Accounting for Government

Grants and Disclosure of

Government Assistance:
MFRS 120
 Accounting for Government
Grants and Disclosure of
Government Assistance

⚫ Related standards
⚫ MFRS 120
⚫ Current GAAP comparisons
⚫ Looking ahead
⚫ End-of-chapter practice

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 MFRS 120 - Overview

⚫ Objective and scope

⚫ Accounting for government grants
⚫ Government assistance
⚫ Disclosure

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 MFRS 120 – Objective and
Scope
⚫ Government grant: a form of government
assistance; a transfer from a government to
an entity that requires compliance with
certain conditions related to entity’s operating
activities.
⚫ Government assistance: government action
to generate an economic benefit for entities
that meet qualifying criteria.

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 MFRS 120 – Objective and Scope

⚫ Excludes benefits provided in determining

adjusting taxable profit or tax loss, or that are
determined on the basis of the income tax
liability - such as investment tax credits,
income tax holidays, accelerated tax
depreciation methods and reduced income
tax rates

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 MFRS 120 – Accounting for
Government Grants
Recognition and Measurement:

⚫ Recognize a government grant when there

is reasonable assurance that
1. The grant will actually be received, and
2. The entity will comply with the conditions
attached to the grant

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 MFRS 120 – Accounting for
Government Grants
Two general approaches:
1. Capital approach (whereby grant is directly
credited to shareholders’ interest) (Not allowed
under MFRS 120)
2. Income approach* (Apply this one *)
- in line with the accrual concept.
* Grants from government are not equity
financing. They are non-shareholder-related
increases in net assets (ie NOT receipts from
shareholders) and therefore items of income.
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 MFRS 120 – Accounting for
Government Grants
⚫ Income approach: recognize government
grants in profit or loss in the same periods
that the related expenses are recognized

⚫ If for acquisition of assets – on the same

basis as the depreciation on the assets

⚫ If related directly to incurring specific

expenditures – on the same basis as the
expenditures
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 MFRS 120 – Categories of
Government Grants
Two groups:

⚫ Grant related to assets (ie grants given to

help acquire or construct non-current assets) ;
and

⚫ Grant related to income (ie grants other than

those related to assets)

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 Grant Related to Asset
Presentation of grants related to assets:
⚫ Companies have a choice – recognize as
(a) deferred income, or
(b) as a reduction in the carrying amount of
the related asset

⚫ Example: Company A receives a RM25 million

grant toward the purchase of new equipment
that cost RM100 million; equipment has a five
year life and is depreciated on a straight-line
basis
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 Grant Related to Asset (contd)
⚫ Entry when grant received:
(a) Dr. Cash 25
Cr. Deferred government grant 25
(Deferred Income)

OR
(b) Dr. Cash 25
Cr. Equipment 25

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 Grant Related to Asset (contd)
⚫ Entry as asset is used:
(a) Dr. Depreciation expense 20
Cr. Accumulated depreciation 20
Dr. Deferred government grant 5
Cr. P or L (deferred income - grant) 5
OR
(b) Dr. Depreciation expense 15
(RM100 - RM25) ÷ 5 = 15
Cr. Accumulated depreciation 15

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 Grant Related to Income
⚫ Grants are recognized as income over the periods
the related costs are incurred, because the grants
are given to compensate for the expenses
incurred.

⚫ Presentation of grants related to income:

❑ Example: Company B receives a government
grant equal to 10% of the payroll costs incurred.
Payroll costs incurred are RM100,000.

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 Grant Related to Income
⚫ If the payroll expenses have not been incurred, the
grant is taken to deferred income:
Dr. Grant receivable/ Cash 10,000
Cr. Deferred income 10,000

⚫ If the payroll expenses have been incurred, or for

immediate financial support with no future related
costs, the grant should be recognized as income in
the period in which it is receivable.
Dr. Grant receivable / Cash 10,000
Cr. Grant income (in SOPL) 10,000
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 Non-monetary Government
Grants

⚫ Non-monetary grant (eg land and other

resources.
⚫ Usual to assess the fair value of the non-
monetary asset, and account for both the
grant and asset at fair value, or
⚫ Alternatively, record both asset and grant at
nominal value.

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 Non-monetary Government
Grants contd
Example:
On 1 Jan 20x8, a state government granted and
transferred a land to Cee Bhd for a nominal
consideration of RM10,000. The market value of
the land at this date was RM10,000,000. The
condition attached to the grant was that Cee Bhd
would clean up the water pollution in state’s rivers
for 10 years.

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 Non-monetary Government
Grants contd
Option 1: Record grant at nominal value
Dr: Land (at nominal value) 10,000
Cr: Cash 10,000

Note: A separate grant is not recognized, but the

benefits are received indirectly from not paying
RM9,990,000.

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 Non-monetary Government
Grants contd
Option 2: Record grant at fair value
Dr: Land (at fair value) 10,00,000
Cr: Cash 10,000
Cr: Government grant 9,990,000

Note: Grant initially recognized as a liability (eg

deferred income) and subsequently amortized in
profit or loss over the 10-year period.

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 Grants that become Repayable
⚫ Normally due to failure to meet the specified
conditions of the grant.
⚫ If repayment relates to income: first applied
against any unamortised deferred income. Any
excess recognise immediately as expense.
⚫ If repayment relates to an asset: increase the CV
of asset or reduce the deferred income balance,
by the amount payable.
➢ Cumulative additional depreciation that would
have been recognized to date in the absence of
the grant is recognized immediately as an
expense in P&L
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 Government Assistance
⚫ Grants exclude assistance that:
➢ cannot reasonably be valued (eg technical or
marketing advice, provision of guarantees)
➢ benefits provided only indirectly through action
affecting general trading conditions, (eg provide
infrastructure and impose trading constraints on
competitors).
⚫ Govt assistance is neither quantified nor
introduced into the financial statements.
⚫ Example of assistance that cannot be separated
from the normal trading activities is the govt ‘s
20 procurement policy, which is part of entity’s sales.
 MFRS 120 Disclosure

⚫ Three types:
1. Accounting policy for grants and their
presentation
2. Nature and extent of grants recognized,
and information about other forms of
assistance that have been beneficial
3. Information about contingencies or
conditions not yet met related to assistance
recognized

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