CASE STUDY 1 SOLUTION

QUESTION 1

(a) Prepare a memorandum to management in which you critically discuss, including

calculations and including the requirements of IFRS 15.120 - 122, the extract of the Revenue
note disclosed in GlamPets Ltd’s separate annual financial statements for the year ended
30 September 2022. Limit your calculations to amounts to be disclosed per service revenue
as follows:

(i) Pet Bathing services and nail & teeth grooming services (10)
(ii) Pet Training services (7)

MEMORANDUM
To: Management
From: CTA Candidate
Date: Oct 2022
Topic: Discussion on the revenue disclosure in terms of IFRS 15.120-122

(i) Pet bathing and grooming services

In terms of IFRS 15.120(a) and (b)

• GlamPets must disclose the total amount of the transaction price of the unsatisfied
performance obligations. The transaction price of the unsatisfied performance obligations (1)
are the portion that is not yet recognised as revenue, for the years ended
30 September 2022 and 2021. (1)

• GlamPets must also disclose an explanation of when GlamPets expects to recognise the
amount disclosed above as revenue. This disclosure should either be time-based or by
using qualitative information. (1)

GlamPets measures the level of completion of the performance obligation over time and not at
a point in time. Therefore, disclosure should be on a quantitative basis using time-bands. (1)

The service revenue recognised for the pet bathing and teeth grooming are correctly disclosed
at 76 800 000 (2 400 x 2 000 x 16) (1)

The additional disclosure should be as follows:

2022 2021
Aggregate amount of the transaction price allocated to pet 76 800 000 - (2)
bathing and teeth grooming contracts that are partially or fully
unsatisfied as at 30 September

Management expects that 75% (57 600 000 [C1] / 76 800 000) of the transaction price allocated
to unsatisfied performance obligations as at 30 September 2022 will be recognised during the
2023 financial year and 25% (19 200 000 [C2] / 76 800 000) recognised as revenue during the
2024 financial year. (3)

The fact that 10 of the customer contracts only utilise three of the four visits per month, does
not change the revenue earned by GlamPets as the amount payable is fixed. (1)
Total (11)
Maximum (10)
 Page 2 of 10

(ii) Pet training service contracts

GlamPets Ltd earns a fixed amount for each hour of pet training services provided. (1)

GlamPets has the right to invoice the relevant customers for hours already worked up to year
end, at the fixed rate per hour at which the pet training services have been provided for.
[IFRS 15.B16]. (1)

The amount to be invoiced per customer p.a. is a minimum of R18 200 (R350 x 52 weeks). (1)

However, the relevant service contracts were only entered on 1 February 2022. Consequently,
for the current year ended 30 September 2022 this amounts to R12 133 (R18 200 x 8/12) per
contract. (1)

Total Pet training revenue in this regard is disclosed at the incorrect value of R27 300 000
(revenue is overstated). (1)

The correct amount that to disclose for Pet training revenue for year ended 30 September 2022
should be R18 199 500 (R12 133 x 1 500 contracts) (rounding = 18 200 000). (1)

GlamPets applies the practical expedient in IFRS 15.121 and no additional disclosures in respect
of Pet training revenue is necessary (No disclosure regarding unsatisfied remaining performance
obligations is necessary). (1)

The disclosure regarding the underlying contracts in the extract is correct. (1)
Total (8)
Maximum (7)
Communication skills: presentation, logical flow and conclusion (1)

CALCULATIONS

[C1] R57 600 000 = R2 400 × 2 000 contracts x 12 months (1 Oct 2022 to 30 Sept 2023). (1)

[C2] R19 200 000 = R2 400 × 2 000 contracts x 4 months (1 Oct 2023 to 31 Jan 2024). (1)

(b) Discuss the recognition of the loyalty points in the separate financial statements of
GlamPets Ltd for the year ended 30 September 2022 in terms of IFRS 15 Revenue from
Contracts with Customers. Reference to amounts or calculations are not required for the
discussion.

