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The Open Country Safari Company Case Study
Michael J C Wells, Director, IFRS Education Initiative, IFRS Foundation
Makeit PLC is a company listed on the London Stock Exchange. The company has operated successfully in the manufacturing sector for more than twenty years and for many years has prepared its financial statements in accordance with International Financial Reporting Standards (IFRS). Although Makeit presents its financial statements in British Pounds (£), its functional currency is the Euro (€).
In 20X0 Makeit’s board of directors decide to expand Makeit’s operations into new types of business and into a geographical location in which it currently does not operate—Sub-Saharan Africa. Accordingly, management selects a number of activities in Southern Africa to be carried out as part of a ten-year diversification plan. The company appoints James and Judith Bilkersen to manage its African operations, under the brand name The Open Country Safari Company (Open Safari). The Bilkersens have over fifteen years’ experience in the hospitality industry in Africa and they share a passion for conserving wildlife and natural habitats. Makeit intends to operate a safari lodge and other African operations indefinitely.
Events in 20X0–20X2
On 2 January 20X0, Makeit incorporates a wholly-owned separate legal entity, Open Safari, in the Republic of Africania (Africania) by contributing £10,000,000 to form Open Safari’s permanent capital.
On 3 January 20X0, Open Safari obtains an £8,000,000 loan facility from a British bank. The loan is denominated in British pounds (£). The loan agreement obligates the bank to transfer £8,000,000 to Open Safari on 3 January 20X0 and Open Safari to transfer to the bank ten years later £13,031,157 on 2 January 20Y0 (in full and final settlement of the loan). Makeit guarantees all payments to the bank in the event that Open Safari defaults.
Acquisition of land
On 1 February 20X0, Open Safari purchases 1,000 hectares of undeveloped natural land called Freelands, an area of land in central Africania, for $10,000,000,1 with the aim of establishing an ecotourism business. The property is not fenced and adjoins a national park on all its boundaries except the western boundary, where Freelands adjoins privately owned undeveloped land that is currently unused. A wide range of indigenous plants and wild animals (including significant numbers of buffalo, crocodile, giraffe, hippopotamus, leopard, lion, zebra and a wide variety of antelope) inhabit Freelands and the surrounding lands. Law in Africania specifies that wild animals are the property of the owner of the land that they occupy. Neither elephant nor rhinoceros frequent Freelands because both species are no longer present in Africania because of heavy poaching during the civil war that plagued the country approximately a decade ago.
Design of infrastructure
The Bilkersens are inspired by the potential of the property to attract international tourists because visitors would be able to view native animals at close range in their natural habitat. Consequently, in February 20X0, the couple contract a leading Italian architect to design a luxury safari lodge. The construction phase is expected to take about three years to complete. The managers plan for the buildings to blend in with their setting and to have minimal impact on the environment. They therefore prefer to use local materials and building techniques, including thatch-grass roofing harvested from Freelands, for the lodge and staff accommodation buildings.
In April 20X0 the plans for the lodge are finalised. They include the construction of a reception area, restaurant, lounge, swimming pool and an office from which to administer the lodge and safari operations. The plans also include a home for the Bilkersens, twenty smaller free-standing homes for the staff and eighteen movable, luxury aluminium-framed canvas safari tents for guests.
When complete, the main lodge building will comprise the external structure (expected economic life 60 years), ducted air-conditioning (30 years), grass roof (20 years), fixtures and fittings (15 years), hard furniture (15 years) and soft furnishings (5 years). However, to maintain the upmarket image of the lodge, management expect to replace the grass roof, fixtures and fittings, hard furniture and soft furnishings at intervals of 10, 5, 3 and 2 years respectively. Management do not intend to replace the external structure or the ducted air-conditioning before the end of its economic life. Although the grass roof and the fittings will not have reached the end of their expected economic lives at the time of their expected replacement, removing these assets is expected to damage them to a degree that will render them worthless. Management intend to use the natural stone swimming pool for its entire 60-year economic life.
