Page 17 - CIMA OCS August 2018 Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

EXERCISE TWO (GOVERNMENT GRANTS)
Briefing Notes

Government Grants

A government grant is an amount of money that is made available to an entity for use on a
specific item of expenditure. This is usually done to encourage a business to follow a particular
course of action or to assist a business in achieving something that would otherwise be difficult to
achieve. This usually benefits the government as well in achieving a policy objective such as
increasing productivity, reducing unemployment or encouraging the export of products overseas.
In order to ensure that public money is to be spent wisely there are usually a number of
restrictions and requirements attached to receipt of the grant that must be adhered to.
In this particular situation the Department for Industry, Enterprise and Trade (DIET) is making
money available to manufacturing business to encourage investment in long term assets to
improve productivity.
Acquisition of assets
The treatment of the new rolling machine would be governed by International Accounting
Standard 16 (IAS 16) Property, Plant and Equipment. This stipulates that expenditure can be
recognised as an asset on the statement of financial position providing:

• It is probable that future economic benefits will flow to the entity and
• The cost of the asset can be measured reliably.

This is the case with the rolling machine as it will be used in the production of teas and the cost
can be established as the D$2,500,000 charged by the supplier so the initial treatment would be
as follows.

The assets would be valued at cost which includes:

• Its purchase price
• Directly attributable costs to bring the asset to the location and condition necessary for it
to be capable of operating for its intended use, i.e. site preparation, initial delivery costs,
installation costs, testing costs and professional fees.
• The initial estimate of cost of dismantling and removing the item and restoring the site,
where there is an obligation to incur such costs.

Therefore all of the D$2,500,000 can be capitalised leading to an increase in the value of property,
plant and equipment on the statement of financial position from D$18,550,000 at the end of
March 2018 to D$21,050,000. There appears to be no obligation to repair any site at the end of
the project, the entire process is kept in house with no external damage to any site.
Depreciation

Each year a depreciation charge should be made to reflect that some of the economic value of the
asset has been used up. The method of calculating this charge can be done in either of two ways.

Straight line method
An expected scrap value would be removed from the value of the rolling machine and the
remaining amount would be divided by the number of years that the asset is expected to last.
This results in the same amount being removed from the value of the asset and being charged as
an expense to the statement of profit or loss.

KAPLAN PUBLISHING 73