OVERVIEW
Objective
¾
To account for the transfer of resources from government and indicate the extent to which entity’s benefit from such assistance during the reporting period.¾
To facilitate comparison of an entity’s financial statements with prior periods and other entity’s.INTRODUCTION
GOVERNMENT ASSISTANCE GOVERNMENT
GRANTS
DISCLOSURE
¾ Scope
¾ Definitions
¾ Matters
¾ Definition
¾ Excluded from government
grants but are included as government assistance
¾ Issue
¾ Loans at nil or low interest
rates
¾ Criteria
¾ Forgivable loans
¾ Possible approaches to
accounting treatment
¾ IAS 20 treatment
¾ Non-monetary government
grants
¾ Presentation of grants related
to assets
¾ Presentation of grants related
to income
¾ Repayment of government
1
INTRODUCTION
Government assistance takes many forms varying both in nature of the assistance given and in conditions attached. Its purpose may be to encourage an entity to embark on a course of action that it would not otherwise have taken.
1.1
Scope
¾
IAS 20 shall be applied in accounting for and disclosure of government grants, and disclosure of other forms of government assistance.
¾
IAS 20 does not deal with accounting for government grants in financial statements reflecting the effects of changing prices or in supplementary info of a similar nature
income tax benefits (e.g. income tax holidays, investment tax credits, accelerated depreciation allowances and reduced income tax rates)
Government participation in the ownership of the entity.
1.2
Definitions
¾
Government refers to government, government agencies and similar bodies whether local, national or international.¾
Government grants are assistance by governments in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to operating activities. They exclude those forms of government assistance which cannot reasonably have a value placed on them and transactions with government which cannot be distinguished from the normal trading transactions of the entity.¾
Grants related to assets are government grants whose primary condition is that an entity qualifying for them shall purchase, construct or otherwise acquire long-term 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.¾
Grants related to income are government grants other than those related to assets.¾
Forgivable loans are loans which the lender undertakes to waive repayment of under certain prescribed conditions.2
GOVERNMENT GRANTS
2.1
Criteria
¾
Government grants shall not be recognised until there is reasonable assurance that the entity will comply with the conditions attaching to them, and the grants will be received.
¾
Receipt of a grant does not of itself provide conclusive evidence that conditions have been or will be fulfilled.¾
A grant is accounted for in the same manner whether received in cash or a reduction of a liability to the government.2.2
Forgivable loans
¾
Definition – the lender undertakes to waive repayment under certain prescribed conditions.¾
A forgivable loan from government is treated as a grant when there is reasonable assurance that the entity will meet the terms for forgiveness.2.3
Possible approaches to recognition
Immediate “capital” approach
Deferred “income” approach
¾
Credit shareholders’ interests.¾
Recognise as income (in profit or loss) over one or more periods.Arguments for
Arguments for
¾
Like any other form of financing it should be dealt with in the statement of financial position.¾
No repayment is expected therefore benefit accrues to owners.¾
Grants are not earned income but an incentive without related costs therefore it is inappropriate to recognise in profit or loss.¾
Finance from a source other than owners should not be credited directly to shareholders’ interests.¾
Government grants are rarelygratuitous (i.e. free) but earned through compliance with conditions and
meeting obligations.
¾
To match against the associated costs for which the grant is intended to compensate.2.4
IAS 20 treatment
¾
Recognise in profit or loss over the periods necessary to match them with related costs which they are intended to compensate, on a systematic basis.E.g. grants related to depreciable assets – over periods in which depreciation is charged
non-depreciable assets – over periods bearing cost of meeting obligations
Commentary
Receipts basis does not accord with accruals ∴ only acceptable if no other basis exists
¾
Do not credit directly to reserves within equity.¾
Compensation for expenses or losses already incurred or for immediate financial support with no future related costs shall be recognised in profit or loss in the period receivable.2.5
Non-monetary government grants
¾
Where a grant takes the form of a transfer of a non-monetary asset for the use of the entity (E.g. land or other resources) we usually account for both the grant and the asset at fair value. As an alternative, both the asset and the grant may be recorded at a nominal amount2.6
Presentation of grants related to assets
¾
Acceptable alternatives in the statement of financial position are to:EITHER OR
Set up grant as deferred
income. Deductcarrying amount grant in arriving at of asset.
Income recognised on a systematic and rational basis over UEL.
Income recognised over UEL by way of a reduced depreciation charge.
2.7
Presentation of grants related to income
¾
Acceptable alternatives in statement of comprehensive income are to:EITHER OR
Credit separately or under general heading e.g. “Other income”.
Deduct in reporting related expense.
Argument for
Argument for
Inappropriate to net income and expense item. Separation of grant from
expense facilitates comparison with other expenses.
Expenses might not have been incurred if grant had not been available.
∴ presentation without offsetting may be misleading.
2.8
Repayment of government grants
¾
Account for as a revision to an accounting estimate.Related to income Related to an asset
Apply first against any unamortised deferred credit
Recognised excess immediately as an expense.
Increase carrying amount of asset or reduce deferred income balance
Recognise cumulative additional depreciation immediately as an expense.
3
GOVERNMENT ASSISTANCE
3.1
Definition
¾
Government action designed to provide an economic benefit specific to entity’s qualifying under certain criteria.Commentary
Does not include indirect benefits (e.g. provision of infrastructure
3.2
Excluded from government grants but are included as government
assistance
Assistance which cannot reasonably
have a value placed on it Transactions which cannot be distinguished from normal trading transactions
Examples
¾
Free technical or marketing advice¾
Provision of guarantees.Example
¾
Government procurement policy responsible for a portion of sales.¾
Existence of benefit might beunquestioned but segregating trading activities from
government assistance could be arbitrary.
3.3
Issue
¾
Significance of benefit may be such that disclosure of nature, extent and duration of assistance is necessary in order that the financial statements may not be misleading.3.4
Loans at nil or low interest rates
¾
Government loans with a below market rate of interest are a form of government assistance.¾
The benefit of such loans should be accounted for as a government grant – measured as the difference between the initial carrying amount of the loan (determined inaccordance with IAS 39) and the proceeds received.
4
DISCLOSURE
4.1
Matters
¾
Accounting policy adopted for government grants including methods of presentation adopted.¾
Nature and extent of government grants recognised and an indication of other forms of government assistance providing direct benefit.¾
Unfulfilled conditions and other contingencies attaching to government assistance recognised.FOCUS
You should now be able to:
