IAS 20
Accounting for Government Grants and Disclosure of Government Assistance
Question 1
A government agency receives a 20% grant towards the cost of a new item of machinery which
cost Tshs.100 million. The machinery has an expected life of 4 years and a zero residual value.
The expected profits of the company before accounting for depreciation on the new machine or
the grant, amount to Tshs.50 million per annum in each year of the machinery’s life.
Required
Show the results of the company for the 4 years of the machinery’s life using
(a) Treating the grant as deferred income
(b) Reducing the cost method
Question 2
A non-profit organization receives a government grant of Tshs. 20 million to cover 20% of its
yearly operating costs for the next 4 years. The organization's annual operating costs without the
grant are Tshs. 30 million.
Show the results of the organization for the 4 years
(c) Treating the grant as deferred income
(d) Reducing the net cost method
Question 3
Tanga Ltd, a manufacturer and supplier of cashew products, has recently established a new
facility in Mtwara. To help in this new operation, Tanga Ltd has secured support from the
Government of Tanzania and is unsure how the grants are to be accounted for in the financial
statements. The company has a year-end of 30 April 2021, and all the following transactions
took place on 1 May 2020.
i) A grant of Tsh 150,000,000 was paid to a company to allow it to settle its outstanding accounts
payable and prevent it from going into liquidation.
ii) A grant of 50% tax relief, the net effect of which is estimated at Tshs 85,000,000 per annum,
for establishing a manufacturing company in the area was to provide employment for the youth.
iii) Tanga Ltd receives a grant of Tshs 300,000,000 towards the acquisition of a machine costing
Tshs 500,000,000. The machine has a useful life of five years.
Required:
Explain how each of the above should be accounted for in the financial statements of Tanga Ltd
for the year ended 30 April 2021, in accordance with IAS 20: Accounting for Government
Grants and Disclosure of Government Assistance.
Question 4
Herbs chemical ltd functions in an area which is economically backward. During 2013 it installs
a special device which controls pollution for a cost of Tshs.12 million for which it receives a
grant of Tshs.8 million from the local government. The government however, on a routine
inspection, finds out that Herbs has not complied with the terms of the grant and so demands a
repayment of the grant in 2015. Herbs tried to negotiate with the government, which was not
accepted by the government and it finally had to repay Tshs.8 million. Herbs has accounted for
the grant by deducting from the carrying amount of the device and depreciating at 10% under the
straight line method for two years.
Required
Advice Herbs as to how to account for the refund amount
Question 5
On 1 January 2018, CGT Plc (CGT) applied to a government agency for a grant to assist with the
construction of a factory in Mtwara. The proposed construction cost of the factory was TSZ 520
million and the company projected that 350 people would be employed on its completion. The
land was already owned by the CGT.
On 1 March 2018, the government agency offered to grant a sum amounting to 25% of the
factory’s construction cost to a maximum of Tshs 12 million. The grant aid was to be payable on
completion, and would be repayable on demand if total employment at the factory fell below 300
people within 5 years of completion. At the financial year end, 31 March 2018, CGT had
accepted the offer of grant aid, and had signed contracts for the construction of the factory at a
total cost of TZS 520 million. Construction work was due to commence on 1 April 2018.
By 31 March 2019, the factory had been completed on budget, 400 people were employed ready
to commence manufacturing activities, and the government agency agreed that the conditions
necessary for the drawdown of the grant had been met.
On 1 April 2019, the factory was brought into use. It was estimated that it would have a ten year
useful economic life. On 1 June 2019, the government agency paid over the agreed TZS 130
million.
Required:
a) Detail the requirements of IAS 20 Accounting for Government Grants and Disclosure of
Government Assistance with respect to government grants to aid capital expenditure. Your
answer should cover the initial recognition and subsequent treatment of these grants.
b) Discuss, showing calculations and journal entries where relevant, how CGT Plc should
record the above transactions and events in its financial statements for year ended 31 March
2018, 2019 and 2020.
c) Advise what accounting adjustments which would be necessary should it become apparent at
31 March 2021, that employment at the factory would soon drop below 300 people.
Question 6
Bosco Aluworks Ltd, a manufacturer and supplier of aluminium utensils for households, has
recently established a new facility in Dodoma. To help in this new operation, Bosco Aluworks
Ltd has secured several grants from the Government of Tanzania and is unsure how the grants
should be accounted for in the financial statements. The company has a year-end of 30 April
2017, and all the following transactions took place on 1 May 2016.
i) Bosco Aluworks Ltd has been awarded a grant for TZS 80,000,000, to be received over three
years, for providing employment to fresh graduates in the area.
ii) Bosco Aluworks Ltd received a TZS 5,000,000 grant from the Ministry of Industry and Trade
for the initial training of the new employees.
iii) The company also received a grant of TZS 120,000,000 from the Ministry of Finance and
Planning towards the acquisition of a TZS 600,000,000 machine. The machine has a useful
economic life of 8 years and an estimated residual value of TZS 60,000,000. Depreciation is on
the straight-line basis.
Required:
Explain how each of the above should be accounted for in the financial statements of Bosco
Aluworks Ltd for the year ended 31 April 2017, in accordance with IAS 20 Accounting for
Government Grants and Disclosure of Government Assistance. (5 marks)
Question 7
Cowboys Ltd is a large textile manufacturing company. Wherever possible, it
structures its operations to take advantage of any financial assistance available
from national and regional authorities.
During the year, heavy-duty equipment was purchased for Cowboys Ltd’s main
manufacturing operation for $12 million on 1 April 2015. The equipment was
expected to be used for 10 years, with a zero residual value. Cowboys Ltd preapplied for a government grant on 1 January 2015, meeting all necessary
criteria for awarding of the grant. On 1 February 2015, the grant was awarded
for 40% of the equipment’s cost, and the cash was received on 1 July 2015.
Conditions relating to maintaining employment are attached to the grant, and
if they are not satisfied, the grant becomes repayable, or partly repayable.
Cowboys Ltd expected to meet these conditions when the grant was applied for.
However, due to worsening economic conditions, redundancies for some staff
on 31 December 2016 resulted in a repayment of 10% of the original grant
becoming due. The repayment was made on 1 February 2017. Cowboys Ltd
accounted for the grant as a reduction in the carrying amount of the asset.
Required:
Explain, with suitable calculations, the financial reporting treatment of the above in
the financial statements of Cowboys Ltd for the year ended 31 December 2016, in
accordance with IAS 20: Accounting for Government Grants and Disclosure of
Government Assistance