QUESTION 1 (38 marks)

Held Ltd (“Help”) is a large South African private hospital group with hospitals nationwide. The entity has a 31 August financial yearend.

Given the nature of Help’s business activities, the entity is capital intensive as it requires a large sum of fixed assets, such as hospital buildings, medical machinery and other medical equipment to conduct its business.

Property, Plant and Equipment
After a recent review of the business, it has been brought to the directors’ attention that some of the medical equipment will reach the end of their useful life in 3 years’ time from today. In order to replace them, new equipment to the value of R850 000 will have to be purchased at that point in time.

To have sufficient funds available, the directors have decided to start paying amounts (of a varying values) each six months in advance into a bank account. After conducting an evaluation of the cash flow budget, the directors agreed that R72 300 will be paid as the first payment, in the first year of the bank account. The bank account has been opened this year, and thus, a payment will be required for this year. The value of each payment made by Help will be increased by 7.4% from the value of the previous payment made.

Should Help not be able to accumulate enough funds at the end of the 3 years from the payments described above, the entity will make one lumpsum payment into the same bank account at the end of the second year to ensure that the required amount will be available at the end of the 3 years. This lumpsum payment will be additional to the payment that will be made into the account in that period, as described in the above paragraph.

The bank account offers an interest rate of 8.6% annually compounding.

The bank account will pay out the total accumulated funds to Help at the end of the 3 years.

Assume today is 1 September 2024.

Investment Opportunity
An investment opportunity has been made available to Help. According to the terms of the investments, Help may purchase the investment for R125 000, payable upon acquisition of the investment. Once purchased, the investment will generate interest for two (2) years. During these two (2) years, no payment will be made to Help. Thereafter, four (4) R38 000 annual payments will be made to Help, payable in advance. Once these four (4) payments have been made to Help, it will be deemed that all balances have been settled between the two parties, and no amount is due further. The investment offers a return of 7.6% monthly compounding.

Assume that Help will acquire this investment today.

General Maintenance
In a few years, Help will need to perform general maintenance activities on their hospital’s buildings. It is estimated that this general maintenance will cost R230 000 in total. To ensure sufficient funds are available, Help wishes to put money aside from the profits made. A savings account will be opened which offers a return of 8.1% bi- monthly compounding, into which R17 785 bi-monthly payments will be made.

Assume that the savings account will be opened today to start making payments into it.

REQUIRED:

Refer to the Property, Plant and Equipment. Calculate whether Help Ltd will be required to make a lumpsum payment into the savings account. If so, advice Help Ltd of the value of the lumpsum payment that should be made at the end of the second year.

Round all amounts to two decimals.(17 marks)

Refer to the Investment Opportunity. Advise Help Ltd whether it will be worth purchasing the investment opportunity. Provide supporting calculations.

Round all amounts to two decimals.
(13 marks)

Refer to the General Maintenance. Advise Help Ltd for how many years will the entity have to put money aside in order to be able to fund the general maintenance. Provide supporting calculations.

Round all amounts to two decimals.
(8 marks)

NOTE TO STUDENTS: Please remember that only financial calculator calculations or manual mathematical calculations are permitted as supporting calculations.
Excel calculations are not permitted.

QUESTION 2 (35 marks)

Spur Corporation Limited (“Spur Corporation”) consists of a group of restaurant brands. The restaurant brands include: Spur, Panarottis, John Dory’s, RoccoMamas and other speciality brands (such as The Hussar Grill, Casa Bella and NikΩ∑).

The various restaurant brands are sold as franchises to independent, entrepreneurial franchisees. Each franchisee pays a franchise fee to Spur Corporation each period based on the sales revenue generated by the franchisee’s restaurant. Spur Corporation, in turn, provides the intellectual property, experience, skills, and support infrastructure to manage the franchised restaurant.

Following is an extract from Spur Corporation’s 2023 Integrated Report:
We have created an employee strategy that concentrates on employee talent acquisition and an increased investment in learning and development. The short-term and long-term incentive programmes enable retention of key skills in critical roles. This investment in our employees builds on an already strong foundation of passion and ownership created over several decades.

Our portfolio of market-leading brands has a broad consumer appeal, providing South Africa’s growing middle-income market with casual dining restaurant experiences through our family sit-down and fast-casual restaurants, as well as higher- income customers through the speciality dining restaurants.

In South Africa, we have adopted key legislative requirements relating to the National Development Plan (NDP) and Extended Producer Responsibility (EPR). We are also participating in the development of the circular economy and assuming greater responsibility around product lifecycles and end-of-life management, with a particular reference to single-use packaging and food security. The group is a signatory and founding member of the South African Plastics Pact (established in 2020) and we joined the Voluntary Food Waste Initiative of the Consumer Goods Council of South Africa in May 2022.

