How to Account for Government Grants (IAS 20)
Almost every government supports certain companies or business by providing grants or other kind of assistance.
As this is clear benefit and advantage comparing with other companies without such an assistance, it should be properly reported in the financial statements.
How?
Let’s explain the rules and then solve a simple example.
What do the rules say?
The most important standard dealing with government grants is IAS 20 Accounting for government grants and disclosure of government assistance.
It’s quite an old standard – it was issued in 1983 with the effective date from 1 January 1984 and there were no significant changes from that day.
The main objective of IAS 20 is to prescribe the accounting for and the disclosure of
- The government grants – simply speaking, these are the actual resources, whether monetary or non-monetary, transferred to an entity by a government, in most cases upon completion of some conditions;
- The government assistance – these are other actions of the government designed to provide some economic benefit to an entity, for example free marketing or business advices.
IAS 20 deals with almost all types of government grants, with the following exclusions:
- Government assistance in the form of tax reliefs (tax breaks, tax holidays, etc.),
- Grants related to agriculture under IAS 41;
- Grants in the financial statements that reflect the effect of changing prices and
- Government acting as a part-owner of the entity.
How to Account for Government Grants
Before we dig a bit more in details, let me stress that you should never ever credit the receipt of any grant directly in equity.
This capital approach is not permitted in IFRS.
Instead, IFRS prescribe so-called “income approach” – to recognize grants as income over the relevant periods to match them with the related expenditures or costs they should compensate.
Specific accounting treatment depends on the purpose of the grant received. An entity can receive a grant either for:
- Acquisition of an asset, or
- Reimbursement of costs.
Grant related to assets
If an entity receives the grant for acquisition of some assets, there are 2 options to present such grant in the financial statements:
- To present it as deferred income; or
- To deduct the grant from the carrying amount of an asset acquired.
In the example below, I show you both options.
Grant related to income (reimbursement of expenditures)
Here, you need to differentiate between the grants for past costs (already incurred) or the grants for current or future costs.
If the grant is provided to reimburse costs incurred in the past, then it is recognized immediately in profit or loss.
If the grant is provided to reimburse costs incurred or to be incurred at the present time or in the future, then the grant is recognized in profit or loss in the periods when the costs are incurred.
From the presentation point of view, there are 2 options:
- To present the grant income as a separate line item as “other income”, or
- To deduct the grant income from the related expense.
Let me illustrate it on a short example:
Government grants – question:
ABC receives the following government grants in 20X2:
- Grant of CU 40 000 to acquire a water cleaning station. The cost of the station was CU 100 000 and its useful life is 8 years. ABC acquired the station on 1 July 20X2 and recognized depreciation on a straight-line monthly basis.
- Grant of CU 10 000 to cover the expenses for ecological measures during 20X2 – 20X5. ABC assumes to spend CU 3 000 in 20X2-20X5 and CU 2 000 in 20X6 (CU 14 000 in total).
- Grant of CU 3 000 to cover the expenses for ecological measures made by ABC in 20X0-20X1.
Prepare the journal entries in the year ended 31 December 20X2.
Government grants – solution:
As there are 3 different grants, let’s solve them one by one.
Grant for a water cleaning station
This grant is a typical grant to acquire property, plant and equipment. As written above, we have 2 choices to present it:
Option #1: Deferred income
ABC can credit the grant to deferred income and amortize it over the useful life of a water cleaning station in order to match the grant income with the relevant costs (in this case depreciation charges).
In 20X2, ABC recognizes CU 2 500 in profit or loss (calculated as the grant of CU 40 000 divided by 8 years times 6 monhts in 20X2 divided by 12 months in a year).
Our journal entries are:
| Description | Amount | Debit | Credit |
| Receipt of the grant | 40 000 | SoFP – Cash/Bank account | SoFP – Deferred income |
| Recognition in P/L in 20X2 | 2 500 (40 000/8*6/12) | SoFP – Deferred income | P/L – Income from government grant |
Option #2: Deduction from an asset
ABC can deduct the grant amount to arrive at carrying amount of a water cleaning station. Then its recognition in profit or loss is automatically reflected in depreciation charges.
