IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, is a short standard that ICAG’s Chief Examiners keep reporting as poorly answered. In this article you will learn the definitions, the recognition rule, how to account for a grant on an asset, and what to do if the grant must be repaid, using three real ICAG questions.
Grant or 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. It excludes benefits provided only indirectly through general action, such as infrastructure. A government grant is a transfer of resources in return for past or future compliance with conditions relating to operating activities. ICAG’s November 2021 scheme gave a tax rebate for employing fresh graduates and an interest-free export loan as assistance, and a GH¢1 million reforestation receipt, GH¢2 million to settle debt, and a transferred vehicle as grants. The examiner said candidates struggled with assistance.
Recognition and matching
Recognise a grant only when there is reasonable assurance that the entity will comply with the conditions and will receive the grant. Then recognise it in profit or loss over the periods in which the related costs are expensed. A grant related to assets has the acquisition of long-term assets as its primary condition; a grant related to income is any other.
If you want to see this explained visually with worked examples, watch the full lesson on the Profs Accountancy Solutions YouTube channel.
Worked example: Abaa Plc (ICAG Corporate Reporting, July 2024, Q2(b))
Factory cost GH¢62.4 million; grant 25%, maximum GH¢15.6 million; repayable on demand if employment falls below 300 within five years; factory in use 1 April 2022, ten-year life.
| Date | Entry (Option 1, net against asset) | Entry (Option 2, deferred income) |
|---|---|---|
| 31 Mar 2021 | No entry; disclose commitment and grant approval | Same |
| 31 Mar 2022 | Dr PPE 62.4 / Cr Cash 62.4. Dr Grant receivable 15.6 / Cr PPE 15.6 | Dr PPE 62.4 / Cr Cash 62.4. Dr Grant receivable 15.6 / Cr Deferred income 15.6 (1.56 current, 14.04 non-current) |
| 31 Mar 2023 | Receive grant. Depreciation 4.68 (46.8 ÷ 10) | Receive grant. Depreciation 6.24 (62.4 ÷ 10); release deferred income 1.56 |
Net effect on profit in both options: GH¢4.68 million expense. The separate GH¢1.44 million employment grant relates to staff cost, has no repayment provisions, and is recognised as income when received. (Library note: the scheme’s year-end labelling for this item is inconsistent; the cash was received 1 June 2022, so it falls in the year to 31 March 2023.)
Worked example: Sawaleh Ghana Ltd (ICAG Financial Reporting, December 2022, Q2(a)(ii))
GH¢20 million grant on a GH¢160 million plant, ten-year life. Directors proposed crediting GH¢5 million (25%) to profit or loss, following the repayment schedule. The scheme: an asset grant is released over the asset’s life, so GH¢20m ÷ 10 = GH¢2 million to profit or loss, and GH¢18 million in deferred income (GH¢2 million current, GH¢16 million non-current). A liability arises only if the directors intend to sell; if they do, the deferred credit is reversed, and any repayment beyond the balance goes to profit or loss.
What the examiners said
- Nov 2021 (FR): candidates “struggled with government assistance”.
- Dec 2022 (FR): “Many candidates left this question unanswered.”
- July 2024 (CR): over 90% scored below ten out of twenty on the question, and most “wrote theories instead of showing calculations and relevant entries”.
EXAM TIP: When directors propose crediting a grant to profit now, ask what the grant relates to. Asset grant: over the asset’s life. Income grant: match to the cost it compensates. Then show the entries, not just theory.
Conclusion
IAS 20 is small, repeated and under-prepared, which makes it a mark-winner. Know the definitions, the recognition test, the two presentation options, and the repayment rule, and practise the entries.
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