IAS 20 | Accounting for Government Grants and Disclosure of Government Assistance

1

Scope

This standard applies to the accounting for and disclosure of government grants and the disclosure of other forms of government assistance.

2

Exclusions

The standard does not deal with problems arising from changing prices, assistance provided in the form of tax benefits (e.g., tax holidays, investment tax credits), government participation in ownership, or grants covered by IAS 41 Agriculture.

3

Definitions

The following terms are used in this Standard with the meanings specified:

• Government refers to government, government agencies and similar bodies whether local, national or international.
• Government assistance is action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria.
• 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.
• 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.
• Grants related to income are government grants other than those related to assets.
• Forgivable loans are loans which the lender undertakes to waive repayment of under certain prescribed conditions.
• Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

4

Assistance Forms

Government assistance takes many forms with varying natures and conditions, often intended to encourage entities to take actions they otherwise would not have taken.

5

Significance

Receipt of assistance is significant for financial statements to determine the appropriate method of accounting for transferred resources and to indicate the extent of benefit received, facilitating comparison with prior periods and other entities.

6

Terminology

Grants may be referred to by other names such as subsidies, subventions, or premiums.

7

Recognition Criteria

Government grants, including non-monetary ones at fair value, are not recognised until there is reasonable assurance that the entity will comply with the attached conditions and the grants will be received.

8

Receipt vs Compliance

Receipt of a grant does not by itself provide conclusive evidence that the conditions have been or will be fulfilled.

9

Receipt Method

The accounting method is not affected by whether the grant is received in cash or as a reduction of a liability to the government.

10

Forgivable Loans

A forgivable loan is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness.

10A

Below-Market Loans

The benefit of a government loan at a below-market interest rate is treated as a government grant. The loan is recognised and measured under IFRS 9, and the benefit is measured as the difference between the initial carrying value of the loan and the proceeds received.

11

Contingencies

Once recognised, any related contingent liability or asset is treated in accordance with IAS 37.

12

Income Approach

Grants are recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs the grants are intended to compensate.

13

Approaches

Two broad approaches exist: the capital approach (recognised outside profit or loss) and the income approach (recognised in profit or loss).

14

Capital Approach Arguments

Arguments for the capital approach include that grants are financing devices and should be in the statement of financial position, they do not need repayment, and they are incentives without related costs so should not be in profit or loss.

15

Income Approach Arguments

Arguments for the income approach include that grants are receipts from a source other than shareholders, they are earned through compliance with conditions, and since taxes are expenses, grants (as fiscal policy extensions) should be in profit or loss.

16

Systematic Recognition

It is fundamental to the income approach that grants are recognised in profit or loss on a systematic basis over the periods the related costs are expensed. Recognition on a receipts basis is generally not acceptable unless no allocation basis exists.

17

Cost Identification

Periods for recognising costs related to grants are usually ascertainable. Grants for specific expenses are recognised in the same period as the expense. Grants for depreciable assets are recognised in proportion to depreciation expense.

18

Non-Depreciable Assets

Grants related to non-depreciable assets may require fulfilling obligations and are recognised in profit or loss over the periods that bear the cost of meeting those obligations (e.g., a land grant conditional on erecting a building).

19

Package of Aid

When grants are part of a package with multiple conditions, care is needed to identify conditions giving rise to costs to determine the earning periods. Allocation of the grant on different bases may be appropriate.

20

Immediate Support

A grant receivable as compensation for expenses/losses already incurred or for immediate financial support with no future related costs is recognised in profit or loss in the period it becomes receivable.

21

Specific Entities

Grants awarded for immediate support rather than specific expenditure incentives may be confined to a specific entity. These may warrant recognition in the period the entity qualifies to receive them, with disclosure.

22

Past Losses

Grants receivable for expenses or losses incurred in a previous period are recognised in profit or loss when receivable, with disclosure.

23

Non-Monetary Grants

Grants may involve non-monetary assets like land. These are usually accounted for at fair value, though recording both asset and grant at a nominal amount is an alternative.

24

Presentation (Assets)

Grants related to assets are presented in the statement of financial position either as deferred income or by deducting the grant from the carrying amount of the asset.

25

Asset Methods

Both methods are acceptable. One recognises deferred income amortised over the useful life; the other deducts the grant from the asset, resulting in reduced depreciation expense.

26

Cash Flows

Because asset purchases and related grant receipts cause major cash flow movements, they are often disclosed as separate items in the statement of cash flows regardless of the presentation method used in the balance sheet.

29

Presentation (Income)

Grants related to income are presented in the statement of profit or loss, either separately (or under a general heading like other income) or as a deduction in reporting the related expense.

30

Income Methods Arguments

Supporters of separation argue netting is inappropriate and separation facilitates comparison. Supporters of deduction argue expenses might not have been incurred without the grant, so netting avoids misleading presentation.

31

Income Disclosure

Both presentation methods are acceptable. Disclosure of the grant is necessary for proper understanding, usually involving the effect of the grant on any item of income or expense required to be separately disclosed.

32

Repayment

A repayable grant is accounted for as a change in accounting estimate. Repayment of an income grant is applied against any unamortised deferred credit, with any excess recognised in profit or loss. Repayment of an asset grant increases the carrying amount of the asset or reduces deferred income; cumulative additional depreciation is recognised immediately in profit or loss.

33

Impairment on Repayment

Repayment of an asset grant may require consideration of possible impairment of the new carrying amount of the asset.

34

Excluded Assistance

Certain forms of government assistance that cannot reasonably be valued or distinguished from normal trading are excluded from the definition of grants.

35

Examples

Examples of excluded assistance include free technical advice, guarantees, and government procurement policies responsible for a portion of sales.

36

Assistance Disclosure

The significance of such benefits may require disclosure of the nature, extent, and duration of the assistance to prevent misleading financial statements.

38

Infrastructure

Government assistance does not include the provision of general infrastructure (transport, communication) or improved facilities available to the entire local community.

39

Disclosures

Matters to be disclosed include: (a) the accounting policy and presentation methods adopted; (b) the nature and extent of recognised grants and indication of other assistance; and (c) unfulfilled conditions and contingencies attached to recognised assistance.

40

Transition

An entity adopting the standard for the first time shall comply with disclosure requirements and either adjust financial statements for the policy change under IAS 8 or apply provisions only to grants becoming receivable/repayable after the effective date.

41

Effective Date

The standard becomes operative for financial statements covering periods beginning on or after 1 January 1984.