After going through this module, you will be able to:

1. Understand the recognition criteria of Grants
2. Measurement basis
3. Disclosure requirements

1.1.       Introduction

Objective of IAS 20

The objective of IAS 20 is to prescribe the accounting for, and disclosure of, government grants and other forms of government assistance.

Scope

IAS 20 applies to all government grants and other forms of government assistance. [IAS 20.1] However, it does not cover government assistance that is provided in the form of benefits in determining taxable income. It does not cover government grants covered by IAS 41 Agriculture, either. [IAS 20.2] The benefit of a government loan at a below-market rate of interest is treated as a government grant. [IAS 20.10A]

Accounting for grants

A government grant is recognised only when there is reasonable assurance that (a) the entity will comply with any conditions attached to the grant and (b) the grant will be received. [IAS 20.7]

The grant is recognised as income over the period necessary to match them with the related costs, for which they are intended to compensate, on a systematic basis. [IAS 20.12]

Non-monetary grants, such as land or other resources, are usually accounted for at fair value, although recording both the asset and the grant at a nominal amount is also permitted. [IAS 20.23]

Even if there are no conditions attached to the assistance specifically relating to the operating activities of the entity (other than the requirement to operate in certain regions or industry sectors), such grants should not be credited to equity. [SIC-10]

A grant receivable as compensation for costs already incurred or for immediate financial support, with no future related costs, should be recognised as income in the period in which it is receivable. [IAS 20.20]

A grant relating to assets may be presented in one of two ways: [IAS 20.24]

• as deferred income, or
• by deducting the grant from the asset’s carrying amount.

A grant relating to income may be reported separately as ‘other income’ or deducted from the related expense. [IAS 20.29]

If a grant becomes repayable, it should be treated as a change in estimate. Where the original grant related to income, the repayment should be applied first against any related unamortised deferred credit, and any excess should be dealt with as an expense. Where the original grant related to an asset, the repayment should be treated as increasing the carrying amount of the asset or reducing the deferred income balance. The cumulative depreciation which would have been charged had the grant not been received should be charged as an expense. [IAS 20.32]

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1.2.       Question

When the client company buys asset which allows the government to give the client grants, then this has to be treated in the financial statement as follows:

There are two issues to be considered:

1. Matching principles

Example:

“The government paid a grant of $10m when the client company purchased an asset of $100m in Nov. 2009. The useful life of the asset is 10 years. “- an extract from ACCA past question

Required: state the audit risk.

Solution:

To answer this question, we first consider

The accounting issues: That’s how the transaction should be treated in the financial statement.

According to IAS 20 – Government Grants, on receipt of grant it should be deferred over the useful life of the asset.

On receipt:

At the end of year 1

2. Repayment:

Existence:

Inspect the government grant document to ensure if it actually happened.

Condition:

Whether there is a condition attached to the grant received. Enquire from management a written representation to confirm the conditions are true and inspect document and ask lower level staff.

• Repayment:

If the conditions are not achievable, it means repayment must be paid. Then there will be provisions in relation to the repayment.

1.3.       Disclosure of government grants

The following must be disclosed: [IAS 20.39]

• accounting policy adopted for grants, including method of balance sheet presentation
• nature and extent of grants recognised in the financial statements
• unfulfilled conditions and contingencies attaching to recognised grants

Government assistance

Government grants do not include government assistance whose value cannot be reasonably measured, such as technical or marketing advice. [IAS 20.34] Disclosure of the benefits is required. [IAS 20.39(b)]

Bibliography

• Association of Certified Chartered Accountants – United Kingdom BPP F7
• Institute of Chartered Accountants – Ghana – Study Manual
• London School and Business and Finance
• COM
• com
• Premium Education Hub’s Library
• Lecturer’s Book on Management Accounting

 Enroll in the course here

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After going through this module, you will be able to:

1. Understand the recognition criteria for Non – Current Assets
2. Understand the measurement basis
3. Prepare an Extract of financial statements for Non – Current Assets
4. Disclosure requirements of Non – Current Assets

When talking about PPE, there are two issues to be discussed. These are:

• Initial measurement:

To discuss the initial measurement of asset, two things have to be considered:

Capital expenditure:

These are the expenditure that has to be capitalised in the financial statements. The cost of capitalisation includes:

• Initial cost:
• Import duty
• Instalment cost
• Intended use
• Delivery cost

NOTES: This is recognised in the Non-Current Asset Register of the company.

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Revenue expenditure:

Other expenditure in relation to assets are treated as revenue expenditure and recognised in Income Statement. These include:

• Repair cost
• Insurance cost
• Maintenance cost
• Subsequent measurement:

After the asset has been recognised, the subsequent measurement of the asset has to be considered. There are two methods to be considered:

• Cost model:

This is where the asset is valued using the carrying value of the asset. Thus Value of asset = Cost- Accumulated depreciation

• Revaluation model:

This where the asset is valued based on the fair market value of the asset. Thus Value of asset = Fair value – Accumulated depreciation.

Issues to be considered in relation to revaluation:

Upward revaluation.

Example; if carrying value of the asset is $10 and the revalue amount is $12, it means the asset has increased in value.

Accounting treatment:

Debit PPE $2

  Credit Revaluation Reserve $2

When the asset is sold,

Debit Revaluation reserve $2

 Credit retained earnings              $2 

Accounting Policy:

Because of the upward revaluation, the value of the asset is going to increase and since we charge depreciation on the revalue amount, the total depreciation charged for the high will also be high. It means profit will fall and shareholders will receive fewer dividends. As such, the entity has to compensate them for this loss.

Annual transfer:

It means we take the revalue excess amount, thus

Entry into accounts;

Debit Revaluation Reserve $0.2

        Credit Retained Earning   $0.2

This increases the retained earnings so that it can be distribution to shareholders.

Other discussions will be made in class/video!!!!!

Question:

Adom Ltd acquired a property on 1 January 2007 at a cost of GHC400, 000   and immediately occupied it as office premise. On acquisition, it was estimated to have a useful life of 50 years.  Subsequent to its acquisition, the asset was measured at depreciated cost until 1 July 2012 when management of Adom Ltd decided to convert the building into an investment property (mainly for rentals). Following this decision, the property was fair valued at GHC373,800. Adom Ltd adopted the fair value model for subsequent measurement of the investment property. At 31 December 2012, it was fair valued at GHC380,000.

Required: Account for the treatment of this property in the 2012 financial statements of Adom Ltd.

Solution:

Income Statement for the year ended 31 December 2012:

Expenses                                                                             GHC

Depreciation charge                                                            4,000

(400,000/50 years x 6/12)

Other income

Fair valuation surplus-Investment Property               6,200

380,000-373,800

Statement of Financial Position as at 31 December 2012

(373,800 – 356,000)

Fair value surplus                                   6200

                                    As at 1 July 2012 where the asset was changed to an Investment Property, the asset has been depreciated for 5 years six months (1 January 2007 – 1 July 2012), hence the Value of the asset was GHS 356000

Bibliography

• Association of Certified Chartered Accountants – United Kingdom BPP F7
• Institute of Chartered Accountants – Ghana – Study Manual
• London School and Business and Finance
• COM
• com
• Premium Education Hub’s Library
• Lecturer’s Book on Management Accounting

Take the course here

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