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AFE3872 Assignment

Question 1

Part 1

NAMPA was established in Namibian 1995. Over the years the company has grown to a multi-national manufacturer and distributer of authentic Yogurt. NAMPA’s yogurt is made in a traditional Namibian style with milk, cream, various sugars and fresh fruit purees. NAMPA has a 31 December year end.

You are the IFRS consultant of NAMPA. The financial manager of NAMPA requires your advice on the following transactions:

Transaction 1

NAMPA issued 2 500 N$800 cumulative convertible preference shares at face value on 1 January 2023. The preference shares have a dividend rate of 6% per annum, whilst similar preference shares without conversion rights currently earn a market related dividend at a rate of 8% per annum. A preference dividend was declared and paid by NAMPA to preference shareholders on 31 December 2023. Any unpaid dividends are accumulated until conversion date.

The financial manager is considering the following two conversion options for the preference shares:

(a) Each preference share is compulsory convertible into 10 ordinary shares on 31 December 2025; or

(b) Each preference share is compulsory convertible into a number of shares with a value equalling the issue price plus a 20% premium thereon on 31 December 2025.

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Transaction 2

On 15 July 2023 NAMPA decided to replace a pasteurisation machine that was nearing the end of its useful life. Pasteurisation is an important step in the manufacturing process of yogurt since it reduces the number of non-pathogenic bacteria.

On 1 August 2023, NAMPA placed a non-cancellable order to purchase a pasteurisation machine from a German supplier at a cost of €80 000. On the same date the company entered into a six-month forward exchange contract (FEC) to buy €80 000, in order to protect the company against unfavourable fluctuations in the NAD/Euro exchange rate.

The pasteurisation machine was shipped free-on-board on 15 September 2023 and arrived in the harbour at Walvisbay harbor on 12 October 2023, after which it was delivered to NAMPA’s premises on 31 October 2023. NAMPA does not apply hedge accounting in terms of IFRS 9.

The following exchange rates were applicable:

Date	Spot rate	Forward rate expiring on 31 January 2024
15-Jul-23	€1 = N$15,12
01-Aug-23	€1 = N$15,17	€1 = N$15,23
15-Sep-23	€1 = N$15,15	€1 = N$15,24
12-Oct-23	€1 = N$15,16	€1 = N$15,27
31-Oct-23	€1 = N$15,13	€1 = N$15,25
31-Dec-23	€1 = N$15,10	€1 = N$15,22
31-Jan-24	€1 = N$15,11	€1 = N$15,22

Part 2

Greener Ltd (Greener ) is a subsidiary of NAMPA. The group accountant of NAMPA , Saima June, has requested you to assist in the finalisation of the preparation of the consolidated statement of changes in equity of the Greener Ltd for the year ended 30 June 2018.

On 2 October 2020, Greener acquired 75% of the ordinary shares and voting rights of Herb Ltd (Herb) for a cash consideration of N$1 025 000 and obtained control over Herb in terms of IFRS 10 Consolidated Financial Statements from that date. Herb is incorporated in Jamaica and has the Jamaican Dollar (J$) as its functional currency. On 2 October 2020, Herb had 15 000 issued ordinary shares with ordinary share capital amounting to J$1 500 000. There has been no change in the issued ordinary share capital of Herb since the date of acquisition.

All the assets and liabilities of Herb were deemed to be fairly valued at acquisition date with the exception of trade payables that were overvalued by J$565 000. These trade payables were settled by 30 June 2021.

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Other components of the equity of Herb are reflected as follows on the respective dates:

	Retained earnings	Mark-to-market reserve
	J$	J$
02-Oct-20	12 570 000	–
01-Jul-21	13 850 000	–
01-Jul-22	14 870 000	340 000
30-Jun-23	15 300 000	365 000

 On 28 February 2023, Greener reduced its shareholding in Herb from 75% to 65%. The shares in Herb were sold for an amount equal to the fair value of the shares. Greener did not lose control over Herb at this date. Non-controlling interests were adjusted with an amount of N$173 809 as a result of this sale (calculated in accordance with IFRS 10.B96).

The fair value of the share price of Herb amounted to J$1 235 per share and J$1 687 per share on 2 October 2020 and 28 February 2023 respectively.

