Multiple choice questions on Government Grants – IAS 20

Financial Accounting and Reporting 1

Ahmed Raza Mir, FCA

1. What is the primary objective of IAS 20?

A) To prescribe the accounting for government assistance.
B) To define government grants.
C) To disclose government assistance.
D) All of the above.
Answer: D) All of the above.

2. Which of the following entities can be considered as 'Government' under IAS 20?
A) Federal governments.
B) International Monetary Fund (IMF).
C) Small and Medium Enterprises Development Authority.
D) All of the above.
Answer: D) All of the above.

3. How should government grants related to assets be presented according to IAS 20?
A) As deferred income.
B) Deducted from the cost of the related assets.
C) Recognized in equity.
D) A or B.
Answer: D) A or B.

4. What conditions must be met for a government grant to be recognized in financial

statements?
A) Compliance with the conditions attached to them.
B) Receipt of the grant.
C) Both A and B.
D) Neither A nor B.
Answer: C) Both A and B.

5. Which approach does IAS 20 not allow for accounting for government grants?
A) Capital approach.
B) Income approach.
C) Deferred approach.
D) A and C.
Answer: D) A and C.

6. A company receives a government grant of Rs 10,000 for machinery that depreciates over 5
years. How should the grant be recognized in profit or loss?
A) Rs 2,000 annually over 5 years.
B) Rs 10,000 immediately.
C) Rs 5,000 in the first year and the rest over 4 years.
D) Not recognized in profit or loss.
Answer: A) Rs 2,000 annually over 5 years.

7. If a forgivable loan from the government for Rs 50,000 becomes a grant upon certain
conditions being met, how is this initially recognized?
A) As a liability.
 B) Directly in equity.
C) As income.
D) As deferred income.
Answer: A) As a liability.

8. A government loan provided at a below-market interest rate results in a benefit of Rs 5,000.

How should this benefit be recognized?
A) As a government grant in profit or loss as difference between Fair value and proceeds
B) As a reduction in the carrying amount of the loan.
C) Directly in equity.
D) Not recognized.
Answer: A) As a government grant in profit or loss as difference between Fair value and
proceeds

9. Which statement is true regarding the presentation of grants related to income under IAS
20?
A) Must be presented as deferred income only.
B) Can be presented as other income or deducted from related expenses.
C) Should be recognized directly in equity.
D) Are not recognized in financial statements.
Answer: B) Can be presented as other income or deducted from related expenses.

10. A company receives a government grant of Rs 50,000 for a project expected to incur costs
over 4 years. If the project incurs Rs 15,000 in costs in the first year, how much of the grant
should be recognized in profit or loss?
A) Rs 50,000 immediately.
B) Rs 15,000 based on the costs incurred.
C) Rs 12,500 annually over 4 years.
D) Cannot be determined from the information provided.
Answer: B) Rs 15,000 based on the costs incurred.

11. What is the treatment for a government grant that becomes repayable?
A) Recognized immediately as an expense.
B) Accounted for as a change in accounting estimate.
C) Deducted from equity.
D) Remains as income.
Answer: B) Accounted for as a change in accounting estimate.

12. A company receives a non-monetary government grant of land valued at Rs 100,000 with no
conditions attached. How should this grant be recorded?
A) As a liability.
B) At fair value as income.
C) At nominal value.
D) B or C, depending on the policy chosen by the company.
Answer: B) At fair value as income

13. Which condition does not need to be met for recognizing government grants (no Incomes) ?
A) The grants must be approved by the government.
B) There must be reasonable assurance that the entity will comply with the grant conditions.
C) The entity must have incurred the related expenses.
 D) There must be reasonable assurance that the grant will be received.
Answer: C) The entity must have incurred the related expenses.

14. How are grants related to non-depreciable assets recognized over time?
A) Equally over the asset's useful life.
B) Based on the depreciation method.
C) Over the periods that bear the cost of meeting the obligations.
D) Immediately in profit or loss.
Answer: C) Over the periods that bear the cost of meeting the obligations.

15. A forgivable loan becomes a government grant income when:

A) It is repayable within one year.
B) It is used for operational expenses.
C) The entity meets the terms for forgiveness.
D) The entity decides to repay the loan early.
Answer: C) The entity meets the terms for forgiveness

16. What happens if a grant related to assets becomes repayable?

A) It is recognized as revenue.
B) It increases the carrying amount of the asset or reduces deferred income.
C) It is directly deducted from equity.
D) No action is required until repayment.
Answer: B) It increases the carrying amount of the asset or reduces deferred income.

