IAS 20 GOVERNMENT GRANTS

1 INTRODUCTION AND SCOPE

IAS 20 deals primarily with government grants. The term government refers to state authorities and similar bodies whether local, national or international, irrespective of their legal form (IAS 20.3).

Government grants are assistance from the government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to operating activities of the entity (IAS 20.3). Government assistance also meets the definition of government grants if there are no conditions specifically relating to operating activities of the entity other than the requirement to operate in certain regions or industry sectors (SIC 10). Government grants exclude those forms of government assistance that cannot be measured reasonably (e.g. free technical advice), as well as transactions with the government that cannot be distinguished from the normal trading transactions of the entity (IAS 20.3 and 20.34–20.35). Government grants for biological assets measured at fair value less costs to sell1 are within the scope of IAS 41 and are therefore excluded from the scope of IAS 20 (IAS 20.2d, IAS 41.1c, and 41.34–41.38).

Grants related to assets are government grants whose primary condition is that the entity acquires or constructs long-term assets. Subsidiary conditions may also be attached (e.g. with regard to the type or location of the assets or the periods during which they are to be acquired or held). Grants related to income are defined as government grants other than those related to assets (IAS 20.3).

2 RECOGNITION AND MEASUREMENT

Government grants (including non-monetary grants at fair value) are recognized when there is reasonable assurance that the entity will comply with the conditions attaching to them and that the grants will be received (IAS 20.7). Receipt of a grant itself does not provide evidence that the conditions attaching to the grant have been or will be fulfilled (IAS 20.8). Any contingent liability or contingent asset relating to a government grant has to be treated according to IAS 37 (IAS 20.11).

The accounting treatment of a grant does not depend on the manner in which a grant is received (e.g. whether the grant is received in cash or as a reduction of a liability to the government) (IAS 20.9).

A lender may give a loan that will be forgiven if certain conditions are met (forgivable loan) (IAS 20.3). A forgivable loan from the government is treated as a government grant only when there is reasonable assurance that the entity will meet the terms of forgiveness of the loan (IAS 20.10).

The benefit of a government loan at a below-market interest rate is treated as a government grant. The loan is recognized and measured according to IFRS 9. The benefit of the below-market interest rate is the difference between the initial carrying amount of the loan determined according to IFRS 9, and the proceeds received. The benefit is accounted for in accordance with IAS 20. When identifying the costs for which the benefit of the loan is intended to compensate, it is necessary to consider the conditions and obligations that have been, or must be, met (IAS 20.10A).

A government grant is recognized in profit or loss on a systematic basis over the periods in which the expenses are recognized, for which the grant is intended to compensate (IAS 20.12). In the case of a grant being related to a depreciable asset, the grant is usually recognized in profit or loss over the periods and in the proportions in which depreciation expense on the asset is recognized (IAS 20.17). If a grant related to a non-depreciable asset requires the fulfillment of certain obligations, it is recognized in profit or loss over the periods that bear the cost of meeting the obligations (IAS 20.18).

A government grant may become receivable as compensation for expenses already incurred or for the purpose of giving immediate financial support to an entity with no future related costs. Such a grant is recognized in profit or loss of the period in which it becomes receivable (IAS 20.20).

A government grant may take the form of a transfer of a non-monetary asset (e.g. land). In such cases, the entity proceeds in one of the following ways at initial recognition (IAS 20.23):

• The asset and the grant are measured at the asset's fair value. Fair value is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm's length transaction (IAS 20.3).
• The asset and the grant are measured at a nominal amount.

3 PRESENTATION

3.1 Grants Related to Assets

A government grant related to an asset (including a non-monetary grant at fair value) is presented in the statement of financial position in one of the following ways (IAS 20.24–20.27):

• Gross method: The grant is recognized as deferred income, which is recognized in profit or loss (other operating income) on a systematic basis over the asset's useful life.
• Net method: The grant is recognized as a reduction of the asset's carrying amount, which subsequently leads to a reduction of depreciation expense.

3.2 Grants Related to Income

A grant related to income is presented in the statement of comprehensive income in one of the following ways (IAS 20.29):

• Gross method: The grant is presented as a credit (either under a general heading such as “Other income” or separately).
• Net method: The grant is presented as a deduction from the related expense.

Grants related to income affect profit or loss and not other comprehensive income (IAS 20.29A and 20.12). In the case of a government grant that becomes receivable for the purpose of giving immediate financial support to an entity, the grant has to be presented according to the gross method.

4 REPAYMENT OF GOVERNMENT GRANTS

If a government grant becomes repayable, this is accounted for as a change in accounting estimate (IAS 20.32 and IAS 8.32–8.38).

Repayment of a grant related to income results in the derecognition of any unamortized deferred income recognized relating to the grant and in the recognition of a liability relating to the repayment of the grant. The difference between these amounts is recognized in profit or loss (IAS 20.32).

In the case of the repayment of a grant related to an asset, it is necessary to distinguish between the gross method and the net method (IAS 20.24).2 If the gross method is applied, the deferred income is derecognized and a liability relating to the repayment of the grant is recognized. The difference between these amounts is recognized in profit or loss. If the net method is applied, the carrying amount of the asset is increased to the carrying amount that would exist had no government grant ever been received. A liability is recognized relating to the repayment of the grant. Moreover, the cumulative additional depreciation that would have been recognized in profit or loss to date in the absence of the grant is recognized immediately in profit or loss (IAS 20.32). If a government grant related to an asset becomes repayable, this may result in the recognition of an impairment loss (IAS 20.33).

