2020/03/30 FINANCIAL ACCOUNTING Lecture 1 Exam technique in advanced group questions, ITC feedback Content of lecture 1 A. IFRS 15 B. Approach to advanced group statement issues 1. Goodwill calculations including foreign operations 2. Calculating re-measurement gains in a step acquisition (eg. associate to subsidiary) 3. Preparing the pro-forma journal entries for a step acquisition or a loss of control 4. Calculating the group profit/loss on loss of control 5. Journalising intercompany transactions 6. Preparing consolidated cash flow statements 2 1
2020/03/30 IFRS 15 Revenue 3 Approach to a theory question Step 1: Identify the contract Probability Step 2: Identify the performance obligations Distinct (2 requirements) – paragraph 27! Step 3: Determine the transaction price VAT Variable consideration Significant financing element Non-cash consideration Consideration payable to a customer Step 4: Allocating the transaction price to the performance obligations Stand alone selling prices Discounts Variable consideration Step 5: Recognise revenue Over time (input or output methods) – paragraph 35! At a point in time (control) 4 2
2020/03/30 Approach to a theory question Required: Critically review or Discuss the accounting treatment or accounting recognition and measurement - All 5 steps Required: Critically review of Discuss the recognition - Steps 1, 2 and 5 Required: Critically review of Discuss the measurement - Steps 3 and 4 - Be able to identify the items dealt with specifically in the standard - Include principles from the specifics in the standard - Sale with a right of return - Bill and hold sales - Non-refundable upfront fees, customer loyalty programmes 5 Approach to a theory question Be able to identify the items dealt with specifically in the standard - Include principles from the specifics in the standard in your answer - Sale with a right of return - Warranties – two types: manufacturers warranty and extended warranty - Customer options for additional goods or services (customer loyalty programmes) - Non-refundable upfront fees - Consignments - Bill and hold arrangements Detailed construction contracts excluded Licensing excluded 6 3
2020/03/30 Revision of the core principle Example 1: On 16 September a customer books and pays (via EFT) for a return flight from Johannesburg to Cape Town on Kulula.com. The EFT payment has been transferred from the customer’s bank account to Kulula's bank account on 19 September. The flight to Cape Town is on 30 November and the return flight is on 7 December. The amount paid is non-refundable if the customer cancels the booking. When will Kulula recognise revenue? (a) 16 September (b) 19 September (c) 30 November (d) 7 December 7 Core principle The entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services Transfer = base on control 8 4
2020/03/30 WHAT IS CONTROL? Obtain substantially Ability to direct all of the Control the use remaining benefits from the asset Control also includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, the asset Great definition in paragraph 33 of IFRS 15! 18 9 INDICATORS OF CONTROL Indicators that control has passed include a customer having… …a present …risks and …physical …accepted obligation …legal title rewards of possession the asset to pay ownership IFRS 15 paragraph 38 10 5
2020/03/30 Revision of distinct Goods or services are distinct if BOTH the following criteria are met: The customer can benefit from the good or The entity’s promise to transfer the good or service either on its own or together with other service to the customer is separately identifiable resources that are readily available to the from other promises in the contract customer Not separately identifiable if (factor examples) The entity bundles the goods or The goods or services significantly The good or service is highly services that represents the modify or customise another good dependent or interrelated with combined output for which the or service promised in the other goods or services in the customer has contracted contract contract 27 Bundle test Customisation test Dependency test 11 Example 2: Distinct • Hifi corporation sells: • 55 inch UHD TV • 12 month manufacturers guarantee/warranty • Extended warranty purchased What are the performance obligations? See B28 – B33 specifically dealing with warranties 12 6
