IAS 20: Accounting for government grants and disclosure of government assistance

It is common for entities to receive government grants for various purposes (grants may be called subsidies, premiums, etc). They may also receive other types of assistance which may be in many forms. The treatment of government grants is covered by IAS 2 Accounting for government grants and disclosure of government assistance. !rior to the issue of IAS 2 , government grants provided companies wilh an easy way to ramp up profits. In some cases grants would be credited to revenue in full, as soon as they were received. IAS 2 was issued to remedy this abuse. IAS 2 does not cover the following situations.

Accounting for government grants in financial statements reflecting the effects of changing
prices "overnment assistance given in the form of 'tax breaks' "overnment acting as part-owner of the entity These definitions are given by the standard, as amended by I#$S %&. overnment! "overnment, government agencies and similar bodies whether local national or international. overnment assistance! Action by government designed to provide an economics benefit specific to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. They e'clude those terms of government assistance which cannot reasonably have a value placed upon them and transaction with government which cannot be distinguished from the normal trading transaction of the entity. rants related to assets! "overnment grants whose primary condition is that an entity (ualifying for them should purchase construct or otherwise ac(uire non)current assets. Subsidiary conditions may also be attached restricting he type or location of the assets or the periods during which they are to be ac(uired or held. rants related to income! "overnment grants other than those related to assets. "orgivable loans! *oans which the lender underta+es to waive repayment of under certain prescribed conditions.

"air value! The price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between mar+et participants at the measurement date. There are many different forms of government assistance, both the type of assistance and the conditions attached to it will vary. "overnment assistance may have encouraged an entity to underta+e something it would not otherwise have done. -ow will the receipt of government assistance affect the financial statements.

a. An appropriate method must be found to account for any resources transferred. b. The e'tent to which an entity has benefited from such assistance during the reporting period
should be shown. An entity should not recognise government grants (including non)monetary grants at fair value) until it have reasonable assurance that,

The entity will comply with any conditions attached to the grant The entity will actuall# receive the grant
/ven if the grant has been received, this does not prove that the conditions attached to it have been or will be fulfilled. It ma+es no difference in the treatment of the grant whether it is received in cash or given as a reduction in a liability to government, ie the manner of receipt is irrelevant! Any related contingenc# should be recognised under IAS 37 Provisions, contingent liabilities and contingent assets, once the grant has been recognised. In the case of a forgivable loan (as defined in the +ey terms above) from government, it should be treated in the same way as a government grant when it is reasonably assured that the entity will meet the relevant terms for forgiveness. Accounting treatment of government grants There are two methods which could be used to account for government grants, and the arguments for each are given in IAS 2 . $apital approach The grant is credited directly to shareholders0 funds. Income approach The grant is credited to profit or loss over one or more periods. The standard gives the following arguments in support of each method. $apital approach

a. The grants are a financing device% so should go through the statement of financial position. In
profit or loss they would simply offset the e'penses which they are financing. 1o repayment is e'pected by the "overnment, so the grants should be credited directly to shareholders0 interests.

b. "rants are not earned& they are incentives without related costs, so it would be wrong to ta+e
them to profit or loss. Income approach

a. The grants are not received from shareholders so should not be credited directly to
shareholders0 interests. b. "rants are not given or received for nothing! They are earned by compliance with conditions and by meeting obligations. There are therefore associated costs with which the grant can be matched in profit or loss as these costs are being compensated by the grant. c. "rants are an e'tension of fiscal policies and so as income ta'es and other ta'es are charged against income, so grants should be credited to income. IAS 20 re'uires grants to be recognised under the income approach% ie grants are recognised as income over the relevant periods to match them with related costs which they have been received to compensate. This should be done on a systematic basis. rants should not% therefore% be credited directl# to shareholders' interests! It would be against the accruals assumption to credit grants to income on a receipts basis, so a s#stematic basis of matching must be used. A receipts basis would only be acceptable if no other basis was available. It will usually be easy to identify the costs related to a government grant% and thereby the period(s) in which the grant should be recognised as income, ie when the costs are incurred. 2here grants are received in relation to a depreciating asset, the grant will be recognised over the periods in which the asset is depreciated and in the same proportions. In the case of grants for non-depreciable assets% certain obligations may need to be fulfilled, in which case the grant should be recognised as income over the periods in which the cost of meeting the obligation is incurred. #or e'ample, if a piece of land is granted on condition that a building is erected on it, then the grant should be recognised as income over the building0s life. There may be a series of conditions attached to a grant, in the nature of a pac+age of financial aid. An entity must ta+e care to identify precisely those conditions which give rise to costs which in turn determine the periods over which the grant will be earned. 2hen appropriate, the grant may be split and the parts allocated on different bases. An entity may receive a grant as compensation for e'penses or losses which it has alread# incurred! Alternatively, a grant may be given to an entity simply to provide immediate financial support where no future related costs are e'pected. In cases such as these, the grant received should be recognised as income of the period in which it becomes receivable. !resentation of grants related to assets (resentation of grants related to assets! There are two choices here for how government grants related to assets (including non)monetary grants at fair value) should be shown in the statement of financial position.

