IAS 20 Government grants

Applicability

• The standard does not apply to following situations:

– Accounting for Govt. grants in FS reflecting changes in prices

– Government assistance given in the form of tax breaks

– Government acting as a part-owner of entity

Definitions

• Government includes government agencies & similar other

bodies whether local, national or international

• Grant is the assistance provided by the Govt. in the form of

transfers of resources to the entity in return for past or future
compliance with certain conditions relating to operating
activities of the entity
When to recognise GG?
An entity should not recognise government grants (including non-monetary
grants at fair value) until it has reasonable assurance that:

The entity will comply with any

conditions attached to the grant

The entity will actually receive the grant

Any related contingency should be recognised under IAS 37, once

the grant has been recognised.
Accounting for GG
 To be recognised as income over the relevant periods to match them with
related costs
 Grants should not be directly credited to equity
 Grants related to assets
o Set up grant as a deferred income i.e. recognised as income over useful
life of the asset or
o Deduct the grant amount from carrying value of the asset
 Grants related to income
o Separate credit in the SOPL or
o Deduct from related expense
Example

A company receives a 20% grant towards the cost of a new item of

machinery, which cost $100,000. The machinery has an expected life of
four years and a nil residual value. The expected profits of the company,
before accounting for depreciation on the new machine or the grant,
amount to $50,000 per annum in each year of the machinery's life.

Required:
Account for GG per IAS 20.
Answer
Answer
Repayment of grant
 If grant has to be repaid, it should be accounted for as change in
accounting estimate i.e. prospectively

 Repayment of grant related to income

– First applied to unamortised balance of deferred income & any
excess taken as expense to SOPL

 Repayment of grant related to asset

– Increase in carrying value of asset or reduce deferred income
– Change in depreciation should be recognised immediately as
expense
Example Repayment of asset related grant
Sonora Ltd installs solar panels on 1 January 2004 at a cost of $12 million and
receives a grant of $8 million from the local government.

During 20X6, the government finds out that Sonora has not complied with
certain terms of the grant and therefore asks it to repay the grant. Sonora gives
up and repays $8 million. It had deducted the grant from the carrying amount of
the asset and charged depreciation at 10% under the straight-line method for
two years.

Required:

Show the accounting treatment as per IAS 20.

Answer
The carrying value of the asset as on the date of repayment would be:
Cost 12 million – Grant 8 million = Net cost 4 million

Depreciation for 2 years will be = 0.8 million

Carrying value = 3.2 million

Depreciation on $12m (ignoring grant) = $2.4 million (for 2 years)

Additional accumulated depreciation = $1.6 million ($2.4 – $0.8)
Answer contd..

 Repayment of the grant of $8m

Dr Asset $8m
Cr Bank $8m

 Additional depreciation of $1.6m - charged in SOPL and credited to accumulated

depreciation.

Revised gross amount = $12m (4 + 8)

Accumulated depreciation = $2.4m ($0.8 + $1.6)
Revised carrying value = $9.6m
Thank You!