IAS 20 : Government Grants

Question 1

IAS 20 applies in accounting for, and in the disclosure of, government grants and in the disclosure of other forms of government assistance. [IAS 20.1].
The distinction between government grants and other forms of government assistance is important because the standard’s accounting requirements only apply to the former.

Answer 1

IAS 20 applies in accounting for, and in the disclosure of, government grants and in the disclosure of other forms of government assistance. [IAS 20.1].
The distinction between government grants and other forms of government assistance is important because the standard’s accounting requirements only apply to the former.

Question 2

The standard regards the term ‘government’ to include government agencies and similar bodies whether local, national or international.

Answer 2

The standard regards the term ‘government’ to include government agencies and similar bodies whether local, national or international.

Question 3

Government assistance 1

Government assistance is defined as action by government designed to provide an economic benefit to an entity or range of entities qualifying under certain criteria. [IAS 20.3].
Government assistance takes many forms ‘varying both in the nature of the assistance given and in the conditions which are usually attached to it’.

Answer 3

Government assistance is defined as action by government designed to provide an economic benefit to an entity or range of entities qualifying under certain criteria. [IAS 20.3].
Government assistance takes many forms ‘varying both in the nature of the assistance given and in the conditions which are usually attached to it’.

Question 4

Government assistance 2

However, such assistance does not include benefits provided indirectly through action affecting general trading conditions, such as the provision of infrastructure (e.g. transport, communications networks or utilities) in development areas or that are
available for the benefit of an entire local community or the imposition of trading constraints on competitors

Answer 4

However, such assistance does not include benefits provided indirectly through action affecting general trading conditions, such as the provision of infrastructure (e.g. transport, communications networks or utilities) in development areas or that are
available for the benefit of an entire local community or the imposition of trading constraints on competitors

Question 5

Government grants 1

Government grants are a specific form of government assistance. Under IAS 20, government grants represent 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. [IAS 20.3].

Answer 5

Government grants are a specific form of government assistance. Under IAS 20, government grants represent 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. [IAS 20.3].

Question 6

Government grants 2

The standard identifies the following types of government grants:

• grants related to assets are government grants whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire longterm 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; and

• grants related to income are government grants other than those related to assets.
[IAS 20.3].

Answer 6

The standard identifies the following types of government grants:

• grants related to assets are government grants whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire longterm 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; and

• grants related to income are government grants other than those related to assets.
[IAS 20.3].

Question 7

Government grants 3

Government grants exclude:
(a) assistance to which no value can reasonably be assigned, e.g. free technical or

marketing advice and the provision of guarantees; and
(b) transactions with government that cannot be distinguished from the normal trading transactions of the entity, e.g. where the entity is being favoured by a government’s procurement policy. [IAS 20.3, 35].

Answer 7

Government grants exclude:
(a) assistance to which no value can reasonably be assigned, e.g. free technical or

marketing advice and the provision of guarantees; and
(b) transactions with government that cannot be distinguished from the normal trading transactions of the entity, e.g. where the entity is being favoured by a government’s procurement policy. [IAS 20.3, 35].

Question 8

Scope exclusions

IAS 20 deals with almost all types of government grants, with the following exclusions:

• Government assistance in the form of tax reliefs (tax breaks, tax holidays, etc.),
• Grants related to agriculture under IAS 41;
• Grants in the financial statements that reflect the effect of changing prices and
• Government acting as a part-owner of the entity.

Answer 8

IAS 20 deals with almost all types of government grants, with the following exclusions:

• Government assistance in the form of tax reliefs (tax breaks, tax holidays, etc.),
• Grants related to agriculture under IAS 41;
• Grants in the financial statements that reflect the effect of changing prices and
• Government acting as a part-owner of the entity.

Question 9

Type of Grants

Government grants could be:
• revenue grants, e.g. contribution towards payroll costs
• capital grants, e.g. contribution towards purchase of non-current assets

Answer 9

Government grants could be:
• revenue grants, e.g. contribution towards payroll costs
• capital grants, e.g. contribution towards purchase of non-current assets

Question 10

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.

Grants related to income are government grants other than those related to assets – known as revenue grants.

Answer 10

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.

Grants related to income are government grants other than those related to assets – known as revenue grants.

Question 11

General principles

IAS 20 follows two general principles when determining the treatment of grants:

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.

