3/21/2017 IAS20AccountingforGovernmentGrantsandDisclosureofGovernmentAssistance(detailedreview)

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IFRS

IAS20AccountingforGovernmentGrantsand OBURAPGuide

DisclosureofGovernmentAssistance(detailedreview)
Thursday,March6,2014 Print Email 0
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Objective

ThisStandarddealswiththeaccountingtreatmentofgovernmentgrants,alongwiththedisclosure
requirementsforgovernmentgrantsandgovernmentassistance.

Scope

Therequirementsofthisstandardareapplicablefortherecognitionandmeasurementofgovernment RSSArticles
grantsincludingthedisclosurerequirementsrelatedtogovernmentgrantsandgovernmentassistance.
Howeverthisstandarddoesnotdealwiththefollowingaspects:

Governmentassistanceintheformoftaxrelatedbenefitssuchasincometaxcredits,taxbreaks,
LastAccounting
News
orreducedtaxrates.

Benefitsintheformof,governmentparticipationintheownershipoftheentity M&ADealActivityReached
GovernmentgrantswhicharecoveredunderIAS41 itshighestpointSince2008

Treatmentofgovernmentgrantsduetothechangingpricelevels.
RecentACCAReportonthe
Provisionofgeneralinfrastructure IncreasingscopeofShared
Services
Definitions

Government MicrobusinessesOpinion
withRegardstoMakingTax
Itisdefinedasgovernment,governmentagenciesactingonbehalfofgovernmentandothersimilar DigitalProposal
local,nationalorinternationalbodies.

AccountantscanPlayan
GovernmentGrants ImportantRoleinReducing
Corruption
Theseareassistancebythegovernmentintheformoftransfersofeconomicresourcestoanentity,asa
resultofentityspastorfuturecompliancewithcertainspecifiedconditionsrelatingtotheoperating
AATHasBeenApprovedas
activitiesoftheentity.However,itdoesnotincludethoseformsofgovernmentassistancewhichcannot
anApprenticeAssessment
bereliablymeasuredinmonetarytermsandtransactionswithgovernmentwhicharenotdistinguishable
Organization
fromthenormaltradingtransactionsoftheentity.

IPSAS40,NewPublic
GovernmentAssistance
SectorAccountingStandard
IssuedbytheIPSASB
Theseareactionsbythegovernmentundertakentoprovideeconomicbenefitstoanentityorrangeof
entitieswhichqualifycertainconditions.Thesedonothaveexactvalueplacedupontheminmonetary
IAASBReleasesitsTwo
terms.
yearWorkPlantoEnhance
AuditQuality
GrantsrelatedtoAssets

Thegovernmentgrantswhichareavailablefortheconstruction,acquisitionorpurchaseofcertainassets Allaccountingnews
arecalledgrantsrelatedtoassets.Itmaybehavingsomecertainconditionsattachedtoitregardingthe

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3/21/2017 IAS20AccountingforGovernmentGrantsandDisclosureofGovernmentAssistance(detailedreview)
nature,useorlocationoftheasset.

GrantsrelatedtoIncome Have10minutestorelax?

Thesearegovernmentgrantsotherthangrantsrelatedtoassets,andarenormallyavailablefor Playourunique
Balancegame
developmentorimprovements.Suchasgrantforimprovementinworkingconditionsforemployees,
grantforthecreationofjobvacancies,andgrantforthetrainingofthestaff. PlayTheGame

ForgivableLoans

Thesearetheloanswhoserepaymenthasthepotentialtobewaivedbythelenderundercertain
prescribedconditions.

RecognitionofGovernmentGrants

Governmentgrantsareonlypermittedtoberecognizedwhenitisreasonablycertainthat:

(a)Grantwillbereceivedand
(b)Theentitywillsatisfythepredeterminedconditionsrelatedtothegovernmentgrant

ApproachesfortheRecognitionofGovernmentGrant

Therearetwobroadapproachestotheaccountingforgovernmentgrants:

CapitalApproach

IncomeApproach

1.CapitalApproach

Underthisapproach,governmentgrantisrecognizedoutsidetheprofitorloss,aspartoftheequityin
thestatementoffinancialposition.Thesupportersofcapitalapproachhavethefollowingargumentsin
favorofthisapproach:

(a)Governmentgrantsarefinancingcomponentstherefore,shouldbetreatedassuchinthestatement
offinancialpositionaspartofequity.

