IAS 20 - Government Grants Flashcards
What is the definition of Government Grants?
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.
What is the definition of Government Assistance?
Government Assistance is action by government designed to provide an economic benefit specific to an entity qualifying under certain criteria.
What are examples of forms of Government Assistance EXCLUDED from the definition of Government Grants?
These include : - >Free technical & marketing advice > The provision of guarantees > Tax breaks > Transactions with government that cannot be disguised from the normal trading transactions
When should a government grant be recognised?
A government grant should only be recognised when there is REASONABLE ASSURANCE that :
> The entity will comply with any conditions attached to the grant
> The entity will actually receive the grant
What happens where a grant is received in relation to a depreciating asset?
Where grants are received in relation to a depreciating asset, the grant should be recognised over the periods in which the asset is depreciated AND in the same proportions.
How should a grant for non-depreciable assets be recognised?
In the case of grants for non-depreciable assets certain obligations may need to be fulfilled, in which case the grant should be recognised in the profit and loss over the period in which the cost of meeting the obligation is incurred.
For example, if a piece of land is granted on condition that a building is erected on it, then the grant should be recognised in profit or loss over the buildings life.
How should a grant related to assets be presented in the financial statements?
Government grants related to assets should be presented in the statement of financial position either : -
1) By setting up the grant as deferred income
2) By deducting the grant in arriving at the carrying amount of the asset (i.e netting off)
What is the deferred income method of presenting government grants in the statement of financial position?
The deferred income method sets up the grant as deferred income in the statement of financial position, which is recognised on profit & loss on a systematic and rational basis over the useful life of the asset.
Normally this corresponds to the method of depreciation on the related asset.
EXAMPLE > equip purchased £50,000 on 01.01.05. Depn SL over 5 years. grant received for £5,000 to help finance equip….
SOFP
Cost of Equip = £50,000
Depn = (£10,000)
Carrying Amount = £40,000
Deferred income - non current £3,000
Deferred income - current £1000
I/S
Depn = £10,000 DR
Deferred Income = £1,000 CR
- Total deferred income = £5,000 grant less £1,000 recognised in P&L
What is the netting off method of presenting government grants in the statement of financial position?
The netting off method deducts the grant in arriving at the carrying amount of the asset to which it relates.
The grant is recognised in the profit or loss over the life of a depreciable asset by way of a reduced depreciation charge.
EXAMPLE > equip purchased £50,000 on 01.01.05. Depn SL over 5 years. grant received for £5,000 to help finance equip….
SOFP
Cost of Equip = £45,000 (50,000 - 5,000)
Depn = (£9,000)
Carrying Amount = £36,000
I/S
Depn = £9,000
How should a grant related to income be presented in the financial statements?
Government grants related to income are defined as those not related to assets and can be presented in two ways : -
1) A credit in the profit & loss under ‘other income’
2) A deduction from the related expense.
*Note treating the grant as a deduction from the related expense results in the income statement being less comparable with those of similar entities that have not yet received such grants.
How is a government grant that becomes repayable be accounted for?
A government grant that becomes repayable should be accounted for as a change in an accounting estimate under IAS 8
What disclosures are required under IAS 20?
> The accounting policy adopted for government grants, including the method of presentation
The nature and extent of government grants recognised in the financial statements
An indication of other forms of government assistance from which the entity has directly benefited.
Unfulfilled conditions and other contingencies attaching to government assistance that have been recognised.
How should repayment of a grant related to assets be applied in the financial statements?
Repayment of a grant related to an asset should be recognised by either : -
1) Increasing the carrying amount of the asset
2) Reducing the deferred income balance
How should repayment of a grant related to income be applied in the financial statements?
Repayment of a grant related to income should be applied in the following order : -
1) Against any unamortised deferred credit
2) Recognise as an expense
