The purpose of this standard is to provide guidance on how an entity should treat government grants in its books of accounts. The Standard also provides guidance with regards to the disclosure requirements in relation to government grants and other forms of assistance by government.
This standard covers and applies to all types of grants and assistance provided by the government to an entity against fulfilling specific requirements. However the standard does not covers the assistance provided by the government in shape of benefits associated in calculating taxable income. The government grants that are covered under IAS 41 are also out of the scope of this standard.
Definitions of Relevant terms
It is referred to as government, agencies that are owned and controlled by government and similar kind of bodies whether local, national or international.
It can be defined as assistance provided by the government to an entity, through transferring economic resources to that very same entity only if the entity either has complied or will comply with certain conditions that are specified by government, in relation to the entity’s operating activities.
This can be referred to as the steps taken by government so that to provide specific economic benefits to an entity or a bunch of entities only if those entities meet a certain criteria.
Grants related to Assets
These type of grants are the grants that are provided by government so that to aid the entity in purchase, acquisition or construction of certain kind of assets. These kinds of grants may have certain conditions attached to it relating to the type, location or use of the assets.
Grants related to Income
These are all the grants that are provided by government other than the ones that are provided by government in respect of assets.
These are the loans in which the repayment of the loan is waived by the lender only if certain terms and conditions are met.
Recognition Criteria for Government Grants
An entity should recognize a grant from government only if there is reasonable assurance that first the entity will receive the grant and second that the entity will be able to meet the conditions attached with the grant provided by government to the entity.
As per IAS 20, there exist two approaches that can be used to account for the grants from government in the entity’s books of accounts, the first one is the capital and the other one is Income Approach.
1. Capital Approach
According to the capital approach, an entity is not allowed to recognize any kind of grant from government in profit or loss instead the grant is made part of equity in the entity’s statement of financial position. Those who are in favor of the capital approach give the following arguments in support of this approach:
(a) These grants are used as a financing tool and therefore these should be treated as such by being made part of the equity in the entity’s statement of financial position.
(b) These grants are not earned by the entity instead these are considered as an incentive that is provided by government without any cost associated with these and therefore it would be inappropriate to treat these grants in the entity’s profit or loss.
2. Income Approach
As per the Income approach, the grant given by the government should be accounted for in profit or loss on a systematic basis over the periods, to which the costs relate to, for which the grant is provided to the entity at the first place. Those who are in favor of the Income approach give the following arguments in support of this particular approach:
(a) The first argument the supporters of this approach make is that these types of grants are received by the entity from government and not from the entity’s shareholders and therefore these grants should be treated in the entity’s profit or loss statement instead of making it a part of equity in the entity’s statement of financial position.
(b) The government grant is earned by an entity by showing compliance with specific conditions attached with the grant and also by meeting the other obligations associated with the grant and therefore an entity should recognize this type of grant in its profit or loss statement, over the periods, to which the costs relate to, against which the grant is provided to the entity by the government.
Measurement of Government Grant
If a grant given to an entity by the government fulfills the criteria for recognition mentioned above then that particular grant will be measured through the following ways:
1) If Government Grant is received in Cash
If the entity receives grant from the government in cash then the grant should be recognized by the entity at an amount that it has received from the government as grant in cash or which the entity is about to receive in cash from the government.
2) If Non-monetary Government Grant is received by the Entity
If an entity gets provided with a non-monetary asset (for example license or free land) as a grant from the government then in that scenario the entity should recognize that particular asset in its books either at the asset’s fair value or at the asset’s nominal cost.
Other Important Points:
• In case of a depreciable asset, the asset related grant should be amortized in the entity’s profit or loss statement in the periods and also in the same proportion in which the related asset is being depreciated.
• In case of a non-depreciable asset, the grant should be amortized by the entity in its profit or loss statement by using the life of any related obligation or condition attached with the related asset, for example, a land is given as a grant by the government to an entity but also attaches a condition with the grant and that the entity is required to construct a building over that piece of land and therefore in such a scenario the amount of grant recognized in the entity’s books will be amortized using building’s useful life as a basis for it.
• Grants related to income are realized by the entity in its profit or loss statement in a way that it reflects the related costs incurred in the relevant periods.
• In some cases grants are provided to the entity as part of a package with which various conditions are attached that needs to be fulfilled by the entity. In such situations the entity is required to highlight the conditions which give rise to the expenses and also to determine the periods over which the grant is expected to be earned.
• A grant that becomes due to be received by the entity as compensation against losses or expenses that have already been incurred, basically to provide the entity with immediate financial help with no related future costs. The entity should recognize such a grant in its profit or loss statement in the period in which it is due to be received.
Presentation of Government Grants
IAS 20 gives guidance with regards to the presentation of both the income related grants and asset related grants.
Asset related Grants
Asset related grants should be presented by the entity in its statement of financial position either as deferred grant income (which is realized in profit or loss using the appropriate method over the asset’s useful life) or by deducting the amount of grant from the asset’s carrying value against which the grant was given to the entity by the government.
Income related Grants
As per IAS 20 grants related to income can be presented by the entity in its books either by recognizing the grant separately under the heading ‘other income’ or by deducting the grant from the expenses, which the grant is intended to compensate.
Repayment of Government Grant
If an entity is required to repay the government grant due to any particular reason then in that scenario the entity should treat the repayment of the grant as a change in estimate as per IAS 8. In case of Income related grant, the amount of repayment should first be settled against any unamortized grant balance and if the amount of repayment exceeds the unamortized government grant balance then the remaining repayment amount in relation to the grant should be treated as an expense in the entity’s profit or loss statement. In case of Asset related grant, the repayment in relation to this type of grant should be recognized by the entity either by increasing the asset’s carrying value or decreasing the deferred grant income balance.
This can be referred to as the steps taken by government so that to provide specific economic benefits to an entity or a bunch of entities only if those entities meet a certain criteria. This type of assistance naturally does not carry a value and example of it can be that of a free marketing or technical advice. As per IAS 20, an entity is required to give disclosures regarding the nature, scope and timing of the assistance provided by the government to the entity.
As per the requirements of this standard, an entity is required to give disclosures regarding the following:
• The entity’s accounting policies that are in place in relation to the government grants and also including the methods used for presentation of these grants in the entity’s financial statements
• The type and nature of the grants given by government that have been recognized in the entity’s financial statements
• All the details regarding the assistance which the entity received from the government and also the details regarding the benefits obtained by the entity as a result of the assistance provided by the government.
• Any condition that is yet to be fulfilled in relation to assistance provided by government that has already been recognized by the entity.