Solutions to Gripping IFRS : Graded Questions

Government grants and assistance

Solution 27.1 a)
Debit 1 January 20X6 Bank Given Deferred grant income Recognition of government grant 31 December 20X6 Staff costs Given Bank Wages paid during the year 31 December 20X6 Deferred grant income 200 000 x 20% Grant income Recognising grant income to the extent payments made 31 December 20X7 Staff costs Given Bank Wages paid during the year 31 December 20X7 Deferred grant income 250 000 x 20% Grant income Recognising grant income to the extent payments made 31 December 20X8 Staff costs Given Bank Wages paid during the year 31 December 20X8 (400 000 x 20%) but limited to the balance in the Deferred grant income deferred income account: 150 000 40 000 50 000 Grant income Recognising grant income to the extent payments made 150 000 150 000 Credit

200 000 200 000

40 000 40 000

250 000 250 000

50 000 50 000

400 000 400 000

60 000 60 000

P.S. Staff costs are an employee benefit. The account could therefore also be called employee benefit expense: wages, if preferred.

Kolitz & Sowden-Service, 2009

Chapter 27: Page 1

Solutions to Gripping IFRS : Graded Questions

Government grants and assistance

Solution 27.1 continued b)

Debit 1 January 20X6 Bank Given Deferred grant income Recognition of government grant 31 December 20X6 Staff costs Given Bank Wages paid during the year 31 December 20X6 Deferred grant income 200 000 x 20% Staff costs Recognising grant income to the extent payments made 31 December 20X7 Staff costs Given Bank Wages paid during the year 31 December 20X7 Deferred grant income 250 000 x 20% Staff costs Recognising grant income to the extent payments made 31 December 20X8 Staff costs Given Bank Wages paid during the year 31 December 20X8 (400 000 x 20%) but limited to the balance in the Deferred grant income deferred income account: 150 000 40 000 50 000 Staff costs Recognising grant income to the extent payments made 150 000 150 000 Credit

200 000 200 000

40 000 40 000

250 000 250 000

50 000 50 000

400 000 400 000

60 000 60 000

P.S. Staff costs are an employee benefit. The account could therefore also be called employee benefit expense: wages, if preferred.

Kolitz & Sowden-Service, 2009

Chapter 27: Page 2

Solutions to Gripping IFRS : Graded Questions

Government grants and assistance

Solution 27.2 a)
Debit 1 January 20X5 Bank Deferred grant income Recognition of government grant Equipment: cost Bank Purchase of equipment Given 400 000 400 000 Credit

Given

1 500 000 1 500 000

31 December 20X5 Depreciation (1 500 000 0) / 4 Equipment: accumulated depreciation Depreciation charge for the year Deferred grant income (400 000 / 4) Grant income Grant income recognised on the same basis as depreciation on the equipment 31 December 20X6 Depreciation (1 500 000 0) / 4 Equipment: accumulated depreciation Depreciation charge for the year Deferred grant income (400 000 / 4) Grant income Grant income recognised on the same basis as depreciation on the equipment 31 December 20X7 Depreciation (1 500 000 0) / 4 Equipment: accumulated depreciation Depreciation charge for the year Deferred grant income (400 000 / 4) Grant income Grant income recognised on the same basis as depreciation on the equipment 31 December 20X8 Depreciation (1 500 000 0) / 4 Equipment: accumulated depreciation Depreciation charge for the year Deferred grant income (400 000 / 4) Grant income Grant income recognised on the same basis as depreciation on the equipment

375 000 375 000

100 000 100 000

375 000 375 000

100 000 100 000

375 000 375 000

100 000 100 000

375 000 375 000

100 000 100 000

Kolitz & Sowden-Service, 2009

Chapter 27: Page 3

Solutions to Gripping IFRS : Graded Questions

Government grants and assistance

Solution 27.2 continued b)

Debit 1 January 20X5 Bank Deferred grant income Recognition of government grant Equipment: cost Bank Purchase of equipment Given 400 000 400 000 Credit

Given

1 500 000 1 500 000

Deferred grant income Equipment: cost Recognizing grant as reduction of equipments cost 31 December 20X5 Depreciation (1 500 000 400 000 0 ) /4 Equipment: accumulated depreciation Depreciation on equipment 31 December 20X6 Depreciation (1 500 000 400 000 0 ) /4 Equipment: accumulated depreciation Depreciation on equipment 31 December 20X7 Depreciation (1 500 000 400 000 0 ) /4 Equipment: accumulated depreciation Depreciation on equipment 31 December 20X8 Depreciation (1 500 000 400 000 0 ) /4 Equipment: accumulated depreciation Depreciation on equipment

