Chapter 1: Introduction

Objective

This chapter addresses the IFRS requirements for government grants and government assistance.

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance prescribes the accounting for, and disclosure of, government grants and other forms of government assistance.

Government grants are recognized in profit or loss on a systematic basis over the periods in which the entity recognizes expenses for the related costs for which the grants are intended to compensate, which in the case of grants related to assets requires setting up the grant as deferred income or deducting it from the carrying amount of the asset.

There are currently two Standards that address government grants – IAS 20 and IAS 41. IAS 20 is the general Standard which sets out the accounting and disclosure requirements for government grants and other forms of government assistance.

IAS 41 deals with government grants related to agricultural activity, other than grants related to bearer plants and other biological assets carried on a cost basis, which are dealt with under IAS 20. In addition, SIC-10 deals with government assistance granted subject to conditions that may not be specifically related to the operating activities of the entity.

Scope

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. Such government grants may be given to an entity to help finance a particular asset or other expenditure. Grants given by local, national and international government, including inter-governmental agencies and similar bodies, are within the scope of IAS 20.

Grants related to income tax, agriculture or government participation in the ownership of an entity are not in the scope of IAS 20.

IAS 20 should be applied in accounting for government grants, and in the disclosure of government grants and other forms of government assistance.

The Standard does not deal with:

• the special problems arising in accounting for government grants in financial statements reflecting the effects of changing prices or in supplementary information of a similar nature;
• government assistance that is provided for an entity in the form of benefits that are available in determining taxable profit or loss or that are determined or limited on the basis of income tax liability (such as income tax holidays, investment tax credits, accelerated depreciation allowances and reduced income tax rates);
• government participation in the ownership of the entity; or
• government grants covered by IAS 41.

Definitions

IAS 20 provides the following definitions for terms used in the Standard.

• Government refers to government, government agencies and similar bodies, whether local, national or international.
• Government assistance is action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria. Government assistance excludes benefits provided only indirectly through action affecting general trading conditions, such as the provision of infrastructure in development areas or the imposition of trading constraints on competitors.
• 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.

For the purposes of IAS 20, government grants represent a particular form of government assistance involving awards given in return for the fulfilment of conditions. They are sometimes called by other names (e.g., subsidies, subventions or premiums).

The following forms of government assistance are not classified as government grants:

• • those that cannot reasonably have a value placed upon them (e.g., free technical or marketing advice or export credit guarantees); and
  • transactions with government that are indistinguishable from the normal trading transactions of the entity (e.g., a government procurement policy that is responsible for a significant part of the entity’s sales).
• Grants related to assets are government grants whose primary condition is that the entity qualifying for them should purchase, construct or otherwise acquire long-term assets. There may also be subsidiary conditions restricting the type or location of the assets, or the periods during which they are to be acquired or held.
• Grants related to income are government grants other than those related to assets.
• Forgivable loans are loans which the lender undertakes to waive repayment of under certain prescribed conditions.