Fair value
The price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. [IAS 20.3, IFRS 13 Appendix A].
Non-monetary government A government grant that takes the form of a transfer of a non-monetary
grant
asset, such as land or other resources, for the use of the entity. [IAS 20.23].
Biological asset
A living animal or plant. [IAS 41.5].
Bearer plant
A bearer plant is a living plant that: [IAS 41.5]
(a) is used in the production or supply of agricultural produce;
(b) is expected to bear produce for more than one period; and
(c) has a remote likelihood of being sold as agricultural produce, except
for incidental scrap sales.
Costs to sell
The incremental costs directly attributable to the disposal of an asset,
excluding finance costs and income taxes. [IAS 41.5].
2
SCOPE OF IAS 20
IAS 20 applies in accounting for, and in the disclosure of, government grants and in the
disclosure of other forms of government assistance. [IAS 20.1]. The distinction between
government grants and other forms of government assistance is important because the
standard’s accounting requirements only apply to the former.
The standard regards the term ‘government’ to include government agencies and similar
bodies whether local, national or international. [IAS 20.3].
2.1 Government
assistance
Government assistance is defined as action by government designed to provide an
economic benefit to an entity or range of entities qualifying under certain criteria.
[IAS 20.3]. Government assistance takes many forms ‘varying both in the nature of the
assistance given and in the conditions which are usually attached to it’. [IAS 20.4].
However, such assistance does not include benefits provided indirectly through action
affecting general trading conditions, such as the provision of infrastructure (e.g.
transport, communications networks or utilities) in development areas or that are
available for the benefit of an entire local community or the imposition of trading
constraints on competitors (see 3.7 below). [IAS 20.3, 38].
2.2 Government
grants
Government grants are a specific form of government assistance. Under IAS 20,
government grants represent assistance by government in the form of transfers of
resources to an entity in return for past or future compliance with certain conditions
relating to the operating activities of the entity. [IAS 20.3]. The standard identifies the
following types of government grants:
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• grants related to assets are government grants whose primary condition is that an
entity qualifying for them should purchase, construct or otherwise acquire long-
term assets. Subsidiary conditions may also be attached restricting the type or
location of the assets or the periods during which they are to be acquired or held;
and
• grants related to income are government grants other than those related to assets.
[IAS 20.3].
Government grants exclude:
(a) assistance to which no value can reasonably be assigned, e.g. free technical or
marketing advice and the provision of guarantees; and
(b) transactions with government that cannot be distinguished from the normal trading
transactions of the entity, e.g. where the entity is being favoured by a government’s
procurement policy. [IAS 20.3, 35].
Such excluded items are to be treated as falling only within the standard’s disclosure
requirements for government assistance (see 3.7 below).
Loans at below market interest rates are also deemed to be a form of government
assistance and the standard requires entities to measure and record the benefit of the
below-market rate of interest in accordance with IFRS 9 – Financial Instruments.
[IAS 20.10A]. The accounting consequences are discussed at 3.4 below.
In public-to-private service concession arrangements a government may give certain
assets to the operator of the service concession. If the entire arrangement is to be
accounted for under IFRIC 12 – Service Concession Arrangements – the assets are not
a government grant. [IFRIC 12.27]. Service concessions are discussed in Chapter 26.
While grants of emission rights and renewable energy certificates typically meet the
definition of government grants under IAS 20, the rights and certificates themselves are
intangible assets. Accounting for emission rights and renewable energy certificates is
discussed in Chapter 17 at 11.2 and 11.3.
2.2.1
Grants with no specific relation to operating activities (SIC-10)
SIC-10 addresses the situation in some countries where government assistance is
provided to entities, but without there being any conditions specifically relating to their
operating activities, other than to operate in certain regions or industry sectors. It
determined that such forms of government assistance are to be treated as government
grants. [SIC-10.3]. This ruling was made to avoid any suggestion that such forms of
assistance were not governed by IAS 20 and could be credited directly to equity.
2.3 Scope
exclusions
IAS 20 does not deal with:
(a) accounting for government grants if the entity prepares financial information that
reflect the effects of changing prices, whether as financial statements or in
supplementary information of a similar nature;
(b) government
assistance in the form of benefits that are available in determining
taxable profit or loss or are determined or limited on the basis of income tax
Government
grants
1777
liability, e.g. income tax holidays, investment tax credits, accelerated depreciation
allowances and reduced income tax rates;
(c) government participation in the ownership of the entity; and
(d) government grants covered by IAS 41. [IAS 20.2].
