How to approach it
- Start depreciation and grant release on the date the asset is available for use.
- When a component is added, add its cost to the carrying amount and spread the new total over the revised remaining life.
- Release the deferred grant over the same pattern; a change in life changes the release too.
- On repayment, debit the unamortised deferred income first; any excess goes to profit or loss.
Key rules to apply
- IAS 20: grants related to assets are presented as deferred income (or deducted from the asset) and released over the asset's life.
- Repayment of an asset-related grant reduces the deferred income balance; a shortfall is expensed immediately.
- IAS 16: depreciation begins when the asset is available for use, which may be after installation if regulatory approval is needed.
- Changes in useful life and grant repayments are changes in estimate, applied prospectively.
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Starting depreciation at purchase or at installation instead of availability for use (examiners' point).
- Changing the depreciation life but leaving the grant release on the old life.
- Charging the grant repayment straight to profit or loss.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q3 without copying it.
Original practice question
Grant repayment on an asset-related grant
A machine costing Rs 300m was bought on 1 January 2024 and was available for use on 1 March 2024. Life 5 years, residual Rs 20m. A related grant of Rs 60m is held as deferred income. In January 2025, Rs 15m of the grant became repayable and was paid.
Required: Calculate depreciation and grant income for 2024 and 2025.
Worked solution
| Working | 2024 (Rs m) | 2025 (Rs m) |
|---|---|---|
| Depreciation: (300 − 20) ÷ 5 = 56 a year | 56 × 10/12 = 46.67 | 56.00 |
| Grant income: 60 ÷ 5 × 10/12 | 10.00 | |
| Deferred income after 2024 | 50.00 | |
| Repayment debited to deferred income | (15.00) | |
| Remaining 35 over 50 months: 35 × 12/50 | 8.40 |
Answer: 2024: depreciation Rs 46.67m, grant income Rs 10m. 2025: depreciation Rs 56m, grant income Rs 8.4m; no P&L charge for the repayment because it was less than the deferred balance.