PRACTICAL ACCOUNTING 1

GOVERNMENT GRANTS – Lecture

Government grants are assistance provided by government by transfer of resources (either monetary or non-monetary)
to entities in return for past or future compliance with conditions relating to the operating activities of the entity. They
exclude that form of government assistance which cannot reasonably have a value placed upon them and transactions
with government which cannot be distinguished from the normal trading transactions of the enterprise.

Recognition of Government Grants:

Government grants are provided in return for past or future compliance with certain conditions. Thus grants should not
be recognized until there is reasonable assurance that both
a) The entity will comply with the conditions attaching to the grant; and
b) The grant(s) will be received

Period of Recognition:
Government grants should be recognized as income over the periods necessary to match them with the related costs,
which they are intended to compensate, on a systematic and rational basis. They should not be credited directly to
shareholders/ interests.

Additional Principles Laid Down for Recognition of Grants:

a) Grants in recognition of specific costs are recognized as income over the same period as the relevant expense.
b) Grants related to depreciable assets are usually recognized as income over the periods and in the proportions in
which depreciation on those assets is charged.
c) Grants related to non-depreciable assets may also require the fulfilment of certain obligations and would then be
recognized as income over periods, which bear the cost of meeting the obligations. As an example, a grant of land
may be conditional upon the erection of a building on the site and it may be appropriate to recognize it as income
over the life of the building.
d) Grants are sometimes received as part of a package of financial or fiscal aids to which a number of conditions are
attached. In such cases, care is needed in identifying the conditions giving rise to costs and expenses, which
determine the periods over which the grant will be earned. It may be appropriate to allocate part of a grant on one
basis and part on another.

Measurement of Government Grants:

Government Grants are measured at the fair value of grants received of receivable.

Presentation of Government Grants:

a) For grants related to assets – should be presented in the balance sheet either by setting up the grant as deferred
income or by deducting the grant in arriving at the carrying amount of the asset.
b) For grants related to Income – are sometimes presented as a credit in the income statement, either separately
or under a general heading such as “Other Income”, alternatively, they are deducted in reporting the related
expense.

Repayment of Government Grants:

A government grant that becomes repayable should be accounted for as a revision to an accounting estimate.
Repayment of a grant related to income should be applied first against any unamortized deferred credit set up in
respect of the grant. To the extent that the repayment exceeds any such deferred credit, or where no deferred credit
exists, the repayment should be recognized immediately as an expense.

Increasing the carrying amount of the asset or reducing the deferred income balance by the amount repayable
should record repayment of grant related to an asset. The cumulative additional depreciation that would have been
recognized to date as an expense in the absence of the grant should be recognized immediately as an expense.

Differences between IFRS for SMEs and FULL IFRS

IFRS for SMEs
A different model is applied for the accounting of
government grants based on future performance
No provision that grants may be deducted from the
carrying amount of the related asset.
No requirement to disclose the accounting policy
Full IFRS
The accounting model depends on whether it relates to
expenses and assets
Grants related to an asset may be deducted from the
carrying amount of the asset
Accounting policy must be disclosed
PRACTICAL ACCOUNTING 1

AGRICULTURE-Lecture

1. Definition of terms:
Biological assets –living plants and animals
Agricultural produce – the harvested product of the entity’s biological assets.
Biological transformation – relates to the processes of growth, degeneration and production that can cause
changes of quantitative or qualitative nature in a biological asset.
a. Asset changes through
 Growth (increase in quantity or improvement in quality of an animal or plant)
 Degeneration (a decrease in the quantity or deterioration in quality of an animal or plant) or
 Procreation (creation of additional living animals or plants)
b. Production of agricultural produce such as latex, tea leaf, wool, and milk.

Agricultural activity – is the management by an entity of the biological transformation of biological assets for sale,
into agricultural produce, or into additional biological assets, such as the following:
a. Raising livestock e. Cultivating orchards and plantations
b. Forestry f. Floriculture
c. Annual of perennial cropping g. Aquaculture (including fish farming)
d. Cultivating

A group of biological assets – is an aggregation of similar living animals or plants.

Harvest – is the detachment of produce from a biological asset or the cessation of a biological asset’s life
processes.
2. Examples of biological assets, agricultural produce, and products that are the result of processing after harvest:
Biological Assets Agricultural Produce Products that are the result of
processing after harvest
Sheep Wool Yarn, carpet
Trees in plantation forest Logs Lumber
Plants Cotton Thread, clothing
Harvested cane Sugar
Dairy cattle Milk Cheese
Pigs Carcass Sausages
Bushes Leaf Tea, cured tobacco
Vines Grapes Wine
Fruit trees Picked fruit Processed fruit

3. Recognition
An entity shall recognize a biological asset or agricultural produce when and only when:
a. The entity controls the asset as a result of past events.
b. It is probable that future economic benefits associated with the asset will flow to the entity, and
c. The fair value or cost of the asset can be measured reliably.

