Reference no: EM132918603

Pinky and the Brain Ltd acquired an item of plan at a gross cost of $680,000 on October 20X2. The plant has an estimated life of 10 years with residual value equal to 15% of its gross cost. The company uses straight line depreciation charge on a time-apportioned basis. The company received a government grant of 30% of its cost price at the time of its purchase.

• The terms of the grant are that if the company retains the asset for four years or more, then no repayment liability will be incurred. If the plant is sold within four years a repayment on a sliding scale would be applicable. The repayment is 75% if sold within the first year of purchase and this amount decreases by 25% per annum.
• Pinky and the Brain Ltd has no intention to sell the plant within the first four years. The company's accounting policy for capital based government grants is to treat them as deferred credits and release them to income over the life of the asset to which they relate.

Required:

Problem a. Discuss whether the company's policy for the treatment of government grants meets the definition of a liability in the IASB's Framework.

Problem b. Prepare extracts of the Pinky and the Brain Ltd financial statement for the year to 31 March 20X3 in respect of the plant and related grant applying the company's policy, and in compliance with the definition of the liability in the Framework. Your answer should consider whether the sliding scale repayment should be used in determining the deferred credit for the grant.