Government Grant

Government Grants

Govt Grant and Govt Assistant

Government – Refers to a Government Government  Agencies and similar bodies whether

Local

National

International

Government Assistant

Government Grants

Government                                                                 Entity                                                                                                                                  

**Transfer of Resources in return for past or future compliance with certain conditions relating to operating activities of an enterprise.

Recognition of Government Grant

G Grant including non monetary grants should be recognized @fair value .

Government Grant should only be recognized when

*The entity will comply with the conditions attached to them

*The grant will be received

Government Grant

*related to asset

                *Grant related to depreciating assets

                *Grant related to non depreciating assets

*Related to income

Example

ABC Plc acquire a Machine

Machine Cost    100m@40%  Grant Percentage

Residual Value 20M

useful life of the machine 4YRS

Years                     Depreciation                                      Grant Income

Y1                           20                                                           10

Y2                           20                                                           10

Y3                           20                                                           10

Y4                           20                                                           10

                                80                                                           40

100@40%

40/4

10 (Grant Per Year)

100-20

80/4

20(Depreciation Per Year)

Presentation of Grants

**Grant Related to Assets

                ***Differed Income Method    

                ***Netting Off Method                              

Example

Cost of the Equipment 100m(01/01/2008)

Dep over the Useful life for 5yrs

Residual Value 0

Grant Value 10m

Deferred Income Method

Journal Entries

Asset A/C                                                            90

                Cash A/C                                                                              90

(Being Accounted Cash Payment)

Asset A/C                                                            10

                Differed Income                                                               10

(Being Accounted the Differed Income)

Depreciation  A/C                                            20

                Acc Depreciation                                                              20

(Being Accounted Depreciation)

Deferred Income A/C                                    2

                Profit and Loss A/C                                                          2

(Being Charged Relevant Portion of Def Income to P and L)

Balance Sheet Presentation

Non Current Asset                                          100         20           80

Non Current Liability                                                                       6

Current Liability                                                                                                2

Rough Works

100/5=20(Depreciation)                                                10/5=2(Deferred Income)

Netting Off Method

Asset A/C                                            100

                Cash/Bank                                          100

(Being Accounted Machine Cost)

Cash/Bank                                                          10

                Deffered Income                                                             10

(Being Accounted GR)

Depreciation A/C                                             18

                Acc Depreciation                                                                              18

(Being Accounted Depreciation Expense)

Working

Asset cost is netted off with Grant Amount

100m-10m = 90m/5 = 18(Depreciation Expense)    

Repayment of Government Grant            

LKAS 16
Property Plant and Equipment

Special Points

Carrying Amount of PPE as per LKAS

PPE @ Cost                                                                    xxxx

Less
Accumilated Depriciation                             xxx
Accumulated Imairment Losses                 xxx
 

Carrying Amount                                                           xxxx

Terms

Cost
Decidable Amount
Entity Specific Value
Fair Value


Impairment Loss - If the Assets Carrying Value exceeds the Fair Value Impairment Loss Occurred.

(CV > FV)

Recoverable Amount

Fair Value                                                                              xxxx

Less
Cost to Sell                                     xx
Value in Use                                   xx

Recoverable Amount                                                             xxxx

Residual Value

Amount that entity expect to recover from the Disposal                                              xxxx


Less
Estimated Cost of Disposal                                                                        xxx


*** Useful Life
Cost of an Item of PPE shall be recognize as an asset if and only if

a ) It is probable that future economic benefits associated with the item will flow to the entity

b)the cost of the item can be measured reliably

Spare Parts and  Servicing Equipment are treated as inventory and recognized in profit and loss as consumed

Major Spare Parts and Stand by Equipment qualify as PPE

Elements of Cost

Purchase Price                                            xxxx
Import Duties                                               xxx
Non Refundable Purchase Taxes                 xxx
                                                                   xxxx


Less
Trade Discount                                             xxx
Rebates                                                         xxx
                                                                    xxxx

Decommissioning Cost

Ex
ABC Constructed Power generating Plant    1/1/2008
Cost 250 mn
ABC agreed to decommision building @ the end of the useful life
Decommissioning Cost @ the end of the useful life 100mn
Useful Life 20yrs
Discount Rate 10%

Ans
NPV of 100 Mn   = 1/(1+0.10)^20
                                 0.149

100Mn @ 0.1486 = 14.86Mn

NPV of Decommissioning 14.86 is debited to the Asset Account and Create a liability

Jouranal Entry

Asset Account                        Dr  14.86
             Liability Account                       14.86

(Being Accounted the NPV Value of Decommissioning Cost)

10% interest is charged to the income statment over 20 yrs which will make liability 100mn @ the end of the 20 yrs.


Ex
Fire Extinguishers - It doesn't directly increase the economic benefits of the manufacturing plant it is necessary to have the fire extinguishers in the factory for safety reasons.there for assets of this nature will be accounted under LKAS 16.

Subsequent Cost - Should be considered under PPE if recognition criteria is met.


