IAS 20

GOVERNMENT GRANTS AND SUBSIDY

SESSION 4
 IAS 20 – 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.

i o n s
S o lu t
i ng
 Government assistance: government action to generate an economic benefit for
entities that meet qualifying criteria.arn
x L e
er t e
V

VERTEX LEARNING SOLUTIONS - HTTPS://VLS-ONLINE.COM

 IAS 20 GOVERNMENT GRANTS

 It is common for entities to receive government grants for various purposes

(grants may be called subsidies, premiums, etc).

i o n s
l u
 They may also receive other types of assistanceowhich t may be in many forms.
i n g S
ea r n
ex L
r
 The treatment of government
e t grants is covered by IAS 20 Accounting for
government grants andVdisclosure of government assistance.

VERTEX LEARNING SOLUTIONS - HTTPS://VLS-ONLINE.COM

 IAS 20 GOVERNMENT GRANTS

IAS 20 does not cover the following situations:

1.
i o n s
Accounting for government grants in financial statements reflecting the
effects of changing prices ol u t
n g S
iform of 'tax breaks'
2. r n
Government assistance given inathe
e
3. Government actinge ex L
asrtpart-owner of the entity
V

VERTEX LEARNING SOLUTIONS - HTTPS://VLS-ONLINE.COM

 RECOGNITION AND MEASUREMENT

 An entity should not recognise government grants until it has reasonable

assurance that:
 The entity will comply with any conditions attached to the grant
i o n s
 The entity will actually receive the grant
S o lu t
n g
 Even if the grant has been received, this idoes
n not prove that the conditions
L
attached to it have been or will bee a r
fulfilled.
r t ex
e
 It makes no differenceVin 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.

VERTEX LEARNING SOLUTIONS - HTTPS://VLS-ONLINE.COM

 IAS 20 GOVERNMENT GRANTS

 Any related contingency should be recognised under IAS 37 Provisions, contingent

liabilities and contingent assets, once the grant has been recognised.

i o n s
 In the case of a forgivable loan from government, o l u t
it should be treated in the same
i n g S
ea r n
way as a government grant when it is reasonably assured that the entity will meet
ex L
the relevant terms for forgiveness.
V e r t

VERTEX LEARNING SOLUTIONS - HTTPS://VLS-ONLINE.COM

 ACCOUNTING TREATMENT

There are two methods which could be used to account for government grants,
and the arguments for each are given in IAS 20:

i o n s
o l u t
Capital approach: Credit the grant directly to shareholders’ interest
i n g S
ea r n
e x L
Income approach: The grant
V e r t is credited to the income statement over one or
more periods.

VERTEX LEARNING SOLUTIONS - HTTPS://VLS-ONLINE.COM

 IAS 20 GOVERNMENT GRANTS

Capital approach

(a) The grants are a financing device, so should go through the statement of
i o n s
financial position.
S o lu t
a r n i ng
(b) (b) Grants are not earned, they are incentives without related costs, so it would
x L e statement.
er e
be wrong to take them totthe income
V

VERTEX LEARNING SOLUTIONS - HTTPS://VLS-ONLINE.COM

 IAS 20 GOVERNMENT GRANTS

Income approach
1. The grants are not received from shareholders so should not be credited directly
to shareholders' interests.
i o n s
S o lu t
2. Grants are not given or received for nothing. They are earned by compliance
with conditions and by meeting obligations.
n i n g There are, therefore, associated
costs with which the grant can be a
L r
matched
ethe grant. in the income statement as these
r te
costs are being compensated x by
3.
e
V of fiscal policies and so as income taxes and other taxes
Grants are an extension
are charged against income, so grants should be credited to income.

VERTEX LEARNING SOLUTIONS - HTTPS://VLS-ONLINE.COM

 IAS 20 GOVERNMENT GRANTS

 IAS 20 requires 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.
i o n s
S o lu t
 Where grants are received in relation ton i
a n g
depreciating asset, the grant will be
L e
recognised over the periods inxwhicha r
the asset is depreciated and in the same
e r t e
proportions. V

VERTEX LEARNING SOLUTIONS - HTTPS://VLS-ONLINE.COM

 IAS 20 GOVERNMENT GRANTS

Presentation of grants related to assets:

There are two choices here for how government grants related to assets should
be shown in the balance sheet:
i o n s
S o lu t
1. a rn
Set up the grant as deferred income. i ng
x L e
er t e
V
2. Deduct the grant in arriving at the carrying amount of the asset.

VERTEX LEARNING SOLUTIONS - HTTPS://VLS-ONLINE.COM

 IAS 20 GOVERNMENT GRANTS

Presentation of grants related to income

Method a:
i o n s
Soheading (“other income”)
Present as a separate credit or under a general lu t
n i n g
L ea r
r t ex
Method b: Ve
Deduct from related expenses

VERTEX LEARNING SOLUTIONS - HTTPS://VLS-ONLINE.COM

 IAS 20 GOVERNMENT GRANTS

 Disclosure is required of the following:

 Accounting policy adopted, including method of presentation

i o n s
S o lu t
a r n i ng
 Nature and extent of government grants recognised and other forms of assistance
received
x L e
er t e
V
 Unfulfilled conditions and other contingencies attached to recognised government
assistance

VERTEX LEARNING SOLUTIONS - HTTPS://VLS-ONLINE.COM