Page 34 - CIMA MCS Workbook November 2018 - Day 1 Suggested Solutions

CIMA NOVEMBER 2018 – MANAGEMENT CASE STUDY

flavours, such as development of low‐sugar drinks or new recipes for energy drinks. This activity is
unlikely to meet the IAS 38 criteria to be classified as a development cost. Consequently, any such
costs incurred will be written off as incurred.

IAS 38 may apply to sponsorship deals arranged in advance of the Athletics World Cup in 2020.
Amounts paid in advance to secure the right to advertise or to be be approved supplier of soft
drinks may meet the criteria to be capitalised as an intangible asset or at least accounted for as a
prepayment in advance of the period in relation to which it applies.

IAS 38 could also be of relevance to Grapple if it was to incur expenditure that complied with the
definition of development costs. If this was the case, such costs would need to be capitalised and
amortised over the expected period that future economic benefits would be received.

If Grapple was to acquire a competitor with a recognised brand name, the brand name may meet
the requirements to be recognised and accounted for as a separate assets in the consolidated
financial statements. If this was the case, the brand should be written off over its estimated useful
life to the business on a straight‐line basis, or be subject to an annual impairment review if
estimated useful life cannot be reliably determined.

Requirements of IAS 17 Leases

A lease is an agreement whereby the lessor conveys the right to use the asset for a specified
period of time to the lessee in return for a series of payments. The lessor is the legal owner of the
asset.

IAS 17 classifies leases as either finance or operating leases depending on the substance of the
agreement. In accordance with the substance concept, the substance of the lease agreement is
reflected in financial statements and not the legal form.

A finance lease is a lease where the risks and rewards of ownership transfer to the lessee at the
start of the agreement. A finance lease is where the commercial substance is that the lessee has
acquired an asset and financed the acquisition via a loan. Indicators that would suggest a lease
should be classified as a finance lease would be:
● Lease term is for majority of asset’s life
● Present value of minimum lease payments is substantially all of the fair value of the asset
● The lessee is responsible for maintenance costs
● The lease is non‐cancellable
For finance leases, IAS 17 requires an asset and lease obligation to be recognised. The asset is
subject to depreciation. The lease liability gives rise to finance costs within profit.

All other leases are operating leases.
Operating leases are accounted for by charging the lease rentals to profits on a straight line basis
over the lease term. No asset is recognised by the lessee.

Application to Grapple
There is no indication that Grapple has obtained use of assets by finance lease as there are no
finance lease obligations disclosed in the financial statements. If any operating lease assets are

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