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The Standard does not favor either option. It acknowledges the reasoning given in support of each approach by its supporters. The Standard considers both methods
to be acceptable. However, it does recommend disclosure of the grant for a proper understanding of the financial statements. The Standard recognizes that the
disclosure of the effect of the grants on any item of income or expense may be appropriate.
REPAYMENT OF GOVERNMENT GRANTS
When a government grant becomes repayable, for example, due to nonfulfillment of a condition attached to it, it should be treated as a change in estimate under IAS
8 and accounted for prospectively (as opposed to retrospectively).
Repayment of a grant related to income should
• First be applied against any unamortized deferred income (credit) set up in respect of the grant
• Be recognized immediately as an expense, to the extent that the repayment exceeds any such deferred income (credit), or in the case where no deferred credit
exists
Repayment of a grant related to an asset:
• Should be recorded by increasing the carrying amount of the asset or reducing the deferred income balance by the amount repayable
• In the case where, the cumulative additional depreciation that would have been recognized to date as an expense in the absence of the grant should be
recognized immediately as an expense
When a grant related to an asset becomes repayable, it would become incumbent upon the entity to assess whether any impairment in value of the asset (to which
the repayable grant relates) has resulted. For example, a bridge is being constructed through funding from a government grant. During the construction period, because
of nonfulfillment of the terms of the grant, the grant became repayable. Because the grant was provided to assist in the construction, it is possible that the entity may
not be in a position to arrange funds to complete the project. In such a circumstance, the asset is impaired and may need to be written down to its recoverable value, in
accordance with IAS 36.
GOVERNMENT ASSISTANCE
Government assistance includes government grants. IAS 20 deals with both accounting and disclosure of government grants but only with disclosure requirements
of government assistance. Thus government assistance comprises government grants and other forms of government assistance (i.e., those not involving transfer of
resources).
Excluded from the government assistance are certain forms of government benefits that cannot reasonably have a value placed on them, such as free technical or
other professional advice. Also excluded from government assistance are government benefits that cannot be distinguished from the normal trading transactions of the
entity. The reason for the second exclusion is obvious: Although the benefit cannot be disputed, any attempt to segregate it would necessarily be arbitrary.
DISCLOSURES
IAS 20 prescribes these three disclosures:
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 from which the
entity has directly benefited
3. Unfulfilled conditions and other contingencies attached to government assistance that has been recognized
MULTIPLE-CHOICE QUESTIONS
1. In the case of a nonmonetary grant, which of the following accounting treatments is prescribed by IAS 20?
a. Record the asset at replacement cost and the grant at a nominal value.
b. Record the grant at a value estimated by management.
c. Record both the grant and the asset at fair value of the nonmonetary asset.
d. Record only the asset at fair value; do not recognize the fair value of the grant.
2. In the case of grants related to an asset, which of these accounting treatments (balance sheet presentation) is prescribed by IAS 20?
a. Record the grant at a nominal value in the first year and write it off in the subsequent year.
b. Either set up the grant as deferred income or deduct it in arriving at the carrying amount of the asset.
c. Record the grant at fair value in the first year and take it to income in the subsequent year.
d. Take it to the statement of comprehensive income and disclose it as an extraordinary gain.
3. In the case of grants related to income, which of these accounting treatments is prescribed by IAS 20?
a. Credit the grant to “general reserve” under shareholders’ equity.
b. Present the grant in the statement of comprehensive income as “other income”’ or as a separate line item, or deduct it from the related expense.
c. Credit the grant to “retained earnings” on the balance sheet.
d. Credit the grant to sales or other revenue from operations in the statement of comprehensive income.