Questions and Analysis

Introduction

Anyone who studies International Accounting Standards will be aware of the dearth of materials available to help them. The International Accounting Standards Board (IASB) has published the Standards themselves, of course, and they have also published a book called IAS Explained which, when read along side the Standards is an excellent text.

There is also the excellent www.iasplus.com site that contains a vast amount of information on the Standards including summaries of every Standard and up to date news from the IASB and other sources.

This page takes an overview of IAS 20: Accounting for Government Grants and Disclosures of Government Assistance. It does so with a mixture of questions and comment and direct references to the Standard itself. This page doesn't pretend to be the be all and end all of IAS 20 but it is a useful introduction.

The solutions to the questions on this page are available to anyone who asks: just email me and I'll send them by return ... don't forget to tell me what you want!! Whilst I have prepared all of the solutions to these questions, I have used IAS materials for some of them and I can't put them here because to do so could infringe the IASB's copyrights.

IAS 20 is concerned solely with Government Grants and their reporting treatment: consequently, it is one of the simpler Standards both to read and understand.

I have used one of the few good books on IASs, by Epstein and Mirza, and have taken a couple of their examples to help to explain some of the points arising from the Standard.

The layout of this page is that I have worked my way through the Standard from start to finish exploring the most important paragraphs as I go. It will be most useful if you have the Standard in front of you as you work your way through this page.

Scope

1 This Standard should be applied in accounting for, and in the disclosure of, government grants and in the disclosure of other forms of government assistance.

Paragraph 3 defines the following terms that are vital in understanding the Standard

3 Government assistance
Government grants
Grants related to assets
Grants related to income
Fair value

Fair value is a key phrase that appears in many IASs: the definition is the same in all Standards!

Why Bother Reporting Receipts of Government Grants?

5. The receipt of government assistance by an enterprise may be significant for the preparation of the financial statements for two reasons.

Firstly, if resources have been transferred, an appropriate method of accounting for the transfer must be found.
Secondly, it is desirable to give an indication of the extent to which the enterprise has benefited from such assistance during the reporting period. This facilitates comparison of an enterprise's financial statements with those of prior periods and with those of other enterprises.

Recognition of Government Grants

Government grants should only be recognized if the organization is reasonably sure that:

7 (a) the enterprise will comply with the conditions attaching to them; and
(b) the grants will be received.

Credit Capital or Credit Income?

IAS 20 paragraphs 13 - 15 discuss two potentially alternative ways of accounting for Government Grants:

13. … the capital approach, under which a grant is credited directly to shareholders' interests, and

the income approach, under which a grant is taken to income over one or more periods.

The Standard then goes on to discuss the arguments in favour of crediting Capital with the value of the Government Grant and then the arguments in favour of crediting the Income accounts with the value of the government grants: we see this is a strange approach and that these arguments should be contained in an appendix rather than in the body of the Standard: See paragraphs 14 and 15 of IAS 20 for the full text of this argument.

There is no allowed alternative treatment of Government Grants: they MUST be Credited to Income

12. Government grants should be recognised as income over the periods necessary to match them with the related costs which they are intended to compensate, on a systematic basis. They should not be credited directly to shareholders' interests.

Accounting Treatment of Government Grants

IAS 20 goes on to say that Government grants must be recorded in accordance with the principles of IAS 1: that is, they must be recognized in accordance with the accruals principle and not on the receipts basis unless "no basis existed for allocating a grant to periods other than the one in which it was received." (paragraph 16)

Paragraphs 17 - 22 of IAS 20 expand on the provisions of paragraph 16 by discussing the periods over which the income and expenditures associated with a government grant are to be recognized.

… grants in recognition of specific expenses are recognised as income in the same period as the relevant expense.

Example

An organization receives a grant of $30 million to defray environment costs over a period of five years. Environment costs will be incurred by the organization as follows:

Year	Cost ($m)
1	1
2	2
3	3
4	4
5	5
Total	$15

We apply the grant, notice it is for $30 million not only $15 million as follows:

year	Cost ($ m)
1	$30 x (1/15) = 2
2	$30 x (2/15) = 4
3	$30 x (3/15) = 6
4	$30 x (4/15) = 8
5	$30 x (5/15) = 10
Total	$30

Also from paragraph 17 of IAS 20: "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."

