Accounting For Government Grants under IAS 20
IAS 20 deals with accounting and disclosure of government grants and government assistance.
Government, according to the standard, refers to government, government agencies and similar bodies, whether local, national or international.
Government Grants are assistance by government in the form of transfer of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity.
* The government grants can be monetary or non-monetary.
Example:
AV Ltd wants to set up a factory in a rural district. The government provides a cash assistance (monetary) as well as land at subsidised price (non-monetary).
Manner of recognition of government grants:
IAS 20 suggests that Government grants, including non-monetary grants, should not be recognised until there is a reasonable assurance that:
The entity will comply with the conditions attaching to them; and
The grant will be received.
* The grant may be received before the conditions have been met. However, the above two conditions should be met in totality. If there is likelihood that the conditions won’t be met, the government grant cannot be recognised.
Example:
AV Ltd has set up a factory in a rural area. The government announces a grant of $5 million to the companies setting up factories in the area similar to the one set up by AV Ltd. The grant is received by AV Ltd.
Also, the government also wants that the companies are required to install necessary equipment’s to ensure that the pollution levels do not increase to a significant level. AV Ltd believes that it would not be able to install the pollution control equipment’s at the site.
In the above situation, government grant cannot be recognised and will be treated as a liability (for cash received). In other words, the money received by AV Ltd is required to be returned back to government, since the conditions attached thereto would not be met.
Types of grants:
Grants related to income: (Revenue Grants)
These grants may be presented:
Either as income (under ‘Other Income’ heading); or
As a deduction from related expense
The IASB accepts either treatment, subject to being followed in a consistent manner.
Grants related to assets (Capital Grants)
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. 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.
These grants may be presented as:
deferred income; or
deduction from asset
Deferred income approach:
This method recognises the grant as a deferred income (liability). The deferred income is recognised an income over the useful life of the asset. To the extent the deferred income is not recognised, it is shown as a liability (current and non-current) in the statement of financial position (SOFP).
Deduction from asset approach:
Under this approach, the amount of government grant is reduced from the cost of the asset. As a result, the asset’s carrying amount is reduced, and therefore, depreciation charge is reduced automatically.
Grants received for non-depreciable assets:
These grants would have specific terms and conditions with regard to their use. For grants received for land, usually the grant is written off over the useful life of the factory or building constructed on the land.
Non-monetary grants
When government gives the grants in non-monetary form (land, etc), these assets may be recognised at their fair value, or the nominal value (price paid).
Example:
AV Ltd received a plot of land for setting up a cottage industry to generate employment under labour intensive production. AV Ltd had paid $20,000 for the land as costs of registration. The market value of the plot of land is estimated as $1 million.
AV Ltd may recognise the above land either at nominal value or at the market price.
For recording at nominal value:
Debit Land Account $20,000
Credit Cash Account $20,000
For recording at market value:
Debit Land Account $1,000,000
Credit Cash Account $20,000
Credit Grant Account $980,000
Note: Grant received without any condition is directly taken to Income statement.