Kenya Fisheries Limited (KFL) erected a fish processing factory complex in early 1995 in Lodwar to process Nile perch caught in Lake Turkana. The factory complex had cost Sh.200 million and has a useful life of 20 years. The food and Agricultural Organisation (FAO) of the United Nations had provided a grant of Sh.100 millions towards the cost of the complex. When operations commenced on 1 July 1995. FAO paid a further Sh.80 million towards electricity cost for the first 10 years operation of the factory. The only condition attached to these grants was that the factory output would be exported using empty return flights which brought relief supplies for southern Sudan into Lokichogio. If at any time during the first 10 years of operation of the factory the output was not exported, part of the grant would become repayable to FAO, in the proportion of the number of years the condition would not be fulfilled, plus two penalty years, to the period of 10 Years. The output of the processed fish was picked up at Lodwar airport, which was expanded at a cost of Sh.20 million, met by the Kenya government, to accommodate the large Hercules C130 transport aircraft. The factory became operational on 1 July 1995 and was considered by FAO as a model project. The fish was exported profitably to Europe. In early January 1999, the European Union (EU) announced that the importation of fish would be banned forthwith; KFL commenced negotiations with EU officials who allowed imports of fish to continue until 30 June 2000, pending the outcome of tests to be carried out at the factory. In the meantime, KFL carried out market research to locate alternative export markets: this proved to be fruitless, but with effect from early July 2000, KFL ceased exports and concentrated on selling to the Kenya market, which it did with a high degree of success, KFL had protracted negotiations with FAO and pleaded that force majeure had caused non compliance with the condition: this fell on deaf ears, and KFL refunded the amounts due on 30 April 2000. KFLs electricity costs were Sh.9 million and Sh.11 million in the years ended 30 June 2000, respectively.

Required:

(a) State the two broad approaches to the accounting treatment of government grants and the arguments in support of each of them.

(b) How should a government grant that becomes receivable as compensation for losses already incurred or for the purpose of giving immediate financial support to the enterprise with no future related costs be recognized under IAS 20? (2 marks)

(c) KFL had adopted the accounting policy of presenting all governments grants as a credit in the income statement as a single, separate item. You are required to show extracts from the balance Sheets as at 30 June 1999 and as at 30 June 2000, and from the Income Statements to these two dates, to deal with all the facts stated above, showing the figures that would appear in KFLs financial statements but also showing the figures that would have appeared if KFL had adopted the alternative accounting policy. When the 1999 financial statements were approved by the directors on 25 July 1999, they were confident that exports would be able to be resumed in the near future. The requirements of IAS 37: provisions. . Contingent Liabilities and Contingent Assets should be ignored in relation to the year ended 30 June 1999. (11 marks)

(Total: 20 marks