Class Question Rono Limited ('Rono') acquired 10 000 Class A shares in Protect Limited on 1 March 2000 at a cost of R5 per share. Transaction costs at the acquisition date amounted to R500. The shares were classified as at fair value with gains and losses recognised in profit and loss. The investment in these 10 000 Class A shares was correctly recognised at R87 000 at 30 September 2009, its previous reporting date. Protect Limited issued capitalisation shares of 1 new Class A share for every 100 shares held on 15 November 2009. Rono sold half of the shares held in Protect Limited on 25 February 2010 for R9.50 per share. The Class A shares in Protect Limited traded at R9 each at 30 September 2010. Limited did not declare any dividends during the current reporting year. Protect YOU ARE REQUIRED TO: 1. What does this tell you about Rono, "The shares were classified as at fair value with gains and losses recognised in profit and loss"? 2. Calculate the carrying amount of Non-current investments, to be recognised in the statement of financial position of Rono Limited at 30 September 2010. 3. Calculate the following amounts to be recognised in the statement of comprehensive income of Rono Limited for the year ended 30 September 2010: · Dividend income and · Fair Value Adjustments relating to investments. 4. How would Protect account for the shares owned by Rono? In your discussion, discuss the treatment of: · transaction costs; · cash received when the shares were issued; and the · change in the price at which the shares are trading. Commented [AD1]: What are the reporting implications at initial recognition? Commented [AD2]: At the moment of the capitalisation issue, have we benefitted at all economically? What about subsequently to this? Based on your answer to this, should we have any impact on our statement of comprehensive income at the moment of the capitalisation issue? Commented [AD3]: When we sell the shares, should we have a profit on disposal? Commented [AD4]: We've sold some shares, what happens to the carrying amount of our asset? What is the contra-account? Commented [AD5]: What are our reporting implications of this market price at our reporting date?
SUGGESTED SOLUTION Abbreviations: P/L = profit and loss RE = Retained Earnings O/Bal = opening balance FVA = fair value adjustment 1. Class discussion Key points: · Accounting treatment driven by business model, rather than intention for an individual investment · Rono seeks to benefit from capital appreciation rather than contractual cash flows 2. Statement of Financial Position of Rono Limited as at 30 September 2010 Non-current investments: Investment in equity instrument: Protect Limited - 5 050 Class A shares (w1) Shares in Protect Limited: (10 000 + 100) /2 = 5 050 shares Carrying amount: 5 050 x R9 = R45 450 R (w1) 45 450 3. Statement of Comprehensive Income for year ended 30 September 2010: Fair Value Adjustment (w2) Profit and loss for the year (w2)