Page 27 - CIMA MCS Workbook May 2019 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

Exercise 3
Requirements of IAS 2 Inventories
Inventories should be measured at the lower of cost and net realisable value for each separate
class of item or product.

Cost is defined as all costs incurred in bringing the items to their location and condition. This will
include an element of production overhead, but will exclude post‐production costs such as admin
and any storage costs.

Application to Jord
Jord holds a significant level of inventories – approximately C$12m at 31 December 2018 and
2017. Reference has already been made within the Exercise 1 (Analysis of performance and
position) of the JIT system operated by Jord, which required effective control and processes to
minimise the risk of this system failing for any reason. Whilst there may be some element of
wastage etc on the manufacturing and construction process, there is no indication that it is
significant.

If Jord sources any specialised timber products from abroad which are purchased directly from an
overseas business, Jord will need to comply with IAS 21 to record transactions (and their
settlement) at the spot rate on the date of the transaction, with any exchange gain or loss on
settlement included in the SP&L in arriving at profit before tax. This may become a more
significant issue if Jord expands its customer base in countries outside of Corvola.

Requirements of IAS 16 Property, plant and equipment
Property, plant and equipment (PPE) is defined as being tangible assets that are held for use 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, including delivery and installation costs.
Subsequent expenditure can be capitalised when it results in an enhancement of 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 using
either the straight‐line or reducing‐balance basis, 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 accumulated within equity. If a revaluation policy is adopted then all assets
within the same class should be revalued.

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