- 3 Marks
Question
c) On 1 June 2020, Karikari Ltd received a Government of Ghana grant of GH¢8 million towards the purchase of a new plant with a gross cost of GH¢64 million. The plant has an estimated life of 10 years and is depreciated on a straight-line basis. One of the terms of the grant is that the sale of the plant before 31 May 2024 would trigger a repayment on a sliding scale as follows:
The directors propose to credit the statement of profit or loss with GH¢2 million (GH¢8 million @ 25%) being the amount of the grant they believe has been earned in the year ended 31 May 2021. Karikari Ltd accounts for government grants as a separate item of deferred credit in its statement of financial position. Karikari Ltd has no intention of selling the plant before the end of its useful economic life.
Required:
Explain with computations, the appropriate accounting treatment of the above transaction in accordance with IAS 20 Government Grants and Disclosure of Government Assistance in the financial statements of Karikari Ltd for the year ended 31 May 2021. (3 marks)
Answer
c) Government grants related to non-current assets should be credited to the statement of profit or loss over the life of the asset to which they relate, not in
accordance with the schedule of any potential repayment.
The directors’ proposed treatment is implying that the government grant is a liability which decreases over four years. This is not correct as there would only be a liability if the director intended to sell the related plant, which they do not intend to do so.
Therefore, in the year ended 31st May 2021, GH¢800,000 (8 million/10 years) should be credited to the statement of profit or loss and GH¢7·2 million should be shown as deferred income (GH¢800,000 current and GH¢6·4 million non-current) in the statement of financial position.
(1 mark per valid point up to maximum of 3 marks)
- Topic: Financial Reporting Standards and Their Applications
- Series: APR 2022
- Uploader: Cheoli