LESSON 2 - DEYA ALDEEN AND ALBERTO PONCE

FINANCIAL ACCOUNTING II

ACTIVITY CARRIED OUT BY DEYA ALSAKAJI AND ALBERTO PONCE

LESSON 2

12. Refundable vs. Non-Refundable Subventions

B.Subventions, GRANTS,DONATIONS,ETC

INDEX

11. Subventions Granted by Partners or Owners

10. Accounting Treatment

9. Valuation Criteria

8. Classification & Recognition

6. Statement of changes in equity

5. Transfer

3. Regularization

2. Recognition

1. Description

A. FINANCIAL ASSETS

FINANCIAL ASSETS

Held for trading(LT)

Market Value (9-8)

Held for Trading(ST)

Market Value (7-6)

Held to maturity investment

Amortization cost

Market Value (7-6)

Valued at fair value in the I.S

Valued at fair value in equity(LT)

Market Value (9-8)

Amortization cost

In group companies

Adquisition Cost

- Cash/Bank account -Trade accounts receivable• Customers • Other receivables - Non-trade accounts receivable • Credits (loans to other companies) • Guarantees given • Long-term (time) deposits - Equity instruments or debt securities acquired by the firm (financial investments)

EQUITY INSTRUMENTS

They represent a participation in the equity of another firm

DEBT SECURITIES

They represent a participation in a debt of another entity

The classification of all financial assets

FINANCIAL ASSETS

Description

Groups 9 and 8

RECOGNITION

25%

25%

PROFITS

(250/251) Financial Asset

(8301) Deferred tax

Liabilities arising from taxable temporary differences (479)

Profits on financial assets valued at fair value in equity (900)

XX/XX/20XX

LOSSES

Financial Asset (250/251)

Deferred tax (8301)

(4740) Assets arising from deductible temporary differences(A)

(800) Losses on financial assets valued at fair value in equity(Exp)

XX/XX/20XX

Bank Account

Bank Account

(251) Non-current debt securities

(250) Non-current investments in equity instruments

XX/XX/20XX

2. FAIR VALUE MEASUREMENTS

1. IN THE BALANCE SHEET

2. RECOGNITION

Transfer to the equity

REGULARIZATION

Valuation adjustments to financial assets valued at fair value in equity (133)

(133) Valuation adjustments to financial assets valued at fair value in equity

LOSSES

Losses on financial assets valued at fair value in equity(Exp) (800)

31/12/20XX

(8301) Deferred tax

It is only done once at the end of the year

PROFITS

(8301) Deferred tax

(900) Profits on financial assets valued at fair value in equity

31/12/20XX

TRANSFER TO THE EQUITY

WHEN IS IT DONE?

3. REGULARIZATION

Transfer to gruops 7 and 6

TRANSFER TO THE INCOME STATEMENT

Liabilities arising from taxable temporary differences (479)

(802) Transfers of profits of financial assets valued at fair value in equity

Assets arising from deductible temporary differences(A) (4740)

(8301) Deferred tax

The transfer of profits is done when all or part of the financial assets are sold

WHEN DO WE DO THE TRANSFER OF PROFITS/LOSSES?

PROFITS

Deferred tax (8301)

Losses on financial instruments valued at fair value in equity (7)

XX/XX/20XX

LOSSES

Transfers of losses of financial assets valued at fair value in equity (902)

XX/XX/20XX

(6) Losses on financial instruments valued at fair value in equity

The quantity of the transfer of profits/losses(9-8) is in proportion of the sell

HOW MUCH DO WE TRANSER?

TRANSFER TO INCOME STATEMENT

4. TRANSFER TO THE INCOME STATEMENT

All revenues and expenses recorded in the Equity

STATEMENT OF REVENUES AND EXPENSES

5. STATEMENT OF ALL REVENUES AND EXPENSES IN EQUITY

B.SUBVENTIONS, GRANTS,DONATIONS,ETC

1. Classification & Recognition From Partners/Owners: Private firms: Recorded as equity (capital and reserves). Public firms: Can be classified as equity when used for activities of public/general interest. From Third Parties : Subventions for exploitation (operating subsidies) or without a specific purpose. Subventions for capital investment. Other subventions affecting assets or expenses. Refundability: Non-refundable → Recognized in equity as subventions, donations, or legacies received. Refundable → Recorded as a liability (current or non-current).

