QUESTION TWO (45 MARKS)

Question

Norbit 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:
Machinery A:
Cost R480 000
Accumulated Depreciation 1 January 20.12 (R160 000)
Carrying Amount R320 000
Net replacement Value 1 January 20.12 R500 000
Machinery B:
Cost R540 000
Accumulated depreciation 1 January 20.12 (R180 000)
Carrying amount R360 000
Net repalcement value 1 January 20.12 R330 000
Machinery C :
Cost R600 000
Accumulated depreciation 1 january 20.12 (R200 000)
Carrying amount R400 000
Net replacement value 1 January 20.12 R450 000
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.



Required

Disclose all the notes to the financial statements of Norbit 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

To prepare the notes to the financial statements for Norbit Ltd in compliance with the International Financial Reporting Standards (IFRS), we need to reflect the revaluation of the machinery and its impact on the financial statements. Below, I provide a structured outline for the notes along with the relevant computation and disclosures.

Notes to the Financial Statements for the Year Ended 31 December 20.12

Note 1: Accounting Policies

• Property, Plant and Equipment (PPE):
  • Items of property, plant, and equipment are measured at cost less accumulated depreciation and any impairment losses.
  • Machinery is revalued every two years. Revaluations are performed by an independent appraiser.

Note 2: Property, Plant, and Equipment

• Reconciliation of Carrying Amounts:

  | Machinery | Cost (R) | Accumulated Depreciation (R) | Carrying Amount (R) | Net Replacement Value (R) | Revaluation Surplus (R) | |:--------------:|:-------:|:-----------------------------:|:-------------------:|:-------------------------:|:-----------------------:| | A | 480,000 | (160,000) | 320,000 | 500,000 | 180,000 | | B | 540,000 | (180,000) | 360,000 | 330,000 | (30,000) | | C | 600,000 | (200,000) | 400,000 | 450,000 | 50,000 |

  The total revaluation surpluses recognized in equity for the year ended 31 December 20.12 is calculated as follows:

  • Machinery A: R500,000 - R320,000 = R180,000 (increase)
  • Machinery B: R330,000 - R360,000 = (R30,000) (decrease)
  • Machinery C: R450,000 - R400,000 = R50,000 (increase)

Note 3: Revaluation Surplus

• The revaluation surplus is included in the statement of changes in equity.
• Total revaluation surplus recognized for the year 20.12:
  • Machinery A: R180,000
  • Machinery C: R50,000
  • (Decrease in Machinery B results in no surplus)

The total revaluation surplus recognized in equity is:

• Revaluation Surplus: R180,000 + R50,000 - R30,000 = R200,000

Note 4: Income Tax Effects of Revaluation Surpluses

• The effect of taxation on the revaluation surpluses is as follows:

• The tax on the revaluation surplus is computed on the unrealized gains:

  • For Machinery A and C, the total revaluation surplus is R230,000 before tax.
  • Taxable Gain = 66.6% of (R180,000 + R50,000) = R152,000
  • Tax at 28% = R152,000 * 28% = R42,560

Note 5: Depreciation Policy

• Machinery will be depreciated on a straight-line basis over its remaining useful life, which is estimated at 5 years as at 1 January 20.12. The residual value remains Rnil.

Note 6: Significant Judgments and Estimates

• The estimation of useful lives and residual values of machinery is a key area of judgment. Significant changes in market conditions or usage could necessitate further impairment assessments.

Other Relevant Information

1. No decision has been taken to sell the machinery.
2. The temporary reduction in the replacement value of Machinery B is recognized as a loss.

Statement of Changes in Equity

The equity section will reflect the revaluation surplus:

• Revaluation Surplus:
  • Opening Balance: R0
  • Revaluation Gains: R200,000
  • Closing Balance: R200,000

Conclusion

This outline provides a detailed view suited for presentation in compliance with IFRS standards, ensuring that Norbit Ltd’s financial position regarding its property, plant, and equipment is accurately reflected in its financial statements.