MFRS 120

MFRS 120

Accounting for Government Grants and

Disclosure of Government Assistance
In November 2011 the Malaysian Accounting Standards Board (MASB) issued
MFRS 120 Accounting for Government Grants and Disclosure of Government
Assistance. The Standard is applicable for annual periods beginning on or after
1 January 2012. MFRS 120 is equivalent to IAS 20 Accounting for Government
Grants and Disclosure of Government Assistance as issued and amended by the
International Accounting Standards Board (IASB).

About IAS 20

In April 2001 the IASB adopted IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance, which had originally been issued by the
International Accounting Standards Committee in April 1983.

Other Standards have made minor consequential amendments to IAS 20. They
include IFRS 13 Fair Value Measurement (issued May 2011), Presentation of
Items of Other Comprehensive Income (Amendments to IAS 1) (issued June 2011),
IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9,
IFRS 7 and IAS 39) (issued November 2013) and IFRS 9 Financial Instruments
(issued July 2014).

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CONTENTS from
paragraph
Preface
MALAYSIAN FINANCIAL REPORTING STANDARD 120
ACCOUNTING FOR GOVERNMENT GRANTS AND
DISCLOSURE OF GOVERNMENT ASSISTANCE
SCOPE 1
DEFINITIONS 3
GOVERNMENT GRANTS 7
Non-monetary government grants 23
Presentation of grants related to assets 24
Presentation of grants related to income 29
Repayment of government grants 32
GOVERNMENT ASSISTANCE 34
DISCLOSURE 39
TRANSITIONAL PROVISIONS 40
EFFECTIVE DATE 41

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Malaysian Financial Reporting Standard 120 Accounting for Government Grants

and Disclosure of Government Assistance (MFRS 120) is set out in paragraphs
1-48. All the paragraphs have equal authority. MFRS 120 should be read in the
context of the Basis for Conclusions, the Preface to MASB Approved Accounting
Standards and the Conceptual Framework for Financial Reporting. MFRS 108
Accounting Policies, Changes in Accounting Estimates and Errors provides a basis
for selecting and applying accounting policies in the absence of explicit guidance.

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Preface
The MASB is implementing its policy of convergence through adopting International
Financial Reporting Standards (IFRSs) as issued by the IASB for application for annual
periods beginning on or after 1 January 2012. The IASB defines IFRSs as comprising:
(a) International Financial Reporting Standards;
(b) International Accounting Standards;
(c) IFRIC Interpretations; and
(d) SIC Interpretations.

MFRSs equivalent to IFRSs that apply to any reporting period beginning on or after
1 January 2012 are:
(a) Malaysian Financial Reporting Standards; and
(b) IC Interpretations.

First-time application of MFRSs equivalent to IFRSs

Application of this Standard will begin in the first-time adopter’s* first MFRS financial
statements* in the context of adopting MFRSs equivalent to IFRSs. In this case, the
requirements of MFRS 1 First-time Adoption of Malaysian Financial Reporting
Standards must be observed. Application of MFRS 1 is necessary as otherwise such
financial statements will not be able to assert compliance with IFRS.

MFRS 1, the Malaysian equivalent of IFRS 1 First-time Adoption of International

Financial Reporting Standards, requires prior period information, presented as
comparative information, to be restated as if the requirements of MFRSs effective for
the first-time adopter’s first MFRS reporting period have always been applied, except
when MFRS 1 (1) prohibits retrospective application in some aspects or (2) allows the
first-time adopter to use one or more of the exemptions or exceptions contained therein.
This means that, in preparing its first MFRS financial statements, the first-time adopter
shall refer to the provisions contained in MFRS 1 on matters relating to transition and
effective dates instead of the transitional provision and effective date contained in the
respective MFRSs. This differs from previous requirements where an entity accounted
for changes of accounting policies in accordance with the specific transitional
provisions contained in the respective FRSs or in accordance with FRS 108 Accounting
Policies, Changes in Accounting Estimates and Errors when the FRS did not include
specific transitional provisions. In this regard the effective and issuance dates contained
in this Standard are those of the IASB’s and are inapplicable in the MFRS framework
since MFRS 1 requirements will be applied by the first-time adopter.

