Page 20 - CIMA MCS Workbook November 2018 - Day 2 Suggested Solutions

CIMA NOVEMBER 2018 – MANAGEMENT CASE STUDY

TASK 2 – ACCOUNTING ISSUE

From: Finance Manager
To: Matthew Jones, Production Director
Date: Today
Subject: ‘The stub’
Treatment of initial expenditure

All expenditure is classed as either revenue or capital expenditure. Revenue expenditure is
expensed to the statement of profit or loss when it is incurred whereas capital expenditure will
be capitalised as an asset in the statement of financial position. It is then written off to profit or
loss over its expected useful life to the business so that it matches against the benefits generated
from its use.

In order to be capitalised, the expenditure must meet the definition of an asset. This means that
the expenditure is expected to result in a resource that is controlled by the entity and which will
result in the future economic benefits for the entity. The amount to be capitalised must also be
capable of being reliably measured.

Initially, all costs incurred prior to the feasibility study (salary costs, purchase of resources etc)
should be written off to profit or loss as it is incurred, unless any of it meets the definition of an
asset, such as the purchase of equipment which would normally be capitalised.

Feasibility study

At the time the expenditure is incurred for the external consultants to perform and report upon
the feasibility study, the cost can be reliably measured at Z$100,000. However at the point the
expenditure is incurred, it would not yet be determined that probable future economic benefits
would be receivable as a result of that expenditure. Therefore, this cost should be written off as
an expense as it is incurred.

Similarly, the internal salary and other costs incurred to assist the consultants with the feasibility
study can be reliably measured. This information may be obtained from payroll records and
time/job cards for recording time employed on the study. However, at the time the cost is
incurred, it cannot be regarded as probable that it will lead to an inflow of future economic
benefits. Therefore, this cost should also be written off as an expense as it is incurred.

Development of heavy duty mould for production of ‘the stub’

Progression to the development stage will only occur if the feasibility report concludes that it is
possible and practical to develop ‘the stub’ as a usable asset to the business. For development
expenditure to be capitalised in accordance with IAS 38 Intangible Assets requires the following:

● it is technically feasible (reliably estimated by the study conclusion)
● Grapple is committed to completion of the project (confirmed by Roger Grapple)
● the intangible asset will be used or sold to generate economic benefits
● Grapple is committed to providing the financial and other resources required to complete
development and use the software (confirmed by Roger Grapple)
● reliable measurement of all costs which will be capitalised

110 KAPLAN PUBLISHING