Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

IAS20; Government Grants and Government Assistance
This is IAS deals with government grants and deal with accounting government grants and disclosure of
government assistance
...

When we have a government grant, we usually record a double entry
...
Government assistance does not feature in the p
...
s and will only
be disclosed in the notes to the financial statement
...
It can refer also to local councils, Malta Enterprise (agency)
...
The Government can be local,
national and even international (E
...
If the ECB provides a loan at a favourable rate (reduced interest
rate) to companies, then that also falls within the definition of a government
...
Ex to give a
60% of 100,000 spent in development fees, it would be reimbursed for 60,000 of the first 100,000
incurred
...
Or the banks would lend money at a
high interest rate
...
Eg from 7%
(market rate) it would lend me the money for 3% interest rate
...
The government is giving me a grant for the difference of 4% point interest rate
...
When the government
gives you the loan at an interest rate lower than the market, it is referred to as a soft loan
...
It would tell
the company that if you don’t manage to sell 300,000 of your newly developed product within 3 years,
the government would tell the company that there is no need to repay back the loan
...

It does not mention transfer of resources, and only mentions an economic benefit
...
It
could also provide me with a piece of land and physical assets such as machinery
...
In the interest rate example, there was a transfer of resources, so yes it is a government
grant
...
Eg the government takes business people to a delegation
abroad, so that they would form foreign relationships with other companies
...
These trips are funded by the government, so he is providing an economic benefit, since he is
helping this business man to create new business relations in a foreign country, with the hope of

increasing sales
...

Government grant is a type of government assistance but government assistance has a wider meaning
...
For something to be a grant, it has to be
provided specifically to 1 entity and cannot be offered to a range of companies
...

In return for past or future compliance with certain conditions, is what defines government grants and
the reason why it provides you with government grants
...
The government will tell you
for eg he is ready reimburse you with 60% of the cost to develop a new product, if and only if, you meet
a certain conditions and criterias eg the average number of employees must not go below 100
...
The government might also provide a piece of
land to build a factory, and impose the company to employ 75% of employees as Gozitans, so if the
company does not abide with it, it can take back the land
...

When going on a business delegation, we cannot place a value, as it may take 3 years for such relation to
actually start working for the company, so it is difficult to put a monetary value for such trip
...
The guarantee fees depend on a number of
factors, so if the government will act as a guarantor, there is a question of how much that guarantee is
valued
...
There is a transfer of resources, but since it is difficult to place a value of such guarantee, we
cannot account for it as a government grant, so the issue with the power station is not a government
grant
...
It might be very difficult to distinguish what is being
offered to the government in respect of the government in respect to the normal trading transactions
...

(If the government decides to put in quotas eg not to import more than 15000 units, so basically I own
the local market
...
)

The IAS 20 example of VLE; Dorp Plc
...


ii
...

iv
...


It is government assistance, because there is no certainty in these talks and the money was
paid by the government
...
This should be disclosed in the notes to the financial
statements that the government has sponsored this trip for us to meet with foreign
businessmen in Japan, and no accounting entries should be made
...
(Does it have to be necessarily
disclosed? Do it if disclosure of the 25000 affect the users judgement – if yes disclose it, if
no, don’t disclose it)
This means that if something happen, and Dorp plc will not finish the project for this
customer, Dorp plc or its guarantor will have to pay a penalty fee of 3,500,000
...
So we don’t
need to pay anything to this governmental agency
...

Ias40 and Ias20 (skipped for now)
It is a government assistance, because there is the term irrespective of the hours serviced
...
We need to
account for it as revenue
...


When to recognize a government grant
Nearly each and every standard, will usually be made up of the definitions, when to recognize an asset
or a liability, how to measure such liability asset or expense, and then there would be the disclosures
...
(Paragraph 7)
...
Even though something falls within the definition of a
government grant, but it does not meet the recognition criteria, then you cannot recognize that sum of
money received as a government grant
...

If there are no conditions, it is not a government grant
...
It should be recognised if it meets the recognition criteria of a government grant
...
In order to recognise a government grant, the
first condition, the entity will need to comply with the conditions attached, and if they are
contemplating that they will lay off some employees resulting in the average number to go below 100,
then the condition will not be met, so it will not avail itself to get such a government grant
...

Another condition is that the government must pay; the government will pay no matter what
...
So, this one is easily met
...
Nearly certainty
that the company will comply with such conditions, and nearly certainty that the grants will be received
...
There are instances where the government will pay in advance such grant, so even though a
company might have received a grant, if it thinks that it will not comply with the conditions, the
company cannot recognise such monies as a government grant
...
The total cost of renovating the plant amounted to 1,000,000, and the
government will refund an 80% equivalent of such cost if the following 2 conditions are met; the
company will start exporting into 2 new foreign markets, and the average employees over the next 3
years will increase from 150 to 220
...
During a board meeting, held in July, the board of directors expressed
their concern as to wheatear they will be able to increase the workforce by 70 over the coming 3 years
in view of the fact that demand for the company’s products in mainland Europe is not that strong in
view of the slow recovery of the EU’s economy
...
The second
condition was met, but is the company able to export in the foreign markets and will it is able to
increase work force
...
If they are not met, the company

will have to refund the money back to the government the 800,000 it had originally received
...
So we cannot recognise a government grant
...
Thus it has to be shown as a liability
...
To give a loan,
and if a no of conditions are met, there will be no need to repay back the loan
...


Questions Case study 2; HoWe
b) It can be considered as a forgivable loan
...

2011: Dr Bank
Cr Creditor (amounts due to the government)
By the end of 2011, the directors were confident that the target would be reached, so the loan would
have had to be paid to the government
...

2012: Dr Creditor (amounts due to the government)
Cr Other Income
In normal circumstances, a grant will need to recognised over a number of years (See Paragraph 12)
Grants have to be recognised over a systematic period
...
We need to match the grant, with the expense you are incurring for
which you are receiving the grant
...

Dr bank 1,000,000
Cr Deferred Income (as a liability) 1,000,000
1st year
Dr Deferred Income 333,333
Cr Other Income (Profit and Loss) 333,333
2nd year
Dr Deferred Income 333,333
Cr Other Income 333,333
3rd year
Dr Deferred Income 333,333
Cr Other Income 333,333
Here we assumed, they were incurred equally among the 3 years
...

First we have to reverse that 1,300,000 as it was wrong
...
5% x 615,000)
Cr Other Income 630,375

My total employment cost is going to be 1,845,375
600,000 – 32
...
3%
630,375 – 34
...
5% of 1,300,000)
Cr Other Income 422,500
Year2
Dr Deferred Income (33
...
2% of the 1,300,000)
Cr Other Income
We did this because we were compensated for 8 employees, but we were employing 10
...

Government grants should always find their place or should always go to the income statement,
irrespective of wheatear a grant is an asset, cash, or if given to reimburse us against any particular
expense incurred
...
Allocate the grant in line with how you are incurring the expense
...


Dorp Plc Question 3 – Investment property is when you have a building or land which you are keeping
specifically for capital appreciation or leasing it to third parties and therefore you would be earning
rental income
...
There is a main difference with how we measure investment
property compared to property which falls within the scope of IAS16
...

This property is going to be leased out to tenants for under the criteria of social cases at a rate lower
then what the normal market would have paid
...
If I am going to earn lower rental income, my cash flows
are going to decrease, and my fair value is going to decrease
...

Dr Income statement 3,000,000
CR Investment Property 3,000,000
We have to recognise it over 10 years, as we are going to lease it for 10 years under the contract
...
I had to recognise the full grant
immediately in the first year
...

Dr Cash 3,000,000
Cr Other Income 3,000,000

Paragraph 20 of the standard: When you receive a grant that relates to past losses, then the grant
should be immediately recognize the grant in the P and L
...
This is done to
compensate for prior year losses, and when this is the case, you recognise it in the year it was received
...
The way we will present a grant depends if it was
received for an asset that has been bought or an expense that has been incurred
...
The gross method implies that the grant you will receive, you
will not net it off against the expense
...

EG the company decided to send employees on training and it incurred expenses of 100,000 euros and
the government decided to reimburse the company for 60% of the cost incurred
...

If I use the net method
Dr Cash 60,000
Cr Staff Training 60,000
Using the gross method, I am going to show other income as 60,000 less staff training expenses of
100,000, giving a loss of 40,000
...


Case study 3; Assets
Here we are being reimbursed for buying an asset
...

