IFRS 9 & IAS 32 homework solutions 2021 PDF

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FINANCIAL ACCOUNTING 300IAS 32, Financial Instruments: Presentation IFRS 7, Financial Instruments: Disclosure IFRS 9, Financial InstrumentsSuggested solutions to homework questionsWM BadenhorstDEPARTMENTOFACCOUNTINGUPNote: The marking memos are only an indication of the possible mark allocation and ...

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FINANCIAL ACCOUNTING 300 IAS 32, Financial Instruments: Presentation IFRS 7, Financial Instruments: Disclosure IFRS 9, Financial Instruments Suggested solutions to homework questions WM Badenhorst

DEPARTMENT OF ACCOUNTING UP

Note: The marking memos are only an indication of the possible mark allocation and are not necessarily the same as what would be used for a test or exam. QUESTION 1

(14 marks)

1. Investment with Namib Bank Limited (i)

This is a financial asset^ of SA Bank Limited

(ii) It represents the right to receive cash from the bank . (iii) This is a financial liability^ of Namib Bank Limited (obligation to deliver cash). 2. Investment with LNS Bank Limited (i)

This is a financial asset^ of SA Bank Limited.

(ii) It represents the right to receive cash from the bank . (iii) This is a financial liability^ of LNS Bank Limited (obligation to deliver cash). 3. Accrued interest on investment with LNS Bank Limited (i)

This is a financial asset^ of SA Bank Limited.

(ii) It represents the right to receive cash from the bank . (iii) This is a financial liability^ of LNS Bank Limited (obligation to deliver cash). 4. Investment with Zim Stores Limited (i)

This is not a financial asset, financial liability or equity instrument of SA Bank Limited^.

(ii) There is no right/obligation to exchange cash or financial instruments, only a right to a physical asset. SA Bank Limited also does not have a right to the residual net assets of Zim Stores Limited . (iii) This is not a financial asset, financial liability or equity instrument of Zim Stores Limited^ (only an obligation to deliver a physical asset).

2 5. Shares in Natal Sugar Plantations Limited (i)

This is a financial asset^ of SA Bank Limited.

(ii) It represents an equity instrument of another entity . (iii) This is an equity instrument^ of Natal Sugar Plantations Limited (the instruments issued to finance the residual net assets of the company). 6. Ordinary share capital (i)

This is an equity instrument^ of SA Bank Limited.

(ii) It represents the instruments issued to finance the residual net assets of the company . (iii) This is a financial asset^ of the counterparty (an equity instrument of another entity). 7. Loan from WeBank (i)

This is a financial liability^ of SA Bank Limited.

(ii) It represents an obligation to deliver cash to another entity . (iii) This is a financial asset^ of the counterparty (a right to receive cash from another entity.

3 QUESTION 2 Cold-Hold Limited Statement of financial position on 30 June 20X8 Equity and liabilities Equity Ordinary share capital (R1 000 000^ + [2 500 000 x R2^] – R65 000^)  Preference share capital (250 000 x R3) Retained earnings (calc 1) ^

^

Non-current liabilities Long-term borrowings (calc 5) Deferred tax liability (calc 4) Current liabilities Short-term portion of long-term borrowings (calc 6) Total equity and liabilities

(28 marks) minus ½ if heading incomplete

R

Marks

7 285 022 5 935 000

1½

750 000 600 022

1 19

4 852 573 3 781 717 1 070 856

2 ^mt

111 814 111 814

1½

12 249 409

^m/t

Format: Total:

2 28

R 614 500 633 000

Marks ^ ^

(45 000) (18 750) 25 000 (48 064) (131 717) (38 000) (212 471) (178 476) 600 022

# 1 1 1 (3) (3) ^ ^ (8)

Calculations 1. Retained earnings Opening balance (given) Profit for the year (given) Dividends - Class A preference shares - Class B preference shares (120 000 x R5 x 10% x 9 / 12) - Class C preference shares (50 000 x R0,50 x 9 / 12) Day one gain (R1 000 000 – R975 000) Accrued interest on long-term debenture (calc 2) Interest expense on short-term debenture (calc 3) Employee cost on issue of short-term debenture (note 1) Depreciation (R8 498 857 / 40 or calc 4) Deferred tax movement (calc 4) # Minus ½ if dividend has been deducted

(19 marks to SFP)

Note 1: IFRS 9 only allows the capitalisation of incremental transaction costs to a financial liability at amortised cost. As the employees’ salaries would have been paid in any event, these costs are therefore expensed.

