10.2 IAS 20 Government Grants

Question 1

What is the purpose of government grants

Answer 1

Governments often provide money or incentives to companies
* To export their goods
* To promote local employment

Question 2

What are governments

Answer 2

Government, government agencies or similar bodies whether local, national or international

Question 3

What is government assistance

Answer 3

• Action by government designed to provide an economic benefit specific to an entity or range of entities under certain criteria
• E.g., granting a local operating licence, free marketing, or provisions of helplines

Question 4

What are government grants

Answer 4

Assistance by the government in the form of transfers of resources (money) to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity

Question 5

What are grants relating to assets

Answer 5

• Government grants whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire long term assets
• Known as capital grants

Question 6

What are grants relating to income

Answer 6

• Government grants other than those relating to assets
• Known as revenue grants
• Such as money towards wages

Question 7

What does IAS 20 not cover

Answer 7

• Accounting for government grants in FS reflecting the effects of changing prices
• Government assistance given in the form of tax breaks
• Government acting as a part owner of the entity

Question 8

What are the two general principles when treating grants in IAS 20

Answer 8

1. Prudence – grants should not be recognised until the conditions for receipt have been complied with and there is reasonable assurance the grant will be received
2. Accruals – grants should be matched with the expenditure towards which they were intended to contribute

Question 9

When should revenue grants be recognised

Answer 9

The recognition will depend on the circumstances
1. If the grant is paid when evidence is produced that certain expenditure has been incurred
a. The grant should be matched with that expenditure
2. If the grand is paid on a different basis
a. The achievement of a non-financial objective (creation of jobs)
b. The grant should be matched with identifiable costs of achieving that objective

Question 10

What are the two ways of presenting revenue grants

Answer 10

1. Deducted from related expense
   or
2. Presented as a credit (income) in the P/L

Question 11

What are capital grants

Answer 11

• Grants for purchase of non-current assets should be recognised over the expected useful life of the related asset

Question 12

What are the two treatments of capital grants

Answer 12

1. On initial recognition, deduct the grant from the cost of the non-current asset and depreciate the reduced cost
2. Recognise the grant initially as deferred incomes and transfer a portion to revenue each year. This will offset the higher depreciation charge based on the full original cost

Question 13

When would capital grants need to be repaid

Answer 13

• If the conditions of the grant are breached, then grant may need to be repaid to the government
• If there is an obligation to repay the grant and the repayment is probable, then it should be provided for in accordant with IAS 37

Question 14

What are the disclosure requirements under IAS 20

Answer 14

1. The accounting policy adopted in relation to government grants, including the method of presentation adopted in the financial statements
2. The nature and extent of the government grants recognised in the financial statements
3. Any unfulfilled conditions attaching to government grants that have been recognised