The external structure of the residential buildings (homes) has an expected economic life of 60 years, the grass roof (20 years), furniture (15 years) and soft furnishings (5 years). Management intend to replace only those items at the end of their economic lives, at which point they will be worthless. The costs of disposal are expected to be insignificant.
Because local legislation prohibits the disposal of all but the most biodegradable waste (for example, the grass roofing) on the entity’s land, management expects to dispose of the removed fixtures and fittings at the nearest local government recycling plant, which is situated about 200 kilometres from the entity’s land. The costs of dismantling, removing and disposing of those assets is likely to be significant. Although the fair value of the removed furniture and soft furnishings is likely to be significant at the date of their disposal, the entity’s policy is to sell those fittings to their staff in exchange for a nominal amount of cash. Because the staff come from largely impoverished communities it is highly likely that all of the soft furnishings will be disposed of in this manner. This benefit also provides an incentive for the employees to stay in the employment of the company and to take greater care of the soft furnishings.
Each safari tent has an aluminium frame (expected economic life 30 years), a canvas covering (10 years), fixtures and fittings (8 years), furniture (6 years) and soft furnishings (2 years). The lower economic life of the assets when compared with those in the lodge is mainly attributable to the greater exposure to the elements (for example, sunlight, wind and dust) in the canvas tents. The safari tents are fully transportable and can be removed to another location if required. Open Safari expects to replace its safari tents every 15 years. Although the fair value of the safari tents will probably be significant at the end of their economic lives, Open Safari’s ‘community support policy’ is to donate the used tents to a charity that supports health care and education in nearby rural communities. Open Safari aims to foster good relations with nearby communities from which its employees come.
On 1 May 20X0, the architect billed Open Safari AFZ2,000,0002 for design work performed from February to April 20X0. Her time was allocated as follows: 90 per cent on the lodge building, 5 per cent on the home that will be used by the Bilkersens and 5 per cent on the staff housing.
On 2 May 20X0, a diesel-powered electricity generator was purchased for $100,000 and installed at the lodge at a further cost of AFZ20,000. The generator is the only source of electricity at the remote lodge site and there are no plans to extend the national electricity grid to the area in the foreseeable future.
The twenty staff houses and the manager’s house are built between May and December 20X0. The Bilkersens manage the construction project. In 20X0 Open Safari is billed the following amounts in respect of the construction of all of the houses:
(a) building material: AFZ30,000,000 and $1,000,000; (b) building contractors: AFZ20,000,000; (c) building equipment: AFZ10,000 and $20,000; (d) casual labour to cut, bundle and bind thatch-grass: AFZ900,000; and (e) electrician fees and fittings: AFZ600,000.
The cost incurred to construct the Bilkersens’ house (the manager’s house) is approximately double that of a regular staff house.
The main lodge building is constructed between January 20X1 and June 20X2 by an independent construction firm in accordance with a €5,000,000 fixed-price contract. Open Safari rents the staff housing to the independent construction contractors to house their employees while the main lodge is constructed. The total rent charged is AFZ4,000,000.
Acquisition of safari tents On 30 September 20X2, the eighteen canvas safari tents are purchased from an external supplier for $1,000,000 and transported to the site for erection (transport costs AFZ1,000,000).
Acquisition of furniture, fittings and furnishings
In November 20X2 all of the furniture, fittings and furnishings for the main lodge building are fitted and tested and all are ready for use, as intended by management, by 1 December 20X2.
Acquisition of helicopter and hot air balloons
On 10 December 20X2, Open Safari purchases a helicopter for $3,000,000 and two hot air balloons for €20,000 each.
The helicopter is to be used to transfer clients between the nearest airport and Freelands (a distance of nearly 100 kilometres) and for operating aerial safaris on Freelands. Open Safari expects the helicopter engine to last five years and the helicopter airframe to last ten years. At the time of purchase, the helicopter had passed the mandatory air safety inspection (a legal condition of the helicopter licence) at a cost of $100,000. The next safety inspection must be completed before 30 September 20X4.
