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Chapter12  governmentgrants2008
Chapter12  governmentgrants2008
Chapter12  governmentgrants2008
Chapter12  governmentgrants2008
Chapter12  governmentgrants2008
Chapter12  governmentgrants2008
Chapter12  governmentgrants2008
Chapter12  governmentgrants2008
Chapter12  governmentgrants2008
Chapter12  governmentgrants2008
Chapter12  governmentgrants2008
Chapter12  governmentgrants2008
Chapter12  governmentgrants2008
Chapter12  governmentgrants2008
Chapter12  governmentgrants2008
Chapter12  governmentgrants2008
Chapter12  governmentgrants2008
Chapter12  governmentgrants2008
Chapter12  governmentgrants2008
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Chapter12 governmentgrants2008

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  • 1. Gripping IFRS Government grants and government assistance Chapter 12 Government Grants and Government AssistanceReference: IAS 20 and SIC 10Contents: Page 1. Introduction 384 2. Definitions 384 3. Recognition 385 3.1 General 385 3.2 Grants related to expenses 385 3.2.1 Grant for past expenses or immediate financial support 385 Example 1: grant for past expenses 385 3.2.2 Grant for future expenses 386 Example 2: grant for future expenses – direct approach 386 Example 3: grant for future expenses – indirect approach 387 3.3 Grants related to assets 389 Example 4: grant related to a depreciable asset – direct approach 389 Example 5: grant related to a depreciable asset – indirect approach 390 Example 6: grant related to a non-depreciable asset – direct approach 391 3.4 Grants received as a package 393 Example 7: grant is a package deal 393 4. Measurement 394 Example 8: grant asset – fair value or nominal amount 394 5. Change in estimates and repayments 395 Example 9: grant related to expenses – repaid 395 Example 10: grant related to assets – repaid 397 6. Disclosure 399 7. Summary 400 383 Chapter 12
  • 2. Gripping IFRS Government grants and government assistance1. IntroductionGovernment grants are provided to encourage an entity to become involved in certainactivities that it may otherwise not have involved itself in (or may even be used to discouragecertain activities). It is often provided to assist businesses in starting up. This obviouslybenefits the business but also benefits the government through creation of jobs and thus alarger base of taxpayers. Grants are often referred to by other names such as subsidies,subventions and premiums.2. DefinitionsThe following definitions have been simplified wherever considered appropriate:Government:• government;• government agencies;• similar bodies;• whether local, national or international.Government assistance:• action designed by government• to provide an economic benefit• to an entity or range of entities• that qualify under certain criteria.Government grants:• government assistance• in the form of transfers of resources to an entity• in return for past or future compliance with certain conditions relating to the operating activities of the entity• but excludes: - assistance that cannot be reasonably valued, and - transactions with government that cannot be distinguished from normal trading.Grants related to income:• a government grant• that is not a grant related to an asset.Grants related to assets:• a government grant• that has a primary condition requiring: - the qualifying entity - to purchase, construct or otherwise acquire long-term assets;• that may have a secondary condition/s restricting: - the type or location of the assets, and/ or - the periods during which the assets are to be acquired or held.Forgivable loan:• a loan• that the lender has undertaken to waive repayment of• under certain conditions.Fair value:• the amount for which an asset could be exchanged between• knowledgeable, willing parties in an arms length transaction. 384 Chapter 12
  • 3. Gripping IFRS Government grants and government assistance3. Recognition3.1 General (IAS 20.7 – .18)A government grant can take one of two forms:• grant related to an asset: these are those where the grant must be used to purchase some sort of asset;• grant related to an expense: these are any grants other than those related to the purchase of an asset.The type of grant provided determines how it should be accounted for.Government grants are only recognised when there is reasonable assurance:• that the entity will comply with the conditions; and• the grants will be received.Government grants are recognised as:• income over the relevant periods• on a rational basis• that matches the grant income with the costs that they were intended to compensate.The grant income can be presented as:• ‘other income’ or as a separate income in the statement