IAS 20: ACCOUNTING FOR GOVERNMENT

GRANTS AND DISCLOSURE OF

GOVERNMENT ASSISTANCE

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History of IAS 20

Sep-81:Exposure Draft E21 Accounting for

Government Grants and Disclosure
of Government Assistance
Apr-83: IAS 20 Accounting for
Government Grants and Disclosure of
Government Assistance
1-Jan-84: Effective date of IAS 20 (1983)
1994: IAS 20 (1983) was reformatted

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History of IAS 20

22-May-08: IAS 20 amended for Annual

Improvements to IFRSs 2007 to bring it
in line with IAS 39 in respect of loans
with the below market- rate of interest
1-Jan-09: Effective date of May 2008
amendment to IAS 20

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RELATED INTERPRETATIONS

SIC 10, Government Assistance - No Specific

Relation to Operating Activities

AMENDMENTS UNDER CONSIDERATION BY

IASB
Government Grants Reconsideration of I
AS 20

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DEFINITIONS:
Government assistance- action by government
designed to provide an economic benefit specific
to an entity qualifying under certain criteria.
Does not include benefits provided only indirectly
through action affecting general trading conditions
e.g., provision of infrastructure in development
areas
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
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DEFINITIONS

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.
Fair value- the amount of which an asset
could be exchanged between a
knowledgeable, willing buyer and a
knowledgeable, willing seller in an arms
length transaction.
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The objective of IAS 20:

To prescribe the accounting for, and

disclosure of, government grants and
other forms of government assistance.

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Scope
IAS 20 applies to all government grants and
other forms of government assistance. [IAS
20.1]
However, it does not cover government
assistance that is provided in the form of
benefits in determining taxable income.
It does not cover government grants covered
by IAS 41 Agriculture, either. [IAS 20.2] The
benefit of a government loan at a below-
market rate of interest is treated as a
government grant. [IAS 20.10A]
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GOVERNMENT GRANTS

Accounting for Grants

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IAS 20.7

Government grants, including non-

monetary grants at fair value shall be
recognized only when there is
reasonable assurance that:
(a) the entity will comply with any
conditions attached to the grant and
(b) the grant will be received. [IAS
20.7]

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IAS 20.10
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
IAS 20.10A
The benefit of a government loan at a below-
market rate of interest is treated as a
government grant. The
loan shall be recognized and measured in
accordance with IAS 39 Financial Instruments:
Recognition and Measurement.
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IAS 20.10A

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 IAS 39 and the proceeds
received.
IAS 20.11
Once a government grant is recognized, any
related contingent liability or contingent asset is
treated in
accordance with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets

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IAS 20.12

Government grants shall be recognized

in profit or loss on a systematic basis
over the periods in which the entity
recognizes as expenses the related
costs for which the grants are intended
to compensate. i.e.,
The grant is recognized as income over the
period necessary to match them with the
related costs, for which they are intended to
compensate, on a systematic basis.

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IAS 20. 13 - 15
Credit Capital or Credit Income
IAS 20. 13-15 discuss two potentially
alternative ways of accounting for
Government Grants:
(a) 13. the capital approach, under
which a grant is credited directly to
shareholders' interests, and
(b) the income approach, under which
a grant is taken to income over one or
more periods.
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IAS 20. 13 - 15
Credit Capital or Credit Income
Standard discusses the arguments in favor of
crediting Capital with the value of the Government
Grant & arguments in favor of crediting the Income
accounts with the value of the government grants:
Finance device, no repayment, not earned but
incentive
Receipts not from shareholders so recognize in P &
L in appropriate periods, extension of fiscal policies
etc
See paragraphs 14 and 15 of IAS 20 for the full
text of this argument.

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IAS 20. 16 - 22

IAS 20 states that Government grants

must be recorded in accordance with the
principles of IAS 1: Presentation of
Financial Statements i.e., they must
be recognized in accordance with the
accruals principle and not on the receipts
basis unless "no basis existed for
allocating a grant to periods other than
the one in which it was received." (par.
16)
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IAS 20. 16 22

Pars. 17 22 expand on the

provisions of par. 16 by discussing
the periods over which the income
and expenditures associated with a
government grant are to be
recognized.
grants in recognition of specific
expenses are recognized as income
in the same period as the relevant
expense 17
Example
An organization receives a grant of P30 million to defray
environment costs over a period of five years. Environment
costs will be incurred by the organization as follows:
Year Cost (P m)
1 1
2 2
3 3
4 4
5 5
Total P15

