Question

N 2016 Sanford LTD. received a government grant of $100,000 to be used for the purchase of a machine. Sanford prepares its financial statements using IFRS. The grant must be recognized:

a) as revenue in 2016.
b) as a reduction in the cost of the machine.
c) as deferred income in the balance sheet and then recognized in the income statement systematically over the asset's useful life.
d) either b or c.

Answer 1

Sanford LTD. can recognize a government grant received for purchasing a machine either as deferred income over the asset's useful life, or as a reduction in the cost of the machine, according to IFRS. The correct answer approximately b,c or d.

Step-by-step explanation:

In 2016, Sanford LTD. received a government grant of $100,000 to be used for the purchase of a machine. According to IFRS (International Financial Reporting Standards), there are two ways of recognizing government grants.

One way is to present the grant as a reduction in the carrying amount of the asset, which will subsequently reduce the depreciation expense recognized in the profit or loss statement over the useful life of the asset. The second method is to recognize the grant as deferred income, and then spread and recognize it in the income statement systematically over the periods that the asset's cost is expensed.

Therefore, the correct option for Sanford LTD. to recognize the grant is:

• c) as deferred income in the balance sheet and then recognized in the income statement systematically over the asset's useful life.

Alternatively, the grant could be recognized as a reduction in the cost of the machine, which is option b. Thus, the final answer is d) either b or c.