Review of IAS 20 International Accounting Standard: Accounting for Government Grants and Disclosure of Government Assistance

IAS 20 International Accounting Standard, “Accounting for Government Grants and Disclosure of Government Assistance,” addresses how to account for and present grants received by entities from government bodies, as well as the disclosure of other forms of government assistance. IAS 20 International Accounting Standard aims to ensure the proper recognition and measurement of government grants and to provide useful and transparent information about their impact on an entity’s financial statements.

In this article, we will provide a comprehensive review of IAS 20 International Accounting Standard, discussing its objectives, scope, and key requirements, focusing on the conditions for recognizing government grants and the methods of accounting for them, in addition to highlighting the importance of this standard and its impact on the financial statements.

What are Government Grants?

Government grants are assistance by the 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. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with the government which cannot be distinguished from the normal trading transactions of the entity.  

Examples of Government Grants:

• Cash grants for the purchase of fixed assets.
• Grants to cover research and development costs.
• Grants for employing and training employees.
• Tax exemptions linked to specific conditions.
• Interest-free or low-interest loans.
• Grants in kind, such as land and other resources

What is IAS 20 International Accounting Standard: Accounting for Government Grants and Disclosure of Government Assistance?

IAS 20 International Accounting Standard is an International Financial Reporting Standard that specifies how to account for and disclose government grants in the financial statements. The standard also addresses the disclosure of other forms of government assistance that do not qualify as grants under the accounting definition.

Objectives of IAS 20 International Accounting Standard:

• Determine How to Account for Government Grants: IAS 20 International Accounting Standard provides guidance on how to recognize, measure, and present government grants in the financial statements.
• Improve the Quality of Disclosures: IAS 20 International Accounting Standard imposes specific disclosure requirements aimed at improving the transparency and reliability of information related to government grants and other government assistance.
• Enhance Comparability: IAS 20 International Accounting Standard contributes to improving the comparability of financial statements of companies that receive government grants.
• Provide Useful Information for Decision-Making: IAS 20 International Accounting Standard helps users of financial statements understand the impact of government grants on the entity’s financial position and financial performance.

Scope of IAS 20 International Accounting Standard:

IAS 20 International Accounting Standard applies to all government grants, regardless of their nature or form. It also applies to other forms of government assistance.

IAS 20 International Accounting Standard excludes from its scope:

• 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.  
• 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 (such as income tax holidays, and investment tax credits).  
• Government participation in the ownership of the entity.
• Government grants covered by IAS 41 Agriculture.

Recognition of Government Grants:

A government grant is not recognized until there is reasonable assurance that:

• The entity will comply with the conditions attaching to the grant. This means that the entity has met or will meet all the terms and conditions associated with the grant.  
• The grant will be received. This means that the entity has reasonable assurance that it will receive the grant from the government.

In other words, a grant is not recognized until it is virtually certain of receipt, and the entity has fulfilled (or will fulfill) all obligations associated with it.

Methods of Accounting for Government Grants:

IAS 20 International Accounting Standard addresses government grants using two main methods, depending on the nature of the grant:

1. Grants related to Assets: These are government grants whose primary condition is that an entity qualifying for them should purchase, construct, or otherwise acquire long-term assets. Subsidiary conditions may also be attached restricting the type or location of the assets or the periods during which they are to be acquired or held.   Grants related to assets are recognized in the statement of financial position either:
   • As Deferred Income: The deferred income is recognized in profit or loss on a systematic basis over the useful life of the asset. The amount of the grant is allocated to the accounting periods in which the asset is depreciated.
   • By Deducting the Grant from the Carrying Amount of the Asset: The cost of the asset is reduced by the amount of the grant, and the income is recognized through a reduced depreciation charge over the asset’s life.
2. Grants related to Income: These are government grants other than those related to assets. That is, these grants are not directly related to the acquisition or construction of long-term assets. Grants related to income are recognized in profit or loss in one of two ways:
   • Presentation Separately: The grant is presented as a separate item within revenue in the statement of profit or loss, or under a general heading such as “Other income.”
   • Deduction from the Related Expense: The grant is deducted from the expense that the grant is intended to compensate. For example, if the grant is intended to cover training costs, it is deducted from the training expense.

Accounting Treatment for Non-Monetary Grants:

Non-monetary government grants are measured at either the fair value of the non-monetary asset received or at a nominal amount.

Repayment of Government Grants:

If a government grant becomes repayable, it should be treated as a change in accounting estimate (applied prospectively) in accordance with IAS 8.

• Grant Related to Income: The repayment of the grant is first applied against any unamortized deferred credit related to the grant. To the extent that the repayment exceeds any such deferred credit, or where no deferred credit exists, the repayment is recognized immediately in profit or loss as an expense.  
• Grant Related to an Asset: The repayment of the grant is treated either by increasing the carrying amount of the asset or by reducing the deferred income balance, and the cumulative additional depreciation that would have been recognized to date as an expense in the absence of the grant is recognized immediately in profit or loss.  

Disclosure Requirements under IAS 20 International Accounting Standard:

IAS 20 International Accounting Standard requires entities to disclose the following information related to government grants and other government assistance:

• The accounting policy adopted for government grants, including the methods of presentation adopted in the financial statements.
• The nature and extent of government grants recognized in the financial statements and an indication of other forms of government assistance from which the entity has directly benefited.  
• Unfulfilled conditions and other contingencies attaching to government assistance that has been recognized.  
• A reconciliation between the beginning and ending balance of grants related to assets, showing the changes during the period, such as:
  • New grants received.
  • The portion recognized as income from grants related to assets.
  • Amounts repayable.
  • Any other changes in the balance of grants.
• A reconciliation between the beginning and ending balances for grants related to income, showing the changes during the period.