The hot air balloons are to be used for aerial safaris on Freelands. Open Safari expects the balloons and basket to last for five years and the firing equipment to last for ten years
Acquisition of customer list
On 20 December 20X2, Open Safari pays €200,000 for a database of names and contacts from an upmarket German-based adventure-tour operator. The Bilkersens expect the customer list will be effective in identifying potential customers for a maximum of five years, after which the database will be too old to be effective. By that time they expect that Open Safari will have established itself as a leading brand in the ecotourism industry and direct mailing will no longer be necessary.
In December 20X2, the Bilkersens begin the intensive training of the staff recruited from nearby communities. The staff are trained in all aspects of running an exclusive ecotourism lodge. Because of the lack of an established network of roads on Freelands, safaris are undertaken in three ways:
game tracking on foot;
game viewing by helicopter; and
game viewing by hot air balloon.
The Bilkersens ensure that the most knowledgeable local game trackers are hired to lead the walking safaris.
20X3 On 31 January 20X3 Open Safari’s website goes live, with a development cost of £100,000. The website is Open Safari’s main link to its customers. The website provides much information about the lodge and its ecotourism activities and allows customers to book safaris directly. In February and March 20X3 Open Safari runs an extensive advertising campaign in a range of leading international ecotourism and natural interest publications ($50,000), promoting its exclusive ecotourism operations in Africania. The Bilkersens also promote the lodge at trade fairs in Germany, France, the Netherlands (€30,000) and the United Kingdom (£10,000) and by mailing the contacts on the purchased customer list. In accordance with their ecotourism development support programme, the Africanian government contributes a grant of AFZ100,000 to meet particular costs associated with the Bilkersens’ promotional activity of the lodge at the European trade fairs. In April 20X3 the lodge opens for business and welcomes its first customers. In 20X3 the lodge incurs a small operating loss. However, the loss is significantly smaller than the loss forecast by Makeit for Open Safari’s first year of operations. Eradication of lantana On 30 October 20X3 Open Safari receives a grant of AFZ200,000 from the Africanian government to partly fund the purchase of the equipment and chemicals necessary for use in the eradication of lantana (an invasive alien plant) from about 15 acres of Open Safari’s land. The grant is conditional upon the lantana being substantially eradicated from Open Safari’s land by 31 December 20X4. In November and December 20X3 Open Safari spends $40,000 on chemicals and AFZ200,000 on chemical spraying equipment and machetes for use in its lantana eradication efforts.
20X4 By September 20X4, all the lantana has been eradicated from Freelands to the satisfaction of the inspector from Africania’s Ministry of Tourism. The Africanian operations are generating a profit significantly in excess of the Bilkersens’ expectations and Makeit’s forecast. Consequently, the Bilkersens decide to expand Open Safari’s African operations further. The introduction of elephant-back safaris in March 20X4 allows Open Safari to significantly increase the price of its Africanian safaris in response to unexpectedly high demand for that service. Acquisition of WoXy Safari’s assets and businesses On 2 January 20X4 Open Safari acquires all of the assets and businesses of WoXy Safaris at public auction for ZAR30 million.3 Open Safari also retained all of WoXy Safari’s staff. The founding owner-manager and sole shareholder of WoXy Safaris (Mr Lucky) disposed of WoXy Safaris to fund his retirement. WoXy Safaris operates in the ecotourism and agribusiness sectors on land it owns in South Africa. That land, which is securely fenced, is the sole remaining habitat of the endemic quagga (Equus quagga quagga). The quagga is a subspecies of the common zebra (Equus quagga) and was, until its rediscovery by Mr Lucky about a decade ago, thought to be extinct. WoXy Safari’s profitable ecotourism business allows tourists to observe the world’s only quaggas Page 10 in their natural habitat in a one-hour elephant-back safari. The elephant-back safaris are marketed under the registered ‘WoXy’ brand name. WoXy Safari’s profitable agribusinesses comprise a premium badger-friendly honey production business and sustainable exotic pine plantations. The main reasons for Open Safari acquiring WoXy Safaris is to obtain its herd of quaggas and its ten safari-trained elephant bulls. Following the acquisition, the elephants are immediately relocated to Freelands using a military helicopter provided at no cost to Open Safari by the government of Africania. The relocation assistance is provided in accordance with that government’s ecotourism development support programme. Prior to the auction, the Bilkersens estimate the fair values of WoXy Safari’s tangible assets as follows: ZAR Land and all plants (including pine trees) growing on it 20,000,000 Quaggas (herd: 30 mature + 10 immature) 4,000,000 Elephants (‘herd’: 10 mature bulls) 2,500,000 500 active beehives 500,000 Total tangible assets 27,000,000 Open Safari also continues to operate WoXy Safari’s South African agribusinesses. In February 20X4, Open Safari relaunches the modified South African ecotourism business using the WoXy brand—offering horseback quagga safaris using a herd of 20 horses that it acquired at a cost of ZAR200,000 in a separate acquisition from an independent third party.
