TOPIC 9 - IAS 20 Government Grants

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1 TOPIC 9 - IAS 20 Government Grants Introduction: Government provides financial assistance to industry. Grant is usually in the form of cash 1. Grants related to Assets purchase or construction of long term assets 2. Grants related to Income Any other government grants Accounting Treatment Do not recognise grant until reasonable assurance exists that 1. Entity will comply with any conditions attaching to the grant probable inflow of economic benefits 2. The grant will be received Once reasonable assurance exists, then account for the Government Grant from the date that reasonable assurance exists (even if the grant has not actually been received) If met, grants should be recognised in the Statement of Profit or Loss over the periods necessary to match them with their related costs accruals/matching concept Grants related to assets 1. Deduct the grant from the cost of the related asset. Depreciate the net amount over the useful life of the asset (Not in Compliance with Irish Company Law) OR 1

2 2. Treat the grant as deferred income and recognise it as income on a systematic basis over the useful life of the asset (In Compliance with Irish Company Law) Grants related to Income 1. Include the grant amount received for the period as other income for inclusion on profit or loss for the period OR 2. Deduct the grant for the period from the related expense (i.e. grant received for a revenue item of expenditure) Disclosure Requirements IAS 20 requires the following disclosures in the notes to the financial statements 1. The accounting policy adopted for governments grants 2. The nature and extent of government grants recognised and an indication of other forms of government assistance 3. Unfulfilled conditions and other contingencies attaching to government assistance Other Points Repayment of government grant Where Asset is being Disposed Off 1. On the disposal of an asset which qualified for grant assistance, if the grant has to be repaid then two options exist to account for the repayment As a Dr to Government Grants recognised in the Statement of Profit or Loss OR As a Dr to the Profit/Loss on Disposal of the Asset Repayment of government grant Where Asset is not being Disposed Off A government grant that becomes repayable shall be accounted for as a change in accounting estimate (see IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors). Repayment of a grant related to income shall be applied first against any unamortised deferred credit recognised in respect of the grant. To the extent that the repayment exceeds any such deferred credit, or when no deferred credit exists, the repayment shall be recognised immediately in profit or loss. Repayment of a grant related to an asset shall be recognised by increasing the carrying amount of the asset or reducing the deferred income balance by the amount repayable. The cumulative additional depreciation that would have been recognised in profit or loss to date in the absence of the grant shall be recognised immediately in profit or loss. 2

3 Circumstances giving rise to repayment of a grant related to an asset may require consideration to be given to the possible impairment of the new carrying amount of the asset. P1 Past Exam Questions IAS 20 Q3 (7) Apr 14 Q2 April 2011 (Note 3) P2 Past Exam Questions IAS 20 Q1 Aug Issue 5 3

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