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IAS 20 Accounting For Government Grants0
IAS 20 Accounting For Government Grants0
1
History of IAS 20
2
History of IAS 20
3
RELATED INTERPRETATIONS
4
DEFINITIONS:
Government assistance- action by government
designed to provide an economic benefit specific
to an entity qualifying under certain criteria.
Does not include benefits provided only indirectly
through action affecting general trading conditions
e.g., provision of infrastructure in development
areas
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
5
DEFINITIONS
7
Scope
IAS 20 applies to all government grants and
other forms of government assistance. [IAS
20.1]
However, it does not cover government
assistance that is provided in the form of
benefits in determining taxable income.
It does not cover government grants covered
by IAS 41 Agriculture, either. [IAS 20.2] The
benefit of a government loan at a below-
market rate of interest is treated as a
government grant. [IAS 20.10A]
8
GOVERNMENT GRANTS
9
IAS 20.7
10
IAS 20.10
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
IAS 20.10A
The benefit of a government loan at a below-
market rate of interest is treated as a
government grant. The
loan shall be recognized and measured in
accordance with IAS 39 Financial Instruments:
Recognition and Measurement.
11
IAS 20.10A
12
IAS 20.12
13
IAS 20. 13 - 15
Credit Capital or Credit Income
IAS 20. 13-15 discuss two potentially
alternative ways of accounting for
Government Grants:
(a) 13. the capital approach, under
which a grant is credited directly to
shareholders' interests, and
(b) the income approach, under which
a grant is taken to income over one or
more periods.
14
IAS 20. 13 - 15
Credit Capital or Credit Income
Standard discusses the arguments in favor of
crediting Capital with the value of the Government
Grant & arguments in favor of crediting the Income
accounts with the value of the government grants:
Finance device, no repayment, not earned but
incentive
Receipts not from shareholders so recognize in P &
L in appropriate periods, extension of fiscal policies
etc
See paragraphs 14 and 15 of IAS 20 for the full
text of this argument.
15
IAS 20. 16 - 22
18
Example
We apply the grant, notice it is for P30 million not only P15
million as follows:
Year Cost (P m)
1 P30 x (1/15) = 2
2 P30 x (2/15) = 4
3 P30 x (3/15) = 6
4 P30 x (4/15) = 8
5 P30 x (5/15) = 10
Total P30
19
IAS 20.17
20
Example
21
IAS 20.19
Grants are sometimes received as part of a package of
financial or fiscal aids to which a number of conditions are
attached
Example:
Given a plot of land by a Government department in return
for providing guaranteed employment to local people as
they work with on improving the facilities on that land. The
budget for the work says that the total cost of the work is
to be P60 million, to be spent as follows:
Year 1 P10 million
Year 2 P10 million
Year 3 P40 million
The fair value of the land at acquisition is P120 million.
22
SOLUTION:
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Presentation of Grants Related
to Assets
including non monetary grants at fair value,
should be presented in the balance sheet
either by setting up the grant as deferred
income or by deducting the grant in arriving
at the carrying amount of the asset. [20.24]
Two methods of presentation in financial
statements of grants (or the appropriate
portions of grants) related to assets are
regarded as acceptable alternatives. [20.25]
25
1. Deferred income option
Method sets up the grant as deferred income which is
recognized as income on a systematic and rational
basis over the useful life of the asset.
Example 1:
A P3 million grant is awarded that is to be used to buy for P9
million a dilapidated building in 2009 that is estimated to have
a useful life of 3 years. The deferred income account will
behave as follows:
Date Open/Bal. b/d Recgn as income Bal. c/f
2009 3 3
31.12.09 3 1 2
31.12.10 2 1 1
31.12.11 1 1 0
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2. Grant deducted from
carrying value
Method deducts the grant in arriving at the carrying
amount of the asset. The grant is recognized as income
over the life of a depreciable asset by way of a reduced
depreciation charge.
Example 2:
grant deducted from carrying value
Date Open/Balance b/d Depreciation Balance c/d
2009 9 3* 6
31.12.096 2 4
31.12.104 2 2
31.12.112 2 0
27
IAS 20.28
28
Presentation of Grants Related
to Income
sometimes presented as a credit in
the income statement, either
separately or under a general
heading such as "Other income";
alternatively, they are deducted in
reporting the related expense.
29
Arguments for and against
[20.30]
First method supporters 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.
Second method supporters argue 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.
30
Arguments for and against
[20.31]
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
31
Duncan Williamson (2006) argue that
pars.30 and 31 should be consigned
to an appendix as they present
arguments supporting the
alternatives here rather than
anything constructive
32
Repayment of government grants [32 - 38]
35
DISCLOSURE [39 40]
The following matters should 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
recognized in the financial statements and an
indication of other forms of government assistance
from which the enterprise has directly benefited; &
(c) unfulfilled conditions and other contingencies
attaching to government assistance that has been
recognized
36
Transitional Provisions [20.40]
37
EXAMPLE 1
Thabiso Ltd. erected a number of buildings at a cost of P1 000
000. these buildings have useful life of 10 years and were
completed and put into use on 1 January 2011.
Thabiso Ltd. received a government grant of P100 000 on 1
January 2011, since the national government regards it as a
priority to provide houses to all citizens.
Required:
Prepare the journals in respect of the above transactions if
(a) it is assumed that the government grant is reflected in the
balance sheet as deferred income and
(b) it is assumed that the government grant is reflected in the
balance sheet by deducting the government grant from the
carrying amount of the asset.
Your answer should comply with IAS 20
38
SOLUTION
(a)
Date Particulars Dr Cr
01.01. Buildings 1 000
11 Bank/Payables 000 1 000
000
Bank 100
Deferred Income (B/S) 000 100 000
40
TUTORIAL EX.
Moyo Ltd is a company that provides medical services in remote areas in Orapa. They
receive a government grant every year in respect of these medical services, since
the government wishes to provide medical services to all residents of Botswana.
Moyo Ltd spent P500 000 in respect of the provision of medical services in remote
areas in Orapa for the year ended 31 December 2011.
Moyo Ltd collected P50 000 during the year from the inhabitants of the remote areas
in Orapa.
Moyo Ltd received P400 000 on 1 January 2011 from the local government in Orapa,
in order to encourage them to continue with the provision of the medical services in
the remote areas of Orapa.
Required:
Prepare journal entries in respect of transactions if:
(a) it is assumed that the government grant is reflected as a credit in the income
statement and
(b) it is assumed that the government grant is deducted in the bringing to book of
the related expense.
41
REFERENCES
IAS 20: accounting for Government
grants and disclosures of
Government Assistance
Duncan Williamson: IAS 20:
Accounting for Government grants
ias20.html
Accounting Standards (latest edition)
by Oppermann, Booysen, Binnekade
and Oberholster Juta publication
42
SOLUTION TO TUTORIAL
QUESTION
Date Particulars Dr Cr
31.12.1 Medical costs incurred 500
2 Bank 000 500
000
Bank 50 000
Income from provision of medical 50 000
expenses
Bank 400
Government grant iro medical 000 400
services 000
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SOLUTION
(b)
Date Particulars Dr Cr
31.12.1 Medical costs incurred 500 000
2 Bank 500 000
Bank 50 000
Income from provision of medical services 50 000
44