1.1 Overview of IAS 20

Government grants are transfers of resources to an entity in return for past or future compliance with certain conditions relating to the entity's operating activities. [IAS 20.3]. Such assistance has been available to businesses for many years, although the exact nature of such support will vary from country to country and over time as governments and their priorities change. The purpose of government grants, which may be called subsidies, subventions or premiums, [IAS 20.6], and other forms of government assistance is often to encourage a private sector entity to take a course of action that it would not normally have taken if the assistance had not been provided. [IAS 20.4]. As the standard notes, the receipt of government assistance by an entity may be significant for the preparation of the financial statements for two reasons:

• if resources have been transferred, an appropriate method of accounting for the transfer must be found; and
• it is desirable to give an indication of the extent to which an entity has benefited from such assistance during the reporting period, because this facilitates comparison of its financial statements with those of prior periods and with those of other entities. [IAS 20.5].

The main accounting issue that arises from government grants is how to deal with the benefit that the grant represents. IAS 20 adopts an income approach, whereby grants are recognised in profit or loss in the same periods as the costs that the grants are intended to compensate. [IAS 20.12]. Accordingly, grants relating to specific expenses are recognised in profit or loss in the same periods as those expenses, and grants relating to depreciable assets are recognised in profit or loss in the same periods as the related depreciation expense. [IAS 20.17]. This approach is applied regardless of whether the benefit is received in the form of cash; by a transfer of a non-monetary asset; or as a reduction of a liability to the government. [IAS 20.9, 23].

The standard recognises that an entity may receive other forms of government assistance, such as free technical or marketing advice and the provision of guarantees, which cannot reasonably have a value placed upon them. Rather than prescribe how these should be accounted for, it requires disclosure about such assistance. [IAS 20.35, 36].

1.2 Terms used in this chapter

The following terms are used in this chapter with the meanings specified:

2.1 Government assistance

Government assistance is defined as action by government designed to provide an economic benefit to an entity or range of entities qualifying under certain criteria. [IAS 20.3]. Government assistance takes many forms ‘varying both in the nature of the assistance given and in the conditions which are usually attached to it’. [IAS 20.4].

However, such assistance does not include benefits provided indirectly through action affecting general trading conditions, such as the provision of infrastructure (e.g. transport, communications networks or utilities) in development areas or that are available for the benefit of an entire local community or the imposition of trading constraints on competitors (see 3.7 below). [IAS 20.3, 38].

2.2 Government grants

Government grants are a specific form of government assistance. Under IAS 20, government grants represent 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. [IAS 20.3]. The standard identifies the following types of government 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; and
• grants related to income are government grants other than those related to assets. [IAS 20.3].

Government grants exclude:

1. assistance to which no value can reasonably be assigned, e.g. free technical or marketing advice and the provision of guarantees; and
2. transactions with government that cannot be distinguished from the normal trading transactions of the entity, e.g. where the entity is being favoured by a government's procurement policy. [IAS 20.3, 35].

Such excluded items are to be treated as falling only within the standard's disclosure requirements for government assistance (see 3.7 below).

Loans at below market interest rates are also deemed to be a form of government assistance and the standard requires entities to measure and record the benefit of the below-market rate of interest in accordance with IFRS 9 – Financial Instruments. [IAS 20.10A]. The accounting consequences are discussed at 3.4 below.

In public-to-private service concession arrangements a government may give certain assets to the operator of the service concession. If the entire arrangement is to be accounted for under IFRIC 12 – Service Concession Arrangements – the assets are not a government grant. [IFRIC 12.27]. Service concessions are discussed in Chapter 25.

While grants of emission rights and renewable energy certificates typically meet the definition of government grants under IAS 20, the rights and certificates themselves are intangible assets. Accounting for emission rights and renewable energy certificates is discussed in Chapter 17 at 11.2 and 11.3.

2.3 Scope exclusions

IAS 20 does not deal with:

1. accounting for government grants if the entity prepares financial information that reflect the effects of changing prices, whether as financial statements or in supplementary information of a similar nature;
2. government assistance in the form of benefits that are available in determining taxable profit or loss or are determined or limited on the basis of income tax liability, e.g. income tax holidays, investment tax credits, accelerated depreciation allowances and reduced income tax rates;
3. government participation in the ownership of the entity; and
4. government grants covered by IAS 41. [IAS 20.2].

The accounting treatment of government assistance either provided by way of a reduction in taxable profit or loss; or determined or limited according to an entity's income tax liability is discussed in the context of investment tax credits at 2.3.1 below and in Chapter 33 at 4.3.

In the case of exclusion (c), for an entity in which the government is a shareholder, it will be necessary to determine whether any assistance being provided to the entity is being given by the government acting in its capacity as a shareholder. If so, such assistance will not be within the scope of IAS 20 and will be accounted for in equity, in common with other shareholder transactions (see Chapter 3 at 3.3).

