Government grants are assistance in the form of a transfer of resources (e.g. cash, assets, or assistance) in return for past or future compliance with conditions relating to an enterprise’s operating activities.
Government refers to government, government agencies and similar bodies whether local, national or international.
The standard does not deal with:
- Tax allowances
- Government participation in the ownership of an entity
- Government grants covered by IAS 41 – Agriculture
There are three types of government grant which we will look at:
- Grants related to assets, these are usually for the purchase or construction of long-term assets
- Grants related to income, which are other types of government grant, and
- Non-monetary government grants
Grants should not be recognised in the income statement until:
- The conditions for receiving the grant have been complied with, and
- There is reasonable assurance that the grant will be received.
When these conditions are met, grants should be recognised in the income statement so as to match them with the expenditure towards which they are intended to contribute.
Grants Relating to Assets
Under IAS 20, there are two treatments allowed for government grants which relate to assets.
- Method 1: Write off the grant against the cost of the asset
- Method 2: Treat the grant as deferred income and transfer a portion to revenue each year.
Method one, where the grant is offset against the cost of the asset, is simpler to work out.
The asset is included in the financial statements at its cost minus the grant.
Depreciation will be charged to the asset on this net amount over the useful life of the asset.
But method two, where grant is recognised as deferred income, has the advantage of ensuring that assets acquired at different times, some with or without grant assistance, are recorded on a uniform basis.
Let’s take an example.
- A company bought an asset for €500,000 and
- Received €250,000 from the government as a grant
- The asset has a useful life of 5 years and
- no residual value.
- Using method one, the asset would be recorded at its net cost of €250,000 and depreciated over five years.
- Using method two, the asset would be recorded at its cost of €500,000 and depreciated over five years. The €250,000 grant should be treated as deferred income (which is a liability) and released to the income statement as revenue over the next five years.
Both of these methods achieve the same result.
Grants Relating to Income
Under IAS 20, grants relating to income should be taken to income over the periods necessary to match the grant with the costs that the grant is intended to compensate.
There are two allowable treatments for government grants relating to income:
- Method 1: Record in the income statement as a separate item, or under “Other income.”
- Method 2: Write off the grant against the related item of expense
Say if the entity received a grant for training costs which is intended to run for three years.
The grant should be recorded as deferred income (a liability) and released over the three years.
Non-monetary Government Grant
Sometimes the government may provide other types of assistance to a business, which is not monetary, this might include expertise or the use of property.
When this happens the entity should account for the value of the grant at fair value.
Repayment of Government Grant
If a grant becomes repayable, it should be recorded in the financial statements as a current liability until paid.
The revision should be accounted for a as a change in accounting estimate under IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors.
This will require a prospective change in the financial statements.
The following disclosures are required by IAS 20
- The accounting policy adopted for government grants, including methods of presentation in the financial statements
- The nature and extent of grants recognised in the financial statements
- Any unfulfilled conditions and contingencies attaching to recognised grants