Page 38 - CIMA May 18 - MCS Day 1 Suggested Solution

CIMA MAY 2018 – MANAGEMENT CASE STUDY

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 Menta
Revenue recognition for journeys taken when passengers are paying by cash, debit/credit card,
smart card at the point of purchase should be straight‐forward.

In terms of journeys booked in advance and season/multi‐ride tickets, there may need to be some
element of deferred income until the appropriate journey has been taken. For example, for a
season/multi‐ride ticket, the buses must have the scanning equipment to check the validity of the
ticket and to reduce the amount of credit remaining on the ticket. The operating costs associated
with generating that revenue (wages, depreciation etc.) should be matched in the SP&L.

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 Menta
Menta receives subsidies to operate specified bus routes and/or provide a specified level of
service. Menta should therefore ensure that financial assistance received is matched against the
service provision to which it relates. The nature and extent of financial support should also be
disclosed in the financial statements.

Contingent liabilities may exist if subsidies or financial assistance may be withdrawn and may
need to be repaid.

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.

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.

82 KAPLAN PUBLISHING