Ch 4 . NCA - Goverment Grants, Borrowing costs, Agriculture Flashcards
How are Government grants or Government Assistance defined? (IAS 20)
And
How are they generally accounted for?
Government assistance is government action designed to provide an economic benefit to a specific entity. It does not include indirect help such as infrastructure development.
Government grants are transfers of resources to an entity in return for past or future compliance with certain conditions. They exclude assistance that cannot be valued and normal trade with governments.
2 Main Types of Grants:
- Revenue grants, e.g. contribution towards payroll costs
- Capital grants, e.g. contribution towards the purchase of non-current assets.
How are government-granted Recognised and Initially Measured?
Revenue Grants?
Recognised when:
- Conditions for receipt have been complied with and
- There is reasonable assurance that the grant will be received.
Revenue Grant-
- If they are paid when the expenditure has occurred, the revenue should be matched in proportion to the expense.
- If they are paid on meeting an objective, the grant should be recognised with the identifiable costs of meeting the objective.
Can be Accounted/Recognised/Presented as
- Income in the P/L as Other income
or
- Deducted from the related expense
How are government-granted Recognised and Initially Measured?
Capital Grants?
Recognised when:
- Conditions for receipt have been complied with and
- There is reasonable assurance that the grant will be received.
Capital Grant-
Can be Accounted/Recognised/Presented as
- Reduce the Carrying Amount of the Asset. Write off the grant against the cost of the non-current asset and depreciate the reduced cost.
or
- Treat the grant as a deferred credit and transfer a portion of revenue each year, so offsetting the higher depreciation charge on the original cost.
When do government grant repayments occur and how are they accounted for?
Repayments Occur when the company does not meet the required conditions of the grant, and the government expects a repayment.
Accounted as:
(a) Income-based grants
- *- Firstly, debit the repayment to any liability for deferred income.
- Any excess repayment must be charged to profits immediately.**
(b) Capital-based grants deducted from the cost
- *- Increase the cost of the asset with the repayment.
- This will also increase the amount of depreciation that should have been charged in the past. This should be recognised and charged immediately.**
(c) Capital-based grants treated as deferred income
- *- Firstly, debit the repayment to any liability for deferred income.
- Any excess repayment must be charged to profits immediately.**
What Disclosures are required for Government Grants?
IAS 20 requires the following disclosures:
- the accounting policy and presentation methods adopted
- the nature of government grants recognised in the financial statements
- unfulfilled conditions relating to government grants that have been recognised.
Define Borrowing costs (IAS 23)? and how is it treated with a qualifying asset?
Borrowing costs are defined as ‘interest and other costs that an entity incurs in connection with the borrowing of funds’
Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset (IAS 23: para. 26).
A Qualifying Asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale (IAS 23: para. 5).
How should borrowing costs be Accounted for?
Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset
- STARTS when all of the following apply:
– Expenditure for the asset is being incurred
– Borrowing costs are being incurred
– Activities necessary to get the asset ready for use are in progress.
- SUSPENDED during extended periods in which active development is interrupted.
- STOPS when substantially all the activities that are necessary to get the asset ready for use are complete.
How do Specific loans and General borrowings affect the interest cost allowed to be capitalised?
Specific loan is taken out to finance the construction of an asset, IAS 23 says that the amount to be capitalised:
- Interest payable on the specific loan
(less) income earned on the temporary investment of loan
Construction financed General borrowings, the borrowing costs eligible to be capitalised are determined by:
- Applying the weighted average general borrowings rate to the expenditure incurred on the asset.
- - Please see the image for illustration
What disclosures are required for IAS 23 Borrowing costs?
IAS 23 requires the following disclosures:
- the value of borrowing costs capitalised during the period
- the capitalisation rate.
What types of assets does (IAS41) Agriculture apply to?
Agriculture covers the accounting treatment of biological assets and agricultural produce From:
- Birthing of animals & Planting
Till
- Point of Slaughter or Harvest.
After harvest IAS 2 Inventories applies to the agricultural produce, *illustrated in the timeline Attached
Exception for Bearer Plants, which are plants that are used to grow crops but are not consumed, Instead they are accounted for under IAS 16 using cost or revaluation model.
e.g.
-
Coconut Trees used to grow Coconuts
- Trees >>> IAS 16 - (as the asset continues living)
- Coconuts once picked>>> IAS 41 and then treated as inventories
- Trees are grown for timber or paper >>> IAS 41
How are Biological assets Recognised and Initially Measured?
A biological asset should be recognised if:
- Probable that future economic benefits will flow to the entity from the asset
- Cost or F.V of the asset can be reliably measured
- An entity controls the asset
Biological assets are initially Measured:
- F.V (less) estimated costs to sell.
- Gains and losses charged to P/L,
- There could be gain or loss when first recognised. example:
- A loss can arise because estimated selling costs are deducted from fair value.
- A gain arises when a new biological asset (such as a lamb or a calf) is born.
Note: some assets are likely to have a very long payback period e.g trees for the paper so level 3 of Fair Values is likely to be used.
Inability to measure F.V
- IAS 41 presumes that the fair value of biological assets should be capable of being measured reliably.
- If market prices are not readily available then the biological asset should be measured at COST MODEL
- Once the asset’s fair value can be measured reliably, it should be remeasured to fair value less costs to sell.
Subsequently measured: Revalued on the reporting date at F.V less cost of sales
Once the animals are slaughtered now treated under IAS 2
How is agricultural produce Recognised and Measured in the F.S?
Agricultural Produce (Fruit, Veg, Milk) is recognised when Harvested.
Measured at: F.V less estimated costs to sell.
Gains and losses on initial recognition are included in profit or loss (operating profit) for the period.
Note:
After produce is harvested, it becomes an item of inventory. Therefore, IAS 41 ceases to apply.
The initial measurement value on the harvest is the deemed ‘cost’ for IAS 2 Inventories, which is applied from then onwards.
4.8.2 Masurement
To be completed
