IAS 20 Accounting for government grants and disclosure of government assistance Why standard on government grants? Companies receive grant and if there is no standard on the accounting treatments there will be inconsistent treatments as the companies will be at liberty to decide on how to treat the grants. Take for example a company receives a grant of $5m and it decides to credit its statement of profit or loss. The company will show a massive profit for that year and what happens after? This seems to be against accrual concept. IAS 20 is explaining how government assistance received by companies should be treated and disclosed. It is possible that a company receives help from a government to pay for:  non-current assets,  past costs incurred or  current/future costs. Areas not coveredin IAS 20 IAS 20 does not cover the following:  Accounting for govt. grants in financial statements reflecting the effects of changing prices  Government assistance given in the form of ‘tax breaks’  Government acting as part-owner of the entity The definitions Government. Government, government agencies and similar bodies whether local, national or international. Government assistance Action by government to designed toprovide an economic benefit specific to an entity or range of entities qualifying under certain criteria. Government grants Assistance by government given to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. What is the accounting treatment for government grants ? There two methods which could be used to account for government grants: 1. Capital approach, and 2. Income approach Capital approach: Dr Cash Cr Asset account With total grant This means that the grant is directly credited to shareholders interest. BRATIM Lecture notes Page 1 Income approach: Under income approach the grant is spread over the useful life of the asset Dr Cash Cr Deferred income With total grant received. Dr Deferred income Cr Statement of profit or loss With annual income realised (grant/useful life) The arguments on the approaches Capital approach 1. Grants are not earnedsono related costs, taking it to profit or loss might be wrong. 2. No repayment is expected. Also grants are a financing device. Income approach 1. The grants should not be credited to shareholders equity because they are not contributed by shareholders. 2. There are associated costs in complying with the conditions of the grants. That is the grants are not received for nothing. Recognitions Government grants should be recognised in the statement of profit or loss to match them against the expenditure to which they contribute: Non-current assets grants - over the useful economic life of the asset For past costs incurred – immediately in the profit and loss account For current/future costs – in the period that the costs are recognised Illustration 1 Acumen co receives a government grant representing 50% of the cost of depreciating asset which costs $ 100, 000.00 with 5 years useful life. Show the double entries under capital and income approaches. Illustration 2 The information in illustration applies. In addition, the company’s expected profits before accounting for the depreciation is $ 50, 000.00 per annum. Prepare statement of profit or loss and financial position to show the effects of the grant under both approaches. Disclosure The following should be disclosed  Accounting policy adopted for grants, including method of presentation  The nature and extent of government grants recognised in the financial statements  Unfulfilled conditions and other contingencies attached to government assistance that has been recognised Tejan A. Ibrahim is the Chief Executive Officer and a tutor at Bratim Training Limited BRATIM Lecture notes Page 2