Section 24 – Practical Examples

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Example 1: Recognition as a receivable

Company A has been approved to receive a government grant of CU50,000 to contribute towards the cost of employing 20 staff on a new department opened by the company. Approval was obtained during year 1. A condition as part of the grant is that the entity must create a non-distributable reserve equal to the amount of the grant to be received and the employees must be kept on for a minimum of 3 years. At the end of year 1 the company has employed the 20 employees but at year end has not created the non-distributable reserve. The company has sufficient distributable reserves to allow for the recognition of the non-distributable reserve. The company will receive the grant when the claim is made by the company. During year 2, the non-distributable reserve was created and the formal claim was made to the government authority.

Given that the company has met the employee number requirement and all that had to be done was to create the non-distributable reserve and the company has the reserves to do this, it is reasonable for the company to assume that the conditions of the grant will be complied with and the grant will be received. In this case it may be appropriate to recognise the CU50,000 as a receivable at the year end of year 1. Whether this income can be recognised in the profit and loss or deferred on the balance sheet will depend on whether the performance model or the accruals model has been adopted by the company.

Example 2: Performance related model – revenue grant

Company A has been approved to receive a government grant of CU50,000 to contribute towards the cost of employing 20 staff for a new department opened by the company. Approval was obtained during year 1. A condition as part of the grant is that the employees must be kept on for a minimum of 3 years and the entity must create a non-distributable reserve equal to the amount of the grant to be received.

The company made a formal claim for the CU50,000 during year 2 and the grant was received.

Given the condition of the grant is that the employees must be retained for a minimum of 3 years and a non-distributable reserve should be created, the CU50,000 cannot be recognised in the profit and loss until the performance conditions are met.

Therefore on receipt of the CU50,000 in year 2, the grant would be deferred as the 3 year condition has not been met. The journal to be posted would be:

	CU	CU
Dr Bank	50,000
Cr Deferred Revenue		50,000

Only at the end of year 3, can the CU50,000 be recognised as a credit in the profit and loss. Although the non-distributable reserve has been created before then not all conditions of the grant has been met.

Example 3: Performance related model – revenue grant – conditions

Take example 2, and assume the conditions are such that the amount repayable is reduced by 1/3 for every year elapsed.

In this situation, assuming the likelihood of meeting the conditions and obtaining the grants is reasonable at the end of year 1 (as required by Section 23.3A and illustrated in example 1), then the amount equal to CU16,667 (CU50,000/3) should be credited to the profit and loss each year.

Example 4: Performance related model – revenue grant – no conditions

Take example 2, and assume there are no conditions attached to the grant, the full CU50,000 can be recognised in year 1.

Example 5: Performance related model – capital grant -conditions

Company A received a grant of CU100,000 towards the cost of constructing a factory. A condition of the grant is that the Company continues to utilise the manufacturing plant for a period of 20 years. The useful life of the plant itself is 50 years. Under the conditions of the grant the amount repayable if the 20 year condition is not met is reduced for every year the company stays in the factory.

Under the performance model, the grant can be recognised evenly in the profit and loss over the 20 years of CU5,000 (i.e. CU100,000/20 years).

Example 6: Performance related model – capital grant – no conditions

Take example 5, and assume the full amount is repayable if the company vacates within the 20 years.

In this case the CU100,000 would remain as a liability on the balance sheet for 20 years and then released.

Example 6A: Performance related model – capital grant – no conditions

Take example 5, and assume there are no conditions attached to the grant, the full CU100,000 can be recognised in year 1.

Example 7: Accruals model – revenue grant

Under the accruals model, it may be appropriate to recognise the CU16,667 (CU50,000/3 yrs) in income each year so as to match the costs.

If we assume that the wage cost would increase by 10% per annum, then the release of the grant would be lower in year 1 than in year 2 and year 3 as higher costs are incurred in those years. Here the grant received would be recognised in proportion to the years cost over the total cost over the three years if this type of policy is chosen.

Example 8: Accruals model – revenue grant

Company A obtained a grant for the cost of relocation. This grant is repayable if the company moves within 3 years.

Under the accruals method, Company A would recognise the grant income in year one so as to match the costs charged for relocation.

