AC120 lecture 21

1
AC120 lecture 21

• Outline of semester 2
• Individual standards on grants, VAT, stock,
  tangible fixed assets
• Final accounts of companies and relevant notes
• Internal control and error correction
• Cash flow statements
• Interpretation of financial statements

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Tutorials and CA exam

• Standard tutorials re-commence week 2
• Additional tutorial by request only
• Refer to the webpage for your tutorial time and
  location
• Continuous assessment week 4
• Tuesday 11.00am QG13
• Same procedure as for CA in semester 1

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Accounting for government grants

• Guidance is provided by SSAP 4 (refer to ICAI
  Handbook in the library)
• First issued in 1974, amended in 1990
• Government assistance can take different forms
• Loans
• Equity
• Grant aid

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Accounting for grants

• Different grants may be given on varying terms,
  differing conditions to be fulfilled, different
  times of payment.
• Grants may be to assist with meeting specific
  expenditure or to contribute towards
  non-financial goals.
• How should an entity account for grants so that
  the reader of financial statements is provided
  with useful information?

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Accounting for grants

• Revenues and costs should be accrued and matched
  with each other in the profit and loss account of
  the period to which they relate.
• Government grants should therefore be booked to
  the profit and loss account in the same period as
  the expenditure towards which it is supposed to
  contribute

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Example 1

• Company A applies to a government agency for
  funding to support a marketing drive in one of
  the new EU-member countries. The marketing drive
  has a budget of 500,000. The full amount is
  spent before financial year end 31 December. The
  grant application is successful and the amount of
  the grant is received before financial year end
• How should company A account for the grant and
  marketing expenditure for the year ended 31
  December?

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Example 2

• Same situation as example 1 except that the
  company was notified that the application was
  successful before year end but didnt actually
  receive the funds until after the year end
• How should the company account for the grant and
  the expenditure?

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Example 3

• Same situation as example 2 except that the
  company only spent 400,000 of the 500,000
  marketing budget before the financial year end
• How should the company account for the grant and
  the expenditure?

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Example 4

• Company A buys a fixed asset for 1 million.
  Depreciation policy is 25 straight line
• The company receives a government grant of
  600,000 as a contribution towards the cost of
  the asset
• Grant income and expenditure amounts received and
  paid respectively before the financial year end.
• How should company A account for the grant and
  the fixed asset?