Chapter 13 Accounting for Government Grants and Disclosure of Government Assistance

1.
1.1 1.2 1.3 1.4

Objectives
Define government, government assistance and government grants. Explain the principles and methods of recognition for government grants. Explain the treatment of government assistance. Describe the disclosure requirements of government grants.

D e f in itio n

R e c o g n it io n

" o v e rn m e n t " ra n ts

" o v e rn m e n t ! s s is ta n c e

R e la t e d t o ncom e

R e la te d t o ! sse ts

D is c lo s u r e

2.
2.1

Definitions
DEFINITIONS #a$ #b$ Government refers to government, government agencies and similar bodies %hether local, national or international. Government assistance # $ is action b& government designed to provide an economic benefit specific to an enterprise or range of enterprises qualif&ing under certain criteria. "overnment assistance for the purpose of this 'tandard does not include benefits provided onl& indirectl& through action affecting general trading conditions, such as the provision of infrastructure in development areas or the imposition of trading constraints on competitors. #
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#c$

!"#$ %&'()*+,-./01!"23 4567# 89+:;<=>?@ABC D+EFGHIDJKLMN$$ Government grants # O $ are assistance b& government in the form of transfers of resources to an enterprise in return for past or future compliance %ith certain conditions relating to the operating activities of the enterprise. # PQRSTUVW+XY"<1Z[X\] ^_`a#bc5defg$ hgO,-.fijklmn P*,opqrsLtpu8sL$$ *he& exclude those forms of government assistance %hich cannot reasonabl& have a value placed upon them and transactions %ith government %hich cannot be distinguished from the normal trading transactions of the enterprise. Grant related to assets # pTvbcO $ are government grants %hose primar& condition is that an enterprise qualif&ing for them should purchase, construct or other%ise acquire long)term assets. 'ubsidiar& conditions ma& also be attached restricting the t&pe or location of the assets or the periods during %hich the& are to be acquired or held. #hwO+xA% _`ybTz"{O|}~ PxVW~T v$ obJ_`+;MNTv+E~bh iTv8$$ Grant related to income # p b c O $ is grants other than those related to assets. Forgivable loans # $ are loans %hich the lender underta+es to %aive pa&ment of under certain prescribed conditions.

#d$

#e$ #f$

3.
(A) 3.1

Recognition
General principles !n entit& should not recogni,e government grants #including non)monetar& grants at fair value$ until it has reasonable assurance that #a$ *he entit& %ill compl& %ith an& conditions attached to the grant- and #b$ *he entit& %ill actually receive the grant. t ma+es no difference in the treatment of the grant %hether it is received in cash or given as a reduction in a liabilit& to government, i.e. the manner o receipt is
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3.2

irrelevant! (") 3.3 Accounting treatment o government grants *here are t%o methods %hich could be used to account for government grants, and the arguments for each are given in ./!' 20. #a$ #apital approac$% credit the grant directl& to shareholders1 interests. #b$ Income approac$% the grant is credited to the income statement over one or more periods. ./!' 20 requires grants to be recogni,ed under the income approac$& i.e. grants are recogni,ed as income over the relevant periods to match them %ith related costs %hich the& have been received to compensate. *his should be done on a s&stematic basis. Grants s$ould not& t$ere ore& be credited directly to s$are$olders' interests! t %ould be against the accruals assumption to credit grants to income on a receipts basis, so a systematic basis o matc$ing must be used. ! receipts basis %ould onl& be acceptable if no other basis %as available. t %ill usuall& be eas& to identif& the costs related to a government grant& and thereb& the period#s$ in %hich the grant should be recogni,ed as income, i.e. %hen the costs are incurred. 4here grants are received in relation to a depreciating asset, the grant %ill be recogni,ed over the periods in %hich the asset is depreciated and in the same proportions. E(A)*+E , 678 9o receives a government grant representing 20: of the cost of a depreciating asset %hich costs ;40,000. .o% %ill the grant be recogni,ed if 678 9o depreciates the asset< #a$ over four &ears straight line- or #b$ at 40: reducing balance= *he residual value is nil. *he useful life is four &ears. Solution% *he grant should be recogni,ed in the same proportion as the depreciation. #a$ 'traight line Depreciation ; "rant income ;

3.4

3.2

3.3

3.5

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7ear

1 2 3 4

10,000 10,000 10,000 10,000

2,000 2,000 2,000 2,000

#b$

Reducing balance Depreciation ; 13,000 ?,300 2,530 >,340 "rant income ; >,000 4,>00 2,>>0 4,320

7ear

1 2 3 4

3.>

3.?

