TITLE BCOM ACCOUNTING

SUBJECT FINANCIAL ACCOUNTING 2A

SUBJECT CODE FNA 210
TEST/EXAM TEST MEMORANDUM
SEMESTER 1ST SEMESTER
DATE WRITTEN 13 APRIL 2018

TOTAL MARKS 120

DURATION 2 HOURS
PASS MARK 50%
WEIGHTING 60%
EXAMINER ELSON PHIRI

REQUIREMENTS:

Learner Requirements: Stationery, Examination Book

Please answer ALL questions.

PLEASE READ THE ASSESSMENT RULES AND REGULATIONS THAT FOLLOW

Learners are warned that contravening any of the examination rules or disobeying the instructions of an
invigilator could result in the examination being declared invalid. Disciplinary measures will be taken which
may result in the students’ expulsion from Damelin.

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ASSESSMENT RULES AND REGULATIONS

Please ensure that you have read and fully understand the following assessment rules and regulations prior
to commencing with your assessment:
1. To be permitted access to the examination, a learner must arrive with:
- an Identity Document or other official proof of identity (for example,
- a student card, passport or driver's licence card with photo); and
- the required exam stationery.
2. No learner may enter the examination room more than 30 minutes after the examination sitting has
commenced and no candidate may leave the room less than one hour after the examination sitting
has commenced.
3. No extra time will be allowed should a student arrive late.
4. All learners must sign the Attendance Register for the examination on arrival.
5. It is the responsibility of learners to familiarise themselves with the examination rules prior to sitting
for the examination.
6. All examinations are to be written on the date and time officially stipulated by the College.
7. It is the responsibility of learners to ensure that they are writing the correct paper and that the
question paper is complete
8. Cell phones must be switched off prior to entering the exam venue. Cell phones and wallets may be
placed under candidates' chairs rather than at the front of the room.
9. Learners may not handle cell phones or wallets during the exam.
10. No weapon of any description may be taken into the assessment room.
11. All personal belongings are to be placed at the front of the examination room. Personal belongings
brought to the examination are at the owner's risk.
12. Smoking is not permitted and learners will not be allowed to leave the examination room in order to
smoke
13. Once the examination has commenced, all conversation of any form between candidates must
cease until after candidates have left the room, after the examination.
14. Only the official College examination book, as supplied by the College, may be used.
15. Learners must ensure that their student number is written on the answer book.
16. Learners are responsible for ensuring that they follow the instructions in the examination for
submitting their answers.
17. Please read the instruction appearing on the examination paper carefully
18. The number of every question must be clearly indicated at the top of every answer.
19. No pages may be torn out of the answer book. All question papers and scrap paper must be handed
to the invigilator after the examination.
20. Learners finishing earlier are to leave the examination room as quietly as possible on the instruction
of the invigilator, and may not talk until outside the building where the examination is being written.
21. Only under exceptional circumstances will a learner be permitted to leave the examination room
during the examination, and if the invigilator gives permission. An invigilator must accompany the
learner. Only one learner at a time may be absent from the examination room.
22. Candidates may not act dishonestly in any respect.

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Question 1 [Framework for the preparation of financial Statements] [30]
S Mallfry is the director of Bitsy Business Limited. He has been doing some reading into differential
reporting after having become interested in this topic due to the following except that he found on SAICA’s
website regarding the new IFRS for Small and Medium-sized Entities(SMEs):

The long awaited financial accounting requirements for Small and Medium Entities (SMEs) has finally
arrived.

Following from significant worldwide demand by users, pro-active consultation by SAICA with South
African Stakeholders, as well as substantive input by SAICA to the International Accounting
Standards Board(IASBs) process, the IASB published an International Financial Reporting
Standards(IFRS) for SMEs on the 9th July 2009.

This is the first set of international accounting requirements developed specifically for SMEs.

Required:
S Mallfry is unsure of some of the issues and terminologies that he came across whilst reading up on this
topic and has asked that you provide brief explanations to the following questions:

a)What is differential reporting and briefly explain its purpose [8]

b)What was significant with regard to South Africa and the IFRSs for Small and Medium-sized Entities
(SMEs) project? [5]
c) How has the IFRSs for Small and Medium-sized Entities (SMEs) benefited the companies it applies
to and explain the inter relationship with other IFRSs? [8]
d)What type of entity would an SME refer to? [5]
e)What does public accountability mean? [4]

Solution [30 marks]

a) Differential reporting refers to the various levels of compliance which apply depending on the
category of company.

