FIAC7311 Assessment questions: 2021
Red Devils Limited (10 marks)
Red Devils Limited (Red Devils) is a distributor and retailer of official sports clothing and
memorabilia, located in Pretoria and listed on the Johannesburg Security Exchange. The company
has a 30 April year-end.
On 1 February 2019, Red Devils obtained the license to sell and distribute in South Africa, the
official FIFA sports clothing for the Europa League, for a period of five years from 1 May 2019 to 30
April 2024. The cost of the licence was €250 000. The payment for the licence was made on 1 April
2019 when the exchange rate was €1 = R16.00. The licence will be amortised on a straight-line basis
over the licence period.
On 1 April 2019, the financial manager prepared the following projections in respect of the annual
revenue and costs from the licence:
Revenue R7 500 000
Cost of sales (excluding amortisation) 75% of revenue
Amortisation of the licence ??
For the year ended 30 April 2020, sales of Europa sports clothing exceeded the projections and the
recoverable amount of the licence exceeded the carrying amount.
The COVID pandemic of 2020 resulted in the lockdown of sports stadiums in Europe. Europa League football
fixtures for the 2020 year were cancelled and postponed. In South Africa the national lockdown prevented
fans from watching the Europa League matches in public venues. The effect of the pandemic is expected to
continue into at least the 2021 and 2022 football season. Retail sales of sports clothing declined significantly
and the expected sales of Europa League football clothing to retail outlets decreased as fans were not
purchasing their favourite teams shirts.
The financial manager revised the projections for the remaining period of the licence agreement as
follows:
Per annum Actual 2021 Projection 2022
Revenue R3 200 000 R3 500 000
Cost of sales (excluding amortisation) 80% of Revenue 80% of Revenue
The Independent Institute of Education 1
FIAC7311 Assessment questions: 2021
The financial manager projects that the revenue will begin to recover in the 2023 and 2024 football
seasons. He therefore anticipates that the revenue will increase by 20% in each of these two years.
The cost of sales ratio will remain at 80%.
It is estimated that the license could be sold for R2 000 000 on 30 April 2021, before deducting
agents commission of 5%.
Red Devils expects a fair rate of return of 12.96% after tax. The SA normal tax rate is 28%.
Required
Prepare the intangible asset note to be included in the financial statements of Red Devils Limited for
the year ended 30 April 2021.
Your answer must comply with the requirements of International Financial Reporting Standards.
Accounting policy notes are not required.
Show all calculations.
Round off all calculations to the nearest Rand.
The Independent Institute of Education 2
