International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 352
from that in which it is taxed, gives rise to a temporary difference that should be
accounted for in accordance with IAS 12 (see Chapter 29). The example below
illustrates that the interpretation of the matching requirement in the standard is not
always straightforward.
Example 25.4: Grant associated with investment property
The government provides a grant to an entity that owns an investment property that is let for social housing.
The grant is intended to compensate the entity for the lower rent it will receive when the property is let as
social housing at below market rates. That means that future rental income will be lower over the period of
the lease which, at the same time, reduces the fair value of the investment property.
If the entity accounts for the investment property under the IAS 40 cost model then it could be argued that
the government grant should be recognised over the term of the lease to offset the lower rental income.
Alternatively, if the entity applied the IAS 40 fair value model then the cost being compensated is the
reduction in fair value of the investment property. In that case it is more appropriate to recognise the benefit
of the government grant immediately.
If, instead of a grant, the government subsidises a loan used by the entity to acquire the property, then the
loan will be brought in at its fair value. The difference between the face value and fair value will be a
government grant and the arguments above will apply to its treatment.
If the government imposes conditions, e.g. that the building must be used for social housing for ten years,
this does not necessarily mean that the grant should be taken to income over that period. Rather, it should
apply a process similar to that in Example 25.1 above. The entity assesses whether there is reasonable
assurance that it will meet the terms of the grant and, to that extent, treat an appropriate amount as a grant as
above. This should be reviewed at each reporting date and adjustments made if it appears that the conditions
will not be met (see 3.6 below).
In the face of the problems described above of attributing a grant to related costs, it is
difficult to offer definitive guidance; entities will have to make their own judgements as
to how the matching principle is to be applied in light of the specific facts and
circumstances of the case. The only overriding considerations are that the method
should be systematically and consistently applied, and that the policy adopted in respect
of both capital and revenue grants, if material, should be adequately disclosed.
1786 Chapter 25
3.5.2
The period to be benefited by the grant
IAS 20 cautions that care is needed in identifying the conditions giving rise to the costs
and expenses, which determine the periods over which the grant will be earned.
[IAS 20.19]. The qualifying conditions that have to be satisfied are not necessarily
conclusive evidence of the period to be benefited by the grant. For example, certain
grants may become repayable if assets cease to be used for a qualifying purpose within
a certain period; notwithstanding this condition, the grant should be recognised over
the whole life of the asset, not over the qualifying period.
3.5.3
Separating grants into elements
The grant received may be part of a package, the elements of which have different costs
and conditions. In such cases, it is common that the elements for which the grant is given
are not specifically identified or quantified. It will often be appropriate to treat these
different elements on different bases rather than accounting for the entire grant in one
way. For example, a grant may be given on the basis that an entity makes approved
capital expenditure in a particular area and employs a specified number of local people
for an agreed period of time. The amount of grant may be based on the approved capital
expenditure but this does not mean that the grant is necessarily treated wholly as a
capital grant. It will be necessary to examine the full circumstances of the grant in order
to determine its purpose.
In general, the most straightforward way of recognising a grant is by linking it to long-
term assets where this is a possible interpretation, particularly where the receipt of the
grant depends on the cost of acquisition of long-term assets. However, this approach
can only be taken if there is no clear indication to the contrary.
Allocation of a grant between the elements will always be a matter of judgement and
entities may place more stress on some features than on others. We believe that the
most important consideration where there are significant questions over how the grant
is to be recognised, and where the effect is material, is that the financial statements
should explicitly state what treatment has been chosen and disclose the financial effect
of adopting that treatment.
3.6
Repayment of government grants
A government grant that becomes repayable after recognition should be accounted for
as a revision of an accounting estimate. Repayment of a grant related to income should
be charged against the related unamortised deferred credit and any excess should be
recognised as an expense immediately. [IAS 20.32].
Repayment of a grant related to an asset should be recognised by increasing the
carrying amount of the related asset or reducing the related unamortised deferred
credit. The cumulative additional depreciation that would have been recognised to
date as an expense in the absence of the grant should be charged immediately to profit
or loss. [IAS 20.32].
Government
grants
1787
IAS 20 emphasises that the circumstances giving rise to the repayment of a grant related
to an asset may require that consideration be given to the possible impairment of the
asset. [IAS 20.33].