The reason for exclusion (d) above is that the presentation permitted by IAS 20 of deducting government grants from the carrying amount of the asset (see 4.1 below) was considered inconsistent with a fair value model, which must be used in the measurement of biological assets. [IAS 41.B66]. The IASB decided to deal with government grants related to agricultural activity in IAS 41 rather than initiate a wider review of IAS 20. [IAS 41.B67]. The requirements of IAS 41 in relation to government grants are set out at 5 below and in Chapter 42 at 3.3.

There are no similar exclusions for government grants in IAS 40 – Investment Property – which includes a similar fair value model (see Chapter 19), nor was IAS 20 revised to deal with the matter. This is probably because government grants in the investment property sector are relatively rare compared to the agricultural sector. However, governments do on occasion provide grants and subsidised loans to finance the acquisition of social housing that meets the definition of investment property. The discount on these subsidised loans is now considered to be a government grant, as described at 3.4 below.

3.1 General requirements of IAS 20

IAS 20 requires that government grants should be recognised only when there is reasonable assurance that:

1. the entity will comply with the conditions attaching to them; and
2. the grants will be received. [IAS 20.7].

The standard does not define ‘reasonable assurance’, which raises the question of whether or not it means the same as ‘probable’ (or ‘more likely than not’ [IAS 37.15]). When developing IAS 41 the Board noted that ‘it would inevitably be a subjective decision as to when there is reasonable assurance that the conditions are met and that this subjectivity could lead to inconsistent income recognition.’ [IAS 41.B69]. The phrase ‘reasonable assurance’ is generally interpreted as being a high threshold which we would suggest implies a significantly higher probability that ‘more likely than not’. Therefore, we would not expect an entity to recognise government grants before it was significantly more likely than probable that the entity would comply with the conditions attached to them and that the grants would be received. In assessing the likelihood of compliance with conditions attached to the grant it is acknowledged the conditions may relate to future performance and other future events. However, for a grant related to an asset, we would not expect a grant to be recognised before the asset is acquired, regardless of how likely the acquisition of the asset is. If the grant is also conditional on maintaining a number of jobs to operate the asset, the grant should be recognised as soon as the asset is acquired as long as there is reasonable assurance that the jobs will be maintained as required. The standard notes that receiving a grant does not of itself provide conclusive evidence that the conditions attaching to the grant have been or will be fulfilled. [IAS 20.8].

After an entity has recognised a government grant, any related contingent liability or contingent asset should be accounted for under IAS 37 – Provisions, Contingent Liabilities and Contingent Assets. [IAS 20.11].

Accounting for government grants is not affected by the manner in which they are received, i.e. grants received in cash, as a non-monetary amount, or forgiveness of a government loan, are all accounted for in the same manner. [IAS 20.9].

3.2 Non-monetary grants

A government grant in the form of a transfer of a non-monetary asset, such as land or other resources, which is intended for use by the entity, is usually recognised at the fair value of that asset. [IAS 20.23]. Fair value is defined in IFRS 13 – Fair Value Measurement – and applies when another IFRS requires or permits fair value measurement, including IAS 20. [IFRS 13.5, IAS 20.45]. 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. [IAS 20.3, IFRS 13.9]. The requirements of IFRS 13 are discussed in Chapter 14.

An alternative of recognising such assets, and the related grant, at a nominal amount is permitted. [IAS 20.23]. This alternative is available even if the fair value of the asset differs materially from the nominal amount. Under IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors – an entity should select an accounting policy and apply it consistently to all non-monetary government grants. [IAS 8.13].

3.3 Forgivable loans

A forgivable loan from government, the repayment of which will be waived under certain prescribed conditions, [IAS 20.3], is to be treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan. [IAS 20.10].

However, an arrangement only meets the definition of a forgivable loan if its terms provide for circumstances where repayment would be waived (i.e. forgiven), without any other form of settlement. In Example Example 24.1 above, the entity either repays some or all of the loan if the project generates any sales or, if no sales are made, its liability is waived in full, with no further recourse to the government. In May 2016, the Interpretations Committee concluded on a request to clarify whether cash received to help an entity finance a research and development project would be treated as a forgivable loan in the following specific circumstances:²

• the loan was repayable only if the entity decided to exploit and commercialise the results of the research phase of the project;
• otherwise, the loan was not repayable in cash but instead the entity was required to transfer to the government the rights to the research.

