Intermediate Corporate Reporting Notes Part 5

Accounting for Government Grants and Disclosure of Government Assistance Government grants Assistance by government in the form of transfer of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. Government Assistance Action by government designed to provide economic benefit specific to an entity or range of entities under certain criteria. Accounting Treatment IAS 20 requires that grants are recognised as income, on a systematic basis, over the periods against which the relevant costs occur. Recognise when reasonable assurance that entity will: Comply with any conditions attached to grant ➤ Actually receive grant The treatment will depend on whether it's a: ➤ revenue grant or capital grant Rev Grant-Grants related to income- support with operating expenses Capital Grant-Grants related to Assets Examples Revenue Grant Q1 Revenue Grant The Dearing Restaurant has received a £20,000 government grant. The terms of the grant require the funds to be spent on the salary costs of employing a new member of staff for a two year period, after which any unspent funds must be returned to the government. The staff member commenced work at the beginning of the accounting period with an annual salary of £10,000. At the end of year one there is no indication that the employee is to leave their employment. Required Produce the accounting entries required in order to report the grant in accordance with IAS 20. YEAR ff £ £ Dr Cash 20,000 Cr Other operating income #0,000 10,000 Cr Deferred income YEAR 2 £ Dr Deferred income Cr Other operating income In yr ff income is split between income earned first year and income to be earned in the second уг. In the second year that deferred income is debited and credited to operating income. Capital Grant Government grants should be recognised in profit or loss "over the periods in which the entity recognises as expenses the related costs which the grants are intended to compensate". SO, recognise grant for the acquisition of an asset when calculating profit or loss for the periods in which depreciation is charged on that asset. Two possible ways allowed by IAS20: a) The grant may be credited to a deferred income account and then systematically transferred to the statement of comprehensive income over the useful life of the asset. or b) The grant may be deducted from the carrying amount of the asset. This will result in reduced depreciation charges over the asset's useful life. 1A5 20 Example Capital Grant A company prepares os francial Decomber each year On mary 2013 icing 200.000 which attracted government grant of 40% as they were expanding muračacturing in Month Yockshes. The machine fus a useful life of 4 years and an estimated residual lue of £60.000 the company uses suragni lee deprecaton Have the ways of acetunting for government grant Gement grum 300.000 40% 10000 EITHER Deferred Income Approach 200,000 1,000 1000 D415,000 за рег Deprecation NEV at Grint uned Dec 2014 495.000 35.000 30.000 130,000 10.000 spread on TAR 20 Example-capital grant 2013(200000 40.000 the mys Cam Deduct pant from machine orrying amoure of 200.000 15,000 per deprecation Defation onting whose existence be confirmand Rione uncertaint wither the comb NOT recognised in the financial statements under an onerous concract must bo recognised as a smvision Hodructuring Sing the be reveland fran by management matartally chang eithers undertaken by any The man in which Dha conducted mmand restructuring if the restructuring invelives the sale of cooration, a binding sale peement is needed dest esteite of the expenditure corpened the The obligation Movements table Best estimate if known known Best estimate of expenditure required oblgahan coligation to restructurs Costs must be directly atmbutable to the best estimate of the expenditure required to settle the obligahon me note to the francal salemonds in the notes to the Anancial statement where an infow st Definin probable A protion Lecture ffo: IAS37 Provisions, Contingent Liabilities and Contingent Assets Purpose of IAS37 To ensure that necessary provisions are recognised and properly measured in the financial statements To prevent unjustified provisions being made