As a result, the new carrying amount of a water cleaning station upon initial recognition is CU 60 000 (cost of CU 100 000 less grant of CU 40 000) and the annual depreciation charge is CU 7 500 (CU 60 000 divided by 8) instead of CU 12 500 (CU 100 000 divided by 8). In the first year, it’s CU 3 750 (6 months only).
Our journal entries are:
| Description | Amount | Debit | Credit |
| Receipt of the grant | 40 000 | SoFP – Cash/Bank account | SoFP – PPE (Water cleaning station) |
| Recognition in P/L in 20X2 (within depreciation charge) | 3 750 (60 000/8*6/12) | P/L – Depreciation of water cleaning station | SoFP – PPE (water cleaning station) |
Note: SoFP = statement of financial position.
Grant for ecological measures in 20X2-20X5
Apparently, the second grant is provided to reimburse the expenses for ecological measures in 20X2 to 20X5. In other words, it is a grant for current and future expenses.
ABC needs to recognize the income from grant in the periods when relevant expenses are incurred.
In this example, we can calculate the portion recognized in P/L in 20X2 on a proportionate basis, i.e. assumed CU 3 000 in 20X2 divided by total assumed expenses of CU 14 000 times the grant of CU 10 000.
The credit entry goes in profit or loss, but here, ABC has a choice to present the grant income as a separate line item (that’s easier) or to deduct it from the expenses.
The journal entries are:
| Description | Amount | Debit | Credit |
| Receipt of the grant | 10 000 | SoFP – Cash/Bank account | SoFP – Deferred income |
| Recognition in P/L in 20X2 | 2 143 (3 000/14 000*10 000) | SoFP – Deferred income | P/L – Income from grants (or relevant expense) |
Grant for ecological measures in 20X0-20X1
The third grand relates to the expenses that had already been incurred in the previous years 20X0 and 20X1.
As a result, the grant is recognized immediately in profit or loss.
The journal entry is:
| Description | Amount | Debit | Credit |
| Receipt of the grant | 3 000 | SoFP – Cash/Bank account | P/L – Income from government grant |
You can watch a video about accounting for government grants here:
In my next article, I will try to clarify the biggest issues arising around government grants, so if you have any specific question, just leave me a comment and stay tuned! I’ll be happy if you share this article with your friends, thanks a lot!
JOIN OUR FREE NEWSLETTER AND GET
report "Top 7 IFRS Mistakes" + free IFRS mini-course
Please check your inbox to confirm your subscription.
253 Comments
Leave a Reply
Hi Silvia! Your article is great as usual!
I have a question. If Government give us tax reliefs as long as buying new technologies in order to develop our activity, how will we reflect this Government assistance? Please, clarify this….
Hi Mirolim,
usually, these tax reliefs are out of scope of IAS 20, but you account for them under IAS 12. Please read this article for more details. S.
Dear silvia. May i ask whats the difference between ias 41 and ias 20 when it comes to measurement and accounting for government grants? Im kinda confuse.. it seems the same to me? is that correct? Thanks. Would really appreciate your reply
Hi Dexter,
it’s not totally the same. If you measure biological assets at fair value, then the related government grant is recognized as an income in profit or loss when conditions are met or when it becomes receivable (if there are no conditions). So, the difference is that the grant is not recognized as deferred income and recognized as an income gradually over the useful life of an asset.
Grants for biological assets at cost less accumulated depreciation is accounted for under IAS 20 (i.e. deferred income, plus amortize over the useful life). S.
