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
What does IAS 20 say gvmt grants can be?
Either grants relating to assets
Grants relating to income
What is a grant that relates to assets per IAS 20?
Gvmt grants whose primary condition is that annuity qualifying for them should purchase, construct or otherwise acquire LT assets (IAS 20, para 3)
Give an example of a grant that relates to assets per IAS 20?
Money towards a machine
What is another name for a grant that relates to assets per IAS 20?
Capital grants
What is another name for a grant that relates to income per IAS 20?
Revenue grant
Give an example of a grant that relates to income per IAS 20?
Money towards wages
What are grants relating to income per IAS 20?
Gvmt grants other than those related to assets
How does IAS 20 state gvmt grants should be recognised?
as income over the periods in which the related costs are incurred
When can gvmt grants be recognised per IAS 20?
Gvmt grants should only be recog when there is reasonable assurance that
The entity will comply w/ the conditions of the grant
The entity will receive the grant
How does IAS 20 allow gvmt grants to be presented?
IAS 20 allows revenue grants to be either
- Presented as a credit in P&L
- Deducted from the related expense
Note: this is only a presentational choice, has no impact on FS
Why does IAS 20 allow 2 options for presenting grants?
This is only a presentational choice, has no impact on FS
What are the 2 ways to account for gvmt grants?
- Netting off method
Write off the grant against the cost of the NCA and depr the reduce cost - Deferred income method
Treat grant as deferred income and transfer a portion on the P&L each year over assets UEL
So offsets the higher depr charge on the original cost
What is the netting off method for recognising gvmt grants under IAS20?
Write off the grant against the cost of the NCA and depr the reduce cost
What is the deferred income for recognising for recognising gvmt grants under IAS20?
Treat grant as deferred income and transfer a portion on the P&L each year over assets UEL
So offsets the higher depr charge on the original cost
Under IAS rules
A company buys a NCA for £4,000 (UEL of 10 years) and gvmt gives £1,000 towards the cost of the asset
Using the netting off method show the initial treatment and subsequent treatment
- Record purch of asset
DR NCA 4,000
CR Cash 4,000
Record receipt of £1,000 grant and net this against the asset
DR Cash 1,000
CR NCA 1,000
So overall asset and cash change is £3,000 each - Subsequently
Charge depr on asset of £3,000 value / 10 year UEL = £300
DR Depr Exp (P&L) 300
CR Acc Depr (Bal sheet) 300
Under IAS Rules
A company buys a NCA for £4,000 (UEL of 10 years) and gvmt gives £1,000 towards the cost of the asset
Using the deferred income method show the initial treatment and subsequent treatment
1. Initially Record purch of asset as normal DR NCA 4,000 CR Cash 4,000 Record the receipt of the £1,000 grant as deferred income DR Cash 1,000 CR Deferred income 1,000 Therefore overall, have asset recorded at £4,000 and a liability (Def inc) of £1,000, and cash reduction of £3,000 2. Subsequently Charge depr of £4,000 asset value / 10 yr UEL = £400 DR Depr Exp (P&L) 400 CR Acc Depr (Bal sheet) 400 Note: Carrying value now £3,600 Then release deferred income over 10 years (1,000 def inc / 10 yr UEL) DR Deferred Income 100 CR Other income 100
How should the repayment of capital grants be dealt with under IAS 20?
- Netting off method
Increase the carrying amount of the asset by the amount of the repayment and recog any cumulative depr that should’ve been charged to the P&L - Deferred income method
Reduce deferred income by the amount of the repayment and recog the bal of the repayment immediately as an expense
How should the repayment of revenue grants be dealt with under IAS 20?
Reduce deferred income, if any, and recog the bal of the repayment immediately as an expense
What is the diff between IFRS and UK GAAP for recognising gent grants
FRS = reasonable assurance of compliance and receiving of grant, using perf/accrual
But IAS 20 doesn’t use these, uses capital/income approach instead
What is the diff between FRS 102 and 105 re gvmt grants?
Under FRS 105
The performance model is not an available option under FRS 105
Can ONLY use the accruals model
