Accounting for Government

Grants and Disclosure of

Government Assistance: IAS 20

Wiecek and Young

IFRS Primer
Chapter 14
 Accounting for Government
Grants and Disclosure of
Government Assistance
 Related standards
 IAS 20
 Current GAAP comparisons
 Looking ahead
 End-of-chapter practice

2
 Related Standards

 IAS 41 Agriculture
 IAS 37 Provisions, contingent liabilities and
contingent assets

3
 IAS 20 - Overview

 Objective and scope

 Accounting for government grants
 Government assistance
 Disclosure

4
 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.

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 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

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 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

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 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.

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 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

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 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

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 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

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

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 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

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 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
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 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

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 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

16
 Current GAAP Comparisons

Pages 108-109 of 164 of

www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOverview(2008).pdf

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 Looking Ahead

 IAS 20 – part of short-term convergence

project with FASB. IAS 20 shortcomings:
1. Inconsistent with the conceptual framework
(deferred credits do not meet the definition of
a liability)
2. Option allowed now understates an entity’s
assets, reducing comparability of the entity’s
financial statements (i.e., option to deduct
grant from asset acquired)
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 Looking Ahead

 Work on amending IAS 20 set aside pending

outcome of related standards, such as IAS
37 Provisions, Contingent Liabilities and
Contingent Assets and Conceptual
Framework Project

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 End-of-Chapter Practice

14-1 Iota Inc. receives a $100 government grant to be applied against the
construction of a new building. The building is accounted for using the
cost model, has an initial cost of $500, a useful life of 25 years and $0
residual value.

Instructions
(a) Prepare entries to account for the acquisition of the building and
receipt of the government grant on Day 1, assuming Iota presents the
grant as deferred income, and then assuming it is presented as a
reduction of the asset’s cost.
(b) Prepare the entry to record depreciation expense at the end of the
first year of operations, as well as any other adjusting entries required
under each assumption in (a) above.
(c) In what respects will the statement of financial position and income
statement differ under the two accounting presentations? Does it
matter that they are different? Why?

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 End-of Chapter Practice

14-2 Refer to 14-1 above. Assume that after four years of operating
in the new building, Iota Inc. decides to transfer its operations
to a larger municipality. The original $100 grant is required to
be repaid if Iota does not remain in the building for a minimum
of seven years.

Instructions
(a) Prepare the entry(ies) to recognize the grant repayment
liability at the end of year 4, assuming Iota recognized the
grant originally as deferred income.
(b) Prepare the entry(ies) to recognize the grant repayment
liability at the end of year 4, assuming Iota recognized the
grant originally as a reduction of the asset’s cost.
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 End-of Chapter Practice

14-3 Chi Corp. agreed to locate a new call center in an economically disadvantaged area in
return for specific government assistance. The government provided $200 funding to a
local college to bring the general education level of a number of residents to an
acceptable minimum, $25 toward the cost of a four-week call center employee training
program delivered by Chi Corp., and a $50 grant to offset the higher travel and
administrative costs to be incurred by Chi over a five-year period. This grant is
repayable at the rate of $10 per year for each year less than five years that Chi does
not operate in the area.
In addition, Chi Corp. is eligible for a 10% wage rebate at the end of each year in which
an average of 20 people or more are employed at the operation. The company expects
to have more than 23 employees on staff at any time and to operate in this location for
a minimum of eight years.
Assume the operation opens on July 2, 2009, at which time the $50 grant is received.
The employee training program takes place from July 5 to August 3 and Chi receives
the $25 grant in early September. The payroll for the first six months for the 27 full-time
employees hired is $400.

Instructions
(a) Prepare all entries related to government assistance that need to be made by Chi
Corp. from July 1 to December 31, 2009, Chi’s fiscal year end. Identify any situations
where there are alternatives.
(b) Identify the government assistance disclosures that are required for Chi’s December
22 31, 2009 financial statements.
 End-of Chapter Practice

14-4 In this chapter, flag icons identify area where there are GAAP
differences between IFRS requirements and national standards.

Instructions
Access the website(s) identified on the inside back cover of this book,
and prepare a concise summary of the differences that are flagged
throughout the chapter material.

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