Accruals: grants should be matched with the expenditure towards which they were intended to contribute.

Answer 11

General principles

IAS 20 follows two general principles when determining the treatment of grants:

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.

Accruals: grants should be matched with the expenditure towards which they were intended to contribute.

Question 12

General requirements of IAS 20

IAS 20 requires that government grants should be recognised only when there is reasonable assurance that:

(a) the entity will comply with the conditions attaching to them; and
(b) the grants will be received. [IAS 20.7].

Answer 12

IAS 20 requires that government grants should be recognised only when there is reasonable assurance that:

(a) the entity will comply with the conditions attaching to them; and
(b) the grants will be received. [IAS 20.7].

Question 13

The recognition of the revenue grant will depend upon the circumstances.
• If the grant is paid when evidence is produced that certain expenditure has been incurred, the grant should be matched with that expenditure.

• If the grant is paid on a different basis, e.g. achievement of a nonfinancial objective, such as the creation of a specified number of new jobs, the grant should be matched with the identifiable costs of achieving that objective.

Answer 13

The recognition of the revenue grant will depend upon the circumstances.
• If the grant is paid when evidence is produced that certain expenditure has been incurred, the grant should be matched with that expenditure.

• If the grant is paid on a different basis, e.g. achievement of a nonfinancial objective, such as the creation of a specified number of new jobs, the grant should be matched with the identifiable costs of achieving that objective.

Question 14

Grants should be recognised in the income statement on a systematic basis that matches them with the related costs that they are intended to compensate. [IAS 20.12].
They should not be credited directly to shareholders’ funds.

Answer 14

Grants should be recognised in the income statement on a systematic basis that matches them with the related costs that they are intended to compensate. [IAS 20.12].
They should not be credited directly to shareholders’ funds.

Question 15

IAS 20 rejects a ‘capital approach’, under which a grant is recognised outside profit or loss (typically credited directly to equity), [IAS 20.13], in favour of the ‘income approach’, under which grants are taken to income over one or more periods, because:

(a) government grants are receipts from a source other than shareholders. As such, they should not be credited directly to equity but should be recognised in profit or loss in appropriate periods;
(b) government grants are rarely gratuitous. An entity earns them through compliance with their conditions and meeting the envisaged obligations. They should therefore be recognised in profit or loss over the periods in which the entity recognises the associated costs which the grant is intended to compensate; and
(c) as income and other taxes are expenses, it is logical to deal also with government grants, which are an extension of fiscal policies, in profit or loss.
[IAS 20.15].

Answer 15

IAS 20 rejects a ‘capital approach’, under which a grant is recognised outside profit or loss (typically credited directly to equity), [IAS 20.13], in favour of the ‘income approach’, under which grants are taken to income over one or more periods, because:

(a) government grants are receipts from a source other than shareholders. As such, they should not be credited directly to equity but should be recognised in profit or loss in appropriate periods;
(b) government grants are rarely gratuitous. An entity earns them through compliance with their conditions and meeting the envisaged obligations. They should therefore be recognised in profit or loss over the periods in which the entity recognises the associated costs which the grant is intended to compensate; and
(c) as income and other taxes are expenses, it is logical to deal also with government grants, which are an extension of fiscal policies, in profit or loss.
[IAS 20.15].

Question 16

Grants related to depreciable assets are usually recognised as income over the periods, and in the proportions, in which depreciation on those assets is charged. [IAS 20.17].

Grants related to non-depreciable assets may also require the fulfilment of certain obligations, in which case they would be recognised as income over the periods in which the costs of meeting the obligations are incurred.

For example, a grant of land may be conditional upon the erection of a building on the site and it may be appropriate to recognise it as income over the life of the building. [IAS 20.18].

Answer 16

Grants related to depreciable assets are usually recognised as income over the periods, and in the proportions, in which depreciation on those assets is charged. [IAS 20.17].

Grants related to non-depreciable assets may also require the fulfilment of certain obligations, in which case they would be recognised as income over the periods in which the costs of meeting the obligations are incurred.

For example, a grant of land may be conditional upon the erection of a building on the site and it may be appropriate to recognise it as income over the life of the building. [IAS 20.18].

Question 17

Repayment of government grants 1

A government grant that becomes repayable after recognition should be accounted for as a revision of an accounting estimate.

