QUESTION 1 (40 marks)

Question

Comptia Ltd purchased machinery on 1 January 20.10 and the machinery is written off over
its estimated useful life (at that stage six years). It is the policy of the enterprise to revalue
machinery every two years. On 1 January 20.12 machinery was revalued for the first time by
Mr X, an independent sworn appraiser, on a depreciated (net) replacement value basis with
reference to recent market transactions on arm's length. On that date the remaining useful life
of all the machinery was estimated to be five years. The residual value of all machinery
remains Rnil despite the fact that the useful lives have changed. The following information is
available:
Additional information
1. The entity realises revaluation surpluses as the assets are used.
2. The entity discloses all revalued property, plant and equipment on the net replacement value
basis.
3. The reduction in the replacement value of machine B is permanent.
4. A tax allowance is granted on the straight-line method over 5 years.
5. The income tax rate is 28%. 66,6% of all capital gains are taxable.
6. No decision has in principle been taken to sell the machinery.
7. Assume that all the dates mentioned above are after 1 October 2001.
Disclose all the notes to the financial statements of Comptia Ltd for the year ended 31
December 20.12 which relate to the above-mentioned information. Your answer must comply
with International Financial Reporting Standards.
Ignore comparative figures.
Also disclose the revaluation surplus in the statement of changes in equity.

Answer 1

Here’s a structured approach to prepare the notes to the financial statements of Comptia Ltd for the year ending 31 December 2012, as well as the disclosure of revaluation surplus in the statement of changes in equity.

Notes to the Financial Statements of Comptia Ltd for the Year Ended 31 December 2012

Note 1: Property, Plant and Equipment

Machinery (Net Replacement Value)

| Description | Cost | Accumulated Depreciation | Carrying Amount | Revaluation Surplus | |---------------------|-------|-------------------------|------------------|------------------------| | Machinery (at 1 Jan 2010) | Rxxx | R(Accumulated Dep.) | Rxxx | Rxxx | | Revaluation at 1 Jan 2012 | Rxxx | R(Accumulated Dep.) | R(revalued amount) | Rxxx | | Total | Rxxx | Rxxx | Rxxx | Rxxx |

*The carrying amount of the machinery as of 31 December 2012 has been determined after reflecting the revaluation conducted by Mr. X on 1 January 2012.

Note 2: Depreciation

In accordance with IAS 16 - Property, Plant and Equipment, the machinery is depreciated over its useful life. After revaluation on 1 January 2012, the remaining useful life of the machinery has been reassessed as five years with no residual value. The annual depreciation expense from 1 January 2012 onwards will be calculated as follows:

Depreciation Calculation

• Revalued amount of machinery / Remaining useful life (5 years) = Annual depreciation expense

Total depreciation expense recorded for the year ended 31 December 2012: Rxxx

Note 3: Revaluation Surplus

Revaluation Surplus

Upon revaluation on 1 January 2012, the net replacement value of the machinery exceeded its carrying amount, resulting in a revaluation surplus that is recognized in other comprehensive income.

| Date | Type | Amount | |--------------|---------------------|----------| | 01-Jan-2012 | Revaluation surplus | Rxxx | | Total | Revaluation surplus | Rxxx |

Statement of Changes in Equity

For the Year Ended 31 December 2012

| Components of Equity | Amount | |------------------------------|----------| | Opening balance (1 January 2012) | Rxxx | | Total comprehensive income | Rxxx | | - Revaluation surplus | Rxxx | | Closing balance (31 December 2012) | Rxxx |

Note 4: Tax Implications

Tax Allowance Recognition

Under current legislation, a tax allowance is granted on the machinery depreciation based on a straight-line method over 5 years. The effective income tax rate is 28%, with 66.6% of capital gains being taxable.

• Tax effect on revaluation surplus:
• Tax impact = Revaluation surplus * 66.6% * 28%

This amount should be recognized in deferred tax liabilities.

Deferred Tax Liability

• Amount: Rxxx (The amount calculated above due to revaluation surplus)

Note 5: Permanent Reduction in Value

For machine B, the reduction in replacement value is considered permanent. Any impairment losses must be recognized immediately, impacting the profit and loss statement.

• Impairment Loss (if applicable): Rxxx

Disclosure: Effects on Financial Position

• The net result of the changes in the value of machinery is adjusted in both the asset values and the recognized losses or gains in the profit and loss statement.

Note 6: Accounting Policies

The company has adopted the revaluation model for property, plant, and equipment as per IAS 16 requirements, which allows for the revaluation of machinery to be accounted for at fair value ensuring consistent measurement basis in accordance with applicable standards.

Conclusion

All the notes must be cross-referenced with the financial statements to provide clarity and transparency to the users of the financial statements. The numbers (denoted with Rxxx) should be filled in with accurate figures from the accounting records related to the machinery assets for proper reporting.