IAS 20 PRESCRIBES the ‘accounting‘ for and ‘disclosure‘ of government grants and other forms of government assistance.
Table of Contents
- IAS 20 – Key Terms
- IAS 20 – Scope
- IAS 20 – Recognition Criteria
- Types of Government Grant
- Other Government Grants
- IAS 20 Disclosures
IAS 20 – Key Terms
1. Government Grant
Assistance by the government in the form of transfer of resources to the entity in return for past or future compliance with certain conditions relating to the entity’s operating activities.
It EXCLUDES forms of government assistance that cannot reasonably have a value placed on them and which cannot be distinguished from the normal trading transactions of the entity.
2. Government Assistance
Action by the government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria.
Government assistance DOES NOT include benefits provided only indirectly through the action affecting general trading conditions such as the provision of infrastructure in development areas or the imposition of trading constraints on competitors.
IAS 20 – Scope
|IAS 20 Deals with All Types of Government Grant EXCEPT:|
|– Government assistance in the form of tax reliefs (tax holidays, tax credits etc).|
|– Government participation in the ownership of an entity.|
|– Government grants covered by IAS 41 Agriculture.|
IAS 20 – Recognition Criteria
Grants are recognized when BOTH:
- There is reasonable assurance the entity will comply with the conditions attached to the grant;
- The grant will be received.
Types of Government Grant
1. Grant Related to Income
IAS 20 defines them as government grants OTHER than those related to assets.
1.1 Recognition and Presentation
Income Approach should be used and the grant should be taken to income over the periods necessary to match the grant with the costs that the grant is intended to compensate.
There are 2 options to present grants relating to income in Financial Statements:
- Separately as ‘Other Income’
- Deduction from the related expense.
|If the grant is provided to reimburse costs already incurred in the past, then it is recognized immediately in the Profit or Loss (P&L).||If the grant is provided to reimburse costs to be incurred, then it is recognized in the Profit or Loss (P&L) in the periods when the costs are incurred.|
1.2 Repayment of Government Grant
Govt. grant might become repayable by the entity (e.g. when underlying conditions for the grant are not met).
[Repayment of government grant is accounted for as a CHANGE in accounting estimate.]
|Repayment of Government Grant is|
|– First applied against any unamortized deferred credit recognized in respect of such grant.|
|– If the repayment EXCEEDS any such deferred credit any excess is recognized as an expense immediately in profit or loss (P&L).|
2. Grant Related to Assets
Government grants whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire long-term assets.
2.1 Recognition and Presentation
There are 2 options to present grant relating to assets in Financial Statements:
- As deferred income (and recognize it as income on a systematic basis over the useful life of the asset)
- By deducting the grant from the asset’s carrying amount. DEPRECIATE the net amount of asset over its useful life.
2.2 Repayment of Government Grant
|– If grant was accounted for as a reduction in the carrying amount of asset, its repayment is recognized by increasing the carrying amount of the asset.|
The cumulative additional depreciation that would have been recognized in profit or loss (P&L) to date in the absence of the grant shall be recognized immediately in profit or loss. (Repayment of grant might indicate the possible impairment of the new carrying amount of the asset).
|– If grant was accounted for as deferred income, its repayment is recognized by reducing the deferred income balance by the amount repayable.|
Other Government Grants
1. Forgivable Loans
Forgivable loans are loans which the lender undertakes to waive repayment of under certain prescribed conditions.
|A forgivable loan from the government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for the forgiveness of the loan.|
2. Loans at 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 benefit is Measured as the difference between the initial carrying value of the loan determined in accordance with IAS 39/IFRS 9 and the proceeds received.|
3. Non-Monetary Grant
It may take the form of a transfer of a non-monetary asset such as land or other resources for the use of the entity.
|Usually, such grant is accounted for at its fair value although recording both the asset and the grant at nominal amount is permitted.|
IAS 20 Disclosures
|(a) Accounting policy adopted for grants including method of presentation in the Statement of Financial Position.|
|(b) Nature and extent of grants recognized in the Financial Statements.|
|(c) An indication of other forms of government assistance from which the entity has directly benefited.|
|(d) Unfulfilled conditions and contingencies attached to recognized grants.|
IAS 20 was ISSUED in April 1983 and is applicable to annual periods beginning on or after 1 January 1984. It outlines how to account for government grants and other assistance.
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)