Page 35 - MCS August Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

included within non‐current liabilities, they are not identified as relating to finance lease
obligations.

Finance lease obligations are not immediately visible on their SOFP currently, suggesting that any
leases that are currently held are classified as operating leases.

Entering into finance lease agreements in the future may be a way of financing investment in PPE.

Montel has significant PPE balances in its SOFP, If finance was required Montel could consider
entering into sale & leaseback transactions with these assets. If Montel owns premises, it may be
possible to use the premises as security against borrowings.

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 that 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 Montel

Revenue recognition for Montel should be relatively straightforward as it will typically recognise
revenue when risks and rewards have been transferred. This is likely to be upon delivery of goods
ordered. In the case of sales via the website, the payment is often collected in advance of order.
Therefore, there may be a relatively small amount of deposits received in advance of goods being
delivered, which should be accounted for a deferred income.

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 Montel
There is no indication that Montel receives grants or any other form of government assistance.

Requirements of IAS 37 Provisions
IAS 37 covers the accounting for assets and liabilities of uncertain timing or amount.

IAS 37 only allows provisions to be recognised when all of the following criteria are met:
 A present obligation exists as a result of a past event
 A probable outflow of economic benefit will be required to settle the obligation
 A reliable estimate of the amount of the obligation can be made.

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