IAS 20 QUESTIONS.

1. Arturo Co receives a government grant representing 50% of the cost of a depreciating

asset which costs $40,000. How will the grant be recognised if Arturo Co depreciates the
asset:
a) over four years straight line
b) At 40% reducing balance.

2. A company receives a 20% grant towards the cost of a new item of machinery, which
cost $100,000. The machinery has an expected life of four years and a nil residual value.
The expected profits of the company, before accounting for depreciation on the new
machine or the grant, amount to $50,000 per annum in each year of the machinery's life.
Required: Show how the grant should be accounted for.

3. A company received the following grants in the year to 31 May 2013. £600,000 related to
the purchase of new machinery that cost £3,000,000. The machinery was acquired in the
current year and is being depreciated on a straight-line basis over eight years, with a full
year’s charge in the year of acquisition. Under the terms of the grant the company must
keep the asset for at least five years.

£100,000 related to training costs for the years to 31 May 2013 and 2014. The grant
represents 25% of the total estimated costs. During 2013 £150,000 was spent on training.
The company’s budgeted training costs for 2014 are £290,000. If total training costs are
not at least £400,000 by the end of 2014 the grant is repayable pro-rata.
The company was set up in 2012 and in the current year a grant of £50,000 relating to
start-up costs of the company was received. No amount had been accrued for this as at 31
May 2012 as there was not reasonable assurance that the grant would be received at that
date.
In addition to the above grants received the company is considering installing new energy
efficient boilers that use renewable fuel. The boilers would cost £150,000 and currently
grants of 15% are available.

Required: Explain how the above items should be dealt with in the financial statements
of the company for the year to 31 May 2013 and prepare any necessary journal entries
relating to grants.

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 4. Rahara Ltd purchased a piece of equipment for €600,000 on the 1st January 2007. The
equipment is expected to have an economic life of 5 years and will have no residual
value. Depreciation is calculated on a straight-line basis over the life of the asset. The
company received a government of €200,000 towards the purchase of the equipment. The
financial year end of the company is December 31st each year.
Required: Show the relevant extracts from the financial statements for the years ended
31/12/07 & 31/12/08 under each of the two allowable methods of presentation.

5. The following issued affect Konas Limited in relation to government grants for the year-
ended 31 December 2016.
a) The Irish government decided to set up a development zone in Leitrim and it
offered to compensate businesses for their relocation costs. €30,000 was received
by Konas Limited for relocating.
b) Due to Konas Limited not meeting in full grant conditions, €15,000 of a grant
previously received and credited in full to profit or loss had to be repaid in 2016.
c) €80,000 was received by Konas Limited from the government in relation to the
purchase of equipment. The equipment cost €160,000 and it is expected to be
depreciated over its useful life of eight years with no residual value at the end of
the eight years.

Required: Calculate how much of the government grants should be included in the
Statement of Profit or Loss and Other Comprehensive Income and in the
Statement of Financial Position for the year ended 31 December 2016.

6. Mreeu Limited purchased some plant in June 2016 costing €1,600,000. Its useful life is
expected to be ten years and the residual value at the end of its useful will be €100,000. It
received a grant of 30% of the cost of the asset in August 2016 having received
government approval before it purchased the plant. Any grant received becomes
repayable if the asset is sold within five years. Its company policies are to depreciate in
full in the year of purchase and none in the year of sale and to maximise asset values.
Required: Prepare the relevant extracts for the financial statements for the year ended 31
December 2016.
7. Entity N received a government grant of $ 30,000 relation to the training costs of $
100,000.
Require: Show how the costs and the grant could be presented in accordance with IAS
20.

IAS 23 BORROWING COSTS.

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 1) Apex is a publicly listed supermarket chain. During the current year it started the building
of a new store. The directors are aware that in accordance with IAS 23 Borrowing costs
certain borrowing costs have to be capitalized.
Required: Explain the circumstances when, and the amount at which, borrowing costs
should be capitalized in accordance with IAS 23.

