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Article IAS 20 Accounting for Government Grants and Disclosure of

Government Assistance
By: Richie Hoare, Senior Lecturer in Accounting
Examiner: Formation 2 Financial Accounting
FOREIGN CURRENCY TRANSACTION RISK MANAGEMENT

Introduction
The object of IAS 20 is to prescribe the accounting for, and disclosure of, government
grants and assistance. The key definitions in the Standard are as follows:
Government assistance is action by government designed to provide an economic benefit
specific to an entity or range of entities qualifying under certain criteria. Government
assistance for the purpose of this Standard does not include benefits provided only
indirectly through action affecting general trading conditions, such as the provision of
infrastructure in development areas or the imposition of trading constraints on
competitors.
Government grants are assistance by government in the form of transfers of resources in
return for past or future compliance with certain conditions relating to the operating
activities of an entity. They exclude those forms of government assistance which cannot
reasonably have a value placed upon them and transactions with government which
cannot be distinguished from the normal trading transactions of the entity.

Government grants shall not be recognised until there is reasonable assurance that;
The entity will comply with any conditions attached to the grant; and
The grants will be received.
Even if a grant has been received, this does not prove that the conditions attached to it
have been or will be fulfilled.

Accounting treatment of government grants


Government grants shall be recognised as income over the periods necessary to match
them with related costs which they are intended to compensate, on a systematic basis.
They shall not be credited directly to shareholders interests.
IAS 20 prescribes the accounting treatment for the following three types of grants:
(i)
Grants relating to assets;
(ii)
Grants relating to income;
(iii)
Non-monetary government grants.
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GRANTS RELATING TO ASSETS


IAS 20 permits the following two methods of presentation:
(i)
Present the grant as deferred income which is recognised as income on a
systematic and rational basis over the useful life of the asset; or
(ii)
Deducting the grant in arriving at the carrying value of the asset, in which
case the grant is recognised in income over the life of the asset by way of a
reduced depreciation charge.
The profits recorded under both approaches will be exactly the same in each financial
period.
Example:
Rahara Ltd purchased a piece of equipment for 600,000 on the 1st January 2007. The
equipment is expected to have an economic life of 5 years and will have no residual
value. Depreciation is calculated on a straight-line basis over the life of the asset. The
company received a government of 200,000 towards the purchase of the equipment. The
financial year end of the company is December 31st each year.
Required:
Show the relevant extracts from the financial statements for the years ended 31/12/07 &
31/12/08 under each of the two allowable methods of presentation.
Method 1: Set up a deferred grant income account.
This involves opening a deferred grant income account when the grant is received:
Dr
Bank
200,000
Cr
Deferred grant income account
200,000
A portion of the deferred grant income is transferred to the Income Statement as income,
each year over the useful life of the asset. In this example (200,000/5years) 40,000 will
be transferred to the Income Statement each year. At the end of December 2007 the
remaining balance in the deferred grant income account is (200,000 - 40,000) 160,000
and this must be recorded as a liability in the balance sheet. This liability must be split
between non-current liabilities (120,000) and current liabilities (40,000).
At the end of December 2008 two years deferred income will have been transferred to the
Income Statement and the remaining balance in the deferred grant income account is
(200,000 - 40,000 - 40,000) 120,000. This balance must then be split between noncurrent liabilities (80,000) and current liabilities (40,000).
Income Statement Extract of Rahara Ltd for the year ended:
31/12/07

Depreciation (600,000/5 years)


(120,000)
Deferred grant income
40,000

31/12/08

(120,000)
40,000

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Balance Sheet extract of Rahara Ltd as at:


31/12/07

31/12/08

Non-current Asset
Equipment

480,000

360,000

Non-Current Liabilities
Deferred grant income

120,000

80,000

Current Liabilities
Deferred grant income

40,000

40,000

Method 2: Deducting the grant in arriving at the carrying value of the asset
Under this method the cost of the asset of 600,000 is reduced by the value of the grant
of 200,000 to give an in initial carrying value of the asset of 400,000. This will result
in a reduced annual depreciation charge of (400,000/5 years) 80,000.
Income Statement Extract of Rahara Ltd for the year ended:
31/12/07

Depreciation (400,000/5 years)


(80,000)

31/12/08

(80,000)

Balance Sheet extract of Rahara Ltd as at:

Non-current Asset
Equipment

31/12/07

31/12/08

*320,000

**240,000

* NBV of equipment at 31/12/07 is [400,000 - 80,000] 320,000.


** NBV of equipment at 31/12/08 is [400,000 - 80,000- 80,000] 240,000.
Key points
Under both methods 1 and 2 above the net charge to the income statement each year is
80,000.
Grants relating to income
An example of this type of grant would be a grant received for the training of staff.
IAS 20 prescribes the following methods for these types of grants:
(i) Present grant received in income statement, either separately or under a general
heading such as Other Income;
(ii) Net grant off against related item of expenditure.

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Non monetary government grants


A government grant may take the form of a transfer of a non-monetary asset, such as land
or other resources, for use by the entity. The fair value of the non-monetary asset should
be assessed and accounted for at fair value.
Repayment of a grant
A government grant that becomes repayable shall be accounted for as a revision to an
accounting estimate under IAS 8 Accounting Policies, Changes in Accounting Estimates
and Errors.
Disclosure requirements
IAS 20 requires the following matters to be disclosed:
(i) Accounting policy adopted for grants, including methods of balance sheet
presentation;
(ii) Nature and extent of grants recognised in the financial statements;
(iii)Unfulfilled conditions and contingencies attaching to recognised grants.

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