Dear Sylvia,
appreciate your efforts
I have a little issue with an ACCA question.
the question says’Verge was given a building by a private individual’ and in order to get the building you must transfer it into a Musume, at the year end the building is still under progress….. what should we record the building at the time of receiving it and at the year end???
thanks for your time
Dear Sylvia,
What are the accounting treatment on grants/subsidy granted by the National Government to GOCC and transferred to non-governmental organizations which are the electric cooperatives to implement rural electrification in the countryside. May I know the accounting entry/ies upon receipt of subsidy by the GOCC of the subsidy grant from the National Government and also the entry upon release of the subsidy fund to electric cooperatives. thank you.
Dear Sylvia,
our company is a public water and garbage utility. The Company had in previous years a contract with the municipality to use a certain part of land as landfill. The land is not recognized as asset in the company’s books, and no provision was made for restoring the land.
After few years, the landfill is closed, and European bank provided non repayable grant to the company. However, the money was made available to the Federal Ministry of finance, and the Ministry pays to the suppliers, and the company receives invoices for the landfill restoration. How should these invoices and non repayable grant be recognized in company’s books?
Kind regards!
The scenario is:
1) Company A(University) received $180000 grant from B on 03 March 2015.
2) Grant was given to provide scholarship of Company A and Grant period 01 Jan 2015 – 31 Dec 2016 (2 Years)
3) As at 31 Dec 2016
– The entire Grant fund was allocated to eligible students
– But only $100000 was expensed in the books
– Remaining fund $80000 was not recorded as expenses in the books
– $80000 is retained as future expenses for the scholarship to whom commitment was made for scholarship
(As some students take more than 3 years to complete their program, so their allocated scholarship is being held until their graduation completion)
Now can you show all the possible and correct journal entries for:
– During the grant period
– After the grant period
hi,
if our company received a land from a government to use it in agriculture activity for 99 years. The company will pay 150 USD annual fees to the government. Can you please advice for the accounting transactions for that issue.
thank you too much.
Hi Mohammed,
I guess the fees of USD 150 per annum are not at market price, is it? If not, then you effectively received a government grant amounting to difference between the fair value of rentals and USD 150 p.a. You need to recognize it as deferred income and amortize it. Also, you should not account for that land as for finance lease (if you are under IAS 17, not IFRS 16) – the reason is that the land has infinite useful life and therefore it’s operating lease. S.
Thanks for the site, it is very helpful for me. I have two questions about government grant standard. if we receive an asset, without any condition, should we immediately consider it as an income? or we should recognized deferred income on financial statements.should we treat government grant standard for agricultural grant by government similarly? I have heard that the treatment is different in agriculture.
Dear Akbar,
if you receive an asset as a government grant, then its accounting treatment depends on whether it’s a current asset or non-current asset. If it’s a non-current asset, then you should recognize it in its fair value and yes, the credit entry is deferred income. Then during the useful life of that asset, you need to match the expenses for depreciation with the revenue from the grant.
As for the grants in agriculture – if you measure the related biological asset at fair value less cost to sell, then you should recognize the grant as an income when it becomes receivable. If you measure the related biological asset at cost less accumulated depreciation, then you follow IAS 20. Let me just remind you that the grants for land are treated under IAS 20. S.
Hi Silvia,
In your first example re:$40,000 government grant received on a $100,000 water station:
Option 1) when the $40,000 grant is credited to the cost of the asset of $100,000, it actually recognized the whole $40,000 as a reduction in asset in 20X2. The mere fact that the whole amount was deducted against the asset reduces the annual depreciation of the asset by ($12,500 – $7,500) $5,000 for the next 8 years ($2,500 in 20X2, $5,000 in years 20X3 to 20X9, and $2,500 in 20X10). Dividing the 20X2 annual amortization by 2 will result in $2,500 reduction in annual amortization in 20X2. Thus the need to recognize the other half ($2,500) in year 20X10.
The same effect is achieved if this grant is recorded as deferred income (option 2). In 20×2 the income to be recognize is $2,500 ($40,000/8 x 6/12), $5,000 in years 20X3 to 20X9, and $2,500 in 20X10. Comparing it above, the net result is the same.
