QUESTION 1 (25 marks)
Melon Ltd is an entity in the agricultural sector and owns the following investments in other entities:

Additional Information about the entities (except Grape Ltd): Peach Ltd:
The investment in Peach Ltd’s ordinary shares was obtained by Melon Ltd at the start of both entity’s current financial year i.e., on 1 January 2023 when the issued share capital of Peach Ltd was 1 000 000 ordinary shares. There were no further changes to the issued share capital during the year. On the same day (acquisition date), Peach Ltd also issued 1 000 000 options. These were the only options issued by the entity. Each option allows the holder to obtain one ordinary share (with a voting right) once it is exercised. As at 31 December 2023, the options are in the money i.e. the option has a value or its strike price is favorable compared to the prevailing market price of the underlying share.

Orange Ltd:
Melon Ltd has appointed five of the seven directors of Orange Ltd. The directors are executive and thus form part of the key management of Orange Ltd.

Mango Ltd:
Melon Ltd has the power to participate in the financial and operating policy decisions of the investee, Mango Ltd, but is not in control or joint control of those policies.

Lemon Ltd:
Lemon Ltd’s activities are directed through voting rights. The remaining 56% of the voting rights (which are not held by Melon Ltd) are widely held by various other shareholders. None of these other shareholders, individually own more than 1% of the voting rights nor do they have collective voting arrangements.

Additional information:
• There were no changes in the shareholdings (e.g., number of shares in issue) of the investees during the financial year. No options were actually exercised during the financial year.
• All entities, including Melon Ltd have a 31 December year end.

REQUIRED:
Discuss whether or not each of the five investees is a subsidiary of Melon Ltd at 31 December 2023. If an entity is not a subsidiary, discuss how the investment should be classified instead.

You discussion should include knowledge from the International Financial Reporting Standards (IFRS 10 and/or IFRS 28) and then application of the specific paragraph/section/knowledge to the question. Also substantiate your answers with calculations where possible.

Structure you answers with appropriate headings e.g. the names of the entities. Your discussion should be written to the extent to which information in the scenario permits i.e. do not assume any additional facts.

QUESTION 2 (30 marks)
On 30 June 2023, Crab Ltd acquired 100% of the share capital of Prawn Ltd in a business combination and thus obtained control over Prawn Ltd in terms of IFRS10.

Below is the Statement of Financial Position of Prawn Ltd as at the acquisition date, 30 June 2023, along with the corresponding information that will assist in determining the fair values at the acquisition date in terms of IFRS 3:

Crab Ltd paid the consideration for Prawn Ltd’s equity shares to the previous shareholder as follows:
• 10% of Crab Ltd’s own ordinary shares. This consisted of 100 000 shares that were issued at R30 per share. Crab Ltd’s shares were trading at R32 on 30 June 2023.
• Inventory that cost Crab Ltd R50 000. The inventory had a fair value of R80 000 on 30 June 2023.
• A cash payment of R920 000 that will only be paid on 29 June 2024 (after one year) since Crab Ltd did not have cash resources at the time of acquiring Prawn Ltd. The business combination agreement however states that no interest will be charged on this amount.
In addition to the above, Crab Ltd incurred legal costs of R4 500 with regards to the acquisition of Prawn Ltd’s equity shares which were paid in cash on 30 June 2023.

Additional information:
• Both Crab Ltd and Prawn Ltd accounts for all property, plant, and equipment using the historical cost model in terms of IAS 16 in their separate financial statements.
• Both Crab Ltd and Prawn Ltd accounts for all investment property using the cost model in terms of IAS 40 in their separate financial statements.
• Assume a market-related effective rate of 15% per annum, pre-tax, applicable to Crab Ltd.
• Assume an Income Tax rate of 27% and a Capital Gains Tax inclusion rate of 80% thereof.
• Ignore the effects of Dividend Tax and Value Added Tax (VAT).

REQUIRED:
Calculate the goodwill or gain on bargain purchase that arose on the acquisition of Prawn Ltd. Round off to the nearest Rand, if applicable. (16.5 marks)

Prepare only the general journal entries that would have been passed in the separate financial records of Crab Ltd to record the acquisition of Prawn Ltd for the financial year ended 30 June 2023. Reference any workings used from 2.1. Dates and narrations can be ignored.
Ignore Value Added Tax (VAT).
Show and reference all your workings clearly. Round off to the nearest Rand, if applicable.

QUESTION 3 (45 marks)
The following trial balances were obtained from the financial records of Airlyft Ltd (“Airlyft”) and Runway Ltd (“Runway”) for the financial year ended 31 December 2023:

On 1 January 2023, Airlyft purchased 70 000 shares (70%) in Runway for R1 245 000 and thereby obtained control over Runway on this date. The net assets and liabilities of Runway (including land) were considered to be fairly valued on the acquisition date. The fair value of the non-controlling interest was R550 000 at acquisition.

Runway applies the cost model to account for all land and accordingly, the land reflected in the trial balance is the acquisition cost of R1 600 000. The group, however, applies a revaluation model to account for land and on 31 December 2023, obtained a new valuation for Runway’s land, which was valued at R2 000 000.

Despite making a loss in the 2023 financial year, the directors of Runway declared dividends on 31 December 2023 because they wanted to make shareholders happy and had adequate retained earnings. The dividends were still outstanding at year-end. Airlyft’s dividend receivable from Runway is included under trade and other receivables.

On 31 December 2023, after the land valuation and after dividends were declared, Airlyft determined that the recoverable amount of Runway as a cash-generating unit is R1 800 000.

Additional information:
• Airlyft elected to measure the non-controlling interest at its fair value at acquisition date (full goodwill method).
• In Airlyft’s separate financial statements, Airlyft classified its investment in Runway at cost as per IAS27.10.
• There have been no changes to the share capital (e.g., number of shares in issue) of Runway since Airlyft’s initial investment in Runway on 1 January 2023.
• No portion of the investment in Runway was sold since its acquisition.
• Airlyft is not a share dealer for income tax purposes.
• Both Airlyft and Runway have a 31 December financial year-end.
• For all financial years, assume a Company Income Tax rate of 27% and 80% of capital gains are included in taxable income, at the time gains are realised.

• Assume that any goodwill arising as a result of a business combination is not deductible for tax purposes.
• Ignore the effects of Dividend Tax and Value Added Tax (VAT).

REQUIRED:
Prepare all the pro-forma general journal entries to account for Runway Ltd in the consolidated financial statements of the Airlyft Ltd Group for the financial year ended 31 December 2023.
• Dates and narrations are not required.
• Show and reference all your workings and calculations clearly.
• Be clear, where applicable, regarding which entity the entries are referring to i.e., put the name of the entity in brackets after the account description.
• Where pro-forma journal entries affect the Profit and Loss accounts, be specific as to which account it is [e.g. Depreciation (Airlyft Ltd) (P/L)]. In other words, do not merely write ‘Profit before tax’.
• Round off to the nearest Rand, if applicable. (45 marks)

Answers to Above Questions on Financial Reporting

Answer 1: In order to determine whether the five investees are the subsidiary of Melon Limited, it is important to assess the level of control that Melon limited has over each of these investee. With respect to Grape Limited, the ownership indicates that 75% of ordinary shares are owned by Melon Limited, which implies that there is significant ownership held by Melon Limited, and it is therefore its subsidiary company.

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