(b)Governmentgrantsarenotearned,so,itisnotappropriatetorecognizetheseinprofitorloss
becausetheserepresentanincentiveprovidedbygovernmentwithoutrelatedcosts.

2.IncomeApproach

Underthisapproach,governmentgrantisrecognizedinstatementofprofitorlossusingappropriate
methodovertheperiodsinwhichtheentityrecognizestherelatedcosts,forwhichthegrantisintended
tocompensate.ThesupportersofIncomeapproachhavethefollowingargumentsinfavorofthis
approach:

(a)Governmentgrantshouldnotberecognizeddirectlyinequitybecausethesearereceivedfroma
sourceotherthanequityparticipants,butshouldberecognizedinprofitorlossintherelevantperiods
usingappropriatemethod.

(b)Theentityearnsgovernmentgrantbycomplyingwithpredeterminedconditionsattachingtoitand
meetingtherelatedobligations.Therefore,itshouldberecognizedinstatementofprofitorlossusing
appropriatemethodovertheperiodsinwhichtheentityrecognizestherelatedcosts,forwhichthegrant
isintendedtocompensate.

Notes:

Thisstandardsupportstheuseofincomeapproachandrequiresthatgovernmentgrantshouldbe
initiallyrecordedasdeferredincomeanditshouldberecognizedinstatementofprofitorlossusing
appropriatemethodovertheperiodsinwhichtheentityrecognizestherelatedcosts,forwhichthe
grantisintendedtocompensate.

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Themannerinwhichagrantisreceiveddoesnotaffecttheaccountingtreatmentofthe
governmentgrant,itwillbeaccountedforinthesamemannerasspecifiedinthisstandard.

MeasurementofGovernmentGrant

Ifgovernmentgrantsatisfiestherecognitioncriteria,itwillbemeasuredasfollows:

1)InCaseofGovernmentGrantinCash

Ifgovernmentgrantisintheformofcash,itwillbemeasuredattheamountofcashreceivedor
receivable.

2)InCaseofNonmonetaryGovernmentGrant

Ifthegovernmentgrantisintheformofnonmonetaryassetsuchasfreeofcostland,licenseorother
nonmonetaryresources,itwillbemeasuredeitheratfairvalueofassetornominalcostofsuchasset.

AmortizationofGovernmentGrant

Thisstandardrequiresthatgovernmentgrantshouldbeinitiallyrecordedasdeferredincomeandit
shouldthenbeamortizedinthestatementofprofitorlossattheendofeachreportingperiod,using
appropriatemethod,inwhichtheentityrecognizestherelatedcostsforwhichthegrantisintended
tocompensateasfollows:

1.GrantrelatedtoAsset

Ifthegovernmentgrantisavailablefortheconstruction,acquisitionorpurchaseofanasset,itwillbe
amortizedasfollows:

Ifitisdepreciableasset,itwillbeamortizedinthestatementofprofitorlossintheperiodsand
proportionasthatassetisdepreciated.

Ifitisnondepreciableasset,itwillbeamortizedinthestatementofprofitorlossoverthelifeofany
obligationattachedtothatassetsuchasthegrantofalandmayberequiringtheconstructionofa
buildingoverit,inthiscasethegrantrecognizedmaybeamortizedoverthelifeofthebuilding.

2.GrantrelatedtoIncome

Ifthegovernmentgrantisavailableforthegeneralimprovementsordevelopments,itwillbeamortized
inthestatementofprofitorlossfollowingthepatternofexpensesintherelevantperiods.

3.OtherPoints:

Sometimesgovernmentgrantsarereceivedaspartofapackage,andhavenumberofconditions
attachedtoit.Insuchcases,theentityneedstoidentifytheconditionsandshoulddetermine
theperiodsoverwhichthegrantwillbeearned.Itmaybeappropriatetoamortizepartofagranton
onebasisandremainingpartonanother.

