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2017Tutorial letter 102/0/2017APPLIED FINANCIAL ACCOUNTING IIFAC4864/NFA4864/ZFA4864Year ModuleDepartment of Financial GovernanceIMPORTANT INFORMATION:This tutorial letter contains important informationabout your module.

2INDEXFAC4864/102ZFA4864/102NFA4864/102PageDue date3Personnel and contact details3Prescribed method of study3Suggested working programme4Exam technique4Learning unit1Consolidated and separate financial statements2Business combinationsSelf assessment questions and suggested solutions73652MJM

FAC4864/102ZFA4864/102NFA4864/1023DUE DATEDUE DATE FOR THIS TUTORIAL LETTER:TEST 1 ON TUTORIAL 102:14 FEBRUARY 201714 MARCH 2017PERSONNEL AND CONTACT DETAILSPersonnelTelephoneNumberLecturersProf ZR Koppeschaar (CTA coordinator)Ms A de Wet (Course leader)Ms C Wright (Course leader)Mr HA CombrinkMs T DeyselMr T NkwaneMs A OosthuizenMs S RiekertMs T van Mourik012 429-4717012 429-6124012 429-2004012 429-4792012 429-4713012 429-6346012 429-8971012 429-4669012 429-3549SecretaryMs MJ Marais012 429-4720Please send all e-mail queries to: use the module telephone number to contact the lecturers: 012 429-4185PRESCRIBED METHOD OF STUDY1.Firstly study the relevant chapter(s) in your prescribed textbook so that you master the basic principlesand supplement this with the additional information in the learning unit (where applicable).2.Read the standards and interpretation(s) covered by the learning unit.3.Do the questions in the study material and make sure you understand the principles contained in thequestions.4.Consider whether you have achieved the specific outcomes of the learning unit.5.After completion of all the learning units - attempt the self assessment questions (open book, but withinthe time constraint) to test whether you have mastered the contents of this tutorial letter.MJM

FAC4864/102ZFA4864/102NFA4864/1024SUGGESTED WORKING PROGRAMMEWEDNESDAY1Consolidatedand onsolidatedand separatefinancialstatementsFEBRUARY lidatedand separateand separateand inationsTHURSDAYFRIDAY11Businesscombinations12Do inationsBusinesscombinations13Do selfassessmentquestions14Do selfassessmentquestionsEXAM TECHNIQUE1.IntroductionExamination technique remains the key distinguishing feature between candidates who passand those that fail. Practice by answering questions under exam conditions by preparing thesolution within the time limits and then by marking your solution. By marking your solution youwill learn from your mistakes.2.Examination techniqueFrom a review of candidates’ answers to past examination questions, the general examinationtechnique issues were identified. These problems affected the overall performance ofcandidates. Although these aspects seem like common sense, candidates who pay attentionto them are likely to obtain better marks.To improve your overall examination technique and performance take note of the following: Discussion questionsLay the foundation of your answer by stating the relevant theory first. Stating the theoryprovides perspective from which the question is answered. Then proceed to apply thetheory and to demonstrate insight into the question.Identify all the issues and address all considerations in your application. Remember toconclude at the end.In addition markers found that candidates used their own abbreviations (sms messagingstyle) in their answers. Marks could not be awarded here as it is not up to the markers tointerpret abbreviations that are not commonly used. The increased use of an sms style ofwriting in a professional examination is a major concern. Candidates should payspecific attention to the way in which they write their answers, and bear in mindthat this is a professional examination for which presentation marks are awarded. Journal entriesDescribe the specific accounts affected by the journals and clearly convey theclassification of the account (e.g. P/L; OCI; SFP; SCE). Ensure that the journal entriesare processed the correct way around. Indicate the debit and credit of accounts clearly.MJM