The accounting treatment of government assistance either provided by way of a
reduction in taxable profit or loss; or determined or limited according to an entity’s
income tax liability is discussed in the context of investment tax credits at 2.3.1 below
and in Chapter 29 at 4.3.
The reason for exclusion (d) above is that the presentation permitted by IAS 20 of
deducting government grants from the carrying amount of the asset (see 4.1 below) was
considered inconsistent with a fair value model, which can be used in the measurement
of biological assets. [IAS 41.B66]. The IASB decided to deal with government grants related
to agricultural activity in IAS 41 rather than initiate a wider review of IAS 20. [IAS 41.B67].
The requirements of IAS 41 in relation to government grants are set out at 5 below and
in Chapter 38 at 3.3.
There are no similar exclusions for government grants in IAS 40 – Investment Property
– which includes a similar fair value model (see Chapter 19), nor was IAS 20 revised to
deal with the matter. This is probably because government grants in the investment
property sector are relatively rare compared to the agricultur
al sector. However,
governments do on occasion provide grants and subsidised loans to finance the
acquisition of social housing that meets the definition of investment property. The
discount on these subsidised loans is now considered to be a government grant, as
described at 3.4 below.
2.3.1
Investment tax credits
IAS 20 excludes from its scope government assistance either provided by way of a
reduction in taxable profit or determined or limited according to an entity’s income tax
liability, citing income tax holidays, investment tax credits, accelerated depreciation
allowances and reduces income tax rates as examples. [IAS 20.2(b)]. IAS 12 – Income
Taxes – states that it does not deal with the methods of accounting for government
grants or investment tax credits, although any temporary differences that arise from
them are in the scope of the standard. [IAS 12.4]. Accordingly, if government assistance is
described as an investment tax credit, but it is neither determined or limited by the
entity’s income tax liability nor provided in the form of an income tax deduction, the
requirements of IAS 20 apply.
This raises the question as to how an entity should account for those forms of
government incentives for specific kinds of investment that are delivered through the
tax system. Sometimes, a tax credit is given as a deduction from the entity’s income tax
liability, and sometimes as a deductible expense in computing the liability. Entitlement
to assistance can be determined in a variety of ways. Some investment tax credits may
relate to direct investment in property, plant and equipment. Other entities may receive
investment tax credits relating to research and development activities. Some credits
may be realisable only through a reduction in current or future income taxes payable,
while others may be settled directly in cash if the entity does not have sufficient income
1778 Chapter 25
taxes payable to offset the credit within a certain period. Access to the credit may be
limited according to the total of all taxes paid (i.e. including taxes such as payroll and
sales taxes remitted to government in addition to income taxes). There may be other
conditions associated with receiving the investment tax credit, for example with respect
to the conduct and continuing activities of the entity, and the credit may become
repayable if ongoing conditions are not met.
The fact that both IAS 20 and IAS 12 use the term ‘investment tax credits’ to describe
items excluded from their scope requires entities to carefully consider the nature of
such incentives and the conditions attached to them in order to determine which
standard the particular tax credit is excluded from and, therefore, whether they fall in
the scope of IAS 20 or IAS 12.
In our view, such a judgement would be informed by reference to the following factors,
as applied to the specific facts and circumstances relating to the incentive:
Feature of credit
Indicator of IAS 20 treatment
Indicator of IAS 12 treatment
Method of realisation
Directly settled in cash where
Only available as a reduction
there are insufficient taxable
in income taxes payable (i.e.
profits to allow credit to be fully
benefit is forfeit if there are
offset, or available for set off
insufficient income taxes
against payroll taxes, sales taxes
payable). However, the longer
or amounts owed to government
the period allowed for
other than income taxes payable.
carrying forward unused
credits, the less relevant this
indicator becomes.
