

Rand Rand
Revenue 300 000 200 000
Cost of sales (150 000) (100 000)
Gross profit (1) 150 000 100 000
Other income 10 000 –
Other expenses (calc 3) (97 200) (81 000)
Profit before tax 6 62 800 19 000
Income tax expense (calc 4) (15 240) (5 100)
(1) 300 000 × 50% = 150 000; 200 000 × 50% = 100 000
STRESSED ERIC LTD

30 JUNE 20.6
Note Retained
earnings
Rand
Balance at 1 July 20.4 35 000
Total comprehensive income for the year – restated 7 13 900
Dividends (5 000)
Balance at 30 June 20.5 – restated 43 900
Dividends (5 000)
Balance at 30 June 20.6 86 460
STRESSED ERIC LTD


The profit before tax is stated after taking into account the following:
20.6 20.5
Rand Rand
Expenses
Depreciation 17 200 16 000
100

Change in estimate
During the year the residual value was changed. This change in estimate resulted in an
increase in depreciation in the current year of R1 200 (1). The cumulative effect of this
change on future periods will be an increase in depreciation of R1 800 (2).
(1) 17 200 – 16 000 = 1 200

(2) 10 000 old residual value – 7 000 new residual value – 1 200 (1)
7. Correction of prior period error
Electricity was underpaid during 20.5. The resulting outstanding electricity payment
was made during 20.6, after which the comparative amounts have been appropriately
restated. The effect of the adjustment on the 20.5 results is as follows:
20.5
Rand
Increase in other expenses 15 000

Decrease in income tax expense (4 500)
Decrease in profit for the year 10 500
Increase in electricity payable 15 000

Decrease in current tax payable (4 500)
Decrease in equity 10 500
Decrease in basic earnings per share xx

Decrease in diluted earnings per share xx
Calculations
1. Change in accounting estimate 20.6
Accumulated depreciation on 30 June 20.5 40 000

Thus: Expired useful life (1) on 30 June 20.5 2,5 years
Remaining useful life on 1 July 20.5 (5 years total – 2,5 years expired) 2,5 years
Rand
Carrying amount of machinery on 30 June 20.5 (2) 50 000

Revised residual value 7 000
Thus revised depreciation for 20.6 (3) 17 200
Carrying amount on 30 June 20.6 (4) 32 800
(1) 40 000/16 000 = 2,5 years

(2) 90 000 – 40 000 = 50 000
(3) (50 000 – 7 000)/2,5 years = 17 200
(4) 50 000 – 17 200 = 32 800
101

2. Correcting journal entries Rand

Dr/(Cr)
Depreciation (P or L) (5) 1 200
Accumulated depreciation – machinery (SFPos) (20.6) (1 200)
Deferred tax (20.6) (SFPos) 360
Income tax expense (P or L) (360)
Other expenses (P or L) (20.5) 15 000
Electricity payable/Accrued expenses (SFPos) (15 000)
Current tax payable to SARS (SFPos) 4 500
Income tax expense (P or L) (20.5) (4 500)
(5) 17 200 – 16 000 = 1 200
3. Other expenses
20.6 20.5
Rand Rand
Other expenses per trial balance (given) 80 000 50 000
Depreciation
Old residual value – 16 000
New residual value 17 200 –
Prior period error – 15 000
Other expenses 97 200 81 000
4. Income tax expense

20.6 20.5
Rand Rand
Given 15 600 9 600
Correction in deferred tax movement (calc 5) (360) –
Prior period error (6) – (4 500)
15 240 5 100
(6) 15 000 × 30% = 4 500
5. Deferred tax
CA TB TD DT P or L
Dr/(Cr) Dr/(Cr)
After correction
20.5 Machinery (7) 50 000 36 000 14 000 (4 200) 4 200
20.6 Machinery (8) 32 800 18 000 14 800 (4 440) 5 640
(7) 90 000 – (90 000 × 20% × 3) = 36 000
(8) 90 000 – (90 000 × 20% × 4) = 18 000
Before correction
20.5 Machinery 50 000 36 000 14 000 (4 200) 4 200
20.6 Machinery 34 000 18 000 16 000 (4 800) 6 000
Thus correction in movement in deferred tax (9) = 360 cr
(9) 6 000 – 5 640 = 360
102

CA = Carrying amount
TB = Tax base
TD = Temporary difference
DT = Deferred tax balance
P or L = Movement in profit or loss
The following information relating to Galaxy Ltd is available:
 Revenue for 20.7 amounted to R564 000 (20.6 – R315 000).
 Purchases of inventories for the two years were as follows:

