CALCULATIONS ON GOVERNMENT GRANT - IAS 20

Example 1:

Do IT BETTER Limited opens a factory in Koforidua and receives $15,000.00 government grant for capital equipment whose cost is $100,000.00. All plant and machinery in DO IT BETTER is depreciated using 20% straight line.

Required

Prepare an extract of statement of profit or loss and statement of financial position for the grant in the first year under both approaches prescribed by IAS 20.

GOVERNMENT GRANT - IAS 20

Government grants are assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity.

Types of Grants

There are two (2) types of grants. These are:

1.       Capital Grant

2.       Revenue Grant

Capital Grant: Grant government gives to an entity to purchase, construct or acquire long term assets. Example: Government grant given to an entity to set up a factory, build a branch office in a particular location.

Revenue Grant: Grant government gives to an entity to take care of expenses such as salaries, utility cost, training cost etc.

Government grants, including non-monetary grants at fair value shall not be recognized until there is a reasonable assurance that:

1.       The entity will comply with the conditions attaching to them; and

2.       The grants will be received.

   

Treatment of Government Grant

Capital Grant

There are two methods of treating capital grants. These are:

1.       Deferred Income Approach: This is where the grant is recognised as deferred income and amortised(sent to the income statement) periodically in proportion to the useful life of the related asset

2.       Deduct grant from the cost of Asset: Deduct the grant from the cost of the asset and recognize the result in the income statement.