Thanks Silvia.
Yes, Lawrence, the net effect on profit or loss is the same. But, the presentation in the statement of FP is different: with option 1), you would show lower assets and liabilities than under option 2) and also, your financial rations would be impacted. S.
Thank you Silvia. Yes that’s true using the way I presented the options. Sorry I didn’t realized that I interchanged the options that you presented in the problem – Option 1 should be the recognition of deferred income and option 2 is the netting of the grant to the tangible asset.
I have a partnership who received housing grants, construction and regeneration act 1996 on the basis that a four year lease will be agreed with housing association. In year one costs were £60,000 and the second year costs were £150,000 with grant of £80,000 received in the second year (total grant). How would these be shown in the accounts for both the years?
Thank you
Hi Dipak,
Is the lease a condition for obtaining the grant? If yes, then you can recognize the grant when there is a reasonable assurance that this condition will be fulfilled (i.e. you will keep the lease).
How the grant would be accounted – it depends, you did not write what was the grant provided for. If it was for partial reimbursement of expenses, then you should match the expenses with the revenue from the grant using some reasonable matching method.
Dear Silvia,
I have a complex question. I try to summarize breifly the situation.
The company books in USD. The grant is recognised in profit or loss over the life of a depreciable asset as a reduced depreciation charge. The company capitalizes the grant amount as an additional capitalization to the asset and records it on separate accounts. (Gross value, Accoum depreciatoin and depreciation account)
The purchasing of the asset is in EUR. The invoice date of the asset’s invoice e.g. 8/15/2016.
Exchange rate (EUR/USD) is 1.10 at 8/15/2016
Asset gross value in original currency: 1,000 EUR
The asset is capitalized at 9/1/2016 with (1,000 *1.10=) 1 100 USD for 5 years, with straight-line monthly basis depreication.
The company will receive a grant for the asset in next year in EUR, grant intensity 50%, so the expected grant amount 500 EUR.
The company is using a technical account for grant booking which has to be closed zero when receiving the grant amount.
At End of the year: the exchange rate e.g. 1.30
The company books a journal for the Grant.
Debit: Technical account
Credit: Asset gross value account
Amount: 500 EUR (Grant amount)
1. Question: which rate should be used for the booking? (Invoice date of the asset (1.10 it means 550 USD booked amount, or year end rate(1.3 it means 650 USD booked amount)
The company will accrue the depreciation effect of grant amount for 4 months.
Debit: : Accrual account
Credit: Depreciation account
Amount: Depends on the first question answer.
In next year the company will receive the 500 EUR grant amount, deposit date: 1/20/2016, rate e.g. 1.40
Debit: Bank account
Credit: Technical account
Received origianal grant amount: 500 EUR , it means 700 USD booked amount.
I can imagine 2 options which depends on the first question’s answer.
Option A:
If the answer of the first question is year end date rate (1.30).
The company reverses the last year booking and books the following.
Debit: Technical account
Credit: Asset Gross value account
Amount: 500 EUR on grant’s received date rate: 1.40, so booked amount is 700 USD
In this case the technical account will be closed to zero.
The company depreciaties the „capitalized” grant amount from 9/1/2016.
Debit: Accum. depreciation account
Credit: Depreciation account.
Depreciation basis is 700 USD.
Option B:
If the answer of the first question is the asset’s invoice date rate: 1.10 (it means 550 USD grant amount)
The company does not reverse the last year booking and books the following to close the technical account to zero.
Debit: Technical account
Credit: Fx account
Amount: 700-550 = 150 USD amount.
The company depreciaties the „capitalized” grant amount from 9/1/2016 (depreciaton basis amount: 550 USD).
Could you please advise which the correct option is?
Thanks in advance.
OMG, Istvan!!! Could you please make it shorter? It’s beyond my human capacity to read all of this, I am really sorry.
