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CIMA AUGUST 2018 – MANAGEMENT CASE STUDY
The capital structure is constant, since if this changes, the weightings in the WACC
calculation would also need to change.
The new investment does not have a different risk profile to the existing entity’s investment
projects. This could be the case if Montel invests only in entities undertaking similar
activities.
The new investment is marginal to the entity. Any substantial new investment is likely to
result in a change to the WACC.
Exercise 3 – Revision and application of IAS/IFRS
Requirements of IAS 2 Inventories
Inventories must be valued at the lower of cost or net realisable value for each separate product
or item. Old or obsolete items should be written down to their net realisable value.
Application to Montel
Montel has significant inventories levels (approx 60% of current assets), much of which will be
made or purchased to particular technical specifications. It is possible that some of the
inventories will be old or obsolete, with the risk that inventories are overstated in the financial
statements.
Requirements of IAS 8 Changes in accounting estimates and errors
Entities must select and disclose accounting policies which are appropriate to their circumstances,
and they should be consistently applied throughout the accounting period and from one
accounting period to the next. Accounting policies should also be reviewed to ensure that they
remain relevant to the circumstances of the business.
Changes in accounting estimates should be made prospectively, i.e. from the date of the change
of estimate, without re‐stating earlier years. Accounting errors should be adjusted retrospectively
by re‐stating earlier years.
Application to Montel
There is no immediate indication of errors or that changes in estimates may be required within
the information made available.
Requirements of IAS 16 Property, plant and equipment
Property, plant and equipment (PPE) is defined as being tangible assets that are held for use in
the business by an entity.
PPE should initially be recognised at cost. All costs that are incurred in bringing the item into
working condition for its intended use can be capitalised. Subsequent expenditure can be
capitalised when it results in an improvement to the economic benefits that can be generated by
the asset.
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