Page 28 - CIMA MCS Workbook May 2019 - Day 1 Suggested Solutions

CIMA MAY 2019 – MANAGEMENT CASE STUDY

On disposal, the difference between the sale proceeds and carrying amount will be recognised
within profit as a gain/loss on disposal. Any surplus in equity on a revalued asset can then be
transferred to retained earnings within the SOCIE.

Application to Jord
Jord operates from one set of premises (now approx. 40 years old) which may be in need of
ongoing repairs/renewals Although new plant was purchased during 2018, there is no indication
of its estimated useful life – consideration may need to be given to when it needs to be replaced
and how that will be financed. Note that there was a net increase in the carrying amount of PPE of
C$5.0m. There is no evidence that this increase was the result of either a revaluation exercise or
of entering into finance lease agreements; therefore it probably represents cash paid to acquire
additional or replacement PPE during the year.

If Jord intends to expand or update its productive capacity, it is probably well‐placed to do so as it
currently has no right‐of‐use lease obligations and nor does it have any loan finance. It could use
its premises as security for any finance raised.

The case study makes reference to Jord having its own trucks to make delivery of house
components. The timing of replacement of some or all of the trucks may need to be considered
as, given the specialist nature of the trucks, the capital cost may be considerable. Given Jord’s
commitment to environmental management, acquisition of new vehicles may be particularly
costly if they are to be efficient in terms of fuel efficiency, minimising adverse environmental
impact and energy efficient.

Requirements of IFRS 16 Leases
IFRS 16 defines a lease as ‘an agreement that transfers control of an identified asset for a
specified period of time, in exchange for consideration’. This definition therefore includes any
lease agreements which were previously classified as an operating lease in accordance with the
now superseded IAS 17. The consequence of this is that any lease agreement will almost certainly
(with minimal exception) result in recognition of lease assets and obligations in the statement of
financial position. This will therefore affect gearing. The exceptions to recognition of right‐of‐use
assets relate to assets of small value and agreements of less than twelve months.

The right‐of‐use asset will be subject to an annual depreciation charge. The right‐of‐use liability
will be stated at present value and will be subject to an annual finance charge, accounted for as
an expense in the statement of profit or loss.

If an agreement does not transfer control of an identified asset for a specified period of time in
exchange for consideration, it is not a lease and IFRS 16 will not apply. This could be, for example,
organising the delivery of goods by a freight company – this will be a transport or distribution
cost.

Application to Jord
If Jord decided to acquire additional production capacity or premises, it could do so by leasing,
rather than outright purchase.

78 KAPLAN PUBLISHING