400 000 400 000

275 000 275 000

275 000 275 000

275 000 275 000

275 000 275 000

Kolitz & Sowden-Service, 2009

Chapter 27: Page 4

Solutions to Gripping IFRS : Graded Questions

Government grants and assistance

Solution 27.3 a)
Debit 1 January 20X5 Bank Deferred grant income Recognition of government grant Given 500 000 500 000 200 000 200 000 Credit

Deferred grant income Given Grant income Portion of the grant received for immediate financial support is recognised as income immediately Harvester: cost (asset) Bank Purchase of harvester Given

900 000 900 000

31 December 20X5 Depreciation (900 000 50 000) / 5 Harvester: accumulated depreciation Depreciation for the year Deferred grant income (500 000 - 200 000) / 5 Grant income Grant income recognised on the same basis as depreciation 31 December 20X6 Depreciation (900 000 50 000) / 5 Harvester: accumulated depreciation Depreciation for the year Deferred grant income (500 000 - 200 000) / 5 Grant income Grant income recognised on the same basis as depreciation 31 December 20X7 Depreciation (900 000 50 000) / 5 Harvester: accumulated depreciation Depreciation for the year Deferred grant income (500 000 - 200 000) / 5 Grant income Grant income recognised on the same basis as depreciation 31 December 20X8 Depreciation (900 000 50 000) / 5 Harvester: accumulated depreciation Depreciation for the year Deferred grant income (500 000 - 200 000) / 5 Grant income Grant income recognised on the same basis as depreciation 31 December 20X9 Depreciation (900 000 50 000) / 5 Harvester: accumulated depreciation Depreciation for the year Deferred grant income (500 000 - 200 000) / 5 Grant income Grant income recognised on the same basis as depreciation

170 000 170 000 60 000 60 000

170 000 170 000 60 000 60 000

170 000 170 000 60 000 60 000

170 000 170 000 60 000 60 000

170 000 170 000 60 000 60 000

Kolitz & Sowden-Service, 2009

Chapter 27: Page 5

Solutions to Gripping IFRS : Graded Questions

Government grants and assistance

Solution 27.3 continued b)

Debit 1 January 20X5 Bank Deferred grant income Recognition of government grant Given 500 000 500 000 Credit

Deferred grant income Given Grant income Portion of grant for immediate financial support is recognised as income immediately Harvester: cost (asset) Bank Purchase of harvester Deferred grant income Harvester: cost (asset) Grant set off against cost of harvester Given

200 000 200 000

900 000 900 000

(500 000 200 000)

300 000 300 000

31 December 20X5 (900 000 300 000 50 000) / 5 Depreciation Harvester: accumulated depreciation Depreciation for the year 31 December 20X6 (900 000 300 000 50 000) / 5 Depreciation Harvester: accumulated depreciation Depreciation for the year 31 December 20X7 (900 000 300 000 50 000) / 5 Depreciation Harvester: accumulated depreciation Depreciation for the year 31 December 20X8 (900 000 300 000 50 000) / 5 Depreciation Harvester: accumulated depreciation Depreciation for the year 31 December 20X9 (900 000 300 000 50 000) / 5 Depreciation Harvester: accumulated depreciation Depreciation for the year

110 000 110 000

110 000 110 000

110 000 110 000

110 000 110 000

110 000 110 000

Kolitz & Sowden-Service, 2009

Chapter 27: Page 6

Solutions to Gripping IFRS : Graded Questions

Government grants and assistance

Solution 27.4 a)
Debit 1 January 20X6 Bank Deferred grant income Recognition of government grant Machinery: cost (asset) Bank Purchase of machinery 31 December 20X6 Depreciation Machinery: accumulated depreciation Depreciation for the year Deferred grant income Grant income Recognised on same basis as depreciation 31 December 20X7 Depreciation Machinery: accumulated depreciation Depreciation for the year Deferred grant income Grant income Recognised on same basis as depreciation
Given

Credit

250 000 250 000

Given

500 000 500 000

(500 000 0) /4

125 000 125 000

(250 000 / 4)

62 500 62 500

(500 000 0) /4

125 000 125 000

(250 000 / 4)

62 500 62 500

1 December 20X8 (250 000 62 500 62 500) Deferred grant income Balancing Grant forfeited expense Given Bank Grant forfeited, first reduce deferred grant income then expense rest 31 December 20X8 Depreciation Machinery: accumulated depreciation Depreciation for the year 31 December 20X9 Depreciation Machinery: accumulated depreciation Depreciation for the year

125 000 125 000 250 000

(500 000 0) /4

125 000 125 000

(500 000 0) /4

125 000 125 000

Kolitz & Sowden-Service, 2009

Chapter 27: Page 7

Solutions to Gripping IFRS : Graded Questions

Government grants and assistance

Solution 27.4 continued b)

