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Accounting for Government Grants and Disclosure of Government Assistance: IAS 20

Accounting for Government Grants and Disclosure of Government Assistance: IAS 20. Wiecek and Young IFRS Primer Chapter 14. IAS 20 – Objective and Scope.

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Accounting for Government Grants and Disclosure of Government Assistance: IAS 20

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  1. Accounting for Government Grants and Disclosure of Government Assistance: IAS 20 Wiecek and Young IFRS Primer Chapter 14

  2. IAS 20 – Objective and Scope • Governmentgrant: a form of government assistance; a transfer from a government to an entity that requires compliance with certain conditions related to entity’s operating activities. • Governmentassistance: government action to generate an economic benefit for entities that meet qualifying criteria.

  3. IAS 20 – Objective and Scope • Excludes benefits provided by adjusting taxable profit or loss, or that are determined on the basis of the income tax liability - such as investment tax credits, income tax holidays, accelerated tax depreciation methods and reduced income tax rates

  4. IAS 20 – Accounting for Government Grants Recognition and Measurement: • Recognize a government grant when there is reasonable assurance that • The grant will be received, and • The entity will comply with the conditions attached to the grant

  5. IAS 20 – Accounting for Government Grants Two general approaches: • Capital approach • Income approach * Apply this one * * Grants from government are not equity financing, they are non-shareholder-related increases in net assets and therefore items of income.

  6. IAS 20 – Accounting for Government Grants • Income approach: recognize government grants in profit or loss in the same periods that the related expenses are recognized • If for acquisition of assets – on the same basis as the depreciation on the assets • If related directly to incurring specific expenditures – on the same basis as the expenditures

  7. IAS 20 – Accounting for Government Grants Presentation of grants related to assets: • Companies have a choice – recognize as (a) deferred income or (b) as a reduction in the carrying amount of the related asset • Example: Company A receives a $25 grant toward the purchase of new equipment that cost $100; equipment has a five year life and is depreciated on a straight-line basis

  8. IAS 20 – Accounting for Government Grants • Entry when grant received: (a) Dr. Cash 25 Cr. Deferred government grant 25 Or (b) Dr. Cash 25 Cr. Equipment 25

  9. IAS 20 – Accounting for Government Grants • Entry as asset is used: (a) Dr. Depreciation expense 20 Cr. Accumulated depreciation 20 Dr. Deferred government grant 5 Cr. Depreciation expense/grant income 5 Or (b) Dr. Depreciation expense 15 Cr. Accumulated depreciation 15 Depreciation: ($100 - $25) ÷ 5 = 15

  10. IAS 20 – Accounting for Government Grants Presentation of grants related to income: • Example: Company B receives a government grant equal to 10% of the payroll costs incurred. Payroll costs incurred are $100. • Entry when payroll costs incurred: Dr. Grant receivable 10 Cr. Wages expense/grant income 10

  11. IAS 20 – Accounting for Government Grants Repayment of grants: • If grant becomes repayable – treat as a change in estimate • If related to an asset: cumulative amount of additional depreciation that would have been recognized to date is recognized in P&L • If related to income: any necessary adjustments are made to current year profit or loss

  12. IAS 20 – Government Assistance • Grants exclude assistance that cannot reasonably be valued, and transactions between the government and the entity that are in the normal course of business. • Other assistance (e.g., guarantee of loan, significant sales) may be of interest to financial statement readers if benefits are significant and recurring

  13. IAS 20 Disclosure • Three types: • Accounting policy for grants and their presentation • Nature and extent of grants recognized, and information about other forms of assistance that have been beneficial • Information about contingencies or conditions not yet met related to assistance recognized

  14. Looking Ahead • IAS 20 – part of short-term convergence project with FASB. IAS 20 shortcomings: 1. Inconsistent with the conceptual framework (deferred credits do not meet the definition of a liability) 2. Option allowed now understates an entity’s assets, reducing comparability of the entity’s financial statements (i.e., option to deduct grant from asset acquired)

  15. Looking Ahead • Work on amending IAS 20 set aside pending outcome of related standards, such as IAS 37 Provisions, Contingent Liabilities and Contingent Assets and Conceptual Framework Project

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