5 FAC4864/102ZFA4864/102NFA4864/102Layout and presentationNarrations to journals should always be provided, except for when it is stated in aquestion that it is not required.Candidates should allocate time to planning the layout and presentation of their answersbefore committing thought to paper. Very often, candidates start to write without havingread the question properly, which invariably leads to, for example, parts of the samequestion being answered in several places or restatement of facts in different parts.Marks are awarded for appropriate presentation and candidates should answerquestions in the required format, that is, in the form of a letter, memorandum or a report,if this is what is required.The quality of handwriting is also an ongoing problem. The onus is on the candidate toproduce legible answers. IrrelevancyMarks are awarded for quality, not quantity. Long-windedness is no substitute for clear,concise, logical thinking and good presentation. Candidates should bear in mind that adisplay of irrelevant knowledge, however sound, will gain no marks. CalculationsAlways show all your calculations. Remember that your calculations should contain areference when used in a solution. Calculations done in pencil will NOT be marked. Time managementUse the reading time allocated to a question wisely, by highlighting important issues bytrying to envisage the required.Candidates are advised to use their time wisely and budget time for each question. Themarks allocated to each question are an indication of the relevant importance theexaminers attach to that question and thus the time that should be spent on it.Candidates should beware of the tendency to spend too much time on the first questionattempted and too little time on the last. They should never overrun on time on anyquestion, but rather return to it after attempting all other questions. Recommendations / interpretationsResponses to these requirements are generally poor, either because candidates areunable to explain principles that they can apply numerically or because they are reluctantto commit themselves to one course of action. It is essential to make a recommendationwhen a question calls for it, and to support it with reasons. Not only the direction of therecommendation (i.e. to do or not to do something) is important, but particularly thequality of the arguments – in other words, whether they are relevant to the actual caseand whether the final recommendation is consistent with those arguments. Unnecessarytime is wasted by stating all the alternatives.MJM

6 FAC4864/102ZFA4864/102NFA4864/102Open-book examinationCandidates are reminded that they MUST familiarise themselves with the open bookpolicy. To this end candidates are advised of the following: No loose pages (of any kind) may be brought into the exam. Writing on flags – Candidates are only allowed to highlight, underline, sideline andflag in the permitted texts. Writing on flags is permitted for reference and crossreferencing purposes only, that is, writing may only refer to the name or number ofthe relevant discipline, standard, statement or section in the legislation.Any contravention of this regulation will be considered to be misconduct.MJM

FAC4864/102ZFA4864/102NFA4864/1027LEARNING UNIT 1 - TIONIAS 27 prescribes accounting and disclosure requirements on how to account for the costof an investment in the separate records of the investor for investments in subsidiaries,joint ventures and associates. This includes use of IFRS 9 where the entity exercises thepolicy choice.IFRS 10 deals with the definition of control and establishes control as the basis forconsolidation. IFRS 10 also sets out how to apply the principle of control and sets out theaccounting requirements for preparation of consolidated financial statements. IFRS 10deals with the principles that should be applied to a business combination (including theelimination of intragroup transactions, consolidation procedures, etc.) from the date ofacquisition until date of loss of control.OBJECTIVES/OUTCOMESAfter you have studied this learning unit, you should be able to demonstate knowledge of:1.Define control (IFRS 10 Appendix A and IFRS 10.5-.18).2.Identify situations in which consolidated financial statements should be presentedand the scope of consolidated financial statements (IFRS 10.4).3.Apply the consolidation procedure (IFRS 10.19-.24 and IFRS tion of the parent’s investment in the subsidiary;Account for non-controlling interests in the profit or loss of consolidatedsubsidiaries;Account for non-controlling interests in the net assets of consolidatedsubsidiaries;Elimination of intragroup balances, transactions, income and expenses;Use of uniform accounting policies;Use of the same end of reporting period date; andPresentation of non-controlling interests in the statement of financial position.4.Account for a loss of control transaction (IFRS 10.25 and IFRS 10.B97-.B99) –Details in Tutorial Letter 104/2016.5.Account for changes in ownership interest – Details in Tutorial Letter 104/2016.6.Account for the cost of investments in subsidiaries, joint ventures and associates inthe separate financial statements of the investor (IAS 27.9-.14) either: cost;In accordance with IFRS 9; orUsing the equity method as described in IAS 28.Account for dividends from subsidiaries, joint ventures and associates (IAS 27.12).MJM

