Page 15 - CIMA MCS Workbook August 2018 - Day 2 Suggested Solution

SUGGESTED SOLUTIONS

EXERCISE TWO (NON-CURRENT ASSETS AND GOVERNMENT GRANTS)
Briefing Notes

Acquisition of non-current assets

The treatment of the new gym equipment would be governed by International Accounting
Standard 16 Property, plant and equipment (IAS 16). This stipulates that expenditure can be
recognised as an asset in the statement of financial position provided that:

• it is probable that future economic benefits will flow to the entity, and
• the cost of the asset can be measured reliably.

This is the case with the gym equipment as it will be used in gyms and the cost can be established
as the amount charged by suppliers for its purchase, delivery and installation to bring the
equipment to its required location and bring it into working condition.

Therefore if GymFIT purchased equipment at a cost of C$2,000,000, this will be capitalised leading
to an increase in the carrying amount of property, plant and equipment in the statement of
financial position.
Depreciation

Each year a depreciation charge should be made to reflect the fact that some of the economic
value of the equipment has been used up. The method of calculating this charge can be done in
either of two ways.

Straight line method
This method of depreciation writes off the depreciable amount (capitalised cost less estimated
residual value) in equal amounts based upon the number of years it is expected to be used in the
business. This results in the same amount being written off the carrying amount of the asset and
being charged as an expense to the statement of profit or loss.

Reducing balance method
This method of calculating depreciation is based upon charging a fixed percentage to the carrying
amount off the asset at each reporting date, which is then charged to the statement of profit or
loss. Using this method, the annual depreciation charge is higher in the earlier years than in the
later years of ownership.
Government Grants - principles

A government grant is an amount of money that is made available to an entity for use on a
specific item of expenditure. This is usually done to encourage a business to follow a particular
course of action or to assist a business in achieving something that would otherwise be difficult to
achieve, or to help implement and achieve government policies. This usually benefits the
government to achieve a policy objective such as reducing obesity levels or reduce the increasing
incidence of Type 2 diabetes due to poor lifestyle choices. In order to ensure that public money is
to be spent wisely there are usually a number of restrictions and requirements attached to receipt
of the grant that must be complied with.
In this particular situation the Department of Health (DOH) is making money available to eligible
organisations to encourage investment new and updated gym equipment and to increase
membership of organisations promoting and encouraging fitness and healthy lifestyles.

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