– R303 000 (20.7)
– R182 500 (20.6)
 Other expenses
– R100 000 (20.7)
– R78 000 (20.6)
 Profit before tax for 20.7 amounted to R182 000 (20.6 – R62 000).
 Retained earnings at the end of 20.7 amounted to R76 700. No dividends have been
paid in the last few years.
 The tax rate has remained unchanged at 30% for the past four years. Taxable income
was the same as profit before tax for the past four years, except for a penalty of R2
000 which was paid to the local government in 20.7. The South African Revenue
Service did not allow this penalty as a deduction.
The purchase prices of inventories have recently been very volatile and after taking into
account the above information, the directors decided to change the basis for valuing
inventories from the first-in, first-out method (FIFO) to the weighted average cost method,
as it would result in more stable inventory values.
A summary of closing inventories is provided:
20.4 20.5 20.6 20.7

Rand Rand Rand Rand
On the first-in, first-out method 18 000 19 500 27 000 48 000

On the weighted average cost method 19 000 22 900 34 800 51 000
1 000 3 400 7 800 3 000
The South African Revenue Service will only accept the new inventory values from
31 December 20.7 onwards.
103

Required
a. Prepare the statement of profit or loss and other comprehensive income (with notes)
and statement of changes in equity (retained earnings only) of Galaxy Ltd for the year
ended 31 December 20.7 applying the new method of inventory valuation so as to
comply with the requirements of International Financial Reporting Standards (IFRS).
b. Prepare the statement of profit or loss and other comprehensive income, statement of
changes in equity (retained earnings only) and note on change in accounting policy if
the weighted average cost of inventory could not be determined at the end of 20.4 and
20.5.
c. Prepare the statement of profit or loss and other comprehensive income, statement of
changes in equity (retained earnings only) and note on change in accounting policy if
the weighted average cost of inventory could not be determined at the end of 20.6,
20.5 and 20.4.
a. GALAXY LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHEN-
SIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.7
Note 20.7 20.6

Rand Rand
Revenue 564 000 315 000
Cost of sales (1) (286 800) (170 600)
Gross profit 277 200 144 400
Other expenses (100 000) (78 000)
Income tax expense (2) 3 (53 760) (19 920)
(1) 34 800 + 303 000 – 51 000 = 286 800; 22 900 + 182 500 – 34 800 = 170 600
(2) 56 100 (calc 4) – 2 340 (calc 3) = 53 760; 18 600 (calc 4) + 1 320 (calc 3) = 19 920
GALAXY LTD
31 DECEMBER 20.7
Note Retained
earnings/
(accumulated
loss)
Rand
Balance at 1 January 20.6 (calc 5) (93 500)
Change in accounting policy 4 2 380
Restated balance (91 120)
Total comprehensive income for the year (restated) 4 46 480
104

Note Retained
earnings/
(accumulated
loss)
Rand
Balance at 31 December 20.6 (restated) (44 640)

Balance at 31 December 20.7 (3) 78 800
(3) 76 700 + 2 100 (calc 1) = 78 800
GALAXY LTD
1. Accounting policy
1.1 Inventories
Inventories are valued at the lower of cost and net realisable value on the weighted
average cost method.
1.2 Deferred tax

Deferred tax is provided for on temporary differences according to the reporting date
balance liability method.
1.3 Revenue
Revenue consists of net invoiced sales and is measured at the amount of consideration
the entity is expected to be entitled to, excluding VAT. Revenue is recognised when
control of the goods is transferred to the customer.
3. Income tax expense
20.7 20.6
Rand Rand
Major components of tax expense:

Current tax expense: current year (calc 4) 56 100 18 600
Deferred tax expense: current year (calc 3) (2 340) 1 320
53 760 19 920
Tax rate reconciliation 20.7 20.6

% %
Statutory tax rate 30,00 30,00

Non-deductible items (4) 0,34 –
Effective tax rate (5) 30,34 30,00
(4) (2 000 × 30%)/177 200 × 100 = 0,34%

(5) 53 760/177 200 × 100 = 30,34%
105

4. Change in accounting policy
During the year the company changed its accounting policy for the valuation of
inventories from the first-in, first-out method of valuation to the weighted average cost
method as it results in more stable inventory values given the recent volatile inventory
prices.
The change in policy has been accounted for retrospectively and the comparative
amounts have been appropriately restated. The effect of this change in accounting
policy is as follows:
20.7 20.6 20.5

Rand Rand Rand
(Increase)/decrease in cost of sales (4 800) 4 400

Decrease/(increase) in income tax expense 1 440 (1 320)
(Decrease)/increase in profit for the year (3 360) 3 080
Increase in inventory 3 000 7 800 3 400

Increase in deferred tax liability – (2 340) (1 020)
Increase in current tax payable (900) – –
Increase in equity 2 100 5 460 2 380
Adjustment against retained earnings at the

end of 20.5 2 380
(Decrease)/increase in basic earnings per share (xx) xx

(Decrease)/increase in diluted earnings per share (xx) xx
Calculations
1. Inventories
20.7 20.6 20.5