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Example
We apply the grant, notice it is for P30 million not only P15
million as follows:
Year Cost (P m)
1 P30 x (1/15) = 2
2 P30 x (2/15) = 4
3 P30 x (3/15) = 6
4 P30 x (4/15) = 8
5 P30 x (5/15) = 10
Total P30

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IAS 20.17

grants related to depreciable assets are

usually recognized as income over the
periods and in the proportion in which
depreciation on those assets is charged
Example:
In the case of an asset costing, P200 million
that is to be depreciated on the straight line
basis over a period of ten years that attracts
a Government grant of P100 million, the
provision for depreciation of the asset will be:

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Example

P200 million/10 years = P20 million per year

Similarly, the organization will recognize
Government grant along side the depreciation
provision and it would amount to
P100 million/10 years = P10 million per year
Note also that if, for example the Government
had given the grant on condition that the
recipient complied with certain conditions
then the organization must disclose these
conditions for as long as the conditions apply.

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IAS 20.19
Grants are sometimes received as part of a package of
financial or fiscal aids to which a number of conditions are
attached
Example:
Given a plot of land by a Government department in return
for providing guaranteed employment to local people as
they work with on improving the facilities on that land. The
budget for the work says that the total cost of the work is
to be P60 million, to be spent as follows:
Year 1 P10 million
Year 2 P10 million
Year 3 P40 million
The fair value of the land at acquisition is P120 million.

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SOLUTION:

Per Par. 19, recognize the fair value of

the land, i.e., the value of the grant,
over the duration of the conditions
attaching to the grant:
Year Grant recognized (million)
1 P120 x (10/60) = $20
2 P120 x (10/60) = $20
3 P120 x (40/60) = $80
Total P120
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Non-monetary government
grants
[20.23]
Where government grant takes the form of a
transfer of a non-monetary asset, e.g., land
or other resources, for the use of the entity.
In these circumstances it assess the fair
value of the non-monetary asset and
account for both grant and asset at that fair
value.
Alternative course followed is to record both
asset and grant at a nominal amount.

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 Presentation of Grants Related
to Assets
including non monetary grants at fair value,
should be presented in the balance sheet
either by setting up the grant as deferred
income or by deducting the grant in arriving
at the carrying amount of the asset. [20.24]
Two methods of presentation in financial
statements of grants (or the appropriate
portions of grants) related to assets are
regarded as acceptable alternatives. [20.25]

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1. Deferred income option
Method sets up the grant as deferred income which is
recognized as income on a systematic and rational
basis over the useful life of the asset.
Example 1:
A P3 million grant is awarded that is to be used to buy for P9
million a dilapidated building in 2009 that is estimated to have
a useful life of 3 years. The deferred income account will
behave as follows:
Date Open/Bal. b/d Recgn as income Bal. c/f
2009 3 3
31.12.09 3 1 2
31.12.10 2 1 1
31.12.11 1 1 0

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2. Grant deducted from
carrying value
Method deducts the grant in arriving at the carrying
amount of the asset. The grant is recognized as income
over the life of a depreciable asset by way of a reduced
depreciation charge.
Example 2:
grant deducted from carrying value
Date Open/Balance b/d Depreciation Balance c/d
2009 9 3* 6
31.12.096 2 4
31.12.104 2 2
31.12.112 2 0

* this deduction of P3 million represents the total value of the

Government grant being offset against the total value of the building

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IAS 20.28

The purchase of assets and the receipt of

related grants can cause major
movements in the cash flow of an
enterprise. For this reason and in order to
show the gross investment in assets, such
movements are often disclosed as
separate items in the cash flow statement
regardless of whether or not the grant is
deducted from the related asset for the
purpose of balance sheet presentation.

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Presentation of Grants Related
to Income
sometimes presented as a credit in
the income statement, either
separately or under a general
heading such as "Other income";
alternatively, they are deducted in
reporting the related expense.

