Gripping IFRS

Government grants and government assistance

Chapter 12 Government Grants and Government Assistance

Reference: IAS 20 and SIC 10

Contents: 1. Introduction 2. Definitions 3. Recognition 3.1 General 3.2 Grants related to expenses 3.2.1 Grant for past expenses or immediate financial support Example 1: grant for past expenses 3.2.2 Grant for future expenses Example 2: grant for future expenses direct approach Example 3: grant for future expenses indirect approach 3.3 Grants related to assets Example 4: grant related to a depreciable asset direct approach Example 5: grant related to a depreciable asset indirect approach Example 6: grant related to a non-depreciable asset direct approach 3.4 Grants received as a package Example 7: grant is a package deal 4. Measurement Example 8: grant asset fair value or nominal amount 5. Change in estimates and repayments Example 9: grant related to expenses repaid Example 10: grant related to assets repaid 6. Disclosure 7. Summary

Page 384 384 385 385 385 385 385 386 386 387 389 389 390 391 393 393 394 394 395 395 397 399 400

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1. Introduction Government grants are provided to encourage an entity to become involved in certain activities that it may otherwise not have involved itself in (or may even be used to discourage certain activities). It is often provided to assist businesses in starting up. This obviously benefits the business but also benefits the government through creation of jobs and thus a larger base of taxpayers. Grants are often referred to by other names such as subsidies, subventions and premiums. 2. Definitions The 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 arm's length transaction.

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3. Recognition 3.1 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 will find in IAS 20, but are merely terms devised for ease of explanation and understanding of the two 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 as income in the period in which the grant becomes receivable. Example 1: grant for past expenses The government offers companies that incur certain labour expenditure, a cash sum equal to 30% of the specified expenditures. Giveme Limited incurred C30 000 of specified expenses during 20X0 and presented the government with an audited statement of expenses on 31 March 20X1. Required: Show the related journal entries in the records of Giveme Limited assuming that the grant becomes 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.

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Solution to example 1A: grant for past expenses

31 December 20X0 Labour expenses Salaries and wages payable Labour costs incurred during 20X0 Grant income receivable (asset) 30 000 x 30% Grant income Grant income recognised based on past expenses; recognised when the expenses were incurred Debit 30 000 Credit 30 000

9 000 9 000

Solution to example 1B: grant for past expenses

31 December 20X0 Labour expenses Salaries and wages payable Labour costs incurred during 20X0 31 March 20X1 Grant income receivable (asset) 30 000 x 30% Grant income Grant income recognised based on past expenses; recognised when the required audited expense statement was presented to government Debit 30 000 Credit 30 000

9 000 9 000

3.2.2 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 recognised in 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 basis that reflects the pattern in which the costs are expected to be incurred or are incurred. Example 2: grant for future expenses direct approach The government grants a company a cash sum of C10 000 to contribute 10% towards C100 000 of future wage expenditure. The grant was received on 1 January 20X1 as a result of compliance with certain conditions in 20X0 (the prior year). All conditions attaching to the grant (with the exception of the incurring of the future wages) had all been met on date of receipt. Required: Show the journal entries for the year ended 31 December 20X1 assuming that the company policy 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..

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Solution to example 2A: grant for future expenses direct approach

1 January 20X1 Bank Deferred grant income Recognising a government grant intended to reduce future expenses 31 December 20X1 Wage expenditure Wages payable Wage expenditure incurred Deferred grant income Grant income Recognised directly as income Recognising 100% of the government grant since all related expenses that the grant was intended to compensate have been incurred Debit 10 000 Credit 10 000

100 000 100 000

10 000 10 000

Note: the statement of comprehensive income will reflect a wage expense of 100 000 and grant income of 10 000 (the net effect on profit is a net expense of 90 000).