2020/03/30 Example 2: Solution • 2 performance obligations • 55 inch UHD TV • Extended warranty • Manufacturer warranty not a separate performance obligation. Will be accounted for as a provision in terms of IAS 37 13 Guidance on maintenance plans • Maintenance plans on assets • Will be distinct if: • 27(a): The entity regularly sells maintenance plans separately • 27 (b): The maintenance plan is separately identifiable from other promises in the contract 14 7
2020/03/30 Examples: Comprehensive example and ITC Questions • 2019 January Paper 3 Question 1 • 2017 January Paper 1 Question 1 15 Revision of groups issues 16 8
2020/03/30 BUSINESS COMBINATIONS– IFRS 3 – Calculating goodwill • IFRS 3 – paragraph 32 Consideration Fair value of transferred + identifiable net NCI + Fair value asset value of previously held interest Goodwill What happens if the goodwill arises in a foreign operation? 17 Example 1: January 2018 ITC Feedback • 2018 January Paper 1 Question 1 – Observations (Cooba) • Don’t miss the “Ignore taxation” at the beginning of the scenario • Part (a) • Contingent liability disclosed in subsidiary books – Present obligation but problem with recognition criteria (15%) OR – Possible obligation (15%) • Liability recognised at acquisition date – Exception to IAS 37: A contingent liability shall be recognised if it as present obligation that arises from past events and its fair value can be measured reliably (IFRS 3: 22-23) 18 9
2020/03/30 Example 1: January 2018 ITC Feedback • 2018 January Paper 1 Question 1 – Observations from the requirement (Cooba) • Part (a) • Discuss the appropriate accounting treatment of the client claim in the financial statements of both Cars4Africa and the Valare Group for FY2017. Presentation and disclosure should not be addressed. • Do you discuss? • Definitions (Provision/Contingent/Liability) • Classification (Provision or contingent liability) • Recognition • Initial measurement • Subsequent measurement 19 Example 1: January 2018 ITC Feedback • 2018 January Paper 1 Question 1 – Solution (Cooba) • Part (a) - Separates • Identify the past event • Prove the obligation • Prove the probability of outflow ( more likely than not ) • Evaluate measurement • Conclude ! • Part (a) – Group • State exception • Apply present obligation and FV measurement • Conclude • Measurement • Spot rate the acquisition date • Taking into account probability • Subsequent measurement: monetary amount (re-translation), IFRS 3 subsequent measurement principles IFRS 3:56 20 10
2020/03/30 Example 1: January 2018 ITC Feedback • 2018 January Paper 1 Question 1 – Solution (Cooba) • Part (b) - Separates • Use your standard • 2 types of costs • Relocation and retraining costs should be expensed (R500 000) IAS 37:81 • Retrenchment costs can be provided for (included in the provision) (R125 000) – IAS 19 Termination Benefits • Discounting is not necessary – short term – Part (b) – Group • IAS 19 Employee Benefits is an exception to fair value. IFRS 3:26 lists this as an exception. Therefore continues to measured at IAS 19 carrying amount – Part (c) • Do not miss the “Ignore taxation” at the beginning of the question 21 STEP ACQUISITION Associate or simple Subsidiary investment Y0 Y1 Deemed disposal of PHI @ fair value, hence recognition of remeasurement gain + deferred tax on the remeasurement gain + [realisation of relevant reserves IAS 28:22(c) 22 22 11
2020/03/30 STEP ACQUISITION Associate or simple Subsidiary investment Y0 Y1 Deemed disposal of IFRS 3 PHI Acquisition of control over business @ consideration = additional consideration + Fair value of PHI Recognition of goodwill or GoBP 23 23 STEP ACQUISITION • Example 2: – Let us look at January 2015 ITC Question – Paper 1 Question 2 – Draw a timeline for yourself – timeline is CRITICAL! Subsidiary consolidated (at 20%) Joint venture (20%) NCI (at 80%) 30/6/2014 1/7/2012 1/11/2013 Equity Consolidation accounting Acquisition of Purchase of control over NCI business through (not an IFRS shareholder 3 issue) B96 agreement (no purchase 24 consideration) 12
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