Finance & Accounting

IAS 20 on Government Grants and Assistance

IAS 20 deals with the accounting of government grants and other types of government assistance. This Standard applies to financial statements for fiscal years starting on or after January 1, 1984.

The objective of IAS 20

The basic aim of the Accounting Standard (i.e., IAS 20) is to define the accounting treatment & disclosure requirements to be adopted for government grants and any similar kinds of government assistance. Government help comes in a variety of different forms, depending on both the nature of the assistance and the criteria that are generally linked to it. The aid may be offered to encourage an entity to take action that it would not have otherwise taken if the assistance had not been supplied.

For two reasons, an entity’s receipt of government support may have a substantial impact on the preparation of financial statements:

• If resources have been distributed, a suitable means of accounting for the distribution must be identified, and
• It is preferable to indicate the extent to which the entity benefited from such government support throughout the reporting period.

This makes it easier to compare an entity’s financial statements to those of previous periods and to those of other businesses.

Scope of IAS 20

This Standard must be followed when accounting for and disclosing government grants, as well as when disclosing other types of government aid.

However, IAS 20 Standard shall not deal with the following:

• the unique issues that arise in accounting for government grants in financial statements that include the effects of varying prices or in the similar additional information
• Benefits that are accessible in assessing taxable profit or tax loss, or that are calculated or limited on the basis of income tax liabilities, are supplied by the government to an entity. Income tax holidays, investment tax credits, accelerated depreciation allowances, and lower-income tax rates are examples of such advantages.
• Involvement of the government in the entity’s ownership
• The government grants that are covered under IAS 41 on Agriculture

Terms defined under IAS 20

The term “government” refers to the government, government agencies, and equivalent organizations at the local, national, and international levels.

Government assistance is a government activity meant to offer an economic benefit to a specific entity or group of entities that meet specified requirements. For the purposes of this Standard, government assistance does not include advantages obtained only indirectly through actions impacting general market conditions, such as the supply of infrastructure in developing regions or the enforcement of trading restrictions on competitors.

Government grants are transfers of resources from the government to an entity in exchange for the entity’s past or future compliance with specific requirements pertaining to its operational activities. They exclude government aid that cannot be fairly valued, as well as transactions with the government that are indistinguishable from the entity’s regular trade operations.

Grants connected to assets are government grants whose principal requirement is that the organization receiving them should buy, build, or otherwise acquire long-term assets. Subsidiary requirements may also be imposed, limiting the type or location of the assets, as well as the time periods over which they are to be acquired or kept.

Grants connected to income are government grants except those that are related to assets.

Recognition and measurement of government grants

When there is reasonable certainty that the company will comply with the criteria attached to the grants and that the funds will be received, government grants, including non-monetary ones at fair value, will be recognized. When there is reasonable certainty that the entity will satisfy the requirements for loan forgiveness, a forgivable loan from the government is recognized as a government grant.

The advantage of a government loan that is available at a below-market interest rate is recognized as a government grant. The loan will be recognized and quantified in line with IFRS 9 on Financial Instruments. The benefit of the below-market interest rate must be calculated as the difference between the loan’s original carrying value and the cash obtained. The benefit is accounted for in line with this Standard (i.e., IAS 20). When determining the costs for which the loan benefit is intended to compensate, the entity should take into account the criteria and obligations that have been or must be satisfied.

Government grants must be included in profit or loss on a consistent basis across the periods in which the business records the corresponding expenditures for which the grants are intended to compensate as expenses.

The capital method, which recognizes a grant outside the scope of profit or loss, and the income approach, which recognizes a grant in the profit or loss over one or more periods, are the two basic ways to account for government grants.

Those who favour the capital method contend that government grants are a financing instrument and should be treated as such in the statement of financial position rather than being recognized in profit or loss to balance the items of cost that they fund. Because no repayment is anticipated, such donations should be recorded separately from the profit or loss. Government grants should not be included in profit or loss since they are not earned but instead reflect a government incentive with no associated expenses.

On the other hand, according to supporters of the income method, because government grants are received from sources other than shareholders, they should not be recognized immediately in equity but rather in profit or loss in the relevant periods. Furthermore, government grants are seldom unacknowledged. They are earned by the entity by complying with their conditions and completing the anticipated responsibilities. As a result, they should be included in profit or loss throughout the periods in which the business records the corresponding expenditures for which the grant is meant to compensate as expenses. Because income and other taxes are costs, it makes sense to include government grants, which are an extension of fiscal policy, in the profit or loss calculations.

The income method requires that government grants be recognized in profit or loss on a consistent basis across the periods in which the business recognizes the corresponding expenditures for which the grant is meant to compensate as expenses.

As a result, grants made to recognize particular costs are recorded in profit or loss in the same period as the respective expenses. Furthermore, grants relating to depreciable assets are typically recognized in profit or loss over the periods and also in the proportions in which depreciation expenditure on such assets is recognized. Grants associated to non-depreciable assets may also need the fulfillment of specific obligations, which would then subsequently be included in profit or loss over the periods that bear the cost of satisfying the requirements.

Where a government grant becomes receivable in the form of compensation for costs or losses that have been previously incurred or for the sake of providing expeditious financial help to the business with no future associated costs, it will be recognized in the profit or loss of the relevant period in which it becomes receivable. On similar grounds, where a government grant becomes receivable for the sake of providing instant financial help to a business rather than in the form of an incentive to undertake specific expenditures, it can also warrant recognizing a grant in profit or loss of the relevant period in which the business qualifies to receive such grant, along with appropriate disclosure to assure that its impact is clearly understood.

A government grant might take the form of a non-monetary asset transfer, such as land or other resources, for the corporation’s use. In such cases, it is typical to determine the fair value of the non-monetary asset and account for both the grant and the asset at that particular fair value. A different approach that is occasionally taken is to record both the asset and the grant at a nominal amount.

Where government grants are associated with assets, comprising any non-monetary government grants at fair value, they are to be reported in the balance sheet either as deferred revenue/income or by subtracting the grant from the carrying value of the concerned asset.

On the other hand, grants connected to income are reported as part of profit or loss, either individually or under a broad category such as ‘Other income’; otherwise, they are subtracted when reporting the associated expenditure.

The information given below must be disclosed in the entity’s financial statements:

• The accounting policy^[1] which is employed for government grants, including the technique of balance sheet presentation
• The nature & extent of grants recognized in the books of account or financial statements
• Any unfulfilled criteria or contingencies linked to the grants recognized

Conclusion

This Accounting Standard (IAS 20) will be used in the accounting for and disclosure of government grants, as well as other kinds of aid provided by the Government. Government grants will not be recognized until the organization has a reasonable belief that the criteria attached to them will be met and that the grants will be received.

Read our Article:Accounting for Business Combinations under IFRS 3