International Accounting Standard 20 covers government grants issued to corporations and other non-governmental entities. The standard establishes accounting policy and financial statement disclosure for most governmental grants. IAS 20 also addresses other forms of government assistance and dictates the necessity for their disclosure. However, not all types of government assistance are covered by IAS 20. The standard does not address grants related to agricultural production (IAS 41), assistance provided through the use of tax benefits (IAS 12), and partially government ownership of corporations (not considered a form of grant or assistance).
IAS 20 History
IAS 20 was first issued in April of 1983, and was made effective the following year on January 1, 1984. The standard first started with its Exposure Draft in 1981, and became the official IAS 20: Accounting for Government Grants and Disclosure of Government Assistance two years later. It was not until May of 2008 when the first amendments to the standard were made. IAS 20 was revised to align more appropriately with IAS 39 (Financial Instruments: Recognition and Measurement) regarding loans with below market-rate interest levels.
Government assistance involves measures taken by government bodies designed to provide a beneficial economic impact specific to a business enterprise or a range of business entities that qualify under certain criteria. The types of government assistance include grants, forgivable loans, and non-monetary forms of assistance. Government grants are usually provided with the intention to encourage business enterprises to embark on business activities they would not have normally taken. These grants are considered “a transfer of resources” provided by the government to an unrelated business entity. The transfer of these resources can be either monetary or nonmonetary. There are a few criteria that must be met to qualify as a government grant. First, government grants must be provided to entities in return for past or future compliance with conditions relating to the operating activities of the enterprise. They must also be provided by either local, national, or international government bodies and government agencies. Government grants do not include assistance that cannot be reasonably valued. They also do not include transactions with governments that are related to the normal business operations of the receiving entity. Forgivable loans may be classified as a government grant if there is reasonable assurance that the business entity will meet the terms of forgiveness under the loan agreement. Grants are either classified as grants related to assets or grants related to income. When the primary condition of a government grant is to purchase or construct a long term asset, it is classified as a grant related to an asset. There may also be secondary positions in grants related to assets such as type of long term asset, or the location of the long term assets. All other government grants that are not “grants related to assets” are classified as grants related to income.
Under IFRS, International Accounting Standard 20 is the relevant guidance dealing with accounting treatment for entities who receive grants and assistance from the government. The standard also provides authoritative guidance on financial statement presentation and disclosure. IAS 20 handles relevant accounting and reporting issues arising in relation with such grants. Some aspects not covered by IAS 20 involve government assistance in the form of benefits to determine taxable income and also does not apply to grants covered by the agriculture standard.
Revenue Recognition & Examples
IAS 20 provides relevant guidance when dealing with the revenue recognition of government grants and assistance. Government grants are a transfer of resources in return for past or future compliance with specific identified conditions. Under these circumstances, the revenue from grants should not be recognized until there is reasonable assurance that both (1) the business entity will comply with the conditions attached to the grant, and (2) the grant will be received. (Wiley) There is no set threshold for reasonable assurance under this standard. However, revenue recognition criteria for income requires a sufficient degree of certainty. It is important that both of these criteria are met in order to recognize revenue. For example, just because an entity has received the grant does not mean that they have complied with all conditions of the grant. Under these circumstances, a business entity would not be able to recognize revenue until there was reasonable assurance that all conditions had been met.
There are has been much debate over many issues regarding the revenue recognition of government grants and assistance. One example would be the treatment for forgivable loans. There has also been discussion regarding whether the terms of forgiveness on the loan should be recognized when the loan is received as opposed to when there is reasonable assurance that the business entity will meet the terms of forgiveness set forth in the loan agreement.
There are two primary approaches for the accounting treatment of government grants provided by IAS 20. These two approaches are known as the capital approach and the income approach. IAS 20 does not endorse the capital approach due to the fact that it advocates crediting grants to shareholders’ equity. IAS 20 fully endorses the income approach. Under the income approach grants should be recognized as income, on a systematic and rational basis over the periods necessary to match them with the related costs. IAS 20 established rules for recognition of grants under different conditions. One of these includes grants that are in recognition of specific costs to be recognized as income over the same period as the relevant expenses. The following problem will provide an example of such a situation.
Example of a Grant Received in Recognition of Specific Costs Bulldawg Corp. received a government grant worth €20 million to help pay environmental costs for four years. The cost are as follows: Year 1: €4 million; Year 2: €3 million; Year 3: €2 million; Year 4: €1 million. The total costs are €10 million. The grant will be recognized ...