Lkas20

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Sri Lanka Accounting Standard – LKAS 20

Accounting for Government Grants & Disclosure of Government

Assistance


Learning Outcomes

Identify the Scope of the Standard.

Definitions Government Assistance

Government Grants

Grants Related to Assets

Grants Related to Income

Describe the background and implementation guidance of the

Standard.

Discuss the practical scenarios.


Scope of the Standard

1. This standard shall be applied in accounting for, and in

the disclosure of, government grants and other forms

of government assistant.


Scope of the Standard (cont..)

2. This standard does not deal with;

Special problems arising in accounting for government grants in financial statements reflecting the effects of changing price or 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 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 LKAS 41 Agriculture


Government Assistance

Government assistance is action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria.

Government assistance for the purpose of this Standard does not include benefits provided only indirectly through action affecting general trading conditions

E.g..: provision of infrastructure in development areas or the imposition of trading constraints on competitors.


Government Assistance

Other Benefits

Grants Related To

Asset

Other Forms of Government Assistance

Government Grants

Grants Related To

Income

Non Monetary

Grants


Government Grants

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. Exclude forms of government assistance which cannot reasonably have

a value placed upon them and which cannot be distinguished from the normal trading transactions of the entity.


Recognition Of Government Grants

Government grants, including non-monetary grants at fair value, shall not be recognised until there is reasonable assurance that:

a) The enterprise will comply with the conditions attaching to them;AND

b) The grants will be received

Government grants shall be recognised in profit or loss 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.


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.

Subsidiary conditions may also be attached restricting the type or location of the assets or the periods during which they are to be acquired or held.


Grants Related To Assets (cont..)

Government grants related to assets, including non-monetary grants at fair value, shall be presented in the statement of financial position either;

By setting up the grant as deferred income

By deducting the grant in arriving at the carrying amount of the asset.

[Recognise in the profit and loss on a systematic basis over the useful life of the asset]

OR

[Recognise in the profit and loss over a life of a depreciable assets as a reduced depreciation expenses]

[Recognise in the profit and loss on a systematic basis over the useful life of the asset]


Grants Related To Assets (cont..)

E.g.: In the case of an asset costing, Rs.200 Mn that is to be depreciated

on the straight line basis over a period of ten years that attracts a government grant of Rs.100 Mn

Note:Gross investment is assets and receipts of grants shall be disclosed as separate items in the statement of cash flows regardless of whether or not the grant is deducted from the related asset


Grants Related To Income

Grants related to income are government grants other than those related to assets. Grants related to income are sometimes presented as a credit in the statement of comprehensive income, either;

Separately or under a general heading such as “Other Income”;

They are deducted in reporting the related expense.

Alternatively


Grants Related To Income (cont..)

E.g.:

An organization receives a grant of Rs.30 Mn to defray environment costs over a period of five years.

Environment costs of Rs.15 Mn will be incurred by the organization as follows.

Grant is recognised in the profit and loss as follows

Year 1 2 3 4 5

Cost (Rs. Mn) 5 3 4 1 2

Year 1 2 3 4 5Grant (Rs. Mn) 10

(30 * 5/15)

6(30 * 3/15)

8(30 * 4/15)

2(30 * 1/15)

4(30 * 2/15)


Non-Monetary Government Grants

If a government grant is made in a form other than cash (transfer of a non-monetary assets, such as land or other resources) for the use of entity, IAS 20 says;

“Is it usual to assess the fair value of the non-monetary asset and to account for both grant and asset at that fair value. Although recording both the asset and the grant at a nominal amount is permitted.”


Non-Monetary Government Grants (cont..)

E.g.:

An entity is given a plot of land by a government department in return for providing guaranteed employment to local people as they work with on improving the facilities on that land. The budget for the work says that the total cost of the work is to be Rs.60 Mn to be spent as follows.

The fair value of the land at acquisition is Rs.120 Mn.