Debit 1 January 20X6 Bank Deferred grant income Recognition of government grant Machinery: cost (asset) Bank Purchase of machinery Given 250 000 250 000 Credit

Given

500 000 500 000

Deferred grant income Given Machinery: cost (asset) Recognising grant as a reduction of assets cost 31 December 20X6 Depreciation Machinery: accumulated depreciation Depreciation for the year 31 December 20X7 Depreciation Machinery: accumulated depreciation Depreciation for the year

250 000 250 000

(500 000 250 000 0) /4

62 500 62 500

(500 000 250 000 0) /4

62 500 62 500

1 December 20X8 Machinery: cost Bank Given Depreciation Machinery: accumulated depreciation W1: (250 000 125 000) Repayment of government grant and change in estimated depreciation 31 December 20X8 Depreciation Machinery: accumulated depreciation Depreciation for the year 31 December 20X9 Depreciation Machinery: accumulated depreciation Depreciation for the year

250 000 250 000 125 000 125 000

(500 000 0) /4

125 000 125 000

(500 000 0) /4

125 000 125 000

Kolitz & Sowden-Service, 2009

Chapter 27: Page 8

Solutions to Gripping IFRS : Graded Questions

Government grants and assistance

Solution 27.4 continued b) continued

Working 1: change in estimate Cost Depreciation Date 1/1/20X6 20X6 20X7 & Calculations 500 000 250 000 (250 000 0) / 4 x2 (500 000 0) / 4 x2 Was 250 000 (125 000) Is 500 000 (250 000) Difference 250 000 (125 000)

Carrying amount Depreciation

31/12/20X7 20X8 (250 000 x1 (500 000 x1 (250 000 x1 (500 000 x1 Given 0) / 4 0) /4 0) / 4 0) /4

125 000 (62 500)

250 000 (125 000)

125 000 (62 500)

Depreciation

Future

(62 500)

(125 000)

(62 500)

Residual value

31/12/20X9

It is interesting to note that the change in estimate is calculated on a cumulative catch-up basis, rather than a reallocation basis suggested by IAS 8. This cumulative approach is required in IAS 20.32.

Kolitz & Sowden-Service, 2009

Chapter 27: Page 9

Solutions to Gripping IFRS : Graded Questions

Government grants and assistance

Solution 27.5 a)
Debit 30 June 20X8 Weapons licence: cost (FV) Bank Deferred grant income Recognising the licence granted by the government at fair value 31 December 20X8 (900 000/ 5 x 6/ 12) Amortisation - licence Licence: accumulated amortisation Amortisation of weapons licence for 6 months Deferred grant income (850 000/ 5 x 6/ 12) Grant income Recognised on the same basis as amortisation 900 000 50 000 850 000 Credit

90 000 90 000

85 000 85 000

b)
Debit 30 June 20X8 Weapons licence: cost Bank Recognising the licence granted by the government at nominal amount 31 December 20X8 (50 000/ 5 x 6/ 12) Amortisation - licence Licence: accumulated amortisation Amortisation of weapons licence for 6 months 50 000 50 000 Credit

5 000 5 000

c)
ANTHONY LIMITED NOTES TO THE FINANCIAL STATEMENTS (EXTRACTS) FOR THE YEAR ENDED 31 DECEMBER 20X8 25. Government assistance Anthony Limited received free advice from government experts. This advice included technical manufacturing advice as well as marketing advice for the companys weapons manufacturing operations. The company received this assistance because of its excellent BEE rating.

