Government grants and assistance

The receipt of government grants and assistance by an entity may be significant for the preparation of the financial statements for two reasons. Firstly, if resources Government grants and assistancehave been transferred, an appropriate method of accounting for the transfer must be found. Secondly, it is desirable to give an indication of the extent to which the entity has benefited from such assistance during the reporting period. This facilitates comparison of an entity’s financial statements with those of prior periods and with those of other entities.

Scope/Objective

IAS 20 is applied in accounting for, and in the disclosure of, government grants and in the disclosure of other forms of government assistance.

Government grants are sometimes called by other names such as subsidies, subventions or premiums. Government grants and assistance

Definitions

Government assistance

Definition: – Action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria. It does not include benefits provided only indirectly through action affecting general trading conditions, such as the provision of infrastructure in development areas or the imposition of trading constraints on competitors.

Government grants

Definition: – Assistance by the government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the entity.

Definition: – Government grants whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire long-term assets. Subsidiary conditions may also be attached restricting the type or location of the assets or the periods during which they are to be acquired or held.

Definition: – Government grants other than those related to assets

Recognition and measurement

Government grants, including non-monetary grants at fair value, shall not be recognised until there is a reasonable assurance that: Government grants and assistanceGovernment grants and assistance

  • the entity will comply with the conditions attaching to the grants, and Government grants and assistance
  • the grants will be received. [IAS 20 7] Government grants and assistance

The receipt of funds does not of itself provide conclusive evidence that the conditions attaching to the grant have been or will be met.

Something else -   Hyperinflation in Argentina

Government grants are recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate; i.e. match income and expenses. Government grants and assistance

If the grant relates to expenses or losses already incurred by the entity, or to provide immediate financial support to the entity with no future related costs, the income is recognised in the period in which it becomes receivable. Government grants and assistance

Grants are recognised at their fair value and after recognition of any related contingent liability or contingent asset is treated in accordance with IAS 37 Provisions, Contingent Liabilities, and Contingent Assets. Government grants and assistance

Non-monetary Government grants

A government grant may take the form of a transfer of a non-monetary asset, such as land or other resources, for the use of the entity. In these circumstances, it is usual to assess the fair value of the non-monetary asset and to account for both grant and asset at that fair value. An alternative course that is sometimes followed is to record both asset and grant at a nominal amount.

Presentation of grants

Government grants related to assets, including non-monetary grants at fair value, shall be presented in the statement of financial position either by setting up the grant as deferred income or by deducting the grant in arriving at the carrying amount of the asset. The options available within this Standard are: [IAS 20 24]

Option 1:
Deferred income
One method recognises the grant as deferred income that is recognised in profit or loss on a systematic basis over the useful life of the asset.
Option 2:
Against the carrying amount of the asset
The other method deducts the grant in calculating the carrying amount of the asset. The grant is recognised in profit or loss over the life of a depreciable asset as a reduced depreciation expense.

Grants related to income are presented as part of profit or loss, either separately or under a general heading “other income” or deducted in reporting the related expense. [IAS 20 29]

Repayment of Government Grants How do you account for grants received? (IAS 20)

A government grant that becomes repayable shall be accounted for as a change in an accounting estimate (IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors).

Repayment of a grant related to income shall be applied first against any unamortised deferred credit recognised in respect of the grant. To the extent that the repayment exceeds any such deferred credit, or when no deferred credit exists, the repayment shall be recognised immediately in profit or loss. Government grants and assistance

Repayment of grants related to assets shall be recognised by increasing the carrying amount of the asset or reducing the deferred income balance by the amount repayable. The cumulative additional depreciation that would have been recognised in profit or loss to date in the absence of the grant shall be recognised immediately in profit or loss. [IAS 20 32]

Something else -   Combination of Insurance Contracts

Government loan at a below-market rate of interest

The benefit of a government loan at a below-market rate of interest is treated as a government grant. The loan shall be recognised and measured in accordance with IFRS 9 Financial Instruments.

The benefit of the below-market rate of interest shall be measured as the difference between the initial carrying value of the loan and the proceeds received. The benefit is accounted for in accordance with this Standard. The entity shall consider the conditions and obligations that have been, or must be, met when identifying the costs for which the benefit of the loan is intended to compensate. GoGovernment grants and assistancevernment grants and assistance

Forgivable loans How do you account for grants received? (IAS 20)

Definition: – Loans which the lender undertakes to waive repayment of under certain prescribed conditions. Government grants and assistance

Accounting treatment: – Forgivable loans from the government are treated as government grants when there is reasonable assurance that the entity will meet the terms for the forgiveness of the loan. [IAS 20 10] Government grants and assistance

Capital and Income approach

Government grants shall be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate. There are two broad approaches to the accounting for government grants: the capital approach, under which a grant is recognised outside profit or loss, and the income approach, under which a grant is recognised in profit or loss over one or more periods. Government grants and assistance

Those in support of the capital approach argue as follows:
  1. government grants are a financing device and should be dealt with as such in the statement of financial position rather than be recognised in profit or loss to offset the items of expense that they finance. Because no repayment is expected, such grants should be recognised outside profit or loss.
  2. it is inappropriate to recognise government grants in profit or loss, because they are not earned but represent an incentive provided by government without related costs.
Arguments in support of the income approach are as follows:
  1. because government grants are receipts from a source other than shareholders, they should not be recognised directly in equity but should be recognised in profit or loss in appropriate periods.
  2. government grants are rarely gratuitous. The entity earns them through compliance with their conditions and meeting the envisaged obligations. They should therefore be recognised in profit or loss over the periods in which the entity recognises as expenses the related costs for which the grant is intended to compensate.
  3. because income and other taxes are expenses, it is logical to deal also with government grants, which are an extension of fiscal policies, in profit or loss.
Something else -   Disclosure Financial risk management

It is fundamental to the income approach that government grants should be recognised in profit or loss on a systematic basis over the periods in which the entity recognises, as expenses, the related costs for which the grant is intended to compensate. Government grants and assistance

Therefore: Government grants and assistance

  • grants in recognition of specific expenses are recognised in profit or loss in the same period as the relevant expenses. Government grants and assistance
  • grants related to depreciable assets are usually recognised in profit or loss over the periods and in the proportions in which depreciation expense on those assets is recognised.
  • grants related to non-depreciable assets may also require the fulfilment of certain obligations and would then be recognised in profit or loss over the periods that bear the cost of meeting the obligations. Government grants and assistance

A government grant that becomes receivable: Government grants and assistance

  • as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the entity with no future related costs, shall be recognised in profit or loss of the period in which it becomes receivable. Government grants and assistance
  • for the purpose of giving immediate financial support to an entity rather than as an incentive to undertake specific expenditures may warrant recognising a grant in profit or loss of the period in which the entity qualifies to receive it, with disclosure to ensure that its effect is clearly understood. Government grants and assistance
  • as compensation for expenses or losses incurred in a previous period, is recognised in profit or loss of the period in which it becomes receivable, with disclosure to ensure that its effect is clearly understood. Government grants and assistance

Disclosures How do you account for grants received? (IAS 20)

IFRS

Disclosure requirements Government grants and assistance

IAS 20 39

The following information on government grants has to be disclosed: Government grants and assistance

  1. the accounting policy adopted for government grants including, the methods of presentation adopted in the financial statements;
  2. the nature and extent of government grants recognised in the financial statements; and an indication of other forms of government assistance from which the entity has directly benefited; and Government grants and assistance
  3. any unfulfilled conditions and other contingencies attaching to government assistance that has been recognised

Government grants and assistance

Annualreporting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction.

Something else -   Hyperinflation in Argentina

Leave a comment