SFPos P or L SFPos P or L SFPos
Old method (48 000) (27 000) (19 500)

New method 51 000 34 800 22 900
Increase in equity 3 000 7 800 3 400
Increase/(decrease) in
profit for the year (4 800) (2) 4 400 (1)
Tax effect @ 30% (900) 1 440 (2 340) (1 320) (1 020)
After tax 2 100 (3 360) 5 460 3 080 2 380
(1) 7 800 – 3 400 = 4 400

(2) 3 000 – 7 800 = (4 800)
106

2. Reconstruction of the statement of profit or loss and other comprehensive income

according to the ‘old’ method to determine 20.6 figures
20.7 20.6
Rand Rand
Income tax expense (3) (55 200) (18 600)
Profit after tax 126 800 43 400
(3) 62 000 × 30% = 18 600; (182 000 + 2 000) × 30% = 55 200
3. Deferred tax CA TB TD DT P or L
Dr/(Cr) Dr/(Cr)
20.5 22 900 19 500 3 400 (1 020) 1 020
20.6 34 800 27 000 7 800 (2 340) 1 320
20.7 51 000 51 000 – – (2 340)
4. Tax calculation 20.7 20.6
Rand Rand
Profit before tax – old 182 000 62 000
Opening inventory: old (previously deducted,
now added back) 27 000 19 500
new (34 800) (22 900)
Closing inventory: old (previously added, now deducted) (48 000) (27 000)
new 51 000 34 800
Profit before tax after change in accounting policy 177 200 66 400
Non-deductible expense
Penalty 2 000
Temporary differences 7 800 (4 400)
Opening inventory: new (accounting) 34 800 22 900
old (taxation) (27 000) (19 500)
Closing inventory (4): new (accounting) (51 000) (34 800)
old (taxation) 51 000 27 000
Taxable income 187 000 62 000
Current tax @ 30% 56 100 18 600
(4) The closing inventory in 20.7 causes no temporary differences since the South
African Revenue Service has accepted the new valuation method.
5. Reconstruction of statement of changes in equity according to the ‘old’ method to
determine 20.6 and 20.5 figures
Retained
earnings/
(accumulated
loss)
Rand
Balance at 31 December 20.7 (given) 76 700
Profit/total comprehensive income for the year (calc 2) (126 800)
Balance at 31 December 20.6 (50 100)
Profit/total comprehensive income for the year (calc 2) (43 400)
107

b. As new inventory values are not available for 20.4 and 20.5, it is impossible to
calculate the effect of the change in policy on 20.6 (opening inventory for 20.6 not
determinable). As a result, the change in accounting policy should be accounted for
retrospectively from 20.7 onwards, resulting in an adjustment to the opening balance
of retained earnings. Comparative amounts will not be restated.
GALAXY LTD
20.7 20.6
Rand Rand
Revenue 564 000 315 000

Cost of sales (1) (286 800) (175 000)
Gross profit 277 200 140 000
Other expenses (100 000) (78 000)
(1) 34 800 + 303 000 – 51 000 = 286 800; 19 500 + 182 500 – 27 000 = 175 000
(2) (177 200 + 2 000) × 30% = 53 760; 62 000 × 30% = 18 600
GALAXY LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31
DECEMBER 20.7
Notes Retained
earnings/
(accumulated
loss)
Rand
Balance at 1 January 20.6 (refer to part a) (93 500)

Change in accounting policy (1) 4 5 460
Restated balance (44 640)
(1) 7 800 × 70% = 5 460
108

GALAXY LTD

During the year, the company changed its accounting policy for the valuation of
method as it would result in more stable inventory values in view of recent volatile
inventory prices.
Full retrospective application of the change was not possible as the company was not
able to determine the new value of inventory at the end of 20.4 and 20.5 due to
deficient costing systems. As a result, the change has been accounted for
retrospectively from the beginning of 20.7 with an adjustment of R5 460 against the
opening balance of retained earnings. The effect of the change in accounting policy is
as follows:
20.7 20.6
Rand Rand
Increase in cost of sales (4 800)
Decrease in income tax expense 1 440
Decrease in profit for the year (3 360)
Increase in inventory 3 000 7 800

Increase in deferred tax liability – (2 340)
Increase in current tax payable (900) –
Increase in equity 2 100 5 460
Adjustment against retained earnings at the end of 20.6 5 460
Decrease in basic earnings per share xx xx

Decrease in diluted earnings per share xx xx
c. As new inventory values are not available for 20.4, 20.5 and 20.6, it is impossible to
calculate the cumulative effect of the change at the beginning of 20.7. As a result, the
new policy is applied prospectively from the earliest date practicable (which will be
the end of 20.7).
GALAXY LTD
20.7 20.6
Rand Rand
Revenue 564 000 315 000
Cost of sales (1) (279 000) (175 000)
Gross profit 285 000 140 000
Other expenses (100 000) (78 000)
109