Solution to example 2B: grant for future expenses direct approach

1 January 20X1 Bank Deferred grant income Recognising a government grant intended to reduce future expenses 31 December 20X1 Wage expenditure Wages payable Wage expenditure incurred Deferred grant income 10 000 x 20% Grant income Recognising 20% of the government grant since 20% of the expenses that the grant was intended to compensate have been incurred 31 December 20X2 Wage expenditure Wages payable Wage expenditure incurred Deferred grant income 10 000 x 80% Grant income Recognised directly as income Recognising 80% of the government grant since 80% of the expenses that the grant was intended to compensate have been incurred Debit 10 000 Credit 10 000

20 000 20 000

2 000 2 000

80 000 80 000

8 000 8 000

Note: 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 approach The government grants a company a cash sum of C10 000 to contribute 10% towards future specified wages. The grant was received on 1 January 20X1 due to compliance with certain conditions in 20X0. All conditions attaching to the grant (with the exception of the incurring of the future wages) had all been met on date of receipt. The year-end is 31 December.
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Required: Show the journal entries assuming that the company policy is to recognise government grants as 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 approach
1 January 20X1 Bank Deferred grant income Recognising a government grant intended to reduce future expenses 31 December 20X1 Wage expenditure Wages payable Wage expenditure incurred Deferred grant income Wage expenditure Recognised indirectly as income Recognising 100% of the government grant since all related expenses that the grant was intended to compensate have been incurred Debit 10 000 Credit 10 000

100 000 100 000

10 000 10 000

Note: the statement of comprehensive income will reflect a wage expense of 90 000 (the net effect on profit 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 approach

1 January 20X1 Bank Deferred grant income Recognising a government grant intended to reduce future expenses 31 December 20X1 Wage expenditure Wages payable Wage expenditure incurred Deferred grant income 10 000 x 20% Wage expenditure Recognised indirectly as income Recognising 20% of the government grant since 20% of the expenses that the grant was intended to compensate have been incurred 31 December 20X2 Wage expenditure Wages payable Wage expenditure incurred Deferred grant income 10 000 x 80% Wage expenditure Recognised indirectly as income Recognising 80% of the government grant since 80% of the expenses that the grant was intended to compensate have been incurred Note: 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 Debit 10 000 Credit 10 000

20 000 20 000

2 000 2 000

80 000 80 000

8 000 8 000

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3.3 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 obviously simply the cash amount received. If the grant is received as a non-monetary asset, the fair value of the non-monetary asset must be determined. The grant income and the non-monetary asset are recognised at this fair value. If the asset received or to be acquired is a depreciable asset, the grant is usually recognised as income 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 certain obligations to be met, in which case the grant would be recognised as the obligations were met. Judgement would be required to determine when the grant should be recognised as income. By way of example, a grant could be provided by way of cash to purchase land on condition that a building is erected on it. In this case, the grant could be recognised as income once the building is erected or the grant could be recognised as income over the life of the building (being a depreciable asset). Where the grant relates to an asset, the initial grant may be recorded using either of the following 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 approach The government grants a company a cash sum of C12 000 on 1 January 20X1 to assist in the acquisition of a nuclear plant. The nuclear plant was acquired on 1 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 all been met on date of receipt. Required: Show the journal entries in the years ended 31 December 20X1, 20X2 and 20X3. The company has the policy of recognising government grants directly in income. Solution to example 4: grant related to a depreciable asset direct approach
1 January 20X1 Bank Deferred grant income Recognising a government grant intended to assist in the acquisition of a nuclear plant Debit 12 000 Credit 12 000

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1 January 20X1 continued Nuclear plant: cost (asset) Bank Purchase of plant 31 December 20X1 Depreciation - plant (expense) (90 000 0) / 3 years Nuclear plant: accumulated depreciation (asset) Depreciation on plant Deferred grant income 12 000 / 3 years Grant income Grant income recognised on the same basis as plant depreciation 31 December 20X2 Depreciation - plant (expense) (90 000 0) / 3 years Nuclear plant: accumulated depreciation (asset) Depreciation on plant Deferred grant income 12 000 / 3 years Grant income Grant income recognised on the same basis as plant depreciation 31 December 20X3 Depreciation - plant (expense) (90 000 0) / 3 years Nuclear plant: accumulated depreciation (asset) Depreciation on plant Deferred grant income 12 000 / 3 years Grant income Grant income recognised on the same basis as plant depreciation

Debit 90 000

Credit 90 000

30 000 30 000

4 000 4 000

Debit 30 000

Credit 30 000

4 000 4 000

30 000 30 000

4 000 4 000

Note: 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 approach The government grants a company a cash sum of C12 000 on 1 January 20X1 to assist in the acquisition 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 all been met on date of receipt. Required: Show the journal entries in the years ended 31 December 20X1, 20X2 and 20X3. The company has the policy of recognising government grants indirectly in income (i.e. as a reduction of the cost of the asset).

