Accounting Postgrad Question
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Accounting.pdf
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QUESTION 1
Purple Logistics (Pty) Ltd (Purple), is a leading logistics
companies in South Africa, providing our clients to meet
their logistics needs. Since 2010. Purple offers a
comprehensive spread of products to their clients, such as
refrigerating, warehousing, courier services and truck
rentals.
Purple understands that in today’s volatile market,
companies’ successes are dependent on a robust supply
chain that is able to provide a framework to manage their
goods effectively. Our experience spans over a vast range of industries which enables us to
deliver customised solutions to our customers, ensuring their competitiveness.
The Purple Group (‘the Group’) consists of a number of subsidiaries and associate companies
that are strategically placed to add value to the business. The following is an illustration of the
group structure of the Group:
Purple Fridge (Pty) Ltd specializes in refrigerated transportation which is a vital link in the
distribution of Fast Moving Consumer Goods (FMCG). Purple Warehousing provides storage
services for interim transportation solutions. Purple-Leasing is a leader in truck leasing
solutions for short- and long-term contracts with customers. Purple Filming provides filming
production logistics for filming and production companies.
You are the financial accountant of the Group and you are currently busy with the preparation
of the financial reporting pack for the annual audit. The CFO, Mr Ken Adams, requested your
assistance on certain financial matters that will affect the financial statements for the reporting
period ended 30 September 2020. These matters are included in the mails below:
Email number Subject
Email 1 Revenue contract with Hollywood Hills Studios
Email 2 Lease agreements
Email 3 Lease income agreements
Email 4 BEE Share Schemes
Email 5 Financial Instruments
Purple Logistisc (Pty) Ltd
(Purple)
Purple Fridge (Pty) Ltd
100%
Purple Filming (Pty) Ltd 80%
Purple Warehousing (Pty) Ltd
45%
Purple-Leasing (Pty) Ltd
100%
About us:
Deliver. Fast
Purple Logistics
Deliver. Fast
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EMAIL 1 27 MARKS
From: [email protected]
Date: 25 October 2020
Subject: Revenue contract - Speedy
Dear accountant
Please find below the summarised information regarding the revenue contract with Hollywood
Hill Studios, an American filming company. The contract is unique since it is our first
international contract. Will you please write a report on the treatment in terms of IFRS 15
Revenue from Contracts with Customers (‘IFRS 15’)?
Kind regards,
Ken
Purple Filming entered into a 12-month contract with Hollywood Hill Studios (‘the customer’)
on 1 December 2019 on a new unique contract that is denominated in US Dollars (USD). The
contract is to assist the customer with transport and installation services for the Netflix series
called “Poaching Uncovered”, a series about the crisis surrounding rhino poaching. The series
will be filmed in South Africa in different locations over the 12 months, which includes Cape
Town, Hermanus, Knysna, Johannesburg and, very interestingly, a bush lodge in
Mpumalanga. This contract is a valid contract in terms of IFRS 15. The summarised
information of the promises in the contract is provided below:
Promise Additional detail Stand-alone selling price (Excl. VAT)
Installation services The installation services entail for Purple Filming to assist with installation of filming equipment at filming locations based on the customer’s specifications in the contract. The installation is usually “sold” separately to customers who do not have their own installation crews on site.
R 2 000 per hour
Transport services
The transport services entail that Purple Filming transport the filming equipment safely from one filming location to another. The transport services are regularly “sold” separately and does not require installation on most contracts where the customer has their own installation crew on site.
R 95.00 per hour
Since the customer is based in the United States of America (USA) and that COVID 19
quarantine protocols will make it inefficient for the customer to bring along different installation
crew members over the filming period, the installation and transport services are highly
dependent on each other in the context of this contract.