4 2. Accrued interest on long-term debenture Interest from 1 January 20X8 to 31 March 20X8 (R1 000 000 x 9,5%^ x 3 / 12^) Interest from 1 April 20X8 to 30 June 20X8 [(R1 000 000^ + R23 750^m/t above) x 9,5%^ x 3 / 12^] Accrued interest on capital (R1 000 000 x 9,5% x 3 / 12) Accrued interest on interest (R23 750 x 9,5% x 3 / 12)

R 23 750

Marks 1

24 314

2

23 750 564

Total accrued interest

48 064

Alternative calculation Interest on capital (R1 000 000 x 9,5%^ x 6 / 12^) Interest on accrued interest [(R1 000 000 x 9,5%^ x 3 / 12^) x 9,5%^ x 3 / 12 ^]

47 500 564

1 2

48 064 (3 marks to calc 1) 3. Interest on short-term debenture Effective interest rate PV = R2 000 000 – R25 000 = R1 975 000^ FV = R2 200 000^ n = 3 x 2 = 6^ PMT = R2 000 000 x 10%^ / 2^ = R100 000 i = 6,669% Interest expense from 1 January 20X8 to 30 June 20X8 (paid in cash): 1 AMRT^ (from above) = R131 717

(2½ above + ½ = 3 marks to calc 1)

Capital balance at 30 June 20X8: 1 AMRT (from above) = R2 006 717 4. Deferred tax CA

20X7 Land Buildings

20X8 Land Buildings

TB

(1)(a)

^780 000 7 436 500

(1)(b)

(1)(a)

^780 000 7 224 028

(1)(b)

TD

DT (SFP) (dr) / cr (28%) ^

^4 249 429

780 000 3 187 071

^Exempt 892 380 892 380

^3 399 543

780 000 3 824 485

^Exempt 1 070 856 1 070 856

Minus ½ for each item incorrectly indicated to be a deferred tax asset

Total movement (R1 070 856 – R892 380)

^m/t 178 476

Note: The question told you to ignore all tax implictions for the financial instruments, hence there are no liabilities in the deferred tax calculation.

5

a)

20X7: R8 498 857 ^ – (R8 498 857 / 40 x 5 yrs) ^ = R7 436 500 (1 to main calc) OR: R8 498 857 x 35 / 40 = R7 436 500 20X8: R8 498 857 ^ – (R8 498 857 / 40 x 6 yrs) ^ = R7 224 028 (1 to main calc) OR: R8 498 857 x 34 / 40 = R7 224 028

b)

20X7: R8 498 857 ^ - [R8 498 857 x 10% x 5 yrs] ^ = R4 249 429 (1 to main calc) OR: R8 498 857 x 50% = R4 249 429 20X8: R8 498 857 ^ - [R8 498 857 x 10% x 6 yrs] ^ = R3 399 543 (1 to main calc) OR: R8 498 857 x 40% = R3 399 543 (8 marks to calc 1)

5. Long-term borrowings Class B preference shares (120 000 x R5) Class C preference shares (50 000 x R4) Long-term debenture (perpetual debenture) Short-term debenture (calc 3) (capital still repayable more than 12 months after reporting date)

R 600 000 200 000 975 000 2 006 717

Marks ^ ^ ^ ^m/t

3 781 717 (2 marks to SFP) 6. Short-term portion of long-term borrowings Class B preference shares (calc 1) Class C preference shares (calc 1) Long-term debenture (calc 2) Short-term debenture (interest paid in cash on 30 June 20X8)