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Solution to example 5: grant related to a depreciable asset indirect approach

1 January 20X1 Bank Deferred grant income Recognising a government grant intended to assist in the acquisition of a nuclear plant 2 January 20X1 Nuclear plant: cost (asset) Bank Purchase of plant Deferred grant income Nuclear plant: cost (asset) Recognising the government grant as a reduction of the plants cost 31 December 20X1 Depreciation - plant (expense) (90 000 12 000 0) / 3 years Nuclear plant: accumulated depreciation (asset) Depreciation on plant 31 December 20X2 Depreciation - plant (expense) (90 000 12 000 0) / 3 years Nuclear plant: accumulated depreciation (asset) Depreciation on plant 31 December 20X3 Depreciation - plant (expense) (90 000 12 000 0) / 3 years Nuclear plant: accumulated depreciation (asset) Depreciation on plant Debit 12 000 Credit 12 000

90 000 90 000

12 000 12 000

26 000 26 000

26 000 26 000

26 000 26 000

Note: 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 a basis that best reflects the manner in which the conditions are met. Example 6: grant related to a non-depreciable asset direct approach The government grants a company a cash sum of C12 000 on 1 January 20X1 to assist in the acquisition 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 factory was completed on 31 March 20X1 (total building costs of C300 000 were paid in cash on this date), was available for use immediately and has a useful life of 3 years (the factory has a nil residual 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 the grant had all been met on date of receipt. Required: Show the journal entries in the years ended 31 December 20X1, 20X2, 20X3 and 20X4. The companys policy is to recognise grants directly in income.

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Solution to example 6: grant related to a non-depreciable asset direct approach

1 January 20X1 Bank Deferred grant income Government grant received to assist in the acquisition of land Land: cost Bank Purchase of land 31 March 20X1 Factory building: cost Bank Building costs related to factory, paid in cash 31 December 20X1 Depreciation factory building (300 000 0) / 3 years x 9 / 12 Factory building: accumulated depreciation Depreciation of factory building Deferred grant income 12 000 / 3 years x 9 / 12 Grant income Grant income recognised on the same basis as depreciation on the factory building 31 December 20X2 Depreciation factory building (300 000 0) / 3 years Factory building: accumulated depreciation Depreciation of factory building Deferred grant income 12 000 / 3 years Grant income Grant income recognised on the same basis as depreciation on the factory building 31 December 20X3 Depreciation factory building (300 000 0) / 3 years Factory building: accumulated depreciation Depreciation of factory building Deferred grant income 12 000 / 3 years Grant income Grant income recognised on the same basis as depreciation on the factory building 31 December 20X4 Depreciation factory building (300 000 0) / 3 years x 3 / 12 Factory building: accumulated depreciation Depreciation of factory building Deferred grant income 12 000 / 3 years x 3 / 12 Grant income Grant income recognised on the same basis as depreciation on the factory building Debit 12 000 Credit 12 000

90 000 90 000

300 000 300 000

75 000 75 000

3 000 3 000

100 000 100 000

4 000 4 000

100 000 100 000

4 000 4 000

25 000 25 000

1 000 1 000

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3.4 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 are attached, it may be appropriate to recognise each part of the grant on a different basis. The first step is to identify each part of the package to which there are different conditions affecting 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 deal The government grants a company a cash sum of C120 000 on 1 January 20X1. The grant relates 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 for use 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 all been 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 deal
1 January 20X1 Bank Deferred grant income Recognising a government grant: package deal Deferred grant income Grant income Portion of grant income recognised immediately not attached to any asset or future expenses and all criteria met in a prior year: 30 000 2 January 20X1 Vehicles: cost Bank Purchase of vehicles 31 December 20X1 Depreciation vehicles (210 000 0) / 3 years Vehicles: accumulated depreciation Depreciation of vehicles Debit 120 000 Credit 120 000 30 000 30 000