of comprehensive income: direct income approach; or• a reduction to the expense or asset to which it related: indirect income approach.The terms direct income approach and indirect income approach are not terms that you willfind in IAS 20, but are merely terms devised for ease of explanation and understanding of thetwo forms of presentation.3.2 Grants related to expenses (IAS 20.12 - .19 and .21)If the grant received does not relate to an asset it could be used as:• compensation for past expenses or as immediate financial support; or as• compensation for future expenses still to be incurred.3.2.1 Grant for past expenses or immediate financial support (IAS 20.20 - .22; .29 - .31)The grant may be receivable as either:• immediate financial support (unrelated to future costs); or• for expenses or losses already incurred.Where the grant relates to immediate financial support or past expenses, it is recognised asincome in the period in which the grant becomes receivable.Example 1: grant for past expensesThe government offers companies that incur certain labour expenditure, a cash sum equal to30% of the specified expenditures. Giveme Limited incurred C30 000 of specified expensesduring 20X0 and presented the government with an audited statement of expenses on31 March 20X1.Required:Show the related journal entries in the records of Giveme Limited assuming that the grantbecomes receivable:A. In the year in which the company incurs the specified expenses;B. In the year in which the company provides the government with an audited statement of expenses. 385 Chapter 12
  • 4. Gripping IFRS Government grants and government assistanceSolution to example 1A: grant for past expenses31 December 20X0 Debit CreditLabour expenses 30 000 Salaries and wages payable 30 000Labour costs incurred during 20X0Grant income receivable (asset) 30 000 x 30% 9 000 Grant income 9 000Grant income recognised based on past expenses; recognised whenthe expenses were incurredSolution to example 1B: grant for past expenses31 December 20X0 Debit CreditLabour expenses 30 000 Salaries and wages payable 30 000Labour costs incurred during 20X031 March 20X1Grant income receivable (asset) 30 000 x 30% 9 000 Grant income 9 000Grant income recognised based on past expenses; recognised whenthe required audited expense statement was presented to government3.2.2 Grant for future expenses (IAS 20.12 - .17 and .29 - .31)If the grant is to be used to subsidise certain future expenditure, then it should be recognisedin the statement of comprehensive income over the period that the expenditure is recognised.There are two approaches that the company may use in presenting the government grant:• direct income approach: the grant is credited to a grant income account (either deferred or realised) (i.e. the grant is recognised directly as income over the period of the grant);• indirect income approach: the grant is credited to the expense account to which the subsidy relates (indirectly recognised as income over the period of the grant by way of the reduced expenditure).If the grant relates to future expenses, the grant should be recognised as income on a basisthat reflects the pattern in which the costs are expected to be incurred or are incurred.Example 2: grant for future expenses – direct approachThe government grants a company a cash sum of C10 000 to contribute 10% towardsC100 000 of future wage expenditure. The grant was received on 1 January 20X1 as a resultof compliance with certain conditions in 20X0 (the prior year). All conditions attaching tothe grant (with the exception of the incurring of the future wages) had all been met on date ofreceipt.Required:Show the journal entries for the year ended 31 December 20X1 assuming that the companypolicy is to present such a grant as grant income (i.e. direct income):A. The company incurs C100 000 wage expenditure in 20X1;B. The company incurs C20 000 of the related wage expenditure in the year ended 31 December 20X1 and C80 000 thereof in the year ended 31 December 20X2.. 386 Chapter 12
