Page 31 - CIMA MCS Workbook May 2019 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

Application to Jord
Jord’s functional currency is the Corvola dollar C$. Any transactions in a different currency will
therefore be classed as foreign currency transactions.

Reference is made in the case study to doing the design and construction of houses in other
European countries. Whilst it is recognised that contracts require customers to pay in C$, there
will inevitably be some costs incurred in other countries when construction is taking place which
need to be translated into C$ for inclusion in the financial statements.

Additionally, one of the press articles refers to the growing popularity of prefabricated housing in
North America, a possible source of expansion for Jord. This could also lead to establishment of a
manufacturing facility in North America, given the logistical difficulties and costs of transporting
from Corvola. This would require a significant capital investment in PPE.

One way for Jord to set up a foreign operation would be for it to acquire a subsidiary in its chosen
country of location. This would include recognition of goodwill and non‐controlling interest, along
with the annual retranslation requirement for net assets and goodwill of a foreign subsidiary, with
any gain/loss on retranslation allocated between the controlling group and non‐controlling
interest shareholders.

Requirements of IAS 36 Impairment of assets
IAS 36 covers the accounting for impairment of assets.

Impairment is defined as the carrying amount of an asset (or cash generating unit) is less than its
recoverable amount. The recoverable amount is the higher of either: value in use to the business
or fair value less selling costs. This applies to idle or non‐productive assets (such as surplus plant
capacity), in addition to those which may be physically damaged.

Impairment losses are recognised in SP&L in arriving at profit before tax, unless the impairment
relates to revalued PPE when the impairment is allocated first against the revaluation surplus for
that asset.

There may also be implications for assets held for sale (IFRS 5) if the criteria for recognition and
measurement of assets as held for sale have been complied with.

Application to Jord

If any of Jord’s PPE does not comply with new or updated environmental or H&S requirements, it
may be impaired. If there is an indication of impairment, an impairment review should be
performed to ascertain whether that is the case, and to recognise any impairment in full
immediately in profit or loss. Given that Jord is operating at full capacity and is a market‐leader, it
is unlikely that Jord will have any significant asset impairment issues.

Requirements of IFRS 5 Non‐current assets held for sale and discontinued operations
IFRS 5 provides a definition of what constitutes a discontinued operation and the criteria that
must be met for an asset to be classified as held for sale.

KAPLAN PUBLISHING 81