Accounting for Government

Grants and Government

Assistance

IAS 20
Content
1 Scope and Definitions

2 Recognition

3 Presentation and Measurement

4 Refund of Grants

5 Disclosures

6 Key Differences
Scope

Scope
► Applicable to all government grants

Out of scope
► Special problems in accounting for government grants reflecting the effect of changing prices
► Benefits that are available in determining taxable profit or tax loss (e.g., income tax holidays,
investment tax credits)
► Government participation in the ownership of the entity
► Government grants covered by IAS 41

3
Definitions

► Government: refers to the Central Government, State Government, Government agencies and
similar bodies, whether local, national or international

► Government grants 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 operating
activities of the entity.

4
Recognition

Recognition only if there is “reasonable assurance” that:

Entity will
comply with
conditions

Recognize
government
grant

Grants will
be received

5
Presentation

Grants related to Grants related to

assets income

Separately as
Deferred ‘other income’
income under profit &
loss

Deducted Deducted in
from the reporting the
carrying value related
of the asset expense

6
Example

Nova receives $15 million from a local council to set up in a particular area. The money is paid
specifically to contribute to the $80 million cost of a new factory. The factory is to be depreciated
over 40 years.

Required:

Show how the items will be dealt with in the statement of profit or loss and statement of financial
position at the end of Year 1 if the grant is to be treated as:
► deferred income;

► a reduction in the carrying amount of the factory.

7
Solution

(a) Deferred income

Statement of profit or loss $000

Depreciation of factory (assuming no estimated

residual value) (2,000)
Government grant 375

Statement of financial position $000

Tangible non-current assets

Property (80 million – 2 million) 78,000
Non-current liabilities:
Deferred income 14,250
Current liabilities:
Deferred income 375

8
Solution

(b) Reduction in carrying amount

Statement of profit or loss $000

Depreciation of factory (assuming no estimated

residual value)
((80 million – 15 million) ÷ 40) (1,625)

Statement of financial position $000

Tangible non-current assets

Property (65,000,000 – 1,625,000) 63,375

9
Matching of grant income with related expense

Government grants shall be recognised as income in profit or loss on a systematic basis over
the periods necessary to match with the related costs.

Recognised in profit or loss over the periods matching with depreciation expense
Grants on those assets.
related to
assets Non monetary grants at concessional rate may be recognized at either fair value
or at nominal value.

Grants Recognised in profit or loss in which the specific expenses are incurred.
related to Grants relating to past costs with no further cost shall be recognised in profit and
income
loss in the period in which it becomes receivable.

10
An example – income related grant

► Entity B received a subsidy in in return for setting up approved healthcare activities in the local
jurisdiction.

► The other conditions are that the entity shall need to conduct the activities for a period of 10
years.

► How should Entity B account for the income related grant?

The income related grant should be matched with the costs of meeting the grants over the
balance period of employing the locals. So each year a portion of the grant received should
be deferred over the balance portion of the 10 year condition attached to the grant.

11
Refund of government grant

Related to assets Related to income

► Increasing the carrying amount of

the asset or reducing the deferred
income balance by the amount ► Refund shall be first applied
payable towards any unapplied deferred
credit and then charged to profit
► Depreciation that would have been and loss account
recognised in the absence of the
grant is expensed immediately

12
An example – refund of government grant

Facts
► Entity A participates in a program sponsored by the government for the support of the
research and development activities where it received funds from the government on the basis
of R&D costs incurred (up to 50% of the costs incurred).
► These payments are fully repayable by the entity based on a percentage of the sales of
products derived from the research and development projects sponsored by the government
(“royalties”). No repayment is required if there are no sales. However, the repayment period is
not limited in time.
► In addition, the grant bears interest, which will be paid on the same basis as the principal
amount (from the sales of products derived from the research projects). The amounts received
and the repayments thereof are on a project-by-project basis.

► How should Entity A account for the grant and its refund?

13
An example – refund of government grant (cont.)

Response
► A forgivable loan from government is treated as a government grant when there is reasonable
assurance that the enterprise will meet the terms for forgiveness of the loan. Entity A treats the
amounts received from the government as a forgivable loan (in this case, the repayment of
loan will be waived if there are insufficient sales). Therefore, the accounting treatment under
IAS is as follows:

► Recognise the amounts received as liabilities (as long as there are expected future benefits as
a result of the research activity),
► Review at the end of each reporting period whether there is a reasonable assurance that part
or all of the amounts received will not be reimbursed based on future estimated sales.

14
An example – refund of government grant (cont.)

► If there is such assurance, derecognise part or all of the liability initially recognised with a
corresponding credit to profit or loss.
► If in subsequent reporting period, the entity revises upwards its estimates of future sales and
therefore of future payments, a liability for any amounts previously included in profit and loss
are restated with a corresponding debit in profit and loss.

15
Government assistance

► Action by govt. designed to provide an economic benefit specific to an entity or range of

entities qualifying under certain criteria.

► Government grants exclude government assistance which cannot reasonably have a value
placed upon them and transactions with the government which cannot be distinguished from
normal trading transactions of the entity

► Examples:
► Technical or marketing advice
► Government procurement policy responsible for portion of entity’s sales
► Disclose:
► Nature, extent and duration
► Unfulfilled conditions and other contingencies

16
Loans from government

► Forgiveness of loan: government grant

► Nil or low interest loans: government grant
► Loan must be recognised at fair value in accordance with IFRS 9
► Difference between cash received and loan amount recognised is accounted for in
accordance with IAS 20

17
An example – interest free government loan

► Entity Y operates in north-east India and the state government provides interest-free loans to
aid investment in the region.
► On April 1, 2015 Entity Y receives an interest-free loan of INR 5 mn for the project.
► The loan is repayable on March 31, 2018.
► The fair value of the loan is INR 4 mn.
► What would be the accounting entries in year 1?

Cash INR 5 mn
Loan INR 4 mn
Government Grant (deferred income) INR 1 mn
►

18
Past paper Question

19
Solution

20
Disclosure requirements and implications

► Accounting policy including the methods of presentation adopted in the financial statements
► Nature and extent of government grants recognised in the financial statements and an
indication of other forms of government assistance from which the entity has directly
benefited
► Unfulfilled conditions and other contingencies attaching to government assistance that has
been recognised

21
Key differences

Issue IAS 20 AS 12
Recognition criteria Lower threshold- reasonable Higher threshold- reasonable
assurance for conditions to be assurance for conditions to be
met and for receipt. Grant may met and reasonable certainty for
be recognized earlier under receipt.
IFRS.
Monetary grants related to non- Taken to profit and loss account Credited as capital reserve
depreciable assets (without
conditions)

22
Key differences (cont.)

Issue IAS 20 AS 12
Grants in the nature of Silent on this category (and, by To be credited to capital
promoter’s contribution implication, requiring recognition as reserve and to be treated as
income) shareholders funds

23
Key differences (cont.)

Issue IAS 20 AS 12
Loan at concessional rates of Loan to be measured at fair value Silent on this category
interest and recognized as per IFRS 9.

Value of concession i.e., difference

between proceeds received and
valuation done to be recognized as
grant

24
Key differences with IFRS and Ind AS

There is no GAAP difference

Thank You