In late 20X4 Open Safari entered into a contract to sell, on 31 December 20X9, a specified significant quantity of sawn pine logs at a fixed price
20X5 to 20X8 After living in Africania for about five years, the Bilkersens are further inspired by its potential as a showcase for wildlife. On 2 January 20X5, Open Safari acquires a second property (Sealands) in Africania for $2,000,000. Sealands is a mix of undeveloped grassland and bushveld. Except for the portion of the property that adjoins the Indian Ocean, the perimeter of this property is securely fenced. Despite its being securely fenced, there are no animals of significant value on Sealands at the time of acquisition. The main purposes of acquiring Sealands are to obtain land on which to breed rare native animals (for example, African wild dog, brown hyena and rhino) for release into the wild on Freelands and to broaden the range of activities that Open Safari can engage in, including: · breeding Tuberculosis-free (TB-free) African buffalo and a range of antelope, zebra, giraffe and warthog for sale to other parties; · operating land-based photographic safaris; · licencing land-based self-drive photographic safaris; · operating aquatic safaris (snorkelling, diving and whale watching) from the coast bordering Sealands; and · developing a beach holiday facility and casino. All these activities take place on, or adjacent to, Sealands. However, before they can be undertaken, Open Safari must first construct a network of roads on Sealands. Road infrastructure development The road development plans include the construction of several gravel roads and bridges over the three-year period ending 31 December 20X7 to allow access to the property from the national road that runs past the property’s western boundary. The roads and bridges will also make possible photographic safaris on the property. The two main bridges crossing the river will be constructed by an Italian construction company under a €1,000,000 two-year fixed-price construction contract. Payment to the external contractor for the construction of the bridges in accordance with the contract is made as follows: · 20X6: €500,000 on 1 June, when construction started; · €280,000 on 1 December 20X6 for the first bridge (ie €250,000 progress payment plus €30,000 early completion incentive); and · €210,000 on 30 June 20X8 for the second bridge (ie €250,000 progress payment less €40,000 late completion penalty).
By 31 December 20X8 all 200 plots are sold and construction of only 10 beachfront homes is outstanding. In 20X5, before starting construction work on the casino, Open Safari contracts a European casino resort operator to operate the casino for 20 years. The terms of the agreement require Open Safari to construct a fully equipped and fitted casino hotel on Sealands to the specifications stipulated by the casino operator. The construction, fitting and finishing contractor must be chosen by the casino operator in accordance with a $200 million fixed-price construction contract that will be negotiated by the casino operator. The casino operator will actively manage the project of constructing the casino hotel. The casino operator is contractually obliged to pay Open Safari: · €40 million on signing the contract in 20X5; · €100 million over the construction phase of the casino hotel (when payments are required to be made to the construction contractor); and · €20 million per year over the twenty years following the completion of construction. Other than the payments specified above, Open Safari does not share in the revenue and expenses of the casino operation over the 20-year period that it is operated by the international casino operator. The Bilkersens are undecided about how Open Safari will benefit from the casino assets after the agreement with the current operator expires. Options include continuing to contract an external party to operate the casino or Open Safari actively managing the casino operations. The construction of the casino hotel is completed in December 20X8. The economic life of the casino hotel building is estimated at 60 years with no residual value. The economic life of all equipment and fittings and furniture in the casino hotel is 20 years or less. Relocating game to Sealands In 20X5, in anticipation of operating photographic safaris on Sealands and breeding animals to sell to others, Open Safari pays game capture experts ZAR3,000,000 to capture small numbers of zebra, giraffe, warthog and a wide range of antelope on Freelands and to relocate and release those animals on Sealands. The relocated animals adapt well to their new environment and in the absence of their natural predators their numbers increase steadily in the years following their relocation. Animal husbandry facilities In 20X6 Open Safari constructs breeding dens in smaller, securely fenced enclosures to house wild dogs and brown hyena (cost AFZ270,000). Open Safari also ‘rhino proofs’ the perimeter fence of Sealands by reinforcing it with a thick steel cable, which is secured one foot above ground level (cost AFZ400,000).