And also, why is there a booking of Debit Technical account (in other words – grant receivable, I guess)/Credit Asset account at the year end? What’s the point? Is this the moment at which you met the conditions for the grant receipt? I doubt it… If the only condition is the acquisition of an asset, you should recognize the grant receivable together with an asset acquisition. And in that case, you would use the date of acquisition rate.
At the year-end, you do not revalue the asset part (as it’s non-monetary), but you need to revalue grant receivable part to update the rate (it’s monetary). And subsequently, you treat grant receivable as monetary asset. S.
Hi all,
A governmental entity entered into a grant agreement. The agreement includes a specific amount which will only be reimbursed upon claim of eligible expenses. I understand that the grant income should be recognised on a systematic basis matching the cost incurred in the same period. However, do you still record the receivable agreed amount in the statement of financial positon and deffer it to the following year?
Hi Marisabel,
well, you should account for the grant receivable ONLY when 2 conditions are met: 1) you will comply with any conditions attached to the grant and 2) the grant will be received. Here, the condition for receiving the grant is spending or making eligible expenses (i.e. your future performance or future events). If it is highly probable that you will meet the conditions (and you can justify it), then it would be appropriate to recognize the grants (but it’s difficult to justify the occurence of future events). S.
Thanks lot. It was really helpful. Can u please explain if the government provide grants for the compensation of loss and immediate financial support, lt is covered under IAS 20 OR NOT
Yes, it is. Please see the above article (grants to cover past expenses).
Ok, thanks a lot!
Dear Silvia,
the company I work for received a goverment grant for the purchase of a land. Cost of land = 75.000 EUR, goverment grant = 75.000 EUR.
When can I recognize the income? Please help 🙂
Thanks a lot
Seba
Dear Seba,
you recognize it in a deferred income and then in profit or loss. As the land is non-depreciable asset, then – are there some obligations related to the grant that you should meet? If yes, then you recognize the grant in P/L over the period necessary for meeting those obligations. S.
On yur example of grant received in respect of expenses 20×2-20×5 it must be (3000×3 + 2000) = 11000 not 14000 isn’t it’s 4 yrs from 20×2 to 20×5 3000 for the first 3 yrs and 2000 in the last yr. Or maybe am wrong correct me
You’re right, there were typos, thanks for the correction!
Thanks for the information and the accounting treatment for the government grants however i think there is an error regarding the depreciation in
Option #2: Deduction from an asset
ABC can deduct the grant amount to arrive at carrying amount of a water cleaning station. Then its recognition in profit or loss is automatically reflected in depreciation charges.
As a result, the new carrying amount of a water cleaning station upon initial recognition is CU 60 000 (cost of CU 100 000 less grant of CU 40 000) and the annual depreciation charge is CU 7 500 (CU 60 000 divided by 8) instead of CU 12 500 (CU 100 000 divided by 8).
The annual depreciation using the straight line method should be CU 3,750 (CU 60,000/8*6/12)
Hi Richard,
yes, you are right, forgot to divide by 2 as it’s only 6 months, not 12. Thank you for the correction! 🙂 S.
Dear Silvia,
I would appreciate if you can guide me on the following issue :
In order to encourage the dispersal of industries to the less developed areas of the State, Government has been giving a Package of Incentives (by way of Government grant)to New / Expansion Units set up in the developing region. The cap on the quantum of grant is linked to the Fixed Capital Investment . The primary condition is location in less developed areas and the quantum of grant is dependent on other conditions viz :
– Fixed capital investment (to decide the upper cap of grant)
– Sales during defined period and indirect tax collection thereon (to decide the amount of grant for each year within the overall cap on grant).
