FFI Limited is a trading company and it purchased a piece of equipment at a gross cost of $1,800,000 on 1 October 2019. The equipment has an estimated life of ten years with a residual value equal to 15% of its gross cost. FFI Limited uses straight-line depreciation on a time-apportioned basis.

FFI Limited received a grant from the government of 30% towards the cost of purchasing the equipment provided that FFI Limited does not sell the equipment within four years and no repayment liability will be incurred.

However, if FFI Limited sells the equipment within four years, a repayment on a sliding scale would be applicable. The repayment is 75% if the equipment is sold within the first year of purchase, and this amount decreases by 25% per annum. FFI Limited has no intention of selling the equipment within the first four years.

FFI Limiteds accounting policy for capital-based government grants is to treat them as deferred credits and release them to income over the life of the asset to which they relate. FFI Limiteds year end date is 31 March.

Required:

1. a Discuss whether the companys policy for the treatment of government grants meets the definition of liability under HKAS 20 Accounting for government grants. (10 marks)

2. b Prepare the extracts of statement of financial position as at 31 March 2020 and the statement of profit or loss for the year ended 31 March 2020. (20 marks)