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CASE STUDY 1
CASE STUDY 1
QUESTION 1 50 marks

GlamPets Ltd (GlamPets) is a well-established company that provides various pet related services.
These services are offered to individual pet owners and pet companies in South Africa. Over the years,
GlamPets have acquired a considerable market share and have branches located nationally.

The auditors of GlamPets, Edison Auditors Inc., raised concerns regarding the disclosed service
revenue in the annual financial statements of GlamPets Ltd for the year ended 30 September 2022.
They are concerned that the disclosed service revenue are calculated incorrectly. In addition, the
disclosures required in terms of IFRS15 might be incomplete.

An extract of the Revenue note to the annual financial statements of GlamPets Ltd for the year ended
30 September 2022 is as follows:

37. Revenue from contracts with customers

Note 2022 2021
R R
Service Revenue
Pet bathing and teeth grooming 1.1 38 400 000 -
Pet training services 1.2 27 300 000 -

The underlying contracts for the above disclosed service revenue are all active service contracts. All
these active service contracts were entered into on 1 February 2022 and are non-cancellable contracts
that are valid until 31 January 2024. The revenue that arises from these contracts are correctly
measured over time.

The following information regarding the different services offered in the contracts are provided.

1.1 Pet bathing services as well as the nail and teeth grooming services are to be provided as and
when needed with a maximum of four visits per month over the next two years. The relevant pet
owner pays a fixed price of R2 400 per month for both services. There are currently 2 000 active
contracts for this service. Management has noticed that 10 of these customer contracts seem to
be only making appointments for three times a month, while the rest utilise the service fully and
book four appointments every month.
1.2 Pet training services are to be provided on a weekly basis for a year and at a minimum of 1 hour
per week. GlamPets earns R350 per hour for this service. There are currently 1 500 active
contracts for this service. Since contract inception up to year end, no customers utilised more than
the minimum hours in accordance with the contract. This service offered is subject to the practical
expedient in IFRS 15.121 and the recognition of revenue in IFRS 15.121(b).

Pet Products

GlamPets initially started and continues to sell pet grooming products. These pet grooming products are
primarily Do-It-Yourself products that customers use at home for their pets. Pet grooming products
include pet shampoos and conditioners, while other products include pet toys, kennels and other pet
accessories.

All product sales are made in cash. During the year ended 30 September 2022, GlamPets product sales
amounted to R11 400 000 (2021: R9 000 000). These products are sold at their stand-alone selling
prices. GlamPets introduced a new customer loyalty programme on 1 October 2020 that rewards the
pet owner customer with one loyalty point for every R300 spent on any of the pet products. Each point
is redeemable for a R2,50 discount on future product purchases. The estimated stand-alone selling price
of one point is R1,60. The points earned are valid for a period of three years.
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CASE STUDY 1

Loyalty points expectations vs actual points redeemed by customers have been tabled as follows:

At Year-ended Expected to redeem Actually redeemed

30 September 2021 21 000 points (2021 sales) 16 800 points (2021 sales)
30 September 2022 21 0001 points (2021 sales) 19 3201 points (2021 sales) cumulative
22 400 points (2022 sales) 20 650 points (2022 sales)
1
At the end of 2022 management still has this expectation in respects of 2021 sales
2
Actual points cumulatively redeemed in respect of 2021 sales

Aloe-Vera Pet Shampoo

During the current year, GlamPets introduced a new product called D-I-Y 2-in-1 Aloe-Vera pet shampoo
& conditioner. Since this product is new, the customer loyalty programme does not apply to this product.
The product proved to be a fast seller, and various orders were pre-booked by companies in the pet
industry.

The orders placed during the current year are as follows:

Order quantities in Distance to

Order date Litres Delivery to customer customers premises
20 May 2022 4 500L Mobile Grooming Ltd 83 km’s
19 April 2022 2 500L Dog Academy Ltd 40 km’s
31 March 2022 3 000L MuttBubbles Ltd 7 km’s
16 December 2021 1 000L SA Kennels Ltd 33 km’s

All orders were completed and delivered, at year end. All transactions were made at arm’s-length.

The price for the D-I-Y 2-in-1 Aloe-Vera pet shampoo & conditioner is R120 per litre excluding delivery.
Delivery of the pet products is charged at R3,50 per km, while the first 7 kms is free. As part of a
marketing strategy for the initial launch, no mark-up was placed on the price of the product. Customers
do not have an option to collect their orders.

