AccountingQA Latest Questions

AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Before answering the question let’s understand what a government grant is. Meaning of government grants Government grants are the assistance provided by the government in cash or kind to any enterprise for any past or future compliance. This assistance can be subsidies, cash incentives, duty drawbacRead more

    Before answering the question let’s understand what a government grant is.

    Meaning of government grants

    Government grants are the assistance provided by the government in cash or kind to any enterprise for any past or future compliance. This assistance can be subsidies, cash incentives, duty drawback, or assets provided at concessional rate or at no cost etc.

    These grants when provided have some rules and conditions attached to them. If such conditions are not fulfilled or rules are violated, the grant becomes refundable to the government.

    Treatment

    AS-12 ‘Government Grant’ provides two approaches  for the treatment of government grants in the books of accounts of an enterprise:

    • Income approach: Under this approach, the grant is treated as income and taken to profit and loss A/c in one or more accounting periods.

    For example, X Ltd purchase an asset for ₹ 10,00,000 and the government provided a grant of ₹2,00,000 to X Ltd. The useful life of the asset is 4 years and the residual value is nil.

    Now there are two methods to treat this grant as income.

    Method – 1:  The grant amount will be deducted from the asset’s value. This will result in a decreased amount of depreciation. This is an indirect way to recognize government grants as income.

    The journal entries are as follows: (Method-1)

    The journal entries for the 3rd and the 4th years will be the same as of 2nd year.

    In absence of a government grant, the annual depreciation would have been ₹2,50,000 (₹10,00,000 / 4). Hence, due to the grant, the profit will be 50,000 more for the 4 consecutive accounting years.

    Method – 2: The grant amount is credited to a special account called the ‘deferred government grant’ account. Over the useful life of the asset, the grant will be credited to the profit and loss account in equal instalments. This is a direct way to recognize government grants as income.

    The journal entries are as follows: (Method-2)

    The journal entries for the 3rd and the 4th years will be the same as of 2nd year.

    • Capital approach: Under this approach, the grant is treated as part of the shareholders’ funds (as capital reserve)

    When any grant is given is in nature of promoter’s contribution i.e. as a percentage of total investment to be done by an enterprise, and then such grant received from government will be treated as part of shareholder’s funds.

    The grant amount will be transferred to the capital reserve account and it will be treated neither as deferred income nor to be distributed as a dividend.

    Example: ABC Ltd has set up its business in a designated backward area which entitles the company to receive from the government a subsidy of 20% of total investment. ABC Ltd fulfilled all the conditions associated with the scheme and received ₹20 crores toward its total investment of ₹100 crores.

    This ₹20 crore will be transferred to the capital reserve account.

    Special case: If the grant is received in relation to a non-depreciable asset like land, then the entire amount of the grant will be recognized in the profit and loss account in the same year.

    Treatment of non-monetary government grant

    When a government grant is in the form of non-monetary assets like land or other resources at a concessional rate, then the assets are to be recognised at their acquisition cost.

    If the assets are acquired at no cost, then they are to be recorded at their nominal value.

    For example, if an enterprise receives land for free as a government grant, then it has to record the land at cost based on prevailing market rates.

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Aditi
Aditi
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  2. Mehak

    To understand the difference in Revenue recognition under IFRS and GAAP , it is important to understand what are IFRS and GAAP. Both of these are accounting standards accepted globally.  These are discussed below: What is IFRS? IFRS is a set of accounting standards developed by the International AccRead more

    To understand the difference in Revenue recognition under IFRS and GAAP , it is important to understand what are IFRS and GAAP. Both of these are accounting standards accepted globally.  These are discussed below:

    What is IFRS?

    IFRS is a set of accounting standards developed by the International Accounting Standards Board. These standards are globally accepted accounting standards.

    They were developed and implemented with the objective of providing a consistent, transparent and reliable framework for the presentation and reporting of financial statements.

    IFRS ensure uniformity and this helps in comparability of financial statements across the companies of different countries.

    Some examples of IFRS Standards are : IFRS 2 – Share based payments, IFRS 9 – Financial Instruments, IFRS 16 – Leases, etc.

    What is GAAP?

    GAAP stands for Generally Accepted Accounting Principles. GAAP is primarily used in the USA. These are a set of accounting principles, rules and procedures which are crucial for providing consistency and transparency in the presentation and reporting of financial statements.

    Some examples of GAAP Standards are: ASC 606: Revenue Recognition, ASC 842: Leases, ASC 740: Income Taxes, etc.

    Difference in Revenue Recognition under IFRS and GAAP

    Though both of these standards have the main goal of promoting consistency and uniformity, there are certain differences in the Revenue Recognition under IFRS and GAAP.