If at the end of year one it was not reasonable to assume that the grant would be fully collectible or all conditions had been met then a receivable could not be recognised for the grant even though the costs were incurred. If in year 2, a grant was received, the full grant would be recognised in year 2. This would be included prospectively no prior year adjustment is required as it was a change in estimate. Based on facts and circumstances at the end of year 1 it was not reasonable the grant would be received.

Example 9: Accruals model – capital grant – depreciable asset

In this case, the amount to be recognised each year will be based on the 50 year life as this is the life that the asset is depreciated over. Hence there is a matching of the depreciation charge on the property with amortisation of the grant. The total grant to be released each year is CU2,000 (CU100,000/50yrs). The journals required are:

	CU	CU
Dr Bank	100,000
Cr Deferred Revenue/Grant Liability		100,000

Being journal to recognise receipt of the funds

	CU	CU
Dr Accumulated Amortisation on Grant Liability	2,000
Cr Grant Amortisation – Admin Expenses		2,000

Being journal to recognise the release of the grant each year for 50 years.

Note the CU2,000 release per year should be included in the same line item in the profit and loss account as where the deprecation was charged.

If the above was a grant on land, which is non-depreciable, it is likely that this should be released over the terms of the building constructed on it.

Example 10: Accruals model – capital grant

In this particular case, judgement will have to be made as to whether in substance this is a capital grant or a revenue grant. All facts would have to be reviewed. However, given the large grant and the fact that it is principally towards the cost of the plant, in this particular case it would be treated as a capital grant and accounted for accordingly.

Example 11: Repayment of grant – capital grant – accruals model

Company A received a grant of CU100,000 towards the cost of constructing a factory. A condition of the grant is that the Company continues to utilise the manufacturing plant for a period of 20 years. If not then the full amount of the grant full is amount repayable. The useful life of the plant itself is 50 years. Under the conditions of the grant the full amount is repayable if the 20 year condition is not met.

At the end of year 10, the company made a decision to close the manufacturing plant. The NBV of the grant at the end of year 10 is CU80,000 (CU100,000/50yrs * 40yrs).

As at the end of year 10, the repayment of the grant meets the definition of a liability as Company A has a present contractual obligation to repay the grant as a result of a past event (that being the receipt of the grant) that can be reliably measured.

Under the accruals model the journals required for the recognition of the liability is:

	CU	CU
Dr Profit and Loss	20,000
Cr Deferred Revenue/Grant Liability (CU100,000 less carrying amount of grant liability at end of year 10 of CU80,000)		20,000

Being journal to recognise liability for the repayment of the grant

Example 12: Repayment of grant – revenue grant – accruals model

Company A received a grant of CU50,000 for relocating to a premises that is situated in a disadvantaged location. The condition of the grant dictates that the Company must remain in the premises for a minimum of 3 years and if not the grant is fully repayable.

At the end of year 2, the company moved out.

As at the end of year 2, the repayment of the grant meets the definition of a liability as Company A has a present contractual obligation to repay the grant as a result of a past event (that being the receipt of the grant) that can be reliably measured reliably

Under the accruals model the journals required for the recognition of the liability is:

	CU	CU
Dr Profit and Loss	50,000
Cr Deferred Revenue/Grant Liability		50,000

Being journal to recognise liability for the repayment of the grant which was previously recognised in the P&L

Example 13: Repayment of grant – capital grant – performance model

Company A received a grant of CU100,000 towards the cost of constructing a factory. A condition of the grant is that the Company continues to utilise the manufacturing plant for a period of 20 years. If not then the full amount of the grant is repayable. The useful life of the plant itself is 50 years. Under the conditions of the grant the amount repayable if the 20 year condition is not met is reduced for every year the company stays in the factory.

At the end of year 10, the company made a decision to close the manufacturing plant. The carrying amount of the liability at that date was CU50,000 (i.e. CU100,000/20 yrs * 10 yrs).

Example 13A: Repayment of grant – capital grant – performance model

Company A received a grant of CU100,000 towards the cost of constructing a factory. A condition of the grant is that the Company continues to utilise the manufacturing plant for a period of 20 years. If not then the full amount of the grant is repayable. The useful life of the plant itself is 50 years. Under the conditions of the grant, if the company does not remain in the factory for 20 years the full grant is refundable.