MES8.Disclosures in separate financial statements (IAS 27.15-.17).9.Disclosures in consolidated financial statements (IFRS 12).9.1Disclose significant judgements and assumptions that an entity made indetermining that it has control of another entity;Disclose interests in subsidiaries.Disclose interest in unconsolidated subsidiaries held by an investment entity.Disclose interest in unconsolidated structured entities. for investment entities (IFRS 10, IFRS 12 and IAS 27):10.1 Define an investment entity;10.2 Account for an investment entity; and10.3 Disclose an investment entity.PRESCRIBED STUDY MATERIALThe following must be studied before you attempt the questions in this learning unit:1.Group Statements, 16th edition, Volume 1Chapter1345678A group of entities and its financial statements: theory and backgroundConsolidation at acquisition dateConsolidation after acquisition dateIntragroup transactionsAdjustments and sundry aspects of group statementsConsolidation of complex groupInterim acquisition of an interest in a subsidiary2.Group Statements, 16th edition, Volume 2, Chapter 10.3.IAS 27 Separate Financial Statements.4.IFRS 10 Consolidated Financial Statements.5.IFRS 12 Disclosure of Interests in Other Entities.6.Understanding of IFRS 9 Financial Instruments.COMMENTPlease note that Group Statements, Volume 1, was covered thoroughly in yourundergraduate studies and therefore this tutorial letter is only a revision of the basicconsolidation principles. It is very important that you spend enough time to revise theseprinciples.MJM

9FAC4864/102ZFA4864/102NFA4864/102THE REST OF LEARNING UNIT 1 IS BASED ON THE ASSUMPTION THAT YOUHAVE ALREADY STUDIED THE RELEVANT CHAPTERS IN THE PRESCRIBEDTEXTBOOK.SECTION A - ADDITIONAL INFORMATION1.Overview - IAS 27 Separate Financial StatementsDefinitions RecognitionIASDividends received from a subsidiary, joint venture or associateConsolidated financial statementsSeparate financial statements27.427.427.12DisclosureMeasurementWhen an entity prepares separate financial statements, it shall account forinvestments in subsidiaries, joint ventures and associates either:(a)(b)(c)at cost,in accordance with IFRS 9, orusing the equity method as described in IAS 28. When an investment is accounted for at cost or using the equity methodin terms of IAS 27.10 and it’s classified as held for sale – account for inaccordance with IFRS 5. When an investment is accounted for in accordance with IFRS 9 interms of IAS 27.10 and it’s classified as held for sale – continue toaccount for investments in terms of IFRS 9.27.10Refer to IAS 27.15-.17MJM

10Overview - IFRS 10 Consolidated Financial Statements (a)(b)DerecognitionCombine like items of assets, liabilities, equity, income,expenses and cash flows of parent with those ofsubsidiary.Eliminate the carrying amount of the parent’s investmentin subsidiary and the parent’s portion of equity of thesubsidiary.Eliminate intragroup transactions and balances.If a parent loses control of a subsidiary, the parent(a)Derecognise assets (including goodwill) and liabilities ofsubsidiary;(b)Derecognise the carrying amount of any non-controllinginterests;(c)Recognise the fair value of the consideration received;(d)Recognise the retained investment at fair value;(e)Reclassify to P/L or transfer directly to retained earningsthe amounts recognised in OCI;(f)Recognise any resulting difference as a gain/loss inprofit/loss.Disclosure(c)Consolidated financial statementsDecision makerGroupParentRelevant activitiesRemoval rightsSubsidiaryControl of an investeePowerReturnsLink between power and returnsNon-controlling interestsSubstantive voting rightsProtective rightsPotential voting rightsVariable returnsInvestment entityRefer to IFRS 12 Disclosure of Interests in Other s2.FAC4864/102ZFA4864/102NFA4864/102 IFRS10 App A10 App A10 App A10 App A10 App A10 App A10 App A10 App A; 10.5-.910 App A; 10.10-.1410.15-.1610 App A; 10.17-.1810 App A; 10.22-.2410.B22-.B2510 App A;10.B26-.B2810.B47-.B5010.B55-.B5710 App A10.B8610.25-.2610.B97-.B9912.10-.19Definition of liability: Paragraphs 4.15-4.19 and 4.46Definition of equity: Paragraphs 4.20-4.23MJM