Ifthegovernmentgrantbecomesreceivableasacompensationforanexpenseorloss,whichhas
alreadybeenincurred,forthepurposeofimmediatefinancialrelieftotheentitywithnofuturerelated
costs,itwillberecognizedinstatementofprofitorlossoftheperiodinwhichitbecomesreceivable.

PresentationofGovernmentGrant

Thisstandardpermitstwomethodsforthepresentationofgovernmentgranteitheritisgrantrelatedto
assetorgrantrelatedtoincome,theseare:

GrossUpMethod

NetMethod

GrossUpMethod
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Underthismethod,governmentgrantisinitiallyrecognizedatitsgrossamountseparatelyasdeferred
incomeinthestatementoffinancialposition.Itisthenamortizedtostatementofprofitorlossusing
appropriatemethodovertherelevantperiods.Anyunamortizedbalanceofgovernmentgrantwill
remainasdeferredincomeinthestatementoffinancialpositionattheendofreportingperiod.

NetMethod

Underthismethod,governmentgrantisdeductedfromthecostofrelatedassetorexpenseandthenit
isamortizedtostatementofprofitorlossintheformofreduceddepreciationchargeorexpense.

Bothmethodsareregardedasacceptableforthepresentationofgovernmentgranteitheritisgrant
relatedtoassetorgrantrelatedtoincome.

RepaymentofGovernmentGrant

Iftheentityhasnotbeenabletomeetthepredeterminedconditionsattachedtothegovernmentgrant,it
maybecomerepayableandwillbeaccountedforasachangeinaccountingestimateasperIAS8.Itwill
betreatedasfollows:

Ifthegovernmentgrantwasrecognizedusingthegrossupmethod,firsttheentityshouldde
recognizeanyunamortizedgovernmentgrantanditwillbeclassifiedaspayables.Anydifference
betweentheunamortizedbalanceofgovernmentgrantandgrantrepayablewillberecognized
immediatelyinprofitorloss.

Ifthegovernmentgrantwasrecognizedusingthenetmethod,firsttheentityshouldrestatethe
carryingamountofassetbytheamountofgovernmentgrantrepayable.Andthedifferencebetween
cumulativedepreciationthatwouldhavebeentodateintheabsenceofthegrantandexisting
depreciationwillberecognizedimmediatelyinprofitorlossasincrementaldepreciation.
GovernmentAssistance

Thesearetheactionsbythegovernmentundertakentoprovideeconomicbenefitstoanentityorrange
ofentitieswhichqualifycertainconditions.Thesedonothaveexactvalueplacedupontheminmonetary
termssuchasfreeprovisionoftechnicaladviceorfinancialguarantees.

Asthegovernmentassistancedoesnothaveexactvalueplaceduponthem,thereforetheseareonly
disclosedinthenotestotheaccounts.

Disclosures

ThisStandardrequirestheentitytodisclosethefollowingmatters:

Thepresentationmethodadoptedbytheentityforthegovernmentgrantsinthefinancial
statements

Thenatureofgovernmentgrantsrecognizedinthefinancialstatements

Otherformsofthegovernmentassistancereceivedbytheentity,fromwhichentityhasobtained
benefits

Anyunfulfilledconditionsrelatedtothegrantwhichhasbeenrecognized.

WorkedExample

Example1(GrantrelatedtoAsset)

ABLtdpurchasedanenergysavingplantfor$100,000on1January2009,havingusefullifeof5years
witharesidualvalueof$10,000.Theentityreceivedagovernmentgrantequalto20%ofthecostofthe
asset,ontheconditionthatplantmustbeusedatleastforperiodof4yearsotherwisearepaymentwill
ariseonslidingscalebasisi.e.75%ofthegrantwillberepayableiftheassetissoldinthefirstyearand
itwilldiminishby25%forsubsequentyearsuptoyear4.ABLtdhasnointentiontosellplantinfirstfour
years.

