Provisions and government grants - Government grants and ass...

Learning Outcomes

By the end of this article, you will be able to identify and explain the requirements of IAS 20 relating to government grants and government assistance. You should be able to determine when a grant is recognised, analyse the permitted presentation methods for both income and asset grants, account for repayments, and distinguish between government grants and wider government assistance. You will also be able to apply these principles to practical SBR scenarios and exam questions.

ACCA Strategic Business Reporting (SBR) Syllabus

For ACCA Strategic Business Reporting (SBR), you are expected to understand the accounting for and disclosure of government grants and other forms of government assistance under IAS 20. Focus your revision on the following SBR syllabus areas:

• The definition, types and examples of government grants and government assistance in IAS 20
• The recognition criteria for government grants in the financial statements
• Methods for presenting grants related to income and grants related to assets
• Accounting for grants that become repayable after initial recognition
• The treatment of government assistance that does not meet grant recognition criteria
• Detailed disclosure requirements for both grants and assistance

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. When can an entity recognise a government grant under IAS 20?
   1. On receipt of cash
   2. When announced by the government
   3. When conditions are met and there is reasonable assurance of receipt
   4. At each reporting date regardless of conditions
2. How may a grant for the purchase of an item of property, plant and equipment be presented under IAS 20?
   1. Only as deferred income
   2. Only by deducting from the asset’s carrying amount
   3. Either as deferred income or by deduction from the asset’s carrying amount
   4. Directly to equity

3. If a previously recognised grant becomes repayable, what should the entity do with any excess repayment which cannot be set against a deferred income liability?

4. Give one example of government assistance that must be disclosed but is not treated as a grant under IAS 20.

Introduction

Governments may provide economic support to companies in the form of grants or other assistance. IAS 20 Accounting for Government Grants and Disclosure of Government Assistance sets the principles for when such grants are recognised, how they are presented, and what disclosures are required. For ACCA SBR, you must be able to apply these rules accurately and explain the correct approach for exam scenarios.

Key Term: Government grant
Support from government, in the form of resources transferred to an entity, in return for past or future compliance with specific conditions.

Key Term: Government assistance
Government action designed to provide an economic benefit to entities, excluding support for which no reasonable value can be measured or that does not qualify as a grant.

Recognition of Government Grants

A government grant can only be recognised when:

• The entity has reasonable assurance that all conditions attached to the grant will be fulfilled; and
• There is reasonable assurance that the grant will be received.

Recognition may occur before or after the receipt of cash, depending on when these criteria are satisfied. Grants should never be recognised solely on receipt of funds if conditions remain unmet.

Key Term: Reasonable assurance
A high level of confidence, based on available evidence, that both the compliance with conditions and the receipt of the grant will occur.

Worked Example 1.1

A company receives confirmation of a $250,000 grant to subsidise new employee job creation. The grant will be paid only if the company employs at least 40 new staff during the next 12 months.

Should the grant be recognised when the company receives notification of approval, or only after hiring the staff?

Answer:
The grant is not recognised on notification. Recognition occurs only when there is reasonable assurance both that the employees will be hired and that the grant will be received—following evidence that the required number of hires has occurred or that the company has a reliable track record of fulfilling such obligations.

Presentation of Government Grants

The required presentation of the grant depends on its nature: whether it relates to income (revenue) or an asset.

Grants Related to Income

IAS 20 allows two methods to present grants that subsidise operating expenses or are designed to support specified costs:

• Present as a separate credit in profit or loss (either “other income” or a distinct line)
• Deduct the grant from the related expense

Both methods are acceptable. The accounting policy chosen should be applied consistently.

Grants Related to Assets

A grant towards the cost of a non-current asset (such as property, plant or equipment) may also be presented in two ways:

• Deduct the grant from the gross carrying amount of the asset. Depreciation is then calculated on the net amount.
• Recognise the grant as deferred income in the statement of financial position and release it to profit or loss over the asset’s useful life, matching the depreciation expense.

Key Term: Deferred income
A liability representing grant income received but not yet recognised in profit or loss, as it will be matched over future periods.

Worked Example 1.2

On 1 April 20X1, Capri purchases equipment costing $400,000. A government grant of $80,000 is received, payable on purchase. The equipment is depreciated over 8 years (straight-line, no residual value).

Show the accounting entries for the first year under both permitted methods.

Answer:
Method 1: Deduct from cost
Equipment is capitalised at $320,000 ($400,000 – $80,000). Annual depreciation = $40,000 ($320,000/8).
Method 2: Deferred income
Equipment is capitalised at $400,000. Grant is credited to deferred income ($80,000). Depreciation = $50,000. Deferred income released to profit or loss = $10,000 per year ($80,000/8). Net impact on profit: Depreciation charge less grant income = $40,000 ($50,000 – $10,000).
In both methods, the impact on total annual profit is the same ($40,000 expense), but the statement of financial position presents different asset and liability balances.

Repayment of Government Grants

A government grant may become repayable, for example, if related conditions are breached. The accounting treatment depends on how the grant was initially recognised.

• For an income grant recognised as deferred income, reduce the liability. Any repayment exceeding the unamortised deferred income is expensed immediately.
• For an asset grant deducted from cost, increase the asset’s carrying amount by the amount repaid. Adjust prior depreciation for the increase and recognise any resulting charge in profit or loss.
• For an asset grant treated as deferred income, adjust the deferred income liability as above; excess repayment is charged to profit or loss.

Worked Example 1.3

Satellite Co. received a $150,000 grant in 20X2 for purchasing plant recognised under the deferred income method. In 20X5, Satellite Co. must repay $50,000 as conditions have not been met. At repayment, $90,000 remains in the deferred income liability.

How should the repayment be accounted for?

Answer:
The deferred income liability is reduced by $50,000. If the repayment had exceeded the remaining deferred income, the balance would be charged to profit or loss.

Exam Warning

Do not recognise a grant until both the likelihood of receiving it and compliance with all attached conditions are supported by evidence. Receiving cash in advance is not sufficient if performance obligations are outstanding.

Government Assistance

Government assistance encompasses broader forms of economic support, such as uncharged services, benefits in kind, or reductions in expenses where a reliable value can't be placed or where no specific conditions are set. Such assistance is not recognised as a grant but may require disclosure if material. Examples include government-provided technical training or preferential procurement policies.

Disclosure Requirements

Entities must disclose:

• The accounting policies for government grants and how they are presented in the financial statements
• The types and amounts of grants recognised in the period
• Unfulfilled conditions and contingencies attached to recognised grants
• The nature and extent of government assistance received (including assistance that cannot be reliably valued but has a material effect)

Revision Tip
Review IAS 20’s examples for required disclosures in your exam preparation. Clear, specific disclosure improves both compliance and marks.

Summary

IAS 20 requires grants to be recognised only when there is both reasonable assurance of receipt and compliance with conditions. Consistency in the presentation method is essential, with asset and income grants permitted specific alternative treatments. Repayments are accounted for as adjustments to prior recognition. Any government assistance not qualifying as a grant may still require disclosure.

Key Point Checklist

This article has covered the following key knowledge points:

• Recognise government grants only with reasonable assurance of both compliance and receipt
• Distinguish between grants related to income and those related to assets, with correct presentation
• Repay grants as a revision to earlier recognition, matching the original accounting method
• Identify forms of government assistance that require disclosure but are not recognised as grants
• Meet all IAS 20 disclosure requirements relating to grants and assistance

Key Terms and Concepts

• Government grant
• Government assistance
• Reasonable assurance
• Deferred income