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

5 Grants under different situations

5.1 Grants related to specific expenses

Grants in recognition of specific expenses are recognised in profit or loss in the same period as the relevant expenses i.e. by matching grants with related costs recognized in the period as expense

5.2 Grants related to depreciable assets

Grants related to depreciable assets are usually recognised in profit or loss over the periods and in the proportions in which depreciation expense on those assets is recognised.

In simple words the allocation basis used for computing depreciation are used for determining the grant to be recognized.

5.3 Grants related to non-depreciable assets

Grants for non-depreciable asset are recognized in profit and loss by matching grants with costs incurred in the period to meet the conditions and requirements of the grant package

As an example, a grant of land may be conditional upon the erection of a building on the site and it may be appropriate to recognise the grant in profit or loss over the life of the building.

5.4 Grants received as financial aid

Grants are sometimes received as part of a package of financial or fiscal aids to which a number of conditions are attached i.e. one grant package has different components or conditions and therefore appropriate amount of grant is allocated to each requirement and (as per the situation) separate systematic basis are used to determine the grant to be recognized in respect of each component or conditions.

5.5 Government grant received as compensation

A government grant that becomes receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the entity with no future related costs shall be recognised in profit or loss of the period in which it becomes receivable.

6 Non-monetary government grants

A government grant may take the form of a transfer of a non-monetary asset, such as land or other resources i.e. non-cash, for the use of the entity. In such cases both grant and asset can be valued using any of the two methods:

• Usually fair value of non-monetary asset is assessed and used to account for both grant and asset
• Alternatively nominal value of non-monetary asset can be used to record both asset and grant

7 Presentation of grants

7.1 Presentation of grants related to assets

Government grants related to assets can be presented in statement of financial position in either of the following two ways:

1. setting up the grant as deferred income i.e. grant will be recognized over the useful life of the asset on systematic basis
2. deducting the grant in arriving at the carrying amount of the asset i.e. grant will be recognized in the profit and loss over the useful life of depreciable asset as a reduced depreciation expense

According to the standard both methods are acceptable alternatives.

Presentation in statement of cash flows

The purchase of assets and the receipt of related grants can cause major movements in the cash flow of an entity. For this reason such movements are often disclosed as separate items irrespective of the treatment in the statement of financial position.

7.2 Presentation of grants related to income

Grants related to income are sometimes presented in the statement of comprehensive income or income statement in one of the following ways and both methods are appropriate:

(a)    as a credit:

• separately (separate line item) or
• under a general heading such as ‘Other income’ (in accumulated form);

(b)   deducted in reporting the related expense i.e. related expense will be reduced by the grant recognized

Supporters of the first method claim that netting the effect is inappropriate as it hampers the comparability of financial information

For the second method it is argued that entity would have not incurred an expense in the absence of grant therefore net results should be reported otherwise it may be misleading