IAS 20 provides guidance on how entities should account for benefits received from government grants. Government grants, also referred to as subsidies or subventions, are transfers of resources provided by the government to the reporting entity. This aid is given in exchange for the entity’s past or future compliance with certain conditions linked to its operational activities. Commonly, such grants are incentives for activities that wouldn’t be commercially viable without such support. These grants also play a vital role in supporting businesses during challenging times, such as the Covid-19 pandemic.
Certain transactions with governments that are indistinguishable from an entity’s regular trading activities, as well as forms of government assistance without a quantifiable value, aren’t classified as grants. However, they should still be disclosed as government assistance (IAS 20.35-36).
IAS 20 also sets out disclosure requirements for other forms of government assistance, which refers to government actions offering economic benefits to specific entities that meet set criteria. SIC Interpretation 10 clarifies that support for long-term business activities in certain areas or sectors is covered by IAS 20. However, general governmental support, like public infrastructure or trade restrictions on competitors, is outside its scope.
The term ‘government’ in IAS 20 encompasses central and local governments as well as various governmental agencies.
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Recognition of government grants
Government grants are recognised when there is a reasonable assurance that (IAS 20.7):
- The entity will comply with the grant’s conditions, and
- The grant will be received.
While the term ‘reasonable assurance’ isn’t explicitly defined in IFRS, in practice, a probability exceeding 50% is often deemed sufficient.
Receiving a grant in advance doesn’t confirm that all conditions have or will be met (IAS 20.8). Hence, certain grants are treated as liabilities until there’s reasonable assurance of compliance with all conditions. Once recognised, any related contingent asset or liability is handled under IAS 37 (IAS 20.11).
Grants are recognised in profit or loss on a systematic basis during the periods when the corresponding costs they’re compensating for are also recognised (IAS 20.12). If tied to depreciable assets, they’re recognised proportionally with the asset’s depreciation (IAS 20.17). Entities might often require significant judgement when allocating grants to specific reporting periods. If a grant compensates for prior expenses or serves as an immediate financial support (with no related costs expected in the future), it’s recognised as income in the period when it becomes receivable (IAS 20.20-22).
Non-monetary grants are recognised at fair value, although IAS 20.23 allows them to be recognised at a nominal amount, which might be materially different from the fair value, leading to criticisms of this alternative.
Forgivable loans and below-market interest rates
A forgivable loan is considered a government grant if there’s a reasonable assurance that the entity will meet the forgiveness terms (IAS 20.10). Until that assurance is established, such a loan is recognised as a liability at its fair value under IFRS 9. Any difference between cash proceeds and the liability’s fair value is recognised as a government grant (IAS 20.10A). Refer to Interest-free loans or loans at below-market interest rate for further insights.
The IFRS Interpretations Committee deliberated on the treatment of cash received from a government to fund an R&D project. The main question was whether this cash should be recognised as a liability (akin to a forgivable loan) or as income (reflecting it as a government grant). The repayment terms state that the cash must be returned in the event of project commercialisation, potentially doubling the initial cash amount. If not commercialised, rights to the research are to be transferred to the government. The Committee clarified that such a receipt constitutes a financial liability under IAS 32.20(a) due to the conditional terms of cash repayment or research rights transfer. The loan proceeds don’t qualify as a forgivable loan since the government hasn’t committed to waiving repayment but rather stipulates repayment in cash or rights transfer.
Presentation of grants related to assets
Asset-related grants are those government grants where the primary condition is that the qualifying entity should purchase, construct, or acquire long-term assets (IAS 20.3). There are two methods of presenting such grants in the statement of financial position allowed by IAS 20.24-27:
- Presenting as deferred income.
- Deducting the grant from the carrying amount of the related asset.
IAS 20, which was introduced in 1983, has largely remained unchanged in its core requirements. The IASB has acknowledged that deferring the P/L recognition of unconditional grants can lead to recognising a liability (deferred income) that isn’t an actual obligation or can understate the recognised assets. For a detailed history and development of IAS 20 and its inconsistencies with the Conceptual Framework, see Accounting Miscellany.
Presentation of grants related to income
Income-related grants, as defined by IAS 20.3, include all grants other than those related to assets. IAS 20.29-31 outlines two methods to present these grants:
- Separately from related expenses (e.g., as other income).
- As a deduction when reporting the related expense.
Repayment of government grants
If a grant, previously deemed non-repayable due to expected compliance with attached conditions, becomes repayable, it should be accounted for as a change in accounting estimate (IAS 20.32).
For income-related repayable grants, firstly, the unamortised balance of deferred income is debited. The remaining balance that is repayable is immediately recognised in profit or loss. For asset-related repayable grants, the carrying amount of the asset is increased, or the unamortised balance of deferred income is debited. Any additional depreciation that would have been recognised in the absence of the grant is immediately reflected in profit or loss.
Scope restrictions
IAS 20.2 specifies certain items that aren’t covered by IAS 20, including:
- Accounting for government grants in financial statements reflecting the effects of changing prices.
- Benefits affecting taxable profit or determined on the basis of income tax liability (e.g., investment tax credits, tax holidays or reduced tax rates).
- Government participation in the ownership of the entity.
- Government grants covered by IAS 41.
Surprisingly, IAS 12 also excludes investment tax credits (IAS 12.4), rendering them effectively not governed by IFRS. In practice, entities often account for these credits under IAS 12 as a policy choice. However, these credits do fall under IAS 20 if they’re neither determined on the basis of income tax liability nor available as an income tax deduction.
For service concession arrangements, refer to IFRIC 12.
Disclosure
IAS 20.39 outlines disclosure requirements related to government grants and other forms of government assistance.