  • 5. Gripping IFRS Government grants and government assistanceSolution to example 2A: grant for future expenses – direct approach1 January 20X1 Debit CreditBank 10 000 Deferred grant income 10 000Recognising a government grant intended to reduce future expenses31 December 20X1Wage expenditure 100 000 Wages payable 100 000Wage expenditure incurredDeferred grant income 10 000 Grant income Recognised directly as income 10 000Recognising 100% of the government grant since all related expensesthat the grant was intended to compensate have been incurredNote: the statement of comprehensive income will reflect a wage expense of 100 000 and grant incomeof 10 000 (the net effect on profit is a net expense of 90 000).Solution to example 2B: grant for future expenses – direct approach1 January 20X1 Debit CreditBank 10 000 Deferred grant income 10 000Recognising a government grant intended to reduce future expenses31 December 20X1Wage expenditure 20 000 Wages payable 20 000Wage expenditure incurredDeferred grant income 10 000 x 20% 2 000 Grant income 2 000Recognising 20% of the government grant since 20% of the expensesthat the grant was intended to compensate have been incurred31 December 20X2Wage expenditure 80 000 Wages payable 80 000Wage expenditure incurredDeferred grant income 10 000 x 80% 8 000 Grant income Recognised directly as income 8 000Recognising 80% of the government grant since 80% of the expensesthat the grant was intended to compensate have been incurredNote: the statement of comprehensive income will reflect:• 20X1: a wage expense of 20 000 and grant income of 2 000 (the net decrease in profits: 18 000);• 20X2: a wage expense of 80 000 and grant income of 8 000 (net decrease in profits: 72 000).Example 3: grant for future expenses – indirect approachThe government grants a company a cash sum of C10 000 to contribute 10% towards futurespecified wages. The grant was received on 1 January 20X1 due to compliance with certainconditions in 20X0. All conditions attaching to the grant (with the exception of the incurringof the future wages) had all been met on date of receipt. The year-end is 31 December. 387 Chapter 12
  • 6. Gripping IFRS Government grants and government assistanceRequired:Show the journal entries assuming that the company policy is to recognise government grantsas a credit to the related expense (i.e. indirect income approach):A. The company incurs all intended expenditure in the year ended 31 December 20X1;B. The company incurs 20% of the wages in 20X1 and 80% in 20X2..Solution to example 3A: grant for future expenses – indirect approach1 January 20X1 Debit CreditBank 10 000 Deferred grant income 10 000Recognising a government grant intended to reduce future expenses31 December 20X1Wage expenditure 100 000 Wages payable 100 000Wage expenditure incurredDeferred grant income 10 000 Wage expenditure Recognised indirectly as income 10 000Recognising 100% of the government grant since all related expensesthat the grant was intended to compensate have been incurredNote: the statement of comprehensive income will reflect a wage expense of 90 000 (the net effect onprofit is a decrease of 90 000).Compare this to example 2A: the effect on profit is the same.Solution to example 3B: grant for future expenses – indirect approach1 January 20X1 Debit CreditBank 10 000 Deferred grant income 10 000Recognising a government grant intended to reduce future expenses31 December 20X1Wage expenditure 20 000 Wages payable 20 000Wage expenditure incurredDeferred grant income 10 000 x 20% 2 000 Wage expenditure Recognised indirectly as income 2 000Recognising 20% of the government grant since 20% of the expensesthat the grant was intended to compensate have been incurred31 December 20X2Wage expenditure 80 000 Wages payable 80 000Wage expenditure incurredDeferred grant income 10 000 x 80% 8 000 Wage expenditure Recognised indirectly as income 8 000Recognising 80% of the government grant since 80% of the expensesthat the grant was intended to compensate have been incurredNote: the statement of comprehensive income will reflect:• 20X1: a wage expense of 18 000 (the net decrease in profits: 18 000);• 20X2: a wage expense of 72 000 (net decrease in profits: 72 000);Compare this to example 2B: the effect on profit is the same. 388 Chapter 12
  • 7. Gripping IFRS Government grants and government assistance3.3 Grants related to assets (IAS 20.12; .17 - .18; .24 - .28)Grants related to assets could be provided as:• a non-monetary asset (i.e. the actual asset is provided); or as• a monetary asset (i.e. cash) that must be used to acquire a non-monetary asset.The non-monetary asset itself could be:• a depreciable asset; or• a non-depreciable asset.If the grant is received as cash (or another monetary asset) the measurement is obviouslysimply the cash amount received. If the grant is received as a non-monetary asset, the fairvalue of the non-monetary asset must be determined. The grant income and the non-monetaryasset are recognised at this fair value.If the asset received or to be acquired is a depreciable asset, the grant is usually recognised asincome over the same period that the asset is depreciated.If the asset received or to be acquired is a non-depreciable asset, the grant may require certainobligations to be met, in which case the grant would be recognised as the obligations weremet. Judgement would