The Interpretations Committee noted that, in this arrangement, the cash received did not meet the definition of a forgivable loan under IAS 20, because the government did not undertake to waive repayment of the loan but instead required settlement in cash or by the transfer of rights to the research. In other words, the entity could only avoid repayment by settling a non-financial obligation (to hand over the rights to the research). This requirement confirms the status of the cash receipt as a financial liability under IAS 32 – Financial Instruments: Presentation. [IAS 32.20(a)]. The Committee also noted that the financial liability should be measured under IFRS 9. Any difference between the cash receipt and the fair value of the liability would need to be accounted for under IAS 20 as discussed at 3.4 below. The Interpretations Committee decided not to add this issue to its agenda on the basis that existing standards provide an adequate basis of accounting.³

Where an entity receives a loan to finance a research and development project and the loan will be forgiven if the project is not successful then the existence of the forgivable loan has no bearing on assessing the project for capitalisation under the criteria in IAS 38 – Intangible Assets (see Chapter 17 at 6.2). One of the criteria for capitalisation of development costs is that the entity must demonstrate that the intangible asset will generate probable economic benefits. [IAS 38.57(d)]. The existence of the forgivable loan does not mean that this requirement is always met. The criteria in IAS 38 should be assessed on their own merits.

3.4 Loans at lower than market rates of interest

IAS 20 requires government loans that have a below-market rate of interest to be recognised and measured in accordance with IFRS 9. [IAS 20.10A, IFRS 9.5.1.1]. The loans could be interest-free. The difference between the initial carrying value of the loan (its fair value) and the proceeds received is treated as a government grant. [IAS 20.10A, IFRS 9.B5.1.1].

Subsequently, interest will be imputed to the loan using the effective interest method, taking account of any transaction costs (see Chapter 49 at 3.3.1). The grant will not generally be released on a basis that is consistent with the interest expense. The standard stresses that the entity must 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’. [IAS 20.10A]. This process of matching the benefit to costs is discussed at 3.5 below.

As well as routine subsidised lending to meet specific objectives, loans made as part of government rescue plans are generally within scope of IAS 20 if they are at a lower than market rate of interest. In 2009 PSA Peugeot Citroën received assistance from the European Investment Bank as described in Extract Extract 24.1 below.

This will also affect the manner in which arrangements that are similar in substance to loans are accounted for.

Governments sometimes provide assistance by allowing entities to retain sums that they collect on behalf of the government (e.g. value added taxes) until a future event, as in the following example:

In this example, the fact that amounts retained by the entity are required to be repaid after 5 years makes this arrangement similar in nature to an interest free loan. Accordingly, the entity would determine a value for the government assistance by comparing the amounts retained to the fair value of a 5 year loan at market rates of interest, as illustrated in Example Example 24.2 above. In determining an appropriate basis for recognising the benefit of the grant in profit or loss, the entity must 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’. [IAS 20.10A]. In the example above, because the grant is intended to stimulate investment in fixed assets, an acceptable approach would be deferral in line with depreciation of the relevant assets while recognition immediately in profit or loss upon occurrence of sales would generally not be appropriate. The judgement involved in matching the benefit to costs is discussed at 3.5 below.

3.5 Recognition in the income statement

Grants should be recognised in the income statement on a systematic basis that matches them with the related costs that they are intended to compensate. [IAS 20.12]. They should not be credited directly to shareholders' funds. Income recognition on a receipts basis, which is not in accordance with the accruals accounting assumption, is only acceptable if there is no basis for allocating a grant to periods other than the one in which it is received. [IAS 20.16].

IAS 20 rejects a ‘capital approach’, under which a grant is recognised outside profit or loss (typically credited directly to equity), [IAS 20.13], in favour of the ‘income approach’, under which grants are taken to income over one or more periods, because:

1. government grants are receipts from a source other than shareholders. As such, they should not be credited directly to equity but should be recognised in profit or loss in appropriate periods;
2. government grants are rarely gratuitous. An entity earns them through compliance with their conditions and meeting the envisaged obligations. They should therefore be recognised in profit or loss over the periods in which the entity recognises the associated costs which the grant is intended to compensate; and
3. as 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. [IAS 20.15].

IAS 20 envisages that in most cases, the periods over which an entity recognises the costs or expenses related to the government grant are readily ascertainable and thus grants in recognition of specific expenses are recognised as income in the same period as the relevant expense. [IAS 20.17].

Grants related to depreciable assets are usually recognised as income over the periods, and in the proportions, in which depreciation on those assets is charged. [IAS 20.17]. Grants related to non-depreciable assets may also require the fulfilment of certain obligations, in which case they would be recognised as income over the periods in which the costs of meeting the obligations are incurred. For example, a grant of land may be conditional upon the erection of a building on the site and it may be appropriate to recognise it as income over the life of the building. [IAS 20.18].

IAS 20 acknowledges that grants may be received as part of a package of financial or fiscal aids to which a number of conditions are attached. In such cases, the standard indicates that care is needed in identifying the conditions giving rise to the costs and expenses which determine the periods over which the grant will be earned. It may also be appropriate to allocate part of the grant on one basis and part on another. [IAS 20.19].