a. Set up the grant as deferred income! b. )educt the grant in arriving at the carrying amount of the asset.
2hichever of these methods is used, the cash flows in relation to the purchase of the asset and the receipt of the grant are often disclosed separately because of the significance of the movements in cash flow.

*xample 3n % 4anuary 2 56, 5 7o purchased a non)current asset for cash of 8% , and received a grant of 82 , towards the cost of the asset. 5 7o0s accounting policy is to treat the grant as deferred income. The asset has a useful life of 9 years. 2hat will be the accounting entries to record the asset and the grant in the year ended &% :ecember 2 56.

Ac(uisition of the asset and receipt of the grant on % 4anuary 2 56 :/;IT 1on)current assets 8% , 7$/:IT 7ash 8% , - to record the asset at its cost :/;IT 7ash 82 , 7$/:IT :eferred income 82 , - to record the receipt of the grant In the year ended &% :ecember 2 56 the asset is depreciated and a portion of the grant is released to profit or loss, :/;IT 7$/:IT :/;IT 7$/:IT :epreciation e'pense (8% , <9 years) Accumulated depreciation :eferred income (82 , < 9 years) 3perating e'penses 82 , 82 , 8=, 8=,

The release of the deferred income is matched to the depreciation e'pense, so the net effect is an e'pense of +,-%000 relating to the asset. If 5 7o had deducted the grant from the carrying amount of the asset, the net e'pense would have been, 8 % , (2 , 6 , %>,

7ost of asset *ess grant received 7arrying amount :epreciation (6 , < 9 years)

) Same result

(resentation of grants related to income These grants are a credit to profit or loss, but there is a choice in the method of disclosure. .ethod /b0 Income approach :educt from the related e'pense. .ethod /a0 !resent as a separate credit or under a general heading, eg other income

Some would argue that offsetting income and e'penses in profit or loss for the year is not good practice. 3thers would say that the e'penses would not have been incurred had the grant not been available, so offsetting the two is acceptable. Although both methods are acceptable, disclosure of the grant may be necessary0 for a proper understanding of the financial statements, particularly the effect on any item of income or e'pense which is re(uired to be separately disclosed.

1epa#ment of government grants If a grant must be repaid it should be accounted for as a revision of an accounting estimates.

1epa#ment of a grant related to an asset

Increase the carrying amount of the asset or reduce the deferred income balance by the amount
repayable.

The cumulative additional depreciation that would have been recognised to date in the absence
of the grant should be immediately recognised as an e'pense. 1epa#ment of a grant related to income

Apply first against any unamorti?ed deferred income set up in respect of the grant. Any e'cess should be recognised immediately as an e'pense

It is possible that the circumstances surrounding repayment may re(uire a review of the asset value and an impairment of the new carrying amount of the asset. :isclosure is re(uired of the following.

Accounting polic# adopted, including method of presentation 2ature and extent of government grants recognised and other forms of assistance received 3nfulfilled conditions and other contingencies attached to recognised government
assistance The IAS; is intending to amend IAS 2 but the pro@ect is currently deferred. It is unhappy with the following aspects,

"rants being treated as a deferred credit when there is no liability. This is not consistent with
the 7onceptual #ramewor+.

 IAS 2 allows alternative treatments, which does not enhance comparability The option to deduct the grant from the carrying amount of the asset results in understatement
of assets.