1 Introduction to government grants
The terms like grants and subsidies are common and almost everyone is aware of them as these terms are often told and discussed in news.
Government can support business entities in many different ways and if the information pertaining to such financial support is not reasonably reported in the financial statements, then users might confuse the financial effects of grants with the financial effects normal business operations.
Therefore, guidance was required on this matter so that financial statements are more understandable and useful for comparison purposes.
Government grants and other types of government assistance are dealt in IAS 20 – Accounting for government grants and disclosure of government assistance.
1.1 Scope of IAS 20
This Standard shall be applied:
- in accounting for, and in the disclosure of, government grants and
- in the disclosure of other forms of government assistance.
However IAS 20 does not deal with:
- the special problems arising in accounting for government grants in financial statements reflecting the effects of changing prices or in supplementary information of a similar nature.
- tax related government assistance income tax holidays reduced income tax rates etc
- government participation in the ownership of the entity.
- government grants covered by IAS 41 Agriculture.
2 Government grants – In detail
Government grants (a.k.a. subsidies, subversions or premiums) are 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.
However, they exclude the following:
- government assistance which cannot reasonably be monetized
- transactions with government which cannot be distinguished from the normal trading transactions of the entity (e.g. selling goods to government)
Government assistance is action by government designed to provide an economic benefit specific to an entity or range of entities.
However, it does not include benefits provided by government which indirectly favours the trading operations or conditions of the entity for example imposition of trading constraints on competitors
Government refers to:
- government agencies; and
- similar bodies whether local, national or international
Government assistance takes many forms varying both in the nature of the assistance given and in the conditions which are usually attached to it.
By nature, government assistance can either be grants (monetary or non-monetary) or any assistance in monetary or non-monetary form such as tax reduction, forgivable loans, interest free loans etc.
The purpose of the assistance may be to encourage an entity to embark on a course of action which it would not normally have taken if the assistance was not provided.
For example, government wishes to increase urea production in the country and for this government offers subsidies, tax exemptions on imports of raw material and spare parts etc. This facility can either be provided to specific company or range of companies producing urea.