The purpose of differential reporting is to allow smaller and less sophisticated companies to
produce financial statements using a simpler set of reporting standards than the international
standards that larger companies must comply with. The concept of differential reporting was borne
out of the acceptance that the content of the financial statements should be driven by the needs of
users. In other words:

 very small entities, for example, would need less complex financial statements because the
users of the financial statements are generally involved in the management of the entity;
whereas

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  very large entities, for example, have thousands of shareholders who have no involvement
in the running of the business and thus need more information to be included in the
financial statements in order to assist in their decisions.

b) South Africa was the very first country in the world to adopt both the exposure draft and the final
IFRS for SMEs. South Africa’s Institute of Chartered Accountants (SAICA) also provided
substantive input to the IASB in the development of the standard.

c) Although prepared on IFRS foundations, the IFRS for SMEs is a stand–alone framework which is
separate from all other IFRSs. The IFRS for SMEs will be available to be used by certain qualifying
entities (i.e. some entities will have to apply full IFRSs and other qualifying entities may apply IFRS
for SMEs instead). The IFRS for SMEs provides the following benefits:

 provides disclosure relief (less detail needs to be disclosed in financial statements);

 simplifies many recognition and measurement criteria;
 removes choices for accounting treatments; and
 eliminates certain topics that are generally not relevant to SMEs

d) SME is the acronym for small and medium-sized entity and refers to an entity that has no public
accountability but still produces general purpose financials for external users.

e) An entity has public accountability in the following circumstances:

 if its debt/equity instruments are publicly traded or the company is in the process of issuing
such instruments.
or
 one of its primary businesses is to hold assets in a fiduciary capacity (i.e. having the legal
authority and duty to make financial decisions) for a broad group of outsiders. e.g. banks,
insurance companies, mutual funds etc.

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Question 2 [Presentation of financial Statements] [30]
IAS 1 Presentation of financial statements prescribes the basis for presentation of general purpose financial
statements to ensure comparability both with the entity’s financial statements of previous periods and
with financial statements of other entities. It sets out the overall requirements for the presentation of
financial statements, guidelines for their structure and minimum requirements for their content.”(IAS
1.1)
Required:

a)State the objective of IAS 1 Presentation of Financial Statements. [5]

b)List the 5 Statements that make up a complete set of financial statements [5]
c) List 6 possible components of other comprehensive income [5]
d)List the general features of financial statements as outlined in IAS 1 Presentation of Financial
Statements [5]
e)Define and explain the difference between the terms profit and loss. Other comprehensive income
and total comprehensive income [10]

Solution

a) The objective of IAS 1 Presentation of Financial Statements is to prescribe the basis for
presentation of general purpose financial statements to ensure comparability both with the entity’s
financial statements of previous periods and with the financial statements of other entities. It sets
out the overall requirements for the presentation of financial statements, guidelines for their
structure and minimum requirements for their content. IAS 1.1

b) The 5 statements that make up a complete set of financial statements are the following:
 the statement of financial position;
 the statement of changes in equity;
 the statement of profit or loss and comprehensive income;
 the statement of cash flows; and
 the notes to the financial statements. IAS 1.10
(Note that an entity may use titles for the statements other than those used in IAS 1. For example,
an entity may use the title ‘statement of comprehensive income’ instead of ‘statement of profit or
loss and other comprehensive income’.)

c) 6 possible components of other comprehensive income are the following:

 changes in revaluation surplus;
 re-measurements of defined benefit plans;
 gains and losses from translating foreign operations;
 gains and losses on investments in equity instruments measured at fair value through other
comprehensive income;
 the effective portion of gains and losses on hedging instruments in a cash flow hedge; and
 for liabilities designated as at fair value through profit or loss, the amount of the change in
fair value that is attributable to changes in the liability’s credit risk. IAS 1.7

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d) The general features of financial statements as outlined in IAS 1 Presentation of Financial
Statements are as follows:
 Fair presentation and compliance with IFRSs;
 Going concern;
 Accrual basis of accounting;
 Materiality and aggregation;
 Offsetting;
 Frequency of reporting;
 Comparative information; and
 Consistency of presentation. IAS 1.15-46

e) Profit or loss, other comprehensive income and total comprehensive income

Profit or loss is the total of income less expenses, excluding the components of other
comprehensive income. IAS 1.7
Other comprehensive income comprises items of income and expenses (including reclassification
adjustments) that are not recognised in profit or loss as required or permitted by other IFRSs. IAS
1.7
The IFRS lists the components of other comprehensive income:
 changes in revaluation surplus;
 re-measurements of defined benefit plans;
 gains and losses from translating foreign operations;
 gains and losses on investments in equity instruments measured at fair value through other
comprehensive income;
 the effective portion of gains and losses on hedging instruments in a cash flow hedge; and
 for liabilities designated as at fair value through profit or loss, the amount of the change in
fair value that is attributable to changes in the liability’s credit risk. IAS 1.7

Total comprehensive income is the change in equity during a period resulting from transactions
and other events, other than those changes resulting from transactions with owners in their
capacity as owners. IAS

Question 3 [Property, Plant and Equipment] [30]

Maroon Limited has plant that cost R100 000 on 1/1/2001.Depreciation is provided over the useful life of 5
years on a straight line basis to a nil residual value.

