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Chapter 6

MFRS 120 Government

.Government Grant • MFRS 120 defines Government Grants as the assistance provided by the government in the form of transfer of resources to a company in return for past or future compliance with certain conditions relating to the operating activities of the company. • They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions of the entity.

This approach is in line with the accrual concept.Two approaches to accounting for GG • Capital approach – under this approach the grant is directly credited to shareholder’s interest. • Income approach – under this approach the grant is credited to the income statement over one or more periods. • MFRS120 only permits income approach. .

Capital approach  Grant is directly credited to shareholders’ interest.Accounting for government grants 1. MFRS 120 permits income approach . Income approach  Grant is credited to the income statement over one or more periods. 2.

MFRS 120 Grants can be categorised into two groups: • Government grant related to assets • Government grant related to income .

construct or acquire non-current assets. • E. Grant received to buy an tableting machine for Pharmacy Faculty or to buy a university building . They may come with conditions which restrict the type or location of the assets or the period during which they are to be acquired or held.Government grant related to assets • Grants related to assets are grants given to an entity to help purchase.g.

.Government grant related to income • Grants related income are the grants that are not related to assets • For example XYZ College received grant to subsidize tuition fees of the students.

and that the grant will be received. and • the grants will be received. A government grant is not recognized until there is reasonable assurance that the entity will comply with the conditions attaching to it.Recognition of Grant Government grants. including non-monetary grants at fair value. . shall not be recognized until there is reasonable assurance that: • the entity will comply with the conditions attaching to them.

Categories of Grants Grants related to assets ● ● Deferred income (Deferred credits) or Write off against asset Grants related to income ● Credit in income statement or ● Deduction against related expense .

It is the policy of New TM Bhd to depreciate all equipment over five years. .000 for equipment which costs RM1million. Required Prepare the statement of financial position extracts to record the grant in the first year using both the methods mentioned above.Grant related to assets –Deferred Income New TM Bhd opens a new factory and receives a government grant of RM150.

000 RM Cash grant 150.000 .000 Balance c/d 120.Government Grant (Year 1) RM Statement of Comprehensive Income (20% x RM150.Deferred Income.000 classified as Deferred Income in the Statement of Profit or Loss and Other Comprehensive Income 150.000) 30.000 150.000 RM30.

000 Current liabilities Deferred government grant income 30.000 800.Statement of Financial Position (extract) for the Year 1 RM Non-current asset Equipment Less: Accumulated Depreciation (RM1.000 Non-current liabilities Deferred government grant income (120.000) 90.000 x 20%) 1.000 200.000 .000.000.000 -30.

000 x 20%) 170.000 .000 680.000 Less: Accumulated Depreciation (RM850.Write off against asset method • By deducting the grant from the asset’s carrying amount RM Non-current asset Equipment (1.000 – 150.000.000) 850.

• The first alternative is to present the grant as a credit item in the statement of comprehensive income ( such as other income) • The other alternatives is to deduct the grant in reporting the related .Grants Related to Income There are two alternatives to presenting the grants related to income.

• Treatment depends on how the repayment is made: – If repayment of grant is related to income • It should be applied first against any unamortised deferred income. • Any excess should be recognised immediately as an expense. . • The cumulative additional depreciation that would have been recognised to date as an expense in the absence of the grant should be recognised immediately as an expense.Revocable/Repayable Grants • A government grant that has been revoked (cancel) or becomes repayable should be treated as a revision of an accounting estimate. – If repayment of grant is related to asset • It should be recorded by increasing the carrying amount of the asset or reducing the deferred income balance by the amount repayable.

• Examples of such assistance whose value cannot be reasonably measured are technical or marketing advice and provision of guarantees.Government Assistance • Definition of government assistance: ‘Action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria’ • Does not include benefits provided only indirectly through action affecting general trading conditions. such as the provision of infrastructure in development areas or the imposition of trading constraints on competitors. .’ • Not quantified and introduced into the financial statements.

Unfulfilled conditions and other contingencies attached to government assistance that has been recognised. Nature and extent of government grants recognised in the financial statements and other forms of government assistance received 3. including the methods of presentation adopted in the financial statements 2. .Disclosures 1. Accounting policy adopted for government grants.