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Arguments for and against
[20.30]
First method supporters claim that it is
inappropriate to net income and expense
items and that separation of the grant from
the expense facilitates comparison with other
expenses not affected by a grant.
Second method supporters argue that the
expenses might well not have been incurred
by the entity if the grant had not been
available and presentation of the expense
without offsetting the grant may therefore be
misleading.
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Arguments for and against
[20.31]
Both methods are regarded as acceptable
for the presentation of grants related to
income.
Disclosure of the grant may be necessary
for a proper understanding of the financial
statements.
Disclosure of the effect of the grants on
any item of income or expense which is
required to be separately disclosed is
usually appropriate
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 Duncan Williamson (2006) argue that
pars.30 and 31 should be consigned
to an appendix as they present
arguments supporting the
alternatives here rather than
anything constructive

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Repayment of government grants [32 - 38]

that becomes repayable 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
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 recognised immediately
in profit or loss.
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 Repayment of government
grants [32 - 38]
Repayment of a grant related to an asset
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 recognized in profit
or loss to date in the absence of the grant
shall be recognized immediately in profit
or loss.
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Government Assistance

does not include government

assistance whose value cannot
be reasonably measured, such as
technical or marketing advise.
[IAS 20.34]

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DISCLOSURE [39 40]
The following matters should 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
recognized in the financial statements and an
indication of other forms of government assistance
from which the enterprise has directly benefited; &
(c) unfulfilled conditions and other contingencies
attaching to government assistance that has been
recognized

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Transitional Provisions [20.40]

An enterprise adopting the Standard for the first time

should:
(a) comply with the disclosure requirements, where
appropriate; and
(b) either:
(i) adjust its financial statements for the change in
accounting policy in accordance with IAS 8, Net
Profit or Loss for the Period, Fundamental Errors and
Changes in Accounting Policies; or
(ii) apply the accounting provisions of the Standard
only to grants or portions of grants becoming
receivable or repayable after the effective date of
the Standard.

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 EXAMPLE 1
Thabiso Ltd. erected a number of buildings at a cost of P1 000
000. these buildings have useful life of 10 years and were
completed and put into use on 1 January 2011.
Thabiso Ltd. received a government grant of P100 000 on 1
January 2011, since the national government regards it as a
priority to provide houses to all citizens.
Required:
Prepare the journals in respect of the above transactions if
(a) it is assumed that the government grant is reflected in the
balance sheet as deferred income and
(b) it is assumed that the government grant is reflected in the
balance sheet by deducting the government grant from the
carrying amount of the asset.
Your answer should comply with IAS 20

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 SOLUTION
(a)
Date Particulars Dr Cr
01.01. Buildings 1 000
11 Bank/Payables 000 1 000
000
Bank 100
Deferred Income (B/S) 000 100 000

31.12. Depreciation 100

11 Accumulated depreciation on 000 100 000
building
Deferred Income (B/S) 10 000
Government grant in respect of 10 000
building (I/S)
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 SOLUTION
(b)
Date Particulars Dr Cr
01.01.11 Buildings 1 000
Bank/Payables 000 1 000
000
Bank 100 000
Buildings 100 000

31.12.11 Depreciation 90 000

Accumulated depreciation on 90 000
buildings

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 TUTORIAL EX.
Moyo Ltd is a company that provides medical services in remote areas in Orapa. They
receive a government grant every year in respect of these medical services, since
the government wishes to provide medical services to all residents of Botswana.
Moyo Ltd spent P500 000 in respect of the provision of medical services in remote
areas in Orapa for the year ended 31 December 2011.
Moyo Ltd collected P50 000 during the year from the inhabitants of the remote areas
in Orapa.
Moyo Ltd received P400 000 on 1 January 2011 from the local government in Orapa,
in order to encourage them to continue with the provision of the medical services in
the remote areas of Orapa.
Required:
Prepare journal entries in respect of transactions if:
(a) it is assumed that the government grant is reflected as a credit in the income
statement and
(b) it is assumed that the government grant is deducted in the bringing to book of
the related expense.

Your answer should comply with IAS 20

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 REFERENCES
IAS 20: accounting for Government
grants and disclosures of
Government Assistance
Duncan Williamson: IAS 20:
Accounting for Government grants
ias20.html
Accounting Standards (latest edition)
by Oppermann, Booysen, Binnekade
and Oberholster Juta publication
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 SOLUTION TO TUTORIAL
QUESTION
Date Particulars Dr Cr
31.12.1 Medical costs incurred 500
2 Bank 000 500
000

Bank 50 000
Income from provision of medical 50 000
expenses

Bank 400
Government grant iro medical 000 400
services 000

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 SOLUTION
(b)
Date Particulars Dr Cr
31.12.1 Medical costs incurred 500 000
2 Bank 500 000

Bank 50 000
Income from provision of medical services 50 000

Bank 400 000

Medical costs incurred 400 000

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