be required to determine when the grant should be recognised asincome. By way of example, a grant could be provided by way of cash to purchase land oncondition that a building is erected on it. In this case, the grant could be recognised as incomeonce the building is erected or the grant could be recognised as income over the life of thebuilding (being a depreciable asset).Where the grant relates to an asset, the initial grant may be recorded using either of thefollowing approaches:• direct income approach: the grant is credited to a deferred grant income account and is recognised as grant income over the useful life of the asset (i.e. the grant is recognised directly as income over the life of the asset);• indirect income approach: the grant is credited to the asset account to which the subsidy relates (i.e. indirectly recognised as income over the period of the grant by way of a reduced depreciation charge).Example 4: grant related to a depreciable asset – direct approachThe government grants a company a cash sum of C12 000 on 1 January 20X1 to assist in theacquisition of a nuclear plant. The nuclear plant was acquired on 1 January 20X1 forC90 000, was available for use immediately and has a useful life of 3 years (the plant has a nilresidual value).The grant was received after compliance with certain conditions in 20X0 (the prior year).All conditions attached to the grant, with the exception of the acquisition of the plant, had allbeen met on date of receipt.Required:Show the journal entries in the years ended 31 December 20X1, 20X2 and 20X3. Thecompany has the policy of recognising government grants directly in income.Solution to example 4: grant related to a depreciable asset – direct approach1 January 20X1 Debit CreditBank 12 000 Deferred grant income 12 000Recognising a government grant intended to assist in the acquisitionof a nuclear plant 389 Chapter 12
  • 8. Gripping IFRS Government grants and government assistance1 January 20X1 continued … Debit CreditNuclear plant: cost (asset) 90 000 Bank 90 000Purchase of plant31 December 20X1Depreciation - plant (expense) (90 000 – 0) / 3 years 30 000 Nuclear plant: accumulated depreciation (asset) 30 000Depreciation on plantDeferred grant income 12 000 / 3 years 4 000 Grant income 4 000Grant income recognised on the same basis as plant depreciation31 December 20X2 Debit CreditDepreciation - plant (expense) (90 000 – 0) / 3 years 30 000 Nuclear plant: accumulated depreciation (asset) 30 000Depreciation on plantDeferred grant income 12 000 / 3 years 4 000 Grant income 4 000Grant income recognised on the same basis as plant depreciation31 December 20X3Depreciation - plant (expense) (90 000 – 0) / 3 years 30 000 Nuclear plant: accumulated depreciation (asset) 30 000Depreciation on plantDeferred grant income 12 000 / 3 years 4 000 Grant income 4 000Grant income recognised on the same basis as plant depreciationNote: the statement of comprehensive income will reflect:• 20X1 – 20X3: a depreciation expense of 30 000 and grant income of C4 000 (net decrease in profits: 26 000 per year).Example 5: grant related to a depreciable asset – indirect approachThe government grants a company a cash sum of C12 000 on 1 January 20X1 to assist in theacquisition of a nuclear plant. The nuclear plant:• was acquired on 2 January 20X1 for C90 000;• was available for use immediately; and• has a useful life of 3 years (the plant has a nil residual value).The grant was received after compliance with certain conditions in 20X0 (the prior year).All conditions attached to the grant, with the exception of the acquisition of the plant, had allbeen met on date of receipt.Required:Show the journal entries in the years ended 31 December 20X1, 20X2 and 20X3. Thecompany has the policy of recognising government grants indirectly in income (i.e. as areduction of the cost of the asset). 390 Chapter 12
  • 9. Gripping IFRS Government grants and government assistanceSolution to example 5: grant related to a depreciable asset – indirect approach1 January 20X1 Debit CreditBank 12 000 Deferred grant income 12 000Recognising a government grant intended to assist in the acquisitionof a nuclear plant2 January 20X1Nuclear plant: cost (asset) 90 000 Bank 90 000Purchase of plantDeferred grant income 12 000 Nuclear plant: cost (asset) 12 000Recognising the government grant as a reduction of the plant’s cost31 December 20X1Depreciation - plant (expense) (90 000 – 12 000 – 0) / 3 years 26 000 Nuclear plant: accumulated depreciation (asset) 26 000Depreciation on plant31 December 20X2Depreciation - plant (expense) (90 000 – 12 000 – 0) / 3 years 26 000 Nuclear plant: accumulated depreciation (asset) 26 000Depreciation on plant31 December 