    This is because of the fact that the nature of IFRS and GAAP is different as IFRS is more principle- based and GAAP is rule based.

     

     

     

     

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Jayesh Gupta
Jayesh GuptaCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    As per AS-10 ( Revised ): Property, Plant and Equipment, depreciation on an asset should begin when the asset is in the location and condition necessary for it to be capable of operating in the manner as intended by the management. This means a firm should start charging depreciation when the assetRead more

    As per AS-10 ( Revised ): Property, Plant and Equipment, depreciation on an asset should begin when the asset is in the location and condition necessary for it to be capable of operating in the manner as intended by the management.

    This means a firm should start charging depreciation when the asset is ready to be used as per the management’s desire.

    Let’s take an example to understand this clearly:

    A business bought a drinking water cooler for its office use on 1st April 2021. Now, this water cooler needs to be installed and wiped with Isopropyl Alcohol before it can be put to use.

    The business completed all the required procedures by 1st May 2021, but it opened the machine for office use from 1st August 2021.

    So the question arises, from when to start charging depreciation?

    • 1st April 2021 – The date of Purchase
    • 1st May 2021- The date when the machine was ready to use.
    • 1st August 2021 –The date from which the machine was put to use.

    The answer is 1st May 2021– The date when the machine was ready to use.

    It doesn’t matter whether the company started the use of an asset or not. Once an asset is in

    • the location and condition
    • necessary for it to be capable of operating
    • as intended by the management,

    the depreciation should begin.

     

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Ayushi
AyushiCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    AS-11: The effects of changes in foreign exchange rates deal with the issues in the translation of foreign currency transactions and foreign operations. Foreign operations of a reporting enterprise mean its subsidiary, associate, joint venture or branch which is based or conducted in a country otherRead more

    AS-11: The effects of changes in foreign exchange rates deal with the issues in the translation of foreign currency transactions and foreign operations.

    Foreign operations of a reporting enterprise mean its subsidiary, associate, joint venture or branch which is based or conducted in a country other than the country of the reporting entity

    For simple understanding let’s consider foreign operation as a branch of a business that is based in a foreign country.

    Foreign Integral operations

    So, integral foreign operations will be a dependent branch that works on the directions of the head office and it is like an extension of the business. The head office consigns goods to it and it sells them and remits cash and reports to the head office.

    It is dependent on head office for receiving goods to sell and to cover its expenses.

    Further, the difference in foreign exchange rate affects the present and future cash flows to the head office.

    Foreign Non-Integral operations

    A non-integral foreign operation will be like an independent branch that can operate without the aid of the head office. Apart from selling goods of the head office, it also buys goods from the local market and sells them.

    Also, it covers its expenses on its own. It doesn’t remit the cash from sales regularly like a dependent branch. It is like acts an investment of the main business.

    The difference in the foreign exchange rate has little or no effect on the present or future cash flows of the head office

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A_Team
A_Team
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a) Current Liability b) As an appropriation of profits c) Either a or b d) None of the above

  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)

    The correct option is (d) None of these. AS-3(Revised) deals with the preparation and presentation of cash flow statements. A cash flow statement is a statement that summarises the movement of cash and cash equivalents of an enterprise in an accounting year. It helps the stakeholder to know: the amoRead more

    The correct option is (d) None of these.

    AS-3(Revised) deals with the preparation and presentation of cash flow statements. A cash flow statement is a statement that summarises the movement of cash and cash equivalents of an enterprise in an accounting year. It helps the stakeholder to know:

    • the amount of cash generated by operating activities,
    • amount of cash invested in various assets or sale of assets,
    • the types of finance source utilised by an enterprise and
    • the net cash flow of the business.

    Provision for depreciation is actually a charge on profit, i.e. it will be deducted even if there is loss. Also, there is nothing mentioned in the AS-3(revised) from which we can consider the provision for tax as an appropriation of profit.

    Generally, the cash flow statement is prepared as per the ‘indirect method’ by most enterprises.

    As per the indirect method, the computation starts from Net Profit before tax and extraordinary items. To calculate this, we have to take the current year’s profit and add the current year’s provision for tax to it.

    The reason behind it is that we need to obtain the cash flow from operations and the provision for tax is a non-cash item that has reduced the net profit. So, we have to add it back to the current year’s profit.

     

    Option (A) Current Liabilities is wrong.

    Though the provision for tax is classified as a current liabilities in the balance sheet, it is not considered as a current liability when making adjustments for changes in working capital while preparing cash flow statement.

     Option (B) as appropriation of profit is wrong.

    An appropriation of profit is an item for which an amount is put aside when there is profit. For example, transfer to reserves. But the provision for tax is a charge on profit.

    Option (C) either (A) or (B) is also wrong because both the options are incorrect as discussed above.

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