Reference no: EM13489015

Julius Mazibuko is a trainee accountant at an audit firm that has branches across South Africa. He has been temporarily assigned to the Technical Department of the firm to expose him to different functions within the audit firm. The Technical Department is responsible for assisting audit teams with queries on financial reporting issues. Julius received the following e-mail from the audit senior assigned to the Olympic group of companies.

When providing assistance on technical matters you may assume that all current International Financial Reporting Standards (IFRSs) have always been in existence and are currently fully effective. You may also ignore all transitional provisions in any IFRS.

From: Thabile
To: Julius
Date: 15 January 2013
Subject: Assistance on the audit of the Olympic group
Good day Julius

Thank you for your willingness to assist me with a few issues that emerged during the audit of the Olympic group and certain individual companies within the group. Here is the background information that you requested:
Our audit firm has been responsible for the audit of the Olympic group for the last four years. Olympic Ltd ('Olympic') is listed on the Johannesburg Securities Exchange and the group consists of various companies that operate in several business sectors. The end of the current reporting period for all companies in the Olympic group is 31 December 2012.
All companies in the group adopted IFRSs a few years ago.

Please take the following into account when preparing your comments:

- It is the policy of the Olympic group to present items of other comprehensive income as an amount before the related tax effect, with one amount for the aggregate amount of income tax relating to those items (in accordance with par. 91(b) of IAS 1, Presentation of Financial Statements).

- It is the policy of the Olympic group to transfer any realised cumulative gains or losses on instruments classified as 'at fair value through other comprehensive income' to retained earnings, where applicable (in accordance with par. 5.7.5 and par. B5.7.1 of IFRS 9, Financial Instruments).

Attachment name
Details
Attachment A
Information in respect of the Olympic group and certain companies within the group
Attachment B
Information on the financing of MakeIt's constructed plant
Attachment C
Information on the investments of Investco
Regards, Thabile
2
Attachment A
Information in respect of the Olympic group and certain companies within the group
The Olympic group is structured as follows:
Olympic Ltd
80%
100%
Other subsidiaries
MakeIt Ltd
Investco Ltd
Operations
The operations of the Olympic group are diversified and each company operates solely in its particular sector. The business activities of Olympic are mainly to hold investments in its subsidiaries. Olympic receives dividends from its subsidiaries and distributes them to its shareholders. The group administration function is also housed in Olympic.
Olympic has held an 80% interest in MakeIt Ltd ('MakeIt') since its incorporation a few years ago. MakeIt is a company which manufactures household appliances. MakeIt sells its branded products exclusively to a large retailer.
Investco Ltd ('Investco') is wholly owned by Olympic. It is a company which invests in various financial instruments.
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Attachment B
Information on the financing of MakeIt's constructed plant
During 2011 MakeIt identified the need to expand its operating capacity as a result of a substantial and sustainable increase in the demand for its products. MakeIt commenced with the construction of a new plant on 1 January 2012 and, as intended by management, the plant was available for use on 30 June 2012. The total cost of the plant amounted to R3 500 000.
MakeIt partly financed the construction of the plant by issuing 200 000 R10 convertible debentures to the public on 1 April 2012 at their face value. Interest is payable annually in arrears at a nominal rate of 6% per annum. The maturity date of the debentures is 31 March 2016. Each debenture is convertible at the option of the holder into two ordinary shares of MakeIt on the date of maturity. Debentures which are not converted into ordinary shares will be redeemed at par value on 31 March 2016. On 1 April 2012 the prevailing market interest rate for similar debt instruments without conversion rights was 8% per annum. MakeIt's shares traded at R4,25 each on 1 April 2012. MakeIt incurred direct incremental transaction costs of R48 000 to issue these instruments.
On 31 December 2012 the prevailing market interest rate for similar debt instruments without conversion rights was 8,21% per annum. On this date MakeIt's shares traded at R4,33 each.
The plant does not meet the definition of a qualifying asset as defined in IAS 23, Borrowing Costs.
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Attachment C
Information on the investments of Investco
Page 1/2
Name of investment
Notes
Carrying amount on 31 December 2011
Existing investments
Listed investment in Medal Ltd
1
R523 000
Other listed investments
R2 724 597
Money market
R475 265
New investments made during 2012
Convertible preference shares in Torch Ltd
2
n.a.
Options in Goldwinn Ltd
3
n.a.
Notes

1 Investco purchased 100 000 ordinary shares in Medal Ltd ('Medal') on 1 November 2006 at R3,40 each. Investco also incurred direct incremental transaction costs of R7 000 at that date. Investco acquired these shares as a long-term investment and expected annual dividends and capital growth in excess of the general increase in inflation. Investco classified this investment as 'at fair value through other comprehensive income'. Investco's investment in these shares never resulted in significant influence, control or joint control over Medal. The fair value of Medal's shares was R5,23 each on 31 December 2011.
During January and February 2012 the fair value of Medal's shares increased significantly due to the company's excellent results as published in its financial statements as well as public announcements regarding expected synergies from new acquisitions concluded by Medal.
On 29 February 2012 the directors of Investco decided to realise some of the gains resulting from the higher market price of the shares and sold 45 000 shares in Medal at R5,88 per share. Investco paid capital gains tax on this transaction.
At 31 December 2012 the market value of Medal's shares was R5,15 each.
2 On 1 July 2012, Investco invested R500 000 in Torch Ltd ('Torch') by acquiring 50 000 R10 convertible preference shares from Torch. The preference shares are compulsorily convertible on 31 December 2015 on the basis of two ordinary shares for each preference share. Dividends on the preference shares are payable semi-annually in arrears at a nominal rate of 5,75% per annum. In terms of its contract with Investco payment of the preference dividends is compulsory for Torch. On 1 July 2012 the prevailing market yield for similar preference shares without conversion rights was 8,36% per annum. Investco incurred direct incremental transaction costs of R11 000 on the acquisition of these instruments.
The preference shares were acquired by the group for strategic purposes, as Torch is the main supplier of materials used by some of the subsidiaries of the Olympic group. Investco's management does not expect to actively trade the preference shares, but does not necessarily expect to hold all of them to maturity.
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Attachment C
Information on the investments of Investco
Page 2/2
On 31 December 2012 the prevailing market yield for similar preference shares without conversion rights was 8,4% per annum.

3 The directors of Investco have considered ordinary shares of Goldwinn Ltd ('Goldwinn') to be a viable investment for speculative purposes since 2011. On 15 November 2012 Investco acquired an option to purchase 250 000 ordinary shares of Goldwinn at R2,75 per share, when Goldwinn's shares were trading at that price. Investco paid R34 000 for the option on 18 November 2012. Investco also had to pay a commission of 5% of the purchase price of the option to the broker who negotiated the deal. The option will expire on 15 February 2013. On 31 December 2012 the option was worth R85 000, at which date Goldwinn's shares traded at R2,97 each.