Where a grant relates to expenses or losses already incurred, or for the purpose of giving immediate financial support to the entity with no future related costs, the grant should be recognised in income when it becomes receivable. If such a grant is recognised as income of the period in which it becomes receivable, the entity should disclose its effects to ensure that these are clearly understood. [IAS 20.20-22].

Many of the problems in accounting for government grants relate to that of interpreting the requirement to match the grant with the related costs, particularly because of the international context in which IAS 20 is written. It does not address specific questions that relate to particular types of grant that are available in individual countries.

3.6 Repayment of government grants

A government grant that becomes repayable after recognition should be accounted for as a revision of an accounting estimate. Repayment of a grant related to income should be charged against the related unamortised deferred credit and any excess should be recognised as an expense immediately. [IAS 20.32].

Repayment of a grant related to an asset should be recognised by increasing the carrying amount of the related asset or reducing the related unamortised deferred credit. The cumulative additional depreciation that would have been recognised to date as an expense in the absence of the grant should be charged immediately to profit or loss. [IAS 20.32].

IAS 20 emphasises that the circumstances giving rise to the repayment of a grant related to an asset may require that consideration be given to the possible impairment of the asset. [IAS 20.33].

3.7 Government assistance

IAS 20 excludes from the definition of government grants ‘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’. [IAS 20.34]. In many cases the ‘existence of the benefit might be unquestioned but any attempt to segregate the trading activities from government assistance could well be arbitrary’. [IAS 20.35]. The standard therefore requires disclosure of significant government assistance (see 6.2 below). [IAS 20.36, 39(b)].

The following example describes two different forms of government assistance:

Under IAS 20, ‘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 that is available on an ongoing indeterminate basis for the benefit of an entire local community.’ [IAS 20.38].

4.1 Presentation of grants related to assets

Grants that are related to assets (i.e. those whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire long-term assets) should be presented in the statement of financial position either: [IAS 20.24]

1. by setting up the grant as deferred income, which is recognised as income on a systematic basis over the useful life of the asset; [IAS 20.26] or
2. by deducting the grant in arriving at the carrying amount of the asset, in which case the grant is recognised in profit or loss as a reduction of depreciation. [IAS 20.27].

IAS 20 regards both these methods of presenting grants in financial statements as acceptable alternatives. [IAS 20.25]. The presentation approach should be applied consistently to all similar grants and appropriately disclosed.

Greencore Group plc adopted the former treatment, as shown below:

An example of a company adopting a policy of deducting grants related to assets from the cost of the assets is shown below:

4.2 Presentation of grants related to income

Grants related to income should be presented either as:

1. a credit in the income statement, either separately or under a general heading such as ‘other income’; or
2. a deduction in reporting the related expense. [IAS 20.29].

The presentation approach should be applied consistently to all similar grants and appropriately disclosed.

The standard points out that supporters of method (a) consider it inappropriate to present income and expense items on a net basis and that ‘separation of the grant from the expense facilitates comparison with other expenses not affected by a grant’. [IAS 20.30]. Furthermore, method (a) is consistent with the general prohibition of offsetting in IAS 1. [IAS 1.32-33]. However, supporters of method (b) would 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’. [IAS 20.30]. The standard regards both methods as acceptable for the presentation of grants related to income. [IAS 20.31]. When offsetting is permitted by another standard, the general prohibition in IAS 1 does not apply. [IAS 1.32]. In any case, IAS 20 considers that disclosure of the grant may be necessary for a proper understanding of the financial statements. Furthermore, disclosure of the effect of grants on any item of income or expense, which should be disclosed separately, is usually appropriate. [IAS 20.31].

As illustrated below, Anheuser-Busch InBev has adopted a policy of presenting grants within other operating income, although not separately on the face of the income statement, rather than as a deduction from the related expense.

Akzo Nobel N.V. is an example of a company presenting the grant as a deduction from the related expense in the income statement, as illustrated in Extract Extract 24.3 above.

6.1 Government grants

The extract below illustrates how companies typically disclose government grants under IFRS. It should be noted that disclosures concerning the nature and conditions of government grants are sometimes relatively minimal, possibly because the amounts involved are immaterial.

Eskom Holdings also provided information relating to the parent company and for other items of deferred income that is not reproduced above for reasons of space. Additional examples of accounting policies for government grants can be found in Extracts 24.2, 24.3 and 24.4 above.

6.2 Government assistance

In addition to the disclosures noted above, for those forms of government assistance that are excluded from the definition of government grants, the significance of such benefits may be such that the disclosure of the nature, extent and duration of the assistance is necessary to prevent the financial statements from being misleading. [IAS 20.36].