THE FINANCIAL REPORTING WORKSHOP 25 TH TO 29 TH JUNE 2014 HILLTON HOTEL, NAIROBI IAS 20 ACCOUNTING FOR GOVT. GRANTS AND DISCLOSURE OF GOVT. ASSISTANCE.

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THE FINANCIAL REPORTING WORKSHOP

25TH TO 29TH JUNE 2014HILLTON HOTEL, NAIROBI

IAS 20 ACCOUNTING FOR GOVT. GRANTS AND DISCLOSURE OF

GOVT. ASSISTANCE

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Content

1. Definitions2. Key issue on govt. grants3. Types of government grants and

accounting treatment4. Repayment of government grants5. Disclosures of government

assistance and grants.

31. Definitions

Government: Refers to government, government agencies and similar bodies whether local, national or international.

41. Definitions

Government grants:Government grants 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.

51. Definitions

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. For example the provision of technical or marketing and guarantees.

62. Key Issue of Govt. grants

Should we report a government grant as income in the profit or loss for the period or should we report directly in the retained profits outside the profit or loss for the period?


Reporting directly in the income statement is called the income approach and reporting directly in retained profits outside profit or loss is called the capital approach.


Arguments for Income approach are:1.Government grants are receipts form sources other than owners and lenders, so the accounting treatment should be consistent with other incomes.


2.Most government grants have conditions attached. To fulfill these conditions, an entity may incur expenses. Hence it is recommended that the grant be reported as income to match with the related expenses.


3. Income and other taxes are expenses. It is therefore logical to deal also with government grants, which are an extension of fiscal policies, in profit or loss.


Arguments for Capital approach:1. Government grants are a financing device and should be dealt with as such in the statement of financial position rather than be recognized in profit or loss.


2. It is inappropriate to recognize government grants in profit or loss, because they are not earned but represent an incentive provided by government without related costs.

132. Types of govt. grants

1. Grants related to assetsGrants 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. Conditions may also be attached restricting the type or location of the assets and even period of use.


For a grant related to assets an entity can either:1.Transfer the grant initially to a liability account called deferred government grant. Then report as income over the period of use of asset and as conditions are met.


2.Offset the grant against the cost of asset. The asset will be stated net of the grant and depreciation provided on the reduced amount over the period of use of the asset. This second method is “not fair”.


2. Grant related to incomeIAS 20 defines this grant as any other grant not related to an asset. The grant is basically in two forms:1. A lump sum to cover certain operating expenses over a given period of time.


The lump sum is transferred to a liability account and called deferred government grant. It is then reported as income over the period expenses are incurred and as the entity meets the conditions attached to the grant.


2. The grant can be reimbursed after the entity incurs the expense. In this case report as income when the grant becomes receivable and if the conditions attached to the grant are met.


3. Forgivable loanThis is a loan in which the lender undertakes to waive repayment if certain prescribed conditions are met. The loan should be reported initially as a liability and then as income when the loan is forgiven.

203. Repayment of government grant

If the entity does not fulfill the conditions attached to the grant, then the “govt.” may require the part or the whole of the grant to be paid back. The accounting treatment will depend on the type of the grant:


1. If the grant was initially reported as deferred govt. grant then the repayment should first be offset against the balance in the deferred govt. grant. Any additional payment should be expensed.


2. If the repayment relates to a grant that was used to offset the cost of an asset, then increase the carrying amount of the asset with the repayment. Understated depreciation as a result of the offset needs to be expensed.


3. If the grant was initially a reimbursement of expenses (in which case a refund may not happen), then the amount to be paid back is expensed.


4. In case it is a forgivable loan, then the amount payable should be offset against the liability.

254. Government Assistance

Government assistance should be disclosed:Recall, these includes technical or marketing services. Disclosures should include the nature, extent and duration of the assistance that is necessary in order that the financial statements may not be misleading.

264. Government grants - 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 recognized in the financial statements and an indication of other forms of government assistance fromwhich the entity has directly benefited; and


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

THE FINANCIAL REPORTING WORKSHOP 25 TH TO 29 TH JUNE 2014 HILLTON HOTEL, NAIROBI IAS 20 ACCOUNTING FOR GOVT. GRANTS AND DISCLOSURE OF GOVT. ASSISTANCE.

Documents

grants grants

government grants assistance

government agencies

definitionsgovernment

deferred government

key issue of

contentdefinitions key

income approach