Accounting for Government

Grants & Disclosure of

Government Assistance LKAS - 20

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Learning Outcomes

Identify the Scope of the Standard. Describe the background material and implementation guidance of the Standard.

Discuss the practical scenarios.

Scope of the Standard

1.

This standard applies to accounting

for, and in the disclosure of all

government grant and other form of government assistant.

2) This Standard does not deal with

Government

participation in the ownership of the

enterprise.
Government

grants covered by LKAS 41

Agriculture.

2) This Standard does not deal with Contt

Government assistance that is provided for an enterprise in the form of benefits that are available in determining taxable income or are determined or limited on the basis of income tax liability (such as, Tax holidays, investment tax credits, accelerated depreciation allowances and

reduced income tax rates)

Definitions
Government assistance

Government
government

assistance
designed

is
to

action
provide

by
an

economic benefit specific to an enterprise

or range of enterprises qualifying under

certain criteria.
Eg. Custom duty waiver at the point of important.
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Government assistance Contd. Government assistance for the purpose of this Standard does not include benefits provided indirectly through action affecting general trading conditions. Eg. provision of infrastructure in

development areas or the imposition of trading constraints on competitors.

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Definitions Contd
Government Grant

Government Grants are assistance by

government in the form of transfer of

resource to an enterprise in return for past of

future compliance with certain condition

relation to the operation activates of the

enterprise
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Example: The government wants to encourage investment in industrial machinery. It offers a 10% cash grant for purchase of a range of machines. The conditions are: All machines must be used in the country. All machines must be bought within a 2year period to qualify for the grants.

Government Grant Contd

They exclude

Government assistance which cannot

reasonably have a value placed upon them.

and
Transactions

with

government

which

cannot be distinguished from the normal

trading transactions of the enterprise.
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Forms of Government Grants Grant related to assets

Grant related to Assets are government

grants whose primary condition is that an

enterprise qualifying for them should

purchase , construct of otherwise acquire

long term assets.

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Grant related to assets

Contd

Subsidy conditions may also be attached restrecting the type or location of the assets or the during which they are to be acquired or held.

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Example: The government wants to encourage investment in industrial machinery. It offers a 10% cash grant for purchase of a range of machines. The conditions are: All machines must be used in the country. All machines must be bought within a 2year period to qualify for the grants.

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Grant related to income

Grant related to income are government grants other than those related to assets.
For example, if the government wishes to encourage training in companies it may offer 25% reimbursement of cost for each training course undertaken from an approved list.

Forgivable loans
Forgivable loans are loans which the lender

undertakes to waive repayment of under

certain prescribed conditions.
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Government loan at a below-market rate of interest

The benefit of a government loan at a below-market rate of interest (BMRI)is treated as a government grant. The loan shall be recognised and measured in accordance with LKAS 39 Financial Instruments: Measurement.
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Recognition

and

Government loan at a below-market rate of interest Contd

The benefit of the below-market rate of interest shall be measured as the

difference between the initial carrying value of the loan determined in

accordance with LKAS 39 and the proceeds received.

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Recognition of Government Grants

A government grant is recognized only

when

they

there

is

reasonable

assurance that,
1.

The enterprise will comply with any

condition attached to the grant and

2.

The grant will be received

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Approaches to Account for Government Grants Capital Approach Grant is credited directly to shareholders interest DR- Asset CR-Government Grant Government grant will be treated as a source of finance & it will be there for an indefinite period
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Argument in Support of Capital Approach

a)
b) c) d)

Financing Device
No repayment Not earned income Incentive provided by Government

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Income Approach
Grant is taken to income over one or

more periods.
DR-Asset

CR- Deferred Income

Deferred income will be charged to

income statement on a systematic basis

over the life of the assets.
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Argument in Support of Income

Approach
a)

Receipt from a source other than

Shareholders

b)

Earns them through compliance with

their conditions

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Non-monetary Government Grants

Transfer of Non- Monitory asset, land or other resources. Valuation at Fair value Or Record at a nominal value

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Presentation of Grants Related to Assets

Government grants related to assets,

including non-monetary grants at fair value,

could be presented in the balance sheet in

two ways.
1st Method

Setting up the grant as deferred income which is recognized as income on a systematic and rational basis over the
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Presentation of Grants Related to Assets Contd. 2nd Method

The grant is recognized as income over the life of a depreciable asset by way of a reduced depreciation charge.

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Presentation of Grants Related to Income Either separately or under a general heading (such as other income)

Alternatively
Deduct from related expenses.

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Repayment of Government Grants

Repayable on non compliance with the condition laid down. (Applicable

LKAS 8-Accounting policies, changes

in accounting estimates and errors)

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Repayment of a grant related to Income

Applied first against any unamortized deferred credit.

If the repayment exceeds any such deferred credit, or where no deferred credit exists, recognized immediately as an expense.
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Repayment of a grant related to an asset

Increasing the carrying amount of the

asset
or

Reducing the deferred income balance by the amount repayable.

Cumulative additional depreciation recognize immediately as an expense
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Other forms of Government Assistance

Free technical advices Marketing advices Provision of Guarantees

Disclose the nature, extent and duration of the assistant

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Other forms of Government Assistance Contd. Does not include the provision of

infrastructure by improvement to
General

Transport Network

Communication Irrigation Water

reticulation
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Disclosure

The accounting policy adopted for

government grants.

Methods of presentation adopted in

the financial statements.

The nature and extent of government

grants recognized.
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Disclosure
An

indication

of

other

forms

of

government assistance from which the

enterprise has directly benefited.

Unfulfilled

conditions

and

other

contingencies attaching to government

assistance that has been recognized

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Example 01
On April 2009 Benevolent Hospitals Ltd, revived a government grant of Rs 4,000,000 for the purchase of a machine which will be used for Kidney transplanting. The total cost of the machine was Rs.10,000,000 with an estimated life of five years. The company depreciated its machinery by the straight line method. You are required to advice the management as to the correct accounting treatment of this government grant with reference to LKAS 20.

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Example 02
The company received Government Grant of 40% of the cost of a machine purchased on 1st April 2009. The purchase price of the machine was Rs 12million. The machine is expected to have a

useful life of 5 years, depreciation being charged

on straight line method. What is the charge to the profit and loss account for year ended 31st March 2010 on account of depreciation and grant amortization.
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Thank You