Number of conditions not related
Many
None or few
to tax position (e.g. minimum
employment, ongoing use of
purchased assets)
Restrictions as to nature of
Highly specific
Broad criteria encompassing
expenditure required to receive the
many different types of
grant
qualifying expenditure
Tax status of grant income
Taxable
Not taxable
In group accounts, in which entities from a number of different jurisdictions may be
consolidated, it may be desirable that all ‘investment tax credits’ should be
consistently accounted for, either as an IAS 20 government grant or as an income
tax under IAS 12. However, the judgment as to which standard applies is made by
reference to the nature of each type of investment tax credit and the conditions
attached to it. This may mean that the predominant treatment in a particular
jurisdiction for a specific type of investment tax credit has evolved differently from
the consensus in another jurisdiction for what could appear to be a substantially
similar credit. We believe that, in determining whether the arrangement is of a type
that falls within the scope of IAS 20 or IAS 12, an entity should consider the
following factors in the order listed below:
• the predominant local determination as to whether a specific credit in the relevant
tax jurisdiction falls within the scope of IAS 20 or IAS 12;
Government
grants
1779
• if there is no predominant local consensus, the group-wide approach to
determining the standard that applies to such a credit should be applied; and
• in the absence of a predominant local consensus or a group-wide approach to
making the determination, the indicators listed in the table above should
provide guidance.
This may mean that an entity operating in a number of territories adopts different
accounting treatments for apparently similar arrangements in different countries, but it
at least ensures a measure of comparability between different entities operating in the
same tax jurisdiction.
The treatment of investment tax credits accounted under IAS 12 is discussed in
Chapter 29 at 4.3.
3
RECOGNITION AND MEASUREMENT
3.1
General requirements of IAS 20
IAS 20 requires that government grants should be recognised only when there is
reasonable assurance that:
(a) the entity will comply with the conditions attaching to them; and
(b) the grants will be received. [IAS 20.7].
The standard does not define ‘reasonable assurance’, which raises the question of
whether or not it means the same as ‘probable’ (or ‘more likely than not’ [IAS 37.15]).
When developing IAS 41 the Board believed that recognition of government grants
when there is ‘reasonable assurance’ was different from the alternative approaches
it considered for biological assets, being recognition when ‘it is probable that the
entity will meet the conditions attaching to the government grant’ and ‘the entity
meets the conditions attaching to the government grant’. [IAS 41.B70]. The Board also
noted that ‘it would inevitably be a subjective decision as to when there is
reasonable assurance that the conditions are met and that this subjectivity could lead
to inconsistent income recognition.’ [IAS 41.B69]. Neve
rtheless, we would not expect
an entity to recognise government grants before it was at least probable that the
entity would comply with the conditions attached to them (even though these
conditions may relate to future performance and other future events) and that the
grants would be received. The standard notes that receiving a grant does not of itself
provide conclusive evidence that the conditions attaching to the grant have been or
will be fulfilled. [IAS 20.8].
After an entity has recognised a government grant, any related contingent liability or
contingent asset should be accounted for under IAS 37 – Provisions, Contingent
Liabilities and Contingent Assets. [IAS 20.11].
Accounting for government grants is not affected by the manner in which they are
received, i.e. grants received in cash, as a non-monetary amount, or forgiveness of a
government loan, are all accounted for in the same manner. [IAS 20.9].
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3.2 Non-monetary
grants
A government grant in the form of a transfer of a non-monetary asset, such as land or
other resources, which is intended for use by the entity, is usually recognised at the fair
value of that asset. [IAS 20.23]. Fair value is defined in IFRS 13 – Fair Value Measurement
– and applies when another IFRS requires or permits fair value measurement, including
IAS 20. [IFRS 13.5, IAS 20.45]. Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. [IAS 20.3, IFRS 13.9]. The requirements of IFRS 13 are discussed in
Chapter 14.
An alternative of recognising such assets, and the related grant, at a nominal amount
is permitted. [IAS 20.23]. This alternative is available even if the fair value of the asset
differs materially from the nominal amount. Under IAS 8 – Accounting Policies,
Changes in Accounting Estimates and Errors – an entity should select an accounting
policy and apply it consistently to all non-monetary government grants. [IAS 8.13].
3.3 Forgivable
loans
A forgivable loan from government, the repayment of which will be waived under
certain prescribed conditions, [IAS 20.3], is to be treated as a government grant when
there is reasonable assurance that the entity will meet the terms for forgiveness of the
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 350
