IAS 20 Government Grants and

Assistances 03
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DEFINITIONS
refers to government, government agencies and similar bodies whether local,
Government
national or international.
is action by government designed to provide an economic benefit specific to
an entity or range of entities qualifying under certain criteria. Government
Government assistance for the purpose of this Standard does not include benefits
assistance 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.
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
Government the operating activities of the entity. They exclude those forms of government
grants 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 entity (subsidies etc.).
are government grants whose primary condition is that an entity qualifying for
Grants
them should purchase, construct or otherwise acquire long-term assets.
related to
Subsidiary conditions may also be attached restricting the type or location of
assets
the assets or the periods during which they are to be acquired to held.
Grants
related to are government grants other than those related to assets.
income

RECOGNITION
GENERAL
Government grants including non-monetary grants at fair value shall not be
When recognized until there is reasonable assurance that:
recognised? (a) The entity will comply with the conditions attaching to them; and
(b) The grants will be received
They are two broad approaches to the accounting treatment of government
grants:
(a) The capital approach (recognise directly in equity)
Approaches
(b) The income approach (recognise in profit or loss)

The IAS 20 advocates income approach.

Monetary Grant received in the form of cash.
grant
Grant received in the form other than cash.
Non-
In this case the asset and the grant are recognized at the fair value. The
monetary
other alternative may be to record the grant and the related asset at the
grant
nominal amount.
 ICMAP M4 Financial Accounting

PERIOD OF RECOGNITION
Government grants shall be recognized as income over the periods necessary to match
them with the related costs, which they are intended to compensate, on a systematic basis.
Grants related to These are recognized over the period and matched with the related
income expenses.
Grants related to are recognized over the useful life of the fixed assets in the
2| depreciable assets proportion in which the depreciation on those assets is charged.
Grants related to are also recognized over the period, in which the related expenses
non-depreciable are made (conditions of the grant are fulfilled).
assets
QUESTION 01
B Limited receives a government grant representing 50% of the cost of a depreciating asset
which costs Rs. 40,000. How will the grant be recognised if B Limited depreciates the asset:
(a) Over four years straight line; or
(b) At 60% reducing balance (remaining to be charged in year 4)?

The residual value is nil. The useful life is 4 years.

PRESENTATION
GRANT RELATED TO INCOME
Method 1: Include the grant in “other income” in profit or loss.
Method 2: Deduct from relevant expense by linked presentation.
Present in separate line item as an “exceptional item” only if it is very
Method 3:
material.
GRANT RELATED TO ASSET
setting up the grant as deferred income and amortise it (same basis as for
Method 1:
depreciation)
Method 2: deducting the grant in arriving at the carrying amount of the asset
QUESTION 02
A company receives a Rs. 20,000 grant towards the cost of a new item of machinery, which
cost Rs. 100,000. The machinery has an expected life of four years and nil residual value.
The expected profits of the company, before accounting for depreciation on the new
machine or the grant, amount to Rs. 50,000 per annum in each year of the machinery’s life.

Required:
Prepare extracts of financial statement under both methods of presentation allowed under
IAS 20 for grants related to assets.

REPAYMENT
GRANT RELATED TO INCOME
The amount of repayment is first applied against any un-amortised balance of
deferred grant. If repayment exceeds deferred grant, the excess is recognised as
expense in profit or loss.
GRANT RELATED TO ASSET
The amount of repayment is first applied against any un-amortised balance of
Method 1: deferred grant. If repayment exceeds deferred grant, the excess is
recognised as expense in profit or loss.
The amount of repayment is debited to cost of the asset. The cumulative
additional depreciation that would have been recognized to date as an
Method 2:
expense in the absence of the grant shall be recognized immediately as an
expense.

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 Class Notes

QUESTION 03
Top Limited operates in a poor area. During 2004, it installs a special pollution control device
at a cost of Rs. 6,000 and receives a Rs. 4,000 grant from a local government. The
depreciation is charged at 10% using straight line method. During 2006, the government
finds out that Top Limited has not complied with the terms of the grant and asks it to repay
the grant.
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Required
Show the accounting treatment of repayment if Top Limited uses:
(a) Separate deferred grant method
(b) Reduction form cost of asset method

DISCLOSURE OF GOVERNMENT ASSISTANCE

The government grants not recognized because no value can be assigned to them or not
distinguishable from the other transactions of the entity shall be disclosed (if material).

QUESTION 04 PE November 2013 Q6 (b)

Wahid Company purchased an item of plant at a value of Rs. 1 million on January 1, 2013
with additional modification cost of Rs. 100,000 and transportation and installation costs of
Rs. 50,000. The plant has an estimated life of 5 years with no residual value. The plant
qualified for a government grant of 40% of its purchase price at the time of its purchase but it
had not been received by June 30, 2013. It is the company policy to treat the grant as
deferred credit and transfer a portion to revenue each year.

Required:
Prepare extracts of Wahid Company.s financial statements for the year to June 30, 2013 in
respect of the plant and the related grant as per IAS 20. (10)

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