Sunday, July 6, 2014

IAS 20 – How to account for government grants and assistance under IFRS

What is the difference between government grant and government assistance?

A grant means that a public body transfers resources to another entity in return for past or future compliance with certain conditions. “If you behave well, I will give you money.” Government grants are also called subsidies, subventions, or premiums.

Assistance is broader: It is a government action that provides an economic benefit to entities qualifying under certain criteria.
In both cases, the term government refers to any national or international body.

How are government grants accounted for?

A grant is only recognized if there is reasonable assurance that the receiving entity will comply with its conditions.

In general, there are two possibilities to recognize government grants:

  • Income approach: Recognizing a grant in profit or loss makes sense because grants are rarely gratuitous. In addition, as it is not a funding source from shareholders, one can argue that they should not be recognized in equity.
  • Capital approach: Recognizing a grant on your balance sheet makes sense because the government usually doesn’t expect repayment and because grants are not “earned” by the firm.

In practice, IAS 20 suggests a rather simple solution:

  • If related to assets, grants are recognized in the statement of financial position, either through deferred income or through deducting the grant from the asset to state its carrying amount only.
  • If related to income, grants are accounted for as profit or loss, either separately or under a general heading such as “Other Income”.

How is government assistance accounted for?
Government assistance is only disclosed in a company’s financial statements.

IAS 20 – Accounting for Government Grants and Disclosure of Government Assistanc