Page 21 - CIMA MCS Workbook November 2018 - Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

The cost of the external consultant for the three‐year term can be reliably measured and is
expected to result in the probable inflow of future economic benefits as ‘the stub’ is developed
and put into commercial production. This should enable Grapple to increase sales to both
supermarkets and airlines. The time cost of collaboration between the external consultants and
Grapple managers will total Z$300,000 over the three‐year development period which should be
capable of reliable measurement from time sheets and diary records and can be capitalised.

The cost of the heavy duty mould at Z$5,000,000 can also be capitalised.

One important factor to remember is that the progress of the development project must be
subject to review to ensure that any costs capitalised continue to meet the required criteria. If, for
example, the development work and expected outcome becomes unfeasible or is no longer
expected to generate future economic benefits, any costs capitalised to date must be written off
to the statement of profit or loss immediately.

The intangible asset would then be amortised over the period that it is expected to generate
future economic benefits. Amortisation would normally be on a straight‐line basis. If it was not
possible to reliably estimate the expected useful life of the intangible asset, it would be subject to
an annual impairment review, with any impairment written off to profit or loss.

Training costs

It could be argued that training costs should improve the efficiency of the Grapple to produce
goods for sale and therefore generate increased future economic benefits from their work
activities. In addition, the training cost can be reliably estimated at Z$500,000.

However, consideration needs to be given as to whether an increase in future economic benefits
can be regarded as probable solely as a result of this expenditure. IAS 38 specifically forbids
capitalisation of training costs to use or operate an intangible asset. One reason for this is that
Grapple will not have control over employees to be able to regard any increase in future
economic benefits as probable. For example, an employee who has received training may resign
and leave the entity, or the training may not be as effective as initially expected. This expenditure
does not meet the definition of an asset and should therefore be written off as incurred.

Further issues

It may be possible to obtain legal protection for ‘the stub’ bottle if it is regarded as sufficiently
different or distinctive from other bottles. If this is the case, the direct costs of obtaining the
patent, such as legal and professional fees, and associated registration costs could be capitalised
and recognised as an intangible asset. Any further costs directly attributable to protection of the
‘the stub’ that would help to prevent its illegal copying and use could also be capitalised.

If you have any further queries relating to these issues, please contact me.

Finance Manager

KAPLAN PUBLISHING 111