On going through the discussions papers on the scheme, it is clear that the incentive scheme is formulated to offset the high costs in underdeveloped region and low returns on investments. Since the primary condition of grant is setting up unit in underdeveloped region and not acquiring fixed assets, I believe, that this is not a “grant related to assets. In that case, this will have to be treated as grant related to income. The related costs which this grant is supposedly intended to compensate are the ‘higher costs’ which the unit will suffer due to its operations in underdeveloped region and such higher costs will be there as long as the region remains underdevelped. Inspite of such grants and other benefits, the said region has continued to be underdeveloped for more than three decades (the Government still continues to provide grant to new units being set up there). In such case, will it be prudent to show this grant as capital reserve because it is intended to compensate higher costs for all times to come.
Miss
How I will get ur next article on IAS 20?
Dear Silvia
A loan agreement exists between two governments , and this is further is availed on the agreement between two governments, the loan is further lent to one company.Will this borrowing be accounted under Grant or under IAS 23 borrowings.
Please advise
Thanking you
Sonam Choeden
DGPC
Bhutan
Dear Sonam, why would you apply IAS 20? Are there any special non-commercial provisions, like below-market interest rate on the loan? If yes, then apply IAS 20. Moreover, if your interest cost meets the criteria of IAS 23, then capitalize it under IAS 23. You can apply both standards, can you? The reason is that they arrange slightly different things here. S.
Dear Silvia
Company A is providing one of the company in my country Loan for construction of asset. That same company through local government is supporting company another B through technical assistance. Consultants have been appointed and payment is also made to that consultants for the work carried out at company B by company. So my query is ,
1. Can company B consider this technical support as grant
2. And at what value the grant is to be recognized.
Please advise
Thanking you
Sonam Choeden
Bhutan
Sonam, I’m lost in your question. So A provided loan to B and I don’t understand the second sentence. Sorry. Maybe you should reword the first 3 sentences. S.
Dear Silvia,
I think Deducting Grant From Asset will misrepresent the value of Asset in Statement of Financial Statement.
Could you please explain me why my opinion is wrong.
Thanks alot for the video…very very helpful
Hello Silvia,
Thank you for these wonderful lectures and simplifications of standard applications.
Related to government grants I have a question:
1. How should i treat a loan that i will obtain from a bank. The purpose of the loan is to be used as an upgrade of current Property plant investments.
The government on the other hand will deduct the loan principal and interest expense from yearly liabilities that my company has toward the government? [Tax expenses (minus) principal+interest] my role with the bank is as intermediary ( i have an agreement with the bank and i have an agreement with Government).
My exact question is, what Journal entries should I register?
Dear Silvia,
Supposing, in subsequent period, the grant becomes payable to government due to withdrawal or otherwise and the payable amount exceeds the unamortized deferred credit. So how should we account for such payment in case of revenue grant and the capital grant? Would it tantamount to change in estimate?
Thanx in advance.
Dear Arsh,
If a grant becomes repayable, it should be treated as a change in estimate. Where the original grant related to income, the repayment should be applied first against any related unamortised deferred credit, and any excess should be dealt with as an expense. S.
this is good area to chat as an Accountant it has really refreshed my mind thanks guys and many many thanks to Dinesh
To Dinesh? Hmmmm…
EXCELLENT
Dear Silvia,
Thank you so much for your clear presentation.
Would you be so kind to answer this question?
On a subsidy related with the quantities bought (1 CU per Kg), is this subsidy treated under IAS 20 or IAS 2 (Inventories), deducting the amount to the costs of purchase?
Greg
Hi Greg,
it’s very similar as with purchases of PPE – so yes, you can deduct the grant from the cost of purchase. S.
Hi Silvia M.
As you are probably aware, I recently subscribed for your course and I think it is good value for money.
I need your help in the treatment of upfront transaction cost in a below market interest rate loan provided by a government.
I know that the market rate shall be used to determine the PV of all the future cash flow and the difference between the total PV and the actual receipt is initially treated as deferred income, amortised into profit or loss over the period.
