Question

In: Accounting

Case: Rent Relief Caravans4Hire Ltd1 provides short-term rental of caravans to tourists for camping holidays throughout...

Case:

Rent Relief Caravans4Hire Ltd1 provides short-term rental of caravans to tourists for camping holidays throughout Australia. Caravans4Hire Ltd leases several large properties in Adelaide, Perth and Sydney, which it needs to park its caravans when not in use.

Due to border restrictions, travel restrictions, localised lockdowns and Government advice to stay home, Caravans4Hire Ltd has suffered a significant loss of revenue and cash flow. On 1 May 2020 the National Hotel and Tourism Industry Association which is a non-government, not-for-profit industry association. It supports its members, who are businesses operating in the hospitality and tourism industry awarded Caravans4Hire Ltd a grant of $360 000 in total for rent relief for the three months ended 31 July 2020. The grant was received in cash on 1 May 2020. Caravans4Hire Ltd is under no obligation to repay the money received.

REQUIRED

All questions should be answered from the perspective of Caravans4Hire Ltd. The word lengths are a suggestion only, i.e., they are NOT strict word limits for each part.

a) What is the main accounting policy issue(s) that need to be resolved to account for the grant from the National Hotel and Tourism Industry Association? (20%) (part a) 15 – 50 words)

b) i) Identify one principle that is relevant to the accounting policy issue that you identified in part a) by providing a reference for that principle (e.g., AASB XXX, para. zz; or Conceptual Framework, Chapter X, para. x.xx) AND explain why you chose that principle. (20%)

ii) identify another principle that is relevant to the accounting policy issue that you identified in part a) by providing a reference for that principle.(10%) (part b) 50 – 100 words).

c) Describe an accounting policy to account for the grant from the National Hotel and Tourism Industry Association. Do not justify your policy. Just describe it. (50%) (part c) 20 - 80 words)

Solutions

Expert Solution

a)

There are two methods outlined by the AS

1) Capital approach
2) Income / Revenue approach

The method of accounting for any grant is always based on the nature of grant received. The grants are recognized only where a certainty exists for the fulfilment of conditions and ultimate collection of such grants.

1) Grants that can be treated as part of capital or shareholders funds when contribution made as investment in capital.

2) In other cases it can be recognised as Revenue showing under Other Income.

b)

i) One principle is to directly recognise the total amount of grant i.e., $3,60,000 as Revenue showing under other Income.

ii) Another principle is to deducted from the related expense i.e., rental expense in the profit & loss account.

c)

In the present case Grant is a voluntary contribution to cope up the uncertainty so it can be treated as a Deemed Income. Here it can be recognised as Income directly in the statement of Profit & Loss at the time of receipt i.e on 1.05.2020..


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