IAS 20 Summary Notes

Accounting for Government Grants and Disclosure of Government

IAS 20
Assistance

DEFINITIONS

refers to government, government agencies and similar bodies whether local,

Government
national or international.
is action by government designed to provide an economic benefit specific to an
entity or range of entities qualifying under certain criteria. Government
Government assistance for the purpose of this Standard does not include benefits provided
assistance only indirectly through action affecting general trading conditions, such as the
provision of infrastructure in development areas or the imposition of trading
constraints on competitors.
are assistance by government in the form of transfers of resources to an entity in
return for past or future compliance with certain conditions relating to the
Government operating activities of the entity. They exclude those forms of government
grants 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 (subsidies etc.).
are government grants whose primary condition is that an entity qualifying for
Grants
them should purchase, construct or otherwise acquire long-term assets.
related to
Subsidiary conditions may also be attached restricting the type or location of the
assets
assets or the periods during which they are to be acquired to held.
Grants are government grants other than those related to assets.
related to
income

RECOGNITION

GENERAL
Government grants including non-monetary grants at fair value shall not be
When recognized until there is reasonable assurance that:
recognised? (a) The entity will comply with the conditions attaching to them; and
(b) The grants will be received
They are two broad approaches to the accounting treatment of government
grants:
(a) The capital approach (recognise directly in equity)
Approaches
(b) The income approach (recognise in profit or loss)

The IAS 20 advocates income approach.

Monetary Grant received in the form of cash.
grant
Grant received in the form other than cash.
Non-
In this case the asset and the grant are recognized at the fair value. The other
monetary
alternative may be to record the grant and the related asset at the nominal
grant
amount.

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IAS 20 Summary Notes

PERIOD OF RECOGNITION
Government grants shall be recognized as income over the periods necessary to match them with
the related costs, which they are intended to compensate, on a systematic basis.
Grants related to These are recognized over the period and matched with the related
income expenses.
Grants related to are recognized over the useful life of the fixed assets in the proportion in
depreciable assets which the depreciation on those assets is charged.
Grants related to are also recognized over the period, in which the related expenses are
non-depreciable made (conditions of the grant are fulfilled).
assets

EXAMPLE 20A
B Limited receives a government grant representing 50% of the cost of a depreciating asset which
costs $40,000. How will the grant be recognised if B Limited depreciates the asset:
(a) Over four years straight line; or
(b) At 60% reducing balance (remaining to be charged in year 4)?

The residual value is nil. The useful life is 4 years.

PRESENTATION

GRANT RELATED TO INCOME

Method 1: Include the grant in “other income” in profit or loss.
Method 2: Deduct from relevant expense by linked presentation.
Method 3: Present in separate line item as an “exceptional item” only if it is very material.

GRANT RELATED TO ASSET

setting up the grant as deferred income and amortise it (same basis as for
Method 1:
depreciation)
Method 2: deducting the grant in arriving at the carrying amount of the asset

EXAMPLE 20B
A company receives a $20,000 grant towards the cost of a new item of machinery, which cost
$100,000. The machinery has an expected life of four years and 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:
Prepare extracts of financial statement under both methods of presentation allowed under IAS 20
for grants related to assets.

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IAS 20 Summary Notes

REPAYMENT

GRANT RELATED TO INCOME

The amount of repayment is first applied against any un-amortised balance of deferred grant. If
repayment exceeds deferred grant, the excess is recognised as expense in profit or loss.

GRANT RELATED TO ASSET

The amount of repayment is first applied against any un-amortised balance of
Method 1: deferred grant. If repayment exceeds deferred grant, the excess is recognised as
expense in profit or loss.
The amount of repayment is debited to cost of the asset. The cumulative
Method 2: 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.

EXAMPLE 20C
Top Limited operates in a poor area. During 2004, it installs a special pollution control device at a
cost of $6,000 and receives a $4,000 grant from a local government. The depreciation is charged
at 10% using straight line method. During 2006, the government finds out that Top Limited has not
complied with the terms of the grant and asks it to repay the grant.

Required
Show the accounting treatment of repayment if Top Limited uses:
(a) Separate deferred grant method
(b) Reduction form cost of asset method

DISCLOSURE OF GOVERNMENT ASSISTANCE

The government grants not recognized because no value can be assigned to them or not
distinguishable from the other transactions of the entity shall be disclosed (if material).

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IAS 20 Summary Notes

ANSWER 20A
The grant should be recognised in the same proportion as the depreciation. Grant income is
$20,000 (i.e. 50% of $40,000)
(a) Straight line
Year Depreciation $ Grant income $
1 10,000 5,000
2 10,000 5,000
3 10,000 5,000
4 10,000 5,000

(b) Reducing balance

Year Depreciation $ Grant income $
1 24,000 12,000
2 9,600 4,800
3 3,840 1,920
4 2,560 1,280

ANSWER 20B
Method 1: Treating the grant as deferred income
Year 1 Year 2 Year 3 Year 4 Total
Income statement (extracts) $ $ $ $ $
Profit before grant and depreciation 50,000 50,000 50,000 50,000 200,000
Depreciation (25,000) (25,000) (25,000) (25,000) (100,000)
Amortisation of grant income 5,000 5,000 5,000 5,000 20,000
Profit 30,000 30,000 30,000 30,000 120,000

SFP (extracts) $ $ $ $
Non-current asset at cost 100,000 100,000 100,000 100,000
Accumulated depreciation (25,000) (50,000) (75,000) (100,000)
75,000 50,000 25,000 0
Liabilities (Current + Non-
current)
Deferred grant income 15,000 10,000 5,000 0

Method 2: Reducing the cost of the asset

Year 1 Year 2 Year 3 Year 4 Total
Income statement (extracts) $ $ $ $ $
Profit before grant and depreciation 50,000 50,000 50,000 50,000 200,000
Depreciation (20,000) (20,000) (20,000) (20,000) (80,000)
Profit 30,000 30,000 30,000 30,000 120,000

SFP (extracts) $ $ $ $
Non-current asset at cost 80,000 80,000 80,000 80,000
Accumulated depreciation (20,000) (40,000) (60,000) (80,000)
60,000 40,000 20,000 0

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IAS 20 Summary Notes

ANSWER 20C
Part (a)
The un-amortised balance of deferred grant would be $3,200 (i.e. $4,000 – $4,000 x 10% x 2
years).
Dr. Deferred grant $3,200
Dr. Profit or loss $ 800
Cr. Cash $4,000

Part (b)
The asset under this method is shown at $2,000 (i.e. $6,000 – 4,000).
The accumulated depreciation charged on asset would have been $2,000 x 10% x 2 years = $400.
The $4,000 grant has been repaid.
Dr. Equipment $4,000
Cr. Cash $4,000

The additional depreciation for two years on $4,000 paid should also be charged $4,000 x 10% x 2
years = $800.
Dr. Depreciation (P&L) $800
Cr. Accumulated depreciation $800

Dated: 22 August 2016

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