2) Details relating to construction of Apex’s new store:

Apex issued a $10 million unsecured loan with a coupon (nominal) interest rate of 6% on
1 April 2009. The loan is redeemable at a premium which means the loan has an effective
finance cost of 7.5% per annum. The loan was specifically issued to finance the building
of the new store which meets the definition of a qualifying asset in IAS 23. Construction
of the store commenced on 1 May 2009 and it was completed and ready for use on 28
February 2010, but did not open for trading until 1 April 2010. During the year trading at
Apex’s other stores was below expectations so Apex suspended the construction of the
new store for a two-month period during July and August 2009. The proceeds of the loan
were temporarily invested for the month of April 2009 and earned interest of $40,000.
Required: Calculate the net borrowing cost that should be capitalized as part of the cost
of the new store and the finance cost that should be reported in the statement of profit or
loss for the year ended 31 March 2010.

IAS 36 IMPAIRMENT OF ASSETS.

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 3) Telepath acquired an item of plant at a cost of $800,000 on 1 April 2010 that is used to
produce and package pharmaceutical pills. The plant had an estimated residual value of
$50,000 and an estimated life of five years, neither of which has changed. Telepath uses
straight-line depreciation. On 31 March 2012, Telepath was informed by a major
customer (who buys products produced by the plant) that it would no longer be placing
orders with Telepath. Even before this information was known, Telepath had been having
difficulty finding work for this plant. It now estimates that net cash inflows earned from
the plant for the next three years will be:
$000
year ended:
31 March 2013 220
31 March 2014 180
31 March 2015 170
On 31 March 2015, the plant is still expected to be sold for its estimated realizable value.
Telepath has confirmed that there is no market in which to sell the plant at 31 March 2012.
Telepath’s cost of capital is 10% and the following values should be used:

value of $1 at: $
end of year 1 0.91
end of year 2 0.83
end of year 3 0.75

4) Telepath owned a 100% subsidiary, Tilda that is treated as a cash generating unit. On 31
March 2012, there was an industrial accident (a gas explosion) that caused damage to
some of Tilda’s plant. The assets of Tilda immediately before the accident were:
$000
Goodwill 1,800
Patent 1,200
Factory building 4,000
Plant 3,500
Receivables and cash 1,500
12,000

As a result of the accident, the recoverable amount of Tilda is $6.7 million

The explosion destroyed (to the point of no further use) an item of plant that had a carrying
amount of $500,000.
Tilda has an open offer from a competitor of $1 million for its patent. The receivables and cash
are already stated at their fair values less costs to sell (net realisable values).
Required: Calculate the carrying amounts of the assets in (i) and (ii) above at 31 March 2012
after applying any impairment losses. Calculations should be to the nearest $1,000.

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 5) Kanu has recently been acquired by a new owner who has installed a new management
team. Kanu has faced difficult trading activities in the past few years and the finance
director has doubts about the value of some assets on the balance sheet. The company
has two divisions which currently employ the following net assets:

Orange Division Banana Division

000 000

Fixed assets

Tangible 16,750 15,900

Intangible 400 -

Goodwill - 620

17,150 16,520

In addition the company has central tangible fixed assets of Tshs 4,500,000. These are estimated
to be equally related to the two divisions. None of the assets have been revalued in the past.

The intangible asset of the Orange division relates to the cost of a patent acquired from a
competitor several years ago. It is estimated that the patent has a net fair value of Tshs 380,000.

Both divisions have suffered from under investment in recent years.

The net fair value of the Orange division is estimated to be Tshs 13,500,000 and Tshs 12,000,000
for the Banana division.

Budgeted pre-tax cash flows for the next 4 years are as follows:

Orange Banana

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 Tshs’000 Tshs’000

Year 1 3,800 4,700

Year 2 3,900 4,750
Year 3 5,500 5,300
Year 4 5,200 6,000

The required rate of return is 14% for both divisions. The significant increases in cash flow will
arise from the impact of the new management team. There will be no significant cash flows
from the assets employed in each division after year 4.

Required:
(i) Calculate the extent of any impairment in either division; and
(ii) Prepare a schedule of adjustments to the net assets of each division.

Discount factors at 14% are:

Year Factor
1 0.877
2 0.769
3 0.675
4 0.592