Financial Reporting and Ethics - The Institute of Chartered ...

ACCOUNTING STANDARDSThere is no SAS yet on the issues addressed by IAS 20!(a)Governments sometimes transfer economic resources (such ascash and long term assets) to business entities in return for pastor future compliance with certain government conditions. IAS20 prescribes the approach to be adopted in accounting for thesebenefits and how they should be presented in the financialstatements of the benefiting entities. IAS 20 also deals with theaccounting treatment of government assistance with no specificvalue.(b)(c)(d)(e)(f)IAS 20 does not, however, cover accounting for capital grants inthe books of an enterprise, government assistance in terms oftax holidays and treatment of government grant or assistancewhere government is part owner of the business entity.According to IAS 20, grants related to assets are governmentgrants whose primary condition is that an entity qualifying forthem should purchase, construct or otherwise acquire non-currentassets. Subsidiary conditions may also be attached restrictingthe type or location of the assets or the periods during whichthey are to be acquired or held.Government grants relating to income are government grantsother than those related to assets.IAS 20 identifies two methods that could be used to account forgovernment grants, namely capital approach and incomeapproach. Using the capital approach, you are to credit the grantdirectly to shareholders interest, while using the incomeapproach; you are to credit the grant to income statement overone or more period.Presenting the argument in support of the two approaches, IAS20 provides the following in favor of the two:(i) Capital approach:! Government grants are a financing device andshould therefore be recognized in the balancesheet. In the income statement, they would simplyoffset the expenses they are financing.! Grants are not earnings; they are incentives withoutrelated cost, so it would be wrong to take them tothe income statement.(ii) Income approach:! Grants are not contributions from shareholders.Therefore, they should not be credited directly toshareholders interests.93