How do you treat the upfront charges. The practical way out, it seems to me, is to expense the upfront transaction cost and not include it as part of the cost to be amortised.
What do you think Silvia?
Apologies for the initial mix-up on my profile name.
SENATOR
Dear Senator,
well, if upfront charges are immaterial, then do whatever you like with them, but technically it’s not correct. You should really adjust cash flows from the instrument and calculate new internal rate of return for amortization. I solve it in my IFRS Kit, too. Have a nice day!
S.
Hi Silvia, please what happens if the grant comes from nongovernmental organisations?
IAS 20 applies also to grants provided by similar organizations as government.
Hi Silvia,
What shall we do if we have a government grant (say, $10,000) that the obligations will last for 5 years and we use the grant to buy a machine with estimated useful life of 10 years?
If we use deferred income method, shall we amortise the grant in 5 years?
If we reduce the carrying amount of the machine, are we going to depreciate it using 10 years?
Dear David,
in this case, you need to amortize the grant over 10 years, as the standard requires to bring its amortization in line with the related PPE. S.
Please give me answer to this question
We are a fully government own company providing public transport.
Last year we got 50 buses on financial lease basis.
Cost for 50 Bus 1,400 million
Interest 200 million
Total 1,600 million
Leasing payment will be paid by the government. That is government give relevant leasing payment to us then we pay that money to the lessor.
Year Leasing Payment millions
1 400
2 400
3 400
4 400
Then how we recognize this as government grant.
Presently we are doing like this
Debit Assets 1,400
Debit Interest 200
Credit –Lessor 1,600
When money received from Gov
Debit Cash 400
Credit Gov Grant 400
When payment made to lessor
Debit Lessor 400
Credit Cash 400
Then amortize this Gov Grant 400 from 5 years.Is this method ok.or can we do like this
Debit Asset 1,400
Debit Interest 200
Credit Gov Grant 1,600
When we got money from gov
Debit Cash 400
Credit Installment payment a/c 400
When payment made to Lessor
Debit Installment payment a/c 400
Credit cash 400
then we can amortize Gov grant 1,600 for five years that is life of the bus.
Please give me which way is correct.
hi please help me do this question, the government gave our company p 500 000.00, 50 % is loan and 50 % is grant, we bought cameras and equipment, paid salaries, stationery, how do we account for in profit and loss and balance sheet
The first option is referable. When grand is received. DR- Bank
CR- Govt Grant Acct(Liabilty a/c)
When money is paid to the Supplier
DR-Govt Grant Acct
CR- Bank
Also,
DR-Lessor a/c
CR-Lease payable a/c
The payment to the Lessor Acct should be separated into principal and interest element.
Thank you so much. Do you have an idea about why IAS 20, para 23 allow recording (measuring in fact)non monetary grant at a nominal amount?
kind regards,
23 A government grant may take the form of a transfer of a non-monetary asset, such as land or other resources, for the use of the entity. In these circumstances it is usual to assess the fair value of the non-monetary asset and to account for both grant and asset at that fair value. An alternative course that is sometimes followed is to record both asset and grant at a nominal amount.
Hi Silvia, isn’t it okay to account for a compensation of past losses/expenses by crediting retained earnings account rather than crediting directly to P or L account as a prior year adjustment? Thank you
No, Anne. The reason is that the grant received in the current reporting period is a current year’s event, not the event of the past periods. There’s no reason to change prior year’s accounts, as there was neither error nor change of the accounting policy. S.
Dear Silvia,
I’ve been following your website for a while and it has been a great help to me! Thank you for sharing your knowledge. With regard to this question, what if the grant agreement was signed on 20×0 and funds have already been used to satisfy the grant but the compensation was not received until 20×3? Will this also qualify as immediate recognition to p/l or should it have been recognized as receivable on 20×0? Looking forward to your inputs! 🙂
Thanks
Thanks for this article. I need you to kindly relate this government grant to a Facility given by Government Bank (like Bank of Industry) at a lower rate?
