IAS 20: Accounting for

Government grants and

disclosure of
Government Assistance
 DEFINITION
Government grants are assistance
by governments 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.
Other names include SUBSIDIES,
SUBVENTION or PREMIUM
 Definition: contd
Government grants exclude:
 Those forms of government assistance
which cannot reasonably have a value
placed upon them; and
 Transactions with government which
cannot be distinguished from the
normal trading transactions of the
entity. e.g. the government sponsoring
some students in various UDSM
programs cannot be referred
IAS 20: Accounting Govt Grants
to as a
grant to UDSM and Disclosure of Govt
 Government Assistance
• Action by the government designed to
provide economic benefit SPECIFIC to an
entity or range of entities qualifying
under certain criteria.
• Does not include benefits provided only
INDIRECTLY through action affecting
GENERAL trading conditions, e.g. provision
of infrastructure, or imposition of trading
constraints on competitors
 Types of Government Grants

• Grants related to assets:

Are government grants whose primary
condition is that an entity qualifying for
them should purchase, construct or
otherwise acquire long-term assets. Note
that there could be other conditions, e.g.
location, period to be acquired/held, etc.
• Grants related to income:
Are government grants other than those
related to assets.
Why does the government
do that?
Usually to encourage an entity to
embark on a course of action which
it would not normally have taken if
the assistance was not provided.
e.g. Utility companies (electricity
and water) and Quasi government
entities.
 Does it matter in FSs
preparation?

• May be significant to FSs because:

 There has to be an appropriate way of
accounting for the RESOURCE
TRANSFERRED
 EXTENT to which the entity benefited
from the grant during the reporting period
has to be indicated, to enhance
COMPARABILITY [with other
periods/entities FSs]
Recognition of government
grants
Government grants, including non-
monetary grants at fair value, shall
NOT BE RECOGNIZED until there
is reasonable assurance [it is
PROBABLE] that:
 the entity will comply with the conditions
attaching to them; and
 the grants will be received.
 CONDITIONS
 RECEIPT OF A GRANT does not of
itself provide conclusive evidence
that the conditions attaching to
the grant have been or will be
fulfilled.
 Manner of receipt does not affect
the accounting method, e.g. cash,
reduction of liability to the
government, forgivable loan,
government loan at a below market
rate, etc.
 Accounting for the grant
 Government grants shall be
RECOGNIZED in P/L on a
SYSTEMATIC basis over the
periods necessary to match them
with the related costs which they
are intended to compensate.
 They SHALL NOT be credited
directly to shareholders’ interests.
 Capital vs Income approach
Two broad approaches have been debated in
relation to the accounting treatment of
government grants:
 The capital approach, under which a
grant is recognized outside P/L, and
 The income approach, under which a
grant is recognized in P/L over one
or more periods.
 Arguments in support of
the capital approach
• GG are a financing device and should be
dealt with as such in the B/sheet rather
than be passed through P/L to offset the
items of expense which they finance.
• Since no repayment is expected, they
should be credited directly to shareholders’
interests [recognized outside P/L]; and
• Inappropriate to recognize GG in P/L as
they are not earned but represent an
incentive from govt without related costs.
 Arguments in support of the
income approach
• Received from a source other than
shareholders, therefore – shouldn’t be
credited directly to shareholders’
interests
• GG are EARNED through compliance to
their conditions and meeting the
envisaged obligations.
• as income and other taxes are expenses,
it is logical to deal also with govt
grants, which are an extension of fiscal
policies, in P/L. [In other words, GG is
the opposite of taxes – and therefore
just like taxes – should go to P/L)
IAS 20: Accounting Govt Grants
and Disclosure of Govt
 Recognition of GG in the
SoCI
 Government grants are recognised as
income on a systematic basis over the
periods in which the entity recognizes as
expenses the related costs for which
the grant in intended to compensate.
 Income recognition of government grants
on a receipts basis is not in accordance
with the accrual accounting assumption.
 it would only be acceptable if no basis
existed for allocating a grant to periods
other than the one in which it was
received.
 Important:

It is important to carefully
examine the conditions attaching
to the receipt of the GG and
the period in which the entity
fulfills those conditions giving
rise to the costs and expenses
relating to the grant.
 Recognition of GG in the
SoCI
A government grant that becomes receivable
 as COMPENSATION for expenses or losses
ALREADY INCURRED, or
 for the purpose of giving IMMEDIATE
FINANCIAL SUPPORT to the entity with
NO future related costs
shall be recognized as income in the period in
which it becomes receivable.
Non-monetary government
grants
 E.g., land or other resources,
 Entity should assess the fair value of
the non-monetary asset and account for
both grant and asset at that fair value.
 An alternative that is sometimes
followed is to record both asset and
grant at a nominal (small/insignificant)
amount.
 Presentation of grants
related to assets
• Government grants related to
assets, including non-monetary
grants at fair value, shall be
presented in the statement of
financial position either by setting
up the grant as deferred income or
by deducting the grant in arriving
at the carrying amount of the
asset.
 Two methods of presentation
in F/S
• One method sets up the grant as deferred
income which is recognized in P/L on a
systematic basis over the useful life of the
asset.
• The other method deducts the grant in
arriving at the carrying amount of the
asset. The grant is recognized in P/L over
the life of a depreciable asset in form of a
reduced depreciation expense.
 Examples

Entries at year end?

 Presentation of grants
related to income
• Grants related to income are
sometimes presented as income in
the SoCI, either separately or
under a general heading such as
‘Other income’;
• alternatively, they are deducted in
reporting the related expense.
 (Arguments in favor of each methods?)
(par 29 & 30)
 Repayment of government
grants
• Accounted for as a revision to an
accounting estimate (IAS 8)
• Repayment of a grant related to
income shall be applied first against
any unamortized deferred credit set
up in respect of the grant
• The balance of the repayment shall
be recognized immediately as an
expense.
Repayment of a grant related
to an asset
• shall be recorded by increasing the
carrying amount of the asset or reducing
the deferred income balance by the
amount repayable.
• The cumulative additional depreciation
that would have been recognized to date
as an expense in the absence of the
grant shall be recognized immediately as
an expense.
 Govt assistance not included
in F/S as GG
Those that cannot be reasonably valued
or distinguished from normal trading,
examples are
 free technical or marketing advice and
the provision of guarantees.
 a government procurement policy that is
responsible for a portion of the entity’s
sales.
 Loans at nil or low interest rates
Govt assistance not included
in F/S as GG
• The significance of the benefit in
the above examples may be such
that disclosure of the NATURE,
EXTENT and DURATION of the
assistance is necessary in order
that the financial statements
may not be misleading.
 Disclosure
 The accounting policy adopted for
government grants, including the
methods of presentation adopted in the
financial statements;
 The nature and extent of government
grants recognized in the FSs &
indications of other forms of government
assistance from which the entity
benefited directly
 Unfulfilled conditions & other
contingencies attaching to government
assistance that has been recognized.