Reef Ltd & Ray Ltd Consolidation | IFRS Group Accounts 2024

QUESTION 1 (53 marks)

Reef Ltd, ‘’Reef’’ and Ray Ltd, ‘’Ray’’ are two entities which provide scuba diving and snorkelling services. Below are the trial balances of Reef and Ray for the financial year ended 31 December 2024:

Final Trial balance	Reef Ltd (R)		Ray Ltd (R)
	DR	CR	DR	CR
Stated share capital		1 000 000		400 000
Retained earnings: 1 January 2024		659 150		137 590
Ordinary dividends	180 000		50 000
Trade and other payables		310 000		150 810
Deferred tax		59 400		43 200
Licences (at carrying value)	–		94 000
Equipment (at carrying value)	2 350 000		1 297 000
Trade and other receivables	410 000		120 000
Cash and cash equivalents	125 000		32 000
Investment in Ray at cost: 160 000 shares purchased on 1 January 2023 (R200 000) 80 000 shares purchased on 1 April 2024 (R145 000)	345 000		–
Revenue		4 460 000		1 500 000
Other income		155 000		105 000
Other expenses	2 730 000		425 000
Income tax expense (P/L)	503 550		318 600
	6 643 550	6 643 550	2 336 600	2 336 600

Notes:

Reef acquired 40% of the stated share capital of Ray on 1 January 2023 for R200 000 and as a result obtained significant influence over Ray from 1 January 2023. On this acquisition date, Ray’s equity comprised of the following credit balances:

Stated share capital	R400 000
Retained earnings	R95 000
	R495 000

All Ray’s assets and liabilities were considered to be fairly valued on 1 January 2023.

On 1 April 2024, Reef obtained control over Ray when Reef purchased another 20% of Ray’s share capital from a third party. At this date (1 April 2024), the fair value of Reef’s previously held equity interest was R290 000.

All Ray’s assets and liabilities were considered to be fairly valued on 1 April 2024, except for the licences, which were considered by the market to be R25 000 more than their carrying value on that date. The licences are amortised on a straight-line basis over their useful life and were considered to have a remaining useful life of five

(5) years at this acquisition date (1 April 2024).

On 1 June 2024, Ray sold an item of equipment to Reef for R170 000. The profit on the sale of the equipment amounted to R36 000 (included as part of ‘other income’) and on that date the equipment had a remaining useful life of four (4) years.

Ray declared and paid dividends in December 2024. Dividend income earned by Reef has been included as part of ‘other income’.

Other additional information:

Reef recognised the investment in Ray at cost under IAS27.10(a), in its separate financial statements.
Both Reef and Ray have 31 December financial year ends.
Reef elected to measure the non-controlling interest at its proportionate share

of Ray’s identifiable net assets.

Assume the income and expenses of Ray were earned and incurred evenly throughout the year.

With regards to the licences and equipment, the South African Revenue Services (SARS) allowed the same annual deduction as the annual accounting depreciation recorded in the separate accounting records of Reef and Ray.
The income tax rate is 27% and 80% of capital gains are included in taxable income.
Ignore value added tax (VAT) and dividends tax.

REQUIRED:

Prepare the Consolidated Statement of Profit or Loss and Other Comprehensive Income of the Reef Ltd Group for the financial year ended 31 December 2024.

Show and reference all workings clearly.
- Round off to the nearest Rand where applicable.
- Comparative figures are not required.

(53 marks)

QUESTION 2 (35 marks)

Velvet Ltd (“Velvet”) and Marble Ltd (“Marble”) are two entities in the confectionery business. Both entities were incorporated in South Africa and their principal place of business is Pretoria. Both Velvet and Marble have a 30 June year-end.
On 1 July 2024, Velvet acquired 25% of the issued shares in the Johannesburg Stock Exchange (JSE) listed company, Marble from a third party, Death-by-Chocolate Ltd. Velvet obtained significant influence over Marble after paying R475 000 in cash for the 25% shareholding. The purchase was correctly accounted for in the accounting records of Velvet.

The following trial balance was obtained from the financial records of Marble for the financial year ended 30 June 2025:

	Marble Ltd (R)
	DR	CR
Stated share capital (R1 each)		1 000 000
Retained earnings (1 July 2024)		581 468
Revaluation reserve: Land (1 July 2024)		235 200
Trade and other payables		282 000
Land	1 342 000
Equipment	261 000
Trade and other receivables	275 000
Bank	112 000
Inventory	235 000
Revenue		725 500
Cost of sales	435 300
Other expenses	213 800
Income tax expense (P/L)	20 628
Revaluation gain on land (OCI)		90 000
Income tax expense (OCI)	19 440
	2 914 168	2 914 168

On the acquisition date of 1 July 2024, Marble had the following credit balances as part of equity:

	R
Stated share capital (R1 each)	1 000 000
Retained earnings	581 468
Revaluation reserve (land)	235 200
	1 816 668

On 1 July 2024, the net assets of Marble were considered to be fairly valued, except for the equipment, which was considered to be R100 000 more than its carrying value. The equipment had a remaining useful life of 4 years from 1 July 2024 and a nil residual value. The tax base of the equipment was the same as its carrying value on 1 July 2024 and the South African Revenue Services (SARS) allowed the same annual deduction as the annual accounting depreciation recorded in the accounting records of Marble.

