Suspension of capitalisation BORROWING COSTS

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