1. Accounting for Government Grants and Disclosure of Government Assistance: IAS 20 Wiecek and Young IFRS Primer Chapter 14

2. 2 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.

3. 3 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

4. 4 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

5. 5 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.

6. 6 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

7. 7 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

8. 8 IAS 20 – Accounting for Government Grants Entry when grant received: (a) Dr. Cash25 Cr. Deferred government grant25 Or (b) Dr. Cash25 Cr. Equipment25

9. 9 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

10. 10 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 receivable10 Cr. Wages expense/grant income10

11. 11 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

12. 12 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

13. 13 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

14. 14 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)

15. 15 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