The market price of a Marble share was R2.03 on 30 June 2025.
Additional information:
It is Velvet’s policy to measure its investments in associate using the fair value model, through other comprehensive income in its separate financial statements.
The share capital (e.g. number of shares) of Marble remained unchanged since the acquisition made by Velvet.
Marble depreciates its plant and equipment using a straight-line method over its useful life.
The other comprehensive income of Marble for the financial year contains only gains regarding the revaluation of land (property).
Marble is the only equity-accounted investment of the Velvet Ltd Group.
Assume a company’s income tax rate of 27% and 80% of capital gains are included in taxable income for all financial years.
Ignore the effects of dividend tax and value added tax (VAT).
REQUIRED:
Prepare the general journal entries to record the acquisition of Velvet Ltd’s investment in Marble Ltd on 1 July 2024 in the separate accounting records of Velvet Ltd.
Dates and narrations are not required.
Round off all answers to the nearest Rand. (8 marks)
Prepare the IFRS 12, Disclosure of interests in Other Entities, note disclosure for the investment in associate to be included in Velvet Ltd’s equity-accounted financial statements for the financial year ended 30 June 2025.
Assume that Marble Ltd is Velvet Ltd’s only equity accounted investment and that the investment is material to Velvet Ltd.
Comparative figures are not required.
Use and reference any workings from 2.1
Round off all answers to the nearest Rand.
(27 marks)

QUESTION 3 (12 marks)

Bermuda Ltd ‘’Bermuda’’ and Purple Resorts Ltd ‘’Purple Resorts’’ are two entities in the tourism and hospitality industry. Both entities have a 28 February year-end.

On 1 March 2024, Bermuda acquired a controlling interest in Purple Resorts from a third party and thereby obtained control of Purple Resorts on this date.

The Financial Manager of Bermuda is currently busy with identifying, recognising and measuring the identifiable assets acquired and the liabilities assumed at the acquisition date.

He is unsure of how to treat the following matters in the accounting records at the acquisition date:

Matter 1: Internally Generated Brand

Purple Resorts had created an internally generated brand called the ‘’Beach-life Beauty’’ which is a type of spa treatment provided by their masseuses in all their resort spas. The group considered the brand as being unique to Purple Resorts’ spas, where staff are trained to provide this unique spa treatment. The spa staff are also required to sign non-disclosure agreements so that the spa treatment cannot be provided anywhere else in the world. As a result, this well-known brand is only capable of being experienced at Purple Resorts, where the entity itself is currently utilising the brand, to generate revenue. After careful market analysis, including financial performance and consumer perception of the brand, independent valuators valued the brand as having a fair value of R1 375 000 on 1 March 2024, as well as a remaining useful life of 15 years, during which the brand’s popularity is expected to be maintained, given the budgeted advertising campaigns. The South African Revenue Service (SARS) does not allow tax deductions with regard to the brand.

Matter 2: Purple Resort’s Accumulated Loss

At the date of acquisition, Purple Resorts was operating at a loss and thus had an accumulated loss and an equivalent tax loss of R90 000. Purple Resorts did not think it was likely the tax loss would be utilised, as they believed their company would continue to make losses. However, on 1 March 2024, Bermuda was of the opinion that the profitability of Purple Resorts would be restored in the years to follow, given that

Bermuda’s management will assist Purple Resorts’ operations and that the tax loss could then be utilised. Their opinion was made after careful scrutiny of Purple Resort’s business processes by Bermuda’s business management experts and formulation of realistic, future profit projections after changes to business processes were approved.

Other additional information:

Bermuda recognises investments in subsidiaries at cost under IAS27.10(a), in its separate financial statements.
The income tax rate is 27%.

REQUIRED:

You are the consultant at Group Solutions Ltd who has been contacted with regards to the consolidation of Purple Resorts. In a memorandum to the Financial Manager of Bermuda Ltd, discuss how matters 1 and 2 should be accounted for in the Bermuda Ltd group annual financial statements at the acquisition date. Where possible, include any calculations to enhance your discussion.