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Deferred income – Government grants, IAS 20

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Deferred income – Government grants, IAS 20

  • This topic has 4 replies, 3 voices, and was last updated 5 months ago by P2-D2.
Viewing 5 posts - 1 through 5 (of 5 total)
  • Author
    Posts
  • July 9, 2022 at 7:00 pm #660220
    Phenomenal01
    Member
    • Topics: 1
    • Replies: 1
    • ☆

    Hi John,

    I have an issue regarding following question. ( Kaplan Study Book, Chp 2 Test your understanding 11.7)

    A manufacturing entity is entitled to a grant of $3 million for
    creating 50 jobs and maintaining them for three years. $1.5m is
    received when the jobs are created and the remaining $1.5m is
    receivable after three years, provided that the 50 jobs are still in
    existence. The entity creates 50 jobs at the beginning of year one
    and there is reasonable assurance that this level of employment
    will be maintained.

    What is the deferred income balance at the end of the first
    year?

    Answer is : $500,000. The total grant income is $3m, to be recognised over a
    three-year period. Annual income is therefore $1m. At the end of
    the first year the entity has received $1.5m of which $1m has been
    recognised in the statement of profit or loss, leaving $500,000
    deferred into future periods.

    When we get 1.5 mln as a cash and 1.5 mln is our receivable, shouldn’t we note is as Dr Cash 1.5 mln Dr Rec 1.5 mln and Cr Deferred Inc 3 mln?
    So, at the end of Year 1, we deduct 1mln from Deferred Inc account and remained balance is 2mln now. How we can deduct 1mln from only 1.5 mln and maintaining $500,000 balance. If we do like this as a Kaplan book states, what about the next year? How can we deduct next 1mln from 500,000? I would be glad if u help me to solve this..

    Thanks in advance !

    July 10, 2022 at 8:20 pm #660259
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 6453
    • ☆☆☆☆☆

    Hi,

    There is nor receivable balance that enters the calculations initially. When we receive the cash we Dr Bank CR Deferred income for the 1.5m

    We then release the amount for the current year of 1m by DR Deferred income CR SPL. This leaves the deferred income balance at 0.5m.

    In year two we need to recognise 1m in the SPL, so we would release the 0.5m from deferred income and then recognise the 0.5 m due to be received. DR Deferred income 0.5 DR Other receivable 0.5 CR SPL 1m

    Hope that helps you clear it up.

    Thanks,

    July 26, 2022 at 9:59 am #661901
    Phenomenal01
    Member
    • Topics: 1
    • Replies: 1
    • ☆

    Thanks a lot!

    August 20, 2022 at 5:39 pm #663774
    fredymaila
    Member
    • Topics: 48
    • Replies: 100
    • ☆☆

    Hello sir.

    A question.

    Grant is recognised when there is a reasonable assurance that that it will be received and the conditions will be fulfilled.

    So by your solution above, it is not allowed to recognise a receivable and a grant liability until time had actually passed and you have fulfilled the conditions partly?

    Am I right?

    And, supposed nothing was received from the government at start, no entries would have had to be made until after a lapse of one year?

    August 26, 2022 at 7:32 am #664293
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 6453
    • ☆☆☆☆☆

    Hi,

    The grant income and the receivable is recognised over time (monthly) in accordance with the accruals concept as we are reasonably sure that we will meet the criteria of the grant. If we were 6-months into the period then we’d recognise 6/12 of the annual amount.

    Thanks

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