IAS 20 – Government Grant

IAS 20 Government Grants

IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance

IAS 20 – Government Grants provides guidance on how entities should account for and present government assistance, whether in the form of cash, subsidies, or non-monetary assets. Governments often provide grants to promote investment, employment, or development in key sectors, and IAS 20 ensures that these are properly recognized and disclosed in financial statements.

Definition and Overview

A government grant is assistance in the form of resources (cash or kind) provided by government, government agencies, or similar bodies to an entity in return for past or future compliance with certain conditions related to the entity’s activities. Unlike loans, grants are non-repayable if the conditions are satisfied.

Governments may provide grants to stimulate specific industries, support export activities, encourage innovation, or fund education and infrastructure projects. For instance, in Ghana, the Ghana Enterprises Agency (GEA) provides SME support grants to boost industrialization and entrepreneurship.

Key Characteristics of Grants

  • Purpose-Specific: Grants are usually awarded for targeted objectives, such as energy development, research, or community projects.
  • Non-Repayable: Provided conditions are met, recipients are not required to repay the funds.
  • Conditional: Grants come with stipulations such as meeting performance targets or achieving specific project outcomes.
  • Application-Based: Applicants must justify the need for financial support and demonstrate their ability to meet grant conditions.
  • Accountability: Recipients must often report periodically on fund utilization and outcomes achieved.

Types of Government Grants

  • Grants Related to Assets: These are grants whose primary condition is that an entity should acquire, construct, or improve long-term assets such as machinery or buildings.
  • Grants Related to Income: These are other forms of assistance intended to subsidize operating expenses or compensate for past or future costs.

Conditions for Recognition

IAS 20 requires that a government grant should be recognized only when there is reasonable assurance that:

  • The entity will comply with the attached conditions; and
  • The grant will actually be received.

Merely receiving the grant does not automatically confirm compliance with its terms. The entity must demonstrate its ability and intent to fulfill the related obligations.

Recognition and Measurement

Government grants are recognized in profit or loss over the same periods as the expenses they are intended to compensate. This ensures that both income and related costs are matched in the same reporting period.

Grants received to cover already incurred expenses are recognized in profit or loss in the period in which the grant becomes receivable. Grants received as immediate financial support with no future obligations are recognized in profit or loss immediately.

Non-Monetary Government Grants

Some grants are provided in the form of non-monetary assets such as land, buildings, or equipment. These should be measured at the fair value of the asset received. If fair value cannot be reliably determined, the asset and grant are recorded at a nominal amount (e.g., GHS 1).

IAS 20 permits two alternative presentation methods for grants related to assets:

  • Method 1 – Deduction from Asset Cost: The grant is deducted from the cost of the related asset, and depreciation is based on the net amount.
  • Method 2 – Deferred Income: The grant is recorded as deferred income and recognized systematically in profit or loss over the useful life of the asset.

Example 1 – Capital Grant Recognition

Assume ABC Ltd. receives a government grant of GHS 500,000 on January 1, 2024, to acquire machinery with a useful life of 10 years and no residual value. The entity opts to use the deferred income method.

Journal Entries:

TransactionDebit (GHS)Credit (GHS)
Cash received from grant500,000
Deferred income – Capital grant500,000
Annual amortization (GHS 500,000 ÷ 10 years)50,000
Other income (grant amortization)50,000

Deferred income balance after 3 years:

CalculationAmount (GHS)
Total grant500,000
Less: 3 years’ amortization (50,000 × 3)(150,000)
Deferred income balance (Dec 31, 2026)350,000

Grants related to income are presented in profit or loss in one of two ways:

  • As a separate line item under “Other income”, or
  • As a deduction from the related expense item (e.g., salaries, utilities, or R&D costs).

Repayment of Government Grants

Although most grants are non-repayable, repayment may be required when the recipient fails to meet conditions or misuses funds. Repayments are accounted for based on how the grant was originally recognized:

  • If the grant reduced the cost of an asset, repayment increases the carrying amount of the asset.
  • If recognized as deferred income, repayment reduces the deferred income balance. Any excess repayment is expensed immediately in profit or loss.

Example 2 – Partial Repayment of Grant

XYZ Ltd. received a capital grant of GHS 200,000 on January 1, 2023, to purchase machinery with a 10-year life. The grant was recorded as deferred income. After two years, due to non-compliance, the company was required to repay GHS 120,000 on January 1, 2025.

Solution:

YearDeferred Income Movement (GHS)
Initial recognition (2023)200,000
Less: 2 years’ amortization (20,000 × 2)(40,000)
Deferred income before repayment160,000
Less: repayment (Jan 1, 2025)(120,000)
Deferred income balance after repayment40,000

Journal Entries:

TransactionDebit (GHS)Credit (GHS)
Initial grant receivedCash 200,000Deferred income 200,000
Annual amortization (20,000 × 2 years)Deferred income 40,000Other income 40,000
Repayment of grantDeferred income 120,000Cash 120,000
Check out our post on Events after Reporting Date

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