Kolitz & Sowden-Service, 2009

Chapter 27: Page 10

Solutions to Gripping IFRS : Graded Questions

Government grants and assistance

Solution 27.6
The subsidy granted by the government would meet the definition of a government grant as defined by IAS 20.3. Government grants are assistance by government: in the form of transfers of resources: The amount of C800 000 is a resource and equates to a transfer of these resources even if the grant has not yet been received in cash: the governments obligation and Trailblazer Limiteds asset would be recognized on the basis that the flow of future economic benefits were expected (if there was any risk that the company would not complete the building, being a condition of the grant, then this grant would not be recorded until either the cash were received or the condition was met); to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity: A condition was attached to the grant requiring that a building be erected in Themiddleofnowhere. They exclude those forms of government assistance which: cannot reasonably have a value placed upon them: this grant clearly has a value since it will equal half of the costs of construction, limited to a grant of C1 000 000. If Trailblazer Limited has no reliable estimate of the costs of construction, then the definition of a grant would not be met: the grant would need to be recognized as and when it was received or as soon as a reliable estimate became possible cannot be distinguished from the normal trading transactions of the entity: the grant is clearly related to the normal trading transactions of the entity since the grant relates to the building of a factory that is essential to the manufacture of its only product: shoes. The subsidy also meets the definition of a grant related to an asset as defined by IAS 20.3: a grant whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire long-term assets. The grant was conditional upon the construction of a factory in a specific area, thus a condition to the grant exists. The government grant therefore exists. Whether or not to recognize this grant, however, depends on whether there is reasonable assurance that the entity will comply with the conditions attaching to it, and that the grant will be received (IAS 20.8). Receipt of a grant does not of itself provide conclusive evidence that the conditions attaching to the grant have been or will be fulfilled. Trailblazer Limited should therefore use professional judgement and be prudent in recognizing this grant and only recognize the grant when the building is significantly complete, feasibility studies have been done to ensure sufficiently cash is available to complete the building etcetera. The terms of the agreement would need to be thoroughly assessed before recognizing this grant and determining how much of the grant may be recognized.. As the grant was provided for the construction of a factory that would be depreciated, Trailblazer would have the choice of recognising the grant of C800 000 as either: Deferred income and periodically amortising the grant on a rational and consistent basis, e.g. the useful life of the factory, to profit or loss; or A reduction against the cost of the factory. This would have the same effect on profit or loss as the depreciation expense will be reduced.
Kolitz & Sowden-Service, 2009

Chapter 27: Page 11

Solutions to Gripping IFRS : Graded Questions

Government grants and assistance

Solution 27.7
a)
Debit 1 January 20X8 Bank Deferred income: government grant Government grant received PPE: glass blower: cost Bank Purchase of glass blower 31 December 20X8 (500 000 0) 5 Depreciation glass blower PPE: glass blower: accumulated depreciation Depreciation for 20X8 Deferred income: government grant Grant income 300 000 5 Portion of grant income realised 31 December 20X9 (500 000 0) 5 Depreciation glass blower PPE: glass blower: cost accumulated depreciation Depreciation for 20X9 Deferred income: government grant Grant income Grant income realised Deferred income: government grant 300 000 x (2 000 10 000) Bank Portion of grant repaid
W1 or (60 000 + 60 000) x 20% Grant income Deferred income: government grant Grant income restated due to repayment (change in estimate)

Credit

300 000 300 000

500 000 500 000

100 000 100 000

60 000 60 000

100 000 100 000

60 000 60 000

60 000 60 000

24 000 24 000

W1: Change in estimate Deferred income 1/1/20X8 (1) Movement (2) (3) 31/12/20X8 Movement 31/12/20X9 Was 300 000 (60 000) 240 000 (60 000) 180 000 Should have been 240 000 (48 000) 192 000 (48 000) 144 000 Difference 60 000 (12 000) 48 000 (12 000) 36 000
Less grant income Less grant income

(1) Amount originally received: 300 000 Amount forfeited (repaid): 60 000 = 240 000 (2) 300 000 / 5 years = 60 000 (3) 240 000 / 5 years = 48 000

Kolitz & Sowden-Service, 2009

Chapter 27: Page 12

Solutions to Gripping IFRS : Graded Questions

Government grants and assistance

Solution 27.7
b)
Debit 1 January 20X8 Bank Deferred income: government grant Government grant received PPE: glass blower: cost Bank Purchase of glass blower Deferred income: government grant PPE: glass blower: cost Grant written off against asset 31 December 20X8 (500 000 300 000 0) 5 Depreciation PPE: glass blower: accumulated depreciation Depreciation for 20X8 31 December 20X9 (500 000 300 000 0) 5 Depreciation PPE: glass blower: accumulated depreciation Depreciation for 20X9 PPE: glass blower: cost Bank Portion of grant repaid
300 000 x (2 000 10 000)

Credit

300 000 300 000

500 000 500 000

300 000 300 000

40 000 40 000

40 000 40 000

60 000 60 000

W1 or 60 000/ 5yrs x 2 yrs Depreciation PPE: glass blower: accumulated depreciation Accumulated depreciation restated due to repayment of grant

24 000 24 000

W1: Change in estimate Glass blower 1/1/20X8 (1) (2) Movement (3) (4) 31/12/20X8 Movement 31/12/20X9 (1) (2) (3) (4) Was 200 000 (40 000) 160 000 (40 000) 120 000 Should have been 260 000 (52 000) 208 000 (52 000) 156 000 Difference 60 000 12 000 (48 000) 12 000 (36 000)

Cost: 500 000 Original grant: 300 000 = 200 000 Cost: 500 000 Reduced grant: (300 000 60 000) = 260 000 (200 000 0) / 5 years = 40 000 (260 000 0) / 5 years = 52 000

Kolitz & Sowden-Service, 2009

Chapter 27: Page 13