Page 36 - MCS August Day 1 Suggested Solutions

CIMA AUGUST 2018 – MANAGEMENT CASE STUDY

Where the above criteria are not met, the situation is classed as a contingent liability. Contingent
liabilities are disclosed in the notes to the financial statements. However, if there is a remote
chance of there being an outflow of economic benefits then the situation is ignored altogether in
the financial statements.

Contingent assets are possible assets as a result of a past event. IAS 37 requires them to be
disclosed where it is probable that there will be an inflow of economic benefits. However, if it is
only possible or less likely it should be ignored.

Application to Montel

As a manufacturing entity, health & safety in the workplace could be an important issue for
Montel. There could be a risk of workplace injury arising connected with use of machinery at any
of its locations if not used and maintained properly.

Other possible sources of obligations, which may result in the need to recognise provisions,
include:

 Compensation or refunds due to customers who purchase a faulty or defective product.
This may be particularly pertinent for cameras and equipment used by professional
photographers where quality and reliability is of paramount importance.
 Breach of environmental regulations particularly in relation to safe disposal or recycling of
waste materials from production processes.

Requirements of IAS 21 re foreign currency transactions
Transactions in a foreign currency are initially translated at the spot rate in force at the date of
the transaction. When transactions are settled, such as when the supplier is paid after having
purchased goods on credit, the payment is also translated at the spot rate in force at the date of
the payment. A foreign exchange gains/loss will arise due to the movement of the exchange rate
between the transaction and the settlement date, which will be credited / charged to profits.

Any balances originating in a foreign currency that are still held at the reporting date are classified
as either monetary or non‐monetary. Monetary assets & liabilities are those that will lead to the
receipt or payment of a determinable number of currency units. Examples of monetary balances
are receivables, cash, payables and loans. Non‐monetary balances are items such as PPE,
intangible non‐current assets and inventory.

At the reporting date, monetary balances are retranslated at the closing rate (i.e. the rate in force
at the reporting date) with any foreign exchange gain/loss being charged to profits.

Non‐monetary items are not retranslated and will remain at their historic rate. This will be the
rate from when the item was originally acquired if it is measured at historic cost or in the case of
the item being revalued, the rate from the date of the revaluation.

Application to Montel – foreign currency transactions
Montel is a multinational manufacturing group and any group member is likely to enter into
individual transactions denominated in foreign currency. If this occurs, the transaction would be

80 KAPLAN PUBLISHING