The payment schedule is set out in the table below based on the agreement between the two
parties:
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Stage Date Amount
Upfront 1 November 2019 USD50 000
Stage 1 – Cape Town & Hermanus 31 January 2020 USD100 000
Stage 2 - Knysna 28 February 2020 USD50 000
Stage 3 - Johannesburg 30 June 2020 USD100 000
Stage 4 – Bush Mpumalanga 31 October 2020 USD300 000
Total USD600 000
Purple Filming has created a budget in terms of hours that is expected to be spent on the
filming set over the 12-month period. The budget was approved by both parties. The details
of the budget are set out below:
Stage Amount of hours spent
Stage 1 – Cape Town & Hermanus 500
Stage 2 - Knysna 120
Stage 3 - Johannesburg 550
Stage 4 – Bush Mpumalanga 780
Total 1 950
On 30 September 2020, the actual hours spent on the series filming was 1 725. This included
90 hours lost due to COVID 19 quarantine protocols when some members of the crew were
infected by COVID 19. On 30 September 2020, the new budgeted hours (2 000) were
approved by both parties.
During 2020, the Rand was strengthening against the USD. Purple Filming was afraid that
they could lose money due to the strengthening of the Rand against the USD. Therefore,
Purple Filming entered into a foreign exchange contract with a local bank for the final payment
of the contract that is due on 31 October 2020. The exchange rate per the contract was
determined as R15.50:$1. At year end the spot rate was R15.33:$1. We know that this should
be recognised and measured in terms of IFRS 9, but not sure what the classification should
be for measurement purposes.
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EMAIL 2 25 MARKS
From: [email protected]
Date: 26 October 2020
Subject: RE: Lease agreements in Purple Warehousing
Dear accountant
Please find below the summarised information regarding the lease agreement of one of our
packing warehouses that we have in Purple Warehousing. Please review it as soon as possible
and get back to me.
Kind regards,
Ken
Lease of Warehouse
On 1 October 2019, Purple Warehousing entered into a twenty-year agreement with Axel
Properties (Pty) Ltd (Axel) to lease a storage warehouse. The storage warehouse is situated
in the perfect location in Randburg to ensure efficient storage solutions for customers. The
terms of the lease agreement are as follows:
• Rental payments of R50 000 are made in arrears, on a monthly basis.
• In addition, Axel has a right to receive payment of 5% of total revenue made per
financial reporting period of Purple Warehousing. The payment is made yearly in
arrears on 30 September.
• Unguaranteed residual value is R80 000. Guaranteed residual value is R100 000.
• The interest rate implicit to the lease agreement is 11%.
• At the end of the lease period, Axel will still have legal title of the distribution facility
and therefore does not transfer the legal title to Purple Warehousing.
• There is no option to renew the arrangement after 20 years.
At inception of the lease, Purple Warehousing paid R20 000 to lawyers to finalise the
agreement. On 30 September 2020, the total revenue generated from use of the distribution
facility amounted to R15 425 250. The incremental borrowing rate of Purple Warehousing is
10.50% per annum.
Similar properties have a useful life of 25 years for depreciation purposes. SARS grants an
allowance of 10% per annum for warehouses. Ignore VAT implications.
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EMAIL 3 25 MARKS
From: [email protected]
Date: 29 October 2020
Subject: Lease income agreements
Hi there,
Hope all is good on your side.
I have the following information relating to Purple Leasing’s lease income agreements below.
Purple’s motor vehicle retailing company, Purple Leasing, offers two types of leases on new
KIA vehicles to its customers. The summarised details of the two different types of contracts
are provided below:
Lease A Lease B
End-of-term purchase option price
10% of original purchase price
None
Implicit rate to the lease 11.5% Prime less 2%
Maintenance option 2% of original purchase price per annum
2% of original purchase price per annum
Term 48 months 24 months
Additional information:
For both types of leases, the customer will have use of a specific KIA that will be provided to them. The KIA can only be replaced with another vehicle in the case when it is subject to major repairs.
On both leases, the customer, have full control over the usage of the KIA (routes and km’s travelled). The customer also takes out specific insurance based on the details of each individual driver.
Fixed monthly rentals, including maintenance payments, are payable monthly in arrears.
The lessee is entitled, but not obligated, to buy the vehicle from the motor retailing division at the end of the lease term for the amount of the purchase option price.
