Seriously Serious and Sombre Sam Ltd (SSSS) is a South African business engaged in the building and
Question:
Seriously Serious and Sombre Sam Ltd (SSSS) is a South African business engaged in the building and maintenance of harbours and sea ports in South Africa. The business has a year end of 30 September.
- Repair of damaged harbour wall In 1995, SSSS was contracted to build a harbour wall at the Cape Town Harbour. The contract specified that if the wall were to show any signs of weakness within 20 years of being built, SSSS would, at their own expense, be responsible for the repair of the wall. In June 2012, SSSS was contacted by the Cape Town Harbour with a complaint that the wall was beginning to crack. Upon inspection by SSSS it was clear that the wall was about to fall to pieces, and that it would need to be rebuilt. As per the contract, SSSS would not be able to charge for rebuilding the wall. SSSS started work on the wall in August 2012, and as at 30 September 2012, SSSS expected to incur a further R132 million (a reliable estimate) to complete the work on rebuilding the wall. As at 30 September 2012, SSSS is unsure whether to recognise the R132 million relating to the repairs needed on the harbour wall.
- Financial statements prepared by SSSS The business is considering expanding its operations into Southern Africa, and is looking to raise significant amounts of funding, in the form of both debt and equity, for the expansion. On 4 August 2013, the owners of SSSS had only prepared financial statements for the year ended 30 September 2012. These financial statements are available to potential investors and lenders. These financial statements are unaudited and do not show any comparatives i.e. no prior year numbers. The financial statements prepared by the owners do not include anything with respect to the R132 million indicated in point 1 above.
Question: 1 (40 Marks)
Based on the provided insert answer the following questions.
Refer to point 1 entitled “repair of damaged harbour wall”. Discuss how the R132 million would be recognised in the financial statements of SSSS as at 30 September 2012. You should apply the relevant definition and the recognition criteria as per the Conceptual Framework in your discussion. 1.1 (15 marks)
Refer to point 2, entitled “financial statements prepared by SSSS”. Identify the three users of the financial statements of SSSS, what decisions they would like to make based on the financial statements, and what information is useful from the financial statements to make those decisions.
International Business and the New Realities
ISBN: 978-0136090984
2nd Edition
Authors: S. Tamer Cavusgil, Gary Knight, John R. Riesenberger