Comparison and compliance with IAS 20

MFRS 120 is equivalent to IAS 20 Accounting for Government Grants and Disclosure
of Government Assistance as issued and amended by the IASB, including the effective
and issuance dates. Entities that comply with MFRS 120 will simultaneously be in
compliance with IAS 20.

* Appendix A of MFRS 1 defines first-time adopter and first MFRS financial statements.

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Malaysian Financial Reporting Standard 120

Accounting for Government Grants and Disclosure of
Government Assistance1
Scope
1 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.

2 This Standard does not deal with:

(a) 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.
(b) government assistance that is provided for an entity in the form of
benefits that are available in determining taxable profit or tax loss,
or are determined or limited on the basis of income tax liability.
Examples of such benefits are income tax holidays, investment tax
credits, accelerated depreciation allowances and reduced income
tax rates.
(c) government participation in the ownership of the entity.
(d) government grants covered by MFRS 141 Agriculture.

Definitions
3 The following terms are used in this Standard with the meanings
specified:
Government refers to government, government agencies and similar
bodies whether local, national or international.
Government assistance is action by government designed to provide an
economic benefit specific to an entity or range of entities qualifying
under certain criteria. Government assistance for the purpose of this
Standard does not include benefits provided only indirectly through
action affecting general trading conditions, such as the provision of
infrastructure in development areas or the imposition of trading
constraints on competitors.
Government grants 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. They
exclude those forms of government assistance which cannot reasonably

1 As part of Improvements to MFRSs (Improvements to IFRSs issued by IASB in May 2008)

the Board amended terminology used in this Standard to be consistent with other MFRSs as
follows: (a) ‘taxable income’ was amended to ‘taxable profit or tax loss’, (b) ‘recognised as
income/expense’ was amended to ‘recognised in profit or loss’, (c) ‘credited directly to
shareholders’ interests/equity’ was amended to ‘recognised outside profit or loss’, and (d)
‘revision to an accounting estimate’ was amended to ‘change in accounting estimate’.

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have a value placed upon them and transactions with government which
cannot be distinguished from the normal trading transactions of the
entity.2
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.
Forgivable loans are loans which the lender undertakes to waive
repayment of under certain prescribed conditions.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants
at the measurement date. (See MFRS 13 Fair Value Measurement.)

4 Government assistance takes many forms varying both in the nature of the
assistance given and in the conditions which are usually attached to it. 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.

5 The receipt of government assistance by an entity 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 entity has benefited from such assistance during the reporting
period. This facilitates comparison of an entity’s financial statements with
those of prior periods and with those of other entities.

6 Government grants are sometimes called by other names such as subsidies,

subventions, or premiums.

Government grants
7 Government grants, including non-monetary grants at fair value, shall
not be recognised until there is reasonable assurance that:
(a) the entity will comply with the conditions attaching to them;
and
(b) the grants will be received.

8 A government grant is not recognised until there is reasonable assurance that

the entity will comply with the conditions attaching to it, and that the grant
will be received. Receipt of a grant does not of itself provide conclusive

2 See also IC Interpretation 110 Government Assistance—No Specific Relation to Operating

Activities.

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evidence that the conditions attaching to the grant have been or will be
fulfilled.

9 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.

10 A forgivable loan from government is treated as a government grant when

there is reasonable assurance that the entity will meet the terms for
forgiveness of the loan.

10A The benefit of a government loan at a below-market rate of interest is treated

as a government grant. The loan shall be recognised and measured in
accordance with MFRS 9 Financial Instruments. The benefit of the below-
market rate of interest shall be measured as the difference between the initial
carrying value of the loan determined in accordance with MFRS 9 and the
proceeds received. The benefit is accounted for in accordance with this
Standard. The entity shall consider the conditions and obligations that have
been, or must be, met when identifying the costs for which the benefit of the
loan is intended to compensate.