ZFA4864/102NFA4864/102Overview - IFRS 12 Disclosure of Interests in Other Entities – Sections relating todisclosure of interests in subsidiaries Income from a structured entityInterest in another entityStructured entityConsolidated financial statementsControl of an entityGroupNon-controlling interestsParentProtective rightsRelevant activitiesSeparate financial statementsSubsidiaryInvestment entityObjective of the standard is to disclose significant judgements andassumptions made in determining: the nature of an interest in an entity or arrangement; and that it meets the definition of an investment entity, if applicableThis IFRS shall be applied by an entity that has an interest in any of thefollowing: subsidiaries unconsolidated structured entities disclose information about unconsolidated structured entities in theseparate financial statements of the entity if consolidated financialstatements are not preparedSignificant judgements and assumptions Disclose information about significant judgements and assumptionsit has made (and changes to those judgements and assumptions) indetermining:- that it has control of another entity- that the parent is an investment entity Examples of disclosure of significant judgements and assumptionsmade in determining that:- it does not control another entity even though it holds more thanhalf of the voting rights of the other entity- it controls another entity even though it holds less than half of thevoting rights of the other entity- it is an agent or a principalIFRS / IAS12 App A12 App A12 App A27.410 App A10 App A10 App A10 App A10 App A10 App A27.410 App A10 App 72MJM

12Interests in subsidiaries Disclose information about interests in subsidiaries to understand:- the composition of the group- the interest that non-controlling interests have in the group’sactivities and cash flows Disclose information about interests in subsidiaries to evaluate:- the nature and extent of significant restrictions on its ability toaccess or use assets, and settle liabilities, of the group- the nature of, and changes in, the risks associated with itsinterests in consolidated structured entities- the consequences of changes in its ownership interest that donot result in a loss of control- the consequences of losing control during the reporting periodDisclosure If date or reporting period of subsidiary’s financial statementsdiffer with the consolidated financial statements, disclose the dateof the end of the reporting period and the reason for using adifferent date or periodNon-controlling interests Disclose for each of an entity’s subsidiaries that have noncontrolling interests that are material to the reporting entity:- the name of the subsidiary- the principal place of business (and country of incorporation ifdifferent from the principal place of business)- the proportion of ownership interests held by non-controllinginterests- the proportion of voting rights held by non-controlling interests,if different from the proportion of ownership interests held- the profit or loss allocated to non-controlling interests of thesubsidiary during the reporting period- accumulated non-controlling interests of the subsidiary at theend of the reporting period- summarised financial information about the subsidiaryRestrictions and changes in ownership Disclose significant restrictions on the entity’s ability to access oruse the assets and settle the liabilities of the group Disclose the terms of any contractual arrangements that couldrequire the parent or its subsidiaries to provide financial support toa consolidated structured entity, including events orcircumstances that could expose the reporting entity to a loss Present a schedule that shows the effects on the equityattributable to owners of the parent of any changes in itsownership interest in a subsidiary that do not result in a loss ofcontrol If control of a subsidiary is lost, disclose the gain or loss, if any,calculated in accordance with IFRS 10.25 When an entity becomes, or ceases to be, an investment entity, itshall disclose the change of investment entity status and thereasons for the changeInterests in unconsolidated subsidiaries (investment entities)Interests in unconsolidated structured 12.10(a)(i)12.10(a)(ii) &12.1212.10(b)(i) &12.1312.10(b)(ii) &12.14-.1712.10(b)(iii) &12.1812.10(b)(iv) B12.19A-.19G12.24-.31MJM

FAC4864/102ZFA4864/102NFA4864/10213EXAMPLESThe following examples illustrates the basic consolidation process:1.Investment in subsidiary accounted for at costP Ltd acquired a 100% interest in S Ltd for R200 000 on 1 January 20.13 when S Ltd’s share capitaland retained earnings amounted to R80 000 and R120 000 respectively.Investments in subsidiaries are accounted for at cost in terms of IAS 27.10(a).Parent (P)Separate FinancialStatementsSubsidiary (S)Financial StatementsR’000R’000AssetsInvestment in S Ltd(cost)Trade debtors200100EquityShare capitalRetained earnings(50)(150)EquityShare capitalRetained earnings(100)LiabilitiesLong-term loanLiabilitiesLong-term loanNote ntsTrade 150)Note 2Consolidated FinancialStatements(P S)R’000AssetsInvestment in S Ltd(cost)Trade debtors380EquityShare capitalRetained earnings(50)(180)LiabilitiesLong-term loan(150)Note 3Notes1.When a parent prepares separate financial statements, it shall account for investments insubsidiaries at cost, in accordance with IFRS 9 at fair value or using the eq

accounting requirements for preparation of consolidated financial statements. IFRS 10 deals with the principles that should be applied to a business combination (including the elimination of intragroup transactions, consolidation procedures, etc.) from the date of acquisition until date of loss of control. OBJECTIVES/OUTCOMES After you have studied this learning unit, you should be able to .

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