IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance

3 Types of 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.

Grants related to income are government grants other than those related to assets.

4 Accounting for government grants

4.1 Recognition criteria

Government grants, including non-monetary grants at fair value, shall not be recognised until there is reasonable assurance that:

  1. the entity will comply with the conditions attaching to them; and
  2. the grants will be received.

Receipt of a grant does not of itself provide conclusive evidence that the conditions attaching to the grant have been or will be fulfilled. The manner in which a grant is received does not affect the accounting method to be adopted in regard to the grant. Thus a grant is accounted for in the same manner whether it is received in cash or as a reduction of a liability to the government.

4.2 Approaches to the accounting for government grant

There are two broad approaches to the accounting for government grants:

  • the capital approach, under which a grant is recognised outside profit or loss i.e. credited to stakeholder’s equity and
  • the income approach, under which a grant is recognised in profit or loss over one or more periods i.e. credited to the income statement or statement of comprehensive income (whichever is applicable)

Those in support of the capital approach argue as follows:

  1. government grants are a “financing device” (i.e. a mode to help financially) and should be dealt with as such in the statement of financial position rather than be recognised in profit or loss to offset the items of expense that they finance. Because no repayment is expected, such grants should be recognised outside profit or loss.
  2. They are simply incentives without related costs and not earned

Arguments in support of the income approach are as follows:

  1. because government grants are receipts from a source other than shareholders, they should not be recognised directly in equity
  2. The entity earns them through compliance with their conditions.They should therefore be recognised in profit or loss using systematic basis
  3. Just like taxes which are treated as expense, grants should be treated as income.

Which approach to be followed?

According to para 12, IAS 20 requires entities to use income approach which is as follows:

Government grants shall be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate.

As per income approach grants should be recognized in profit or loss on systematic basis in which grants are matched with the portion of related costs recognized as expense in the profit or loss.

Recognition of government grants in profit or loss on a receipts basis is NOT in accordance with the accrual accounting assumption and would be acceptable only if no basis existed for allocating a grant to periods other than the one in which it was received.

Heading 5 through 7 might be confusing for some students. Important thing to remember is that heading 5 and 6 will discuss what to recognize in the financial statements whereas heading 7 will discuss how to present in the financial statements