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VIRTUAL COACHING CLASSES ORGANISED BY BOS, ICAI
FINAL LEVEL
PAPER 1: FINANCIAL REPORTING
TOPIC: IND AS 20 ACCOUNTING FOR GOVERNMENT GRANTS & DISCLOSURE OF GOVERNMENT ASSISTANCE
The objective of this Standard is to prescribe the accounting treatment for government grants and disclosures relating to government grants and other forms of government assistance.
Scope
■ Applicable to Govt grants and other form of Govt Assistance except:
This Standard does not apply to:
■ Income Tax related assistance e.g. Income Tax holidays
■ Biological Asset (Ind AS 41)
■ Government participation
■ Accounting of govt grant reflecting
the effect for changing prices
Definition – Govt & Govt Grants
Government: refers to
the Central Government,
State Government,
Government agencies
and similar bodies,
whether local, national or
international
Government grants are
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.
Government Grants exclude those govt assistance which can not have a value &
cannot distinguished from normal trading transactions.
Government Grants
Grants received from Govt against reimbursement of
expense/against expenses/fulfilment of certain conditions
Apply Ind AS 20
Examples of Government Grants
■ Subsidy given by the govt for procurement of material
■ Free allotment of Land by the government
■ Forgivable Loan is government grant when entity meets terms of forgiveness of loan.
■ Interest free loan or at concessional rate
Government Grants should not be recognised until there is reasonable assurance that:
Recognition
Entity will
comply
with
conditions
Grants will
be
received
Recognize
Govt Grant
Recognised in Profit & Loss for the period in which expense for which grant received had been recognised on a systematic manner.
Related Contingent Liability or Contingent Asset is treated in accordance with Ind AS 37
Accounting
Case Study – Recognition
Case Study – Recognition
Case Study – Recognition
Non-Monetary Grant
Case Study – Grants related to Non-Monetary Assets
Presentation
Grants related to Assets
Either presented
in BS by setting
up grant as
“Deferred income”
Or, Deducted
from the carrying
value of the
asset
Grants related to Income
Either presented
separately as
“Other Income”
under P&L
Or, Deducted in
reporting the
related expense
Case Study – Grants related to Assets
Alok Limited receives 15 million from a local council to set up in a
particular area. The money is paid specifically to contribute to the 80
million cost of a new factory. The factory is to be depreciated over
40 years.
Required:
Show how the items will be dealt with in the statement of profit or
loss and Balance Sheet at the end of Year 1 if the grant is to be
treated as:
■ deferred income;
■ a reduction in the carrying amount of the factory.
Solution – Grants related to Assets
(a) Deferred income Approach
Statement of profit or loss Rs’ 000
Depreciation of factory (2,000)
Government grant 375
Balance Sheet Rs’ 000
Tangible non-current assets
Property (80 million – 2 million) 78,000
Non-current liabilities:
Deferred income 14,250
Current liabilities:
Deferred income 375
Solution – Grants related to Assets
(b) Reduction in carrying amount
Statement of profit or loss Rs’ 000
Depreciation of factory
((80 million – 15 million) ÷ 40) (1,625)
Balance Sheet Rs’ 000
Tangible non-current assets
Property (65,000,000 – 1,625,000) 63,375
Case Study - Grants related to Income
The Govt of Haryana reimbursed the OPD expense of Kedanta
Hospital which is treating COVID patient amounting to Rs. 1 Crore
pertaining to FY 2019-20. Advise the treatment of such support from
the government.
Analysis:
Such amount is required to be recognized in P&L either as an Other
Income or it will be reduced from OPD expenses.
Case Study - Grants related to Income
Repayment of Government Grants
Accounted as change in Accounting Estimate
Grant Related to Income
- First, Against unamortised
deferred Credit
- Then, Balance to be
recognised immediately in P&L
Grants Related to Asset
Repayment of a grant related to
an asset shall be recognised by
increasing the carrying amount
of the asset or reducing the
deferred income balance by the
amount repayable, as the case
may be. The cumulative
additional depreciation that
would have been recognised in
P&L to date in the absence of
the grant shall be recognised
immediately in P&L.