At the end of year 10, the company made a decision to close the manufacturing plant.

Under the performance model the liability of CU100,000 is still on the balance sheet as it cannot be released until after 20 years, hence no further provision is required.

Example 14: Repayment of grant – revenue grant – performance model

At the end of year 2, the company moved out. At that date the carrying amount of the grant liability was CU16,667 as the grant is being released evenly over the three year period.

Example 15: Repayment of grant – revenue grant – performance model

Company A received a grant of CU50,000 for providing employment for 20 individuals. The condition of the grant dictates that the Company must maintain the employees in full time employment for a minimum of 3 years and if not the grant is fully repayable.

At the end of year 2, the company laid the employees off.

Under the performance model as the grant cannot be recognised until after the end of year 3, no journal is required as the grant of CU50,000 is already included on the balance sheet as a liability.

Example 16: Adoption of the performance model – revenue grant

Company A’s date of transition is 1 January 2014. The company received a revenue grant on 1 January 2013 of CU10,000 for the cost of employing 10 employees. A condition of the grant states that the employees must be kept on for a minimum of 2 years. Under old GAAP Company A recognised the full CU10,000 on the basis that the conditions of the grant were likely to be achieved and that the CU10,000 grant was set against the first years cost of the employees. Assume the grant was taxable when released in 2013 and the tax rate is 10%

A transition adjustment would be required as follows:

At 1 January 2014

	CU	CU
Dr Profit and Loss Reserves	10,000
Cr Deferred Revenue/Grant Liability		10,000

Being journal to recognise the deferral of the grant under the performance model as the grant cannot be recognised in the P&L until after 31 December 2015.

Dr Deferred Tax Asset

1,000

Cr Profit and Loss Reserves

(CU10,000*10%)

1,000

Being journal to reflect deferred tax for tax previously paid in 2013 assuming the grant was taxable.

Year ended 31 December 2014

No journals required other than the carry forward of the opening balance sheet journal above.

Year ended 31 December 2015

	CU	CU
Dr Deferred Revenue/Grant Liability	10,000
Dr Deferred Tax in P&L	1000
Cr Other Operating Income		10,000
Cr Deferred Tax Asset		1,000

Being journal to derecognise the grant liability and the related deferred tax as the performance conditions are met

Note a similar adjustment would be required if there was a grant received in year ended 31 December 2014.

Example 17: Adoption of the performance model – capital grant

Company A received a grant of CU100,000 towards the cost of constructing a factory 10 years prior to transition. Transition date is 1 January 2014. A condition of the grant is that the Company continues to utilise the manufacturing plant for a period of 20 years. The useful life of the plant itself is 50 years. Under old GAAP, the accruals model was used and the NBV of the grant liability at the transition date was CU80,000. The amortisation per year was CU2,000. Under the conditions of the grant the amount repayable if the 20 year condition is not met is reduced for every year the company stays in the factory. Assume the factory did not qualify for capital allowance purposes and therefore there is no deferred tax impact.

On transition to FRS 102 the following adjustments would be required:

	CU	CU
Dr Deferred Revenue/Grant Liability (CU80,000-CU50,000*)	30,000*
Cr Profit and Loss Reserves		30,000

Being journal to reflect correct opening balance utilising the performance model

*CU100,000/20 yrs being length of performance condition * 10 yrs being number of years left to the expiration of the performance condition= CU50,000. Therefore the adjustment required on transition is the CU80,000 carrying amount under old GAAP less this CU50,000.

Journal required for year ended 31 December 2014 assuming journals above are carried forward

Dr Deferred Revenue/Grant Liability

3,000

Cr Profit and Loss – Other Operating Income

(CU5,000-CU2,000)

3,000*

*Total yearly amortisation on the grant under the performance model is CU5,000 (CU100,000/20 yrs). The adjustment required is the CU5,000 less the CU2,000 charged in the 31 December 2014 TB under old GAAP

Journal required for year ended 31 December 2015 assuming journals above are carried forward through reserves.

The same journals will be required as 31 December 2014 above.

If the factory did qualify for capital allowances purposes the deferred tax would need to be recognized in the above journals.

