QUESTION 1 (40 marks)

Highrise Limited is a property development company. The company has a June finan- cial year-end. The accountant of Highrise Limited, Mr. Price, has approached you for advice on IAS 40 Investment Properties. Mr. Price has requested your assistance re- lating to the following transactions that occurred during the current financial year-end, 30 June 2023:

Transaction 1:

The head office building, which is situated on the company’s Sandton property has been damaged due to mould and mildew as a result of water leakage from the outside.

The management of Highrise Limited made the decision on 30 November 2022 to relocate its head office to the Centurion property immediately as their employee health and wellness are important. The Centurion property was previously let to tenants under an operating lease. The fair value of the Centurion property was as follows:

30 June 2022: R25 450 000

30 November 2022: R25 890 000

On 30 November 2022, the land element of the property amounted to R5 550 000 and the property had a remaining useful life of 21 years.

Transaction 2:

During the current financial year-end, two new investment properties were purchased in Stellenbosch and Cape Town City Centre. The costs incurred are presented below:

Stellenbosch: R19 950 000

Cape Town City Centre: R11 300 000

Due to the increased loadshedding, additional costs have been incurred at the Cape

Town City Centre property to attract and retain tenants.

The following costs were incurred:

Legal and transfer fees for both properties amounted to R2 230 000.

Transaction 3:

On 6 January 2023, the management of Highrise Limited decided that two of the investment properties in Durban should be sold:

Management has decided that Durban property 1 is to be sold after its redevelopment, whereas Durban property 2 is to be sold without any redevelopment.

Redevelopment of Durban property 1 commenced on 6 January 2023.

Additional information:

• Ignore all tax implications.

• Assume that the above-mentioned transactions were the only movements that oc- curred with regard to investment property.
• Highrise Limited uses the cost model for property, plant and equipment and the fair value model for investment properties.
• All properties measured under the cost model are depreciated on the straight-line basis over the asset’s useful life.

• Property, plant, and equipment have a nil residual value.

• The combined fair value of all the investment properties owned by Highrise Limited is as follows:
30 June 2022: R435 000 000

30 June 2023: R575 600 000

REQUIRED:

1.1) With reference to the requirements of International Financial Reporting Standards, explain how transactions 1, 2 and 3 should be accounted for in the annual financial statements of Highrise Limited for the financial year-ended 30 June 2023. Round all amounts to the nearest Rand.

Marks will be awarded as follows:

Transaction 1 (limit your response to address the Centurion property) – 12 marks
Transaction 2 – 4 marks

Transaction 3 – 9 marks

(25 marks)

1.2) Calculate the fair value adjustment to be recognised in the statement of profit or loss and other comprehensive income of Highrise Limited for the year ended 30 June 2023. Round all amounts to the nearest Rand. (15 marks)

QUESTION 2 (22 marks)

Laser Boutique (Pty) Ltd is a leading hair removal and skin specialist. The company has December financial year-end.

To expand its market share, Laser Boutique (Pty) Ltd acquired a famous brand, Ultratherapy, on 26 June 2023 for an amount of R2 750 000. Ultratherapy is a leading skin-tightening technology brand that delivers micro-focused ultrasound therapy to trigger active collagen production. Laser Boutique (Pty) Ltd will be able to provide this ultrasound therapy exclusively to their customers at their salon situated in Sea Point, Cape Town.

The following relates to the purchase of the Ultratherapy brand:

• Half of the purchase price was paid on 26 June 2023, and the other half was due

12 months later on 26 June 2024. Interest is charged on the outstanding amount at 10% per annum.
• Legal fees were incurred regarding the drafting of the purchase agreement and registering the transfer of the Ultratherapy brand onto the name of Laser Boutique (Pty) Ltd. Legal fees amounting to R225 000 were paid on 26 June 2023.
• The somatologists were sent on an extensive training course before they could use the Ultratherapy technology and provide customers with ultrasound therapy. The training took place in Johannesburg, and the following costs were incurred: Training manuals: R135 000
Accommodation in Johannesburg: R60 000

Transport costs: R42 000

• Use of the Ultratherapy technology began on 1 August 2023.

• The Ultratherapy technology brand has an estimated useful life of 12 years.

• The financial manager of Laser Boutique (Pty) Ltd believes that the Ultratherapy technology brand will be able to be sold at the end of its useful life for R235 000.

REQUIRED:

IAS 38 Intangible Assets, defines an intangible asset as an ‘identifiable non-monetary asset without physical substance’. The Ultratherapy technology brand meets the definition of an intangible asset. With reference to IAS 38, you are required to explain how to measure the Ultratherapy technology brand in Laser Boutique (Pty) Ltd’s annual financial statements for the financial year ended 31 December 2023.

You are required to address the following and marks will be awarded as follows:

• Initial measurement – 10 marks

• Residual value – 3 marks

• Amortisation – 6 marks

• Carrying value and presentation at 31 December 2023 – 3 marks

Show all workings and refer to amounts where applicable. Round all amounts to the nearest Rand. (22 marks)

QUESTION 3 (38 marks)

Transaction 1:

On 1 January 2023, Invest Ltd purchased 8 000 listed debentures at a price of R190 per debenture. The debentures are 12% R210 debentures and are redeemable at par value on 31 December 2026.

Transaction costs amounted to R2 800. Interest is payable annually at the end of the year (31 December). The purchase price is equal to the fair value at the transaction date. The debentures are held within a business model with the objective to collect contractual cash flows that are solely payments of principal and interest on the principal outstanding at specified dates.

On 31 December 2023 Invest Ltd estimated the 12-month expected credit losses on the debentures to be R3 000 due to default on payments by the investee.

Transaction 2:

On 2 February 2023 Invest Ltd purchased 16 000 ordinary shares in Traders (Pty) Ltd, an unlisted company at R15 per share. Transaction costs amounted to R2 200.

The shares were purchased as a long-term investment to earn dividend income and make a capital profit upon resale. The management of Invest Ltd irrevocably elected in terms of IFRS 9.5.7.5 to present subsequent changes in the fair value of the investment in other comprehensive income.

On 31 December 2023, the shares were valued at R17 per share.

Transaction 3:

On 1 July 2023 Invest Ltd issued 120 6% bonds for R117 000 each. The principal value of the bonds amounts to R120 000 each. Transaction costs incurred amount to R2 500.

Interest is payable bi-annually in arrears, during December and June each year with the first interest payment taking place on 31 December 2023. The bonds are redeem- able on 30 June 2026 at their principal value. The current market interest rate for sim- ilar bonds is 12%.

REQUIRED:

3.1) Discuss how each of Transactions 1 and 2 should be classified and measured

initially and subsequently in terms of IFRS 9.

Note: No definitions are required. Apply the definitions to the scenario. (10 marks)

3.2) Prepare all the journal entries relating to Transactions 1, 2 and 3 in the records of Invest Ltd for the year ended 31 December 2023.
• Journal dates and calculations are required.

• Narrations are not required.

• Reference all calculations accordingly.

• Round all amounts to the nearest Rand. (28 marks)

Answers to Above Questions on Highrise Limited Case Study

Answer 1: The ways in which transactions 1, 2 and 3 should be accounted for in the annual financial statements of Highrise Limited for the financial year-ended 30 June 2023 is explained as follows:

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