IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
Background & Objective
IAS 20 ‘’Accounting for Government Grants and Disclosure of
Government Assistance’’ prescribes the treatment of government grants and other
government assistance for fair and accurate presentation of those in the
accounts. It also outlines all necessary disclosures to make a fair
presentation for users.
The standard IAS 20 was issued in April 1983 and with the
application starts on or after 1 January 1984.
Scope
This Standard will be applicable in accounting and the
disclosure of government grants and disclosure of other forms of government
assistance. It will NOT be applicable to:
(a) Special problems if any arising in accounting of
government grants in financial statements which may reflect the effects of
changing prices or in supplementary information of a similar nature.
(b) government assistance to an entity in the form of
benefits that are available in determining taxable profit or tax loss, or may
be limited on the basis of income tax liability. Illustrations of those
benefits are income tax holidays, accelerated depreciation allowances, investment
tax credits and reduced income tax rates.
(c) government sharing in the ownership of the
entity.
(d) government grants included in IAS 41 Agriculture.
Key Definitions
Government
This term refers to government, government agencies and
similar bodies whether local, national or international.
Government assistance
This term is action by government designed to provide an economic
benefit specific to an entity or range of entities qualifying under certain
criteria. Government assistance for the purpose of this Standard does not
include benefits provided 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.
Government grants
Those are assistance by government in the form of transfers
of resources to an entity in return for past or future agreement with certain conditions
which relates to the operating activities. The entity excludes those kinds of
government assistance which can’t reasonably have a value placed upon them and
transactions with government which can’t be separated from the normal trading
transactions of the entity. Government grants are sometimes called by other
names such as subsidies, subventions, or premiums.
Grants related to assets
Those are government grants whose primary condition is that
an entity qualifying for them should purchase, construct or otherwise acquire
long‑term assets. Subsidiary
conditions may also be attached restricting the type or location of the assets
or the periods during which they are to be acquired or held.
Grants related to income
Government grants other than those related to assets.
Forgivable loans
Loans which the lender undertakes to waive repayment of
under certain prescribed conditions.
Fair value
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. (See IFRS 13 Fair Value Measurement.)
Government grants
Government grants, including non‑monetary grants at fair value, shall not be recognised
until there is reasonable assurance that:
(a) the entity will comply with the conditions attaching to
them; and
(b) the grants will be received.
IAS 20 also outlines the following understanding: -
· Mode
of grant- The manner in which a grant is received does not affect
the accounting method to be adopted in regard to the grant. Thus a grant is
accounted for in the same manner whether it is received in cash or as a
reduction of a liability to the government.
· Forgivable
loan-
A forgivable loan from government is treated as a government grant when there
is reasonable assurance that the entity will meet the terms for forgiveness of
the loan.
· Loan at a below-market rate -The benefit of a government loan at a below-market rate of interest is treated as a government grant. The loan shall be recognised and measured in accordance with IFRS 9 Financial Instruments. The benefit of the below-market rate of interest shall be measured as the difference between the initial carrying value of the loan determined in accordance with IFRS 9 Financial Instruments and the proceeds received. The benefit is accounted for in accordance with this Standard. The entity shall consider the conditions and obligations that have been, or must be, met when identifying the costs for which the benefit of the loan is intended to compensate.
· Contingent
liability or asset - Once a government grant is recognised, any
related contingent liability or contingent asset is treated in accordance with
IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Accounting of Government grants:-
Government grants shall be recognised in profit or loss on
a systematic basis over the periods in which the entity recognises as expenses
the related costs for which the grants are intended to compensate.
Recognition of government grants in profit or loss on receipt
basis is not in accordance of accrual accounting assumption of IAS 1
‘Presentation of financial statement’ and would be acceptable only if no basis
existed for allocating a grant to periods other than the one in which it was
received.
A government grant that becomes receivable as compensation
for expenses or losses already incurred or for the purpose of giving immediate
financial support to the entity with no future related costs shall be
recognised in profit or loss of the period in which it becomes receivable.
Presentation of grants
Grants for income -
Grants related to income are presented as part of profit or loss, either
separately or under a general heading such as ‘Other income’; alternatively,
they are deducted in reporting the related expense.
Disclosure of the effect of the grants on any item of
income or expense which is required to be separately disclosed is usually
appropriate.
Grants for assets - Government
grants related to assets, including non‑monetary
grants at fair value, shall be presented in the statement of financial position
either by setting up the grant as deferred income or by deducting the grant in
arriving at the carrying amount of the asset.
The purchase of assets and the receipt of related grants
can cause major movements in the cash flow of an entity. For this reason and in
order to show the gross investment in assets, such movements are often
disclosed as separate items in the statement of cash flows regardless of whether
or not the grant is deducted from the related asset for presentation purposes
in the statement of financial position
Non‑monetary
government grants
A government grant may take the form of a transfer of a non‑monetary asset, such as land or other resources, for the
use of the entity. In these circumstances it is usual to assess the fair value
of the non‑monetary asset and to
account for both grant and asset at that fair value. An alternative course that
is sometimes followed is to record both asset and grant at a nominal amount.
Repayment of government grants
A government grant that becomes repayable shall be
accounted for as a change in accounting estimate (see IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors). Repayment of a grant
related to income shall be applied first against any unamortised deferred
credit recognised in respect of the grant. To the extent that the repayment
exceeds any such deferred credit, or when no deferred credit exists, the
repayment shall be recognised immediately in profit or loss. Repayment of a
grant related to an asset shall be recognised by increasing the carrying amount
of the asset or reducing the deferred income balance by the amount repayable.
The cumulative additional depreciation that would have been recognised in
profit or loss to date in the absence of the grant shall be recognized
immediately in profit or loss.
Government assistance
It's an action by government designed to provide an
economic benefit specific to an entity or range of entities qualifying under
certain criteria. Government assistance for the purpose of this Standard does
not include benefits provided 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.
The significance of the benefit in the above examples may
be such that disclosure of the nature, extent and duration of the assistance is
necessary in order that the financial statements may not be misleading.
Disclosure
The following matters shall be disclosed:
(a) the accounting policy adopted for government grants,
including the methods of presentation adopted in the financial statements;
(b) the 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; and
(c) unfulfilled conditions and other contingencies
attaching to government assistance that has been recognised.
Post a Comment