ARNO LIMITED entered into the following share transactions in Jabulani Limited during the financial year ended 31 December 2021:

ARNO LIMITED entered into the following share transactions in Jabulani Limited during the financial year ended 31 December 2021:

Additional information:

• On 31 December 2021, the JSE Limited closing prices for a right was CU0,30 and that of an ordinary share in Jabulani Limited was CU1,80.

• Arno Limited acquired these ordinary shares in Jabulani Limited with the principal objective to generate profits from short-term fluctuations in prices. The rights were not acquired as hedging instruments.

• Brokerage calculated at 0,5% of the amount paid or received has not been taken into account.

REQUIRED

Prepare the investment accounts for shares and rights in Jabulani Limited in the general ledger of Arno Limited for the year ended 31 December 2021.

🇿🇦 Arno, an Afrikaans name from Germanic origin, means “eagle” and is pronounced AR-nou.

🇿🇦 Jabulani, a Zulu name often shortened to Jabu, means “rejoice” and is pronounced Jah-boo-LAH-nee.

SOLUTION

Note:

1. Since this is a portfolio of shares with a pattern of short-term profit-taking, these shares (financial instruments) would fall within the definition of financial assets held for trading and it is therefore classified as at fair value through profit or loss. The rules relating to measurement would be:

• initial measurement: at fair value excluding transaction costs;
• subsequent measurement (at year end): at fair value with fair value changes recognised through profit or loss.

With derecognition (sale) of the shares, the shares are first restated / adjusted to fair value, then sold at that fair value, accordingly there is no resultant profit or loss on the sales transaction. There can only be a profit or loss on such a transaction if the shares are NOT sold at fair value. This approach follows from IFRS 9 par 3.2.12 that states that the difference between the carrying amount (measured on date of derecognition) and the proceeds received, should be recognised in profit or loss. Therefore, the financial instrument should first be measured at the fair value on date of the sale before that carrying amount is compared to the proceeds from the sale, in order to calculate the resultant profit or loss (if any).

2. Arno Limited must adjust the value of the shares, which it owns in Jabulani Limited before the rights issue, to fair value.

After Arno Limited has made this adjustment to fair value, this cum rights value per share must be allocated between an ex rights value per share and a rights value (value of the rights).

Shares from a capitalisation issue (or a share split) are initially recognised at fair value.

3. Since these are speculative investments and classified as financial assets at fair value through profit or loss, transaction costs on initial recognition are recognised immediately in the “Profit or loss” section of the Statement of profit or loss and other comprehensive income and are not included in the price used to value the shares.

Transaction costs incurred on sale of these shares are recognised immediately in “Profit or loss”.

General Ledger of Arno Limited

Calculations