R 45 000 18 750 48 064 111 814

Marks ^m/t ^m/t ^m/t

(1½ marks to SFP)

6 QUESTION 3

(23 marks)

Technologies Limited General journal Dr R ^ 

1 January 20X3 Bank (SFP) (10 000 x R1 000) Ordinary share capital (equity)

Cr R

Mks

10 000 000 10 000 000 1½

^

Ordinary share capital (equity) Bank (SFP)

^67 000 67 000 1

Alternatively, combined journal:

 Bank (SFP) (10 000 x R1 000 – R67 000^)

9 933 000

Ordinary share capital (equity)

9 933 000 2½

^ ^ ^

Bank (SFP) Day one loss (P/L) Debenture liability (SFP)

^

Transaction costs (P/L) Bank (SFP)

^18 000 000 250 000 ^18 250 000 2½ ^84 000 84 000 1

^ ^ ^ ^

Alternatively, combined journal: Bank (SFP) (R18 000 000 – R84 000) Day one loss (P/L) (R18 250 000 – R18 000 000) Transaction costs (P/L) Debenture liability (SFP)

^17 916 000 250 000 ^84 000 ^18 250 000 3½

^ ^ ^

30 June 20X3 Fair value adjustment (P/L) Debenture liability (SFP) (R18 770 000 – R18 250 000) Bank (SFP) (R20 000 000 x 15%^ x 6 / 12^)

2 020 000 520 000 (1)

1 500 000 3½

^ ^ ^

Alternatively, separate journals: Fair value adjustment (P/L) Debenture liability (SFP) (R18 770 000 – R18 250 000) Fair value adjustment (P/L) Bank (SFP) (R20 000 000 x 15%^ x 6 / 12^)

520 000

520 000 2 1 500 000

(1)

1 500 000 1½

Note: The debentures were issued with the intention of repurchasing in the near term. They are therefore held for trading and thus a liability at fair value through profit or loss.

7 Dr R ^

31 December 20X3 Fair value adjustment (P/L) Bank (SFP) (R20 000 000 x 15% x 6 / 12)

1 500 000

Cr R

Mks

^m/t1 500 000 1

^ ^ ^

30 June 20X4 Fair value adjustment (P/L) Debenture liability (SFP) (R18 560 000 – R18 770 000) Bank (SFP) (R20 000 000 x 15% x 6 / 12)

1 290 000 210 000 ^m/t1 500 000 3

^ ^

Alternatively, separate journals: Debenture liability (SFP) Fair value adjustment (P/L) (R18 560 000 – R18 770 000)

210 000

210 000 2



^

Fair value adjustment (P/L) Bank (SFP) (R20 000 000 x 15% x 6 / 12)

1 500 000 ^1 500 000



1



Debenture liability (SFP)  Loss on derecognition (P/L) Bank (SFP)

^18 560 000 ^m/t40 000 18 600 000 2

^

Bank (SFP) Preference share liability (SFP)

^30 000 000 30 000 000 1

^

Preference share liability (SFP) Bank (SFP)

^112 000 112 000 1

Alternatively, combined journal:

 Bank (SFP) (30 000 000^ – 112 000^)

(1)

29 888 000

Preference share liability (SFP)

29 888 000 2

Note: The capital and dividend payments are compulsory payments. Therefore the preference share is classified and accounted for as a financial liability. 30 June 20X5 Finance expense (P/L) (calc 1)  Preference share liability (SFP) Bank (SFP)

(3)

3 492 919 492 919 ^3 000 000 4½ Journals: Format: Total marks:

22 1 23

8 Marking note: -2 if any journals are passed to adjust the ordinary shares issued to fair value. These share are the company’s own equity instruments and therefore fall outside the scope of IFRS 9!