4. Measurement
Biological asset – shall be measured on initial recognition and at each balance sheet date at its Fair Value less
estimated point of sale costs. If the fair value cannot be measured reliably, it shall be measured at cost less any
accumulated depreciation and any impairment losses. Once the fair value of the biological asset becomes reliably
measurable, the entity shall measure at its fair value less estimated point of sale costs.

Agricultural produce harvested from entity’s biological assets – shall be measured at its fair value less estimated
point of sale costs at the point of harvest.

Point-of-sale costs include commissions to brokers and dealers, levies by regulatory agencies and commodity
exchanges, and transfer taxes and duties. Point-of-sale costs exclude transport and other costs necessary to the
asset to a market.

The determination of fair value for a biological asset or agricultural produce may be facilitated by grouping
biological assets or agricultural produce according to significant attributes; for example, by age or quality. An entity
selects the attributes corresponding to the attributes used in the market as a basis for pricing.
PRACTICAL ACCOUNTING 1 Agriculture-lecture
Entities often enter into contracts to sell their biological assets or agricultural produce at a future date. Contract
prices are not necessarily relevant in determining fair value, because fair value reflects the current market in which
a willing buyer and seller would enter into a transaction. As a result, the fair value of a biological asset or
agricultural produce is not adjusted because of the existence of a contract. In some cases, a contract for the sale of
a biological asset or agricultural produce may be an onerous contract, as defined in PAS 37.

If an active market exists for a biological asset or agricultural produce, the quoted price in that market is the
appropriated basis for determining the fair value of that asset. If an entity has access to different active markets,
the entity uses the most relevant one. For example, if an entity has access to two active markets, it would use the
price existing in the market expected to be used.

If an active market does not exist, an entity uses one or more of the following when available, in determining fair
value:
a) The most recent market transaction price provided that there has not been a significant change in economic
circumstances between the date of that transaction and the balance sheet date;

b) Market prices for similar assets with adjustment to reflect differences

c) Sector benchmarks such as the value of an orchard expressed per export tray, bushel or hectare, and the value
of cattle expressed per kilogram of meat.

5. Inability to measure fair value reliably:

There is a presumption that fair value can be measured reliably for a biological asset. However, that presumption
can be rebutted only on initial recognition for a biological asset for which market-determined prices or values are
not available and for which alternative estimates of fair value are determined to be clearly unreliable. In such a
case, that biological asset shall be measured at its cost less any accumulated depreciation and any impairment
losses. Once the fair value of such biological asset becomes reliably measurable, an entity shall measure it at fair
value less estimated point-of-sale costs. Once a non-current biological asset meets the criteria to be classified as
held for sale ( or is included in a disposal group that is classified as held for sale ) in accordance with PFRS 5 Non-
current assets held for sale and discontinued operation, it is presumed that fair value can be measure reliably.

6. Gains and losses

A gain or loss arising on initial recognition of a biological asset at fair value less estimated point of sale costs and
from a change in fair value less estimated point of sale costs of a biological asset shall be included in profit or loss
for the period in which it arises. (PAS 41, Par. 26)

A loss may arise on initial recognition of a biological asset, because estimated point-of-sale costs are deducted in
determining fair value less estimated point-of-sale costs of a biological asset. A gain may arise on initial recognition
of a biological asset, such as when a calf is born. (PAS 41, Par. 27)

A gain or loss arising on initial recognition of agricultural produce at fair value less estimated pint of sale costs shall
be included in profit or loss for the period in which it arises. (PAS 41, Par. 28)

A gain or loss may arise on initial recognition of agricultural produce as a result of harvesting. (PAS 41, Par. 29)

7. Point of sale cost include the following

a. commission to brokers and dealers
b. levies by regulatory agencies and commodity exchanges
c. transfer taxes and duties

8. Differences between IFRS for SMEs and FULL IFRS

IFRS for SMEs
An undue cost and effort test included for the
determination of fair values of biological assets
No specific statement that fair value changes on the
initial recognition of biological assets must be recognized
in profit or loss
Fewer disclosures related to biological assets
Full IFRS
The fair value measurability for biological assets is
presumed
Fair value changes on the initial recognition of biological
assets must be recognized in profit or loss
More disclosure requirements