Example 18: Reasonable that the conditions for the grant will be complied with

Company A’s date of transition is 1 January 2014. The company did not recognise a revenue grant on 31 December 2013 as all the conditions had not been complied with and therefore it could not be recognised under old GAAP however it was reasonable that all the conditions would be complied with. The grant was received during the 31 December 2014 year and was recognised at that date. Under FRS 102 this would have been allowed to be recognised as an asset on 1 January 2014. The grant was a revenue grant of CU10,000 for the cost of carrying out research. There were no conditions to be complied with on receipt of the grant as the work was performed. Under FRS 102, Company A should have recognised the full CU10,000 on the basis that the conditions of the grant were likely to be achieved and that the CU10,000 grant was set against the cost of the work. Assume the grant was taxable when released in 2014 and the tax rate is 10%

A transition adjustment would be required as follows:

At 1 January 2014

	CU	CU
Dr Receivable for Government Grant	10,000
Cr Profit and Loss Reserves		10,000

Being journal to recognise the receivable for the grant and the associated income

Dr Profit and Loss Reserves

(CU10,000*10%)

1,000

Cr Deferred Tax Liability

1,000

Being journal to reflect deferred tax for tax to be paid on this grant in the future.

31 December 2014 journals assuming the above journals were posted to reserves etc

	CU	CU
Dr Other Operating Income	10,000
Cr Receivable for Government Grant		10,000

Being journal to derecognise the receivable for the grant and set it against the grant recognised in the P&L under old GAAP as it has been recognised on transition under FRS 102

	CU	CU
Dr Deferred Tax Liability	1,000
Cr Deferred Tax in P&L		1,000

Being journal to reverse deferred tax on the grant receipt as it was taxed in 2014.

If a similar situation occurred at 31 December 2014 the journals included under the 1 January 2014 would be posted in 31 December 2014 year with the credit going to other operating income in the P&L. The 2015 journals would be the same as these shown at the 31 December 2014 in the example above.

Examples 19: Extract from an accounting policy note in the financial statements

EXAMPLE USING AN ACCRUALS MODEL

Government grants

Government grants are recognised at their fair value when it is reasonable to expect that the grants will be received and all related conditions will be met.

Grants that relate to specific capital expenditure are treated as deferred income which is then credited to the profit and loss account over the related asset’s useful (i.e. an accruals basis). Revenue grants are credited to the profit and loss account when receivable so as to match them with the expenditure to which they relate. Government grants received are included in ‘other income’ in profit or loss

EXAMPLE USING THE PERFORMANCE MODEL

Government grants are recognised when it is reasonable to expect that the grants will be received and all related conditions will be met.

Grants that relate to specific capital expenditure are treated as deferred income which is then credited to the profit and loss account once the performance conditions of the grant have been met. Revenue grants are credited to the profit and loss account when the performance conditions for the grant are fulfilled.

Example 20: Extract from the notes to the financial statements – note on government grants (capital grant)

DEFERRED INCOME – GOVERNMENT GRANTS


	2015	2015
	CU	CU
Capital grants received and receivable
At beginning of year	XXX	XXX
Received during the year (see (i) below)	XXX	XXX
At end of year	XXX	XXX

Capital grants amortised
At beginning of year	XX	XXX
Amortised during the year	XX	XXX
At end of year	XXX	XXX

Net book value	XXX	XXX

Under agreements between the Company and XXXX Development Authority dated on various dates between XX/XX and XXX, the Company has a contingent liability to repay in whole or in part grants received amounting to CUXXX if certain circumstances set out in those agreements occur within five years of receipt of the final instalment of each grant. The amounts received under these agreements amounted to CUXXXXX.

During the year the Company received a grant of CUXXXXX towards the construction of its factory.

Example 21: Extract from the notes to the financial statements – note disclosing contingent liabilities

Contingent liabilities

Under an agreement between the company and the Industrial Development Agency, the company has received certain revenue grants amounting to CUXXXX which may be revoked, cancelled or abated in certain circumstances.

Example 22: Extract from the notes to the financial statements – note disclosing grant amortisation and government grants received

THE PROFIT BEFORE TAXATION WAS ARRIVED AT AFTER CHARGING

	2015	2014
	CU	CU
Depreciation	149,999	170,037
Government grants – training grant	(212,000)	(225,600)

Grant amortisation	(1000)	(1,000)
Research and development tax credit	13,000	13,000

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