In late 20X6 Open Safari purchases the following animals at a reputable game auction in South Africa. The table also shows the prices paid at auction for animals in 20X7 and 20X8.
(All amounts shown in this table are per animal) Price paid by Open Safari at auction in 20X6 ZAR Price paid by others at auction in 20X7 ZAR Price paid by others at auction in 20X8 ZAR 4 wild dogs 1,500 1,600 1,100 4 brown hyena 1,300 1,800 1,700 5 white rhinoceros 150,000 180,000 200,000 5 black rhinoceros 120,000 130,000 150,000 10 TB-free Cape 100,000 160,000 140,000 buffalo
The costs of food, supplies, keepers’ wages and veterinarian services that are incurred in caring for the animals is about AFZ1,000,000 per year.
The table below documents the success of Open Safari’s captive breeding programme on Sealands:
Bespoke safari vehicles
On 30 June 20X8 Open Safari purchases three vehicles (cost $200,000 each) and arranges for the vehicles to be equipped for photographic safaris, including reinforcing the chassis and Page 17 strengthening the suspension before fitting bespoke seating structures with a canvas roof on the back of the vehicles, painting the vehicle and including the logo of the Open Country Safari
Company. The modifications cost $15,000 per vehicle. Each vehicle is expected to be used for three years or until it has travelled 200,000 kilometres (whichever is reached first). Operations Under the careful and enthusiastic management of the Bilkersens, Open Safari prospers in 20X5 to 20X8. Customers at Freelands come mainly from the Eurozone countries with smaller numbers from Canada, China, Japan, the UK and the USA. An insignificant number of customers come from Africania and South Africa. Payments for the holidays are made at least six weeks in advance of the visit and are billed and received in US dollars only.
Release of Elephants on Freelands
In January 20X9, following an elephant culling operation in a country bordering on Africania, the Bilkersens rescued 20 orphaned teenage elephant calves and brought them to Freelands at a total cost to Open Safari of $400,000. To rehabilitate the young herd on Freelands, the herd was first kept in a specially constructed fenced camp. To provide leadership and discipline to the teenage herd, one of Open Safari’s prize elephant bulls was retired from elephant-backed safari work and placed into the camp with the young herd. By March 20X9 the Bilkersens were satisfied that the herd was established and ready for life in the wild. On 1 April 20X9 the teenage herd and their mature leader were released into the wild on Freelands in a grand ceremony sponsored by a cash grant from the Africanian Tourism Development Agency provided specifically for this event. The event attracted much attention from the international news media and led to a serialised weekly documentary about Open Safari’s contribution to conservation, which was broadcast in 40 countries throughout 20X9. These events greatly increased the value of the Open Safari brand.
Some IFRS issues for analysis:
Which Standard applies when accounting for the orphaned elephants rescued by Open Safari?
When released on Freelands, must Open Safari derecognise the released elephants (mature bull and rescued orphans)?
How would Open Safari present the released elephants in its statement of financial position at 31 December 20X9?
Does the sponsorship of the release ceremony by the government of Africania satisfy the definition of income of Open Safari?
Do the expenditures on promotion result in an asset of Open Safari (as defined)?
In order to solve this problem ,you should make a list of IAS/IFRS’s he/she plans to use while writing the answers to the project requirements. Identify accounting methods and policies to be used in the project
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