20X3Depreciation - plant (expense) (90 000 – 12 000 – 0) / 3 years 26 000 Nuclear plant: accumulated depreciation (asset) 26 000Depreciation on plantNote: the statement of comprehensive income will reflect:• 20X1 – 20X3: a depreciation expense of 26 000 (net decrease in profits: 26 000 per year).Compare this to example 4.If the grant relates to the cost of a non-depreciable asset, the grant should be recognised on abasis that best reflects the manner in which the conditions are met.Example 6: grant related to a non-depreciable asset – direct approachThe government grants a company a cash sum of C12 000 on 1 January 20X1 to assist in theacquisition of land. A condition of the grant is that the company builds a factory on the land.The land was acquired on 1 January 20X1 for C90 000. Land is not depreciated. The factorywas completed on 31 March 20X1 (total building costs of C300 000 were paid in cash on thisdate), was available for use immediately and has a useful life of 3 years (the factory has a nilresidual value).The grant was received after compliance with certain conditions in 20X0 (the prior year).With the exception of the completion of a factory building, all conditions attaching to thegrant had all been met on date of receipt.Required:Show the journal entries in the years ended 31 December 20X1, 20X2, 20X3 and 20X4. Thecompany’s policy is to recognise grants directly in income. 391 Chapter 12
  • 10. Gripping IFRS Government grants and government assistanceSolution to example 6: grant related to a non-depreciable asset – direct approach1 January 20X1 Debit CreditBank 12 000 Deferred grant income 12 000Government grant received to assist in the acquisition of landLand: cost 90 000 Bank 90 000Purchase of land31 March 20X1Factory building: cost 300 000 Bank 300 000Building costs related to factory, paid in cash31 December 20X1Depreciation – factory building (300 000 – 0) / 3 years x 9 / 12 75 000 Factory building: accumulated depreciation 75 000Depreciation of factory buildingDeferred grant income 12 000 / 3 years x 9 / 12 3 000 Grant income 3 000Grant income recognised on the same basis as depreciation on thefactory building31 December 20X2Depreciation – factory building (300 000 – 0) / 3 years 100 000 Factory building: accumulated depreciation 100 000Depreciation of factory buildingDeferred grant income 12 000 / 3 years 4 000 Grant income 4 000Grant income recognised on the same basis as depreciation on thefactory building31 December 20X3Depreciation – factory building (300 000 – 0) / 3 years 100 000 Factory building: accumulated depreciation 100 000Depreciation of factory buildingDeferred grant income 12 000 / 3 years 4 000 Grant income 4 000Grant income recognised on the same basis as depreciation on thefactory building31 December 20X4Depreciation – factory building (300 000 – 0) / 3 years x 3 / 12 25 000 Factory building: accumulated depreciation 25 000Depreciation of factory buildingDeferred grant income 12 000 / 3 years x 3 / 12 1 000 Grant income 1 000Grant income recognised on the same basis as depreciation on thefactory building 392 Chapter 12
  • 11. Gripping IFRS Government grants and government assistance3.4 Grants received as a package (IAS 20.19)If the grant is received as a package to which a number of varying sets of conditions areattached, it may be appropriate to recognise each part of the grant on a different basis. Thefirst step is to identify each part of the package to which there are different conditionsaffecting when the grant is earned.The grant may, for instance, relate to a combination of:• an asset• future expenses• past expenses• immediate financial support.In such cases, the grant package may be viewed as multiple parts. The grant relating to:• the asset should be recognised as income in a way that reflects the pattern of depreciation;• future expenses should be recognised as income in a way that reflects the pattern of future expenses;• past expenses should be recognised as income in the period in which the grant becomes receivable;• general and immediate financial support should be recognised as income in the period in which the grant becomes receivable.Example 7: grant is a package dealThe government grants a company a cash sum of C120 000 on 1 January 20X1. The grantrelates to two aspects:• C30 000 is a cash sum as immediate financial support with no associated future costs;• C90 000 is to assist in the future acquisition of vehicles.The vehicles were acquired on 2 January 20X1 for C210 000. The vehicles were available foruse immediately and have a useful life of 3 years (the vehicles all have nil residual values).With the exception of the purchase of the vehicles, all conditions attaching to the grant had allbeen met on date of receipt.Required:Show the journal entries in the years ended 31 December 20X1, 20X2 and 20X3.Solution to example 7: grant is a package deal1 January 20X1 Debit CreditBank 120 000 Deferred grant income 120 000Recognising a government grant: package dealDeferred grant income 30 000 Grant income 30 000Portion of grant income recognised immediately – not attached to anyasset or future expenses and all criteria met in a prior year: 30 0002 January 20X1Vehicles: cost 210 000 Bank 210 000Purchase of vehicles31 December 20X1Depreciation – vehicles (210 000 – 0) / 3 years 70 000 Vehicles: accumulated depreciation 70 000Depreciation of vehicles 393 Chapter 12
