Ch 8 - Government grants Flashcards
Why does the gvmt provide grants?
provide incentives to companies to export or promote local employment
What are grants usually in the form of?
funding towards certain expenditure
Give an example of a gvmt grant
a grant towards the porch of an environmentally friendly car
What FRS is gvmt grants covered by?
FRS 102 Section 24: Government Grants
When do you recognise government grants?
Only recog when there is reasonable assurance that
The entity will comply with conditions of the grant
The entity will receive the grant
What are the models used to recognise government grants?
Performance model
Accruals model
How are government grants measured overall?
models used are decided on a class by class basis (not indiv assets)
How are gvmt grants recognised under the performance model
Recog depends on whether future performance related conditions apply
- No conditions: recognise when grant proceeds are received/receivable
- Conditions: only recog as income when conditions are met
How are grants received before the income recognised?
Any grants received before income can be recognised will be recognised as a liability
Mango Ltd applies and receives 2 grants in 2014
1. A grant of £10,000 to help fund construction of a new factory to create new jobs. The factory was 60% complete at the year end
2. A grant of £75,000 to help with payroll costs. The grant is awarded on the basis that 15 new jobs will be created at Mango’s warehouse. At the year end, 12 new employees have been hired.
What amount would be recog in the P&L acc for the year ended 31 Dec 20X4?
- No conditions were imposed, so can recog income in full
- Perf related conditions were imposed, which haven’t been met yet. At the y-e the grant proceeds should be recog as a liability in the bal sheet. No income can be recog
How are grants classified under the accruals model?
Under this model, grants are classified as relating to revenue or assets
How do you account for grants that relate to revenue?
The grant income is recog as income on a systematic basis over the periods in which the related costs are incurred
If there are no future related costs, or should be recog in the period it becomes receivable.
How do you account for grants that relate to assets?
The grant income is recog as income on a systematic basis over the expected useful life (UEL) of the asset
Any part of the grant not recog as income should be recog as deferred income and not be deducted from NBV of the asset
Where the grant is a non-depr asset and certain obligations must be fulfilled, the grant is recog over the periods in which the cost of meeting the obligations is incurred.
E.g. if a piece of land is granted on condition that a building is erected on it, then the grant should be recog in the P&L over the building’s life
Give an example of how a grant should be released that relates to an asset
E.g. if a piece of land is granted on condition that a building is erected on it, then the grant should be recog in the P&L over the building’s life
What must any part of the grant not recognised as income be recognised as?
deferred income and not be deducted from NBV of the asset
Mango Ltd opens a new factory and receives a gvmt grant of £15,000 in respect of capital equipment costing £100,000. It depreciates all P&M at 20% per annum straight line.
Show the balance sheet extracts in respect of the grant in the first year
Balance sheet extracts £
Fixed assets
P&M at cost 100,000
Accumulated depreciation (20%*£100k) (20,000) 80,000
Deferred income
Gvmt grant (£15,000 - £3,000) 12,000
Profit and loss account
Depreciation 20,000
Gvmt grant credit (3,000)
How should grants be recognised?
Grants should be recognised at the the fair value of the amount received or receivable
How is gvmt assistance treated in the accounts?
Gvmt assistance is not to be quantified and recognised in the FS if there is no practical way to place a reasonable value on it
Therefore no double entry is posted
But comp can choose to make a disclose to state it has been received
Give some examples of government assistance
Examples of such assistance
Free technological/marketing advice
Provision of guarantees
Preferred supplier status
How should government grants subsequently be recognised?
If one is being recog as deferred income, it will need to be released to profit over time
How should gvmt grants be presented in the FS?
Gvmt grants must be recog and disposed in FS once FRS102 Section 24 has been met
Gvmt assistance must be disclosed in the FS
How should repayment of grants be treated in FRS 102?
Section 24 gives no detailed guidance on acc for repayment
When it becomes repayable, should recog as a liability when the repayment meet the def of a liability
Give an example of why a gvmt grant may need to be repaid
If conditions are breached
What are the disclosures required for gvmt grants?
The acc policy adopted
The nature and extent of gvmt grants recog in FS
An indication of other forms of gvmt assistance from which the entity has benefitted
Unfulfilled conditions and other contingencies attaching to gvmt assistance that have been recog