We focus on reducing resource consumption, pollution and waste, and procuring products that are ethically and sustainably sourced.

The Green Feather Reward (GFR) was launched in 2016. This award recognises restaurants that have demonstrated their commitment to implementing green initiatives such as reducing water and electricity consumption, implementing recycling programmes, and sourcing food locally. (The winner was) RocoMamas TableView, Cape Town. Their refurbishment in 2018 resulted in an environmentally conscious design and green building methodologies. The space includes state of-the-art energy saving equipment, on-site waste management, and grey water collection that has resulted in a much smaller environmental footprint. (The runner up was) Birchwood Spur, Boksburg. Birchwood Spur has implemented several improvements over the last few years. These include solar power, reducing water usage through effective employee engagement, and partnering with a recycling company to drive circularity and community involvement. (Third place went to) RocoMamas, Vanderbijlpark. RocoMamas has achieved great success through training and incentives for employees to align with eco initiatives. They are involved in various community projects and are participating in a can recycling programme. They also have their own garden for herbs and lemons on the property and all lights have been replaced with LED lights. They have also introduced a switch on-switch-off schedule and light sensors.

Franchised restaurants in the group purchase significant quantities of raw materials. Energy consumption, population growth, and an increased demand for animal protein are impacting climate change. This is causing extreme weather events that are projected to negatively affect food production over the medium- to long-term. For example, the uncertainty around El Niño is starting to have an impact on global food supply and security. We remain committed to procuring sustainable seafood products that are certified by the Marine Stewardship Council (MSC) and the Aquaculture Stewardship Council (ASC). In partnership with WWF SASSI, John Dory’s has played a meaningful role in supporting sustainable fishing practices. We are fully compliant with the SASSI Seafood Promise and do not procure or sell any species that are on the SASSI red list, or from fisheries that are not in a fish improvement project.

The group has a strategy in place to reduce its reliance on palm oil. As indicated last year, the Russia-Ukraine War contributed to significant increases in the cost of edible oils, including sunflower, palm, soya and canola oil. This unfortunately required us to pause our initiative of reducing palm oil in support of operational sustainability for the franchisees. Adverse weather conditions have further impacted local sunflower yields2; and although palm oil remains a primary alternative, as the Rand continues to weaken and adverse weather patterns in Indonesia impact production, this commodity is also becoming price sensitive.

Spur Corporation has committed to exclusively source cage-free eggs through its entire supply chain by 2025. This is a significant commitment for the company in South Africa, a country where approximately 86% of the 25 million egg-laying hens are confined in wire battery cages. We will continue to provide products of only the highest standarrds , while… sourcing from producers who employ humane animal welfare practices and more sustainable production methods.

Technology and digitally-driven marketing channels continue to decrease the requirement for printed marketing materials. Certain marketing items, such as marketing placemats and children’s menus, will continue to be encapsulated due to the practical application and longevity of the material. Paper remains the most used marketing resource at 112 512 kg (2022: 60 014 kg, 2021: 63 725 kg). Click & collect, takeaway and delivery trends continue to increase, as more consumers have become accustomed to online ordering and the convenience of this method of meal delivery. The focus remains on procuring takeaway packaging made from renewable materials with high recyclability. New line items include a cardboard salad box container with a plastic window that has replaced the non-recyclable PET Thermoform salad container, as well as trialling bamboo cutlery packs. Significant effort is made to improve the recyclability of all single-use plastic containers. During the last five years, we have reported a significant reduction in the use of non-renewable packaging material, based on weight. Certain problematic materials, such as polystyrene and plastic straws, have been removed from the basket of our central procurement partner, Vector Logistics (Vector). The group works in close partnership with Vector to ensure efficient management and procurement of cost-effective, sustainably sourced products to the group’s franchise network.

Data from the South African Reserve Bank shows that by late last year, pressures on local supply chains were not much better compared to the peak seen in the second quarter of 2021 during the COVID-19 lockdowns in China and the initial impacts of the Russia- Ukraine conflict. Food inflation also peaked at 14.4% in March 2023. These conditions made navigating supply challenging. The supply of poultry and french fries was also impacted by loadshedding. The highly pathogenic avian influenza also spread in South Africa. This has constrained the availability of specifically free-range and cage-free eggs and resulted in higher prices. The devaluation of the Rand, compounded by demand from China, also increased pork belly rib prices for part of the year. However, according to the Consumer Financial Vulnerability Index (CFVI) for the second quarter of 2023, growing interest rates, high inflation and loadshedding continued to keep consumers under severe pressure.

Consumers in South Africa are on the hunt for bargains, with almost half of respondents looking for discounts (49%), shopping promotions (36%), and bulk purchases (50%). We have to offer a variety of options while remaining true to our brands. It is not always about discounting; it is also about demonstrating value to our customers. Customers are (also) keen to engage with brands that reflect their social and environmental values, inside and out. Visibility of our sustainability initiatives is essential, whether it be locally sourced products, eco-friendly packaging, or reducing food waste.