To expand market share and provide further product variety, GlamPets acquired a 70% controlling
interest in MuttBubbles Ltd (MuttBubbles) on 15 March 2022. MuttBubbles specialises in making
medicated and deodorised bubble bath liquids for puppies. GlamPets also has a 55% controlling interest
in Mobile Grooming Ltd acquired during 2019.

During August 2022 GlamPets sold machinery to Mobile Grooming Ltd for a cash amount of R8 000 000.
The carrying amount of the machinery was R 7 000 000 prior to the sale.

Since May 2022, GlamPets purchases products from MuttBubbles and settles the cost immediately with
no amount outstanding at year end. The cost of these products for MuttBubbles amounted to R500 000
and MuttBubbles sells its products at 20% on cost.
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CASE STUDY 1

QUESTION 2 50 marks

Toivo Ltd has experienced significant growth in its footprint within South Africa and its revenues have
also exceeded market expectation. Toivo Ltd have recently listed on the Johannesburg Stock Exchange
and have financial year ending 30 September.

The following information from the consolidated trial balance of the Toivo Ltd Group for the year ended
30 September 2022 is submitted to you.

The information below may be assumed to be correct, except where otherwise indicated in the additional
information provided in the question.

TOIVO LTD GROUP

EXTRACT OF THE CONSOLIDATED TRIAL BALANCE AS AT 30 SEPTEMBER 2022

2022 2021
Dr/(Cr) Dr/(Cr)
R R
Land 9 600 000 9 600 000
Property, plant and equipment 10 194 300 8 331 125
Investments in equity instruments 3 748 338 3 128 872
Investments in associates 981 554 812 210
Goodwill 625 637 195 000
Trade and other receivables 882 141 771 150
Inventories 958 332 779 500
Cash and cash equivalents 321 114 289 789
Share capital (3 240 000) (3 000 000)
Retained earnings (14 481 169) (12 127 180)
Mark-to-market reserve (401 961) (312 180)
Non-controlling interests (3 165 385) (1 844 532)
Deferred tax (833 445) (711 234)
Deferred consideration (563 637) -
Long-term loan (2 005 828) (1 750 000)
Trade and other payables (1 751 438) (3 133 026)
Shareholders for dividends (212 666) (317 160)
Current tax payable (655 887) (712 334)
- -
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Additional information

1. Financial information

The following amounts were included in the 2022 consolidated statement of profit or loss and other
comprehensive income for the group:

Revenue 22 655 102

Cost of sales (13 118 228)
Other income 133 255
Other expenses (5 338 119)
Finance cost (185 125)
Share of profit of associates 557 199
Income tax expense (1 007 215)
Mark-to-market reserve for the current year (net of tax) 322 581

Total comprehensive income attributable to non-controlling interests 1 225 136

Profit attributable to owners of the parent 2 471 733

2. Property, plant and equipment

Companies in the group sold plant and equipment to independent third parties for a cash amount
of R375 250. The carrying amounts of the plant and equipment at the date of disposal were
R410 102. The profit or loss with the disposals are included in other expenses.

The total depreciation for the current financial year on property, plant and equipment amounted to
R633 855.

Investments by Toivo Ltd in other companies

1. Investment in Kapital Ltd

On 1 November 2019, Toivo Ltd acquired a 15% interest in Kapital Ltd for a cash consideration of
R650 000. Toiva Ltd classified this investment as an investment in equity instruments in terms of
IFRS 9 Financial Instruments in its separate financial statements. On 1 September 2022,
Toivo Ltd acquired an additional 65% interest in Kapital Ltd and obtained control of Kapital Ltd as
per IFRS 10 Consolidated Financial Statements from that date.

The purchase consideration was settled as follows:

• A cash payment of R1 300 000 on 1 September 2022.

• The issue of 3 000 ordinary shares of Toivo Ltd to the seller. The fair value of these shares
was R80 per share on 1 September 2022 and R90 per share on 30 September 2022 when
the shares were registered in the name of the seller.
• The transfer of land to Kapital Ltd on 1 September 2022 to be used for business purposes.
The land had a carrying amount of R160 000 and a fair value of R185 000 on
1 September 2022.

The fair value of the previously held 15% interest amounted to R950 000 on the date of change in
the shareholding.
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The assets and liabilities included in the trial balance of Kapital Ltd as at 1 September 2022 were
as follows:
R
Dr/(Cr)

Property, plant and equipment 1 520 000

Inventories 1 285 000
Trade and other receivables 1 340 000
Cash and cash equivalents 150 000
Trade and other payables (1 310 000)
2 985 000

All the assets and liabilities of Kapital Ltd were deemed to be fairly valued on 1 September 2022.
No additional assets, liabilities or contingent liabilities were identified at the acquisition date.

