Question

Bio Ltd is a biotech company which specializes in the invention of new medicine. In January 2018, Bio Ltd invested $10 million in a piece of equipment for its research and development centre which has an anticipated useful life of 10 years. Depreciation is charged on a straight-line basis. In the same year, Bio Ltd received a government grant of $1 million towards the purchase of the equipment, which is conditional upon the recruitment of 100 researchers by the company within the next three years .

Explain in detail how Bio Ltd should recognize and measure the government grant with reference to the relevant accounting standards.

Answer 1

Government grant means the assistance given by the government in cash or in kind with certain specific conditions.

Here the government has given $1 million to bio ltd towards the purchase of equipment having a condition that it should recruit 100 Reaserachers.

Accounting treatment of government grant can be done in two ways:

1. First way

(a)The gross value of machinery will be shown as $9 million ( $10 million-$1 million) in the balance sheet.

b) $0.9 million (9 million / Useful life i.e. 10 years) will be charged to profit and loss account each year as a depreciation on this machinery.

Second way:-

The Gross value of machinery will be shown as $10 million in the balance sheet along with $1 million as ‘Deferred Government Grant’.

b) $1 million ($10 million / Useful life i.e. 10 years) will be charged to profit and loss account each year as a depreciation along with an income of $0.1 million ($1 million / Useful life i.e. 10 years).