Page 17 - MCS August Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

example, a change in the discount rate used to calculate value‐in‐use now results in a higher
recoverable amount that exceeds the carrying amount of the asset.

Any reversal of an impairment recognised in an earlier accounting period cannot exceed the
carrying amount of the asset at that date had no earlier impairment been recognised. This is to
ensure that an asset is not overstated in the financial statements.

It is possible to perform an impairment review for a cash generating unit, which is a collection of
assets and liabilities which generate independent cash flows for the entity. This could be, for
example a factory unit or product, or even a subsidiary. If a cash generating unit is found to be
impaired, any impairment loss is fist allocated against obsolete or damaged assets and any
goodwill applicable to the cash generating unit. Thereafter, impairment is allocated against other
assets on a pro‐rata basis, subject to not writing an asset own below its recoverable amount.

Inventory valuation:

IAS 2 Inventories (IAS 2) requires that inventories are valued at the lower or cost and net
realisable value for each separate item of product. As with IAS 36, the objective is to ensure that
assets are not overstated in the financial statements.

The valuation should be performed on this basis for each separate product or item. In doing this,
some items will be valued at cost were they are expected to be sold at a profit, whereas other
items which are old or slow‐moving will be valued at net realisable value as their cost is unlikely to
be recovered by a sale transaction.

The issue of what constitutes cost should also be considered. Cost includes all costs incurred in
bringing an item to its current location and condition. This would include, for example, purchase
cost, freight inwards charges and non‐recoverable taxes and duties such as import levies.

In the case of finished goods the definition of cost also includes an appropriate allocation of
production overheads. In many instances, determination of the lower of cost and net realisable
value should be relatively straightforward as net resalable value can be based upon the after‐date
selling price of items. Inventory items would need to be written down to realisable value if it
appeared that they were slow‐moving or perhaps becoming technologically obsolete.

In the case of work in progress cost should include an appropriate allocation of production
overheads in accordance with their stage of completion. At the year‐end inventory count, it is
important that the stage of completion is noted for items of work in progress. Consequently, at
the year end, the cost incurred of an almost completed model from the Professional DSLR range
would include a higher proportion of production overheads and other costs (e.g. direct labour)
than the same model at an early stage of production. The rationale for this is that they are part of
the definition of ‘all costs required to bring items to their location and condition’ as required by
IAS 2.

Note that selling and distribution costs are excluded from the IAS 2 definition of cost as they are
post‐production costs.

Financial Manager

KAPLAN PUBLISHING 101