Accounting for Government Grants and Disclosure of Government Assistance (IAS 20) specifies the requirements for recogni
Posted: Thu May 26, 2022 8:13 am
Accounting for Government Grants and Disclosure of Government
Assistance (IAS 20) specifies the requirements for recognizing as
income any grants received from government agencies, as well as any
repayments of such grants. Jaleel plc (Jaleel) applied to a
government agency on January 1, 2020, for a grant to help with the
construction of a factory in the West Bank area of al-Aghwar.
The factory's projected construction cost was $26 million, and
the firm estimated that it would employ 250 employees upon
completion. Jaleel already owned the land. On March 1, 2020, the
government agency proposed a grant of up to $6.5 million, or 25% of
the factory's construction costs. The grant funding was to be paid
upon completion and repaid on demand if total employment at the
factory fell below 225 employees within five years of completion.
At the end of the fiscal year, 31 March 2020, Jaleel had accepted
the offer of grant and had signed contracts for the $26 million
factory's construction. Construction work was scheduled to begin on
April 1, 2020. By March 31, 2021, the factory had been finished on
time, 275 people had been hired and were ready to begin
manufacturing activities, and the government agency had agreed that
the conditions for drawing down the grant had been met. The factory
officially opened on April 1, 2021. It was estimated that it would
have a useful economic life of ten years. The government agency
paid more than the agreed-upon $6.5 million on June 1, 2021.
Furthermore, the company requested and received a $0.5 million
employment incentive because employment exceeded initial forecasts.
This is planned to be paid annually for a total of five years, at a
cost of $10,000 for each additional person employed over 225 in
each year. The employment grant contains no repayment provisions.
Jaleel's directors anticipate that employment will reach 350
workers for at least four years beginning March 31, 2022.
Required:
(a) Discuss how Jaleel plc should record the above transactions
and events in its financial statements for the fiscal years ended
31 March 2020, 2021, and 2022, including computations and journal
entries where appropriate.
(b) Specify what accounting adjustments would be required if it
became clear on March 31, 2023, that employment at the factory will
drop below 225 persons.
Assistance (IAS 20) specifies the requirements for recognizing as
income any grants received from government agencies, as well as any
repayments of such grants. Jaleel plc (Jaleel) applied to a
government agency on January 1, 2020, for a grant to help with the
construction of a factory in the West Bank area of al-Aghwar.
The factory's projected construction cost was $26 million, and
the firm estimated that it would employ 250 employees upon
completion. Jaleel already owned the land. On March 1, 2020, the
government agency proposed a grant of up to $6.5 million, or 25% of
the factory's construction costs. The grant funding was to be paid
upon completion and repaid on demand if total employment at the
factory fell below 225 employees within five years of completion.
At the end of the fiscal year, 31 March 2020, Jaleel had accepted
the offer of grant and had signed contracts for the $26 million
factory's construction. Construction work was scheduled to begin on
April 1, 2020. By March 31, 2021, the factory had been finished on
time, 275 people had been hired and were ready to begin
manufacturing activities, and the government agency had agreed that
the conditions for drawing down the grant had been met. The factory
officially opened on April 1, 2021. It was estimated that it would
have a useful economic life of ten years. The government agency
paid more than the agreed-upon $6.5 million on June 1, 2021.
Furthermore, the company requested and received a $0.5 million
employment incentive because employment exceeded initial forecasts.
This is planned to be paid annually for a total of five years, at a
cost of $10,000 for each additional person employed over 225 in
each year. The employment grant contains no repayment provisions.
Jaleel's directors anticipate that employment will reach 350
workers for at least four years beginning March 31, 2022.
Required:
(a) Discuss how Jaleel plc should record the above transactions
and events in its financial statements for the fiscal years ended
31 March 2020, 2021, and 2022, including computations and journal
entries where appropriate.
(b) Specify what accounting adjustments would be required if it
became clear on March 31, 2023, that employment at the factory will
drop below 225 persons.