2. Investment in Beef Korp Ltd

On 31 May 2022, Toivo Ltd acquired 60% of the ordinary shares of Beef Korp Ltd for a cash
consideration of R2 000 000, paid on the date of acquisition, with an additional R600 000 due in
cash in a year’s time. Toivo Ltd obtained control over Beef Korp Ltd, as per IFRS 10 Consolidated
Financial Statements.

All assets and liabilities of Beef Korp Ltd were fairly valued at the acquisition date. The equity at
the acquisition date consisted of share capital and retained earnings of R300 000 and R3 336 363
respectively. No additional assets, liabilities or contingent liabilities were identified at the
acquisition date.

The following balances were included in the trial balance of Beef Korp Ltd as at 31 May 2022:

Dr/(Cr)
R
Property, plant and equipment 3 578 763
Trade receivables 523 700
Inventories 601 200
Trade payables (434 350)
Deferred tax (43 855)
Bank 88 255
Long-term liabilities (677 350)
3 636 363

3. Investment in Dendron Ltd

Toivo Ltd purchased 70% of the shares and voting rights of Dendron Ltd for R1 700 000 on
1 July 2018 as part of its growth strategy to venture into the agricultural sector and obtained control
of Dendron Ltd as per IFRS 10 Consolidated Financial Statements from this date. All the assets
and liabilities were fairly valued at that date and no additional assets, liabilities or contingent
liabilities were identified.

At the date of acquisition, the share capital and retained earnings were R400 000 and R1 750 000
respectively. You may assume goodwill was correctly recognised on the date of acquisition.
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On 1 October 2021, Toivo Ltd decided to sell its controlling interest in Dendron Ltd due to adverse
weather conditions and increasing cost of materials. Toivo Ltd disposed of a 55% interest in
Dendron Ltd for a consideration R4 400 000. Toivo Ltd did not have control or significant influence
over Dendron Ltd from that date. On 1 October 2021, the remaining 15% interest had a fair value
of R1 400 000.

The consideration in the sale agreement comprised of a cash portion R4 000 000 and the balance
in materials that was proving too costly for Toivo Ltd to maintain due to weather conditions and
inflation.

The assets and liabilities of Dendron Ltd consisted of the following on 1 October 2021:

Dr/(Cr)
R
Property, plant and equipment 3 173 754
Investment in equity instruments (no change during the current year) 222 220
Inventories 2 430 500
Trade and other receivables 1 588 900
Bank overdraft (389 239)
Deferred tax (227 550)
Long-term loan (218 000)
Trade and other payables (432 145)

On 30 September 2022, Toivo Ltd received a dividend of R133 255 from Dendron Ltd, which is
correctly included in other income. This was the only dividend declared and paid by Dendron Ltd
during the current financial year.

Other information

1. It is the accounting policy of Toivo Ltd to account for investments in subsidiaries and associates
at cost in its separate financial statements in accordance with IAS 27.10(a).

2. Investments other than investments in subsidiaries and associates are measured in accordance
with IFRS 9 Financial Instruments. Toivo Ltd irrevocably elected to present subsequent changes
in the fair value of the investments in other comprehensive income in a mark-to-market reserve.
Toivo Ltd elected to transfer any cumulative gains/losses within equity in terms of IFRS 9.B5.7.1.

3. Toivo Ltd elected to measure non-controlling interests at the proportionate share of the acquiree's
identifiable net assets at the acquisition date for all its acquisitions.

4. Cash flows from interest paid and dividends received and paid are classified as operating cash
flows by the Toivo Ltd Group.

5. On 30 September 2022, Toivo Ltd, Kapital Ltd and Dendron Ltd declared dividends.

6. There were no other acquisitions or disposals of investments in subsidiaries, except as stated in

the information provided.

7. There were no acquisitions or disposals of investments in associates.

8. Other income consists of dividends received from investments in equity instruments.

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9. Goodwill is tested annually for impairment. You may assume that there were no indications of
impairment as at 30 September 2022.

10. Assume a market-related pre-tax discount rate of 10% per annum, compounded annually.

11. Assume a normal income tax rate of 28% and a capital gains tax inclusion rate of 80%. Ignore
value added tax (VAT) and dividend tax.