Chapter 9 – Government Grants Page 116
5 Government Grants Related to Assets and Income: Presentation
5.1 Grants related to assets
Government grants related to assets are those provided so that an entity can acquire or construct specific long-term assets. [IAS 20.3]
In such circumstances the grant should be presented in the statement of financial position, either by recognising the grant as deferred income and systematically recognising it in profit
or loss over the assets’ useful life or by deducting the grant netting it off directly from the assets’ carrying amount. The netting off approach equally recognises the grant in profit or loss
over the period of use of the asset by reducing the amount of depreciation charged. [IAS 20.24]
This treatment is also appropriate for the receipt of non-monetary grants measured at fair value. [IAS 20.24]
Illustration 2
An entity purchased an item of equipment for CU100,000 on 1 January 2007. It will depreciate this machinery on a straight-line basis over its useful economic life of five years,
with a zero residual value. Also on 1 January 2007, the entity received a government grant of CU10,000 to help finance this equipment.
Under the netting-off method the grant and the equipment should be shown in the statement of comprehensive income for the year to 31 December 2007 and in the statement of
financial position at that date as follows:
Statement of financial position CU
Property, plant and equipment Cost
90,000 CU100,000 less grant of CU10,000
Depreciation 18,000
CU90,000 5 years Carrying amount
72,000 Statement of comprehensive income
Expense: Depreciation CU18,000
Under the deferred income method the grant and the equipment should be shown in the statement of comprehensive income for the year to 31 December 2007 and in the
statement of financial position at that date as follows:
Statement of financial position CU
Property, plant and equipment Cost
100,000 Depreciation
20,000 CU100,000 5 years
Carrying amount 80,000
Deferred income 8,000
CU10,000 less amount recognised in profit or loss in year of CU2,000
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Statement of comprehensive income Expense:
Depreciation CU20,000
Income: Deferred income
CU2,000 CU10,000 5 years
Note: The overall profit effect is the same with each method but the presentation is different.
5.2 Grants related to income
A government grant related to income is simply defined as one not related to an asset. Such grants should be recognised in profit or loss when any conditions for their recognition have
been met. Income related government grants may be presented as income and shown separately, or under ‘other income’ or deducted from the expenditure to which they relate.
6 Government Grants: Other Issues
6.1 Repayment of government grants
A government grant that becomes repayable, for example because conditions of receipt have not been met, should be recognised as a change in an accounting estimate accounted for in
accordance with IAS 8 Accounting policies, changes in accounting estimates and errors. [IAS 20.32]
6.2 No specific relation to operating activities
SIC-10 Government assistance – No specific relation to operating activities considers the situation where government assistance is given but there are no conditions that relate
specifically to the entity’s operating activities. Such government assistance is given, for example, to encourage an entity to operate in a particular industry or area.
Although such government grants do not relate to specific activities of the entity, they meet the definition of a government grant and should therefore be recognised in accordance
with the general requirements of IAS 20.
6.3 Proposed revision of standard
The International Accounting Standards Board IASB has worked on a number of amendments to IAS 20. But in early 2006 the IASB decided that the project should be
deferred until it had completed work in other areas, such as IAS 37 Provisions, contingent liabilities and contingent assets. Work was undertaken on IAS 20 because there are a
number of inconsistencies between IAS 20 and other accounting pronouncements, including the IASB Framework. In addition, the standard offers a number of choices which reduces
comparability.
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7 Disclosure
IAS 20 requires that information is disclosed to provide sufficient detail in an entity’s financial statements so that a user is able to understand the impact that government grants have had
on the entity’s financial statements.
An entity should disclose the accounting policy, including presentation, adopted for the treatment of government grants and the nature and extent of government grants recognised
in the financial statements. This disclosure should include an indication of any other form of government assistance that, although not recognised in the financial statements, the entity
has received a direct benefit from, for example the provision of free services by the government. [IAS 20.39]
An entity should also explain the existence of any unfulfilled conditions or other contingencies that relate to recognised government assistance. [IAS 20.39]
8 Chapter Review
This chapter has been concerned with the accounting and presentation requirements for government grants and assistance. The key issues relate to the recognition and measurement
of both asset and income based grants.