The maintenance option provides the customer with maintenance services for the period of the lease, but excludes fuel, oil and tyres which is for the lessee’s own account. The maintenance option is priced to earn an 15% margin on maintenance costs for Purple Leasing over the life of the contract.
We would like to get an understanding how these leases will be treated in terms of IFRS 16
or IFRS 15 based on the different components of the leases above.
Kind regards,
Ken
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EMAIL 4 15 MARKS
From: [email protected]
Date: 28 October 2020
Subject: BEE Share Scheme
Dear accountant
I need you to assist me on the accounting treatment for our BEE share schemes. I have
included the details of the schemes below. We have 2 schemes, the Thuthuka Scheme and
the Purple Share Scheme. Both these schemes are equity settled in terms of IFRS 2, but the
accountants are unsure how to treat the vesting of these schemes. Will you please review the
terms and conditions below and reply to my email?
Kind regards,
Ken
Thuthuka Scheme
The board of directors of Purple decided to reward qualifying BEE employees through a BEE
share scheme. The incentive scheme was implemented to assist in retaining key staff in key
positions within the company’s operations.
Purple issued 1 000 share options to each of the 50 key BEE employees on 1 October 2019
to acquire ordinary shares when vesting conditions are satisfied. The strike price of these
options is R7.50 per share which is equal to the fair value of a Purple ordinary share on 1
October 2019. The employees will receive the benefit of future growth of the share price. The
share options vest on 30 September 2022 provided both of the following vesting conditions
are satisfied:
Condition A: The employee has remained in the employment of Purple throughout the vesting period.
Condition B: A revenue growth rate of 10% per year should be maintained throughout the vesting period. If the revenue growth rate is lower, the vesting period is extended with another two years.
Condition C: The market price of Purple ordinary shares maintain a 15% growth until 30 September 2022.
The following estimated information has been provided to by management to indicate the
number of BEE employees that are expected to leave during the vesting period.
Date of estimation Expected cumulative number of employees to remain at the end of
vesting period
30 September 2020 40 employees
In 2020, Purple managed to only obtain a 6% revenue growth rate due to the impact of the
nationwide lockdown of COVID 19.
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The fair values of the options, calculated using the Black-Scholes Model, were determined
as follows:
Before adjusting for any of the vesting conditions
After adjusting for the market conditions only
Rand Rand
1 October 2019 11.35 12.10
30 September 2020 10.50 11.88
Purple Share Scheme
Purple issued another 1 000 share options to each of the 10 directors on 1 January 2020 to
acquire ordinary shares when vesting conditions are satisfied. The strike price of these options
is R7.50 per share which is equal to the fair value of a Purple ordinary share on 1 October
2019. The employees will receive benefit of future growth of the share price. There are no
service or performance vesting conditions attached to the options. However, there is a market
condition that the market price of Purple ordinary shares maintain a 15% growth until
30 December 2022. The fair value of the options on 1 October 2019 which incorporated the
market condition is estimated to be R9.20. The fair value without taking marking conditions
into account is estimated to be R10. On 30 September, none of the directors are expected to
leave in the near future.
EMAIL 5 33 MARKS
From: [email protected]
Date: 29 October 2020
Subject: Financial Instruments
Dear accountant
Please find below the information regarding the expected credit losses (ECL’s) on our accounts
receivables as well as the financing transaction with Coronation Equity Fund to expand to air
freight. Will you please assist us with the accounting treatment of both matters?