5 EXAMPLES WITH SOLUTIONS

Reference to another chapter

Government grants related to biological assets measured at fair value less costs to sell are dealt with in the chapter on IAS 41 (Example 3).

Example 1

Grant related to income

On Jan 01, 01, entity E receives a government grant of CU 4 for its research activities that will be performed in 01 and 02. Starting on this date, there is reasonable assurance that E will comply with the conditions attaching to the grant. In both 01 and 02 research costs of CU 10 are incurred.

Required

Prepare any necessary entries in E's financial statements as at Dec 31 for the years 01 and 02. The grant is presented in E's statement of comprehensive income according to the:

(a) gross method,

(b) net method.

Hints for solution

In particular Section 3.2.

Solution (a)

The recognition criteria (reasonable assurance that E will comply with the conditions attaching to the grant and that the grant will be received) (IAS 20.7) are fulfilled from Jan 01, 01 onwards. Half of the grant is recognized in 01 and half in 02 because half of the research expenses are recognized in each of these years (IAS 20.12).

Solution (b)

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Example 2

Repayment of a grant related to income

Required

The situation is the same as in Example 1. However, on Jun 30, 02, E surprisingly violates a condition attaching to the grant. For this reason the whole grant of CU 4 becomes repayable on the same date. For simplification purposes it is assumed that repayment is effected on the same date.

Hints for solution

In particular Sections 3.2 and 4.

Solution (a)

At first, deferred income of CU 1 (= CU 2 · 6 : 12) is derecognized and other operating income is recognized in the same amount:

Afterwards, the remaining carrying amount of deferred income is derecognized, the payment is recognized, and the difference between these amounts is recognized in profit or loss:

Solution (b)

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Example 3

Grant related to an asset

On Apr 01, 01, entity E acquires a new building for CU 600 to be used for administrative purposes. It has a useful life of 30 years. The building is available for use on the same date.

Since the building is located in a development area, E receives a government grant of CU 120 on Apr 01, 01. Starting on this date there is reasonable assurance that E will comply with the conditions attaching to the grant.

Required

Prepare any necessary entries in E's financial statements as at Dec 31 for the years 01 and 02. The grant is presented in E's statement of financial position according to the

(a) gross method,

(b) net method.

Hints for solution

In particular Section 3.1.

Solution (a)

Recognition of the building's depreciation for 01 (CU 600 : 30 years : 12 months · nine months = CU 15):

Deferred income is derecognized to the same extent that the asset is depreciated (CU 120 : 30 : 12 · 9 = CU 3):

Recognition of the building's depreciation for 02 (CU 600 : 30 = CU 20):

Deferred income is derecognized to the same extent that the asset is depreciated (CU 120 : 30 = CU 4):

Solution (b)

The grant reduces the building's costs of purchase from CU 600 to CU 480. Accordingly, the building's depreciation for 01 is CU 12 (= CU 480 : 30 years : 12 months · 9 months):

Recognition of the building's depreciation for 02 (CU 480 : 30 = CU 16):

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Example 4

Repayment of a grant related to an asset

On Jan 01, 01, entity E acquires a machine with a useful life of 10 years for CU 100. The machine is available for use on the same date.

On Jan 01, 01, E receives a government grant of CU 20 for the machine. Hereon out there is reasonable assurance that E will comply with the conditions attaching to the grant.

However, on Dec 31, 02, E violates a condition attaching to the grant. For this reason the entire grant of CU 20 becomes repayable on the same date. Repayment is effected by E on Jan 20, 03.

Required

Prepare any necessary entries in E's financial statements as at Dec 31 for the years 01–03.

Version (a)

The grant is presented according to the gross method. Depreciation is recognized directly, i.e. no allowance account is used.

Version (b)

The grant is presented according to the net method. Depreciation is recognized

(ba) directly, i.e. no allowance account is used.

(bb) through the use of an allowance account.

Assume that the fact that the government grant becomes repayable does not result in an impairment of the machine (IAS 20.33).

Hints for solution

In particular Sections 3.1 and 4.

Solution (a)

On Dec 31, 02, the deferred income of CU 16 (= CU 20 – CU 2 · 2) is derecognized and a liability of CU 20 relating to the repayment of the grant is recognized. The difference between these amounts is recognized in profit or loss. The depreciation of the machine is not adjusted because under the gross method, depreciation is always calculated on the basis of the costs of purchase of CU 100.

Solution (ba)

The machine's carrying amount of CU 64 as at Dec 31, 02 (= CU 80 – CU 8 · 2) is increased to the carrying amount that would exist at the same date had no government grant ever been received. The latter amount is CU 80 (= CU 100 – CU 10 · 2). A liability of CU 20 is recognized relating to the repayment of the grant. Moreover, the cumulative additional depreciation that would have been recognized in profit or loss to date in the absence of the grant is recognized immediately in profit or loss. This amount is CU 4 [= (CU 10 – CU 8) · 2].

The machine's depreciation for 03 is determined by dividing the machine's carrying amount as at Dec 31, 02 (CU 80) by the machine's remaining useful life (eight years):

Solution (bb)

Apart from the fact that depreciation is recognized through an allowance account (“Dr Depreciation expense Cr Allowance account”), the entry presented next is effected on Dec 31, 02. By means of this entry, the balance of the account “machine” is increased from CU 80 (= costs of purchase reduced by the grant) to CU 100 (= costs of purchase without deduction of the grant).

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1 See the chapter on IAS 41, Section 4.

2 See Section 3.1.