IAS 20 Accounting for Government Grants and Disclosure

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance 1

IAS 20 - Overview • • Objective and scope Accounting for government grants Government assistance Disclosure 2

IAS 20 – Objective and Scope • Government grant: a form of government assistance; a transfer from a government to an entity that requires compliance with certain conditions related to entity’s operating activities. • Government assistance: government action to generate an economic benefit for entities that meet qualifying criteria. 3

IAS 20 – Objective and Scope • Excludes benefits provided by adjusting taxable profit or loss, or that are determined on the basis of the income tax liability - such as investment tax credits, income tax holidays, accelerated tax depreciation methods and reduced income tax rates 4

IAS 20 – Accounting for Government Grants Recognition and Measurement: • Recognize a government grant when there is reasonable assurance that 1. The grant will be received, and 2. The entity will comply with the conditions attached to the grant 5

IAS 20 – Accounting for Government Grants Two general approaches: 1. Capital approach 2. Income approach * Apply this one * * Grants from government are not equity financing, they are non-shareholder-related increases in net assets and therefore items of income. 6

IAS 20 – Accounting for Government Grants • Income approach: recognize government grants in profit or loss in the same periods that the related expenses are recognized • If for acquisition of assets – on the same basis as the depreciation on the assets • If related directly to incurring specific expenditures – on the same basis as the expenditures 7

IAS 20 – Accounting for Government Grants Presentation of grants related to assets: • Companies have a choice – recognize as (a) deferred income or (b) as a reduction in the carrying amount of the related asset • Example: Company A receives a $25 grant toward the purchase of new equipment that cost $100; equipment has a five year life and is depreciated on a straight-line basis 8

IAS 20 – Accounting for Government Grants • Entry when grant received: (a) Dr. Cash 25 Cr. Deferred government grant 25 Or (b) Dr. Cash 25 Cr. Equipment 25 9

IAS 20 – Accounting for Government Grants • Entry as asset is used: (a) Dr. Depreciation expense 20 Cr. Accumulated depreciation Dr. Deferred government grant 5 Cr. Grant income Or (b) Dr. Depreciation expense 15 Cr. Accumulated depreciation Depreciation: ($100 - $25) ÷ 5 = 15 20 5 15 10

IAS 20 – Accounting for Government Grants Presentation of grants related to income: • Example: Company B receives a government grant equal to 10% of the payroll costs incurred. Payroll costs incurred are $100. • Entry when payroll costs incurred: Dr. Grant receivable 10 Cr. Wages expense/grant income 10 11

Example Grants related to income In 2012 a company incurred training expenses of € 500, 000 and received a grant towards 10% of this cost. Requirement How should the grant be accounted for under the two methods allowed in IAS 20?

Example Grants related to income Method (i): Gross Profit plus: Other Income Less: Expenses Training Expenses Net Profit Method (ii): Gross Profit Less: Expenses Training Expenses (500, 000 -50, 000) Net Profit € X 50, 000 X (500, 000) X € X (450, 000) X

Example: Grants related to assets Company A purchases a machine for € 120, 000. It received a grant towards 20% of the cost of the machine. The machine has an expected life of 3 years with an expected nil residual value. Profit for each year is € 100, 000 (before depreciation). Requirement How should the grant be accounted for under the two methods allowed in IAS 20?

Example 16. 2: Grants related to assets Method (i) - Reducing the cost of the asset: SPLOCI – P/L Year 1 € Year 2 Year 3 € € Profit before depn 100, 000 Depreciation (32, 000)* (32, 000) Profit 68, 000 Year 2 Year 3 € € *(120, 000 - 24, 000) ÷ 3 SFP Year 1 € NCA at Cost 96, 000 Accumulated Depn 32, 000 64, 000 96, 000 Net Book Value 64, 000 32, 000 -

Method (ii) - Treating the grant as a deferred credit: SPLOCI – P/L Year 1 Year 2 Year 3 € € € Profit before grant & depn 100, 000 Depreciation (40, 000) Grant 8, 000 Profit 68, 000 SFP Year 1 Year 2 Year 3 € € € Non-current asset (cost) 120, 000 Accumulated depreciation 40, 000 80, 000 120, 000 Net book value 80, 000 40, 000 - 8, 000 0 0 Deferred Y - govt grants 8, 000 Nil Closing balance 16, 000 8, 000 - Non-current liabilities Deferred Y - govt grants Current liabilities

IAS 20 – Accounting for Government Grants Repayment of grants: • If grant becomes repayable – treat as a change in estimate • If related to an asset: cumulative amount of additional depreciation that would have been recognized to date is recognized in P&L • If related to income: any necessary adjustments are made to current year profit or loss 17

Repayment of grants • • • A grant becomes repayable should be treated as a revision of an accounting estimate If income-related grant: Ø Apply against deferred income, with any excess being expensed Dr Unamortised deferred credit Dr SPLOCI – P/L Cr Cash If asset-related grant: Ø Increase carrying value of the asset (and expense depreciation that would have been incurred or decrease deferred income Dr Asset or Unamortised deferred income Cr Cash

IAS 20 – Government Assistance • Grants exclude assistance that cannot reasonably be valued, and transactions between the government and the entity that are in the normal course of business. • Other assistance (e. g. , guarantee of loan, significant sales) may be of interest to financial statement readers if benefits are significant and recurring 19

IAS 20 Disclosure • Three types: 1. Accounting policy for grants and their presentation 2. Nature and extent of grants recognized, and information about other forms of assistance that have been beneficial 3. Information about contingencies or conditions not yet met related to assistance recognized 20