However if replacement of a part of PPE or a Major inspection is performed may be included under the cost of the asset if and only if these cost meet the recognition criteria.

*** in such instances the Carrying Value of the Previously recognized cost
should be recognize

ex

ABC has an Air Plan

Air Plane has a useful life over six years
Cost of Air Craft is 100Mn
Seat cost of the Air Plane 5Mn out of 100Mn cost
Policy is to change its seats for every 2yrs

At the end of the year 2 seats were replaced for 7Mn
in that case 5Mn previous seat cost should be recognized from the asset account.And Depreciation impact is ignored.


New Cost

Asset Account    Dr   7Mn
      Cash / Bank                           7Mn
(Being Account New Cost)


                                                                         
      Self Constructed Assets
Ex
ABC Commenced a construction of a Building However prior to the construction it was used as a car park.

Answere
If an asset was constructed using company internal resources same principle used to account for 3rd party constructed asset.However if there are any internal profit and abnormal wastage should be eliminated from the cost of the asset.

Ex
ABC Constructed a commercial building

Company hired its work force

All material cost for construction  was 100mn

work force cost 25mn
construction activities were hold for two weeks due to the labour relaed dispute

Monthly cost of labour 10 mn

MKT value of such building is175mn

Answere
Internal profits are eliminated for internally constructed assets
mkt val of 175mn is not applicable
cost of 5mn  which is the cost cost of the work force two weeks will be consider as a abnormal westage
115mn is the cost of the building



Measurement of a cost

PPE is measured @ cost

Credit purchase beyond normal credit terms


Recognize different between


Cash Price                                                       Total Payment


                                    Different is the Interest income

Cash Price                                     =13000

Total Payment   1000*15              =15000

Interest income is 15000 - 13000 =2000

Exchange of Asset
When Non monetary assets are exchanged for
                       anther non monetary asset  
                                                                             or

                          Combination of Monetary or Non monetary asset exchanged is measured @ Fair Value


IMPORTANT
*if the transfer of the asset has no commercial substance

or

Fair Value of neither the asset received nor the asset given up is reliably measurable then the cost is measured at the carrying amount of the asset given up.

Example

ABC Company has a server

XYZ company also has a server

Both servers have specifically designed for company needs.
there  it is difficult to determine a fair value.

Carrying value of the ABC Owned server is 5Mn there for XYZ Should be valued its new server to 5
Measurment after recognition

Entity Can Follow either cost model or revaluation model

Cost Model

After Recognition entity shall carried out @ cost                  xxxx

Less
Any Accumulated Depreciation                     xxx
Any Impairment Loss                                     xxx

Carrying Value                                                                      xxxx


Revaluation Model

Revalued Amount = Fair Value - Subsequent Accumulated Dep - Subsequent Impairment Losses

Once the revaluation model followed it should be done regularaly to ensure that the asset's CV doesn't Materially differ from FV as at balance sheet date.

example
ABC building 100mn -01/01/2005
useful life of building 50yrs
residual value of building 20mn 1/1/2009
ABC Revalued Amount 110mn
Estimated useful life and the residual value is confirmed in 2005

Answere
 *if ABC applied cost model
therefor the carrying value @ the end of the 2009

    =(100-20)/50

        =1.6

Acc Dep  = 1.6*5  =8     there for carrying value 100-8 = 92 (@ the end of the 2009) (01/01/2005-01/01/2010)
           
*** if  PPE  is revalued entire class of assets should be revalued.

Accounting Treatment for Revaluation Impact ????


De recognition of Revalued Asset

***previously recognised revaluation reserve should be transferred to retained earnings

***this cannot be done through the income statment
 Revaluation Reserve A/C     dr
      Retained Earning                     cr

(being transffered RR to RE)


Useful Life Vs Economic Life

Ex

Air Plane Owned Company Exterior Structure cost is 100mn(ULife 20yrs) Interior cabin is 25 Mn(ULife 5yrs)

But company decided to replace interior cabin for 3 yrs But useful life is 5yrs

*****Depreciation is done when it is available for use*****

Example


ABC Constructed a Building in 01/07/2009

But commercial licensed was issued in 01/09/2009

But Depreciation should be done from 01/07/2009 Boz asset is available to use from that date on wards.

De recognition of an Asset(Removal)

***Consideration related to derecognition  should be measured at fair value

Example

ABC Purchased a motor vehcle

Cost 20mn
Useful Life 4yrs
Disposed for 1.5mn (01/12/2009)
Customer agreed to pay total 1.5mn in 24 installments
similar vehicle has a market value of 1.2 of the same day

Journel Entries

Asset Disposal A/C  dr  2mn
     Asset A/C                      2mn
(Being removed asset cost)

Acc Depriciation A/C   dr 1.5mn
      Asset Disposal A/C             1.5mn
(being transffered Accumilated Depriciation)

Cash / Bank                    dr 1.2mn
         Asset Disposal A/C      1.2mn
Being Accounted Cash received)

Asset Disposal A/C dr 0.7mn
         P and L                    0.7mn
(Being Accounted Profit on Asset Disposal)