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For quite some time, it has been unclear whether the provisions of IAS 20 would apply to government assistance aimed at encouraging or supporting business
activities in certain regions or industry sectors, because related conditions may not specifically relate to the operating activities of the entity. Examples of such grants
are government grants that involve transfer of resources to entities to operate in a particular area (i.e., an economically backward area) or a particular industry (i.e., an
agriculture-based industry that, due to its low profitability, may not be a popular choice of entrepreneurs). The Standing Interpretations Committee’s Interpretation, SIC
10, has clarified that “the general requirement to operate in certain regions or industry sectors in order to qualify for the government assistance constitutes such a
condition in accordance with IAS 20.” This Interpretation has set to rest the confusion as to whether such government assistance falls within the definition of
government grants and thus whether the requirements of IAS 20 apply to such government assistance.
RECOGNITION OF GOVERNMENT GRANTS
Criteria for Recognition
Government grants are provided in return for past or future compliance with certain conditions. Thus grants should not be recognized until there is reasonable
assurance that both:
• The entity will comply with the conditions attached to the grant.
• The grant(s) will be received.
Recognition Period
The Standard discusses two broad approaches with respect to the accounting treatment of government grants—the “capital approach” and the “income approach.” It
is fairly evident that IAS 20 is not in favor of the capital approach, which requires a government grant to be directly credited to the shareholders’ equity. Supporting the
income approach, the Standard sets out this rule for recognition of government grants: “Government grants should be recognized as income, on a systematic and
rational basis, over the periods necessary to match them with the related costs.” As a corollary, and by way of abundant precaution, the Standard reiterates that
government grants should not be credited directly to shareholders’ interests.
In setting out this rule, the Standard expands it further and lays down additional principles for recognition of grants under different conditions. These rules are
explained in the case studies.
Principle 1: “Grants in recognition of specific costs are recognized as income over the same period as the relevant expense.”
According to the Standard, grants in recognition of specific costs should be taken to income “over the period which matches the costs” using a “systematic and
rational basis.”
Facts
CASE STUDY 1
Brilliant Inc. received a grant of $60 million to compensate it for costs it incurred in planting trees over a period of five years. Brilliant Inc. will incur such
costs in this manner:
Year Costs
1 $ 2 million
2 $ 4 million
3 $ 6 million
4 $ 8 million
5 $10 million
Total costs thus incurred will aggregate to $30 million, whereas the grant received is $60 million.
Required
Based on the provisions of IAS 20, how would Brilliant Inc. treat the “grant” in its books?
Solution