Page 34 - CIMA May 18 - MCS Day 1 Suggested Solution

CIMA MAY 2018 – MANAGEMENT CASE STUDY

Exercise 3

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 Menta
One potential issue is the possible discrepancy between the stated depreciation policy for vehicles
of between 6‐10 years (depending upon the vehicle type) and information disclosed in the press
article about the bus involved in the accident, which was 22 years old.

It is possible that this vehicle is held in reserve and used ‘as a last resort’ at times of full
usage/capacity of other vehicles.

There is nothing wrong about continuing to use an asset that has been fully depreciated. Menta
would need to exercise care to ensure that depreciation was not calculated on such vehicles, as
this would lead to an overstatement of the depreciation charge and an understatement of non‐
current assets in the financial statements.

Even if fully depreciated vehicles have not continued to be depreciated, there would appear to be
a mismatch between the stated depreciation policy and what is actually happening. This has
several implications:
 there will be an over‐charge of depreciation for the initial 6‐10 years (depending upon the
type of vehicle), reducing profits and non‐current assets.
 in subsequent years, there will be no depreciation charge, which would therefore improve
profitability and asset utilisation whilst the vehicles continue to be used in the business
 it will affect the estimated residual value of vehicles as they will be older and will have
more mileage
 it is probable that vehicle maintenance costs will increase with the age and usage of the
vehicle
 it would suggest that Menta has not reviewed the underlying assumptions relating to
depreciation of vehicles for some time

If there is a mismatch between the stated vehicle depreciation policy and actual usage, a change
of estimate can be applied prospectively. If, however, this is a deliberate attempt by Menta to
distort reported financial performance and position, it should be regarded as an error and the
financial statement adjusted retrospectively.

78 KAPLAN PUBLISHING