Page 21 - CIMA May 18 - MCS Day 2 Suggested Solutions

CIMA MAY 2018 – MANAGEMENT CASE STUDY

TASK 3 – GOVERNMENT SUBSIDIES AND REVENUE RECOGNITION

From: Financial Manager
To: Leena Forzani
Date: Today
Subject: GOVERNMENT SUBSIDIES AND REVENUE RECOGNITION

Accounting for receipt of subsidies
The accounting requirements relating to the receipt of subsidies is governed by IAS 20 Accounting
for Government Grants and Disclosure of Financial Assistance (IAS 20). IAS 20 includes reference
that a subsidy is simply another name for receipt of a grant or government assistance.

IAS 20 defines government grants as transfers of resources to an entity in return for past or future
compliance with certain conditions to the operating activities of the entity.

Receipt of a subsidy meets the definition of a government grant and will normally be conditional
upon complying with conditions relating to the level of service provision during a specified period
of time (e.g. agreement to operate an hourly rural bus service on an agreed route between the
hours of 8.00am – 8.00pm every day, except Sunday throughout a two‐year period commencing 1
January 2018).

Depending upon the detailed terms and conditions attached to the subsidy, it may be receivable
in advance, at periodic intervals throughout term of the subsidy agreement, or in arrears having
demonstrated compliance with the terms of the subsidy agreement. The agreement may also
include conditions under which the subsidy may need to be repaid back to the government
authority.

In principle, the subsidy should be recognised in the financial statements when its receipt is
virtually certain. If it is a grant to offset against costs incurred, it should be matched against those
costs (e.g. operating costs) incurred in providing the specified service. If it is an income
supplement, it should be recognised as income at a constant rate throughout the subsidy term.

When a subsidy or grant is received in advance, it should initially be accounted for as deferred
income, and released to profit or loss over the subsidy term consistent with the terms of the
subsidy or grant, either as a rebate of costs incurred, or as an income supplement as appropriate.
If the subsidy or grant received covers more than one accounting period, the deferred income
should be split and classified within either current or non‐current liabilities, depending upon when
it is due for release to the statement of profit or loss.

If a subsidy contains conditions under which all or part of a subsidy may be reclaimed by the
government body that provided it, this must also be considered. IAS 37 Provisions, Contingent
Liabilities and Contingent Assets (IAS 37) requires that a provision is recognised only when it is
probable that there will be a future outflow of economic benefits as a result of a past event which
can be reliably measured.

If the probability of repaying all or part of a subsidy is regarded as only possible, it should be
disclosed in the financial statements, and ignored completely if the probability of repayment is
regarded as remote.

108 KAPLAN PUBLISHING