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Accounting for Government Grants and Disclosure of Government Assistance: IAS 20. Wiecek and Young IFRS Primer Chapter 14. IAS 20 – Objective and Scope.

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accounting for government grants and disclosure of government assistance ias 20

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

Wiecek and Young

IFRS Primer

Chapter 14

ias 20 objective and scope
IAS 20 – Objective and Scope
  • Governmentgrant: a form of government assistance; a transfer from a government to an entity that requires compliance with certain conditions related to entity’s operating activities.
  • Governmentassistance: government action to generate an economic benefit for entities that meet qualifying criteria.
ias 20 objective and scope1
IAS 20 – Objective and Scope
  • Excludes benefits provided by adjusting taxable profit or loss, or that are determined on the basis of the income tax liability - such as investment tax credits, income tax holidays, accelerated tax depreciation methods and reduced income tax rates
ias 20 accounting for government grants
IAS 20 – Accounting for Government Grants

Recognition and Measurement:

  • Recognize a government grant when there is reasonable assurance that
  • The grant will be received, and
  • The entity will comply with the conditions attached to the grant
ias 20 accounting for government grants1
IAS 20 – Accounting for Government Grants

Two general approaches:

  • Capital approach
  • Income approach * Apply this one *

* Grants from government are not equity financing, they are non-shareholder-related increases in net assets and therefore items of income.

ias 20 accounting for government grants2
IAS 20 – Accounting for Government Grants
  • Income approach: recognize government grants in profit or loss in the same periods that the related expenses are recognized
  • If for acquisition of assets – on the same basis as the depreciation on the assets
  • If related directly to incurring specific expenditures – on the same basis as the expenditures
ias 20 accounting for government grants3
IAS 20 – Accounting for Government Grants

Presentation of grants related to assets:

  • Companies have a choice – recognize as (a) deferred income or (b) as a reduction in the carrying amount of the related asset
  • Example: Company A receives a $25 grant toward the purchase of new equipment that cost $100; equipment has a five year life and is depreciated on a straight-line basis
ias 20 accounting for government grants4
IAS 20 – Accounting for Government Grants
  • Entry when grant received:

(a)

Dr. Cash 25

Cr. Deferred government grant 25

Or

(b)

Dr. Cash 25

Cr. Equipment 25

ias 20 accounting for government grants5
IAS 20 – Accounting for Government Grants
  • Entry as asset is used:

(a)

Dr. Depreciation expense 20

Cr. Accumulated depreciation 20

Dr. Deferred government grant 5

Cr. Depreciation expense/grant income 5

Or

(b)

Dr. Depreciation expense 15

Cr. Accumulated depreciation 15

Depreciation: ($100 - $25) ÷ 5 = 15

ias 20 accounting for government grants6
IAS 20 – Accounting for Government Grants

Presentation of grants related to income:

  • Example: Company B receives a government grant equal to 10% of the payroll costs incurred. Payroll costs incurred are $100.
  • Entry when payroll costs incurred:

Dr. Grant receivable 10

Cr. Wages expense/grant income 10

ias 20 accounting for government grants7
IAS 20 – Accounting for Government Grants

Repayment of grants:

  • If grant becomes repayable – treat as a change in estimate
  • If related to an asset: cumulative amount of additional depreciation that would have been recognized to date is recognized in P&L
  • If related to income: any necessary adjustments are made to current year profit or loss
ias 20 government assistance
IAS 20 – Government Assistance
  • Grants exclude assistance that cannot reasonably be valued, and transactions between the government and the entity that are in the normal course of business.
  • Other assistance (e.g., guarantee of loan, significant sales) may be of interest to financial statement readers if benefits are significant and recurring
ias 20 disclosure
IAS 20 Disclosure
  • Three types:
  • Accounting policy for grants and their presentation
  • Nature and extent of grants recognized, and information about other forms of assistance that have been beneficial
  • Information about contingencies or conditions not yet met related to assistance recognized
looking ahead
Looking Ahead
  • IAS 20 – part of short-term convergence project with FASB. IAS 20 shortcomings:

1. Inconsistent with the conceptual framework (deferred credits do not meet the definition of a liability)

2. Option allowed now understates an entity’s assets, reducing comparability of the entity’s financial statements (i.e., option to deduct grant from asset acquired)

looking ahead1
Looking Ahead
  • Work on amending IAS 20 set aside pending outcome of related standards, such as IAS 37 Provisions, Contingent Liabilities and Contingent Assets and Conceptual Framework Project
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