Required:
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HowtheplantandtherelatedgovernmentgrantwillbeaccountedforinthefinancialstatementsofAB
Ltdfortheyearended31.12.2009using

i)GrossUpMethod

ii)NetMethod

Solution:

i)GrossUpMethod

StatementofProfitorLoss 31.12.09

$000

DepreciationExpense(W1) (18)

AmortizationofGovernmentGrant 4

TotalCharge (14)

StatementofFinancialPosition 31.12.09

$000

Assets:

NonCurrentAssets:

Plant($100$18) 82

NonCurrentLiabilities:

Govt.Grant($16$4) 12

CurrentLiabilities:

Govt.Grant 4

(W1)DepreciationExpense=($100$10)/5years=$18

(W2)ReceiptofGovt.Grant=($10020%)=$20

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Undergrossupmethodgovt.grantisrecordedasdeferredincomeseparatelyanditwillbe
amortizedusingappropriatemethod.

Casha/c$20
Deferredincomea/c$20

(W3)AmortizationofGovt.Grantat31.12.09

Asthegrantrelatestothedepreciableassetitwillbeamortizedinthewayasassetwillbedepreciatedin
therelevantperiodsas($20/5years)=$4

DeferredIncomea/c$4
ProfitorLossa/c$4

Theremainingbalanceofunamortizedgovt.grantof$16($20$4)willremainasdeferredincomeinthe
statementoffinancialpositionandwillbeamortizedintherelevantperiods.However,itwillbeclassified
intocurrentandnoncurrentliability.

ii)NetMethod

StatementofProfitorLoss 31.12.09

$000

DepreciationExpense(W1) (14)

StatementofFinancialPosition 31.12.09

$000

Assets:

NonCurrentAssets:

Plant[($100$$20)$14(W1)] 66

(W1)DepreciationExpense=[($100$20)$10]/5years=$14

(W2)ReceiptofGovt.Grant=($10020%)=$20

Undernetmethodgovt.grantwillbedeductedfromthecostoftheassetandassetwillbe
recognizedatnetcost$80($100$20).Itisnotrecordedseparatelyas:

Casha/c$20
Planta/c$20

(W3)Asthegovt.granthasbeendeductedfromthecostofasset,thereforethereisnoneedofseparate
amortizationofgovt.grant
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amortizationofgovt.grant

Example2(GrantrelatedtoIncome)

ABLtdreceivedagrantof$500,000fromprovincialgovernmentforcreatingjobvacancies,forthe
individualsinthenearbyarea,andmaintainingthemforaperiodof3years.Theentityhaspreparedan
expenseforecastinrespectofthisprojectwhichisasfollows:

$000

RecruitmentcostinY1 50,000

ExpectedSalaryExpense:

Y1 250,000

Y2 275,000

Y3 300,000

Required:
HowthereceiptofgovernmentgrantwillbeaccountedforinthefinancialstatementsofABLtd?

Solution:

Thegrantisavailablefordevelopmentsratherthanfortheconstructionoracquisitionofanasset
therefore,itisgrantrelatedtoincome.

Thisstandardrequiresthatgovernmentgrantshouldbeinitiallyrecordedasdeferredincomeandit
shouldberecognizedinstatementofprofitorlossusingappropriatemethodovertheperiodsinwhich
theentityrecognizestherelatedcosts,forwhichthegrantisintendedtocompensate.Therefore,itwillbe
accountedforasfollows:

Asthisisgrantrelatedtoincome,therefore,itwillbeamortizedfollowingthepatternofexpensesas
follows:

1.TheReceiptofGovt.Grant

Casha/c$500,000
DeferredIncomea/c$500,000

2.AmortizationofGovt.GrantattheendofY1

[$500,000($50,000+$250,000)/($50,000+250,000+275,000+300,000)]

DeferIncomea/c$171,429
ProfitorLossa/c$171,429

3.AmortizationofGovt.GrantattheendofY2

$500,000$275,000/($50,000+250,000+275,000+300,000)

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DeferIncomea/c$157,142
ProfitorLossa/c$157,142

4.AmortizationofGovt.GrantattheendofY3

$500,000$300,000/($50,000+250,000+275,000+300,000)

DeferIncomea/c$171,429
ProfitorLossa/c$171,429

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