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Solution
Applying the principle outlined in the Standard for recognition of the grant, that is, recognizing the grant as income “over the period which matches the
costs” using a “systematic and rational basis” (in this case, sum-of-the-years’ digits amortization), the total grant would be recognized as
Year Grant recognized
1 $ 60 × (2/30) = $ 4 million
2 $ 60 × (4/30) = $ 8 million
3 $ 60 × (6/30) = $12 million
4 $ 60 × (8/30) = $16 million
5 $ 60 × (10/30) = $20 million
Principle 2: “Grants related to depreciable assets are usually recognized as income over the periods and in the proportions in which
depreciation on those assets is charged.”
Facts
CASE STUDY 2
Intelligent Corp. received a grant of $150 million to install and run a windmill in an economically backward area. Intelligent Inc. has estimated that such a
windmill would cost $250 million to construct. The secondary condition attached to the grant is that the entity should hire labor in the local market (i.e.,
from the economically backward area where the windmill is located) instead of employing workers from other parts of the country. It should maintain a
ratio of 1:1 local workers to workers from outside in its labor force for the next five years. The windmill is to be depreciated using the straight-line method
over a period of ten years.
Required
Advise Intelligent Corp. on the treatment of this grant in accordance with IAS 20.
Solution
The grant received by Intelligent Corp. will be recognized over a period of ten years. In each of the ten years, the grant will be recognized in proportion to
the annual depreciation on the windmill. Thus $15 million will be recognized as income in each of the ten years. With regard to the secondary condition of
maintenance of the ratio of 1:1 in the labor force, this contingency would need to be disclosed in the footnotes to the financial statements for the next five
years (during which period the condition is in force), in accordance with disclosure requirements of IAS 37.
Principle 3: “Grants related to nondepreciable assets may also require the fulfillment of certain obligations and would then be recognized as income over
periods which bear the cost of meeting the obligations.”
Facts
CASE STUDY 3
Citimart Inc. was granted 5,000 acres of land in a village, located near the slums outside the city limits, by a local government authority. The condition
attached to this grant was that Citimart Inc. should clean up this land and lay roads by employing laborers from the village in which the land is located. The
government has fixed the minimum wage payable to the workers. The entire operation will take three years and is estimated to cost $100 million. This
amount will be spent in this way: $20 million each in the first and second years and $60 million in the third year. The fair value of this land is currently
$120 million.
Required
Based on the principles laid down for accounting and recognition of grants, how should this grant be treated in the books of Citimart Inc.?