Kind regards,
Ken
Expected Credit Losses
Purple has a large and diversified customer base that includes customers from all segments on the Living Standards Measure (LSM) scale. The LSM scale ranks the South African population based on 29 variables that measure individuals’ living standards, based on a 10- point scale with 10 being the highest living standard and 1 the lowest. Purple has segmented its customer population into two categories, namely those falling in LSM 1–6 and those in LSM 7–10, for credit-risk evaluation purposes as part of their risk management policy. The default rates over the expected life of its trade receivables resulting from contracts with customers have been provided in the table below. These rates have been
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historically evaluated and are expected to increase by 20% due to the COVID 19 impact on the South African economy:
LSM 1–6 LSM 7–10
12 month expected
credit losses
Lifetime expected
credit losses
12 month expected
credit losses
Lifetime expected
credit losses
Current 0,6% 1,1% 0,2% 0,4%
1–30 days past due 4,9% 8,4% 3,5% 5,9%
More than 30 days past due
14,5% 24,0% 10,6% 17,7%
The following financial data were extracted from Purple’s accounting system with regard to all open contracts with customers on 30 September 2020, the current financial year-end:
Gross carrying amount of trade receivables
R
Current 350 000 000
1-30 days past due 78 312 500
More than 30 days past due 9 187 500 Total 437 500 000
Purple estimates that 40% of its contract assets and trade receivables relating to contracts with customers come from LSM group 1–6 and 60% from LSM group 7–10. These are proportionately spread across the ageing categories above. The contract assets and trade receivables of Purple does not contain a significant financing component based on the nature of its contracts. Purple has not applied the portfolio approach as defined in par. 4 of IFRS 15; and elected to apply the simplified approach allowed in par. 5.5.15(a) (ii) of IFRS 9 when recognising expected credit losses on contract assets and trade receivables in the scope of IFRS 15. (SAICA ITC 2017 - Adapted) Expansion of business through preference shares.
On 1 October 2019 Purple issued 100 000 R20 par value 5% preference shares at a premium
of R2.50 per share. The preference shares are, at the option of Purple, convertible into
ordinary shares (1 ordinary share for every 2 preference shares) on
30 September 2022. If not converted, the preference shares will be redeemed at par on
30 September 2022. Legal costs of R120 000 were incurred to get the preferences shares
issued to the holders. The pre-tax market related discount rate is 11%. The post-tax rate is
7.92%. The interest (coupon) payments are made annually on 30 September.
In addition to the above stipulations, the holders also included a clause that state the following:
“In the event that Purple fails to have an EBITDA profit ratio of 10% over the contractual period,
the issuer has an obligation to make an additional payment of 50% of the par value of the
issued preference shares (excluding transaction costs).”
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REQUIRED:
Email 1
a) Discuss the recognition and measurement of the contract with Hollywood Hills Studios in the accounting records of Purple Filming (Pty) Ltd in terms of IFRS 15 Revenue from Contracts with Customers (IFRS 15). As part of your discussion, please discuss any ethical considerations evident from the comments made by the CEO.
You must use calculations to justify your arguments where applicable.
Assume that the contract is a valid contract in terms of IFRS 15.10
Ignore any deferred tax or VAT implications.
(22)
b) Discuss how the FEC contract should be measured in the accounting records of Purple Filming (Pty) Ltd for the reporting period ended 30 September 2020 in terms of IFRS 9 Financial Instruments. You are not required using the STATE,
DEFINE, APPLY and CONCLUDE method in your discussion. No calculations are necessary
(5)
Email 2
c) Provide the relevant journal entries to account for the lease of the Randburg Packaging Facility in the accounting records of Purple Warehousing Ltd for the reporting period ended 30 September 2020. Please note:
Deferred taxation calculations should be based on the balance sheet method.
Ignore VAT implications
Show all calculations clearly and round of to the nearest Rand.
Marks will be awarded for providing journal narrations, and the neatness and clarity of your answer.
(19)
d) Present the financial statement line items relevant to the lease in (c) on the statement of financial position of Purple Warehousing (Pty) Ltd as at 30 September 2020 in order to comply with the requirements of IAS 1 Presentation of Financial Statements.
(6)
Email 3
e) Discuss the accounting treatment (excluding presentation and disclosure) of both Lease A and Lease B types, including all relevant components of the leases. Your discussion should be based on principles contained in IFRS 16 Leases and IFRS 15 Revenue from Contracts with Customers.
Please note:
You are not required using the STATE, DEFINE, APPLY and CONCLUDE
method in your discussion.
