CAF-1 · Chapter 1
IAS 20 Government Assistance and Grants MCQs with Answers
15 multiple-choice questions on IAS 20 Government Assistance and Grants for CAF-1 Financial Accounting and Reporting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
The local government constructs a new alternate highway connecting an industrial zone to the main port, which reduces transit times and saves Omega Ltd Rs. 5 million annually in freight costs. According to IAS 20, how should Omega Ltd account for this infrastructure improvement?
- A) Recognize Rs. 5 million annually as grant income.
- B) Capitalize the present value of the savings as an intangible asset.
- C) Ignore it, as it is government assistance that affects general trading conditions.
- D) Recognize it as a reduction in the cost of sales.
Show answer & explanation
Answer: C) Ignore it, as it is government assistance that affects general trading conditions.
According to IAS 20, government actions that merely improve the general trading environment, such as the provision of public infrastructure (like roads or irrigation networks), do not meet the definition of government grants and should be ignored in the financial statements.
Question 2
Beta Corp receives a government grant of Rs. 50 million specifically to purchase a specialized manufacturing plant. Which of the following is an acceptable method for presenting this grant in the statement of financial position?
- A) Recognize the grant entirely in profit or loss in the year of receipt.
- B) Present it as deferred income or deduct it from the carrying amount of the asset.
- C) Credit the grant directly to retained earnings.
- D) Present it as a separate component of equity.
Show answer & explanation
Answer: B) Present it as deferred income or deduct it from the carrying amount of the asset.
Under IAS 20, grants related to assets must be presented in the statement of financial position either by setting up the grant as deferred income or by deducting the grant in calculating the carrying amount of the asset.
Question 3
Gamma Ltd received a grant of Rs. 30 million on the condition of employing 50 local residents for three years. In year 2, the workforce drops to 40, triggering a full repayment of the grant. How should this repayment be treated in the books?
- A) As a prior period error, restating previous financial statements.
- B) As an adjustment to the unamortized deferred income balance, with any excess recognized immediately in profit or loss.
- C) As a direct deduction from retained earnings.
- D) Capitalized as an intangible asset.
Show answer & explanation
Answer: B) As an adjustment to the unamortized deferred income balance, with any excess recognized immediately in profit or loss.
Under IAS 20, a government grant that becomes repayable is treated as a change in accounting estimate. Repayment of a grant related to income is applied first against any unamortized deferred credit set up in respect of the grant, and any excess is recognized immediately in profit or loss.
Question 4
A local government grants Omega Corp a parcel of land at no cost, provided it builds a facility there. Under IAS 20, how can this non-monetary grant be initially measured?
- A) Only at its fair value.
- B) Only at a nominal amount.
- C) At either its fair value or a nominal amount.
- D) It cannot be recognized until the facility is fully built.
Show answer & explanation
Answer: C) At either its fair value or a nominal amount.
A non-monetary grant, such as land, can be recorded at fair value, or alternatively, at a nominal amount.
Question 5
Under IAS 20, a forgivable loan from the government is treated as a government grant when:
- A) The loan is officially approved by the bank.
- B) There is reasonable assurance that the entity will meet the terms for forgiveness of the loan.
- C) The loan funds are deposited into the entity's account.
- D) The entity pays its first installment.
Show answer & explanation
Answer: B) There is reasonable assurance that the entity will meet the terms for forgiveness of the loan.
A forgivable loan from the government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.
Question 6
How should the repayment of a government grant related to income be accounted for?
- A) Applied first against any unamortized deferred credit related to the grant, with excess recognized in profit or loss.
- B) Treated as a prior period error and adjusted in retained earnings.
- C) Deducted directly from the carrying amount of related assets.
- D) Capitalized as a long-term liability.
Show answer & explanation
Answer: A) Applied first against any unamortized deferred credit related to the grant, with excess recognized in profit or loss.
Repayment of a grant related to income is applied first against any unamortized deferred credit, and any excess is recognized immediately in profit or loss.
Question 7
If an entity receives a grant related to an asset and accounts for it by deducting the grant from the asset's carrying amount, how is the grant recognized in profit or loss over time?
- A) Through a separate deferred income line.
