Page 18 - CIMA OCS August 2018 Day 2 Suggested Solutions

CIMA AUGUST 2018 – OPERATIONAL CASE STUDY

Reducing balance method

Here a specific percentage is removed from the value of the asset each year and then charged to
the statement of profit or loss. This reflects that many assets lose more of their value in the
earlier years of ownership.

Grants
Government grants are dealt with under International Accounting Standard 20 (IAS 20)
Accounting for government grants and disclosure of government assistance. The treatment of
which depends on the type of grant being offered. A capital grant is offered for the purchase of
assets whilst a revenue grant is related to assets. The grant from DIET is a capital grant.

Treatment
IAS 20 allows two treatments of the capital grant:

1. The full grant can be written off against the carrying value of the asset and the reduced
amount depreciated over its useful economic life.
2. Treat the grant as a deferred credit and release this to the statement of profit or loss, so
offsetting the higher depreciation charge.

The decision is a matter of personal choice so if the first method was chosen, Thomas Fine Teas
would be able to claim a total of (D$2,500,000 x 20%) D$500,000 from the grant and this would
be deducted from the initial expenditure of D$2,500,000 and the net amount would of
D$2,000,000 would be depreciated as appropriate
If the second method is chosen then the full D$2,500,000 would be capitalised whilst the
D$50,000 grant received would be credited to a separate account. As the asset is then
depreciated a similar portion of the grant is released to profit and loss thus effectively reducing
the depreciation charge to the same level as in method 1.

Repayment
If Thomas Fine Teas does not comply with the requirement to maintain the assets then the full
amount of D$50,000 would be repayable. This would now be added to the value of the asset and
an additional depreciation charge would be included in the statement of profit or loss to reflect
the depreciation that would have been charged on the D$50,000.

74 KAPLAN PUBLISHING