Ind AS 20, Accounting for Government Grants and Disclosure of Government Assistance, Important Questions with Solutions for CA Final FR May & Nov 2021 Exams
How will you recognize and present the grants received from the Government in the following cases as per Ind AS 20?
i. A Ltd. received one acre of land to setup a plant in backward area (fair value of land Rs.12 lakh and acquired value by Government is Rs.8 Lakhs).
ii. B Ltd. received an amount of loan for setting up a plant at concessional rate of interest from the Government.
iii. D Ltd. received an amount of Rs.25 lakh for immediate start-up of a business without any condition.
iv. S Ltd. received Rs.10 lakh for purchase of machinery costing Rs.80 lakh. Useful life of machinery is 10 years. Depreciation on this machinery is to be charged on straight line basis.
v. Government gives a grant of Rs.25 lakh to U Limited for research and development of medicine for breast cancer, even though similar medicines are available in the market but are expensive. The company is to ensure by developing a manufacturing process over a period of two years so that the cost comes down at least to 50%.
i. The land and government grant can be recognized at Fair Value or Nominal Value i.e. at either Rs.12,00,000 or Rs.8,00,000.
ii. As per Ind AS 20 ‘Accounting for Government Grants and Disclosure of Government Assistance’, loan at concessional rates of interest is to be measured at fair value and recognised as per Ind AS 109. Value of concession is the difference between the initial carrying value of the loan determined in accordance with Ind AS 109, and the proceeds received. The benefit is accounted for as Government grant.
iii. Rs. 25 lakh has been received by D Ltd. for immediate start-up of business. Since this grant is given to provide immediate financial support to an entity, it should be recognised in the Statement of Profit and Loss immediately.
iv. Rs. 10 lakh should be recognized by S Ltd. as deferred income and will be transferred to profit and loss over the useful life of the asset. In this case, Rs.1,00,000 [Rs.10 lakh / 10 years] should be credited to profit and loss each year over period of 10 years.
v. As per Ind AS 20, the entire grant of Rs.25 lakh should be recognized immediately as deferred income and charged to profit and loss over a period of two years based on the related costs for which the grants are intended to compensate provided that there is reasonable assurance that U Ltd. will comply with the conditions attached to the grant.
Question 2 –
Arun Ltd. is an entity engaged in plantation and farming on a large scale and diversified across India. On 1st April, 2018, the company has received a government grant for Rs. 20 lakhs subject to a condition that it will continue to engaged in plantation of eucalyptus tree for a coming period of five years.
The management has a reasonable assurance that the entity will comply with condition of engaging in the plantation of eucalypts tree for specified period of five years and accordingly it recognizes proportionate grant for Rs. 4 lakhs in Statement of Profit and Loss as income following the principles laid down under Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance.
Evaluate whether the above accounting treatment made by the management is in compliance with the applicable Ind AS. If not, advise the correct treatment.
As per Ind AS 20 Government grant should be recognised when there is reasonable assurance that
a. the entity will comply with condition attaching to them and
b. grant will be received.
The entity is reasonably sure to comply with condition and they are correct to recognise grand in proportionate amount i.e. 1/5 of 20,00,000 = Rs.4,00,000.
Question 3 –
ABC Ltd is a government company and is a first-time adopter of Ind AS. As per the previous GAAP, the contributions received by ABC Ltd. from the government (which holds 100% shareholding in ABC Ltd.) which is in the nature of promoters’ contribution have been recognised in capital reserve and treated as part of shareholders’ funds in accordance with the provisions of AS 12, Accounting for Government Grants.
State whether the accounting treatment of the grants in the nature of promoters’ contribution as per AS 12 is also permitted under Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance. If not, then what will be the accounting treatment of such grants recognised in capital reserve as per previous GAAP on the date of transition to Ind AS.
Paragraph 2 of Ind AS 20, “Accounting for Government Grants and Disclosure of Government Assistance” inter alia states that the Standard does not deal with government participation in the ownership of the entity.
Since ABC Ltd. is a Government company, it implies that government has 100% shareholding in the entity. Accordingly, the entity needs to determine whether the payment is provided as a shareholder contribution or as a government. Equity contributions will be recorded in equity while grants will be shown in the Statement of Profit and Loss.
