Did I insinuate that government grants are taken for granted? Literally, I didn’t. But figuratively, I did. Let me explain.
In this period of the COVID-19 pandemic, businesses gratefully embrace government grants like life buoys to keep them afloat. But when and how do businesses initially recognize the government grants in their financial statements? How are such grants subsequently measured and presented? What if those grants subsequently become repayable?
Search for Application Guidance on IAS 20
IAS 20 [Accounting for Government Grants and Disclosure of Government Assistance] answers all those questions but provides no application guidance. For this reason, I embarked on a rigorous web search but to no avail. Some strived to impart limited guidance. Others haplessly echoed the provisions of IAS 20.
My futile search emboldened me to provide pedantic guidance on this uncharted territory. For those sticklers who share my quest for details, your limitless search ends here!
Definitions of Government Grants and Government Assistance
Government grant is 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.
Government assistance is action by government designed to provide an economic benefit to a specific entity (or range of entities) that qualify under certain criteria.
Recognition of Government Grants
Government grants, including nonmonetary grants at fair value, are recognized, as follows:
The foregoing diagram, along with the ensuing examples, are excerpts from my textbook on EXCELlent Financial Accounting and Reporting. The TWIFOO Diagram logically simplifies the 1,132 words (yes, I counted the words) in paragraphs 7 to 23 of IAS 20 into a decision tree.
In case you are amazed, I created the TWIFOO Diagram and named it after my pseudonym and motto, which is “The world is full of opposites”. Through the TWIFOO Diagram, we can straightforwardly decide whether or not we should recognize the government grant, and if we should, whether to recognize it as Income from Grants related to Income, Deferred Income from Grants related to Income, or Deferred Income from Grants related to Assets.
Presentation of Grants related to Assets
Grants related to assets are government grants whose primary condition is that the entity must purchase, construct, or acquire long-term assets. These grants are recognized and presented as Deferred Income from Grants related to Assets and subsequently amortized on a systematic basis (over the useful life of the asset), either as follows:
1) Gross presentation. The Deferred Income is presented under the Non-current Liabilities section in the Statement of Financial Position and subsequently amortized as Income from Grants related to Assets under the Other Income section in the Statement of Profit or Loss; or
2) Net presentation. The Deferred Income is presented as deduction from the carrying amount of the asset under the Non-current Assets section in the Statement of Financial Position and subsequently amortized as reduced Depreciation Expense under the Operating Expenses section in the Statement of Profit or Loss.
Gross Presentation of Grants related to Assets
The example below illustrates the gross method of presenting grants related to assets.
Notice that Deferred Income from Grants related to Assets is amortized (over the 5-year or 60-month useful life of the Machinery) as Income from Grants related to Assets.
Perhaps, you now know why my textbook is EXCELlent. You’re right! All examples, problems, questions, solutions, and answers therein are presented and calculated in Microsoft EXCEL.
Net Presentation of Grants related to Assets
The example below illustrates the net method of presenting grants related to assets.
Notice that Deferred Income from Grants related to Assets is amortized (over the 5-year or 60-month useful life of the Machinery) as reduced Depreciation Expense.
Presentation of Grants related to Income
Grants related to income are government grants other than those related to assets. These grants are recognized and presented as Deferred Income from Grants related to Income under the Non-current Liabilities section in the Statement of Financial Position and subsequently amortized on a systematic basis (over the periods that the related costs compensated by the grants are recognized as Expenses on Grants related to Income under the Other Expenses section in the Statement of Profit or Loss), either as follows:
1) Gross presentation. The Deferred Income is subsequently amortized as Income from Grants related to Income under the Other Income section in the Statement of Profit or Loss; or
2) Net presentation. The Deferred Income is subsequently amortized as offset to Expenses on Grants related to Income under the Other Expenses section in the Statement of Profit or Loss.
Gross Presentation of Grants related to Income
The example below illustrates the gross method of presenting grants related to income.
Notice that Deferred Income from Grants related to Income is amortized (over the 5-year or 60-month expense incurrence period) as Income from Grants related to Income.
Net Presentation of Grants related to Income
The example below illustrates the net method of presenting grants related to income.
Notice that Deferred Income from Grants related to Income is amortized (over the 5-year or 60-month expense incurrence period) as offset to Expenses on Grants related to Income.
Repayment of Government Grants
Government grants that become repayable, if performance conditions are not fulfilled, are accounted for as a change in accounting estimate and are presented as Government Grants Repayable under the Current Liabilities section in the Statement of Financial Position.
Repayment of Grants Related to Assets
Grants related to assets that become repayable are immediately recognized as offset to Deferred Income from Grants related to Assets, and then either as follows:
1) Gross presentation. The excess of the amount repayable over the balance of Deferred Income is recognized as Expenses on Grants related to Assets under the Other Expenses section in the Statement of Profit or Loss; or
2) Net presentation. The cumulative catch-up adjustment to the carrying amount of the asset is recognized as additional Depreciation Expense under the Operating Expenses section in the Statement of Profit or Loss.
Gross Presentation of Repayable Grants related to Assets
The example below illustrates the gross method of presenting grants related to assets that become repayable.
Notice that the excess of Government Grants Repayable over the balance of Deferred Income from Grants related to Assets is recognized as Expenses on Grants related to Assets.
Net Presentation of Repayable Grants related to Assets
The example below illustrates the net method of presenting grants related to assets that become repayable.
Notice that the cumulative catch-up adjustment to the carrying amount of the Machinery is recognized as additional Depreciation Expense. The adjustment is the accumulated reduction of Depreciation Expense as at the date that the government grant became repayable. After such adjustment, the resulting carrying amount will be as if no government grant had been received.
Repayment of Grants Related to Income
Grants related to income that become repayable are immediately recognized as offset to Deferred Income from Grants related to Income, and the excess of the amount repayable over the balance of Deferred Income is recognized as additional Expenses on Grants related to Income.
Gross Presentation of Repayable Grants related to Income
The example below illustrates the gross method of presenting grants related to income that become repayable.
Notice that the excess of Government Grants Repayable over the balance of Deferred Income from Grants related to Income is recognized as additional Expenses on Grants related to Income.
Net Presentation of Repayable Grants related to Income
The example below illustrates the net method of presenting grants related to income that become repayable.
Notice that the excess of Government Grants Repayable over the balance of Deferred Income from Grants related to Income is also recognized as additional Expenses on Grants related to Income.
The subtle difference between the methods of presenting repayable grants related to income is that under the gross method, the Deferred Income was previously amortized as Income from Grants related to Income, while under the net method, the Deferred Income was previously amortized as offset to Expenses on Grants related to Income.
I usually take the road less traveled, explore uncharted territories, and revisit what others took for granted, anticipating that thenceforth, I may know what was once unknown. If you read this far and I ended your quest for details on government grants, kindly inform me so through a comment below.