11 Once a government grant is recognised, any related contingent liability or

contingent asset is treated in accordance with MFRS 137 Provisions,
Contingent Liabilities and Contingent Assets.

12 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.

13 There are two broad approaches to the accounting for government grants: the
capital approach, under which a grant is recognised outside profit or loss, and
the income approach, under which a grant is recognised in profit or loss over
one or more periods.

14 Those in support of the capital approach argue as follows:

(a) government grants are a financing device 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.
(b) it is inappropriate to recognise government grants in profit or loss,
because they are not earned but represent an incentive provided by
government without related costs.

15 Arguments in support of the income approach are as follows:

(a) because government grants are receipts from a source other than
shareholders, they should not be recognised directly in equity but
should be recognised in profit or loss in appropriate periods.
(b) government grants are rarely gratuitous. The entity earns them
through compliance with their conditions and meeting the

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envisaged obligations. They should therefore be recognised in

profit or loss over the periods in which the entity recognises as
expenses the related costs for which the grant is intended to
compensate.
(c) because income and other taxes are expenses, it is logical to deal
also with government grants, which are an extension of fiscal
policies, in profit or loss.

16 It is fundamental to the income approach that government grants should 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 grant is
intended to compensate. Recognition of government grants in profit or loss
on a receipts basis is not in accordance with the accrual accounting
assumption (see MFRS 101 Presentation of Financial Statements) and would
be acceptable only if no basis existed for allocating a grant to periods other
than the one in which it was received.

17 In most cases the periods over which an entity recognises the costs or
expenses related to a government grant are readily ascertainable. Thus grants
in recognition of specific expenses are recognised in profit or loss in the same
period as the relevant expenses. Similarly, 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.

18 Grants related to non-depreciable assets may also require the fulfilment of

certain obligations and would then be recognised in profit or loss over the
periods that bear the cost of meeting the obligations. 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.

19 Grants are sometimes received as part of a package of financial or fiscal aids

to which a number of conditions are attached. In such cases, care is needed in
identifying the conditions giving rise to costs and expenses which determine
the periods over which the grant will be earned. It may be appropriate to
allocate part of a grant on one basis and part on another.

20 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.

21 In some circumstances, a government grant may be awarded for the purpose

of giving immediate financial support to an entity rather than as an incentive
to undertake specific expenditures. Such grants may be confined to a
particular entity and may not be available to a whole class of beneficiaries.
These circumstances may warrant recognising a grant in profit or loss of the
period in which the entity qualifies to receive it, with disclosure to ensure that
its effect is clearly understood.

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22 A government grant may become receivable by an entity as compensation for

expenses or losses incurred in a previous period. Such a grant is recognised
in profit or loss of the period in which it becomes receivable, with disclosure
to ensure that its effect is clearly understood.

Non-monetary government grants

23 A government grant may take the form of a transfer of a non-monetary asset,
such as land or other resources, for the use of the entity. In these
circumstances 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. An alternative course
that is sometimes followed is to record both asset and grant at a nominal
amount.

Presentation of grants related to assets

24 Government grants related to assets, including non-monetary grants at
fair value, shall be presented in the statement of financial position 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 recognises the grant as deferred income that is recognised in

profit or loss on a systematic basis over the useful life of the asset.

27 The other method deducts the grant in calculating the carrying amount of the
asset. The grant is recognised in profit or loss over the life of a depreciable
asset as a reduced depreciation expense.

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

Presentation of grants related to income

29 Grants related to income are presented as part of profit or loss, either
separately or under a general heading such as ‘Other income’; alternatively,
they are deducted in reporting the related expense.

29A [Deleted by IASB]

30 Supporters of the first method claim that it is inappropriate to net income and
expense items and that separation of the grant from the expense facilitates
comparison with other expenses not affected by a grant. For the second
method it is argued that the expenses might well not have been incurred by
the entity if the grant had not been available and presentation of the expense
without offsetting the grant may therefore be misleading.