Where it is concluded that the contributions are in the nature of government grant, the entity shall apply the principles of Ind AS 20 retrospectively as specified in Ind AS 101 ‘First Time Adoption of Ind AS’. Ind AS 20 requires all grants to be recognised as income on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate. Unlike AS 12, Ind AS 20 requires the grant to be classified as either a capital or an income grant and does not permit recognition of government grants in the nature of promoter’s contribution directly to shareholders’ funds.
Where it is concluded that the contributions are in the nature of shareholder contributions and are recognised in capital reserve under previous GAAP, the provisions of paragraph 10 of Ind AS 101 would be applied which states that, which states that except in certain cases, an entity shall in its opening Ind AS Balance Sheet:
a. recognise all assets and liabilities whose recognition is required by Ind AS;
b. not recognise items as assets or liabilities if Ind AS do not permit such recognition;
c. reclassify items that it recognised in accordance with previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity in accordance with Ind AS; and
d. apply Ind AS in measuring all recognised assets and liabilities.”
Accordingly, as per the above requirements of paragraph 10(c) in the given case, contributions recognised in the Capital Reserve should be transferred to appropriate category under ‘Other Equity’ at the date of transition to Ind AS.
Question 4 –
Rainbow Limited is carrying out various projects for which the company has either received government financial assistance or is in the process of receiving the same. The company has received two grants of Rs.1,00,000 each, relating to the following ongoing research and development projects:
i. The first grant relates to the “Clean river project” which involves research into the effect of various chemicals waste from the industrial area in Madhya Pradesh. However, no major steps have been completed by Rainbow limited to commence this research as at 31st march, 20X2.
ii. The second grant relates to the commercial development of a new equipment that can be used to manufacture eco-friendly substitutes for existing plastic products. Rainbow Limited is confident about the technical feasibility and financial viability of this new technology which will be available for sale in the market by April 20X3.
In September 20X1, due to the floods near one of its factories, the entire production was lost and Rainbow Limited had to shut down the factory for a period of 3 months. The State Government announced a compensation package for all the manufacturing entities affected due to the floods. As per the scheme, Rainbow Limited is entitled to a compensation based on the average of previous three months’ sales figure prior to the floods, for which the company is required to submit an application form on or before 30th June, 20X2 with necessary figures. The financial statements of Rainbow Limited are to be adopted on 31st May, 20X2, by which date the claim form would not have been filed with the State Government.
Suggest the accounting treatment of, if any, for the two grants received and the flood-related compensation in the books of accounts of Rainbow Limited as on 31st March, 20X2.
Accounting treatment for:
1. First Grant
The first grant for ‘Clear River Project’ involving research into effects of various chemicals waste from the industrial area in Madhya Pradesh, seems to be unconditional as no details regarding its refund has been mentioned. Even though the research has not been started nor any major steps have been completed by Rainbow Limited to commence the research, yet the grant will be recognised immediately in profit or loss for the year ended 31st March, 20X2.
Alternatively, in case, the grant is conditional as to expenditure on research, the grant will be recognised in the books of Rainbow Limited over the year the expenditure is being incurred.
2. Second Grant
The second grant related to commercial development of a new equipment is a grant related to depreciable asset. As per the information given in the question, the equipment will be available for sale in the market from April, 20X3. Hence, by that time, grant relates to the construction of an asset and should be initially recognised as deferred income.
The deferred income should be recognised as income on a systematic and rational basis over the asset’s useful life.
The entity should recognise a liability on the balance sheet for the years ending 31st March, 20X2 and 31st March, 20X3. Once the equipment starts being used in the manufacturing process, the deferred grant income of Rs.100,000 should be recognised over the asset’s useful life to compensate for depreciation costs.
Alternatively, as per Ind AS 20, Rainbow Limited would also be permitted to offset the deferred income of Rs.100,000 against the cost of the equipment as on 1st April, 20X3.
3. For flood related compensation
Rainbow Limited will be able to submit an application form only after 31st May, 20X2 i.e. in the year 20X2-20X3. Although flood happened in September, 20X1 and loss was incurred due to flood related to the year 20X1-20X2, the entity should recognise the income from the government grant in the year when the application form related to it is submitted and approved by the government for compensation.
Since, in the year 20X1-20X2, the application form could not be submitted due to adoption of financials with respect to sales figure before flood occurred, Rainbow Limited should not recognise the grant income as it has not become receivable as on 31st March,20X2.