Recognition and disclosure of government grants and other forms of government assistance is covered in IAS 20.
Government assistance is as action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria. SIC Interpretation 10 Government Assistance—No Specific Relation to Operating Activities states that assistance aimed at encouragement or long-term support of business activities either in certain regions (e.g. underdeveloped areas) or industry sectors is within the scope of IAS 20. Excluded from the scope are other forms of government assistance affecting only general conditions, such as the provision of transportation or communication infrastructure available on an ongoing basis to the general public or the imposition of trading constraints on competitors.
Government grants (sometimes referred to as subsidies, subventions etc.) are defined by IAS 20 as 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 the operating activities of the entity. Grants are usually provided as an incentive for an entity to engage in an activity that would not be commercially justified without those grants. Excluded from the definition of a grant (but still treated as government assistance to be disclosed) are transactions with government which cannot be distinguished from the normal trading transactions of the entity and those forms of government assistance which cannot reasonably have a value placed on them, such as free technical or marketing advice and the provision of guarantees (IAS 20.35).
Government is understood broadly in IAS 20 and includes central and local government bodies as well as all sorts of government agencies.
Recognition of government grants
General recognition criteria
Government grants are recognised when there is a reasonable assurance that (IAS 20.7):
- the entity will comply with the conditions attaching to them; and
- the grants will be received.
Unfortunately, it is impossible to find a definition of a reasonable assurance in IFRS. In practice, probability exceeding 50% is considered to be sufficient.
Some grants are received in advance by the entity, but it does not in itself provide conclusive evidence that the conditions attaching to the grant have been or will be fulfilled (IAS 20.8). Therefore, some grants will be presented as a liability until there is a ‘reasonable assurance’ that all the conditions attaching to them will be complied with.
Once a government grant is recognised, any related contingent liability or contingent asset is treated in accordance with IAS 37 (IAS 20.11).
Government grants are recognised in P/L on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate (IAS 20.12). Grants relating to depreciable assets are recognised in P/L over the periods and in the proportions in which depreciation expense on those assets is recognised (IAS 20.17). Allocating grants to periods may not always be obvious and an entity will often need to make a significant judgement when developing its approach.
When a grant constitutes a compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the entity with no future related costs, it should be recognised in P/L in the period in which it becomes receivable (IAS 20.20-22).
Non-monetary grants are recognised at the fair value of the asset subject to grant determined under IFRS 13, though IAS 20 allows to record them at a nominal amount (IAS 20.23). The nominal amount may be materially different from the fair value, therefore this allowed alternative if often subject to criticism.
Forgivable loans and loans with below-market rate of interest
A forgivable loan is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan (IAS 20.10). Until then, such a loan is treated as a liability and recognised at fair value under IFRS 9.
The May 2016 IFRIC update discusses a question on the accounting for cash received from a government to help an entity finance a research and development project. In the example analysed by IFRIC, the cash received from the government is repayable in cash only if the entity decides to exploit and commercialise the results of the research phase of the project. Alternatively, the entity must transfer to the government the rights to the research. IFRIC noted that the cash received from the government does not meet the definition of a forgivable loan in IAS 20 because the government does not undertake to waive repayment of the loan, but rather to require settlement in cash or by transfer of the rights to the research. As such, received proceeds give rise to a financial liability under IAS 32.20a because the entity can avoid a transfer of cash only by settling a non-financial obligation (i.e. by transferring the rights to the research to the government).
Any difference between the cash receipt under a government loan and the fair value of the liability should be recognised as a government grant (IAS 20.10A).
Presentation of grants related to assets
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 (IAS 20.3). There are two ways of presenting such government grants in the statement of financial position (IAS 20.24-27):
- as deferred income, or
- by deducting the grant in arriving at the carrying amount of the related asset.
The choice of presentation method can have significant consequences on performance measures used by an entity. When a grant is recognised as deferred income, it is usually recycled to P/L as other income over the useful life of the asset, therefore it will have a positive impact on EBITDA, whereas depreciation expense relating to the asset will be charged below EBITDA per its definition. The drawback of this method is that an asset subject to the grant is recognised on a gross basis, driving up capital expenditures (‘capex’). If the grant is presented as a deduction from the carrying amount of the asset, it results in lower capex and reduced depreciation expense, without any impact on EBITDA.
Presentation of grants related to income
Grants related to income are all grants other than those related to assets as defined above (IAS 20.3). There are two ways of presenting such government grants (IAS 20.29-31):
- separately from related expenses (e.g. as other income), or
- as a deduction in reporting the related expense.
Repayment of government grants
It may happen that a grant becomes repayable by the entity despite the fact that it was previously estimated that the attached conditions will be complied with. In such a case, entity accounts for the repayment prospectively as a change in accounting estimate (IAS 20.32).
When a repayable grant was related to income, the entity first debits the unamortised balance of deferred income and the remainder of the balance that became repayable is immediately recognised in profit or loss.
When a repayable grant was related to an asset, the entity increases the carrying amount of the asset (or debits the unamortised balance of deferred income – depending on presentation method). The cumulative additional depreciation that would have been recognised in profit or loss to date in the absence of the grant is recognised immediately in profit or loss.
Scope restrictions in IAS 20
The following items are scoped out of IAS 20 (IAS 20.2):
- accounting for government grants in financial statements reflecting the effects of changing prices or in supplementary information of a similar nature,
- government assistance that is provided for an entity in the form of benefits that are available in determining taxable profit or tax loss, or are determined or limited on the basis of income tax liability (e.g. income tax holidays, investment tax credits, accelerated depreciation allowances and reduced income tax rates),
- government participation in the ownership of the entity,
- government grants covered by IAS 41.
Investment tax credits
Interestingly, investment tax credits are excluded from the scope of IAS 12 as well (IAS 12.4), which means that they are effectively not covered by IFRS. However, investment tax credits do fall within the scope of IAS 20 if:
- they are not determined or limited by the income tax liability, or
- they are not available as income tax deduction.
In practice, entities often choose to account for investment tax credits under IAS 12 as a policy choice developed under IAS 8.
For service concession arrangements – see IFRIC 12.
Paragraph IAS 20.39 sets out disclosure requirements relating to government grants and other forms of government assistance. These include accounting policy and presentation methods, nature and form of government grants and other forms of government assistance and unfulfilled conditions and other contingencies attaching to government assistance that has been recognised.
Important thing to note is that disclosure requirements relate also to transactions with government which cannot be distinguished from the normal trading transactions of the entity and those forms of government assistance which cannot reasonably have a value placed on them, such as free technical or marketing advice and the provision of guarantees (IAS 20.36).