Page 33 - CIMA MCS Workbook November 2018 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

No information has been provided relating to the depreciation and the expected useful life of
vehicles, along with the annual depreciation charge and residual value for each type of asset. Nor
were there any disposals of PPE during the year under review. This could be an indication that
Grapple has adequate plant capacity to meet current and expected needs, or it may be that it is
not generating sufficient cash and profits to reinvest in the business.
.
Any purchase of new PPE would need to be capitalised. This would also include the cost of
installation.

Requirements of IAS 36 Impairment of assets
Impairment arises when the recoverable amount of an asset or cash generating unit falls below its
carrying amount. Recoverable amount is defined as the higher of value in use (what continued use
will generate for an entity) and fair value less selling costs (i.e. net realisable value). Any
impairment is written off to profit or loss to bring the asset down to its recoverable amount,
unless it relates to a revalued asset, in which case, impairment can first be offset against the
revaluation surplus for that asset.

Normally, it is necessary to conduct an impairment review only when there is an indication that
an asset may be impaired, such as obsolescence, damage, change to estimated useful life, change
to estimated residual value, change in market conditions etc.

Application to Grapple
Grapple may need review assets for possible impairment if there are any changes to the
underlying assumptions made when accounting for PPE. For example, if some PPE is either
underutilised (based upon their estimated useful live and operational hours) or not generating
economic benefits for the business, this could be an indication of impairment. Similarly, if the
residual value of an asset has fallen because it is relatively inefficient and/or no longer is of an
appropriate standard for effective or profitable use by the business an impairment review should
be performed.

Similarly, if demand for some products should fall (e.g. due to change in consumer tastes and
preferences) some assets may be under‐utilised and therefore, their economic value to Grapple is
reduced.

Requirements of IAS 38 Intangible assets
An intangible asset is an asset without physical substance. It is recognised initially at fair value
(normally cost of purchase) and then subsequently accounted for using either the cost model or
the valuation model. The criteria to apply the valuation model are very restrictive and so, to all
intents and purposes, the cost model is used .If an intangible asset has a finite life, it should be
written off to profit or loss on a systematic basis.

Application to Grapple
At 30 June 2018, Grapple has intangible assets with a carrying amount of Z$1.8, representing only
1.3% of total assets. There is no direct reference within the pre‐seen as to what this is. There is
reference to an R&D department, although this is likely to be for creation of new drinks or

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