Accounting treatment: customer loyalty program for recognition of revenue

Recognition
The customer loyalty program is a contract with the relevant customers because the program
provides customers with a material right to the loyalty points that will grant them a discount when
purchasing GlamPets products in the future (IFRS 15.10). (2)

GlamPets’ initiative to provide points to a customer raises a performance obligation for the
following reasons: (1)

The points to customers are distinct (IFRS 15.27) since: (1)

• the customer can redeem the points for a discount on future purchases indicating that the
customers can benefit from the points on their own, and (1)
• are separately identifiable from other goods offered in terms of the product sales. (1)
 Page 3 of 10

Only once GlamPets has satisfied its performance obligation in terms of the product purchases,
may the revenue from the customer loyalty program be recognised (IFRS 15.31). (1)

GlamPets should therefore recognise revenue from the customer loyalty program only once the
customers redeem the points earned. (1)

Since the performance obligation in relation to unredeemed points has not been satisfied, the
revenue for the unredeemed points should not be recognised yet. (1)

However, the unredeemed points will give rise to a contract liability, which should be recognised
at the end of each financial year. (1)
Total (10)
Maximum (9)

(c) Provide the journal entries to account for the customer loyalty program in the separate
financial statements of GlamPets Ltd for the year ended 30 September 2021 and
30 September 2022

Journal entries Dr Cr
R R
J1 30 September 2021
Bank (SFP) (all cash sales) 9 000 000 (1)
Revenue: pet products (P/L) [C2] 8 952 255 (2)
Revenue: loyalty points (P/L) (47 745 [C2] – 9 549) 38 196 (2)
Contract liability (SFP) [C3] 9 549 (2)
Recognition of revenue from pet products and related
loyalty points
J2 30 September 2022
Contract liability (SFP) 5 729 (1)
Revenue: loyalty points (P/L) [C4] 5 729 (1)
Recognise revenue from 2021 loyalty points redeemed
in 2022
J3 Bank (SFP) (all cash sales) 11 400 000 (1)
Revenue: pet products (P/L) [C6] 11 339 523 (2)
Revenue: loyalty points (P/L) (60 477 [C6] – 4 725) 55 752 (1)
Contract liability (SFP) [C7] 4 725 (2)
Recognition of revenue from pet products and related
loyalty points
Total (15)
Maximum (13)
Communication skills: logical flow and conclusion (1)
 Page 4 of 10

(d) Prepare the related parties note to the separate financial statements of GlamPets Ltd for
the year ended 30 September 2022.

GLAMPETS LTD
NOTES FOR THE YEAR ENDED 30 SEPTEMBER 2022

20. Related parties

Relationships between parents and subsidiaries

The following represents a list of the significant subsidiaries:

Ownership
interest
2022
MuttBubbles Ltd 70% (1)
Mobile Grooming Ltd 55% (1)

Transactions with related parties other than key management personnel

2022
R
Sale of goods to:

MuttBubbles Ltd (3 000L x 120) 360 000 (1)

Mobile Grooming Ltd (4 500L x 120) + ((83-7) km’s x 3,50)) 540 266 (2)

Sale of machinery to:

MuttBubbles Ltd 8 000 000 (1)

Purchases of products from

MuttBubbles Ltd (500 000 x 120/100) 600 000 (2)

All the above-mentioned transactions were made on terms equivalent to

those that prevail in arm’s length transactions. (1)

Total (9)
 Page 5 of 10

CALCULATIONS

C1. Loyalty points incurred during 2021 (R9 000 000/R300) 30 000 [1]
Stand-alone selling price of loyalty points (30 000 x R1,60) R48 000

C2. Allocation of transaction price in 2021

Revenue allocated to products
(9 000 000 x (9 000 000/(9 000 000 + 48 000 [C1]))) 8 952 255 [2]
Revenue allocated to points
(9 000 000 – 8 952 255) OR
(9 000 000 x (48 000 [C1]/ (9 000 000 + 48 000 [C1]))) 47 745 [2]

C3. Contract liability for 2021 9 549 [2]

47 745 x 4 200 unredeemed points / 21 000 expected points

C4. 2021 points redeemed in 2022

((19 320 – 16 800)/4 200 x 9 549[C3])) 5 729 [2]
OR
((19 320 – 16 800)/21 000 x 47 745 [C2])

C5. Loyalty points earned during 2022 (R11 400 000/R300) 38 000 [1]
Stand-alone selling price of loyalty points (38 000 x R1,60) R60 800

C6. Allocation of transaction price in 2022

Revenue allocated to products
(11 400 000 x (11 400 000/(11 400 000 + 60 800 [C5]))) 11 339 523 [2]
Revenue allocated to points
11 400 000 – 11 339 523 OR 60 477
(11 400 000 x (60 800 [C5]/(11 400 000 + 60 800 [C5])))

C7. Contract liability for 2022

2022: 60 477 [C6] x (22 400- 20 650) unredeemed points / 22 400 expected 4 725 [2]
points
 Page 6 of 10

QUESTION 2

(a) Prepare the consolidated statement of cash flows of Toivo Ltd Group for the year ended
30 September 2022 according to the direct method.

