The receipt of government grants/assistance by an entity may be significant for the preparation of the financial statements for two reasons. Firstly, if resources have 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.
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.
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.
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.
|Grants related to assets|
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.
|Grants related to income|
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:
- the entity will comply with the conditions attaching to the grants, and
- the grants will be received. [IAS 20 7]
The receipt of funds does not of itself provide conclusive evidence that the conditions attaching to the grant have been or will be met.
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.
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.
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.
Non-monetary Government grants
Where the grant is received in the form of a transfer of a non-monetary asset; the acceptable accounting methods are either:
- assess the fair value of the non-monetary asset and record the grant and asset at this value, or
- record both the asset and grant at a nominal amount.
Presentation of grants
Grants related to assets How do you account for grants received? (IAS 20)
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. [IAS 20 24]
Grants related to income How do you account for grants received? (IAS 20)
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.
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]
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.
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]
Disclosures How do you account for grants received? (IAS 20)
Disclosure requirements How do you account for grants received? (IAS 20)
The following information on government grants has to be disclosed: