IAS 8, IFRS 10 & IFRS 3

The following information relates to question 1 & 2:

CoralTech Limited (CTL), a South African manufacturer of specialised underwater drones for marine research, who has a current financial year end of 31 December 2023, discovered a significant error in its financial statements. In the 2021 financial year, CTL failed to account for
R1 500 000 in revenue from a sale of drones that had already been delivered and invoiced on 20 December 2021. The cost of sales regarding this transaction was correctly accounted for in the 2021 financial year. The error was only identified during the audit for the year ending 31 December 2023. CTL’s retained earnings balance on 1 January 2022  was R4 000 000.

Question 1:

Which of the following best describes how CoralTech Limited should correct this prior period error in its financial statements in accordance with IAS 8?

• The error should be corrected prospectively in the current year’s financial statements by adjusting the revenue for the year ended 31 December 2023.

• The error should be disclosed, but no adjustment should be made to the prior year financial statements as it is considered immaterial.

• The error should be corrected retrospectively by adjusting the opening retained earnings at the beginning of the earliest prior period presented, which is on 1 January 2022 and restating the prior period’s comparatives.

• The error should only be corrected if it impacts the overall materiality of the financial statements for the 2023 financial year.

The following information relates to question 1 & 2:

CoralTech Limited (CTL), a South African manufacturer of specialised underwater drones for marine research, who has a current financial year end of 31 December 2023, discovered a significant error in its financial statements. In the 2021 financial year, CTL failed to account for
R1 500 000 in revenue from a sale of drones that had already been delivered and invoiced on 20 December 2021. The cost of sales regarding this transaction was correctly accounted for in the 2021 financial year. The error was only identified during the audit for the year ending 31 December 2023. CTL’s retained earnings balance on 1 January 2022  was R4 000 000.

Question 2:

Based on the prior period error identified, what would CoralTech Limited’s corrected retained earnings balance be on 1 January 2022, after adjusting for the R1 500 000 error?

• R5 500 000

• R4 000 000

• R2 500 000

• R6 500 000

Question 3:

Globe Investments Limited (GIL), a South African private equity firm, acquired a 60% equity stake in Horizon Tech Limited (HTL), an emerging technology company, on 1 January 2024, for
R30 000 000. Although GIL holds a 60% share in HTL, it does not possess any voting rights. The founders of HTL retain full voting power and are responsible for all strategic and operational decisions. GIL’s role is limited to receiving dividends, without any influence over HTL’s financial or operational policies.

According to IFRS 10, what must Globe Investments Limited (GIL) evaluate to determine the appropriate classification of its 60% equity interest in Horizon Tech Limited (HTL) (Choose the most correct answer)?

• Whether GIL's 60% ownership automatically results in consolidation as a subsidiary.

• Whether GIL controls HTL by having the power to direct relevant activities, be exposed to variable returns and be able to affect HTL's returns, despite owning 60% of the equity.

• Whether GIL should classify HTL as an associate based on the 60% ownership stake.

• Whether GIL shares control of HTL with other parties, qualifying it as a joint venture.

Question 4:

Vertex Investments Limited (VIL), a South African investment firm, acquired a 75% equity stake in FarmLease Holdings Limited (FHL), a company established to acquire, hold, and lease agricultural land, on 1 January 2024, for R45 000 000. Despite owning 75% of FHL’s equity, VIL does not have any voting rights. The founders of FHL retain 100% of the voting power and are responsible for all strategic and operational decisions. FHL operates solely to acquire and lease out farmland, with no other business processes or activities that would qualify as a business under IFRS 3.

Is the following statement true or false:

Given that FarmLease Holdings Limited (FHL) does not meet the definition of a business as defined in IFRS 3.B7, it shall still be considered whether VIL controls FHL due to their % holding being more than 50%.

• True

• False

Question 5:

Delta Manufacturing Limited (DML) is a South African company specializing in the production of mining safety equipment for the mining sector. On 1 January 2020, DML acquired a heavy-duty mining manufacturing machine to be used in its manufacturing process for R5 000 000 with an expected useful life of 10 years and a residual value of R500 000. The machine was available for its intended use on 1 January 2020. The machine is being depreciated on a straight-line basis. DML has a current financial year end of 31 December 2023.

On 1 January 2023, DML’s management performed a review of the machine’s expected residual value due to changes in market conditions, including a decline in the demand for their safety mining equipment, due to a competitor gaining the majority market share due to their manufacturing process taking half the time to produce the same amount of finished equipment. As a result, the machine’s residual value was revised down to R200 000, as this machine is outdated, effective from 1 January 2023. The useful life of the machine remains unchanged.

Calculate the depreciation expense for the year ending 31 December 2023, after adjusting for the change in the residual value?

• R450 000

• R492 857

• R315 000

• R200 000

Question 6:

Entity A holds 35% of the voting rights in Entity B. Entity A can appoint the majority of the members of Entity B's board of directors.

Is the following statement true or false: According to IFRS 10, Entity A must consolidate Entity B.

• True

• False

Question 7:

Company A acquires Company B for a total consideration as follows: R8 000 000 in cash and R1 000 000 payable 1 year from acquisition date, the present value of the R1 000 000 amount being R920 000. At the acquisition date, company A also gave Company B a machine which forms part of the consideration with a fair value of R2 million and a carrying amount of R1 800 000.

What would be the total consideration for the acquisition?

• R10 000 000

• R11 000 000

• R10 920 000

• R10 720 000

Question 8:

Company A acquires 80% of the shares of Company B for a total consideration of R28 million. At the acquisition date, Company B's share capital is 10 million Rand, and its Retained earnings amount to R20 million.

What is the goodwill recognized at acquisition, considering NCI at its proportionate share?

• R24 million

• RNil

• R4 million

• R20,8 million

Question 9:

Company Y discovers an error in the valuation of its inventory from the previous year. The error resulted in an overstatement of inventory by R30 000. The value of the inventory at the beginning of the previous year was R150 000.

What amount should Company Y recognize as a prior period adjustment for the error?

• R150 000, increase in inventory balance.

• RNil

• R30 000, decrease in inventory balance.

• R120 000, decrease in inventory balance.

Question 10:

Which of the following best describes a change in accounting policy as per IAS 8?

• A change in accounting policy occurs when an entity changes its accounting treatment for an event, transaction, or other item due to it being required by IFRS or due to the fact that it results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows.

• A change in accounting policy occurs only when required by a change in accounting standards.

• A change in accounting policy only arises when an error is discovered in the financial statements.

• A change in accounting policy is not recognized in the financial statements under IAS 8.