INTRODUCTION
IAS 20 sets out the accounting procedures to be followed when dealing with government grants. It also outlines the disclosure requirements necessary upon receipt of such grants.
The standard recognises that government assistance can come in a variety of forms and may be motivated by different government objectives. Indeed some or all of the grant aid may become repayable if certain conditions are not met. IAS 20 also outlines the action to be taken in this situation.
IAS 20 sets out to achieve two main objectives:
- Outline an appropriate accounting treatment for the resources received by the entity from government sources.
- Provide an indication of the extent to which an entity has benefited from such assistance in the accounting period.
DEFINITIONS
Government refers to government, government agencies and similar bodies whether local, national or international.
Government assistance is action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria. For the purposes of IAS 20, government assistance 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 are assistance by 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. (See Section G).
Grants related to assets are 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.
Grants related to income are government grants other than those related to assets.
Forgivable loans are loans which the lender undertakes to waive repayment of under certain prescribed conditions.
RECOGNITION
Government grants should not be recognised in the financial statements until there is reasonable assurance that: (a) The entity will comply with the conditions attaching to them; and
- The grants will be received.
The standard states that the manner in which the grant is received will not affect the accounting treatment. For example, an entity may receive cash or alternatively the government may reduce a liability owed to it by the entity. Both constitute government grants and must be treated as such.
Note that a forgivable loan from government is also treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.
If the grant takes the form of a non-monetary asset, then the fair value of that asset is assessed and both the asset and the grant are treated at this value.
ACCOUNTING TREATMENT
Government grants should be recognised as income over the periods necessary to match them with the related costs which they are intended to compensate, on a systematic basis.
- For grants related to income the grant can be:
- Presented as a credit in the Statement of Comprehensive Income, either separately or under a general heading such as “other income”; or
- They are deducted in reporting the related expense e.g. a labour cost subsidy could be deducted from the cost of labour to be shown in the Statement of Comprehensive Income.
Both methods are acceptable. However, in either case disclosure of the grant, and the effects of the grant must be made.
REPAYMENT OF GOVERNMENT GRANTS
If the grant becomes repayable, for example its prescribed conditions are not subsequently met by the entity, then it should be treated as a revision of an accounting estimate.
Repayment of a grant related to an asset should be recorded by increasing the carrying amount of the asset or reducing the deferred income balance by the amount repayable. The total extra depreciation that would have been recognised to date as an expense, if the grant had not been received, should be recognised immediately as an expense.
Repayment of a grant related to income should be first set against any unamortised deferred credit in relation to the grant. If the repayment exceeds the amount of that deferred credit, or if no deferred credit existed in the first place, the excess should be recognised as an expense immediately.
DISCLOSURE
The following must be disclosed:
- The accounting policy adopted for government grants, including the methods of presentation adopted in the financial statements.
- The nature and the 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.
- Unfulfilled conditions and other contingencies attaching to government assistance that has been recognised.
SUNDRY MATTERS
Examples of government assistance that cannot reasonably have a value placed upon them are:
- Free technical advice
- Free marketing advice
- Provision of guarantees
Thus, these are excluded from the definition of government grants and should not be treated as such.
Furthermore, entities may receive government assistance which is not specifically related to their operating activities. For example, transfers of resources to entities operating in an underdeveloped area.
SIC 10 states that such forms of assistance do constitute grants and should be accounted for in accordance with IAS 20. This is because the grants received are conditional upon the recipient operating in a particular industry or area.
Finally, if a grant is received in relation to an asset that is not depreciated, then the grant should be amortised over the period in which the cost of meeting the obligations or conditions attached to the grant is incurred.
