When should capitalisation of borrowing costs commence?

Chapter 9 – Government Grants Page 115 given to provide immediate financial support and there are no future related expenses expected to be incurred. [IAS 20.20]

4.1 Non-monetary government grants

Where a grant is received in the form of a non-monetary asset i.e. not in the form of cash it is usual to recognise both the grant and the asset at fair value although nominal value is also permitted as an alternative. Illustration 1 The following government grants should be recognised in profit or loss of the relevant entities according to IAS 20 as follows: 1 The government makes a grant to a start-up entity writing teaching software for children with learning difficulties. The purpose of the grant is to help with general financing on start up, and there are no further conditions attaching to the grant. The grant should be recognised in full immediately that it is receivable. This grant has been provided for the purpose of giving immediate financial support to the entity. 2 A manufacturing entity sets up a plant in an area of high unemployment. A grant of CU4 million is receivable if it continues to employ at least 100 people over a period of four years. It is highly probable it will do so. CU2 million of the grant is to be received immediately and a further CU2 million is receivable in four years’ time. Since there is reasonable assurance that the conditions attaching to the grant will be met, the grant is recognised as income evenly over the four year period in which the entity incurs the costs of employing the 100 people. 3 An agricultural research entity is given land that belonged to the government to set up a new laboratory and to investigate new farming methods. This is a grant related to a non-monetary asset and, as such, it should probably be recognised when the costs of constructing the laboratory are incurred. Treatment will depend on the specific circumstances and whether there are conditions relating to the gift of land. 4 Free technical advice is provided by government employees to help an export entity to market its new technology in North America. Free technical advice is likely to be a grant that cannot reasonably have a value placed upon it and therefore should not be recognised. Chapter 9 – Government Grants Page 116 5 Government Grants Related to Assets and Income: Presentation

5.1 Grants related to assets

Government grants related to assets are those provided so that an entity can acquire or construct specific long-term assets. [IAS 20.3] In such circumstances the grant should be presented in the statement of financial position, either by recognising the grant as deferred income and systematically recognising it in profit or loss over the assets’ useful life or by deducting the grant netting it off directly from the assets’ carrying amount. The netting off approach equally recognises the grant in profit or loss over the period of use of the asset by reducing the amount of depreciation charged. [IAS 20.24] This treatment is also appropriate for the receipt of non-monetary grants measured at fair value. [IAS 20.24] Illustration 2 An entity purchased an item of equipment for CU100,000 on 1 January 2007. It will depreciate this machinery on a straight-line basis over its useful economic life of five years, with a zero residual value. Also on 1 January 2007, the entity received a government grant of CU10,000 to help finance this equipment. Under the netting-off method the grant and the equipment should be shown in the statement of comprehensive income for the year to 31 December 2007 and in the statement of financial position at that date as follows: Statement of financial position CU Property, plant and equipment Cost 90,000 CU100,000 less grant of CU10,000 Depreciation 18,000 CU90,000 5 years Carrying amount 72,000 Statement of comprehensive income Expense: Depreciation CU18,000 Under the deferred income method the grant and the equipment should be shown in the statement of comprehensive income for the year to 31 December 2007 and in the statement of financial position at that date as follows: Statement of financial position CU Property, plant and equipment Cost 100,000 Depreciation 20,000 CU100,000 5 years Carrying amount 80,000 Deferred income 8,000 CU10,000 less amount recognised in profit or loss in year of CU2,000