Introduction
Government grant is usually for the purpose of supporting not just non-profit organization but it is also applicable for other types of business entity. Accounting for government grants is very important so that the financial statements can be prepared to give true and fair view; thus enable all stakeholders to make business decision correctly. This requires each entity to account for such grants in accordance with the relevant International Accounting Standards (IAS). Such Government Grants are covered in IAS 20 – Government Grants.
Definition
The accounting for government grants and any relevant disclosures of any government assistances are covered in IAS 20 – Accounting for Government Grants and Disclosure of Government Assistence.
Before going detail of the definition of government grants, let’s understand two common wordings that are relevant to the government grant.
The first one is “Government”. What is government?
IAS 20 has given the definition government as “Government, Government Agencies and other similar bodies whether local, national or international”.
The second one is “Government Assistance” What is Government Assistance?
As per the IAS 20, Government Assistance refer to any actions that each government bodies designed in order to provide to any entities and organization whose need such assistance or support in order to continue its operation. This government assistance is given only to entities or organization that are qualify for or meet certain criteria.
Thus, IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance define the government grants as follow:
“Government Grants are assistant 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. They exclude those 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 transaction of the entity”.
Scope
IAS20 does not deal with the following:
- Any government assistance provided for an organization or entity as benefits which are normally available in determining the taxable income or to be determined or limited to the basis of income tax liability.
- Any government participation in the ownership of an organization or entity.
- Government grant that covered by another International Accounting Standards – IAS 41 Agriculture.
Type of Government Grants
IAS 20 classified government grants into two main types as follow:
Government Grant Related Assets
Grant related to Assets are grants that the government provided to any qualified entity primarily to purchase, construct or to acquire any long term assets. There is also secondary condition that the government may also attach to include the restriction of type or location of the assets or the period that those assets are to be purchased or acquired or held. We generally present this type of grants in the statement of financial position. This presentation can be in the form of deferred income or by deducting the grant from the carrying amount of the assets.
Grant related to income
Government grants as income are the government grants that are not fall under grants related assets. We basically present this type of grants in the Income Statement directly. The presentation can be either separately or under a general heading; for instance as “Other income”. Or alternatively, each entity can recognize such grants as deduction to report related expenses for the grant purpose.
When recognizing government grants related to income, we shall need to differentiate whether the grants if or past costs or the grants is for current or future costs.
If the grants is for past costs, such grants shall be recognized in the Income Statement immediately; however, if the grants is for current and future costs, such grants shall be recognized in the period it incurs.
Recognition
In accordance with IAS 20, each entity shall recognize the government grants as follow:
- In the income statement on a systematic basis over the periods that the grants are intended to compensate.
- Shall not be recognized if such grant, including the non-monetary grants at fair value, until there is reasonable assurance that the organization or entity are able to comply with the conditions that attach to the grants.
Practical Accounting for the Recognition of Government Grants
To understand clearly about the government grants accounting, we will cover two examples as below:
Government Grants related Assets
Example 1: Suppose ABC received a government grants of US$50,000 to purchase water sanitation pump station. The total cost of the station is US$120,000 and its useful life is 10 years. ABC acquired the station on 01 January 2019. ABC recognize the deprecation on the straight-line basis over the 10 year periods.
We can recognize such grants in two ways as follow:
Recognize as deferred income
When ABC recognize the grants as deferred income, the journal entries would be as follow:
- When ABC receives the grants: On 01 January 2019
Dr. Cash/Bank US$50,000
Cr. Deferred Income US$50,000
- Recognize in the profit or loss: On the monthly basis, ABC shall recognize as income in the Income Statement as follow (Assume totally for one year) as at 31 December 2019:
Dr. Deferred Income US$5,000
Cr. Income from Government Grants US$5,000
Recognize as deduction from the assets
When ABC recognize the grants as deduction from assets, the total assets that such entity recognize is deducted by the grants amount. Thus in this case, the total assets initially recognized shall be US$70,000 (US$120,000 minus US$50,000). ABC will need to recognize the depreciation of the water sanitation pump station amounting to US$70,000 on the monthly basis in the Income Statement. Below is the journal entries:
When ABC receives the grants: On 01 January 2019
Dr. Cash/Bank US$50,000
Cr. Water Cleaning Station (PPE) US$50,000
Recognize as deduction as of 31 December 2019
Dr. Depreciation – Water cleaning station US$7,000
Cr. Accumulated depreciation US$7,000
Thus the net book value of the water sanitation pump station (PPE) as of 31 December 2019 would be US$63,000 (US$70,000 minus US$7,000).
Government Grants related income
For instance, assume ABC received a grants of US$20,000 to cover the sanitation project during 2019 to 2022. The total project costs is US$30,000. In 2019, ABC expects to spend US$6,000.
In this example, the grants is for current and future costs. ABC shall recognize the grants at the proportion of the expense incurred during the period of the grants.
In this case, in 2019, ABC shall recognize the grants as follow:
When ABC received the grants: On 01 January 2019
Dr. Cash/Bank US$20,000
Cr. Deferred Income US$20,000
Recognize in the income statement on the monthly basis – assume one year as at 31 December 2019
Dr. Deferred Income US$4,000 (US$6,000*US$20,000/US$30,000)
Cr. Income from Government Grants US$4,000 (Or recognize as relevant expenses)