(1) 27 000 + 303 000 – 51 000 = 279 000

(2) (185 000 + 2 000) × 30% = 56 100; 62 000 × 30% = 18 600
GALAXY LTD
31 DECEMBER 20.7
Retained
earnings/
(accumulated
loss)
Rand
Balance at 1 January 20.6 (refer to part a) (93 500)
GALAXY LTD
During the year the company changed its accounting policy for the valuation of
method as it will result in more stable inventory values in view of recent volatile
inventory prices.
The change in policy could not be accounted for retrospectively, as it was not possible
to determine the cumulative effect of the change at the beginning of 20.7, due to
deficient costing systems. As a result, the change in accounting policy was accounted
for prospectively by adjusting the closing inventory for 20.7. The effect of the change
in accounting policy is as follows:
20.7
Rand
Decrease in cost of sales 3 000
Increase in income tax expense (900)
Increase in profit for the year 2 100
Increase in inventory 3 000

Increase in current tax payable (900)
Increase in equity 2 100
Increase in basic earnings per share xx

Increase in diluted earnings per share xx
110

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ACCOUNTING STANDARDS

A Comprehensive Question Book on

QUESTIONS & SOLUTIONS

Accounting Standards 17e without cropmarks 978148-512-111-4[9].pdf 3 05/12/2016 16:59

Proposed approach to answering questions on the Framework

 QUESTIONS AND SOLUTIONS

FRW.1 Objective of financial statements

PROPOSED APPROACH TO ANSWERING QUESTIONS ON THE ACCOUNTING

The issue is normally to decide whether an item is an:

 Asset or expense – e.g. cost to plant a crop, development costs, etc.

Approach to solving this kind of problem:

3. Apply the fundamental and enhancing qualitative characteristics to determine

4. Take note of the important distinction between recognition and disclosure.

What is the objective in the preparation of financial statements as defined by the

 Suggested solution FRW.1

Accounting Standards 17e without cropmarks 978148-512-111-4[9].pdf 10 05/12/2016 16:59

 Suggested solution FRW.2

A company's financial year ended on 30 September 20.8. On 15 October 20.8 it came to

 Suggested solution FRW.3

‘The conceptual framework is a coherent system of interrelated objectives and fundamentals

(FASB – Statement of Financial Accounting Concepts No. 2.)

Accounting Standards 17e without cropmarks 978148-512-111-4[9].pdf 11 05/12/2016 16:59

With reference to the statement:

Amounts at 31 December 20.1

Total assets R20,8 million

 Suggested solution FRW.4

a. The objective of financial statements is to communicate the financial position,

b. The Framework is described as a coherent system of interrelated objectives and

The Framework can also be applied in circumstances where no standard is issued on a

Accounting Standards 17e without cropmarks 978148-512-111-4[9].pdf 12 05/12/2016 16:59

Definition of expense: Decreases in economic benefits in the form of outflows or depletion

Relevance - Materiality – Amount is material.

Faithful representation – Uncertainty of future economic benefits;

Timeliness – Frequent (annual) financial reporting.

Going concern – Being complied with.

Accrual basis – Expenses should be recognised in the period(s) to which they

Accounting Standards 17e without cropmarks 978148-512-111-4[9].pdf 13 05/12/2016 16:59

Provide a well-reasoned argument, by referring only to the requirements of the Framework,

Accounting Standards 17e without cropmarks 978148-512-111-4[9].pdf 14 05/12/2016 16:59

 Suggested solution FRW.5

1. Tobacco planting cost

 Resource controlled by the entity;

Applying it to the tobacco crop

 Probability of future economic benefits: already discussed in the paragraph

Accounting Standards 17e without cropmarks 978148-512-111-4[9].pdf 15 05/12/2016 16:59

2. Revenue from sales contract

Accounting Standards 17e without cropmarks 978148-512-111-4[9].pdf 16 05/12/2016 16:59

Provide a well-reasoned argument by referring only to the requirements of the Framework as

 Suggested solution FRW.6

a. Recognition is the inclusion in the statement of financial position or the statement of

Accounting Standards 17e without cropmarks 978148-512-111-4[9].pdf 17 05/12/2016 16:59

 Resource under the control of the entity;

Applied to the plantation

 Probability of future economic benefits: As the period prior to expectation of the

 Decrease in economic benefits in the form of the outflow of an asset,

Accounting Standards 17e without cropmarks 978148-512-111-4[9].pdf 18 05/12/2016 16:59

 Suggested solution FRW.7

 Decrease in economic benefits in the form of the outflow of an asset – payment of

Accounting Standards 17e without cropmarks 978148-512-111-4[9].pdf 19 05/12/2016 16:59