Calculations 1. Effective interest on the preference share PV FV PMT n i

= R30 000 000 – R112 000 = R29 888 000  = R33 000 000^ = R3 000 000^ = 5^ = 11,68669%

1 AMRT^ = R3 492 919

(3 marks to journal on June 20X5)

9 QUESTION 4

(20 marks)

Part a – journal entries

(16 marks)

Scott & Co Limited General journal Dr R 1 April 20X2 Bank (SFP) (calc 1)  Convertible debenture liability (SFP) (calc 2) Equity component of convertible debentures (SFP / equity) (calc 2)

(2½)

Cr R

Mks

1 059 752 (3)

894 060

^m/t165 692 7



Convertible debenture liability (SFP) (calc 3) Equity component of convertible debentures (SFP / equity) (calc 3) Bank (SFP)

(1) or

^m/t26 997

(1) or

^m/t 5 003 32 000 2½



1 October 20X2 Finance cost (P/L) (calc 4) Convertible debenture liability (SFP) (bal) Bank (SFP) (R1 000 000 x 12% / 2 = R60 000)

(3)

63 144 ^m/t3 144 60 000 4½





31 March 20X3 Finance cost (P/L) (calc 4) Convertible debenture liability (SFP) (calc) Accrued finance cost (SFP) Alternatively: Finance cost (P/L) (calc 4) Convertible debenture liability (SFP) (bal)

^m/t 63 373

^m/t 3 373 60 000

m/t 63 373 63 373 2

Calculations 1. Fair value of proceeds FV PMT n i PV

= = = = =

200 000 x R5 = R1 000 000 ^ R1 000 000 x 12% ^ / 2 ^ = R60 000 10 x 2 = 20 ^ 11% / 2 = 5,5% ^ R1 059 752 (2½ marks to first journal 1 April 20X2)

10 2. Liability and equity components R m/t Fair value of proceeds (calc 1) 1 059 752 ^ Fair value of liability component (894 060) (2½) (FV = 1 000 000 ^m/t, PMT = 60 000^m/t, n = 20^m/t, i = 14% / 2 = 7%) Equity component (balancing) 165 692 (3 marks to first journal 1 April 20X2) 3. Allocation of transaction costs R Transaction cost of liability component 26 997 (R894 060 / R1 059 752 (calc 2)^m/t x R32 000 ^ or bal ^m/t) Transaction cost of equity component 5 003 (R165 692 / R1 059 752 (calc 2)^m/t x R32 000 ^ or bal ^m/t) Total transaction costs 32 000 (1½ marks to second journal 1 April 20X2) 4. Finance cost 4.1.

Calculate new effective interest rate

FV PMT n PV i

= = = = =

4.2.

Finance cost

R1 000 000 ^m/t R60 000 ^m/t 10 x 2 = 20 ^m/t R894 060 – R26 997 = R867 063 m/t 7,28252% (or 14,56504% per annum)

1 October 20X2: 31 March 20X2:

1 AMRT INT= R63 144 ^m/t + (2½) (calc4.2) 2 AMRT INT= R63 373

Part b – discussion/theory Theory A financial asset is: (i) Cash (ii) An equity instrument of another entity (iii) A contractual right to receive cash or another financial asset from another entity (iv) A contractual right to exchange financial assets or financial liabilities with another entity under potentially favourable conditions (2 marks)

(2½ marks to calc 4.2)

(3 marks to jnl 1/10/20X2)

(maximum: 4 marks) (available: 5 marks) Application The prepaid cleaning service amount is not cash or an equity instrument of another entity^. Although it arises from contractual rights, it is not the right to receive cash / another financial asset or to exchange financial assets / liabilities under potentially favourable conditions^. The prepaid cleaning services merely represent a right to future cleaning services .

Conclusion: The prepaid cleaning services amount is not a financial asset of Scott & Co Limited on 31 March 20X3, as it does not meet the definition of a financial asset .

