03-IAS-20 - Lecture notes 5 PDF

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Summary

| 1IAS 20Government Grants andAssistances03DEFINITIONSGovernment refers to government, government agencies and similar bodies whether local, national or international.Government assistanceis action by government designed to provide an economic benefit specific to an entity or range of entities quali...

Description

IAS 20

Government Grants and Assistances

03

DEFINITIONS refers to government, government agencies and similar bodies whether local, Government national or international. is action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria. Government Government assistance for the purpose of this Standard does not include benefits assistance provided only indirectly through action affecting general trading conditions, such as the provision of infrastructure in development areas or the imposition of trading constraints on competitors. are assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to Government the operating activities of the entity. They exclude those forms of government grants assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the entity (subsidies etc.). are government grants whose primary condition is that an entity qualifying for Grants them should purchase, construct or otherwise acquire long-term assets. related to Subsidiary conditions may also be attached restricting the type or location of assets the assets or the periods during which they are to be acquired to held. Grants related to are government grants other than those related to assets. income

RECOGNITION GENERAL Government grants including non-monetary grants at fair value shall not be When recognized until there is reasonable assurance that: recognised? (a) The entity will comply with the conditions attaching to them; and (b) The grants will be received They are two broad approaches to the accounting treatment of government grants: (a) The capital approach (recognise directly in equity) Approaches (b) The income approach (recognise in profit or loss)

Monetary grant Nonmonetary grant

The IAS 20 advocates income approach. Grant received in the form of cash. Grant received in the form other than cash. In this case the asset and the grant are recognized at the fair value. The other alternative may be to record the grant and the related asset at the nominal amount.

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ICMAP M4 Financial Accounting

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PERIOD OF RECOGNITION Government grants shall be recognized as income over the periods necessary to match them with the related costs, which they are intended to compensate, on a systematic basis. Grants related to These are recognized over the period and matched with the related expenses. income Grants related to are recognized over the useful life of the fixed assets in the depreciable assets proportion in which the depreciation on those assets is charged. Grants related to are also recognized over the period, in which the related expenses non-depreciable are made (conditions of the grant are fulfilled). assets

QUESTION

01

B Limited receives a government grant representing 50% of the cost of a depreciating asset which costs Rs. 40,000. How will the grant be recognised if B Limited depreciates the asset: (a) Over four years straight line; or (b) At 60% reducing balance (remaining to be charged in year 4)? The residual value is nil. The useful life is 4 years.

PRESENTATION GRANT RELATED TO INCOME Method 1: Include the grant in “other income” in profit or loss Method 2: Deduct from relevant expense by linked presentation. Present in separate line item as an “exceptional item” only if it is very Method 3: material. GRANT RELATED TO ASSET setting up the grant as deferred income and amortise it (same basis as for Method 1: depreciation) Method 2: deducting the grant in arriving at the carrying amount of the asset

QUESTION

02

A company receives a Rs. 20,000 grant towards the cost of a new item of machinery, which cost Rs. 100,000. The machinery has an expected life of four years and nil residual value. The expected profits of the company, before accounting for depreciation on the new machine or the grant, amount to Rs. 50,000 per annum in each year of the machinery’s life. Required: Prepare extracts of financial statement under both methods of presentation allowed under IAS 20 for grants related to assets.

REPAYMENT GRANT RELATED TO INCOME The amount of repayment is first applied against any un-amortised balance of deferred grant. If repayment exceeds deferred grant, the excess is recognised as expense in profit or loss. GRANT RELATED TO ASSET The amount of repayment is first applied against any un-amortised balance of Method 1: deferred grant. If repayment exceeds deferred grant, the excess is recognised as expense in profit or loss. The amount of repayment is debited to cost of the asset. The cumulative additional depreciation that would have been recognized to date as an Method 2: expense in the absence of the grant shall be recognized immediately as an expense.

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Class Notes

QUESTION

03

Top Limited operates in a poor area. During 2004, it installs a special pollution control device at a cost of Rs. 6,000 and receives a Rs. 4,000 grant from a local government. The depreciation is charged at 10% using straight line method. During 2006, the government finds out that Top Limited has not complied with the terms of the grant and asks it to repay the grant. |3 Required Show the accounting treatment of repayment if Top Limited uses: (a) Separate deferred grant method (b) Reduction form cost of asset method

DISCLOSURE OF GOVERNMENT ASSISTANCE The government grants not recognized because no value can be assigned to them or not distinguishable from the other transactions of the entity shall be disclosed (if material). PE November 2013 Q6 (b) 04 Wahid Company purchased an item of plant at a value of Rs. 1 million on January 1, 2013 with additional modification cost of Rs. 100,000 and transportation and installation costs of Rs. 50,000. The plant has an estimated life of 5 years with no residual value. The plant qualified for a government grant of 40% of its purchase price at the time of its purchase but it had not been received by June 30, 2013. It is the company policy to treat the grant as deferred credit and transfer a portion to revenue each year.

QUESTION

Required: Prepare extracts of Wahid Company.s financial statements for the year to June 30, 2013 in respect of the plant and the related grant as per IAS 20. (10)

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