Page 30 - CIMA MCS Workbook May 2019 - Day 1 Suggested Solutions

CIMA MAY 2019 – MANAGEMENT CASE STUDY

Ideally, all contracts with customers should specify exactly what Jord will do, and at what point(s)
revenue has been earned. This could be of particular importance if, for any reason, a customer
was not able to meet their financial commitments to pay for work done to date. This may include
specifying that the contract is one which performance obligations are satisfied over a period of
time, with entitlement to claim for work done to date.

If contracts include the potential for Jord to earn bonus payments, they can only be recognised to
the extent that any recognition will not be subject to a subsequent reversal.

Requirements of IAS 21 Foreign currency transactions
Transactions in a foreign currency are initially translated at the spot rate in force at the date of
the transaction. When transactions are settled, such as when the supplier is paid after having
purchased goods on credit, the payment is also translated at the spot rate in force at the date of
the payment. A foreign exchange gains/loss will arise due to the movement of the exchange rate
between the transaction and the settlement date, which will be credited / charged to SP&L in
arriving at profit before tax.

Any balances originating in a foreign currency that are still outstanding or unsettled at the
reporting date are classified as either monetary or non‐monetary items.

At the reporting date, monetary balances denominated in foreign currency (e.g. payables,
receivables, bank, cash, loan and overdraft balances) are retranslated at the closing rate (i.e. the
rate in force at the reporting date) with any foreign exchange gain/loss being taken to SP&L in
arriving at profit before tax. This will represent the best estimate at the reporting date of what
those items could be settled for in domestic currency.

Non‐monetary items (e.g. inventory, PPE) are not retranslated and will remain at their historic
rate. This will be the historic rate at which the item was originally recorded in the accounting
records/financial statements.

Requirements of IAS 21 Foreign operations
When a subsidiary has a different functional currency to that of the parent entity, the subsidiary
will be classed as a foreign operation.

In order to consolidate a foreign operation, the assets and liabilities will be translated using the
“closing rate” i.e. the rate in force at the reporting date.

Goodwill arising on the acquisition of the subsidiary will also be retranslated at the closing rate
each year. Items of income or expense are translated at the average rate for the year.

Foreign exchange gains or losses will arise on the retranslation of the net assets each year along
with the retranslation of goodwill. The gains/losses are recognised in other comprehensive
income and are split between the parent and non‐controlling interest shareholders of the
subsidiary.

80 KAPLAN PUBLISHING