3.7 Government
assistance
IAS 20 excludes from the definition of government grants ‘certain forms of government
assistance which cannot reasonably have a value placed upon them and transactions
with government which cannot be distinguished from the normal trading transactions
of the entity’. [IAS 20.34]. In many cases the ‘existence of the benefit might be
unquestioned but any attempt to segregate the trading activities from government
assistance could well be arbitrary’. [IAS 20.35]. The standard therefore requires disclosure
of significant government assistance (see 6.1 below). [IAS 20.36, 39(b)].
The following example describes two different forms of government assistance:
Example 25.5: Government assistance
(a)
Assistance in the form of priority bidding status
A government specifies that entities below a certain size are to be given priority in bidding for a particular
type of government contract by mandating a minimum number of such entities to obtain bidding status.
Although the entities will benefit from the quota, the value cannot be identified and the effects of the
assistance cannot be segregated from the trading activities of the entities.
(b)
Assistance in the form of credit facilities at market rates
Three governments that between themselves own just over 50% of the shares in an airline participate in
granting it a revolving credit facility at a market rate of interest. This is not a government grant as it is on
terms that a private market participant might have accepted but it is government assistance as the benefit
cannot be distinguished from normal trading activities of the airline.
Under IAS 20, ‘government assistance does not include the provision of infrastructure
by improvement to the general transport and communication network and the supply
of improved facilities such as irrigation or water reticulation that is available on an
ongoing indeterminate basis for the benefit of an entire local community.’ [IAS 20.38].
4
PRESENTATION OF GRANTS
4.1
Presentation of grants related to assets
Grants that are related to assets (i.e. those whose primary condition is that an entity
qualifying for them should purchase, construct or otherwise acquire long-term assets)
should be presented in the statement of financial position either: [IAS 20.24]
(a) by setting up the grant as deferred income, which is recognised as income on a
systematic and rational basis over the useful life of the asset; [IAS 20.26] or
(b) by deducting the grant in arriving at the carrying amount of the asset, in which case
the grant is recognised in profit or loss as a reduction of depreciation. [IAS 20.27].
IAS 20 regards both these methods of presenting grants in financial statements as
acceptable alternatives. [IAS 20.25].
1788 Chapter 25
Greencore Group plc adopted the former treatment, as shown below:
Extract 25.2: Greencore Group plc (2017)
Notes to the Group Financial Statements [extract]
1. GROUP STATEMENT OF ACCOUNTING POLICIES [extract]
GOVERNMENT GRANTS
Government grants for the acquisition of assets are recognised at their fair value when there is reasonable assurance
that the grant will be received and any conditions attached to them have been fulfilled. The grant is held on the Group
Balance Sheet as a deferred credit and released to the profit or loss over the periods necessary to match the related
depreciation charges, or other expenses of the asset, as they are incurred.
An example of a company adopting a policy of deducting grants related to assets from
the cost of the assets is shown below:
Extract 25.3: Akzo Nobel N.V. (2017)
Notes to the Consolidated financial statements [extract]
Note 1: Summary of significant accounting policies [extract]
Government grants
Government grants related to costs are deducted from the relevant costs to be compensated in the same period.
Government grants to compensate for the cost of an asset are deducted from the cost of the related asset. Emission
rights granted by the government are recorded at cost. A provision is recorded if the actual emission is higher than
the emission rights granted.
4.1.1 Cash
flows
The purchase of assets and the receipt of related grants can cause major movements in
the cash flow of an entity. Therefore, if payments are made gross rather than net, such
movements should be disclosed as separate items in the cash flow statement whether
or not the grant is deducted from the related asset for the purpose of presentation in the
statement of financial position. [IAS 20.28].
4.1.2
Impairment testing of assets that qualified for government grants
When an asset is tested for impairment under IAS 36 – Impairment of Assets – the value
of any government grants received in relation to those assets is taken into account
regardless of whether the entity elected to deduct the grants in arriving at the carrying
amount of the related assets or decided to set up the grant as deferred income.
Where grants had been deducted from the initial carrying amount of the related assets,
no further adjustment is required before commencing the impairment test. However,
when grants relating to assets are classified as deferred income, the unamortised balance
carried in the statement of financial position should be deducted from the carrying
amount of the assets or cash generating unit being tested.