Herb declared and paid a dividend of J$120 000 on 30 June 2023.

The following exchange rates were applicable at the respective dates:

	N$1 = JMD (J$)
02-Oct-20	10,90
Average for the period 2 October 2020 to 30 June 2021	10,82
30-Jun-21	10,75
Average for the period 1 July 2021 to 30 June 2022	9,35
30-Jun-22	9,10
Average for the period 1 July 2022 to 28 February 2023	9,45
28-Feb-23	10,12
Average for the period 1 March 2023 to 30 June 2023	10,25
30-Jun-23	10,54

Additional Information

1. It is the accounting policy of Greener to account for investments in subsidiaries at cost in its separate financial statements in terms of IAS 10(a).
2. Greener elected to measure non-controlling interests at fair value at the acquisition date for all acquisitions.
3. Profit after tax and other comprehensive income accrued evenly throughout the year.
4. Assume a normal income tax rate of 32% in Namibia and a tax rate of 30% in Jamaica for the entire financial year. Ignore the effects of Dividend Tax and Value Added Tax (VAT).

Required Part 1 a) Advise the financial manager regarding transaction 1 on the classification of the convertible preference shares for both conversion options (a) and (b) in accordance with IAS 32 Financial instruments: Presentation for year ended 31 December 2023. Please note: ·         Ignore any normal income tax implication. Communication skills: Logical flow and conclusion	11
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(b) Provide the financial manager with the journal entries to account for the convertible preference shares (transaction 1) for both conversion options (a) and (b) in the financial records of NAMPA Ltd for the year ended 31 December 2023. Please note: Journal narrations are required. Ignore any normal income tax implications. (c) Provide the financial manager with the journal entries to account for transaction 2 in the financial records of Gelato Ltd for the year ended 31 December 2023 Please note: Ignore depreciation journals in respect of the machinery. Ignore any normal income tax implications. Ignore the time value of money.	10
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Part 2
Prepare the consolidated statement of changes in equity of the Greener	29
Ltd Group for the year ended 30 June 2023. Only the foreign currency
translation reserve and the non-controlling interests columns are required.
Communication skills: presentation and layout	1
Please note:
•  Comparative figures are required. •  Notes to the consolidated statement of changes in equity are not required. •  Round off all amounts to the nearest Rand or Jamaican Dollar. •   Your answer must comply with International Financial Reporting Standards (IFRS).

QUESTION 2

Ignore value added tax (VAT)

Goat (Pty) Ltd (“Goat”) is domiciled in Namibia with its headquarters in Okahandja. Goat is primarily involved in manufacturing paper, paper-related products, speciality paper packaging products and selling wood. Goat is not involved in agricultural activity. Instead, it purchases its raw materials from timber entities based in Namibia and Southern Africa. Goat has a diverse geographical client portfolio locally and internationally.

Goat and its group entities prepare its financial statements using the International Financial Reporting Standards (IFRS). The presentation and functional currency of Goat and all its group entities is the Namibian Dollars (NAD). The current financial year-end is 30 September 2022 (FY22).

1. Summarized consolidated financial information of Goat for FY22

Extract of the statement of comprehensive
income	Note	FY22	FY21
		NAD ‘000	NAD ‘000
Operating profits	2	1,102,729.00	1,077,403.00
Depreciation and amortization	3	(225,000.00)	(200,000.00)
Interest expense	4	?	?
Profit before tax		723,876.00	698,876.00
Income tax expense		(217,163.00)	(204,641.00)
Profit before tax		506,713.00	494,235.00

 The summarised information in the extract above includes the effect of all information in the notes below unless indicated otherwise.

2. Operating profit

Description	Note	FY 22	FY 21
		NAD ‘000	NAD ‘000
Loss on disposal of Mazy		(80,287.00)	–
Expected credit losses		(23,309.00)	(17,897.00)
Foreign currency translation loss on foreign cash balances		(1,067.00)	(1,882.00)

Depreciation and amortisation

Depreciation relates to plant, machinery and property. Amortization relates to purchased software.

3. Interest expense

The interest expense was calculated using the effective interest rate method. Interest expense relates to issued debentures classified as financial liabilities and measured at amortized cost.

