Techmed Ltd is a company that manufactures and sells medical equipment to hospitals and has a 31 March year-end. Due to a demand for magnetic resonance imaging (MRI) scanners and computed tomography (CT) scanners, the directors decided to expand the business to include the manufacturing and selling of these scanners. To expand, the company had to construct a second plant. The plant is a qualifying asset in terms of IAS 23, Borrowing costs.

Bank loan

A quote of R8 000 000 to construct the plant was received from a building contractor and was accepted by the company. Techmed Ltd secured a loan of R8 000 000 from First Bank to finance the new plant. The loan was advanced to Techmed Ltd on 1 May 2019, and bears interest at 12% p.a., compounded bi-annually. The interest portion of the loan is repayable in ten equal bi-annual payments of R500 000 starting on 31 October 2019. The balance of the loan is repayable on 30 April 2029. The interest earned on excess funds received during the construction period amounted to R120 000.

Construction of the plant

The construction of the plant started on 30 April 2019 and expenses were incurred immediately. The construction price was paid by Techmed Ltd to the building contractor in progress payments, as follows:

1 June 2019	R4 000 000
31 August 2019	R3 000 000
30 November 2019	R1 000 000

The contractor entered into an agreement with Techmed Ltd to use the generator, mentioned below, in the construction of the plant, at no cost.

The plant was completed and ready for use on 30 November 2019 and brought into use on           1 January 2020.

Lease agreement

On 1 April 2019, due to the frequent power outages, Techmed Ltd entered into an agreement with Power Solutions Ltd to lease a 125kW generator from Power Solutions Ltd. It took Power Solutions Ltd one month to install the generator on the premises of Techmed Ltd. The generator was brought into use on 1 April 2019.

The terms of the lease agreement are as follows:

Fair value of generator on commencement date	R1 000 000
Bi-annual instalments payable in arrears, starting 6 months after commencement date	R164 473
Guaranteed residual value at end of lease	R100 000
Unguaranteed residual value at end of lease	R20 000
Lease term	4 years

The agreement further stipulates that the generator can be used for the manufacturing of other products. The generator can only be substituted due to a manufacturing fault during the warranty period. Any maintenance, insurance and running costs will be the responsibility of Techmed Ltd. Techmed Ltd can also use the generator as and when it so wishes and can also move the asset to another premises.

Techmed Ltd will take ownership of the generator at the end of the lease term after payment of the guaranteed residual value. Techmed Ltd paid legal fees of R15 000 and Power Solutions Ltd legal fees of R10 000 to Ntini Attorneys for drawing up the contract.

Depreciation

It is the policy of Techmed Ltd to depreciate property, plant and equipment over their estimated useful lives. The useful life of the plant is estimated at 20 years with a residual value of R500 000. The useful life of the generator (equipment) is estimated at 5 years with no residual value after      5 years.

REQUIRED:

	Marks
(a) Prepare an audit working paper for your audit manager to determine whether the agreement between Techmed Ltd and Power Solutions Ltd contains a lease in terms of IFRS 16, Leases.	10
Assuming that the agreement contains a lease in terms of IFRS 16, Leases, disclose the above information in the following notes to the annual financial statements of Techmed Ltd for the year ended 31 March 2020: Profit before tax Property, plant and equipment Leases (Categories of financial assets and financial liabilities in terms of IFRS 7, Financial Instruments: Disclosures need NOT be disclosed).	19 5 20

Answer rating: 100% (QA)

a To determine whether the agreement between Techmed Ltd and Power Solutions Ltd contains a lease in terms of IFRS 16 Leases an audit working paper ca... View the full answer