TOIVO LTD GROUP

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED

30 SEPTEMBER 2022
R
Cash flows from operating activities
Cash receipts from customers [C1] 22 818 911 (2½)
Cash paid to suppliers and employees [C2] (22 105 657) (12)
Cash generated from operations 713 254
Interest paid (185 125 – 18 182[C4]) (166 943) (2½)
Interest received -
Dividends received (133 255 + 387 855 [C5]) 521 110 (1½)
Dividends paid [C6] (566 334) (6)
Income taxes paid [C9] (850 872) (4)
Net cash from operating activities (349 785)

Cash flows from investing activities

Acquisition of property, plant and equipment [C10] (1 142 123) (3½)
Proceeds from disposal of property, plant and equipment (given) 375 250 (1)
Proceeds of equity instruments [C11] 24 011 (3)
Acquisition of subsidiary – Beef Korp Ltd (2 000 000 – 88 255) (1 911 745) (1)
Acquisition of subsidiary – Kapital Ltd (1 300 000 – 150 000) (1 150 000) (1)
Proceeds from disposal of subsidiary – Dendron Ltd
(4 000 000 + 389 239) 4 389 239 (1)
Net cash used in investing activities 584 632

Cash flows from financing activities

Repayment of long-term loan [C12] (203 522) (1½)
Net cash used in financing activities (314 818)

Net increase in cash and cash equivalents 31 325 (1)

Cash and cash equivalents at beginning of year 289 789
Cash and cash equivalents at end of year 321 114
Total (41½)
Maximum (40)
Communication skills: presentation and layout (1)
 Page 7 of 10

(b) Prepare the acquisition of Kapital Ltd note in the consolidated statement of cash flows of
the Toivo Ltd Group for the year ended 30 September 2022 in accordance with IAS 7
Statement of Cash Flows.

TOIVO LTD GROUP

NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED
30 SEPTEMBER 2022

15. Acquisition of subsidiary

During the current financial year Toivo Ltd obtained control over Kapital Ltd by acquiring
an additional 65% interest in Kapital Ltd. The fair value of the assets acquired, and the
liabilities assumed were as follows: (1)

2022
R

Property, plant and equipment 1 520 000 (½)

Inventory 1 285 000 (½)
Trade and other receivables 1 340 000 (½)
Cash and cash equivalents 150 000 (½)
Trade and other payables (1 310 000) (½)
Net assets acquired 2 985 000
Goodwill ((2 985 500 x 80%) – 2 650 000) 262 000 (1)
Non-controlling interests (2 985 500 x 20%) (597 000) (1)
Total consideration 2 650 000
Consideration paid by non-cash transfers (1 350 000)
- Fair value of the original equity interest (950 000) (½)
- Land (160 000) (1)
- Share capital issued (3 000 x R80) (240 000) (1)
Cash consideration 1 300 000
Less: cash of subsidiary acquired 150 000
Net cash outflow 1 150 000 (1)
(9)

CALCULATIONS

C1. Cash receipts from customers

Revenue 22 655 102 [½]

Increase in trade receivables (771 150 – 882 141) (110 991) [½]
Disposal of subsidiary – Dendron Ltd (1 588 900) [½]
Acquisition of subsidiary – Kapital Ltd 1 340 000 [½]
Acquisition of subsidiary – Beef Korp Ltd 523 700 [½]
22 818 911
[2½]
 Page 8 of 10

C2. Cash paid to suppliers and employees

Cost of sales (13 118 228)

Other expenses (5 338 119)
(18 456 347) [1]

Adjusted for non-cash items:

Depreciation 633 855 [½]
Profit on disposal of subsidiary – Dendron Ltd [C3] (1 301 092) [5]
Loss with disposal of property, plant and equipment
(410 102 – 375 250) 34 852 [1]

Changes in working capital:

Inventory
- increase in inventory (958 332 – 779 500) (178 832) [½]
- disposal of subsidiary – Dendron Ltd (2 430 500) [½]
- acquisition of subsidiary – Kapital Ltd 1 285 000 [½]
- consideration received on disposal – Dendron Ltd 400 000 [½]
- acquisition of subsidiary – Beef Korp Ltd 601 200 [½]
Trade payables and accruals
- decrease in trade payables (1 751 438 – 3 133 026) (1 381 588) [½]
- disposal of subsidiary – Dendron Ltd 432 145 [½]
- acquisition of subsidiary – Kapital Ltd (1 310 000) [½]
- acquisition of subsidiary – Beef Korp Ltd (434 350) [½]
(22 105 657)
[12]

