Leases, government grants and UK GAAP

Question 1

What is a lease?

Answer 1

A contract/part of contract that conveys the right if use on an asset for a period in exchange for consideration.

lessor - party receiving payment.
lessee - party making the payment.

lessor retains legal ownership but transfers the right to use the asset for an agreed period in return for specific payments.

Question 2

What if the right-of-use?

Answer 2

Lessee is deemed to control the asset even without legal ownership.

Right-of-use asset needs to be held at cost less accumulated depreciation. Depreciation over the shorter lease term.

Question 3

What are the accounting treatments for the lessee?

Answer 3

Dr right-of-use X
Cr lease liability X
Cr Cash X (any upfront
payments or
direct costs incurred)
Cr Provisions X (if the lessee is
obligated to
dismantle)

Question 4

What are the depreciation accounting treatments for right-of-use?

Answer 4

Dr P&L - expense X
Cr Right-of-use asset X

Question 5

What is liability subsequent treatment?

Answer 5

• Liability is held at amortised cost using the effective interest rate.
• recorded as a finance cost
• any payments will reduce outstanding liability.
• Liability needs to be split between current and non-current liabilities.

Question 6

When is a simplified accounting treatment okay?

Answer 6

• if the lease is short-term (less then 12 months) or of low value (less then £5,000)
• it can choose to be recognised as a lease payment in the profit or loss on a straight line basis.

Question 7

What is a capital grant?

Answer 7

government grant whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire long term assets.

Question 8

What is a revenue grant?

Answer 8

government grant other then those related to asset.

Question 9

When should you recognise grants?

Answer 9

when there is reasonable assurance that:

• entity will comply with conditions of grant.
• entity will receive the grant.

grant will be recognised as income over the periods in which the related costs are incurred.

Question 10

What does IAS20 allow for revenue grants?

Answer 10

• presented as credit in P&L.
• Deducted from related expense.
• any remainder received but not recognised as deferred income in SOFP

Question 11

What does the IAS20 allow for capital grants?

Answer 11

netting off methods - write off grant against the cost of the non-current asset and depreciate the reduced cost.

deferred income method - treat grant as deferred income and transfer a portion to the P&L each year over assets useful life, so offsetting the higher depreciation charge on original cost.

Question 12

What happens if business needs to repay loan?

Answer 12

• if conditions of revenue are breached, needs to be repaid.
• reduce deferred income if any recognise the balance of the repayment immediately as an expense

Question 13

What are the accounting entries for repayment?

Answer 13

Dr deferred income X
Dr grant repayment expense X
Cr Cash X

Question 14

How would you use the netting off method for repayment of loan?

Answer 14

Dr non-current asset cost X
Dr depreciation expense P&L X
Cr cash X
Cr non-current asset (accumulated deprecation) X

Question 15

What happens if there is a change in the accounting policy?

Answer 15

following disclosures should be made:

• reasons for change
• number of adjustments recognised in the current period and the previous period presented.
• amount of the adjusted relating to the periods prior to those included in financial statements.