The details of the debentures are as follows:

Issue date	2022-01-01
Face value	N$330 million
Coupon rate	9.75%     per     annum     (market related)
Term	5 years
Transaction costs	N$6 million
Payment profile	Monthly         Namib         airments comprising Namib air and interest

4. Income tax expense

Income tax expense includes a deferred tax expense of N$ 49 876 000 and N$ 65 149 000 for FY21 and FY22 respectively. The NAMRA current tax payable balance is N$ 27 675 000 and N$14 987 000 at 30 September 2021 and 2022 respectively.

5. Sale of 60% interest in Mazy (Pty) Ltd (“Mazy”)

Mazy specialises in graphic paper production and is based in Katutura. Goat acquired a 70% controlling interest in Mazy on 1 October 2018 with the intention of entering the graphic paper production market. However, even though this venture was successful, Goat decided to move away from this market to focus on its core product offerings. As a result, Goat sold 60% of Mazy to an international private equity firm and has maintained a 10% interest in Mazy. Goat has lost control as a result of the sale and has treated the remaining 10% interest in Mazy as a financial asset classified at fair value through profit or loss.

• FY19

Goat acquired 70% of the ordinary shares of Mazy on 1 October 2018. The net asset value of Mazy on this date was N$520 million. All assets and liabilities of Mazy were fairy valued on this date except for the plant (remaining useful life of 7.5 years and qualifies for tax allowances) which was undervalued by N$54 million.

Payment terms of acquisition of Mazy
Cash payment on 1 October 2018	N$340 million
Deferred consideration payable	N$140 million
Deferred consideration terms	Earlier of 1 October 2023 or when Goat loses control of Mazy Fair value of deferred consideration
Fair value of deferred consideration
01-Oct-18	N$100 million
30-Sep-21	N$127 million

6. Investment in associate – Ali (Pty) Ltd (“Ali”)

Ali is a Namibian entity based in Oshikango and is involved in the manufacture of protective-wear used in the production process of paper and paper-related products. Goat has a 36% interest (and exercises significant influence) in Ali which was acquired in FY18 when the net asset value of Ali was fairly stated. An extract of the financial information as per the separate financial records of Ali is as follows:

Extract of the statement of comprehensive income for the year ended 30
September 2022	N$ ‘000
Revenue – external	15 110
Revenue – Goat	5 409
Cost of sales*	(12 070)
Other income	1 087
Expected credit losses	(206)
Other expenses	(4 095)
Income tax expense	(1 982)
Profit after tax	3 253
Extract of the statement of changes in equity for the year ended 30 September 2022                                                                                                                                      N$ ‘000 Dividends declared on 30 September 2022                                                                   347

* Ali uses a consistent mark-up for all its products sold. There were no inventory write- downs required.

Ali and Goat use different accounting software packages which cannot be integrated with each other. As such, the financial information of Ali is integrated manually into the consolidated financial information of Goat. All information relating to Ali has not been included in the consolidated financial information of Goat for FY22.

The financial records of Goat include the following relating to Ali:

General ledger account	GL code**	User input date	N$ ‘000
Consumables – protective wear purchased from Ali	1008761	30-Sep-21	1,942
		30-Sep-22	1,365

** GL accounts beginning with 100 are Statement of Financial Position accounts.

Additional information

• Goat measures non-controlling interests at its proportionate share of the net assets on the date of acquisition.

Required (a) Calculate the adjusted profit before tax for the Goat (Pty) Ltd Group for FY22 taking into account the effects of Ali. ·         Round all numbers to N$’000. ·         Show all calculations. Communication skills – presentation of notes

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(b) Prepare the extracts of the consolidated statement of cash flows for the year ended 30 September 2022 for the Goat (Pty) Ltd Group as far as the information available permits.   ·         Present the cash flows from operating activities using the indirect method, starting with profit before tax. ·         Cash flows from interest and dividends are presented as operating activities. ·         Working capiNamib air movements are not required. ·         Round all numbers to N$’000. ·         Show all calculations. ·         Note disclosures are not required. ·         Comparative information is not required. Communication skills – layout and presentation

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