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Sorry Mike, here is the question:
The terms of the grant are that if the company retains the asset for four years or more, then no repayment liability will be incurred. If the asset is sold within four year a repayment on a sliding scale would be applicable.
The company is certain that it will keep the asset for up to 10 years.
How should this grant be treated under IASB conceptual framework?
The answer said that the grant would be treated as income for the year on receipt of the grant, because there was no past event to give rise to a liability.
My question is, if there is no repayment then shouldn’t the grant be treated as if it were a “normal” grant related to asset – “present as deferred income and deduct the grant in arriving at the carrying amount of the asset”?
“the grant would be treated as income for the year ” – I believe that I would have recorded it as deferred income and dribbled it into statement of profit or loss over the same period that the asset is being depreciated
Are you sure that you have copied the answer precisely?
I agree that there is no reason to create any provision (there would be a contingent liability note of the possibility of the repayment of the grant)
The alternative treatment would be to set the grant against the cost of the asset and depreciate the reduced carrying value
I’m sorry I have not, I was afraid it would get too messy for you. This is the whole question and answer:
Hat acquired an item of plant at a gross cost of $800,000 on 1 oct 2012. The plant has an estimated life of ten years with a residual value equal to 15% of its gross cost. Hat uses straight line depreciation on a time apportioned basis. The company received a government grant of 30% of its cost price at the time of its purchase. The terms of the grant are that if the company retains the asset for four years or more, the no repayment liability will be incurred. If the plant is sold within 4 years a repayment on a sliding scale would be applicable. The repayment is 75% if sold within the first year of purchase and this amount decreases by 25% per annum. Hat has no intention to sell the plant within the first 4 years. Hat’s accounting policy for capital-based government grants is to treat them as deferred credits and release them to income over the life of the asset to which they relate.
Discuss whether the company’s policy for the treatment of government grants meets the definition of a liability in the IASB’s Conceptual Framework.
Answer:
Hat has credited the $240,000 grant to a deferred income account which is shown as a liability in the statement of financial position. It is then released to profit or loss over the 10 year life of the related asset. However the Conceptual framework states that a liability should only be recognized if there is probable outflow of economic benefits. This is not true for a grant, under normal circumstances the grant will not have to be repaid and so a liability does not exist.This example is complicated by the possibility of having to repay the grant f the asset is sold. At the end of the reporting period the asset has not been sold, and so there is no past event to give rise to a liability. Hat intends to keep the asset for its 10 year useful life. Nor can it be classified as a contingent liability. Under IAS 37 the “uncertain future event” that creates a contingent liability must be “not wholly within the control of the entity”
Following on from the above, the conceptual framework would not permit the grant to be shown as a liability. Instead the grant would be claimed as income in the year that it was received. However the treatment of the grant as deferred income is in accordance with IAS 20 accounting for government grants.
If there is no obligation to repay the grant then shouldn’t it be treated as it were a normal grant?
This question has an underlying theme of asking why the framework is not consistently followed by IAS / IFRS
In this particular case the argument is put forward that the government grant potential repayment satisfies neither the definition of a liability nor the definition of a contingent liability and should therefore(applying the Framework concepts) be treated as income in the year that it is received
But now the killer!
The answer also points out that the IAS requires the grant to be treated as deferred income and that’s in contradiction with the Framework
“However the treatment of the grant as deferred income is in accordance with IAS 20 accounting for government grants.”
And that is the whole point of the question.
You need to be careful how you tackle questions like this – it isn’t asking simply for the accounting treatment. It’s looking for an appreciation of why / how the treatment specified by IAS / IFRS differs from the conceptual Framework
OK?
I understand it now- I’ve been thinking only about IAS 20 all along.
The only conflict i know of is IAS 17 leases and probably this one too. I should always apply IAS 17 to questions on leases unless specified by the exam question, right? Will questions in paper F7 ask about the conflict between the IAS and the framework on accounting for “specific items”?
Why would it not? It is within the remit of the examiner to ask questions along those lines.
Personally, I doubt that he would – there’s so much more computational stuff that he can ask
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