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QUESTION 1 90 marks
In addition to other equity investments (all less than 20% interests), Winter Ltd owned shares in three
companies at 31 December 2004, the financial year end of the group. Relevant details of the investments
in the three companies are as follows:
SUMMER LTD
Winter Ltd acquired 60% of the shares in Summer Ltd on 1 August 2003 at a cost of R1 440 000.
Summer Ltd had the following equity balances in its accounting records on the relevant dates:
Description 1 Aug. 2003 31 Dec. 2003 31 Dec. 2004
Share capital (par value: R1 per share)
R
1 000
R
1 000
R
1 000
Share premium 9 000 9 000 9 000
Revaluation reserve plant and
machinery
340 000* 410 000
450 000
Retained income 670 000 830 000 970 000
Total 1 020 000 1 250 000 1 430 000
* The revaluation reserve of R340 000 existed before the revaluation arising from the acquisition by
Winter Ltd was taken into account (see details below).
With the exception of plant and machinery, the tangible assets and liabilities of Summer Ltd were fairly
valued at their carrying amounts in its separate financial statements at 1 August 2003. Plant and
machinery were undervalued by R100 000 on 1 August 2003. Winter Ltd immediately instructed Summer
Ltd to revalue the plant and machinery (with effect from 2 August 2003) in its separate financial
statements. Consequently no adjustments are required to the depreciation charged by Summer Ltd when
the consolidated financial statements of Winter Ltd were prepared. It is not the accounting policy of the
Winter Ltd group to revalue plant and machinery.
Summer Ltd has not recognised any intangible assets on its balance sheet.
Summer Ltd has an internally generated brand name. At the date of acquisition, Winter Ltd requested
professional valuators to perform a formal valuation on the brand name. The valuators used a discounted
cash flow model based on an estimated useful life of eight years, an assessment period with which the
directors of Summer Ltd concurred. As a result of the complexity of all the inputs required for the brand
valuation, the valuation was not available in time for the preparation of the consolidated financial
statements of Winter Ltd for the year ended 31 December 2003. Therefore the notes appropriately
disclosed that the initial accounting was provisional and none of the cost of acquisition was allocated to
the brand in the initial accounting. The valuation, which was received in April 2004, placed a fair value of
R800 000 on the brand at the acquisition date of 1 August 2003.
On 1 August 2003 Summer Ltd had an exclusivity contract with a supplier of a major portion of its
inventory, in terms of which the supplier would not supply to any of the competitors of Summer Ltd. The
contract was expected to last until 31 December 2005 and was valued at R200 000 on 1 August 2003.
However, as a result of changes in fashions during 2004, the value of the contract had declined to
R60 000 by 31 December 2004.
SPRING PLC
Spring Plc is a UK registered company with a functional currency of pound sterling (£). Winter Ltd
purchased 80% of the shares of Spring Plc on 1 January 2002 for £1 million, at which date the equity of
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Spring Plc was £1 050 000. All the identifiable assets and liabilities of Spring Plc were considered to be
fairly valued at their carrying amounts in the financial statements of Spring Plc at the date of acquisition.
The only intangible asset of Spring Plc is a purchased trade mark which had an original cost of £80 000
on 1 January 2000, an estimated useful life of ten years and no residual value.
The following exchange rates applied:
£1:R
1 January 2002
31 December 2002/1 January 2003
1 October 2003
31 December 2003/1 January 2004
Average 2003
1 October 2004
1 November 2004
31 December 2004/1 January 2005
Average 2004
1:13
1:15
1:14
1:11
1:13
1:12
1:11
1:13
1:12
AUTUMN LTD
Winter Ltd acquired 40% of the shares in Autumn Ltd on 1 July 2003 for R900 000. Winter Ltd had a
contractual agreement with another shareholder, who also held 40% of the issued share capital of
Autumn Ltd, that they would jointly control the decision making of Autumn Ltd. Therefore the investment
in Autumn Ltd was treated as a joint venture in the consolidated financial statements of Winter Ltd for the
year ended 31 December 2003. At the beginning of January 2004 the agreement was cancelled and the
investment in Autumn Ltd was accordingly no longer considered to be a joint venture. As Winter Ltd
continues to exercise significant influence over Autumn Ltd, the investment will be accounted for as an
investment in an associate.
