ASHIK IQBAL ACA CPA (USA)

CERTIFICATE COURSE ON IFRS

IAS 20 ACCOUNTING FOR GOVERNMENT GRANTS AND

DISCLOSURE OF GOVERNMENT ASSISTANCE
22 March 2021
DISCLAIMER

• This material has been developed for training and education

purposes for the participants of Certificate Course on IFRS offered
by ICAB. This should not be distributed or shared with anyone who
is not a participant of this course.
• Any distribution of this material outside the participant group is
strictly prohibited.
• This material and the facilitation do not create any client &
consultant relationship between the participants and the facilitator.
• For any real life decision making regarding financial reporting and
auditing, please refer to the original IFRSs. Views expressed in
this document are personal.
GROUND RULES

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SCOPE
SCOPE

• IAS 20 applies to all government grants and other forms of

government assistance.

• However, it does not cover government assistance that is

provided in the form of benefits in determining taxable
income.

• It does not cover government grants covered by IAS

41 Agriculture.

• The benefit of a government loan at a below-market rate of

interest is treated as a government grant.
 DEFINITION

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KEY DEFINITION

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.

• does not include benefits provided only indirectly through action

affecting general trading conditions (e.g., infrastructure in
development areas, imposition of trading constraints on
competitors).
KEY DEFINITION

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.

They exclude the following

i. Forms of government assistance which cannot

reasonably have a value placed upon them; and

ii. Transactions with government which cannot be

distinguished from the normal trading transactions of
the entity.
KEY DEFINITION

Grants related to assets are government grants whose

primary condition is that an entity qualifying for them should
purchase, construct or otherwise acquire long-term assets.

Subsidiary conditions may also be attached 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.
ACCOUNTING FOR GRANTS
ACCOUNTING FOR GRANTS

• A government grant is recognized only when there is

reasonable assurance that:

(a) the entity will comply with any conditions attached to

the grant and

(b) the grant will be received.

• The grant is recognized as income over the period necessary

to match them with the related costs, for which they are
intended to compensate, on a systematic basis.

• Non-monetary grants, such as land or other resources, are

usually accounted for at fair value, although recording both
the asset and the grant at a nominal amount is also
permitted.
ACCOUNTING FOR GRANTS

• Even if there are no conditions attached to the assistance

specifically relating to the operating activities of the entity
(other than the requirement to operate in certain regions or
industry sectors), such grants should not be credited to
equity.

• A grant receivable as compensation for costs already incurred

or for immediate financial support, with no future related
costs, should be recognized as income in the period in which
it is receivable.
ACCOUNTING FOR GRANTS

A grant relating to assets may be presented in one of two ways:

1. As deferred income, or

2. by deducting the grant from the asset's carrying amount.

A grant relating to income may be reported separately as 'other

income' or deducted from the related expense.
ACCOUNTING FOR GRANTS

If a grant becomes repayable,

• Change in estimate.

• Where the original grant related to income, the repayment

should be applied first against any related unamortized
deferred credit, and any excess should be dealt with as an
expense.

• Where the original grant related to an asset, the repayment

should be treated as increasing the carrying amount of the
asset or reducing the deferred income balance. The
cumulative depreciation which would have been charged had
the grant not been received should be charged as an
expense.
 DISCLOSURE

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DISCLOSURE OF GOVERNMENT GRANTS

The following must be disclosed:

a) accounting policy adopted for grants, including method of

balance sheet presentation

b) nature and extent of grants recognized in the financial

statements

c) unfulfilled conditions and contingencies attaching to

recognized grants
ILLUSTRATIVE CASES
ILLUSTRATIVE CASES

Q1: The government leases an item of machinery to Entity A. An extract from

the agreement is as follows:

• Fair value of machine TK1 million and useful life of 10 years

• 10 annual lease payments of TK102,770
• Implicit rate of lease is 0.5%
• No guaranteed residual value and no initial direct costs
• Market incremental borrowing interest rate for A is 5%.

Analyze the above considering IAS 20.

ILLUSTRATIVE CASES

Answer Q1: The rate implicit is significantly below a market rate such that the
arrangement is judged to contain a government grant.

Entity A accounts for this grant like the grant of a loan at below market rate
in accordance with IAS 20:10A.

Option 1:

1. Right of use assets Tk1,000,000

2. Lease liability Tk793,560 [PV(5%,10,102,770,0)]

3. Deferred income Tk206,440 (1 – 2)

• Government grant benefit of Tk206,440 is initially recognized as deferred

income.

• Deferred income is recognized in profit or loss on a systematic basis over the

useful life of the asset.
ILLUSTRATIVE CASES

Option 2:

1. Right of use assets Tk793,560 (Tk1,000,000 -Tk206,440)

2. Lease liability Tk793,560 [PV(5%,10,102,770,0)]

• Government grant benefit of Tk206,440 is treated as a deduction from the

carrying amount of the right-of-use asset,

• In which case the grant is recognized in profit or loss over the life of the
right-of-use asset by way of a reduced depreciation expense.

• In this case, the right-of-use asset is initially recognized at an amount equal

to the lease liability of CU793,560.

Subsequent interest expense on the lease liability is accrued at the rate of 5 per
cent.
ILLUSTRATIVE CASES

The benefit of the below market rate of interest loan is measured as the
difference between the fair value of the 'loan' received (in accordance with
IFRS 9, the fair value of a loan at a below market rate is measured at the
present value of the contractual payments, in this case the lease payments,
discounted using the market interest rate of 5 per cent which is Tk793,560);
and the proceeds received, i.e. the right of use asset under market terms
(which in this example may be estimated to be the fair value of the asset of
Tk1 million).
 Q&A

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THANK YOU