  • 12. Gripping IFRS Government grants and government assistance31 December 20X1 continued … Debit CreditDeferred grant income (120 000 – 30 000) / 3 years 30 000 Grant income 30 000Portion of grant income related to purchase of vehicles recognised onthe same basis as vehicle depreciation31 December 20X2Depreciation – vehicles (210 000 – 0) / 3 years 70 000 Vehicles: accumulated depreciation 70 000Depreciation of vehiclesDeferred grant income (120 000 – 30 000) / 3 years 30 000 Grant income 30 000Portion of grant income related to purchase of vehicles recognised onthe same basis as vehicle depreciation31 December 20X3Depreciation – vehicles (210 000 – 0) / 3 years 70 000 Vehicles: accumulated depreciation 70 000Depreciation of vehiclesDeferred grant income (120 000 – 30 000) / 3 years 30 000 Grant income 30 000Portion of grant income related to purchase of vehicles recognised onthe same basis as vehicle depreciation4. Measurement (IAS 20.23)Remember that government grants can be analysed into two basic categories. Either thecompany is granted:• an asset such as a fishing licence; or• cash (or some other asset) o to be used in the acquisition of another asset; or o to be used in the reduction of certain expenditure.Where the grant is a cash sum, the measurement thereof is not in question. If, however, thecompany is granted an asset such as a licence to operate, the company may either measure thegrant at its fair value or at the nominal cost thereof, being the directly attributableexpenditure, if any (in which case, the government grant is not measured at all).Example 8: grant asset – fair value or nominal amountA South African government grants the company a licence to fish off the coast of Cape Town,South Africa. The fair value of the licence is C50 000 and the company is required to pay asmall sum of C1 000 for the licence.Required:Show the journal entries assuming:A. The company chooses to measure the licence at its fair value.B. The company chooses to measure the licence at its nominal amount.Solution to example 8A: grant asset – fair value Debit CreditFishing licence (asset) Given 50 000 Deferred fishing income 50 000 – 1 000 49 000 Bank Given 1 000Recognising the licence granted by the government at fair value 394 Chapter 12
  • 13. Gripping IFRS Government grants and government assistanceSolution to example 8B: grant asset – nominal amount Debit CreditFishing licence (asset) Given 1 000 Bank Given 1 000Recognising the licence granted by the government at nominal value5. Changes in estimates and repayments (IAS 20.32)A change in estimate may be required:• if the grant is received after acquisition of the asset (because this may change the cost of the asset and therefore changes depreciation),• if the grant is provided on certain conditions and these conditions are later breached.A change in estimate must be accounted for using IAS 8. Where the grant has to be repaid thetreatment depends on whether the grant related to expenses or assets.If the original grant related to expenses, the repayment of the grant is debited:• first against the balance on the deferred income account, if any; and• then to an expense account.If the original grant related to an asset, the repayment of the grant is debited either:• to the balance on the deferred income account, if any; or• to the balance on the asset account; and• the cumulative additional depreciation that would have been recognised to date had the grant not been received is recognised immediately as an expense.If a grant becomes repayable, it could also suggest related assets may be impaired.Example 9: grant related to expenses – repaidThe local government granted the company C10 000 on 1 January 20X1 to assist in thefinancing of mining expenses. The grant was conditional upon the company mining for aperiod of at least two years.The company ceased mining on 30 September 20X2 due to unforeseen circumstances. Theterms of the grant required that the grant be repaid immediately and in full.Mining expenses incurred to date were as follows:• 20X1: 80 000• 20X2: 60 000Required:Show the journal entries assuming:A. The company recognises grants directly as ‘grant income’.B. The company recognises grants indirectly as income by reducing the related expense.Solution to example 9A: grant related to expenses – repaid1 January 20X1 Debit CreditBank 10 000 Deferred grant income 10 000Recognising a government grant intended to reduce future expenses 395 Chapter 12