Example

In the case of an asset costing, say, $200 million that is to be depreciated on the straight line basis over a period of ten years that attracts a Government grant of $100 million, the provision for depreciation of the asset will, quite simply, be

$200 million/10 years = $20 million per year

Similarly, the organization will recognize Government grant along side the depreciation provision and it would amount to

$100 million/10 years = $10 million per year

Note also that if, for example the Government had given the grant on condition that the recipient complied with certain conditions then the organization must disclose these conditions for as long as the conditions apply.

Paragraph 19 of IAS 20 says that "Grants are sometimes received as part of a package of financial or fiscal aids to which a number of conditions are attached." Let's consider an example to illustrate this point:

Example

Imagine we are given a plot of land by a Government department in return for providing guaranteed employment to local people as they work with on improving the facilities on that land. The budget for the work says that the total cost of the work is to be $60 million, to be spent as follows:

Year 1 $10 million
Year 2 $10 million
Year 3 $40 million

The fair value of the land at acquisition is $120 million.

In accordance with Paragraph 19, we need to recognise the fair value of the land, ie the value of the grant, over the duration of the conditions attaching to the grant:

Year	Grant recognised (million)
1	$120 x (10/60) = $20
2	$120 x (10/60) = $20
3	$120 x (40/60) = $80
Total	$120

Examples in this section taken from Epstein and Mirza IAS2002

Non Monetary Government Grants

If a government grant is made in a form other than cash, IAS 20 says "… it is usual to assess the fair value of the non-monetary asset and to account for both grant and asset at that fair value (paragraph 23).

Presentation of Grants Related to Assets

24. Government grants related to assets, including non monetary grants at fair value, should be presented in the balance sheet either by setting up the grant as deferred income or by deducting the grant in arriving at the carrying amount of the asset.

25. Two methods of presentation in financial statements of grants (or the appropriate portions of grants) related to assets are regarded as acceptable alternatives.

26. One method sets up the grant as deferred income which is recognised as income on a systematic and rational basis over the useful life of the asset.

Example 1: deferred income option

Set up the grant as deferred income: eg a $3 million grant is awarded that is to be used to buy for $9 million a dilapidated building in 2000 that is estimated to have a useful life of 3 years. The deferred income account will behave as follows:

Date	Open/Balance b/d	Recognition as income	Balance c/d
2000	3		3
31 Dec 2000	3	1	2
31 Dec 2001	2	1	1
31 Dec 2002	1	1	0

27. The other method deducts the grant in arriving at the carrying amount of the asset. The grant is recognised as income over the life of a depreciable asset by way of a reduced depreciation charge.

Example 2: grant deducted from carrying value

Date	Open/Balance b/d	Depreciation	Balance c/d
2000	9	3*	6
31 Dec 2000	6	2	4
31 Dec 2001	4	2	2
31 Dec 2002	2	2	0

* this deduction of $3 million represents the total value of the

Government grant being offset against the total value of the building.

28. The purchase of assets and the receipt of related grants can cause major movements in the cash flow of an enterprise. For this reason and in order to show the gross investment in assets, such movements are often disclosed as separate items in the cash flow statement regardless of whether or not the grant is deducted from the related asset for the purpose of balance sheet presentation.

Presentation of Grants Related to Income

29. Grants related to income are sometimes presented as a credit in the income statement, either separately or under a general heading such as "Other income"; alternatively, they are deducted in reporting the related expense.

Again, we believe that paragraphs 30 and 31 should be consigned to an appendix as they present arguments supporting the alternatives here rather than anything constructive

Disclosure

39. The following matters should be disclosed: (a) the accounting policy adopted for government grants, including the methods of presentation adopted in the financial statements; (b) the nature and extent of government grants recognised in the financial statements and an indication of other forms of government assistance from which the enterprise has directly benefited; and (c) unfulfilled conditions and other contingencies attaching to government assistance that has been recognised.

Transitional Provisions

40. An enterprise adopting the Standard for the first time should:

(a) comply with the disclosure requirements, where appropriate; and
(b) either:

(i) adjust its financial statements for the change in accounting policy in accordance with IAS 8, Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies; or
(ii) apply the accounting provisions of the Standard only to grants or portions of grants becoming receivable or repayable after the effective date of the Standard.

Sources

International Accounting Standard 20: Accounting for Government Grants and Disclosures of Government Assistance
Epstein and Mirza (2002) IAS2002 John Wiley

See also

IAS Explained
Published by John Wiley

© Duncan Williamson
4 August 2002 revised 9th December 2006

Many thanks to Abdul-Rahim Butt for pointing out the collapse of the tables associated with examples 26 and 27: now corrected.