17. When is a government grant recognized as income?

A) When it is received.
B) Over the periods necessary to match them with the related costs.
C) Immediately after the grant agreement is signed.
D) At the end of the fiscal year.
Answer: B) Over the periods necessary to match them with the related costs.

18. The benefit of a loan at a below-market rate from the government is recognized as:
A) A liability.
B) An asset.
C) A government grant.
D) Not recognized.
Answer: C) A government grant.

19. A grant that compensates for expenses already incurred is recognized:

A) Over the expected life of the benefit.
B) Immediately in profit or loss.
C) As deferred income.
D) Equally over the remaining fiscal period.
Answer: B) Immediately in profit or loss.

20. Which of the following is not a disclosure requirement for government grants under IAS 20?
A) The accounting policy adopted for grants.
B) The impact of grants on the financial statements.
C) Detailed information on government assistance not recognized.
D) The fair value of non-monetary grants.
Answer: C) Detailed information on government assistance not recognized.
21. What is the treatment of a grant when the government requires repayment because the
conditions are not met?
A) Treated as a change in accounting estimate.
B) Immediately recognized as an expense.
C) Deducted from future grants.
D) No change; it continues to be recognized as income.
Answer: A) Treated as a change in accounting estimate.

22. When a company receives a grant related to income, how should it be recognized if it
compensates for specific future expenses?
A) Immediately in profit or loss.
B) As deferred income until the expenses occur.
C) Over the periods in which the expenses are recognized.
D) Not recognized until the project is completed.
Answer: C) Over the periods in which the expenses are recognized.

23. A company received a government grant of Rs 30,000 to cover expenses over three years. If
Rs 10,000 of expenses were incurred in year one, how much grant income should be
recognized?
A) Rs 30,000 in year one.
B) Rs 10,000 each year over three years.
C) Rs 10,000 in year one only.
D) The entire Rs 30,000 should be deferred until all expenses are incurred.
Answer: C) Rs 10,000 in year one only.

24. Which of the following would not be considered government assistance under IAS 20?
A) Cash grants.
B) Free technical advice.
C) Forgivable loans.
D) Indirect benefits through general trading conditions.
Answer: D) Indirect benefits through general trading conditions.

25. How should a company account for a government grant that is not related to assets or
specific expenses?
A) Recognize immediately as income.
B) Recognize as deferred income and amortize over a beneficial period.
C) Account for it as a direct increase in equity.
D) Not recognize until related costs are incurred.
Answer: A) Recognize immediately as income.

26. A company receives a Rs 20,000 grant for a machine with a 5-year life. What is the annual
grant income recognition if using the straight-line method of depreciation?
A) Rs 4,000 per year over 5 years.
B) Rs 20,000 immediately.
C) Rs 5,000 per year over 4 years.
D) Dependent on the machine's usage.
Answer: A) Rs 4,000 per year over 5 years.

27. If a government grant related to income is repayable, how is the repayment treated?
A) As a deduction from income in the year of repayment.
 B) As an adjustment to the grant income recognized in previous periods.
C) First against any unamortised deferred grant income, then as an expense.
D) No action is taken until the conditions are fully met.
Answer: C) First against any unamortised deferred grant income, then as an expense.

28. Under IAS 20, a forgivable loan is recognized as a grant (no grant income) when:
A) It is received.
B) The loan terms are met.
C) There is reasonable assurance the conditions for forgiveness will be met.
D) The loan is forgiven.
Answer: C) There is reasonable assurance the conditions for forgiveness will be met.

29. How should a company disclose government grants in its financial statements?
A) As a separate line item in equity.
B) Within the notes, detailing the nature and extent of the grants.
C) As part of its revenue.
D) Only when the grant is repayable.
Answer: B) Within the notes, detailing the nature and extent of the grants.

30. A company receives a non-monetary government grant of equipment. The fair value of the
equipment is Rs 50,000, and its nominal value is Rs 1,000. How should the company
recognize the grant if it chooses to record the asset at nominal value?
A) As income of Rs 50,000.
B) As Asset of Rs 1,000.
C) As a deduction from the cost of the equipment iei recognisnig the asset at Rs 49,000.
D) Not recognized in the financial statements.
Answer: B) As Asset of Rs 1,000.