IAS 20: ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF

GOVERNMENT ASSISTANCE
Introduction
Governments often provide money or incentives to companies to export or promote local employment.
Government grants could be:
• Revenue grants, e.g. money towards wages
• Capital grants, e.g. money towards purchase of non-current assets
General Principles
IAS 20 follows two general principles when determining the treatment of grants:
Prudence: grants should not be recognized until the conditions for receipt have been complied with and there is
reasonable assurance the grant will be received.
Accruals: grants should be matched with the expenditure towards which they were intended to contribute.
Definitions
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 e.g. the grant of a local operating licence.
Government grants are assistance by government in the form of transfer of resources to an entity in
return for past or future compliance with certain conditions relating to the operating activities of the entity.
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.
Grants related to income are government grants other than those related to assets- known as revenue
grants.
Recognition of government grant
An entity should not recognise government grants (including non-monetary grants at fair value) until it has
reasonable assurance that:
• The entity will comply with any conditions attached to the grant
• The entity will actually receive the grant

Revenue grants
The recognition of the grant will depend upon the circumstances:
• If the grant is paid when evidence is produced that certain expenditure has been incurred, the grant should be
matched with that expenditure.
• If the grant is paid on a different basis e.g. achievement of a non-financial objective, the grant should be matched
with the identifiable costs of achieving that objective.
Presentation of revenue grants
IAS 20 allows such grants to either:
• Be presented as a credit in the statement of profit or loss, or
• Deducted from the related expense.
Capital grants
IAS 20 permits two treatments:
• Write off the grant against the cost of the non-current asset and depreciate the reduced cost.
• Treat the grant as a deferred credit and transfer a portion to revenue each year, so offsetting the higher
depreciation charge on the original cost.
Treatment of capital grants
Grants for purchases of non-current assets should be recognized over the expected useful lives if the assets.
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IAS 20 permits two treatments. Both treatments are equally acceptable and capable of giving a fair presentation.
Method 1
On initial recognition, deduct the grant from the cost of the non-current asset and depreciate the reduced cost.
Method 2
Recognize the grant initially as deferred income and transfer a portion to revenue each year, so offsetting the higher
depreciation charge based on the original cost.
Repayment of government grants
If a grant must be repaid it should be accounted for as a revision of an accounting estimate (see IAS 8).
• Repayment of a grant related to income: apply first against any unamortised deferred income set up in respect
of the grant; any excess should be recognised immediately as an expense.
• Repayment of a grant related to an asset
• Capital- based grants deducted from cost: Increase the cost of the asset with the repayment. This
will also increase the amount of depreciation that should have been charged in the past. This should
be recognized and charged immediately.
• Capital-based grants treated as deferred Income: Firstly, debit the repayment to any liability or deferred
income. Any excess repayment must be charged against profit immediately.
Government assistance
Some forms of government assistance are excluded from the definition of government grants.
• Some forms of government assistance cannot reasonably have a value placed on them, e.g. free
technical or marketing advice, provision of guarantees.
• There are transactions with government which cannot be distinguished from the entity's normal trading
transactions, eg government procurement policy resulting in a portion of the entity's sales.
Any segregation would be arbitrary.
Disclosure of such assistance may be necessary because of its significance; its nature, extent and duration should
be disclosed.
Disclosure
Disclosure is required of the following:
• Accounting policy adopted, including method of presentation
• Nature and extent of government grants recognised and other forms of assistance received
• Unfulfilled conditions and other contingencies attached to recognised government assistance.
Example
Accounting for grants related to asset
Example 1
A company receives a 20% grant towards the cost of a new item of machinery, which cost N100,000. The machinery
has an expected life of four years and a nil residual value. The expected profits of the company, before accounting
for depreciation on the new machine or the grant, amount to N50,000 per annum in each year of the machinery's
life.
Show the statement of profit or loss and statement of financial position extracts in respect of the grant in the first
year under both methods.

Example 2
On 1st June 2011, Clock received written confirmation from a local government agency that it would receive a N1m
grant towards the purchase price of a new office building. The grant becomes receivable on the date that clock
transfers the N10m purchase price to the vendor.
On 1st October 2011, Clock paid N10m in cash for its new office building which is estimated to have a useful life
of 50 years. By 1st December 2011, the building was ready for use. Clock rendered the government grant on 1 st
January 2012.
Required: Discuss the possible accounting treatment of the above in the financial statements of Clock for the year
ended 31st December 2011