SUBVENTIONS, DONATIONS & LEGACIES RECEIVED

• Monetary Subventions → Recorded at fair value of the amount granted.
• Non-Monetary Subventions → Recorded at the fair value of the asset received, at the time of recognition.

• Recognition:
• Subventions are recognized when there is reasonable certainty that the company will comply with the conditions and the grant will be received.

Measurement:

• Initial Measurement: Recognized at the fair value of the amount received.
• Subsequent Measurement:
• If recognized in equity → Transferred progressively to income in proportion to the expense or depreciation of the related asset.
• If recorded as a liability → Kept as a liability until it is converted into equity or repaid.

2. Valuation Criteria

Accounting Treatment

1. Subventions for Non-Current Assets (Capital Grants) Initial Recognition: Recorded as equity under subventions, donations, or legacies received. Example account: Government Capital Grants. Subsequent Recognition: The subvention is allocated to income systematically over the useful life of the acquired asset, generally matching the depreciation of the asset. If non-refundable, the grant remains in equity and is transferred to income as the related asset depreciates. 2. Subventions for Operating Expenses (Exploitation Grants) Initial Recognition: Recorded in equity under subventions, donations, or legacies received, or in the income statement, depending on the terms. Example account: Other Grants, Donations, and Bequests. Subsequent Recognition: Income is recognized in a systematic manner as the expenses financed by the grant are incurred. Example: If the grant is for covering operating costs, the corresponding income will be recognized as the expenses are recognized in the profit and loss account.

Private Firms: Recorded as equity under capital and reserves. The grant is treated as an increase in the owner's or partner's equity contribution to the firm. Public Firms: Can also be classified as equity if used for public or general interest activities. This may include grants for projects that benefit the public good, social programs, or environmental initiatives. Capital and Reserves: When granted by owners, subventions are part of the company's equity rather than a liability. Purpose: If directed at activities serving the public interest, they are treated as part of equity under both private and public firms.

Subventions Granted by Partners or Owners

1. Non-Refundable Subventions Definition: Subventions that do not need to be repaid once the conditions attached to them are fulfilled. Accounting Treatment: Recognized in Equity: Non-refundable subventions are recorded under equity (ex: in the subventions, donations, and legacies received account). Income Recognition: The subvention is recognized as income in the income statement over time, generally matching the depreciation or amortization of the asset financed by the subvention. Example: A government grant received for purchasing machinery is recognized in equity, with a portion transferred to income as the machinery depreciates. 2. Refundable Subventions Definition: Subventions that must be repaid if certain conditions are not met (ex: if the company fails to use the funds as intended). Accounting Treatment: Recognized as Liabilities: Refundable subventions are initially recorded as liabilities (either current or non-current payables). Conversion to Equity: Once the conditions for non-refundability are met, the liability is canceled and the amount is transferred to equity or income. Example: A company receives a grant to cover specific expenses but must repay it if the conditions are not fulfilled. If conditions are met, it is moved to equity.

Refundable vs. Non-Refundable Subventions

Subsequent Depreciation and Income Recognition: Debit. Depreciation Expense – 100,000 Credit. Accumulated Depreciation – 100,000 (To record depreciation on the asset financed by the grant.) Debit. Government Capital Grants (Equity) – 100,000 Credit. Income from Government Grants (Income Statement) – 100,000 (To transfer the portion of the government grant to income as the asset is depreciated.)

Non-Refundable Subvention for Asset Purchase (Initial): Debit. Asset (Machinery) – 500,000 Credit. Government Capital Grants (Equity) – 500,000 (To record the receipt of the non-refundable government grant for asset purchase.)

Examples (entries)

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