  • 14. Gripping IFRS Government grants and government assistance31 December 20X1 Debit CreditMining expenditure 80 000 Accounts payable 80 000Mining expenditure incurredDeferred grant income 10 000 x 50% x 12 / 12 5 000 Grant income 5 000Recognising 50% of the government grant since the condition is thecompany mines for 2 years and 1 of the 2 years has been met30 September 20X2Mining expenditure 60 000 Accounts payable 60 000Mining expenditure incurredDeferred grant income 10 000 x 50% x 9 / 12 3 750 Grant income 3 750Recognising 9 months of the remaining 50% of the government grantsince the condition is the company mines for 2 years and only 9months of year 2 has been metDeferred grant income 10 000 – 5 000 – 3 750 1 250Grant income forfeited 10 000 – 1 250 8 750 Bank 1 250 + 8 750 10 000Repayment of the full grant, first reducing the balance on the deferredincome account and then expensing the restSolution to example 9B: grant related to expenses – repaid1 January 20X1 Debit CreditBank 10 000 Deferred grant income 10 000Recognising a government grant intended to reduce future expenses31 December 20X1Mining expenditure 80 000 Accounts payable 80 000Mining expenditure incurredDeferred grant income 10 000 x 50% x 12 / 12 5 000 Mining expenditure 5 000Recognising 50% of the government grant since the condition is thecompany mines for 2 years and 1 of the 2 years has been met30 September 20X2Mining expenditure 60 000 Accounts payable 60 000Mining expenditure incurredDeferred grant income 10 000 x 50% x 9 / 12 3 750 Mining expenditure 3 750Recognising 9 months of the remaining 50% of the government grantsince the condition is the company mines for 2 years and only 9months of year 2 has been metDeferred grant income 10 000 – 5 000 – 3 750 1 250Mining expenditure 10 000 – 1 250 8 750 Bank Given 10 000Repayment of the full grant, first reducing the balance on the deferredincome account and then expensing the rest 396 Chapter 12
  • 15. Gripping IFRS Government grants and government assistanceNote: part A and part B differ simply in the naming of the accounts:• Part A: the grant was originally recognised as ‘grant income’ and therefore it makes sense that any expense related to the repayment of the grant should also refer to the grant income (e.g. an appropriate name might be ‘grant income forfeited’) ;• Part B: the grant is recognised as a reduction in ‘mining expenses’ and therefore it makes sense that any expense related to the repayment of the grant be to the same ‘mining expense’ account.Example 10: grant related to assets – repaidThe local government granted the company C10 000 on 1 January 20X1 to assist in thepurchase of a manufacturing plant. The grant was conditional upon the companymanufacturing for a period of at least two unbroken years.The company purchased the plant on 2 January 20X1 for C100 000. The plant is depreciatedon the straight-line basis over its useful life of 4 years to a nil residual value.The company ceased manufacturing on 30 September 20X2 due to unforeseen circumstances.The terms of the grant required that the grant be repaid immediately and in full. The assetwas not considered to be impaired and the company intended to resume manufacturing in thenext year.Required:Show the journal entries assuming that the company:A. recognises grants as grant income (direct income).B. recognises grants as a reduction of the cost of the related asset (indirect income).Solution to example 10A: grant related to assets – repaid1 January 20X1 Debit CreditBank 10 000 Deferred grant income 10 000Recognising a government grant2 January 20X1Plant: cost 100 000 Accounts payable/ bank 100 000Purchase of plant31 December 20X1Depreciation - plant (100 000 – 0) / 4 years x 12 / 12 25 000 Plant: accumulated depreciation 25 000Depreciation of plantDeferred grant income 10 000 / 4 years x 12 / 12 2 500 Grant income 2 500Recognising 25% of the government grant since the grant relates tothe acquisition of an asset that is depreciated over 4 years30 September 20X2Depreciation - plant (100 000 – 0) / 4 years x 9 / 12 18 750 Plant: accumulated depreciation 18 750Depreciation of plant: (manufacture ceases on 30 September 20X2)Deferred grant income 10 000 / 4 years x 9 / 12 1 875 Grant income 1 875Recognising 9 months of the remaining 75% of the government grantto the date of repayment of the grant 397 Chapter 12
