FR – NOV 2016 – L2 – Q5b – Accounting for Government Grants (IAS 20)

Practical application of IAS 20 requirements for government grants including type identification and accounting treatment in financial statements.

Question

Prospect Nigeria Plc obtained a grant of N100million from the Federal Government of Nigeria (FGN) for an investment project to construct a plant costing N880million.

The principal terms of the grant are as follows:

Grant payment will be made subject to attaining the minimum level of the plant expenditure.
The secondary intention of the grant is to safeguard 500 jobs.
The grant will have to be repaid pro-rata if there is an under spending on capital.
Twenty percent (20%) of the grant will have to be paid if the jobs are not safeguarded until 18 months after the date of the cost of capital expenditure.

Prospect Nigeria Plc completed the construction of plant on January 1, 2013 at a total cost of N900million. The plant has an expected useful life of 20 years and is depreciated on a straight line basis with no residual value.

Required:

i. State the type of grant that Prospect Nigeria Plc has obtained giving reasons for your answer. (3 Marks)

ii. Show how the Asset and the grant would be reflected in the Statement of Financial Position and Statement of Profit or Loss for years ended December 31, 2013; 2014 and 2015 under both methods of Accounting for Grants allowed by IAS 20. (8 Marks)

Answer

i. TYPE OF GRANT

The grant that Prospect Nig. Plc obtained is ‘AN ASSET RELATED GRANT’.

This is because the grant obtained is used for Investment project to construct a plant.
The employment condition is just an additional condition to prevent replacement of labour by capital.

ii. Method 1 – STATEMENT OF FINANCIAL POSITION

(ii) USING METHOD 2 – STATEMENT OF FINANCIAL POSITION

	2015	2014	2013
Property, Plant and Equipment	N’000	N’000	N’000
Plant (Cost)	900,000	900,000	900,000
Depreciation (Accum.)	(135,000)	(90,000)	(45,000)
	765,000	810,000	855,000
Current Liabilities
Deferred Income	5,000	5,000	5,000
Non-Current Liabilities
Deferred Income	80,000	85,000	90,000

Statement of Profit or Loss


Expenses
Depreciation (900,000 ÷ 20)	45,000	45,000	45,000
Income
Government Grant Income (100,000 ÷ 20)	(5,000)	(5,000)	(5,000)

Tags: Asset-related Grants, Government Grants, Grant Recognition, IAS 20, Plant Cost
Level: Level 2

Topic: Accounting for Government Grants
Series: NOV 2016

Uploader: Kwame Aikins