As provided in the pre-accession strategy, one of the ways in which the European Union supports the development of Candidate States is by co-financing projects for small and medium sized enterprises. Assume that on December 5th, 20X3, Construct SRL is awarded a grant of 5000 euros through the EU

Question

As provided in the pre-accession strategy, one of the ways in which the European Union supports the development of Candidate States is by co-financing projects for small and medium sized enterprises. Assume that on December 5th, 20X3, Construct SRL is awarded a grant of 5000 euros through the EU programme for the purchase of a micro rolling mill for small steel structures. Construct SRL orders the equipment the same day. The grant is received in the company’s bank account on December 20th, 20X3. Acquisition and installation costs of the rolling mill amount to 10,000 euros as shown in the manufacturer’s invoice dated December 20th 20X3. The invoice is paid immediately.

The rolling mill is ready for use in January, 20X4. How should
Construct SRL account for the grant and the related transactions?

Accepted Answer

a) The company intends to use the grant for the purpose it has been awarded and there is reasonable assurance that the grant will be received (all previously awarded grants have reached their recipients).
Upon issue by the EU authority, the company recognises the investment grant at the exchange rate on December 5th, 20X3:
5000 euros * 3.6 lei/euro = 18,000 lei

18,000 lei Investment grants receivable = Investment grants (Deferred revenue) 18,000 lei

b) On December 20th, the amount of the grant is transferred to the company’s bank account. In the company’s Cash in Foreign Currency account the amount is exchanged for lei (exchange rate 3.63 lei/euro):

18,150 lei Bank account in foreign currency = % 18,150lei

Investment grants receivable 18,000 lei
Exchange gain 150 lei

c) The company receives the micro rolling mill and the invoice from its manufacturer, ElectricWerk NV, on December 20th (exchange rate 3.63 lei/euro). The amount payable is translated in lei at the spot exchange rate:
10,000 euros * 3.63 lei/euro = 36,300 lei

36,300 lei Equipment = Current asset suppliers 36,300 lei

d) The equipment is exempted from customs tax, but not from VAT, which must be paid on imported goods at the rate of 19% (36,300 lei * 19%).

6897 lei VAT deductible = Cash 6897 lei

e) Construct SRL immediately pays 10,000 euros to the manufacturer of the equipment.
10,000 euros * 3.63 lei/euro = 36,300 lei

36,300 lei Non-current asset suppliers = Cash in foreign currency 36,300 lei

Extract from the Profit and Loss Account for the year 20X3
Exchange gain 150 lei
Extract from the Balance Sheet as of December 31st, 20X3

Non-current assets	Cost	Accumulated depreciation	Carrying amount
Equipment	36,300 lei	–	36,300 lei
Deferred revenues
Investment grants	18,000 lei

f) and g) Construct SRL estimates a useful life of 10 years and a straight-line depreciation pattern. As the rolling mill is ready for use in January 20X4, parallel to accounting for the depreciation of the rolling mill, the company amortises the investment grant. The Profit and Loss Account of the year 20X4 will thus only show the company’s contribution towards the cost of the equipment spread over the useful life, that is:

36,300/10–18,000/10 = 1830 lei

3630 lei Depreciation expense = Accumulated depreciation of equipment 3630 lei

1800 lei Investment grants (deferred revenue) = Revenue from investment grants 1800 lei

Extract from the Profit and Loss Account for the year 20X4 (lei)
Revenue from investment grants 1800 lei
Depreciation expense (3630) lei

Extract from the Balance Sheet as of December 31st, 20X4 (lei)

Non-current assets	Cost	Accumulated depreciation	Carrying amount
Equipment	36,300 lei	3630 lei	32,670 lei
Deferred revenues
Investment grants	16,200 lei

Alternatively, under the second option provided by IAS 20, the company could have deducted the grant from the acquisition cost of the asset. Entries a) through e) remain unchanged.
f) A different carrying amount of the asset emerges:

18,000 lei Investment grants = Equipment 18,000 lei

Extract from the Profit and Loss Account for the year 20X3 (lei)
Exchange gain 150 lei
Extract from the Balance Sheet as of December 31st, 20X3 (lei)

Non-current assets	Cost	Investment grant	Carrying amount
Equipment	36,300 lei	(18,000) lei	18,300 lei

g) As the equipment is ready to use in January 20X4, the carrying amount of 18,300 lei (36,300 − 18,000) will be depreciated from the estimated useful life, resulting in an annual depreciation charge of:
(36,300 − 18,000)/10 = 1830 lei

1830 lei Depreciation expense = Accumulated depreciation of equipment 1830 lei

Extract from the Profit and Loss Account for the year 20X4 (lei)
Depreciation expense (1830) lei
Extract from the Balance Sheet as of December 31st, 20X4 (lei)

Non-current assets	Cost	Accumulated depreciation	Carrying amount
Equipment	36,300 lei	3630 lei	32,670 lei

Question 6.24: As provided in the pre-accession strategy, one of the ways i...

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