Semnet Technologies (SET) is a listed company that manufactures computer microchips and transistors which started operating in Namibia in 2009. The company has been performing quite well and its board of Directors has decided to invest some of its free cash flows. The company finance director, Mr Cashflow, and his team invested in the following financial instruments in 2021:

Transaction 1 Investment in Cocoa shares

On 31 December 2021, SET obtained 50 000 ordinary shares in Cocoa Limited at N$30 a share. On the purchase date, the company paid brokers’ fees of 25 cents per share. It is SET’s intention to sell the shares in the near future.

Transaction 2 Promissory notes

On 1 January 2021 SET bought 1 500 10%-interest-bearing promissory notes in Promise2Pay Ltd with a nominal value of N$150 each at fair value in an active market. These promissory notes are compulsorily redeemable at the nominal price after 5 years. SET Ltd holds these promissory notes with the purpose of both collecting interest and capital repayments as well as selling some of the promissory notes. The market-related rate on similar instruments is 12%

Transaction 3 Instrument

SET had also purchased a 3year instrument at market value on 1 January 2022. The instrument will be redeemed at N$100 000. The instrument pays an annual interest of N$25 000 at the end of each year. A market related rate for this instrument is 9% at inception of the instrument. SEM incurred directly attributable transaction costs of N$ 5 000 on the acquisition of this instrument.

SEM holds the instrument in a business model which has an intention to collect contractual cash flows and an intention to sell the instrument with equal prominence

Transaction 4 Preference shares

By the end of 2021 SET realized they had probably overinvested and needed liquid cash. The company decided not to sell its obtained investments but rather issue its own preference shares. On 30 June 2022 SET issued 3 000 cumulative 11% redeemable preference shares at N$80 each. The preference shares have a face value of N$100 and are redeemable at a premium of N$10 on their face value on 30 June 2027. Interest is paid annually in arrears. SET issued the preference shares on the Namibia Stock Exchange (NSE) where they are actively traded. SET has not elected to account for this financial instrument at fair value through profit and loss. Transaction costs of N$ 5 600 were incurred on the issue of this instrument.

The fair values of the financial instruments are as follows:

Instrument	31 Dec 2022	31 Dec 2021
Cocoa Limited Share price	N$33.5 per share	N$30 per share
10% interest-bearing promissory notes	N$160 per note	N$158 per note
9% instrument	N$150 000	-
11% cumulative compulsorily redeemable preference shares	N$112 per share	-

Required:

1.1 Discuss the initial and subsequent measurement of the investment in Cocoa Bean ordinary shares in accordance with IFRS 9 Financial Instruments in the records of Semnet Technologies. Ignore tax-related matters. (4 Marks)

1.2 Provide the Journal entries to affect the recognition and measurement of transactions 2 and 4 of the financial instruments for the year-ended 31 December 2021 and 2022. Taxation journals are not required. (16 marks) Communications skills – layout and presentation (1 Mark)

1.3 Draft a memo setting out the measurement of the three-year instrument purchased by SET Limited, in accordance with International financial reporting standards (IFRS). (8 Marks) Communication skills and layout presentation.