This chapter covered: the scope and key definitions included in IAS 20 on government grants;
forms of government assistance that should be recognised in the financial statements of the recipient entity;
the alternative permitted methods of measurement of asset related government grants;
the manner in which grants should be recognised in profit or loss; and the principal disclosure requirements of IAS 20.
Chapter 9 – Government Grants Page 119
9 Self Test Questions
Chapter 9
1. In relation to a benefit included in the term government assistance, are the
following statements true or false according to IAS20 Government grants and government assistance?
1 The provision of infrastructure in developing areas is a benefit.
2 The imposition of trading constraints on competitors is a benefit.
Statement 1 Statement 2
A
False False
B
False True
C True
False
D True
True
2. On 1 January 20X8 The Ebro Company commenced trading to provide key
skills education facilities in a region identified for technology development. Also on 1 January 20X8, the company received two grants from its
government for setting up its operations in this location: Grant a – was paid to give financial assistance for start-up costs already
incurred. Grant b – was paid to subsidise the costs of purchasing computer software
over the five-year period. The company is almost certain to keep the facilities operational for the next
five years. The companys accounting year end is 31 December. Are the following
statements concerning recognition of the income from the two government grants true or false, according to IAS20 Government grants and government
assistance?
1 Income from Grant a should be recognised in full on receipt in 20X8.
2 Income from Grant b should be recognised in full at the end of 5
years. Statement 1
Statement 2
A
False False
B
False True
C True
False
D
True True
Chapter 9 – Government Grants Page 120
3. The Cuanza Company purchased a major new piece of machinery for CU10
million on 1 January 20X8. It will depreciate this machinery on a straight line basis over its useful life of 10 years, assuming a zero residual value. Also on
1 January 20X8 the company received a government grant of CU1 million to help finance this machinery.
According to IAS20 Government grants and government assistance, which, if either, of the following methods would be an acceptable treatment of this
machinery and the related government grant in the companys statement of financial position at 31 December 20X8?
Method 1 Method 2
CU CU
Non-current asset Non-current asset
Cost 9,000,000
Cost 10,000,000
Depreciation 900,000
Depreciation 1,000,000
Carrying amount 8,100,000
Carrying amount 9,000,000
Deferred income 900,000
A
Method 1 only
B
Method 2 only
C Neither method
D
Method 1 or Method 2
4. Which TWO of the following statements are correct according to IAS20
Government grants and government assistance?
A
Any adjustment needed when a government grant becomes repayable is accounted for as a change in accounting estimate
B
In respect of loans from the government at an interest rate of 0, an imputed interest charge should be made in profit or loss
C Where conditions apply to a government grant, it should only be
recognised when there is reasonable assurance that the conditions will be met
D
A government grant should not be recognised until it is received in cash
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5. The Palila Company purchased a varnishing machine for CU150,000 on 1
January 20X7. The company received a government grant of CU13,500 in respect of this
asset. Company policy was to depreciate the asset over 4 years on a straight-line
basis and to treat the grant as deferred income. Under IAS20 Government grants and government assistance, what should be
the carrying amounts of the machine and the deferred income DI balance at 31 December 20X8?
Carrying amount DI balance
A CU75,000
CU6,750 B
CU112,500 CU10,125
C CU81,750
CU6,750 D
CU75,000 CU13,500
6. The Perch Company purchased a jewel polishing machine for CU360,000 on
1 January 20X7 and received a government grant of CU50,000 towards the capital cost. Company policy is to treat the grant as a reduction in the cost of
the asset.
The machine was to be depreciated on a straight-line basis over 8 years and was estimated to have a residual value of CU5,000 at the end of this period.
Under IAS20 Government grants and government assistance, what should be the depreciation expense in respect of the machine for the year ended 31
December 20X7?
A CU38,750
B CU76,250
C CU44,375
D CU38,125
7. On 1 January 20X7 The Goodwin Company purchased a plating machine
costing CU135,000. Goodwin received a grant of CU13,500 towards the capital cost. Company policy is to treat the grant as a reduction in the cost of
the asset.
Under IAS20 Government grants and government assistance, what should be the depreciation expense in respect of this machine for the year ended 31
December 20X8, assuming that depreciation is calculated on a 20 reducing balance basis?
A CU27,000
B CU24,300
C CU19,440
D CU22,140
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