11 QUESTION 5

(15 marks)

Part a- journal entries

(8 marks)

S & S Limited General journal Dr R

Cr R

Marks

Debentures (point 1) ^ Bank (SFP) ^ Debenture liability (SFP) (calc 1) ^ Day one gain on issue of debenture (P/L) Debenture liability recognised at fair value on initial recognition^ 

Finance cost (P/L) (calc 1) Debenture liability (SFP) Bank (SFP) Recognise finance cost for the year^

^7 050 000

(3)

7 042 680 7 320 5½

^m/t1 056 402 96 402 ^m/t 960 000 2½

Calculations 1. Fair value on date of issue FV PMT n i PV

= 8 000 000 x 1,125 = 9 000 000  = 8 000 000 x 12% = 960 000  = 10^ = 15%^ = 7 042 680

(3 marks to journal 1) m/t

R7 042 680 x 15% or 1 AMRT = R1 056 402 ^

(½ mark to journal 2)

12 Part b – theory / discussion

(7 marks)

A derivative is a financial instrument with all of the following characteristics^: Theory (i) The value changes in response to the change in a variable, provided that a non-financial variable is not specific to a party to the contract (the “underlying”)

(ii)

It requires no initial net investment or an initial net investment which is smaller than what would be required for other types of contracts with a similar response to market factors

(iii)

It is settled on a future date

Application The value of the options are dependent on the difference between the share price of the ordinary shares of Chew & Chew Limited and the exercise price of the options (1). The share price of Chew & Chew Limited is therefore the underlying^. The options give S & S Limited the right to the movement in the share price of 10 million shares (1 000 x 10 000) of Chew & Chew Limited for which R3 000 was paid (1). To obtain the same exposure on 30 June 20X7, S & S Limited would have to invest R50 million (10 million shares x R5,00 per share) in Chew & Chew Limited’s shares (1). The R3 000 is therefore a small initial net investment^. The options can only be exercised on 30 June 20X8, which is a future date when compared to the issue date of 30 June 20X7 (1).

(1 for theory; -½ for each element left out)

Conclusion: Therefore, the options are a derivative in accordance with International Financial Reporting Standards (IFRS) ^m/t. Marking note: No application marks can be awarded if appropriate theory has not been provided. No conclusion mark can be awarded if appropriate theory has not been provided and applied. Conclusion must flow logically from discussion provided.

13 QUESTION 6 Part a: theory / discussion

(23 marks) (Maximum: 10 marks) (Available: 12 marks)

Classification The issuer of a financial instrument should classify the instrument, or its component parts, on initial recognition as a financial liability, financial asset or equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial liability, financial asset and an equity instrument (IAS 32.15)  . As ZAR Bank Limited is the issuer of the preference shares, it should consider the substance of the contract to determine whether the proceeds received from the issue of the preference shares represent an equity instrument or a financial liability ^. Preference shares may be issued with various rights. In determining whether a preference share is a financial liability or an equity instrument, an issuer assesses the particular rights attaching to the share to determine whether it exhibits the fundamental characteristic of a liability (IAS 32.AG25)  . The fundamental characteristic of a financial liability is that if an entity does not have an unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation, the obligation meets the definition of a financial liability (IAS 32.19) . OR: An instrument is an equity instrument if there is no contractual obligation to deliver cash or another financial asset to another entity or to exchange financial assets or financial liabilities with another entity under terms that are potentially unfavourable to the entity  . ZAR Bank Limited should consider the capital and dividend payments separately to determine if they exhibit the fundamental characteristic of a financial liability ^. An option of the issuer to redeem the shares for cash does not satisfy the definition of a financial liability, because the issuer does not have a present obligation to transfer financial assets to the shareholders (IAS 32.AG25) . As ZAR Bank Limited has the option to redeem the preference shares, the capital amount is not a financial liability / is equity . The preference share should therefore be assessed as a non-redeemable preference share ^. When preference shares are non-redeemable, the classification is determined by their other righ...