- B) By way of a reduced depreciation charge over the useful life of the asset.
- C) As a single lump sum in the year of purchase.
- D) It is never recognized in profit or loss.
Show answer & explanation
Answer: B) By way of a reduced depreciation charge over the useful life of the asset.
Deducting the grant from the asset's cost results in a reduced depreciable amount, meaning the grant is recognized through reduced depreciation charges over the asset's life.
Question 8
Which of the following is NOT required to be disclosed under IAS 20?
- A) The accounting policy adopted for government grants.
- B) The nature and extent of government grants recognized.
- C) Unfulfilled conditions attached to recognized government assistance.
- D) The names of the specific government officials approving the grant.
Show answer & explanation
Answer: D) The names of the specific government officials approving the grant.
IAS 20 requires disclosure of accounting policies, the nature and extent of grants, and unfulfilled conditions, but not the names of approving officials.
Question 9
Alpha Ltd received government assistance in the form of a general improvement to the water supply network in its industrial area. How is this treated under IAS 20?
- A) Capitalized as an intangible asset.
- B) Recognized as a government grant related to assets.
- C) Ignored, as it is an action affecting general trading conditions.
- D) Recognized immediately in profit or loss.
Show answer & explanation
Answer: C) Ignored, as it is an action affecting general trading conditions.
Benefits provided indirectly through actions affecting general trading conditions, such as infrastructure provision, are excluded from government grants.
Question 10
A government grant that becomes receivable as compensation for expenses or losses already incurred, with no future related costs, should be:
- A) Deferred and amortized over 5 years.
- B) Recognized in profit or loss of the period in which it becomes receivable.
- C) Credited directly to equity.
- D) Deducted from the related asset's carrying amount.
Show answer & explanation
Answer: B) Recognized in profit or loss of the period in which it becomes receivable.
Grants for immediate financial support or compensation for past expenses are recognized in profit or loss in the period they become receivable.
Question 11
According to IAS 20, government grants shall not be recognized until there is reasonable assurance that:
- A) The grant will be received and the entity will comply with the conditions.
- B) The project will generate a 20% return on investment.
- C) The government will not audit the funds.
- D) The grant will be tax-free.
Show answer & explanation
Answer: A) The grant will be received and the entity will comply with the conditions.
Recognition requires reasonable assurance that the entity will comply with conditions attaching to the grants and that the grants will be received.
Question 12
Which of the following bodies is considered 'Government' under IAS 20?
- A) Only national governments.
- B) Only local municipalities.
- C) Government agencies and similar bodies whether local, national, or international.
- D) Private charitable foundations.
Show answer & explanation
Answer: C) Government agencies and similar bodies whether local, national, or international.
Government refers to government, government agencies and similar bodies whether local, national or international.
Question 13
Beta Corp receives free marketing advice from a government export agency. How is this accounted for?
- A) Recorded as a grant related to income.
- B) Recorded as a grant related to an asset.
- C) Excluded from the definition of government grants as its value cannot reasonably be placed.
- D) Deferred over 3 years.
Show answer & explanation
Answer: C) Excluded from the definition of government grants as its value cannot reasonably be placed.
Free marketing advice is a form of government assistance that cannot reasonably have a value placed upon it, thus excluded from government grants.
Question 14
How should an entity present a government grant related to income in the statement of profit or loss?
- A) Only as a separate line item under 'other income'.
- B) Only as a deduction from the related expense.
- C) Either separately under a general heading like 'other income' or deducted from the related expense.
- D) As part of gross revenue from sales.
Show answer & explanation
Answer: C) Either separately under a general heading like 'other income' or deducted from the related expense.
Grants related to income can be presented either separately, under 'other income', or deducted in reporting the related expense.
Question 15
When a grant related to an asset becomes repayable, what happens to the cumulative additional depreciation that would have been recognized if the grant had not existed?
- A) It is ignored completely.
- B) It is deferred over the remaining useful life.
- C) It is recognized immediately in profit or loss.
- D) It is deducted from retained earnings.
Show answer & explanation
Answer: C) It is recognized immediately in profit or loss.
The cumulative additional depreciation that would have been recognized in profit or loss to date in the absence of the grant must be recognized immediately in profit or loss.