Page 34 - MCS August Day 1 Suggested Solutions
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CIMA AUGUST 2018 – MANAGEMENT CASE STUDY
Requirements of IAS 38 Intangible assets
An intangible asset is an asset without physical substance. It is recognised initially at fair value
(normally cost of purchase) and then subsequently accounted for using either the cost model or
the valuation model. The criteria to apply the valuation model are very restrictive and so, to all
intents and purposes, the cost model is used. If an intangible asset has a finite life, it should be
amortised and written off to profit or loss on a systematic basis.
Application to Montel
Currently, there is no indication in the financial statements that Montel has intangible assets. This
may be surprising, given the nature of its manufacturing activities, particularly the design of the
mounting bodies used in Premium DSLR camera bodies. Additionally, there is a research and
development department which is accountable to the production and sales directors.
If Montel undertakes design work of unique components, lenses etc then it should capitalise such
costs in accordance with IAS 38 if they meet the required criteria. It would also facilitate the
future possibility of licencing the patented item for manufacture or use by others and earn
revenue for Montel.
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 Montel
Montel could lease property, PPE rather than making an outright purchase of assets. Currently,
there is no indication in the financial statements that any PPE is leased. Although there are loans
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