IAS 20- Accounting for Government Grants and Disclosure of Government Assistance

IAS 20 - Accounting for Government Grants and Disclosure of Government Assistance.

Scope

 This Standard shall be applied in accounting for, and in the disclosure of, government grants and in the disclosure of other forms of government assistance.

DEFINITION OF TERMS

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.

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:

          i.            Those  forms of government assistance which cannot reasonably have a value placed upon them (e.g. free technical or marketing advice and the provision of guarantees).  and

        ii.            Transactions with government which cannot be distinguished from the normal trading transactions of the entity (e.g. government procurement policy that is responsible for a portion of the entity’s sales).

Also, Forgivable loans are treated as government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan

Forgivable loans are loans which the lender undertakes to waive repayment of under certain prescribed conditions.

TYPES OF GOVERNMENT GRANTS

1)       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.

2)      GRANTS RELATED TO INCOME: are government grants other than those related to assets. Also, It includes a grant receivable as compensation for costs, either:

• —   Already incurred

• —   For immediate financial support, with no future related costs.

RECOGNITION OF GOVERNMENT GRANTS

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

—  i.  the entity will comply with the conditions attaching to them; and

— ii.  the grants will be received.    

b) A forgivable loan from government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.

ACCOUNTING FOR GOVERNMENT GRANTS

APPROACHES

There are two broad approaches to the accounting for government grants:

1)      The capital approach, under which a grant is recognised outside profit or loss, and

2)       The income approach, under which a grant is recognised in profit or loss over one or more periods.

ARGUMENTS IN SUPPORT OF EACH APPROACH

A.       CAPITAL APPROACH: Those in support of the capital approach argue as follows:

—  Purpose: Financing device, government grants are a financing device.

—  Unearned income: they are not earned but represent an incentive provided by government without related costs.

B.       INCOME APPROACH: Arguments in support of the income approach are as follows:

—  Source: government grants are receipts from a source other than shareholders

—  Earned income: government grants are rarely gratuitous; the entity earns them through compliance with their conditions and meeting the envisaged obligations.

—  Extension of Fiscal Policy: 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.

ACCEPTED APPROACH

The INCOME approach, which states that, 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.

       A government grant that becomes receivable 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.

NON-MONETARY GRANTS

Non-monetary grants, such as land or other resources, are usually accounted for at

ü Fair value, {the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.}

ü Nominal amount (alternative treatment), {a minimal price fixed for the sake of having some consideration for a transaction. It need bear no relation to the market value of the item.}

PRESENTATION OF GRANTS RELATED TO ASSET

Presentation in the Statement of Financial Position

        - Methods of presentation: Government grants related to assets, including nonmonetary grants at fair value, should be presented in the statement of financial position in either of two ways:

        i.            Deferred income approach: under this method, the grant is set up as deferred income.

      ii.            Asset’s Net Carrying amount approach: Under this method, the value of the grant is deducted from the cost (gross carrying amount) of the asset that the grant is financing. The asset is then recognised at the net carrying amount (Cost minus grant) from the inception. 

 

ACCEPTABLE METHOD(s)

      The Two methods of presentation in financial statements of grants related to assets are regarded as acceptable alternatives.

PRESENTATION OF GRANTS RELATED TO INCOME

Methods of presentation:

1.       SEPARATE PRESENTATION, where grant is presented as a credit in the statement of comprehensive income, either separately or under a general heading such as ‘Other income’

2.       OFFSET BASIS, where grant are deducted in reporting the related expense.

   -Acceptable method(s)

 Both methods are acceptable

REPAYMENT OF GOVERNMENT GRANT

Repayment? Why should Government be repaid? Recall, the definition of Government grant attached to itself  "compliance with certain conditions". If those future conditions are not met, this may warrant the repayment of the grants
A government grant that becomes repayable shall be accounted for as a change in accounting estimate.

GRANT RELATED TO INCOME                                                                                                      

 •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 the profit or loss.                                                                                                        

GRANT RELATED TO ASSET   

 •Repayment of a grant related to an asset 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.

GOVERNMENT ASSISTANCE

Some forms of government assistance are excluded from the definition of government grants.

(a) Some forms of government assistance cannot reasonably have a value placed on them, e.g. free technical or marketing advice, provision of guarantees.

(b) There are transactions with government which cannot be distinguished from the entity's normal trading transactions, e.g. government procurement policy resulting in a portion of the entity's sales.

Disclosure of such assistance may be necessary because of its significance; its nature, extent and duration should be disclosed

                                                                 DISCLOSURES

The following matters shall be disclosed:

(a) the accounting policy adopted for government grants, including the methods of presentation adopted in the financial statements;

(b) 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

(c) unfulfilled conditions and other contingencies attaching to government assistance that has been recognised.