Question

1. On 1 April 2016, Gidimadjor Ltd received a government grant of GH¢8 million towards the purchase of new plant with a gross cost of GH¢64 million. The plant has an estimated life of 10 years and is depreciated on a straight-line basis.

One of the terms of the grant is that the sale of the plant before 31 March 2020 would trigger a repayment on a sliding scale as follows:

          Sale in the year ended:                                 Amount of repayment

31 March 2017	100%
31 March 2018	75%
31 March 2019	50%
31 March 2020	25%

Accordingly, the directors propose to credit to the statement of profit or loss GH¢2 million (GH¢8 million x 25%) being the amount of the grant they believe has been earned in the year to 31 March 2017.Gidimadjor Ltd accounts for government grants as a separate item of deferred credit in its statement of financial position. Gidimadjor Ltd has no intention of selling the plant before the end of its economic life.

Required:

Advise, and quantify where possible, how the above items should be treated in Gidimadjor LtD’s financial statements for the year ended 31 March 2017.    

Answer 1

The Government given a grant of GH¢8 million on an asset purchase. The government grant needs to be recognised only when we have reasonable assurance that

1. The conditions required will be complied by the company

2. The grants will be received.

Since both these conditions are satisfied in the given question. We will account the government grants.

The given grant is relating to an asset. So there are two ways of accounting

1. Reducing the grant amount from the cost of asset.

2. Showing grant in the liabilities side and taking to P&L every year a certain part of its balance during the life time of asset.

If we follow the first method, then the cost of asset will become GH¢64 million - GH¢8 million = GH¢56 million. So the depreciation expense for the year will be GH¢5.6 million (10 years useful life)

If second method is followed, then the depreciation expense will be GH¢6.4 million and income of GH¢0.8 million (GH¢8 million/10) will be recognised the current year.

The repayments to be made to government in case of sale before the specified period are not recognised in the books (as we have no intention of selling the plant, so no present obligation leading to liability). This repayment provision can be treated as contingent liability for the entity and shown accordingly in the financials.

Note : The amount of repayment based on the year we sell is not required to account the grand, as it is estimated that the asset will not be sold during this period.