NAS 20 – ACCOUNTING OF GVERNMENT GRANTS AND
DISCLOSURE OF GOVERNMENT ASSISTANCE
Q1 Government gives a grant of Rs. 1,000,000 for research and development of
CV vaccine to Pharma Ltd even though similar vaccines are available in market
but are expensive. The entity has to ensure by developing a manufacturing
process over a period of 2 year that the costs come down by at least 40%.
Examine how the government grant be recognized.
Q2 A Ltd received from the government loan of Rs. 5,000,000 @ 5% payable after
5 years in a bulleted payment. The prevailing market rate of interest is 12%. Interest
is payable regularly at the end of each year. Calculate the amount of
government grant and pass necessary journal entries. Also examine how the
government grant be recognized.
Q3 XYZ Ltd has received the following grants from the Government of Nepal for
its newly started pharmaceutical company:
- Rs. 20 lakhs received for immediate start of business without any condition.
- Rs. 50 lakhs received for research and development of drugs required for the
treatment of cardiovascular disease with the condition that drug should be in
accordance with the quality prescribed by WHO.
- Two acres of land (Fair Value: Rs. 10 lakhs) received for plant set up.
- Rs. 2 lakhs received for purchase of machinery of Rs. 10 lakhs. Useful life of
machinery is 5 years. Depreciation on this machinery is to be charged on
straight line basis.
How should ABC Ltd recognize the government grants in its books of account?
Q4 A Ltd purchased fixed assets for Rs. 10 lakhs for which it got grants from an
international agency Rs. 8 lakhs. X Ltd decides to treat the grant as deferred
income. Suggest appropriate basis for taking credits of the grant to Profit and Loss
A/c. Take life of the assets 10 years. The company followed W.D.V method. Scrap
value Rs. 2.5 lakhs. Depreciation rate 12.95%.
Q5 Explain the treatment of the following:
(i) A firm acquired a fixed asset for Rs. 250 lakhs on which the government
grant received was 40%.
(ii) Capital subsidy received from the central government for setting up a plant
in the notified backward region. Cost of the plant Rs. 300 lakhs, subsidy
received Rs. 100 lakhs.
(iii) Rs. 50 lakhs received from the state government for the setting up of water-
treatment plant.
(iv) Rs. 25 lakhs received from the local authority for providing medical facilities
to the employees.
Q6 A manufacturing company has a turnover of Rs. 45 crores and net pre-tax
profit of Rs. 6 crores The Company’s financial year ends on 31st March, 2015.
Company’s policy is to treat grants received in respect of fixed assets as deferred
income and to deduct all grants identified as relating to specific revenue
expenditure against that expenditure. All other grants recognized are credited to
profit and loss account. Answer the following questions.
(a) During the year the company received a grant from the Defense
Department of Government of Nepal for Rs. 300,000 towards the cost of new
equipment. The equipment has an estimated useful economic life of ten years
and cost Rs. 700,000. Company’s policy is to depreciate all depreciable assets by
the straight line method.
(b) In December, 2004 the company spent Rs. 70,000 on training, in respect of
which it is due to receive government grant of 50%. The grant formalities have
been completed but payment is not expected until mid-June.
(c) In October, 2005 a grant of Rs. 40,000 was received from the government
in recognition of the high quality that the company’s production has maintained
over the five years, which had ended on 31st March, 2005 the previous year.
Q7 On 01.04.2011 XYZ Ltd received government grant of Rs. 300 lakhs for
acquisition of a machinery costing Rs. 1500 lakhs. The grant was credited to the
cost of asset. The life of the machinery is 5 years. The machinery is depreciated at
20% on WDV basis. The Company had to refund the grant in May 2014 due to non-
fulfillment of certain conditions.
How would you deal with the refund of grant in the books of XYZ Ltd?
Q8 The following issue has arisen during the preparation of War’s draft financial
statement for the year ended 31st March, 2017.
On 1st April, 2016 War Ltd received a government grant of Rs. 8 million towards the
purchase of new plant with a gross cost of Rs. 64 million. The plant has an
estimated life of 10 years and is depreciated on a straight line basis. One of the
terms of the grant is that the sale of plant before 31st March, 2021would trigger a
repayment on a sliding scale as follows:
Sale in the year ended Amount of repayment
31st March, 2017 100%
31 March , 2018
st 75%
31 March, 2019
st 50%
31 March, 2020
st 25%
Accordingly, the directors propose to credit to the statement of profit or loss Rs. 2
million (Rs. 8 million*25%) being the amount of the grant they believe has been
earned in the year to 31st March, 2017. War Ltd accounts for government grant
as a separate item of deferred credit in its statement of financial position. War Ltd
has no intention of selling the plant before the end of its economic life.
Advise, whether the treatments made by War Ltd is correct.
