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IAS 20

Accounting for Government


Grants

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This material is the property of Department of Accounting and Finance, CoBE,
AAU. Permission must be obtained from the Department prior to reproduction

Learning Objectives
At the completion of studying this chapter, you will
be able to:

explain the accounting treatment of government grants and


government assistance
identify the disclosure requirements for government grants and
government assistance
distinguish between the accounting treatment of government
grants under US GAAP and IFRS

List of Applicable IFRS


Topic List
IAS 41 Agriculture

Standards
IAS 41 Agriculture

IAS 37 Provisions, contingent liabilities IAS 37 Provisions,


and contingent assets
contingent liabilities and
contingent assets

The objective of IAS 20

The objective of IAS 20= To prescribe the accounting for and the
disclosure of:
Government grants are 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.
Government assistance is action by the government designed
to provide an economic benefit specific to an entity or range of
entities qualifying under certain criteria.

The Scope of IAS 20

This Standard does not deal with:


a) the special problems arising in accounting for government grants
in financial statements reflecting the effects of changing prices or
in supplementary information of a similar nature.
b) government assistance that is provided for an entity in the form of
benefits that are available in determining taxable profit or tax
loss, or are determined or limited on the basis of income tax
liability. Examples of such benefits are income tax holidays,
investment tax credits, accelerated depreciation allowances and
reduced income tax rates.
c) government participation in the ownership of the entity.
d) government grants covered by IAS 41 Agriculture.
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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
Once a government grant is recognized, any related contingent
liability or contingent asset is treated in accordance with IAS
37.27-.35 (IAS 20.11).

Recognition and Measurement

Two general approaches:


1.
Capital approach=under which a grant isrecognized outside
profit or loss i.e. credited to stakeholders equity and
2.
Income approach (* Apply this one *)=under which a grant
isrecognized in profit or loss over one or more periods i.e.
credited to theincome statement or statement of
comprehensive income (whichever is applicable).
* Grants from government are not equity financing, they are nonshareholder-related increases in net assets and therefore items of
income.

Recognition and Measurement

Government grant
Test your understanding

Your Company receives the following government grants in 20X8:


1. Grant of Br. 40 000 to acquire a water cleaning station. The cost
of the station was Br. 100 000 and its useful life is 8 years. Your
Company acquired the station on 1 July 20X8 and recognized
depreciation on a straight-line basis.
2. Grant of Br. 10 000 to cover the expenses for ecological measures
during 20X8 20X11. Your Company assumes to spend Br. 3 000
each in 20X8,20x9 and 20X10 and Br. 2 000 in 20X11 (Br. 14 000
in total).
3. Grant of Br. 3 000 to cover the expenses for ecological measures
made by Your Company in 20X6 and 20X7.
Prepare the journal entries in the year ended June 30, 20X8.
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Q1.
income

Option #1: Deferred

Our journal entries are:


Cash/Bank Account40,000
Deferred Income..40,000
Profit and Loss In 20x8
Deferred Income.5,000
Income from Government Grant.5,000

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Q1.
from an asset

Option #2: Deduction

Our journal entries are:


Cash/Bank Account40,000
PPE40,000
Profit and Loss In 20x8
Depreciation Expense..7,500
PPE..7,500

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Q2. Recognition
The journal entries are:
Cash10,000
Deferred Income.10,000
Profit and Loss In 20x8
Deferred Income2,143
Income from Grants.2,143
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Q3. Recognition
Grant for ecological measures in 20X6-20X7
The third grand relates to the expenses that had already been
incurred in the previous years 20X6 and 20X7. As a result, the
grant is recognized immediately in profit or loss.
The journal entry is:
Cash/Bank Account..3,000
Income from Government Grant.3, 000

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Disclosure Requirements

The following matters shall be disclosed:

the accounting policy adopted for government grants, including the methods
of presentation adopted in the financial statements;
the nature and extent of government grants recognised in the financial
statements and an indication of other forms of government assistance from
which the entity has directly benefited; and
unfulfilled conditions and other contingencies attaching to government
assistance that has been recognised.

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