OBJECTIVE
The objective of IAS 20 is to set out the accounting treatment for both government grants and other forms of government assistance.
Government assistance takes many forms, including grants, equity finance, subsidised loans and advisory assistance. Government grants are made in order to persuade or assist enterprises to pursue courses of action, which are deemed to be socially or economically desirable. The range of grants available is wide and changes regularly, reflecting changes in government policy. More significantly, different grants tend to be given on different terms as to eligibility, manner of determination, manner of payment and conditions to be fulfilled. The term ‘government’ covers national government and all of the various tiers of local and district/regional government of any country, government agencies and ‘non-departmental public bodies’.
BASIC CONCEPTS
The accruals concept requires that revenue and costs are accrued, matched with one another so far as their relationship can be established or justifiably assumed, and dealt with in the Statement of Comprehensive Income of the period to which they relate. Government grants should be recognised in the Statement of Comprehensive Income so as to match them with the expenditure towards which they are intended to contribute.
The prudence concept requires that revenue and profits are not anticipated, but are recognised by inclusion in the Statement of Comprehensive Income only when realised in the form either of cash or of other assets the ultimate cash realisation of which can be established with reasonable certainty. Accordingly, government grants should not be recognised in the Statement of Comprehensive Income until the conditions for their receipt have been complied with and there is reasonable assurance that the grant will be received.
In many cases, the grant-making body has the right to recover all or part of a grant paid if the enterprise has not complied with the conditions under which the grant was made. On the assumption that the enterprise is a going concern, the application of the prudence concept does not normally require postponement of the recognition of the grant in the Statement of Comprehensive Income solely because there is a possibility that it might have to be repaid in the future. The enterprise should consider regularly whether there is a likelihood of a breach of the conditions on which the grant was made. If such a breach has occurred, or appears likely to occur, and it is probable that some grant will have to be repaid, provision should be made for the liability.
DEFINITIONS
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.
TYPES OF GRANT AVAILABLE
Government grants may be given for a number of projects. Examples would be:
- Grants related to Assets: Primary condition is that the entity qualifying for them should purchase, construct or otherwise acquire long-term assets
- Grants related to Income: Other than those related to assets e.g. towards staff training costs
ACCOUNTING TREATMENT
Grants Related to Assets
Government grants shall be recognised as income over the periods necessary to match them with the related costs on a systematic basis. They shall not be credited directly to shareholders’ interests.
Presentation of Grants Related to Assets
Government grants related to assets 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.
Grants Related to Income
The matching of grants received and expenditure is straightforward if the grant is made as a contribution toward specified items of expenditure and is described as such. Once the relationship between the grant and the related expenditure has been established, the recognition of the grant in the Statement of Comprehensive Income will follow. The grant should be recognised in the same period as the related expenditure – ‘matching’ concept.
Difficulties arise where the terms of the grant do not specify precisely the expenditure it is intended to meet, but use such phrases as ‘to assist with a project’ or ‘to encourage job creation’ or where the basis of calculation is related to two or more criteria – e.g. the capital expenditure incurred and the number of jobs created. In these instances, it is usually appropriate to consider the circumstances which give rise to the payment of the grant. If the grant is paid when evidence is produced that certain expenditure has been incurred, the grant should be matched with that expenditure. If the grant is paid on a different basis, it will usually be paid on the achievement of a non-financial objective, such as the creation of a specified number of new jobs. In these circumstances, the grant should be matched with the identifiable cost of achieving that objective e.g. the cost of creating and, maintaining for the required period the specified new jobs.
DISCLOSURE
- The financial statement should disclose the accounting policy adopted for government grants, including the methods of presentation adopted in the financial statements
- The nature and extent of grants recognised
- An indication of other forms of government assistance providing direct benefit
- Unfulfilled conditions and other contingencies attaching to government assistance recognised
REPAYMENT OF GOVERNMENT GRANTS
A government grant that becomes repayable shall be accounted for as a revision to an accounting estimate.
Repayment of a grant shall be applied first against any unamortised credit. To the extent that the repayment exceeds any such deferred credit or where no deferred credit exists, the repayment shall be recognised immediately as an expense.
Repayment of a grant relating to an asset shall be recorded 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 to date as an expense, if no grant had been received, shall be recognised immediately as an expense.
GRANT RECOGNITION
A government grant is not recognised until there is reasonable assurance that the entity will comply with the conditions attaching to it and the grant will be received