3.10

n the case of grants or non-depreciable assets& certain obligations ma& need to be fulfilled, in %hich case the grant should be recogni,ed as income over the periods in %hich the cost of meeting the obligation is incurred. @or example, if a piece of land is granted on condition that a building is erected on it, then the grant should be recongised as income over the building1s life. !n entit& ma& receive a grant as compensation or e.penses or losses %hich it has already incurred! !lternativel&, a grant ma& be given to an entit& simpl& to provide immediate financial support %here no future related costs are expected. n cases such as these, the grant received should be recogni,ed as income of the period in %hich it becomes receivable. *here ma& be a series o conditions attached to a grant, in the nature of a pac+age of financial aid. !n entit& must ta+e care to identif& precisel& those conditions %hich give rise to costs %hich in turn determine the periods over %hich the grant %ill be earned. 4hen appropriate, the grant ma& be spilt and the parts allocated on different bases. Non-monetary government grants ! non)monetar& asset ma& be transferred b& government to an entit& as a grant, for example a piece of land, or other resources. *he air value of such as asset is usuall& assessed and this is used to account for both the asset and the grant. !lternativel&, both ma& be valued at a nominal account.

(#) 3.11

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/!
(A) 4.1

*resentation
*resentation o grants related to assets *here are t%o choices here for ho% government grants related to assets #including non)monetar& grants at fair value$ should be sho%n in the balance sheet. #a$ 'et up the grant as de erred income! #b$ Deduct t$e grant in arriving at the carrying amount of the asset. E(A)*+E 0 !n enterprise opens a ne% factor& and receives a government grant of ;12,000 in respect of capital equipment costing ;100,000. t depreciates all plant and machiner& at 20: pa straight)line. 'ho% the balance sheet extracts to record the grant in the first &ear under methods #a$ and #b$ above. Solution% #a$ 4rite off against asset Statement o inancial position (e.tract) (on)current assets< Alant and machiner& at cost #100 B 12$ Cess< Depreciation #20: x >2$ ; >2,000 15,000 3>,000 #b$ Deferred income
"overnment grant deferred income account ; ncome statement transfer for &ear< 20: x ;12,000 Dalance cEd 3,000 12,000 12,000 12,000 9ash grant ; 12,000

4.2

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Dalance bEd

12,000

Statement o inancial position (e.tract) Non-current assets% Alant and machiner& at cost Cess< Depreciation De erred income% "overnment grant ; 100,000 20,000 >0,000 12,000

4.3

E(E1#ISE , ! compan& receives a 20: grant to%ards the cost of a ne% item of machiner&, %hich cost ;100,000. *he machiner& has an expected life of four &ears and a nil residual value. *he expected profits of the compan&, before accounting for depreciation on the ne% machine or the grant, amount to ;20,000 per annum in each &ear of the machiner&1s life. 1e2uired% 'ho% the statement of financial position extracts to record the grant in the first &ear under methods #a$ and #b$ above. Solution%

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(") 4.4

*resentation o grants related to income *hese grants are a credit in the income statement, but there is a choice in the method of disclosure. #a$ Aresent as a separate credit or under a general heading, e.g. Fother income1. #b$ Deduct rom t$e related e.pense! .o%ever, if the grant is paid on a different basis, for example achievement of a non) financial obGective, such as the creation of a specified number of ne% Gobs, the grant should be matched %ith the identifiable costs of achieving that obGective. ./!' 20 allo%s such grants to be presented as a credit in the income statement or deducted from the related expense. 'upporters of the first method claim that it is inappropriate to net income and expense items and that separation of the grant from the expense facilitates comparison %ith other expenses not affected b& a grant. @or the second method it is argued that the expenses might %ell not have been incurred b& the enterprise if the grant had not been available and presentation of the expense %ithout offsetting the grant ma& therefore be misleading. 1epayment o government grants ! government grant that becomes repa&able should be accounted for as a revision to an accounting estimate #./!' >$. 1epayment o a grant related to income should be applied first against an& unamorti,ed deferred credit set up in respect of the grant- an& excess should be recogni,ed immediatel& as an expense. 1epayment o a grant related to an asset should be recorded b& increasing the carr&ing amount of the asset or reducing the deferred income balance b& the amount repa&able. *he cumulative additional depreciation that %ould have been recogni,ed to date as an expense in the absence of the grant should be recogni,ed immediatel& as an expense.

4.2

4.3

(#) 4.5 4.>

4.?

.
2.1

Government Assistance
"overnment assistance, as defined in 2.2 above, ma& be important to an enterprise but ./!' 20 does not require it to be quantified and introduced into the financial statements. Examples of assistance that cannot reasonably $ave a value placed upon them are free technical or mar+eting advice and the provision of guarantees.
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2.2

2.3

2.4

2.2

!n example of assistance that cannot be distinguis$ed rom t$e normal trading transactions of the enterprise is a government procurement polic& that is responsible for a portion of the enterprise1s sales. *he existence of the benefit might be unquestioned but an& attempt to segregate the trading activities from government assistance could %ell be arbitrar&. *he significance of the benefit in the above examples ma& be such that disclosure of the nature, extent and duration of the assistance is necessar& in order that the financial statements ma& not be misleading. ./!' 20 requires disclosure of all substantial government assistance received.

!.
3.1 3.2

Disclosure
*he accounting polic& adopted for government grants, including the methods of presentation adopted in the financial statements. *he nature and extent of government grants recogni,ed in the financial statements and an indication of other forms of government assistance from %hich the enterprise has directl& benefited. Hnfulfilled conditions and other contingencies attaching to government assistance that has been recogni,ed.

3.3

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