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31 Both methods are regarded as acceptable for the presentation of grants related
to income. Disclosure of the grant may be necessary for a proper
understanding of the financial statements. Disclosure of the effect of the
grants on any item of income or expense which is required to be separately
disclosed is usually appropriate.

Repayment of government grants

32 A government grant that becomes repayable shall be accounted for as a
change in accounting estimate (see MFRS 108 Accounting Policies,
Changes in Accounting Estimates and Errors). Repayment of a grant
related to income shall be applied first against any unamortised deferred
credit recognised in respect of the grant. To the extent that the
repayment exceeds any such deferred credit, or when no deferred credit
exists, the repayment shall be recognised immediately in profit or loss.
Repayment of a grant related to an asset shall be recognised by
increasing the carrying amount of the asset or reducing the deferred
income balance by the amount repayable. The cumulative additional
depreciation that would have been recognised in profit or loss to date in
the absence of the grant shall be recognised immediately in profit or loss.

33 Circumstances giving rise to repayment of a grant related to an asset may

require consideration to be given to the possible impairment of the new
carrying amount of the asset.

Government assistance
34 Excluded from the definition of government grants in paragraph 3 are certain
forms of government assistance which cannot reasonably have a value placed
upon them and transactions with government which cannot be distinguished
from the normal trading transactions of the entity.

35 Examples of assistance that cannot reasonably have a value placed upon them
are free technical or marketing advice and the provision of guarantees. An
example of assistance that cannot be distinguished from the normal trading
transactions of the entity is a government procurement policy that is
responsible for a portion of the entity’s sales. The existence of the benefit
might be unquestioned but any attempt to segregate the trading activities from
government assistance could well be arbitrary.

36 The significance of the benefit in the above examples may be such that
disclosure of the nature, extent and duration of the assistance is necessary in
order that the financial statements may not be misleading.

37 [Deleted by IASB]

38 In this Standard, government assistance does not include the provision of

infrastructure by improvement to the general transport and communication
network and the supply of improved facilities such as irrigation or water
reticulation which is available on an ongoing indeterminate basis for the
benefit of an entire local community.

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Disclosure
39 The following matters shall 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 entity has directly
benefited; and
(c) unfulfilled conditions and other contingencies attaching to
government assistance that has been recognised.

Transitional provisions
40 An entity adopting the Standard for the first time shall:
(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 MFRS 108; 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.

Effective date
41 This Standard becomes operative for financial statements covering periods
beginning on or after 1 January 1984.

42 MFRS 101 (IAS 1 Presentation of Financial Statements as revised by IASB

in 2007) amended the terminology used throughout MFRSs. In addition it
added paragraph 29A. An entity shall apply those amendments for annual
periods beginning on or after 1 January 2009. If an entity applies MFRS 101
(IAS 1 revised by IASB in 2007) for an earlier period, the amendments shall
be applied for that earlier period.

43 Paragraph 37 was deleted and paragraph 10A added by Improvements to

MFRSs (Improvements to IFRSs issued by IASB in May 2008). An entity
shall apply those amendments prospectively to government loans received in
periods beginning on or after 1 January 2009. Earlier application is permitted.
If an entity applies the amendments for an earlier period it shall disclose that
fact.

44 [Deleted by IASB]

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45 MFRS 13 (IFRS 13 Fair Value Measurement issued by IASB in May 2011)

amended the definition of fair value in paragraph 3. An entity shall apply that
amendment when it applies MFRS 13.

46 Presentation of Items of Other Comprehensive Income (Amendments to

MFRS 101) [Presentation of Items of Other Comprehensive Income
(Amendments to IAS 1) issued by IASB in June 2011] amended paragraph
29 and deleted paragraph 29A. An entity shall apply those amendments when
it applies MFRS 101 (IAS 1 as amended by IASB in June 2011).

47 [Deleted by IASB]

48 MFRS 9 (IFRS 9 Financial Instruments as issued by IASB in July 2014)

amended paragraph 10A and deleted paragraphs 44 and 47. An entity shall
apply those amendments when it applies MFRS 9.

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