During the year, we submitted a representation in response to the National Minimum Wage Commission’s invitation to interested parties concerning the possible adjustment to the national minimum wage, in accordance with the National Minimum Wage Act, 9 of 2018. As a group, we support the intention of the Act to advance economic development and social justice by improving the wages of the lowest paid workers, protecting workers from unreasonably low wages, and preserving the value of the national minimum wage. We also encourage the review of the country’s minimum wage to ensure wage-earning workers earn compensation that is sufficient to maintain a decent standard of living. As a company, we have introduced a minimum wage of R15 000 for Spur Corporation employees and are evaluating the introduction of a Provident Fund (offering disability and funeral cover) in the coming year for permanent company-owned restaurant employees who have been with the group for more than two years. These employees already belong to a medical aid.

We have launched a refreshed brand for Spur Steak Ranches. The brand is now bolder, brighter, and more adventurous, offering increased features and greater comfort…
Our steps to address the underperformance of Panarottis through a revitalised and repositioned brand and a modernised restaurant concept have been very successful. South Africans love to eat pizza and Panarottis is well positioned to continue to attract families. By the end of December 2023, 16 Panarottis would have been revamped to the new Tuscan style. Growth in sales for the new restaurants has been strong, with increases between 25% to 35%.

The brand has delivered a high level of marketing activity this year, including driving value-added campaigns, engaging the Springbok rugby sponsorship and creating strong outdoor advertising exposure.

The prior year included a material once-off charge against earnings of R22.0 million following the resolution of a dispute with SARS in respect of tax deductions claimed for the group’s 2004-2009 share incentive scheme, as reported on SENS on 18 October 2021. Of this charge, R14.0 million was reflected as an income tax expense and R8.0 million as an interest expense.

The most significant assets on the group’s balance sheet, as would be expected from the nature of the business, are the group’s intangible assets and goodwill of R363 million. The Spur trademark and intellectual property represent 64.0%, the RocoMamas trademark, intellectual property and goodwill represent 13.9% and the Panarottis trademark and intellectual property 9.1% of these balances.

As reported on 24 December 2019, two companies within the group (the defendants) were served with a summons by GPS Food Group RSA (Pty) Ltd (GPS). GPS alleges that an oral agreement was concluded between GPS and the defendants in terms of which the parties would, inter alia, establish a joint venture to acquire, develop and manage a rib processing facility. No written agreement was ever executed with GPS.

REQUIRED:

Perform the following analyses on Spur Corporation Limited based on the above extract:

SWOT analysis (15 marks)
PESTEL analysis (10 marks)
Entities perform a SWOT analysis to identify various factors pertaining to the specific entity in each of the four (4) categories in the SWOT analysis. Entities then proceed by reacting in a specific manner to each of the four categories. For example, for each of the “weaknesses” identified a reparation plan is made, while for each “opportunity” it is decided how to exploit it if possible and wise.

For each of Spur Corporation Limited “threats” that were identified in question 1.1, explain how the entity is or can mitigate that risk.
(5 marks)

Provide only an environmental evaluation as referred to in the Socially Responsible Investment (“SRI”) index.
(5 marks)

Please remember to always motivate statements made to demonstrate a high level of understanding.

QUESTION 3 (27 marks)

You are employed at Valorem Bank Ltd. (“Valorem Bank”).

The bank offers various types of financial services and product, such as wire transfers, savings and investment accounts, card facilities, foreign currency exchange, consultancy, loans and mortgages.

One of Valorem Bank’s clients, Mr. D. Reed, has recently taken out a mortgage loan to finance the acquisition of his house. As part of the bank’s service in this regard, a loan amortisation schedule is drafted and sent to Mr. D. Reed so that he may view the detail of the various repayments required and the balances still due on the various dates.

You have been assigned the task of drafting this amortisation schedule. According to Mr. D. Reed’s loan contract with Valorem Bank, the following has been agreed to: Mr. D. Reed’s house has a purchase price of R1 480 000. He will, however, put a R20 000 cash deposit down on the house and will only be required to borrow the remaining funds. The loan is subject to a 7.4% annually compounding interest rate and equal quarterly payments are required over a 2-year period.

REQUIRED:
Draft this loan amortisation schedule for Mr. D. Reed.

Round to two decimals where applicable. Show all calculations.

SHOW ALL THE MANUAL MATHEMATICAL CALCULATIONS FOR ALL OF THE INTERESTS, PRINCIPLES AND BALANCES.(27 marks)

Answers to Above Questions on Accounting

Answer 1: The calculation of whether Help Ltd will be required to make a lumpsum payment into the savings accountis performed as follows: