Page 35 - CIMA May 18 - MCS Day 1 Suggested Solution

SUGGESTED SOLUTIONS

This situation also has ethical implications for the manner in which Menta operates and reports
financial information.

Requirements of IAS 16 Property, plant and equipment

Property, plant and equipment (PPE) is defined as being tangible assets that are held for use in
the business by an entity.

PPE should initially be recognised at cost. All costs that are incurred in bringing the item into
working condition for its intended use can be capitalised. Subsequent expenditure can be
capitalised when it results in an improvement to the economic benefits that can be generated by
the asset.

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 Menta
Menta holds PPE with a carrying value of C$15.35m at 31 December 2017 which represents 69.5%
of total assets. It is expected that most of the PPE will comprise premises for bus depots/garages,
long with the vehicle fleet. There is no indication that any of the PPE (e.g. land and buildings) has
been accounted for using the valuation model In addition, there is likely to be plant and
equipment for repair and maintenance of vehicles, along with office equipment.

Information has been provided relating to the depreciation and the expected useful life of
vehicles, along with the annual depreciation charge and residual value for each type of vehicle. It
may be appropriate to revisit this information to consider whether any of these estimates need to
be updated. If this is that case, this will be a change of estimate per IAS 8 (not an accounting
error) and would be dealt with prospectively as and when any estimates are amended. For
example, it may be that the residual value of older vehicles needs to be reconsidered as,
potentially, this may need to be reduced due to the availability of newer models with e.g. better
fuel efficiency, electric vehicles, seat belts fitted etc.

Any purchase of new vehicles would need to be capitalised. This would also include the cost of
customising the livery/logo of buses.

KAPLAN PUBLISHING 79