Page 36 - CIMA May 18 - MCS Day 1 Suggested Solution

CIMA MAY 2018 – MANAGEMENT CASE STUDY

Requirements of IAS 36 Impairment of assets
Impairment arises when the recoverable amount of an asset or cash generating unit falls below its
carrying amount. Recoverable amount is defined as the higher of value in use (what continued use
will generate for an entity) and fair value less selling costs (i.e. net realisable value). Any
impairment is written off to profit or loss to bring the asset down to its recoverable amount,
unless it relates to a revalued asset, in which case, impairment can first be off‐set against the
revaluation surplus for that asset.

Normally, it is necessary to conduct an impairment review only when there is an indication that
an asset may be impaired, such as obsolescence, damage, change to estimated useful life, change
to estimated residual value, change in market conditions etc.

Application to Menta
Menta may need review assets for possible impairment if there are any changes to the underlying
assumptions made when accounting for PPE. For example, if some vehicles are underutilised
(based upon their estimated useful live and operational hours) this could be an indication of
impairment. Similarly, if the residual value of a vehicle has fallen because it is relatively inefficient
and/or no longer is of an appropriate standard for public use (e.g. no seat belts in buses used for
transporting school children), an impairment review should be performed.

Similarly, if bus routes are withdrawn, or subsidies withdrawn or reduced. It may mean that some
vehicles are under‐utilised and therefore, their economic value to Menta is reduced.

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
written off to profit or loss on a systematic basis.

Application to Menta

Currently, there is no indication in the financial statements that Menta has intangible assets.
However, IAS 38 may have some relevance or application to Menta in specific circumstances,
depending upon its future activities.

Although this would appear not be applicable in the current situation, it is possible that Menta
may need to apply for operating licences to run bus services in a particular location or country. If
so, the cost should be capitalised and amortised over the licence term.

Another possibility is if Menta continued to use the brand and business name of a competitor that
it acquired. The capitalisation of a brand is permitted by IAS 38 if cost can be reliably measured. It
would then be amortised if estimated useful life could be reliably estimated, or it would be
subject to an annual impairment review.

Training of staff (e.g. new drivers to obtain necessary licences etc.) cannot be recognised as an
asset. Any such costs must be written off when incurred.

80 KAPLAN PUBLISHING