Page 19 - CIMA MCS Workbook February 2019 - Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

Given that the premises were subject to an impairment review, there should be little or no
additional losses to recognise upon disposal. However, if the premises are sold at a profit, this will
only be recognised at the point of disposal.

In principle, disposal of equipment and furniture will be dealt with in a similar manner. Given that
it is unlikely to be used in the new premises, its recoverable value is likely to be negligible with
perhaps only minimal scrap proceeds received upon disposal. In this situation, the equipment and
furniture would be reviewed for impairment and written down to its recoverable amount.
The cost of the new surgery will be capitalised in accordance with IAS 16 Property, plant and
equipment (IAS 16). IAS 16 requires capitalisation of all costs required to bring the asset into
working use. It must therefore include any legal and professional fees incurred as part of
purchasing the property.

The capital cost, less estimated residual value, will be depreciated over the expected useful life of
the asset to the business, with an annual charge to the statement of profit or loss. For premises,
the depreciation charge is likely to be on a straight‐line basis. Note that any land acquired with
the property is not subject to depreciation as land is not regarded as having a finite useful life.

If a ten‐year bank loan is taken out to help acquire the new surgery, this will be classified as a
liability in the financial statements. The total liability outstanding at the reporting date will be split
between current liabilities (due within twelve months of the reporting date) and non‐current
liabilities. The annual finance cost will be charged as an expense to the statement of profit or loss.

As Crowncare currently does not have any loan finance, this will introduce an element of gearing
to the statement of financial position.

In the statement of cash flows, the disposal proceeds received from the sale of the current
surgery will be classified as an ‘Investing activities’ cash inflow. If there is a profit on disposal, the
profit will be deducted as an adjustment to profit before tax within ‘Operating activities’. Any
impairment charge or depreciation charge will be added to profit before tax within ‘Operating
activities’ as they are expenses charged in the statement of profit or loss, but which do not have a
cash outflow.

The receipt of the loan will be classified as a cash inflow within ‘Financing activities’. Finance
charges paid in an accounting period are classified as a cash outflow in arriving at the net cash
inflow (or outflow) arising on ‘Operating activities’.

Financial Manager

KAPLAN PUBLISHING 109