On 1 October 2016, the Government of Ghana awarded Sea Fishing Ltd one of six licences issued to operate a production facility for five years. A subsidised sum of GH¢1m was paid by Sea Fishing Ltd for the licence. The Government of Ghana considers the difference between the nominal value and its fair value which is GH¢3,000,000 as a grant to Sea Fishing Ltd.
Required:
Explain the TWO ways that the Directors of Sea Fishing Ltd can account for this transaction. (Apply the relevant accounting standards). (4 marks)
View Solution
The licence is a purchased intangible asset, financed in part by a government grant.
- Cost of asset is GH¢3 million and government grant is GH¢2 million
It can be accounted for in one of two ways:
- The asset is recorded at the nominal price (cash paid) of GH₵1,000,000 and depreciated at GH₵200,000 per annum over its 5 year life; or
- The asset is recorded at its fair value of GH₵3,000,000 and a government grant is shown as deferred income at GH₵2,000,000. The asset is depreciated over 5 years at annual rate of GH₵600,000 per annum. The grant is amortised as income through profit or loss over the same period at a rate of GH₵400,000 per annum.
This results is the same net cost of GH₵200,000 in profit or loss per annum as the first method. The Relevant Standards are IAS 38 and IAS 20.
NB: Candidates may also prepare extracts of Statement of Profit or Loss and Statement of Financial Position to explain the treatment of the government grant.