InvestCo Ltd is an investment company and earns its revenue from long
term investments. These investments range from equity instruments to investment property and other non‐current assets. InvestCo Ltd has a year ended 30 June 2020. The following details at year end are available:
On 30 June 2020, InvestCo Ltd's listed investments, consisting of 480 000 ordinary shares in a listed property trust. At 30 June 2020 the shares were trading at a total net market value of R128.50 after brokerage fees of 2.5% were deducted. These investments are traded in an active market.
The fair value of these investments was R53 808 000 at 30 June 2019.
These investments were classified as measured at fair value through other comprehensive income.
InvestCo Ltd obtained a 15% interest in Bull (Pty) Ltd on 31 January 2016 for R1 480 000. Bull (Pty) Ltd is a transport company in the food sector. The company transports fresh food products around the country in 18‐wheeler trucks. The fair value and carrying amount of the investment was R1 280 000 at 30 June 2019. On 30 June 2020, the accountant of InvestCo Ltd calculated the fair value of the investment in Bull (Pty) Ltd using adjusted after‐tax earnings yield of 16% before considering a private company risk premium of 4%.
Before‐tax earnings of R8 400 400 included a once‐off insurance payment of R12 500 000 from a freak explosion, caused when one of the 18‐wheeler trucks' fuel tanks exploded and damaged the other four trucks that were in the parking lot at that time. The five trucks had a carrying value of R1 500 000 million each at the time of the explosion. Earnings are expected to grow by a minimum of 5% into the foreseeable future.
The tax rate is 28%.
This investment was designated as measured at fair value through other comprehensive income.
On 1 July 2018, InvestCo Ltd issued 100 000 8% convertible debentures of R1 200 each. The debentures must be converted to ordinary shares at a ratio of 3 ordinary shares for every
1 debenture as at 30 June 2022. The interest is payable annually in arrears.
The market in which these debentures are traded became inactive and one cannot rely on quoted prices or on the market prices of similar instruments. On 30 June 2020, the risk‐free rate was 9% and the risk premium for non‐performance was estimated to be 3%.
The Fair value of these investments at 30 June 2019 was R118 720 845.
On 30 June 2020, InvestCo Ltd had a machine with a carrying amount of R7 000 000, that was held for sale. The machine was written down to a fair value of R5 200 000, less costs to sell of 12%, resulting in a loss, which was included in profit or loss for the current year. The value in use was calculated as R4 240 000.
InvestCo Ltd has a commercial office building that is rented out to third parties. The fair value of the building was R5 600 000 at 30 June 2019. In its current use, the present value of the net cash flows of future earnings was calculated at R5 700 000 on 30 June 2020. On 30 June 2020 the building could be sold in the open market for R6 100 000 before transaction costs of 2%. This open market value was determined with reference to similar buildings, situated in the same location, that are currently in the market.
Calculate the fair values for each of the transactions 1 to 5, to comply with International Reporting Standards (IFRS), for InvestCo Ltd for the year ended 30 June 2020.
Round all figures to the nearest Rand or Percentage.
Transaction 1: 6 marks
Transaction 2: 14 marks
Transaction 3: 7 marks
Transaction 4: 5 marks
Transaction 5: 3 marks
Calculate the fair value adjustment for transactions 1 to 5, to comply with International Reporting Standards (IFRS), for InvestCo Ltd for the year ended 30 June 2020.
Clearly indicate whether the adjustment is a gain or loss.
Transaction 1: 2 marks
Transaction 2: 2 marks
Transaction 3: 2 marks
Transaction 4: 2 marks
Transaction 5: 2 marks
To increase the quality of presentation and disclosure, IFRS 13 Fair value measurement, has established a three‐level hierarchy system to categorise the inputs to valuation techniques.
For each of the five transactions listed above, state whether the level of inputs would be classified as Level 1, Level 2 or Level 3 within the hierarchy.