IAS 20: Accounting for Government Grants and disclosure of Government Assistance

IAS 20

Government assistance is action by government designed to provide an economic benefit specific to an entity qualifying under certain criteria
Government grants are assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity

Government grants, including non-monetary grants at fair value, should not be recognized until there is reasonable assurance that:
1. the entity will comply with the conditions attaching to them; and
2. the grants will be received
note how the grants do not have to be received
Receipt of a grant does not of itself provide evidence that the conditions of the grant have been or will be fulfilled
A forgivable loan from the government is treated like a government grant as long as there is reasonable assurance that the entity will meet the terms for the forgiveness of the loan
The benefit of a government loan at a below-market rate of interest is treated as a government grant
- The benefit = proceeds – carrying value using effective interest method
- The benefit is accounted as a government grant
Government grants are recognized in profit or loss on a systematic basis over the periods in which the entity recognizes the expenses the related costs for which the grants are intended to compensate

grants to compensate current period expenses	Recognize in P&L immediately (the revenue can be netted against the expense or shown as a separate revenue item)
Grants to compensate future period expenses	Defer and amortize to income as the related expenses are incurred(the revenue can be netted against the expense or shown as a separate revenue item) Grant = deferred revenue
Grants to compensate for the acquisition of property, plant and equipment	Defer and amortize to income as the related expenses are incurred; the grant can be presented in 2 ways: reduce PPE balance and amortize the balance remaining (truer cost of asset on B/S); or set up a deferred liability and amortize on the same basis as PPE

Both the asset and grant are measured at the fair value of the non-monetary asset

Repayment of government grants are handled prospectively (i.e. a change in estimate)
Grants usually become repayable when a condition is broken

Repayment of a grant related to income shall be applied first to unamortized deferred credit. To the extent that the repayment exceeds any deferred credit, the repayment is recognized immediately in profit or loss.
Suppose the deferred government balance =$900 and I need to pay back the full $1,000 in grant.
grant for 900; cr. Cash for 1,000, dr. a loss of $100 immediately

Keep in mind that because we amortize a liability to income, the “amortization expense” becomes lower (this gets reversed whenever a grant becomes repayable)
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 recognized in profit or loss to date in the absence of the grant shall be recognized immediately in profit or loss

Example

Suppose you get a $1000 government forgivable loan. In January 2010 to buy a PPE with a UL of 10 years. Now it is December 2011. You broke the terms of the loan, and the entire $1000 is now payable. You set up a deferred revenue account.
Dr. Deferred Revenue $ 800
Dr. Loss due to lower prior year amort 200
Cr. Cash $(1,000)
If you used the net PPE method
Dr. Equipment $800
Dr. Loss due to lower prior year amort 200
Cr. Accumulated Amortization $(200)
Cr. Cash (1,000)

Grants related to biological assets measured at fair value less cost to sell are covered under IAS 41 Agriculture

Under ASPE, when there is a repayment of a government grant, it does not require you to recognize the cumulative additional depreciation that would have been recognised in profit or loss to date in the absence of the grant

Dr. Deferred Revenue	$ 800
Dr. Loss due to lower prior year amort	200
Cr. Cash	$(1,000)

Dr. Equipment	$800
Dr. Loss due to lower prior year amort	200
Cr. Accumulated Amortization	$(200)
Cr. Cash	(1,000)