Considering IAS 20 Standard: Accounting for Government Grants and Disclosure of Government Assistance
Considering IAS 20 Standard: Accounting for Government Grants and Disclosure of Government Assistance
IAS 20 sets the framework to prevent “window dressing” financial results when receiving government support. When should you recognize the grant? How is it presented in the Financial Statements? And what must be disclosed so the support doesn’t become an ambiguous figure? In this article, you will understand the rules of recognition, measurement, and presentation, complete with practical journal entry examples and a calculator for fixed asset grants.
- Clear distinction between Government Grant and Government Assistance.
- Recognition criteria (Reasonable Assurance) and how to prevent premature recording.
- Common presentation methods: Deduction from asset cost vs. Deferred Income (and the impact of each).
- A practical disclosure checklist to minimize audit risks.
- Interactive calculator to schedule the impact of a fixed asset grant on depreciation and/or deferred income.
1) Why is IAS 20 Important?
Government grants may improve liquidity and support investment, but the accounting risk arises when the grant turns into “immediate revenue” without being linked to conditions or the beneficiary period. Here, IAS 20 ensures two things:
- Matching: Recognizing the grant in the same periods as the related expenses/costs.
- Transparency: Disclosing the nature of the support, its conditions, and any future obligations or repayment risks.
2) Definitions and Scope: Grant vs. Assistance
IAS 20 distinguishes between:
| Term | Practical Meaning | Examples |
|---|---|---|
| Government Grant | Transfer of resources to the entity in return for past or future compliance with certain conditions related to operating activities. | Grant for purchasing equipment, wage subsidies linked to retaining employment. |
| Government Assistance | Action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria. | Provision of infrastructure, free technical advice, public services where value is hard to separate. |
| Non-monetary Grant | A grant in the form of an asset/land/equipment instead of cash. | Granting industrial land, training equipment. |
3) Recognition Criteria: “Reasonable Assurance”
A grant is not recognized simply because a “letter exists” or management “expects it.” IAS 20 requires Reasonable Assurance that:
- The entity will comply with the conditions attaching to them.
- The grant will be received (receipt/entitlement/collectability).
- Are the conditions verifiable? (Number of employees, localization ratios, specific CAPEX spending…)
- Is there a history of disbursement? Are there cases of retraction in the sector?
- Has final approval been granted or is it just an application?
- Is there sufficient supporting documentation for the audit file?
4) Measurement: Fair Value, Non-Monetary & Subsidized Loans
General Rule: Government grants are measured at the fair value of the asset received (or receivable). However, complexities arise in three common cases:
4.1 Non-monetary Grants (Land/Equipment)
May be presented at fair value or at a nominal amount depending on the adopted policy, provided there is clear disclosure. In both cases, the goal is for the “grant effect” to appear on the statements understandably.
4.2 Grants related to Assets
When linked to an asset, the grant appears over time, matching the consumption (depreciation) of the asset under IAS 16 Property, Plant and Equipment.
FS Draft Workbook - Excel File
Fixed Assets Depreciation Model - Excel File
4.3 Government Loans at Below-Market Interest Rates
The “difference” between the market interest rate and the subsidized loan rate is often treated as a grant element. Accounting separates the financing element (measured under Financial Instruments standards) from the grant element (under IAS 20) with disclosure.
5) Asset Grants: Deferred Income or Net Method?
Asset grants (e.g., a grant to buy machinery) have two common presentation methods, both acceptable if applied consistently and disclosed:
| Method | Concept | Impact on Statements |
|---|---|---|
| Net Method Deduct grant from asset cost |
Record the asset at net cost after deducting the grant. | Lower annual depreciation — No separate “grant revenue” appears. |
| Deferred Income Gross Method |
Record the grant as a liability/deferred income, then recognize in P&L over time. | Full asset depreciation + Periodic grant income roughly equal to the discount effect. |
5.1 Quick Example (Journal Entries)
Assume: Machine cost 1,000,000, Grant 200,000, Useful life 5 years (Straight line).