Repayment of a grant related to income should
be charged against the related unamortised deferred credit and any excess should be recognised as an expense immediately. [IAS 20.32].

Answer 17

A government grant that becomes repayable after recognition should be accounted for as a revision of an accounting estimate.

Repayment of a grant related to income should
be charged against the related unamortised deferred credit and any excess should be recognised as an expense immediately. [IAS 20.32].

Question 18

Repayment of government grants 2

Repayment of a grant related to an asset should be recognised by increasing the carrying amount of the related asset or reducing the related unamortised deferred credit. The cumulative additional depreciation that would have been recognised to date as an expense in the absence of the grant should be charged immediately to profit or loss. [IAS 20.32].

Example repayment of capital grant : Sep 2016 MCQ

Answer 18

Repayment of a grant related to an asset should be recognised by increasing the carrying amount of the related asset or reducing the related unamortised deferred credit. The cumulative additional depreciation that would have been recognised to date as an expense in the absence of the grant should be charged immediately to profit or loss. [IAS 20.32].

Example repayment of capital grant : Sep 2016 MCQ

Question 19

Presentation of grants related to assets

Grants that are related to assets (i.e. those whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire long-term assets) should be presented in the statement of financial position either: [IAS 20.24]

(a) by setting up the grant as deferred income, which is recognised as income on a systematic and rational basis over the useful life of the asset; [IAS 20.26] or
(b) by deducting the grant in arriving at the carrying amount of the asset, in which case the grant is recognised in profit or loss as a reduction of depreciation. [IAS 20.27]

Answer 19

Grants that are related to assets (i.e. those whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire long-term assets) should be presented in the statement of financial position either: [IAS 20.24]

(a) by setting up the grant as deferred income, which is recognised as income on a systematic and rational basis over the useful life of the asset; [IAS 20.26] or
(b) by deducting the grant in arriving at the carrying amount of the asset, in which case the grant is recognised in profit or loss as a reduction of depreciation. [IAS 20.27]

Question 20

Presentation of grants related to income 1

Here, you need to differentiate between the grants for past costs (already incurred) or the grants for current or future costs.
If the grant is provided to reimburse costs incurred in the past, then it is recognized immediately in profit or loss.
If the grant is provided to reimburse costs incurred or to be incurred at the present time or in the future, then the grant is recognized in profit or loss in the periods when the costs are incurred.

Answer 20

Here, you need to differentiate between the grants for past costs (already incurred) or the grants for current or future costs.
If the grant is provided to reimburse costs incurred in the past, then it is recognized immediately in profit or loss.
If the grant is provided to reimburse costs incurred or to be incurred at the present time or in the future, then the grant is recognized in profit or loss in the periods when the costs are incurred.

Question 21

Presentation of grants related to income 2

Grants related to income should be presented either as:

(a) a credit in the income statement, either separately or under a general heading such as ‘other income’; or
(b) a deduction in reporting the related expense.
[IAS 20.29].

Answer 21

Grants related to income should be presented either as:

(a) a credit in the income statement, either separately or under a general heading such as ‘other income’; or
(b) a deduction in reporting the related expense.
[IAS 20.29].

Question 22

Disclosure

IAS 20 requires that entities should disclose the following information regarding government grants:

(a) the accounting policy, including the methods of presentation adopted in the financial statements;
(b) a description of the nature and extent of the grants recognised and an indication of other forms of government assistance from which the entity has directly benefited; and
(c) unfulfilled conditions or other contingencies attaching to government assistance that has been recognised. [IAS 20.39].

Answer 22

IAS 20 requires that entities should disclose the following information regarding government grants:

(a) the accounting policy, including the methods of presentation adopted in the financial statements;
(b) a description of the nature and extent of the grants recognised and an indication of other forms of government assistance from which the entity has directly benefited; and
(c) unfulfilled conditions or other contingencies attaching to government assistance that has been recognised.
[IAS 20.39].

Question 23

Disclosure - Government assistance

In addition to the disclosures noted above, for those forms of government assistance that are excluded from the definition of government grants, the significance of such benefits may be such that the disclosure of the nature, extent and duration of the assistance is necessary to prevent the financial statements from being misleading

Answer 23

In addition to the disclosures noted above, for those forms of government assistance that are excluded from the definition of government grants, the significance of such benefits may be such that the disclosure of the nature, extent and duration of the assistance is necessary to prevent the financial statements from being misleading