No calculations are needed
(25)
Email 4
f) Discuss the recognition and measurement of both the share incentive schemes in the accounting records of Purple Logistics (Pty) Ltd for the reporting period ended 30 September 2020. Please note:
You are not required to use the STATE, DEFINE, APPLY and
CONCLUDE approach.
Please support your argument with any relevant calculations.
(15)
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Email 5
g) Discuss the appropriate initial classification of the convertible preference shares issued by the Purple Logistics (Pty) Ltd in the financial statements of Purple Logistics (Pty) Ltd and prepare the journal entries for the reporting period ended
30 September 2020.
(20)
h) Calculate and explain the amount of the loss allowance that should be recognised for the reporting period ended 30 September 2020 relating to Purple Logistics’ contracts with customers. You are not required using the STATE, DEFINE, APPLY and CONCLUDE method in your discussion.
(13)
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QUESTION 2 25 MARKS
You are the consolidation accountant at the Hastings Group Limited (Hastings Group), a diversified group of companies engaged in the household and consumer goods industry. You are presented with the following information in respect of the Hastings Group:
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2020 Hastings
Limited Bridgerton
Limited
R’000 R’000 Turnover 12 600 10 200 Operating profit 8 200 6 000 Finance costs 1 000 400 Profit before taxation 7 200 5 600 Taxation expense 2 000 1 600 Profit after taxation 5 200 4 000 Other comprehensive income - - Total comprehensive income 5 200 4 000
EXTRACT FROM THE STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2020
Hastings Limited
Bridgerton Limited
R’000 R’000
Retained earnings
Retained earnings
Balance 1/1/2020 8 600 4 800 Profit for the year to 31/12/2020 5 200 4 000 Dividends paid 30/11/2020 (800) (400) Balance 31/12/2020 13 000 8 400
Additional Information
1. On 1 January 2018, Hastings Group obtained significant influence over Bridgerton Limited
(Bridgerton) when it purchased 3 000 of Bridgerton’s 10 000 issued ordinary shares at a cost of R6 300 000. At that date, the retained earnings of Bridgerton amounted to R1 800 000 and the fair value of Bridgerton’s assets and liabilities were considered to be fairly valued.
2. On 30 June 2020, Hastings Group acquired a further 5 000 shares in Bridgerton for R18 000 000, which then gave Hastings Group control over Bridgerton. At that date, Hastings Group considered the fair value of the land of Bridgerton to be R2 400 000 greater than the recorded carrying amount.
3. On acquiring control of Bridgerton, Hastings Group measured the non-controlling interest
in Bridgerton at their proportionate share of identifiable fair net asset value. On 30 June 2020, the fair value of the previously-held 30% investment in Bridgerton was R10 200 000.
H
Hastings Group
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4. During the course of the year ended 31 December 2019, Bridgerton commenced selling
goods to Hastings Group. These goods were sold at a mark-up of 50% above cost price. Inter-company sales figures were:
Year to 31 December 2019 R6 500 000
Year to 31 December 2020 R7 000 000
Hastings Group’s closing inventory of inter-company items purchased from Bridgerton were as follows:
Date Amount Notes
31 December 2019 R3 000 000 Inventory was sold externally before 30 June 2020
30 June 2020 R4 500 000 Inventory was sold externally before 31 December 2020
31 December 2020 R2 400 000 Purchased by Hastings Group after 30 June 2020.
5. All items of income and expense in the statement of profit or loss and other comprehensive
income have occurred at an even rate over the course of the year.
6. The taxation rate is 28% and the CGT inclusion rate is 80%. Deferred tax is provided in terms of IAS 12 Income Taxes.
7. All fair value adjustments to investments in equity are recorded in profit or loss in terms of
IFRS 9 Financial Instruments.
REQUIRED:
Prepare the consolidated statement of comprehensive income and statement of changes in equity for the year ended 31 December 2020.
Notes to the financial statements and comparative figures are not required.
Work to the nearest Rands in thousands (‘000).
Show all calculations clearly.
(25)
- EXTRACT FROM THE STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2020
- Additional Information