C3. Profit on disposal of subsidiary – Dendron Ltd

Derecognition of net assets (3 173 754 + 222 220 + 2 430 500 +

1 588 900 - 389 239 – 227 550 – 218 000 – 432 145) (6 148 440) [2]
Derecognition of goodwill ((2 150 000 x 70%) – 1 700 000) (195 000) [1]
Derecognition of non-controlling interest (6 148 440 x 30%) 1 844 532 [1]
Consideration received 4 400 000 [½]
Fair value of remaining interest 1 400 000 [½]
Profit on disposal of subsidiary 1 301 092
[5]

C4. Interest paid

Deferred consideration on 31 July 2022

[FV = 600 000; i = 10%; n = 1; pmt = 0; PV = ?] 545 455 [1½]
Deferred consideration on 30 September 2022 (563 637) [½]
Accrued interest for the 6 months (18 182)
[2]

C5. Investments in associates – Dividend received

Increase in investment in associates (981 554 – 812 210) (169 344) [½]
Share of profit of associates (given) 557 199 [½]
Dividends received from associates 387 855
[1]
 Page 9 of 10

C6. Dividends paid

Decrease in shareholders for dividends (212 666 – 317 160) (104 494) [½]
Dividends declared by Toivo Ltd [C7] (350 544) [2]
Dividends declared to non-controlling interests [C8] (111 296) [3½]
(566 334)
[6]

C7. Dividends declared by Toivo Ltd

Increase in retained earnings (14 481 169 – 12 127 180) 2 353 989 [½]
Profit attributable to Toivo Ltd (2 471 733) [½]
Transfer of Mark-to-market on disposal of IFRS 9
((950 000 – 650 000) x 77,6%) (232 800) [1]
(350 544)
[2]

C8. Dividends declared to non-controlling interest

Increase in non-controlling interests (3 165 385 – 1 844 532) 1 320 853 [½]
Profit attributable to NCI (1 225 136) [½]
Disposal of subsidiary – Dendron Ltd [C3] 1 844 532 [½]
Acquisition of subsidiary – Beef Korp Ltd [(300 000 + 3 336 363) x 40%] (1 454 545) [1]
Acquisition of subsidiary – Kapital Ltd (2 985 000 x 20%) (597 000) [1]
(111 296)
[3½]

C9. Income taxes paid

Increase in deferred tax balance (833 445 – 711 234) 122 211 [½]
Disposal of subsidiary – Dendron Ltd 227 550 [½]
Fair value adjustment on equity instrument
[(322 581/(1 – (28% x 80%)) – 322 581] (93 116) [1½]
Acquisition of subsidiary – Beef Korp Ltd (43 855) [½]
Movement of deferred tax included in profit or loss 212 790
Decrease in tax payable balance (655 887 – 712 334) (56 447) [½]
Current tax included in profit or loss (1 007 215) [½]
(850 872)
[4]

C10. Acquisition of property, plant and equipment

Increase in PPE balance (10 194 300 – 8 331 125) (1 863 175) [½]
Depreciation (633 855) [½]
Disposal of subsidiary – Dendron Ltd (3 173 754) [½]
Property, plant and equipment disposed of (410 102) [½]
Acquisition of subsidiary – Beef Korp Ltd 3 578 763 [½]
Acquisition of subsidiary – Kapital Ltd 1 520 000 [½]
Consideration paid for Kapital Ltd (160 000) [½]
(1 142 123)
[3½]
 Page 10 of 10

C11. Proceeds of equity instruments

Increase in equity instruments balance (3 748 338 – 3 128 872 (619 466) [½]
Mark-to-market reserve (322 581/(1 – (28% x 80%)) 415 697 [1]
Subsidiary becomes an IFRS 9 investment 1 400 000 [½]
Disposal of subsidiary – Dendron Ltd (222 220) [½]
IFRS 9 investment becomes a subsidiary (950 000) [½]
24 011
[3]

C12. Repayment of long-term loans

Increase in long-term loan balance (2 005 828 – 1 750 000) (255 828) [½]
Acquisition of Beef Korp 677 350 [½]
Disposal of subsidiary – Dendron Ltd 218 000 [½]
(203 522)
[1½]