The Gross Method
Dr Plant 14,000,000
Cr Bank 14,000,000
Dr Income statement 1,400,000 (divided by 2 since half a year)
CR Provision for Depreciation 1,400,000
(The annual depreciation is 2,800,000 but since the asset was used for half the year, we divide the
amount by 2)
14,000,000 x 40% = 5,600,000
Dr Bank 5,600,000
Cr Deferred Income 5,600,000
(40% of 1,400,000 depreciation, or, the grant was to be allocated, only half a year has passed so 0
...

So, we incurred an expense of 1,400,000 depreciation and we have 560,000 other income, which leaves
us with an expense of 840,000
...
(8,400,000/ 5 is the deprecation for the year, but we
have to divide by 2 because we have 6 months)
Dr Income statement 840,000
Cr Provision for Depreciation 840,000 (half year deprecation, since we have 6 months)
The net method also systematically allocates the grant to the PL
...
When the government provides a nonmonetary grant (land), the company has 2 options, to show the grant at nominal value or at fair value
...
If they decide to show it at nominal value, they would show
nothing in the books
...
16 million is the
total labour cost
...

25% x 25,000,000 = 6,250,000
...
The balance as at year end is
18,750,000
...
SO I am going to release 9,375,000
...

The other 9,375,000 is going to be shown as non-current liabilities
...
We need to account for it in the manner, because of an
amendment in 2009
...

When approaching the bank to get a loan, the bank lends you money at a cost (the interest rate)
...
Usually, it depends on the
amount of loan taken, on the duration of the loan, and on the assets that the borrower can offer to the
bank as a security, the credit risk of the borrower
...
This below the market
rate loan, the lender will charge an interest rate that is not based on the factors that were mentioned
above
...
The government might tell
this company that he is not going to charge you the market interest rate of 6%, but will charge an
interest rate of 2%
...
We defined a government grant as transfer of resources, and this
falls under a grant, because it is an action which saves costs as it is retaining money
...

The government is a borrower and a lender at the same time so he may have people owing him and
people who owe him
...
So, the government assigns the debt of B to A
...

Calculate the fair value of the loan, and compare it to the carrying amount
...
The grant is going to be
allocated over the life of the loan in line with the expense incurred
...
So we have to discount future cashflow, since it is paid in installments
...
1euro is year 0, is the equivalent of
6euro in year 10 for example, as I would have invested and earned interest
...

(1+i)^n
...
If you need to find the fair value, take all the cash flows in from year 0 to year 10, and
discount them to the equivalent value in year 0
...

Case study 1, point 5
...
5% interest
...
All the principle will be paid on 30th June 2018 (at one go)
...

30 June 2015
30 June 2016
30 June 2017

30 June 2018
(Assume the interest is going to be paid at the end of each year, but the full 9,000,000 Is going to be
paid on 30 June 2018)
Step 1; we need to discount all cash flows
...
5% x 9,000,000 = 315,000
...
But since we have a range, we take the
mid-point, which is 8%
...
08)^-1 = 291,667
30 June 2016 – 315,000(1+0
...
08)^-3 = 250,057
30 June 2018 – 9,315,000(1+0
...
The difference between 9,000,000 and 7,658,589 = 1,341,411
is the government grant
...

DR Loan (from EIB) 1,341,411
CR Deferred Income 1,341,411
Then I will start unwinding the deferred income to the PL in line with the interest expense incurred
...
(315,000 / 2= 157,500)
...
How much interest
would I have paid out if the loan had been taken out at market interest rate?
8% x 7,658,589 (fair value) x 6/12
...
I would have paid an interest of
306,344
...

DR Interest Expense 148,844
CR Loan (from EIB) 148,844 (the users need to know that in reality on this loan I should have paid
306,844 interest, but the government helped me by giving me a grant of 148,844 with the result that I

only paid 157,500, so to the users I am going to disclose a finance expense of 306,344 and a grant
148,844, showing the net effect
...

Here the government is telling me you need to pay me that tax of 8,000,000 but the government is
telling me you can pay it by the end of 2014, and if you pay it by the end of 2014 and you meet such
conditions, I will not charge you interest, so the government is like giving me an interest free loan at 0%,
where instead of paying now, the government is allowing me to pay in 3 years’ time without paying any
interest
...

When a government allows you to pay your tax dues at a later date, without charging you interest, we
have the same concept as a below the market interest rate loan
...

8,000,000 x 0
...
The difference between the 8,000,000 and
6,716,952 is the grant ie 1,283,048
DR Current Tax Liability 1,283,048
CR Deferred Income 1,283,048
Now we have to show the finance expense and the government grant
...


Examples



---