  • 16. Gripping IFRS Government grants and government assistance30 September 20X2 continued … Debit CreditDeferred grant income 10 000 – 2 500 – 1 875 5 625Grant forfeited expense 10 000 – 5 625 (balancing) 4 375 Bank Given 10 000Repayment of the full grant, first reducing the balance on the deferredincome account and then expensing the restSolution to example 10B: grant related to assets – repaid1 January 20X1 Debit CreditBank 10 000 Deferred grant income 10 000Recognising a government grant2 January 20X1Plant: cost 100 000 Accounts payable/ bank 100 000Purchase of plantDeferred grant income 10 000 Plant: cost 10 000Recognising the grant income as a decrease in the asset’s cost31 December 20X1Depreciation - plant (100 000 –10 000 – 0) / 4 years x 12 / 12 22 500 Plant: accumulated depreciation 22 500Depreciation of plant:30 September 20X2Depreciation - plant (100 000 – 10 000 – 0) / 4 years x 9 / 12 16 875 Plant: accumulated depreciation 16 875Depreciation of plant: (manufacture ceases on 30 September 20X2)Plant: cost Original grant refunded 10 000 Bank 10 000Depreciation - plant W1: 2 500 + 1 875 4 375 Plant: accumulated depreciation W1: 2 500 + 1 875 4 375Repayment of the full grant: increase cost and increase accumulateddepreciation with extra cumulative depreciation that would otherwisehave been expensed if no grant had been received on 1 January 20X1W1: Change in estimate calculation Date Calculations Was Is DifferenceCost 1/1/X1 100 000 – 10 000 9 100 000 10 000 0 000Depreciation X1 (90 000 – 0) / 4 x 1 (22 500) (25 000) (2 500) (100 000 – 0) / x 1Carrying amount 31/12/X1 67 500 75 000 7 500Depreciation X2 (90 000 – 0) / 4 x 9 / 12 (16 875) (18 750) (1 875) (100 000 – 0) /4 x 9/ 12Carrying amount 31/12/X1 50 625 56 250 5 625Depreciation Future (50 625) (56 250) (5 625)Residual value 0 0 0 398 Chapter 12
  • 17. Gripping IFRS Government grants and government assistance6. Disclosure (IAS 20.39)The following issues must be disclosed:• Accounting policy regarding both recognition and method of presentation, for example: - Government grants are recognised as income over the period to which the grant applies and in a manner that reflects the pattern of expected future expenditure; and - The grant is presented as a decrease in the expenditure to which it relates (or: the grant is presented as a separate line item: grant income).;• The nature and extent of government grants recognised in the financial statements;• An indication of other forms of government assistance not recognised as government grants but from which the entity has benefited directly (e.g. low or no interest loans and assistance that cannot reasonably have a value placed upon them);• Unfulfilled conditions and other contingencies attached to recognised government grants. 399 Chapter 12
  • 18. Gripping IFRS Government grants and government assistance 7. Summary Government assistance Government grants Other government assistanceMonetary grants, for example: Where value cannot be reasonablyForgivable loans or cash to be used to: allocated, for example:• Purchase an asset • Free technical advice• Pay for expenses • Loans at no or low interest• Reimbursement of past costs/ losses• Financial assistance Transactions that can’t be separated from normal trading activities, forNon-monetary grants, for example: example:• Land or • Government procurement policy that• Licence to operate accounts for a portion of sales Recognised Recognised Yes NoWhen there is reasonable assurance thatthe:• entity will comply with the conditions and• grant will be received Disclosed Disclosed Yes Yes 400 Chapter 12
  • 19. Gripping IFRS Government grants and government assistance Government grants Non-monetary Monetary Measurement MeasurementFair value of asset granted Fair value of monetary asset granted OR (i.e. cash amount received or receivable)Nominal amount paid (if any) Recognition: Recognised as income over the period of the grant/ useful life of the asset: Through either: Direct method: recognised as grant income Indirect method: reduction in expense reduction in asset cost (reduces depreciation charge) Non-monetary Monetary Initial journal Initial journalDebit: Debit:• Non-monetary asset (e.g. land) • bankCredit: Credit:• Bank (nominal amount if any) • income (deferred/ realised) Grant income (deferred or realised: fair OR Asset • asset value – nominal amount) acquired • income (deferred/ realised) Future OR expenses • expense Past expense • income (deferred/ realised) past losses or OR immediate • expense assistance 401 Chapter 12

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