Tango Ltd, a manufacturer and supplier of cashew products, has recently established a new facility in Damongo. To help in this new operation, Tango Ltd has secured support from the Government of Ghana 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 GH¢150,000 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 GH¢85,000 per annum, for establishing a manufacturing company in the area was to provide employment for the youth.
iii) Tango Ltd receives a grant of GH¢300,000 towards the acquisition of a machine costing GH¢500,000. 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 Tango Ltd for the year ended 30 April 2021, in accordance with IAS 20: Accounting for Government Grants and Disclosure of Government Assistance. (6 marks)
View Solution
i) This is a grant related to income. As the purchase expense has already been incurred, the grant should be released to profit or loss in full in the period the grant is received. (1mark)
ii) The tax relief is government assistance received. This should be disclosed as a note to the financial statements. (1 mark)
iii) This is a grant related to an asset. The grant should be matched against the associated cost. There are two acceptable accounting approaches in this situation. (1 mark)
iv)
Option 1. Deduct the grant from the asset cost so that the asset is recorded at GH¢ 200,000, the net cost. (1 mark)
Option 2. Record the asset at its total cost of GH¢500,000 and take the grant to the statement of financial position as deferred income. The deferred income is then released to profit and loss over the useful life of the asset. The effect is to reduce the depreciation charge. (2 marks)