Page 33 - MCS August Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

All items of PPE that have a finite life should be depreciated over their useful life, to reflect the
consumption of benefits through the use of the asset. Depreciation is typically charged on either a
straight line or a reducing balance, depending on the pattern of consumption of benefits.

PPE can be revalued to fair value. Revaluation gains should be recognised in other comprehensive
income and then accumulate within equity. If a revaluation policy is adopted then all assets within
the same class should be revalued.

On disposal, the difference between the sale proceeds and carrying value will be recognised
within profit as a gain/loss on disposal.

Application to Montel
Montel holds PPE with a carrying amount of F$66,551m at 31 March 2018 which represents
67,8% of total assets. It is expected that most of the PPE will comprise and plant and equipment
for the manufacturing activities undertaken. There is no indication that any of the PPE (e.g. land
and buildings) has been accounted for using the valuation model, particularly as no revaluation
surplus is disclosed in the financial statements.

It is likely that Montel will need to maintain its manufacturing capability by a programme of
regular investment, although there did not appear to be any significant investment in PPE during
2018.

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 off‐set 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 Montel
Montel 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 items of PPE are
underutilised this could be an indication of impairment. This may arise if a camera or lens model
which relies upon a particular machine with no easy alternative use suffers a fall in demand.
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 use in the business an impairment review should be
performed.

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