If the impairment test requires the carrying value of the asset or related CGU to be reduced
(because it exceeds the recoverable amount determined under IAS 36), the amount of the
impairment is deducted from the carrying amount of the asset. However, no adjustment
Government
grants
1789
should be made to the balance presented as deferred income, which would continue to be
recognised as income over the useful life of the asset. The requirements of IAS 36 are
discussed in Chapter 20.
4.2
Presentation of grants related to income
Grants related to income should be presented either as:
(a) a credit in the income statement, either separately or under a general heading such
as ‘other income’; or
(b) a deduction in reporting the related expense. [IAS 20.29].
The standard points out that supporters of method (a) consider it inappropriate to
present income and expense items on a net basis and that ‘separation of the grant
from the expense facilitates comparison with other expenses not affected by a
grant’. [IAS 20.30]. Furthermore, method (a) is consistent with the general
prohibition of offsetting in IAS 1 – Presentation of Financial Statements.
[IAS 1.32-33]. However, supporters of method (b) would argue that ‘the expenses
might well not have been incurred by the entity if the grant had not been available
and presentation of the expense without offsetting the grant may therefore be
misleading’. [IAS 20.30]. The standard regards both methods as acceptable for the
presentation of grants related to income. [IAS 20.31]. When offsetting is permitted
by another standard, the general prohibition in IAS 1 does not apply. [IAS 1.32]. In
any case, IAS 20 considers that disclosure of the grant may be necessary for a
proper understanding of the financial statements. Furthermore, disclosure of the
effect of grants on any item of income or expense, which should be disclosed
separately, is usually appropriate. [IAS 20.31].
As illustrated below, Anheuser-Busch InBev has adopted a policy of presenting grants
within other operating income, although not separately on the face of the income
statement, rather than as a deduction from the related expense.
Extract 25.4: Anheuser-Busch InBev NV/SA (2017)
Notes to the consolidated financial statements [extract]
3. Summary of significant accounting policies [extract]
(X) Income recognition [extract]
Government grants A government grant is recognized in the balance sheet initially as deferred income when there is
reasonable assurance that it will be received and that the company will comply with the conditions attached to it.
Grants that compensate the company for expenses incurred are recognized as other operating income on a systematic
basis in the same periods in which the expenses are incurred. Grants that compensate the company for the acquisition
of an asset are presented by deducting them from the acquisition cost of the related asset in accordance with IAS 20
Accounting for Government Grants and Disclosure of Government Assistance.
Akzo Nobel N.V. is an example of a company presenting t
he grant as a deduction from
the related expense in the income statement, as illustrated in Extract 25.3 above.
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5
GOVERNMENT GRANTS RELATED TO BIOLOGICAL
ASSETS IN THE SCOPE OF IAS 41
A different accounting treatment to that prescribed in IAS 20 is required if a government
grant relates to a biological asset measured at its fair value less costs to sell, in accordance
with IAS 41; or a government grant requires an entity not to engage in specified
agricultural activity. [IAS 41.38]. In this context, the term ‘biological asset’ excludes bearer
plants as defined in IAS 41 (see 1.2 above). [IAS 41.1(a), 5]. Government grants involving
biological assets should only be accounted for under IAS 20 if the biological asset is
‘measured at its cost less any accumulated depreciation and any accumulated impairment
losses’ (see Chapter 38 at 3.3). [IAS 41.37-38]. For government grants relating to biological
assets measured at fair value less costs to sell, the requirements of IAS 41 apply as follows.
An unconditional government grant related to a biological asset measured at its fair
value less costs to sell is recognised in profit or loss when, and only when, the grant
becomes receivable. [IAS 41.34]. An entity is therefore not permitted under IAS 41 to
deduct a government grant from the carrying amount of the related asset. The IASB
determined that any adjustment to the carrying value of the asset would be inconsistent
with a fair value model and would give rise to no difference in the treatment of
unconditional and conditional government grants, with both effectively recognised in
income immediately. [IAS 41.B66].
A conditional government grant related to a biological asset measured at its fair value less
costs to sell is recognised only when the conditions attaching to the grant are met. [IAS 41.35].
IAS 41 permits an entity to recognise a government grant as income only to the extent that it
(i) has met the terms and conditions of the grant and (ii) has no obligation to return the grant.
This would generally be later than the point of recognition in IAS 20, where reasonable
assurance that these criteria will be met is sufficient. [IAS 20.7]. The following example, which
is taken from IAS 41, illustrates how an entity should apply these requirements. [IAS 41.36].