FAC 3703 SPECIFIC FINANCIAL REPORTING

FAC 3703 SPECIFIC FINANCIAL REPORTING FAC3703 EXAM PACK FAC3703 EXAM PACK 1 FAC3703 Paper 1 Suggested solution May-Jun 2017 Question 1 a) Calculate employee benefits W1. Salary: (275 000 x 9 months [Apr – Dec]) 2 475 000 (275 000 x 3 months [Jan – Mar] x 100/110) 750 000 Bonus paid: 275 000 Bonus obligation OB: (275 000 x 1/12) (22 917) Bonus obligation CB: (275 000 x 1,1 x 1/12) 25 208 Leave obligation OB: (52 145) Leave obligation CB: (24 – 6 – 8) = 10 days x 60% = 6 days 62 857 .’. 6 days x 275 000 x 12 x 80% 252 days Short-term employee benefits 3 513 003 W2. (2 475 000 + 750 000) (W1) x 7,5% = 241 875 W3. Termination benefit = 123 000 W4. Government grant relating to salaries = 45 000 x 9/36 = 11 250 .’. Employee benefits to be disclosed in profit before tax note: (3 513 003 (W1) + 241 875 (W2) + 123 000 (W3) – 11 250 (W4) = 3 866 628 * Illustrative PBT note: 2. Profit before tax Profit before tax includes: Expenses Employee benefits 3 866 628 Short-term employee benefits (3 513 003 (W1) – 11 250 (W4)) 3 501 753 Defined contribution plan expense (W2) 241 875 Termination benefits 123 000 b) Discussion of related party • Ms Smith owns 25% of WWT and therefore has significant influence over WWT. • Mr Lampard owns 80% of Rubber Ltd and therefore has control over Rubber Ltd. • Ms Smith the fiancée of Mr Lampard. It could be argued that they are close family even though this type of relationship is not specifically addressed by IAS 24. • Assuming that Ms Smith and Mr Lampard are close family, Rubber Ltd and WWT are related parties owing to Ms Smith’s significant influence over WWT and Mr Lampard’s control over Rubber Ltd. 2 c) i) Discussion re recognition of government grant A government grant is initially recognised when the amount is received or receivable – which was received on 1 April 2016, and when it is reasonably assured that the conditions attached will be met, i.e., that the entity will not retrench any staff under 35 years of age. The subsequent recognition of a government grant depends on the type of grant and the accounting policy of the entity. This government grant is an income-based grant as it relates to a youth wage subsidy. In addition, it relates to future employment payments of youth employed by the entity. The government grant is initially recognised as a liability in the statement of financial position, and then recognised as a deduction against the related expense, i.e., employee benefits, over the period of the condition attached, i.e., 3 years. ii) Calculation balance of government grant in statement of financial position Government grant received recognised as deferred income liability 45 000 Amount realise in profit or loss as deduction against employee benefits (11 250) (45 000 x 9/36) 33 750 d) Calculation of movement in deferred tax CA TB TD DT@ 28% Leave pay obligation 52 154 - 52 154 14 603 A Bonus obligation 22 917 - 22 917 6 417 A Deferred tax asset at 31 December 2016 21 020 A CA TB TD DT@ 28% Leave pay obligation 62 857 - 52 154 14 603 A Bonus obligation 25 208 - 22 917 6 417 A Government grant def inc liability 33 750 - 33 750 9 450 A Deferred tax asset at 31 December 2016 34 108 A .’. Movement in deferred tax balance = 34 108 A – 21 020 A = 18 088 Deferred tax (SFP) 18 088 Income tax expense: deferred tax (PL) 18 088 e) 1 – c 2 – b (62 857 (W1) x 40/60) 3 – a 4 – b 5 – b 6 – ? (In our opinion there is no correct answer as the government grant to be realised in 2017 would be (40 500 x 12/36) less any change in estimate relating to the repayment of R4 500. The amount recognised in 2016 of 11 250 (c)(ii) versus what should have been recognised on the government grant of R40 500 x 9/36 = 10 125, is 1 125. The total grant to be recognised in PL for 2017 is therefore 12 375 (13 500 – 1 125). It appears as if UNISA meant for option d to be selected.) 3 Question 2 a) Disclosure of notes in financial statements VS Con Ltd Notes to the financial statements for the year ended 29 February 2016 2. Profit before tax 2016 Profit before tax includes: Income Profit on disposal of machinery (500 000 – 450 000 (note 3)) 50 000 Finance income 127 437 Funds invested (7 900 (shares) + 2 041 (loan)) 9 941 Capitalised (2 041) Expenses Finance costs 33 400 Total (37 400 + 31 262 (W1)(J3)) 68 662 Capitalised (W2) (35 262) Depreciation (51 000 (W1)(J5) + (90 000 + 71 290 (note 3)) 212 290 3. Property, plant and equipment Machinery Flowline Carrying amount at 1 March 2015 540 000 - Cost 900 000 - Acc depreciation (900 000 x 24/60) (360 000) - Additions - 1 283 221 Cost - 1 250 000 Borrowing costs (35 262 (W2) – 2 041 (W2)) - 33 221 Depreciation (900 000 x 6/24); (1 283 221 x 2/36) (90 000) (71 290) Disposal (450 000) - Cost (900 000) - Acc depreciation (360 000 + 90 000) 450 000 - Carrying amount at 29 February 2016 - 1 211 931 Cost Accumulated depreciation 3. Lease liability VS Con Ltd entered into a lease agreement on 31 August 2015 machinery. The lease term is 5 years. The instalments are R65 000 payable biannually in arrears, commencing 29 February 2016. The effective interest rate per annum is 12,5%. VS Con Ltd paid R10 000 legal fees to enter into the lease agreement. Ownership of the delivery vehicle will transfer to the company Ltd at the end of the lease term on payment of the guaranteed residual value of R50 000. 4 3.1 Right of use asset Carrying amount at beginning of year Machinery - Total - Acquired during the year (500 000 (W1)(J1) + 10 000 (W1)((J2)) 510 000 510 000 Depreciation (W1)(J5) (51 000) (51 000) Carrying amount at end of year 459 000 459 000 3.2 Maturity analysis Future lease payments (undiscounted) 2017 130 000 (65 000 x 2) 2018 130 000 (65 000 x 2) 2019 130 000 (65 000 x 2) 2020 130 000 (65 000 x 2) 2021 115 000 (65 000 + 50 000) Total future lease payments 635 000 Future finance costs (168 738) (Amort 2-10 : Int) Principal (lease liability) 466 262 Non-current 392 326 Balancing figure Current 73 936 Amort 2-3: Prin 3.3. Total cash outflows relating to leases Presented under financing activities Cash payments for principal portion of lease liabilities (65 000 – 31 262) 33 738 Presented under operating activities - Cash payments for interest portion of lease liabilities (W1)(J3) 31 262 Legal fees paid to enter into lease agreement 10 000 Total cash outflow relating to leases (W1)(J4) 75 000 W1. END mode; PV = 500 000; n = 10 (5 x 2); PMT = (65 000); FV = (50 000); i = comp = 6, 2524 (per biannual period. .’. per annum = 6,2524 x 2 = 12,50%) J1. Right of use asset Lease liability (SFP) (SFP) 500 000 500 000 J2. Right of use asset Bank (SFP) (SFP) 10 000 10 000 J3. Finance costs Lease liability (PL) (SFP) 31 262 31 262 AMORT 1 – 1: INT = 31 262, BAL = 466 262, PRIN = 33 738 J4.