At 1 July 2003 the net assets of Autumn Ltd were fairly valued at their carrying amounts in the financial
statements of Autumn Ltd, with the exception of the sole investment property. The investment property
had a carrying value of R600 000 at 1 July 2003. Autumn Ltd accounts for investment property using the
depreciated cost basis and recognises a depreciation expense of R50 000 per annum. The original cost
of the asset was R800 000, which is the base cost for capital gains tax purposes.
The fair value of the investment property is as follows:
Date Fair value
R
1 July 2003
31 December 2003
31 December 2004
720 000
800 000
860 000
Autumn Ltd purchased a trade mark on 1 October 2003 at a cost of R800 000. The trade mark has an
estimated useful life of ten years and no residual value.
Autumn Ltd had the following equity balances in its financial statements at the relevant dates:
Description 1 July 2003 31 Dec. 2003 31 Dec. 2004
Share capital (par value of R1 per share)
R
2 000
R
2 000
R
2 000
Share premium 8 000 8 000 8 000
Retained Income 1 790 000 2 190 000 2 590 000
Total 1 800 000 2 200 000 2 600 000
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GENERAL WINTER LTD GROUP ISSUES
Autumn Ltd was tested for impairment at 31 December 2003 and 2004. There was no impairment
loss at 31 December 2003. At the end of 2004, the investment in Autumn Ltd was considered to be
impaired by R70 000.
Details relating to dividends received and dividends paid by group companies were as follows:
Dividends received Dividends Company nds paid
2003 2004 2003 2004
Winter Ltd (R1 200 000) (R1 500 000) R500 000 R560 000
Spring Ltd (£10 000) (£12 000) £30 000 £36 000
Summer Ltd (R30 000) (R20 000) R200 000 R100 000
Autumn Ltd (R50 000) (R60 000) R180 000 R250 000
All dividends were declared and paid on 1 October 2003 and 1 October 2004. Dividends earned
were all received in cash on 1 October 2003 and 1 October 2004.
The following assumptions and accounting policies apply:
o A fair rate of interest of 14% should be assumed where applicable. Adjustments relating to
the compounding of interest are not required.
o The group policy for investment property is the fair value model.
o Summer Ltd has adopted International Financial Reporting Standard (IFRS) 3 (AC 140) and
has elected to apply that standard to all business combinations from 1 January 2002. The
valuations and other information needed to apply IFRS 3 (AC 140) to past business
combinations were obtained at the time those combinations were initially accounted for.
o Joint ventures are accounted for using the proportionate consolidation method applied on a
line-by-line basis.
o Investments in subsidiaries, associates and joint ventures are accounted for in the investors
separate financial statements using the cost method.
o There are no intangible assets in any group companies other than those referred to above.
o Intangible assets are accounted for using the cost model.
o There were no movements in retained income other than an increase arising from net profit
and a decrease arising from dividends declared.
o Cash flows from dividends received and dividends paid are classified as operating cash
flows.
o There was no impairment of assets other than those referred to above.
REQUIRED
Marks
(a) Prepare a memorandum in January 2005 for circulation to members of the audit
committee of Winter Ltd outlining the key issues relating to the recognition and
measurement of the intangible assets of Summer Ltd in the consolidated financial
statements of Winter Ltd in terms of the requirements of IFRS 3 (AC 140) and IAS 38 (AC
129). Calculations are not required.
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(b) Prepare the journal entries required to consolidate the results and financial position of
Summer Ltd in the consolidated annual financial statements of Winter Ltd for the year
ended 31 December 2004. Show all workings.
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(c) Prepare the reconciliation of the carrying amount of intangible assets at the beginning and
end of the period that will be included in the notes to the consolidated annual financial
statements of Winter Ltd for the financial year ended 31 December 2004. Comparative
figures are required, but separate disclosure for each class of intangibles is not required.
Show all workings.
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5
Marks
(d) Calculate the amount that will be reflected on the group income statement of Winter Ltd for
the 2004 financial year end for equity accounting of associates. Comparative figures are
not required. Show all workings.
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(e) Provide extracts from the consolidated cash flow statement of Winter Ltd for dividends
received and paid for the financial year ended 31 December 2004, together with
comparatives. You are only required to provide the amount of cash flows that will be
included on the cash flow statement. You are not required to prepare any additional note
disclosures. Show all workings.
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