Page 19 - CIMA OCS August 2018 Day 2 Tasks

FINANCIAL REPORTING AND TAXATION (F1) - PRACTICE TASKS

EXERCISE 2 (NON CURRENT ASSETS - GOVERNMENT GRANTS)

UPDATE

Thomas Fine Teas being a long established family business is in possession of some assets that are
beginning to show their age. Thomas Fine Teas is keen to replace as many of these assets as
possible as part of a modernisation programme. This is hoped to reduce the amount of time that
is lost due to equipment failure and the large amount of regular maintenance that is carried out.

One asset in particular is our rolling machine in which the withered leaf is broken into tiny pieces
to allow contact with the air to oxidise. This has broken down a number of times recently and it is
becoming increasingly difficult to acquire spare parts.

TRIGGER
Today you receive the following email from Steve Gomez.

From: Steve Gomez, Head of Production.
To: Finance Officer
Subject: New tea bag production machine.

I am putting together a proposal for presentation to the board, to replace the tea bag production
machine for green teas. I have sourced a supplier that can install an appropriate machine but I am
concerned that the cost of acquisition (D$ 2,500,000) may be too high to gain the board’s
approval. In order to solve this I have done some research and believe that we would be eligible to
receive a government grant from the Department of Industry, Enterprise and Trade, the details of
which are as follows:

Department of Industry, Enterprise and Trade (DIET)

Business Growth Fund.

The business growth fund can assist a manufacturing business to expand its operations. Grants
are available of 20% of the capital expenditure incurred up to a maximum of D$1,000,000.

Qualifying assets must have an economic life of more than five years and evidence of correct

maintenance of the assets must be provided each year where appropriate during the grant
period. Failure to comply would result in the repayment of the total grant.

I would like to include within the proposal an explanation of why the grant is available and how
the receipt of the grant would affect the acquisition in the financial statements. Unfortunately I
know nothing about this sort of thing and Jack Ford suggested that you might be able to help.

Could you produce a set of briefing notes that briefly introduce the concept of government grants
and explains in detail how the acquisition of the new machine and the receipt of the grant would
be treated in the financial statements.

Steve Gomez (Head of Production)

TASK
Prepare the briefing notes requested by Steve Gomez.
(Time allowed 30 Minutes)

KAPLAN PUBLISHING 41