Page 16 - CIMA MCS Workbook August 2018 - Day 2 Suggested Solution

CIMA NOVEMBER 2018 – OPERATIONAL CASE STUDY

Government Grants – accounting treatment

The accounting treatment for government grants is specified in IAS 20 Accounting for government
grants and disclosure of government assistance (IAS 20). The treatment of these depends on the
type of grant being offered.

A capital grant relates to the purchase of capital equipment whilst a revenue grant relates to
assistance for operating expenses incurred by an entity.

The DOH is offering capital grants to support the GetupGo initiative.
Treatment of capital grants
IAS 20 permits two treatments for receipt of a capital grant as follows:

1. The full grant can be written-off against the carrying amount 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 business entity has the choice as to which treatment should be adopted. Whichever
treatment is adopted, it should then be applied consistently from year to year and to other capital
grants received.
If the first method was chosen, GymFIT would be able to claim a maximum of C$400,000
(C$2,000,000 × 20%) on eligible capital expenditure up to C$2,000,000. On the assumption of
making capital expenditure of C$2,000,000 on equipment which would last for three years, the
grant received would be deducted from the initial expenditure and the net amount of
C$1,600,000 would be depreciated over three years as appropriate.
If the second method is chosen then the full C$2,000,000 would be capitalised whilst the
C$400,000 grant received would be accounted for as deferred income. As the asset is depreciated
over three years, the grant would be released to profit or loss over the same time period,
effectively reducing the net expense relating to the equipment in the statement of profit or loss.

Repayment of capital grants
Under the first method of accounting for the capital grant, if GymFIT did not comply with the
requirement to use and maintain the assets for three years, the full amount of C$400,000 would
be repayable to DOH. This would be recognised as a provision when it becomes probable that
there would be a future outflow of economic benefits, with a corresponding increase in carrying
amount of the equipment asset account. This is regarded as a change in estimate and the annual
depreciation charge would then be re-estimated based upon the updated cost less accumulated
depreciation to date to be written off over the remaining estimated useful life.

Under the second method of accounting for the capital grant, a provision for C$400,000 would be
established by first using any deferred income balance on the grant not yet released to profit or
loss, with any adjustment required charge to profit or loss as an expense.

As a final point, if a grant does need to be repaid, it will reduce some of the future economic
benefits associated with the equipment and it may then be necessary to consider whether an
impairment review is required in accordance with IAS 36 Impairment of assets.

72 KAPLAN PUBLISHING