IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance
What is government assistance and how is it provided?
Government assistance is action by government designed to provide a specific economic benefit to a reporting entity or to a group of entities that qualify under certain criteria. The purpose of government assistance is often to encourage an entity to take a course of action that it would not normally have taken if the assistance had not been provided. Government assistance is expressed in many forms, which differ in the nature of the support given and also in the conditions that are usually attached.
Government grants are government assistance in the form of transfers of resources to a reporting entity in return for past or future compliance with certain conditions relating to its operating activities.
What is the main accounting challenge in recognising government grants?
The accounting challenge with regard to the treatment of government grants is in finding an appropriate method of recognition that will reflect the way in which the reporting entity benefited from the assistance during the reporting period, in order to allow comparison between its financial statements for the reporting period and its financial statements for prior periods, and with the financial statements of other entities.
What alternative approaches exist for accounting for government grants?
There are two fundamental approaches to the accounting treatment of government grants:
- Equity approach
Under this view, the grant should be recognised directly in shareholders’ equity. The rationale of this approach is that it is an equity transaction, since the grants will not be repaid. Moreover, it would not be appropriate to recognise them in profit or loss, as they were not “earned” but rather represent a governmental incentive. - Income approach
Under this view, the grant is recognised as income over one or more accounting periods. The rationale of this approach is that these amounts were not received from shareholders and therefore should not be recognised directly in shareholders’ equity, i.e., they are not transactions with shareholders in their capacity as shareholders. In addition, such grants were not given “for free,” but rather the reporting entity earns them through compliance with their conditions. Consequently, they should be recognised as income and matched with the related costs which the grant is intended to compensate.
Which approach does IAS 20 adopt and why?
IAS 20 adopts the income approach to the accounting for government grants. Adoption of the income approach is consistent with IAS 12 Income Taxes, which requires income taxes to be recognised as an expense in profit or loss and not as an appropriation of profit, even though they do not constitute an expense in generating income.
How does IAS 20 classify government grants?
For accounting purposes, the Standard distinguishes between two main types of government grants:
- Grants related to assets
Grants related to assets are government grants whose primary condition is the purchase or construction of long-term assets. - Grants related to income
Grants related to income are government grants other than asset-related grants. Such grants include government grants received to finance specific expenses or government grants that serve as compensation or are intended to provide immediate financial support.
What is the principal recognition and disclosure requirement under IAS 20?
The principal requirement of the Standard is that government grants shall be recognised as income on a systematic basis over the period necessary to match them with the relevant costs which they are intended to compensate. It should be noted that in accordance with the matching principle under the Standard, income is matched against the related expenses. This is different from the regular matching principle as stated in the Conceptual Framework for Financial Reporting, where normally expenses are matched against income, and not the other way around. The Standard also addresses the disclosure of government grants as well as disclosure of other forms of government assistance.