Page 35 - CIMA MCS Workbook November 2018 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

used in the business, this has not been disclosed. Grapple could lease items of PPE rather than
making an outright purchase. If Grapple entered into finance leases, this would affect the gearing
and interest cover ratios.

Grapple holds significant PPE balances in its SOFP, If finance was required Grapple could consider
entering into sale & leaseback transactions with these assets, if they are not already used as
security for existing loan liabilities.

Requirements of IAS 18 Revenue
IAS 18 deals with revenue recognition. Revenue is the gross inflow of economic benefits during an
accounting period. It should be recognised when it is probable those future economic benefits will
flow to the entity and that those benefits can be reliably measured. When revenue is recognised,
it should be matched against the cost of generating that revenue

Application to Grapple
Revenue recognition for the sale of drinks to supermarkets, restaurants, airlines and other
customers, typically on agreed credit terms, should be straight‐forward. The operating costs
associated with generating that revenue (wages, depreciation etc.) should be matched in the
SP&L.

Requirements of IAS 20 Government grants and disclosure of government assistance.
IAS 20 requires that, when grants are received, they are matched against the item to which they
relate in the financial statements. Revenue‐based grants should be matched in the SP&L against
the expense to which it relates. If the grant relates to a capital item, the grant should be matched
against the cost of the asset using either the net basis (offset against the cost, with the net cost
subject to annual depreciation) or the gross basis (treated as deferred income and released to
SP&L over the life of the asset, with the gross cost of the asset subject to annual depreciation.
The receipt of subsidies is a form of government assistance and should be accounted for and
disclosed in a similar way.

Application to Grapple
Grapple could seek sources of financial support for investment in PPE from third parties to assist
with an capital investment plans. For example, there may be grants available from relevant
agencies to assist with investments which comply with specified criteria, such as anything which
minimises environmental damage or which promote the use of environmentally friendly
technologies. Grapple should therefore ensure that financial assistance received is matched
against the assets to which it relates, normally by accounting for receipt of a capital grant as
deferred income. The nature and extent of financial support should also be disclosed in the
financial statements.

Contingent liabilities may exist if grants or financial assistance may be withdrawn and may need
to be repaid.

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