210 000 210 000

70 000 70 000

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31 December 20X1 continued Deferred grant income (120 000 30 000) / 3 years Grant income Portion of grant income related to purchase of vehicles recognised on the same basis as vehicle depreciation 31 December 20X2 Depreciation vehicles (210 000 0) / 3 years Vehicles: accumulated depreciation Depreciation of vehicles Deferred grant income (120 000 30 000) / 3 years Grant income Portion of grant income related to purchase of vehicles recognised on the same basis as vehicle depreciation 31 December 20X3 Depreciation vehicles (210 000 0) / 3 years Vehicles: accumulated depreciation Depreciation of vehicles Deferred grant income (120 000 30 000) / 3 years Grant income Portion of grant income related to purchase of vehicles recognised on the same basis as vehicle depreciation

Debit 30 000

Credit 30 000

70 000 70 000 30 000 30 000

70 000 70 000 30 000 30 000

4. Measurement (IAS 20.23) Remember that government grants can be analysed into two basic categories. Either the company 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, the company is granted an asset such as a licence to operate, the company may either measure the grant at its fair value or at the nominal cost thereof, being the directly attributable expenditure, if any (in which case, the government grant is not measured at all). Example 8: grant asset fair value or nominal amount A 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 a small 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
Fishing licence (asset) Given Deferred fishing income 50 000 1 000 Bank Given Recognising the licence granted by the government at fair value 394 Debit 50 000 Credit 49 000 1 000

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Solution to example 8B: grant asset nominal amount

Debit 1 000 Credit 1 000

Fishing licence (asset) Given Bank Given Recognising the licence granted by the government at nominal value

5. 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 the treatment 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 repaid The local government granted the company C10 000 on 1 January 20X1 to assist in the financing of mining expenses. The grant was conditional upon the company mining for a period of at least two years. The company ceased mining on 30 September 20X2 due to unforeseen circumstances. The terms 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: 60 000 Required: 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 repaid
1 January 20X1 Bank Deferred grant income Recognising a government grant intended to reduce future expenses Debit 10 000 Credit 10 000

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31 December 20X1 Mining expenditure Accounts payable Mining expenditure incurred Deferred grant income 10 000 x 50% x 12 / 12 Grant income Recognising 50% of the government grant since the condition is the company mines for 2 years and 1 of the 2 years has been met 30 September 20X2 Mining expenditure Accounts payable Mining expenditure incurred Deferred grant income 10 000 x 50% x 9 / 12 Grant income Recognising 9 months of the remaining 50% of the government grant since the condition is the company mines for 2 years and only 9 months of year 2 has been met Deferred grant income 10 000 5 000 3 750 Grant income forfeited 10 000 1 250 Bank 1 250 + 8 750 Repayment of the full grant, first reducing the balance on the deferred income account and then expensing the rest

Debit 80 000

Credit 80 000

5 000 5 000

60 000 60 000 3 750 3 750

1 250 8 750 10 000

Solution to example 9B: grant related to expenses repaid

1 January 20X1 Bank Deferred grant income Recognising a government grant intended to reduce future expenses 31 December 20X1 Mining expenditure Accounts payable Mining expenditure incurred Deferred grant income 10 000 x 50% x 12 / 12 Mining expenditure Recognising 50% of the government grant since the condition is the company mines for 2 years and 1 of the 2 years has been met 30 September 20X2 Mining expenditure Accounts payable Mining expenditure incurred Deferred grant income 10 000 x 50% x 9 / 12 Mining expenditure Recognising 9 months of the remaining 50% of the government grant since the condition is the company mines for 2 years and only 9 months of year 2 has been met Deferred grant income 10 000 5 000 3 750 Mining expenditure 10 000 1 250 Bank Given Repayment of the full grant, first reducing the balance on the deferred income account and then expensing the rest 396 Debit 10 000 Credit 10 000

