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IAS 20 Accounting for Government Grants and Disclosure of Government Assistance is a standard that specifies the accounting that specifies the accounting treatment and disclosure required if an entity received government. This standard is particularly relevant in the current environment where lots of government grants and assistance are given to companies to cushion the COVID-19 pandemic.
Let’s now understand how companies should account for government assistance and government grants in the financial statements as well as the required disclosures to explain to the users of the financial statements on the transaction.
#1: What are government grant and government assistance?
IAS 20 defines government grant and government assistance as follows:
- Government grants are government 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.
- Government assistance is action by the government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria.
Government assistance meets the definition of a government grant. However, only government assistance that has a value placed on it and transaction with the government that can be distinguished from the normal operating transactions of the entity is considered.
There are two types of government grants specify in IAS 20 which is grants related to assets and grants related to income. Grants related to assets are those grants given by the government in which the primary condition is for entities to purchase, construct or acquire long-term assets in order to qualify for the grants. While grants related to income are grants provided to entities other than those related to assets. Sometimes, government grants are also called or referred to with different names such as subsidies, premiums and others.
#2: How do we define government?
One of the questions commonly asked is how do we define government for the purpose of this standard. Does it mean federal government? Does government statutory bodies included? IAS 20 defines government as the government, government agencies and similar bodies whether local, national or international. This definition of government in itself is broad and hence, judgment is needed to determine whether an entity giving out the grant is considered as ‘government’. In most cases, it is quite straightforward to determine whether such an entity is considered a government.
#3: When do we recognise government grants?
Government grants should only be recognised only when there is reasonable assurance that (i) the entity will comply with the conditions attaching to the grants and (ii) the grants will be received. The grants should be recognised at their fair value.
For this purpose, grants are not recognised just because entities have received them as the receipt of a grant in itself is not conclusive evidence that the conditions attaching to the grant have been or will be fulfilled. It is also important to note that the manner in which a grant is received does not affect the accounting method to be adopted for the grant.
#4: How do we recognise a forgivable loan from the government or loan at a below-market rate?
Sometimes, entities may also receive a loan from the government. The interest rate on the loan provided by the government is generally below the market interest rate of commercial loan. In this situation, the benefit for this type of loan is treated as a government grant. The loan itself is recognised and measured in accordance with IFRS 9 Financial Instruments while the benefits of the loan (being the difference between the loan value as per IFRS 9 and the proceeds received) is accounted for in accordance with this Standard.
For a forgivable loan by the government, the loan should be treated as a government grant when there is reasonable assurance that the entity will meet the terms for the forgiveness of the loan.
#5: How and when do we recognise grant income in the profit or loss?
IAS 20 states that government grants should 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. There are two methods generally applied to account for government grants which are the capital approach and the income approach. Under the capital approach, grant income is recognised outside profit or loss while under the income approach, grant income is recognised in profit or loss over one or more periods.
#6: How do we treat grants for expenses or losses already incurred?
IAS 20 states that a government grant that becomes receivables as compensation for expenses or losses already incurred or to give immediate financial support to an entity with no future related costs, grant should be recognised in profit or loss of the period in which it becomes receivables. Entities must also consider the necessary disclosure to ensure the effect is clearly understood and communicated in the financial statements.
#7: What if an entity received a non-monetary government grant? How should it be treated?
Sometimes, entities also received non-monetary grants such as land, buildings, or other resources. In such a situation, entities usually assess the fair value of the non-monetary asset and account both the grant and asset at the fair value. As an alternative method, entities sometimes record the asset and grant at a nominal amount (nominal value).
#8: What are the presentation requirements for grants related to assets and grants related to income?
For government grants related to assets, including non-monetary grants at fair value, such grants are presented either as deferred income or by deducting it to arrive at the carrying amount of the asset in the statement of financial position.
For government grants related to income, it is presented either separately or under a general heading such as “other income” in the profit or loss. Alternatively, they are deducted in reporting the related expenses (net approach).
#9: What is the accounting requirement for repayment of government grant?
Sometimes, it is also possible for entities to repay the government on the government grant received. This for instance, when the costs to be compensated by the government grant is lower than expected. In such a situation, the repayment is accounted for as a change in estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
Repayment of grants related to income should first be offset against unamortised deferred credit in respect of the grant. Otherwise, repayment should be recognised immediately in profit or loss. If the repayment relates to repayment of grants related to the asset, the repayment amount should be recognised by increasing the carrying amount of the asset or by reducing the deferred income balance. The cumulative additional depreciation should be recognised immediately in profit or loss.
#10: What are the disclosure requirements in relation to government grants?
IAS 20 requires the following disclosures to be made in the financial statements:
- The accounting policy adopted for government grants, including the method of presentation adopted.
- The nature and extent of government grants recognised and an indication of other forms of government assistance from which the entity has directly benefited.
- Unfulfilled conditions and other contingencies attached to government assistance that has been recognised.
The 10 questions above summarises the key takeaways on IAS 20 Accounting for Government Grants and Disclosure of Government Assistance.
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