- 15 Marks
FR – L2 – Q29 – Government Grants
Question
During the year ended 30 June Year 2, Karla Ltd received three grants, the details of which are set out below.
(1) On 1 September, a grant of GH₵40,000 from local government. This grant was in respect of training costs of GH₵70,000 which Karla Ltd had incurred.
(2) On 1 November Karla Ltd bought a machine for GH₵350,000. A grant of GH₵100,000 was received from central government in respect of this purchase. The machine, which has a residual value of GH₵50,000, is depreciated on a straight-line basis over its useful life of five years.
(3) On 1 June, a grant of GH₵100,000 from local government. This grant was in respect of relocation costs that Karla Ltd had incurred moving part of its business from outside the local area. The grant is repayable in full unless Karla Ltd recruits ten employees locally by the end of Year 2. Karla Ltd is finding it difficult to recruit as the local skill base does not match the needs of this part of the business.
Required
Show how the above transactions should be reflected in the financial statements of Karla Ltd for the year ended 30 June Year 2. Where any accounting standards allow a choice you should show all possible options.
Answer
Karla Ltd
Option 1 – Net grants off related expenditure
Statement of financial position as at 30 June Year 2 (extracts)
| Non-current assets | GH₵ |
|---|---|
| Property, plant and equipment | 223,333 |
| Current liabilities | GH₵ |
|---|---|
| Other current liabilities | 100,000 |
Notes to the financial statements for the year-ended 30 June Year 2 (extracts)
Property, plant and equipment
| GH₵ | |
|---|---|
| Cost (350,000 – 100,000) | 250,000 |
| Accumulated depreciation ((250,000 – 50,000) ÷ 5 × 8/12) | (26,667) |
| Carrying amount | 223,333 |
Included in statement of profit or loss for the year-ended 30 June Year 2
| GH₵ | |
|---|---|
| Depreciation charge | 26,667 |
| Training costs (70,000 – 40,000) | 30,000 |
Option 2 – Show grants separately from related expenditure
Statement of financial position as at 30 June Year 2 (extracts)
| Non-current assets | GH₵ |
|---|---|
| Property, plant and equipment | 310,000 |
| Current liabilities | GH₵ |
|---|---|
| Other current liabilities | 186,667 |
Notes to the financial statements for the year-ended 30 June Year 2 (extracts)
Property, plant and equipment
| GH₵ | |
|---|---|
| Cost | 350,000 |
| Accumulated depreciation ((350,000 – 50,000) ÷ 5 × 8/12) | (40,000) |
| Carrying amount | 310,000 |
Other current liabilities
| GH₵ | |
|---|---|
| Deferred income relating to government grants (100,000 – (100,000 ÷ 5 × 8/12)) | 86,667 |
| Government grant repayable | 100,000 |
| Total | 186,667 |
Included in statement of profit or loss for the year-ended 30 June Year 2
| GH₵ | |
|---|---|
| Depreciation charge | 40,000 |
| Training costs | 70,000 |
| Government grant received | (40,000) |
| Release of deferred government grant | (13,333) |
Tutorial note
The GH₵100,000 grant in (3) has conditions attached to it. In such a situation IAS 20 states that grants should not be recognised until there is reasonable assurance that the entity will comply with any conditions attaching to the same. Since Karla Ltd is struggling to recruit, and there is only one month left to recruitment to meet these conditions, then it does not seem that there is ‘reasonable assurance’. Hence the grant should not be recognised as such, but should be held in current liabilities, pending repayment.
- Topic: Government Grants
- Uploader: Samuel Duah