We need to recognise the fair value of the land, i.e. the value of the grant, over the duration of the conditions attaching to the grant

Year Grant Recognised (Rs. Mn)

1 120 * (10/60) = 20

2 120 * (10/60) = 20

3 120 * (40/60) = 80

Total 120

Year 1 2 3

Cost (Rs. Mn) 10 10 40


Repayment Of Government Grants

A government grant that becomes payable shall be accounted for as a change in accounting estimate (LKAS 8)

Repayment of a grant related to income shall be applied;1. First, against unamortised deferred credit2. Any excess, shall be recognised immediately in profit or loss

Repayment of a grant related to an asset shall be recognised;1. By increasing the carrying value of the asset, OR2. By reducing the deferred income balance

The cumulative additional depreciation that would have been recognised in profit or loss to date in the absence of the grant shall be recognised immediately in profit or loss.

Note: Consider the possible impairment of the new carrying amount of the asset


Special Cases & Examples Forgivable Loans

A government may give loan that will be forgiven if certain conditions are met.

E.g.:

Entity “X” is launching an airline. Government provides “X” with financing to fund the launch. The financing is in the form of a loan that will be payable by “X” if the business is successful, but the amount advanced will not be repaid if the airline is launched but the business is unsuccessful.

“X” should recognise the amount as liability. The liability would become a government grant if and only if, the venture does not succeed. i.e. when it is reasonably assured that the business is not successful.

When there is reasonable assurance that the entity will meet the terms for forgiveness of the loan

YES

Recognise as LiabilityNO

Recognise as government grant


Special Cases & Examples (cont...)

Government Loans at Below Market Rate of Interest (BMRI)

LKAS 39 requires loans at below market rates to be measured initially at their fair value.

Amount Received

Amount ReceivedThe fair value of the loan on initial

recognition

The fair value of the loan on initial

recognition

Government Grant

Government Grant


Special Cases & Examples (cont...) No future Conditions

A government grant that becomes receivable as compensation for expenses or losses incurred or for the purpose of giving financial support to the entity with no future related costs shall be recognised in profit or loss of the period in which it becomes receivable.

Grants related to a non-depreciable assetsEntity should consider the conditions related to the grant.

E.g.:

An entity is granted land on the conditions that it operates a building on that land.

Recognise land at its fair value together with deferred income.

Deferred income is recognised in profit or loss as the cost of operating the building to meet the conditions of the grant is incurred. (e.g. as the building is depreciated)


Other Forms Of Government Assistance A government assistance which cannot reasonably have a value placed

upon them and transactions with government which cannot be distinguished from the normal transactions of the entity.

E.g.

Free technical advice, Free marketing advice, Provision of guarantee

Disclose the nature, extent and duration of the assistance

Note:

Does not include the provision of infrastructure by improvement to; General transportation Communication Network Irrigation Water reticulation


SIC 10: No Specific Relation To Operating Activities

Issues In some countries government assistance to entities may be aimed at

encouragement or long-term support of business activities either in certain regions or industry sectors.

Conditions to receive such assistance may not be specifically related to the operating activities of the entity.

Examples of such assistance are transfer of resources by government to entities which; Operate in particular industry. Continue operating in recently privatized industries, OR Start or continue to run their business in undeveloped areas.

The issue is whether such government assistance is a “Government Grant” within the scope of LKAS 20?


SIC 10: No Specific Relation To Operating Act. (cont..)

Consensus Government assistance to entities meets the definition of government grants

in LKAS 20, even if there are no conditions specifically relating to the operating activities of the entity other than the requirement to operate in certain regions or industry sectors.

Such grants are therefore not credited directly to shareholders interest and are thus required to be recognised in profit or loss.


Disclosure

1. The accounting policy adopted for government grants, including the methods of presentation adopted in the financial statements;

2. The nature and extent of government grants recognised in the financial statements and an indication of other forms of government assistance from which the entity has benefited;

3. Unfulfilled conditions and other contingencies attaching to government assistance that has been recognised.


Lkas20

Economy & Finance

income grants

assets grants

benefits grants

receipts of grants

government grant of

nonmonetary grants

related asset

forms of government