80 000 80 000 5 000 5 000

60 000 60 000 3 750 3 750

1 250 8 750 10 000

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Note: 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 repaid The local government granted the company C10 000 on 1 January 20X1 to assist in the purchase of a manufacturing plant. The grant was conditional upon the company manufacturing for a period of at least two unbroken years. The company purchased the plant on 2 January 20X1 for C100 000. The plant is depreciated on 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 asset was not considered to be impaired and the company intended to resume manufacturing in the next 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 repaid
1 January 20X1 Bank Deferred grant income Recognising a government grant 2 January 20X1 Plant: cost Accounts payable/ bank Purchase of plant 31 December 20X1 Depreciation - plant (100 000 0) / 4 years x 12 / 12 Plant: accumulated depreciation Depreciation of plant Deferred grant income 10 000 / 4 years x 12 / 12 Grant income Recognising 25% of the government grant since the grant relates to the acquisition of an asset that is depreciated over 4 years 30 September 20X2 Depreciation - plant (100 000 0) / 4 years x 9 / 12 Plant: accumulated depreciation Depreciation of plant: (manufacture ceases on 30 September 20X2) Deferred grant income 10 000 / 4 years x 9 / 12 Grant income Recognising 9 months of the remaining 75% of the government grant to the date of repayment of the grant Debit 10 000 Credit 10 000

100 000 100 000

25 000 25 000 2 500 2 500

18 750 18 750 1 875 1 875

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30 September 20X2 continued Deferred grant income 10 000 2 500 1 875 Grant forfeited expense 10 000 5 625 (balancing) Bank Given Repayment of the full grant, first reducing the balance on the deferred income account and then expensing the rest

Debit 5 625 4 375

Credit

10 000

Solution to example 10B: grant related to assets repaid

1 January 20X1 Bank Deferred grant income Recognising a government grant 2 January 20X1 Plant: cost Accounts payable/ bank Purchase of plant Deferred grant income Plant: cost Recognising the grant income as a decrease in the assets cost 31 December 20X1 Depreciation - plant (100 000 10 000 0) / 4 years x 12 / 12 Plant: accumulated depreciation Depreciation of plant: 30 September 20X2 Depreciation - plant (100 000 10 000 0) / 4 years x 9 / 12 Plant: accumulated depreciation Depreciation of plant: (manufacture ceases on 30 September 20X2) Plant: cost Original grant refunded Bank Depreciation - plant W1: 2 500 + 1 875 Plant: accumulated depreciation W1: 2 500 + 1 875 Repayment of the full grant: increase cost and increase accumulated depreciation with extra cumulative depreciation that would otherwise have been expensed if no grant had been received on 1 January 20X1 W1: Change in estimate calculation Date 1/1/X1 X1 31/12/X1 X2 31/12/X1 Future Calculations
100 000 10 000 (90 000 0) / 4 x 1 (100 000 0) / x 1 (90 000 0) / 4 x 9 / 12 (100 000 0) /4 x 9/ 12

Debit 10 000

Credit 10 000

100 000 100 000

10 000 10 000

22 500 22 500

16 875 16 875

10 000 10 000 4 375 4 375

Was 9 0 000 (22 500) 67 500 (16 875) 50 625 (50 625) 0

Cost Depreciation Carrying amount Depreciation Carrying amount Depreciation Residual value

Is 100 000 (25 000) 75 000 (18 750) 56 250 (56 250) 0

Difference 10 000 (2 500) 7 500 (1 875) 5 625 (5 625) 0

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6. 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.

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7. Summary
Government assistance

Government grants Monetary grants, for example: Forgivable loans or cash to be used to: Purchase an asset Pay for expenses Reimbursement of past costs/ losses Financial assistance Non-monetary grants, for example: Land or Licence to operate

Other government assistance Where value cannot be reasonably allocated, for example: Free technical advice Loans at no or low interest Transactions that cant be separated from normal trading activities, for example: Government procurement policy that accounts for a portion of sales

Recognised Yes When there is reasonable assurance that the: entity will comply with the conditions and grant will be received

Recognised No

Disclosed Yes

Disclosed Yes

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Government grants

Non-monetary

Monetary

Measurement Fair value of asset granted OR Nominal amount paid (if any)

Measurement Fair value of monetary asset granted (i.e. cash amount received or receivable)

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 Initial journal
Debit: Non-monetary asset (e.g. land) Credit: Bank (nominal amount if any) Grant income (deferred or realised: fair value nominal amount) Debit: bank Credit:

Monetary Initial journal

income (deferred/ realised) OR asset

Asset acquired Future expenses Past expense past losses or immediate assistance

income (deferred/ realised) OR expense

income (deferred/ realised) OR expense

401

Chapter 12