- Record asset at net 800,000 → Annual Depreciation = 160,000
- P&L Impact: Lower depreciation expense (no visible grant revenue).
B) Deferred Income Method
- Record asset 1,000,000 + Deferred Income 200,000
- Annual Depreciation = 200,000
- Annual Grant Income = 40,000
- Net P&L Impact ≈ 160,000 (Expense)
6) Income Grants: Other Income or Deduction?
Income grants (like wage subsidies or training reimbursement) are typically presented in one of two ways:
- As Other Income: Support appears as a separate line item, easy to track.
- Deduction from related expense: Such as deducting wage subsidies from the salaries line item.
6.1 Example: Wage Subsidy linked to Retention
If the entity meets the “employee retention” condition during the period, the grant can be recognized in the same period the salary expense was incurred. (For employee benefits detail, see: IAS 19 Employee Benefits).
7) Repayment and Breach of Conditions
The most critical control point in IAS 20 is: What if the entity breaches conditions and must repay the grant? Treatment depends on the type:
| Grant Type | Treatment upon Repayment | Potential Immediate Impact |
|---|---|---|
| Income Grant | Repayment is recognized as an expense in the period (or increase in related expense) to the extent no deferred credit exists. | Direct hit to profit. |
| Asset Grant (Deferred Income) | Deducted first from the deferred income balance; any excess is an expense. | Immediate expense if deferred balance is insufficient. |
| Asset Grant (Net Method) | Repayment amount increases the asset’s carrying value; future depreciation is recalculated. | Increased future depreciation instead of immediate expense (usually). |
8) Disclosure: Practical Checklist to Reduce Audit Risk
IAS 20 emphasizes disclosure because grants may carry future obligations or operational restrictions. Use this checklist as a minimum:
- Accounting Policy: Presentation method (Net or Deferred) + basis of recognition and measurement.
- Nature and Extent: Support program/Agency/Type of grant and its value.
- Unfulfilled Conditions: Any outstanding conditions or contingencies.
- Repayment Risks: If any exist, with a brief description.
- Impact on Line Items: Where did the support appear? (Other income/Expense deduction/Deferred income…)
- IAS 21 Foreign Exchange (If the grant/condition is in foreign currency).
- Accounting Evolution (Useful background on standardization).
9) IAS 20 Calculator: Asset Grant Schedule
Enter the asset cost, grant value, and useful life, then choose the presentation method. You will get the Annual Depreciation and/or Periodic Grant Income and a summary schedule.
| Year | Depreciation | Grant Income | Net P&L Impact | Carrying Amount (Year End) | Deferred Income (Year End) |
|---|
10) Frequently Asked Questions
Can I recognize a grant as soon as I apply for the program?
Generally, no. Recognition requires “Reasonable Assurance” of compliance and receipt, not just probability or intent.
Is the Net Method better than Deferred Income?
There is no absolute “better.” Consistency and disclosure are key. Deferred Income makes the grant impact visible as separate information, while Net Method simplifies presentation by reducing depreciation.
How do I handle repayment if I breach conditions?
It depends on the type and method: It may be deducted from Deferred Income (if any) or added to the Asset value (Net Method), or recognized as an immediate expense for income grants.
Does tax relief fall under IAS 20?
Usually, treatments related to income tax are discussed under Tax Accounting (IAS 12), so check the nature of support first.
11) Conclusion and Action Plan
IAS 20 Government Grants is not just an “entry”; it’s a control system. It ensures support is presented transparently and logically linked to related expenses/assets, disclosing conditions that might turn into liabilities.
- Identify Type: Asset grant, income grant, or subsidized loan?
- Assess Assurance: Documents + Conditions + Collectability.
- Select Method: Net or Deferred (Document justification and apply consistently).
- Match Period: Align recognition with related depreciation/expense periods.
- Prepare Disclosure: Policy + Nature/Extent + Conditions + Repayment risks.
- Test Repayment Scenario: What happens if conditions are breached? (Before it actually happens).