The company uses the revaluation model for subsequent measurement of its property, plant and equipment
and accounts for revaluations on the net replacement value method. The fair values listed below were
measured using the cost approach.

 The fair value as determined by an independent valuer, at 1/1/2002 amounts to R120 000
 The fair value as determined by an independent valuer, at 1/1/2003 amounts to R50 000
 The fair value as determined by an independent valuer, at 1/1/2004 amounts to R50 000
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The company transfers the maximum amount possible from the revaluation surplus to retained earnings on
an annual basis.

NB: Ignore impairments

Required:

Journalise the transactions for the years ended 31 December 2002, 2003 and 2004. [30]

Solution [30 marks]

1 January 2002 Debit Credit

Plant: Accumulated depreciation 20 000√
Plant: Cost 20 000√
NRVM: set-off of accumulated depreciation before
revaluation √

Plant: Cost [CA 80 000-FV 120 000] 40 000√

Revaluation surplus(OCI) 40 000√
Increase in value√

31 December 2002
Depreciation: Plant[FV 120 000÷4 years remaining] 30 000√
Plant: Accumulated depreciation 30 000√
Depreciation of asset√

Revaluation surplus[40 000÷4 years remaining] 10 000√

Retained earnings 10 000√
Transfer of revaluation surplus to retained earnings :over
life of the asset√

1 January 2003
Plant: Accumulated depreciation 30 000√
Plant: Cost 30 000√
NRVM: set-off of accumulated depreciation before
revaluation √

31 December 2003
Depreciation: Plant[FV (50 000-0)÷3 years remaining] 16 667√
Plant: Accumulated depreciation 16 667√
Depreciation of asset√

1 January 2004
Plant: Accumulated depreciation 16 667√
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Plant: Cost 16 667√
NRVM: set-off of accumulated depreciation before
revaluation √

31 December 2004
Depreciation: Plant[FV (50 000-0)÷3 years remaining] 25 000√
Plant: Accumulated depreciation 25 000√
Depreciation of asset√

Revaluation surplus[10 000 ÷ 2 years remaining] 5 000√

Retained earnings 5 000√
Transfer of revaluation surplus to retained earnings :over
life of the asset√

√=1 mark Award 3 marks for workings

Question 4 [Intangible Assets] [30]

Adam Limited is a successful engineering business. Over the past number of years, the company has
achieved a market share of its products of 30%.At a recent board meeting, the directors suggested
recognising an intangible asset for this market share.

Required:

Briefly discuss whether the market share can be recognised as an intangible asset in terms of IAS 38
Intangible Assets.

NB: A discussion of the recognition criteria is not required.

Solution

An intangible asset is defined as:

• an identifiable,

• non-monetary asset,

• without physical substance.

An asset is defined as:

• a resource,

• controlled by the entity,

• as a result of a past event,

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• from which an inflow of future economic benefits is expected.

The market is a resource in that it generates sales for the company.

The event was the creation of the customer loyalty that constitutes the market share (perhaps
through entertainment, advertising etc). This event is a past event if the creation occurred before
year-end.

Future economic benefits can be expected from the market through sales made to customers that
form part of the market.

There is, however, little or no control over a market since a company’s market can be easily
usurped by another company offering better products, service, advertising etc.

Therefore, the market does not meet the definition of an asset.

Further, although the market share does not have physical substance and is non-monetary, the
market share fails the definition of an intangible asset because it is not identifiable. The reasoning
for this is explained below.

An asset meets the Identifiability criterion in the definition of an intangible asset when it:

• Is separable, or

• Arises from contractual or other legal rights.

An asset is separable if it:

• ‘is capable of being separated or divided from the entity and sold, transferred, licensed, rented or
exchanged, either individually or together with a related contract, identifiable asset or liability,

• regardless of whether the entity intends to do so’.

Thus, the market share is clearly not separable from the business as a whole. Furthermore, the
market share does not arise from contractual or other legal rights.

Therefore, the market share does not meet the definition of an asset or an intangible asset and
must thus be expensed (not controllable and not identifiable). [30 marks]

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