Importance of IAS 20 International Accounting Standard for Companies:

IAS 20 International Accounting Standard is an important IFRS that helps companies to:

• Comply with IFRS: IAS 20 International Accounting Standard ensures that companies treat government grants consistently with International Financial Reporting Standards (IFRS).
• Improve the Quality of Financial Reporting: Applying IAS 20 International Accounting Standard leads to improved quality, relevance, and reliability of financial information related to government grants.
• Enhance Investor Confidence: IAS 20 International Accounting Standard helps build investor confidence by providing more accurate and transparent information about the impact of government grants on the entity’s financial position and financial performance.
• Better Manage Government Grants: IAS 20 International Accounting Standard provides a clear accounting framework for government grants, helping companies manage these grants more effectively.
• Make Better Decisions: IAS 20 International Accounting Standard helps management make better decisions about accepting and using government grants.

Challenges in Applying IAS 20 International Accounting Standard:

• Determining Whether Government Assistance Falls within the Definition of a Government Grant: In some cases, it may be difficult to distinguish between government grants and other forms of government assistance, especially when the assistance does not involve a direct transfer of resources.
• Determining the Conditions of the Grant: The conditions of government grants may be complex and difficult to interpret, which can lead to difficulty in determining whether the entity has met all the conditions necessary to recognize the grant.
• Measuring the Fair Value of Non-Monetary Grants: It may be difficult to determine the fair value of a non-monetary asset received as a government grant.
• Keeping Up with Changes in Accounting Standards: Companies must keep up with any changes or updates to IAS 20 International Accounting Standard to ensure compliance with the latest requirements.

Role of Technology in Applying IAS 20 International Accounting Standard:

Accounting software and Enterprise Resource Planning (ERP) systems help in applying IAS 20 International Accounting Standard more efficiently and accurately by:

• Automating the process of recording and treating government grants.
• Tracking obligations related to government grants.
• Generating the necessary reports to comply with disclosure requirements.
• Improving the accuracy and completeness of financial information related to government grants.

Detailed Examples of Applying IAS 20 International Accounting Standard:

Example (1) Grant Related to an Asset:

• Situation: Company “C” received a government grant of 200,000 Riyals to purchase a new machine. The purchase price of the machine is 1,000,000 Riyals.
• Accounting Treatment: Company “C” can choose between two methods to present the grant in the statement of financial position:
  • Method 1: Presenting the Grant as Deferred Income:
    • Upon receiving the grant:
      • Debit: Cash 200,000 Riyals
      • Credit: Deferred Income – Government Grant 200,000 Riyals
    • Upon purchasing the machine:
      • Debit: Machinery 1,000,000 Riyals
      • Credit: Cash 1,000,000 Riyals
    The deferred income is recognized over the useful life of the machine in conjunction with the depreciation expense. For example, if the useful life of the machine is 5 years, 40,000 Riyals (200,000 / 5) will be recognized as income annually. The annual depreciation entry would be: * Debit: Depreciation expense (Annual Deprecation Amount) * Debit: Deferred Income - Government Grant 40,000 * Credit: Accumulated Depreciation (Annual Depreciation + 40,000)
  • Method 2: Deducting the Grant from the Carrying Amount of the Asset:
    • Upon purchasing the machine:
      • Debit: Machinery 800,000 Riyals
      • Debit: Government Grant 200,000 Riyals
      • Credit: Cash 1,000,000 Riyals The machine is depreciated based on its net cost (800,000 Riyals). For example, if the machine’s useful life is 5 years, the annual depreciation expense will be 160,000 Riyals (800,000 / 5).

Example (2) Grant Related to Income:

• Situation: Company “D” received a government grant of 50,000 Riyals to cover employee training costs.
• Accounting Treatment: Company “D” can choose between two methods to present the grant in the statement of profit or loss:
  • Method 1: Presentation Separately:
    • Upon receiving the grant: *Debit: Cash 50,000 Riyals *Credit: Revenue – Government Grant 50,000 Riyals
    The grant amount (50,000 Riyals) is presented as a separate item within revenue in the statement of profit or loss.
  • Method 2: Deducting the Grant from the Related Expense: *Upon receiving the grant:
    • Debit: Cash 50,000 Riyals
    • Credit: Deferred Income – Government Grant 50,000
    • When the training expense is inccured: The training expenses are reduced.

Examples of Government Assistance (Other than Grants):

• Free technical or marketing advice.
• Provision of guarantees.
• Government procurement policies that favor domestic products.

Note: The nature and extent of such government assistance must be disclosed if they are material.

Conclusion:

IAS 20 International Accounting Standard provides a clear accounting framework for treating government grants and disclosing government assistance. Applying this standard ensures that the financial statements reflect the impact of government grants fairly and transparently, which enhances the quality and reliability of financial information and helps users of the financial statements make informed economic decisions. Understanding IAS 20 International Accounting Standard is essential for accountants, auditors, investors, and anyone seeking to understand how government grants affect an entity’s financial position and financial performance.

With the increasing role of governments in supporting economic activities, the importance of IAS 20 International Accounting Standard as a tool to enhance transparency and accountability in financial reporting is growing. Finally, compliance with the requirements of IAS 20 International Accounting Standard contributes to building trust between companies, governments, and society as a whole.