1. Accounting for Government Grants
and Disclosure of Government
Assistance: IAS 20

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5. Accounting for Government
Grants and Disclosure of
Government Assistance
 Related standards
 IAS 20
 Current GAAP comparisons
 Looking ahead
 End-of-chapter practice
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6. Related Standards
 IAS 41 Agriculture
 IAS 37 Provisions, contingent liabilities and
contingent assets
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7. IAS 20 - Overview
 Objective and scope
 Accounting for government grants
 Government assistance
 Disclosure
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8. IAS 20 – Objective and
Scope
 Government grant: a form of government
assistance; a transfer from a government
to an entity that requires compliance with
certain conditions related to entity’s
operating activities.
 Government assistance: government
action to generate an economic benefit for
entities that meet qualifying criteria.
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9. IAS 20 – Objective and Scope
 Excludes benefits provided by adjusting
taxable profit or loss, or that are
determined on the basis of the income tax
liability - such as investment tax credits,
income tax holidays, accelerated tax
depreciation methods and reduced income
tax rates
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10. IAS 20 – Accounting for
Government Grants
Recognition and Measurement:
 Recognize a government grant when
there is reasonable assurance that
1. The grant will be received, and
2. The entity will comply with the conditions
attached to the grant
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11. IAS 20 – Accounting for
Government Grants
Two general approaches:
1. Capital approach
2. Income approach * Apply this one *
* Grants from government are not equity
financing, they are non-shareholder-
related increases in net assets and
therefore items of income.
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12. IAS 20 – Accounting for
Government Grants
 Income approach: recognize government
grants in profit or loss in the same periods
that the related expenses are recognized
 If for acquisition of assets – on the same
basis as the depreciation on the assets
 If related directly to incurring specific
expenditures – on the same basis as the
expenditures
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13. IAS 20 – Accounting for
Government Grants
Presentation of grants related to assets:
 Companies have a choice – recognize as
(a) deferred income or (b) as a reduction
in the carrying amount of the related asset
 Example: Company A receives a $25 grant
toward the purchase of new equipment that
cost $100; equipment has a five year life
and is depreciated on a straight-line basis
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14. IAS 20 – Accounting for
Government Grants
 Entry when grant received:
(a)
Dr. Cash 25
Cr. Deferred government grant 25
Or
(b)
Dr. Cash 25
Cr. Equipment 25
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15. IAS 20 – Accounting for
Government Grants
 Entry as asset is used:
(a)
Dr. Depreciation expense 20
Cr. Accumulated depreciation 20
Dr. Deferred government grant 5
Cr. Depreciation expense/grant income 5
Or
(b)
Dr. Depreciation expense 15
Cr. Accumulated depreciation 15
Depreciation: ($100 - $25) ÷ 5 = 15
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16. IAS 20 – Accounting for
Government Grants
Presentation of grants related to income:
 Example: Company B receives a
government grant equal to 10% of the
payroll costs incurred. Payroll costs
incurred are $100.
 Entry when payroll costs incurred:
Dr. Grant receivable 10
Cr. Wages expense/grant income10
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17. IAS 20 – Accounting for
Government Grants
Repayment of grants:
 If grant becomes repayable – treat as a
change in estimate
 If related to an asset: cumulative amount
of additional depreciation that would have
been recognized to date is recognized in
P&L
 If related to income: any necessary
adjustments are made to current year
profit or loss
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18. IAS 20 – Government Assistance
 Grants exclude assistance that cannot
reasonably be valued, and transactions
between the government and the entity
that are in the normal course of business.
 Other assistance (e.g., guarantee of loan,
significant sales) may be of interest to
financial statement readers if benefits are
significant and recurring
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19. IAS 20 Disclosure
 Three types:
1. Accounting policy for grants and their
presentation
2. Nature and extent of grants recognized,
and information about other forms of
assistance that have been beneficial
3. Information about contingencies or
conditions not yet met related to
assistance recognized
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20. Looking Ahead
 IAS 20 – part of short-term convergence
project with FASB. IAS 20 shortcomings:
1. Inconsistent with the conceptual
framework (deferred credits do not meet
the definition of a liability)
2. Option allowed now understates an
entity’s assets, reducing comparability of
the entity’s financial statements (i.e.,
option to deduct grant from asset acquired)
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21. Looking Ahead
 Work on amending IAS 20 set aside
pending outcome of related standards,
such as IAS 37 Provisions, Contingent
Liabilities and Contingent Assets and
Conceptual Framework Project
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22. End-of-Chapter Practice
14-1 Iota Inc. receives a $100 government grant to be applied
against the construction of a new building. The building is
accounted for using the cost model, has an initial cost of $500,
a useful life of 25 years and $0 residual value.
Instructions
(a) Prepare entries to account for the acquisition of the building
and receipt of the government grant on Day 1, assuming Iota
presents the grant as deferred income, and then assuming it is
presented as a reduction of the asset’s cost.
(b) Prepare the entry to record depreciation expense at the end of
the first year of operations, as well as any other adjusting
entries required under each assumption in (a) above.
(c) In what respects will the statement of financial position and
income statement differ under the two accounting
presentations? Does it matter that they are different? Why?
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23. End-of Chapter Practice
14-2 Refer to 14-1 above. Assume that after four years of
operating in the new building, Iota Inc. decides to
transfer its operations to a larger municipality. The
original $100 grant is required to be repaid if Iota does
not remain in the building for a minimum of seven
years.
Instructions
(a) Prepare the entry(ies) to recognize the grant repayment
liability at the end of year 4, assuming Iota recognized
the grant originally as deferred income.
(b) Prepare the entry(ies) to recognize the grant repayment
liability at the end of year 4, assuming Iota recognized
the grant originally as a reduction of the asset’s cost.
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24. End-of Chapter Practice
14-3 Chi Corp. agreed to locate a new call center in an economically
disadvantaged area in return for specific government assistance. The
government provided $200 funding to a local college to bring the general
education level of a number of residents to an acceptable minimum, $25
toward the cost of a four-week call center employee training program
delivered by Chi Corp., and a $50 grant to offset the higher travel and
administrative costs to be incurred by Chi over a five-year period. This grant
is repayable at the rate of $10 per year for each year less than five years
that Chi does not operate in the area.
In addition, Chi Corp. is eligible for a 10% wage rebate at the end of each
year in which an average of 20 people or more are employed at the
operation. The company expects to have more than 23 employees on staff
at any time and to operate in this location for a minimum of eight years.
Assume the operation opens on July 2, 2009, at which time the $50 grant is
received. The employee training program takes place from July 5 to August
3 and Chi receives the $25 grant in early September. The payroll for the first
six months for the 27 full-time employees hired is $400.
Instructions
(a) Prepare all entries related to government assistance that need to be made
by Chi Corp. from July 1 to December 31, 2009, Chi’s fiscal year end.
Identify any situations where there are alternatives.
(b) Identify the government assistance disclosures that are required for Chi’s
December 31, 2009 financial statements.
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