FR – May 2021 – L2 – Q2b – Accounting for Government Grants under IAS 20

Explain how government grants and tax reliefs should be accounted for under IAS 20

Question

Tango Ltd, a manufacturer and supplier of cashew products, has recently established a new facility in Damongo. To help in this new operation, Tango Ltd has secured support from the Government of Ghana and is unsure how the grants are to be accounted for in the financial statements. The company has a year-end of 30 April 2021, and all the following transactions took place on 1 May 2020.

i) A grant of GH¢150,000 was paid to a company to allow it to settle its outstanding accounts payable and prevent it from going into liquidation.

ii) A grant of 50% tax relief, the net effect of which is estimated at GH¢85,000 per annum, for establishing a manufacturing company in the area to provide employment for the youth.

iii) Tango Ltd receives a grant of GH¢300,000 towards the acquisition of a machine costing GH¢500,000. The machine has a useful life of five years.

Required:
Explain how each of the above should be accounted for in the financial statements of Tango Ltd for the year ended 30 April 2021, in accordance with IAS 20: Accounting for Government Grants and Disclosure of Government Assistance.
(6 marks)

Answer

i) The grant of GH¢150,000 is related to income and should be recognized in the period in which the related expenses are incurred. In this case, as the grant was paid to settle the company’s accounts payable, it should be recognized as income in the year received. (2 marks)

ii) The grant of 50% tax relief should be treated as government assistance. The effect of the tax relief, GH¢85,000, should be disclosed in the notes to the financial statements as government assistance and deducted from the tax expense in the statement of profit or loss. (2 marks)

iii) The grant of GH¢300,000 for the acquisition of the machine is a grant related to an asset. There are two acceptable methods for accounting for such grants:

Option 1: Deduct the grant from the cost of the asset, thereby reducing the amount capitalized.
Option 2: Record the asset at its full cost of GH¢500,000 and recognize the grant as deferred income, which is then amortized over the useful life of the asset (5 years). The deferred income reduces the depreciation expense on the machine each year. (2 marks)

Tags: Disclosure of Government Assistance, Government Grants, IAS 20, Tax Relief
Level: Level 2

Topic: IAS 20: Government Grants
Series: MAY 2021

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