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Practical caseIAS 20L4 · Expert

Below-market government loan financing a qualifying asset: benefit, IFRS 9 boundary and IAS 23 link

6 documents11 tasks≈ 100 min
0 / 16 items completed
Standards
IAS 20 — Accounting for Government Grants and Disclosure of Government Assistance
Assistance levelFree workspace · autonomous situation
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: withdrawn

Case brief

Situation

Énergies du Vallon SA (fictitious entity) builds a hydroelectric plant, a qualifying asset, from 1 January to 30 June 20X5 and places it in service on 1 July 20X5; year end 31 December 20X5. A public bank grants it on 1 January 20X5 a loan A of 1,000,000 EUR, interest-free, repayable in full in 3 years; it had granted it in 20X4 a forgivable loan B of 200,000 EUR, at the market rate, whose forgiveness depends on an employment target.

Your assignment

Measure loan A at initial recognition and compute its benefit; identify the missing information; justify the market rate and the boundary with IFRS 9, and assess the forgiveness of loan B; compute the eligible expenditure for capitalisation and reconcile the liability of loan A; state the disclosures; record the transactions (case data) and present their effect; conclude.

Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.

Autonomous professional situation

As on a real engagement: no method, no checklist and no hints. You identify the issues yourself, organise the work and defend your conclusion.

  • Organise the work
  • Document each point
  • Argue the conclusion

Documents

File documents

6 documents: open each one to read it.

Document 1Contract

Contract of loan A

Contract of loan A of 1 January 20X5: 1,000,000 EUR paid; no interest; single repayment of 1,000,000 EUR on 31 December 20X7, that is in 3 years. The loan finances the construction of the plant.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Proceeds received from loan A€1,000,000.00
Contractual flow repayable at maturity€1,000,000.00
Contractual interest rate of loan A0%
Term of loan A3 years
Market rate adopted (case assumption)6%
Interest of 20X5 at the effective rate€50,377.16
Part of the interest included in the cost of the plant€25,188.58
Part of the interest expensed€25,188.58
Liability of loan A reported at the closing date€889,996.44
Expenditure incurred on the plant€1,400,000.00
Grant received in cash for the plant€0.00
Loan B whose forgiveness is announced€200,000.00
Advisory fees€12,000.00

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort6

  • Contract of loan A

  • Note on the market rate

  • Schedule of loan A

  • Construction log

  • Letter from the public bank (loan B)

  • Advisory fees

Relevant to the treatment0

    No effect0

      Workspace

      Work programme

      Organise your work freely: deal with each point, then argue your conclusion.

      1. Task 1Analysis

        What is the nature of each of the two loans and what does IAS 20 cover?

      2. Task 2Calculation

        Compute the initial value of loan A.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the initial value of loan A.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      3. Task 3Calculation

        Compute the benefit of loan A.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the benefit of loan A.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      4. Task 4Missing information

        What information is missing to adopt the market rate?

      5. Task 5Professional judgement

        Justify the market rate, the boundary with IFRS 9 and the forgiveness of loan B.

      6. Task 6Calculation

        Compute the expenditure eligible for capitalisation of borrowing costs, net of grants received in cash.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the expenditure eligible for capitalisation of borrowing costs, net of grants received in cash.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      7. Task 7Calculation

        Reconcile the liability of loan A.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Reconcile the liability of loan A.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Reconciliation difference of the liability of loan A

      8. Task 8Analysis

        How should the benefit be treated over time and which disclosures should be given?

      9. Task 9Journal entries

        Record loan A, its interest and the forgiveness of loan B.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 4

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        3. Line 3

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Journal entry · Journal entries

        Entry 2 of 4

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 3 · Journal entry · Journal entries

        Entry 3 of 4

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 4 · Journal entry · Journal entries

        Entry 4 of 4

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      10. Task 10Effects on the financial statements

        What is their effect on the financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      11. Task 11Conclusion

        Write the conclusion.

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 16).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IAS 20 §10
      • IAS 20 §10A
      • IAS 20 §12
      • IAS 20 §24
      • IAS 20 §26
      • IAS 20 §27
      • IAS 20 §39