AFS Ltd

AFS Ltd is a large financial services provider. The company prepares its financial statements in accordance with International Financial Reporting Standards (IFRS). The current reporting date of AFS Ltd is 31 December 2023.

AFS Ltd has the following assets and liabilities in its statement of financial position as at 31 December 2023:

·      AFS Ltd owns owner-occupied land which had a carrying amount of R5 million on 31 December 2022, and an original cost price of R3 million. The land is accounted for on the revaluation model of IAS 16 Property, Plant and Equipment. The land was revalued to a fair value of R5,5 million on 1 January 2023. 

·      AFS Ltd owns owner-occupied office buildings which had a carrying amount of R13 775 000 on 31 December 2023. The office buildings are accounted for on the cost model of IAS 16. The South African Revenue Service (SARS) does not allow any deductions in respect of the office buildings for tax purposes. 

·      The statement of financial position reflected a trade receivables balance of R2,5 million on 31 December 2023. The balance is stated net of an allowance for expected credit losses of R300 000. SARS allows 40% of the allowance for expected credit losses as a deduction for tax purposes. 

·      Current liabilities on 31 December 2023 include revenue received in advance of R250 000 and a provision for warranty costs of R120 000. The revenue received in advance had already been taxed during the year ended 31 December 2023, while the expenses related to warranty costs will only be allowed as a deduction for tax purposes when it is paid in cash. 

·      The corporate tax rate is 27% and the capital gains tax inclusion rate is 80%.

Source: Adapted Smit, A. 2024.

Mother Hupboard Ltd

Mother Hupboard Ltd is a manufacturer of kitchen cabinets. The company prepares its financial statements in accordance with International Financial Reporting Standards (IFRS). The current reporting date of Mother Hupboard Ltd is 30 June 2023.

Mother Hupboard Ltd purchased manufacturing equipment at a total cost of R15 million on 1 July 2020. The manufacturing equipment was available for use as intended by management immediately. The manufacturing equipment is accounted for on the revaluation model of IAS 16 Property, Plant and Equipment. On 1 July 2020, the estimated useful life of the manufacturing equipment was 25 years, with an insignificant residual value. These estimates remained unchanged. The manufacturing equipment is depreciated on the straight-line method over its estimated useful life. Deprecation is based on the most recent revalued amount.

The manufacturing equipment was revalued for the first time on 1 July 2022 to a net replacement cost of R16 445 000. The correctly calculated carrying amount of the manufacturing equipment was R13,8 million on 1 July 2022, before taking the revaluation into account.

During the year ended 30 June 2023, it came to management’s attention that the machine was not performing as originally expected. Based on this, management determined the value in use of the machine to be R10 million on 30 June 2023, while the fair value less costs to sell amounted to R9 million on the same date.

 The corporate tax rate is 27%.

Source: Adapted Smit, A. 2024.

Staedle (Pty) Ltd

Staedle (Pty) Ltd is a manufacturer of various stationery items. The company prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) and the current reporting date of Staedle (Pty) Ltd is 29 February 2024.

During the year ended 28 February 2022, Staedle (Pty) Ltd constructed a new manufacturing plant. Due to the specialised nature of the manufacturing plant, it took a significant period to complete, and it met the criteria of a qualifying asset in terms of IAS 23 Borrowing Costs.

The activities necessary to prepare the manufacturing plant for its intended use commenced on 1 March 2021 and was substantially completed on 31 August 2021. The manufacturing plant was only available for use as intended by management on 1 November 2021.

Total construction costs incurred by Staedle (Pty) Ltd in respect of the manufacturing plant amounted to R25 million. The construction costs were financed through a bank loan that was obtained specifically for the project on 1 March 2021. The bank loan bears interest at a market-related interest rate of 12% per annum, payable monthly in arrears. The capital of the loan is repayable in equal monthly instalments over 20 years, with the first payment on 31 March 2022.

The full amount of the bank loan was received in Staedle (Pty) Ltd’s bank account on 1 March 2022. Any funds not used for construction costs were temporarily invested in a money market account. Total investment income earned on the temporary investment of the loan funds was as follows:

·     1 March 2021 – 31 August 2021: R280 000

·     1 September 2021 – 31 October 2021: R93 500

The manufacturing plant is accounted for on the cost model of IAS 16 Property, Plant and Equipment. The plant is depreciated on a straight-line basis over an estimated useful life of 20 years, to an insignificant residual value.

During the audit of the financial statements of Staedle (Pty) Ltd for the year ended 29 February 2024, it was found that no borrowing costs were capitalised to the cost price of the manufacturing plant and that all interest costs in respect of the bank loan were recognised in profit or loss for the year ended 28 February 2022.

Source: Adapted from Smit, A. 2024.

Adam Ltd 

Adam Ltd is a manufacturing company that has significant transactions with related parties. During the year ended 31 December 2024, the following related party transactions occurred:

1.           Adam Ltd sold goods to its wholly owned subsidiary, Evelyn Ltd, at a price of R400 000. The goods were delivered on 15 October 2024.

2.           Evelyn resold these goods to external customers for R1 200 000 in the same year.

3.           The fair value of the goods sold by Adam Ltd to Evelyn was R450 000.

4.           Adam Ltd also provided consulting services to one of its associates, Able Ltd, for which it received R150 000. The services were rendered evenly throughout the year.

5.           Able Ltd paid R100 000 upfront, and the remaining R50 000 will be settled in the following financial year.

                                                                        Source:  Adapted from Gregory, H. 2024.

Safaire Ltd

Safaire operates light aircraft rental agencies throughout South Africa and has a 31 December year-end and is governed by the maintenance requirements of the South Africa Civil Aviation Authority (SACAA). Safaire has developed a client list of its key clients and is actively seeking to expand and build upon these business relationships.

Safaire was sued by one of its clients after the client was involved in an accident on 1 August 2024 in an aircraft rented from the Safaire fleet. The client sustained multiple injuries. He claims that, upon landing, the brakes of the light aircraft failed, which caused the aircraft to crash into a tree when it finally stopped. The client has sued Safaire for damages, arising from negligence for renting out an aircraft that had not been properly serviced and maintained. The matter was discussed with the legal representatives of Safaire who believe that although the aircraft was not properly maintained (as evidenced by the aircraft’s maintenance records) it is unlikely that the company will be required to pay for the damages as the client’s pilot licence was a forgery. However, if Safaire must pay damages for negligence, the legal advisors estimate that it would cost no more than R3 500 000. The probability of this occurring is estimated to be only 15%. This estimate remained unchanged at 31 December 2024.

Source: Adapted from SAICA