Hi Ola,
I recommend reading this article as it applies to you, just the other way round: http://www.cpdbox.com/ifrs-employee-loans/
Now, the initial difference from remeasurement would be recognized as government grant. S.
Your articles are always inspiring and highly educating on IFRSs, and we really appreciate for the wonderful job you do.
Suppose a government compensate a company for the costs or expenses incurred for internships (so as to encourage the hiring of fresh graduates and equipping them with experiences to secure job), Can we account for this compensation in our Financial reports as grant or assistance from government under IAS 20 as you have clearly explained above?
Hi Joseph, from what you wrote, it appears as a government grant 😉 However, if these costs are compensated after they are incurred, then you can recognize them straight in P/L. S.
It is easy to learn even complicated issues from you.
great job. Last sentence you said big issues related to grants in the next article. You mean this article is not exhaustive.
Keep up the good job.
Regards,
Chandrasekhar
Hi Chandrasekhar,
I just wanted to outline the basic accounting treatment here – that’s exhaustive. And in the next article, I will outline some problems 🙂 S.
Thanks for clarification . Always we use one type of recognitions of government grant .
Hi Silvia
I hv small question on government grand. See the following facts…
“Central bank of country XX provides a loan to ABC bank (A private bank) at a lower rate than the market rate. Assume market rate is 12% but Central bank gives at 10%. Can we recognize the difference of this two rates as as Income under Government Grant? or IFRS 9 Financial Instrument “
very well explanied.Thank you for sharing
Great article i enjoy reading your articles
when we received grants for purchase of inventory. the grants charge to income or deducted from inventory
A well balanced, specfic and comprehensive lecture.
Simply awesome 🙂 Thankx for sharing
Thank you so much. Your lectures are excellent.
Looking forward to all your lectures. Madam, please enlighten me more on grants/subsidy to electric cooperatives, a non government agencies for the electrification esp. for the construction of distribution lines to sitios in the rural remote areas? Thank you in advance.
Hi Silvia its nice to contact you and its my pleasure to read and listen your articles.
Please, I would like to ask you about the treatment of recording the government grants to reimbursements the past expenses or cost, I understand that should be recorded immediately to profit or loss but I think this is contrary with the matching principles because these expenses related to past financial periods not the present financial period. please can you clarify this issue. Thanks in advance.
Hi Firas,
you cannot really adjust previous year’s records, because the grant was received only at the present time, isn’t it? Although the expenses were incurred in the past, the grant was not received in the past and therefore, you cannot really adjust previous years. S.
Excellent response.
We can not show a prior year adjustment.
Hi Silvia
In this case lets say previous year is not ended and the grant is to be received in two installments. 1st installment before previous year end and next installment in next year. Then should whole of the grant income be recognised in previous year?
Hello,
from what I understand IFRS 20 requires such grant to be recognized immediately in profit or loss, therefore 1st Installment should be recognized in respective year, and next installment need to be recognized at the time it would be received.
Let’s hear from Colleagues.
Thanks for writing back to me.
The correct way of doing it is that you should follow some steps to reach the final stage.
Step 1) You should credit the amount which will be payable to goverment.
Step 2) The second thing you have to do is that you should debit the deffered income.(remaining amount which is not booked. i.e say you recieved 4000 from goverment as grant and you booked 3000 of it and the condition is breached and now you have to pay so 1000 is remaining, book this by debiting it……
Final step…. the balance will be set in profit and loss…….
These are steps which you should follow…..
Hi Firas. As I understand it, if you are talking about the matching principle, you are right, we should match any income with the cost incurred. But the government grant that the company received during the current year cannot be matched with the expenses from previous year, moreover, that expenses which have been incurred already during previous years have already been matched with appropriate incomes.
Thanks for that beautiful write-up
Thumps up
Its always nice to read your Articles and refresh the knowledge…
i alway look forward to listening to your lectures.