Case Study – Repayment of Grant
Below facts are given for AG Ltd and CFO needs an advise for treatment of
refund in case of both the methods.
Cost of Machinery A = Rs 15,00,000
Life of machinery A = 5 years
Government grant received = Rs 5,00,000
Later on Rs 5,00,000 is required to be repaid to the government in year 2.
Solution – Repayment of Grant
Method 1:
Cost of Machinery A= Rs 15,00,000
Deferred income = Rs 5,00,000
Depreciation charged in year 1 = 15,00,000 / 5 = Rs 3,00,000
Deferred income credited in P&L = Rs 5,00,000 / 5 = Rs 1,00,000
Balance of Machinery A at the end of year 1 = Rs 12,00,000
Deferred income balance at the end of year 1 = Rs 4,00,000
In year 2, Rs 5,00,000 is to be returned back to the government and accordingly, Rs 4,00,000
will be reduced from deferred income balance and Rs 1,00,000 will be debited in P&L.
Balance of Machinery A at the end of year 2 = 12,00,000 – 3,00,000 = Rs 9,00,000
Solution - Repayment of Grant
Method 2:
Cost of Machinery A = Rs 15,00,000 – Rs 5,00,000 = Rs 10,00,000
Closing balance at the end of year 1 = Rs 10,00,000 – Rs 2,00,000 = Rs 8,00,000
Since Rs 5,00,000 was paid back to the government, this amount will be added to the cost of
machinery.
Therefore, balance in Machinery A= 8,00,000 + 5,00,000 = 13,00,000
Depreciation p.a. in absence of government grant= 15,00,000 / 5 = Rs 3,00,000
Depreciation to be charged at the end of year 2
= (3,00,000 X 2) – 2,00,000 (already charged in year 1) = Rs 4,00,000
Carrying value of Machinery A at the end of Year 2 after all adjustments
= 13,00,000 – 4,00,000 = Rs 9,00,000
Loans from Government
Forgivable Loan
A forgivable loan from government, for which the government has undertaken to waive repayment under certain prescribed conditions, is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.
Loans from Government
Loan at a below-market rate of interest
The benefit of a government loan at a below-market rate of interest is treated as a government grant.
The loan shall be recognized and measured in accordance with Ind AS 109 Financial Instruments.
The benefit of the below-market rate of interest shall be measured as the difference between the initial carrying value of the loan determined in accordance with Ind AS 109 and the proceeds received.
Government Assistance
Assistance which cannot reasonably have a value placed on it. Transactions which cannot be distinguished from normal trading transactions. E.g. Government procurement policy resulting in a portion of the entity’s sales. Action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria. E.g. Technical or marketing advice, Government procurement. Disclosure if necessary so that the financial statements are not misleading.
Disclosure Requirements
Disclosures
Accounting policy for measurement and Presentation.
Nature and Extent of Grants recognised in FS.
Indications of Other Form of Government Assistance.
Unfulfilled Conditions & Other Contingencies attached to the amount recognised.
30
Comparison –Ind AS Vs AS
Particulars Ind AS 20 AS 12
Govt Assistance
Ind AS 20 also deals with Government assistance
However, AS 12 does not deal with such government assistance.
Non Monetary Assets
There is an option to value non monetary assets received as a government grant at fair value or nominal value.
Non-monetary assets, given at a concessional rate should be accounted for at their acquisition cost and if given free should be recorded at a nominal value.
Govt grants & promoter’s contribution
Credit to shareholder’s funds is prohibited
Certain government grants are like promoter’s contribution and hence must be credited to capital reserve, thereby treating it as a part of shareholder’s funds.
Forgivable Loans
The guidance for inclusion of forgivable loan as government grant is specified under Ind AS 20.
No such guidance
Loans at below market rates
Loans received from a government that have a below-market rate of interest should be recognized and measured in accordance with Ind AS 109