IAS 20 Government Grants & Assistance - Summary

IAS 20 Government Grants and Disclosure of Government Assistance

IFRS Summaries by Imad Uddin, FRM

Objective

Prescribe the accounting treatment and required disclosures for:

Government grants (transfers of resources).

Other forms of government assistance (benefits without direct resource transfer).

A key aim is to ensure grant income is recognized systematically, matching it with the related costs the grant is intended to compensate.

Scope

Applies to accounting for, and disclosure of, government grants and other forms of government assistance.

Does NOT cover:

Specific problems arising from grants in financial statements reflecting the effects of changing prices or supplementary information of a similar nature.

Government assistance provided in the form of benefits related to income tax (e.g., tax holidays, investment tax credits - covered by IAS 12).

Government participation in the ownership of the entity.

Government grants covered by IAS 41 *Agriculture*.

Key Definitions

Term	Meaning
Government	Refers to government, government agencies and similar bodies whether local, national or international.
Government Grant	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. Excludes forms of assistance that cannot reasonably have a value placed upon them and transactions indistinguishable from normal trading activities.
Government Assistance	Action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria, but which are not grants (e.g., free technical advice, provision of guarantees, procurement policies favouring domestic suppliers). Requires disclosure, not recognition.
Grants Related to Income	Government grants other than those related to assets. They are intended to compensate for expenses already incurred or provide immediate financial support with no future related costs.
Grants Related to Assets	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.

Key Distinction: Grants involve resource transfer (usually recognized), while Assistance provides benefits without direct transfer (disclosed only).

Recognition Criteria

Government grants (including non-monetary grants at fair value) shall not be recognized until there is reasonable assurance that BOTH of the following conditions will be met:

The entity will comply with the conditions attaching to the grant; AND

The grant will be received.

"Reasonable assurance" is generally interpreted as a high probability, similar to the "probable" threshold used elsewhere in IFRS. Receipt of a grant does not itself provide conclusive evidence conditions have been or will be fulfilled.

The manner of receipt (e.g., cash, asset) does not affect the accounting method; it's the nature of the grant (income vs asset related) that dictates treatment.

Recognition of Government Grants

Grants are recognized in profit or loss on a systematic basis over the periods in which the entity recognizes the related costs which the grants are intended to compensate (the matching principle).

Income-Related Grants:

Recognized in Profit or Loss systematically over the periods necessary to match them with the related costs they compensate.

Two acceptable presentation methods in P&L:

1. Present the grant as 'Other income' (gross basis).

2. Deduct the grant from the related expense (net basis).

Grants received as compensation for expenses already incurred or for immediate support with no future related costs are recognized in P&L in the period they become receivable.

Asset-Related Grants:

Two acceptable presentation methods in the Statement of Financial Position:

1. Recognize the grant as deferred income. This deferred income is then recognized in profit or loss on a systematic basis over the useful life of the asset.

2. Deduct the grant in calculating the carrying amount of the asset. The grant is then recognized in profit or loss over the life of the depreciable asset by way of a reduced depreciation charge.

The deferred income method (1) is often preferred for transparency. Both methods result in the same net impact on profit or loss over the asset's life.

Repayment of Grants

Situation (Grant Becomes Repayable)	Accounting Treatment
Repayment of Grant Related to Income	Treated as a change in accounting estimate (IAS 8). Applied prospectively. First, apply against any unamortized deferred credit related to the grant. To the extent repayment exceeds deferred credit, or if none exists, recognize immediately in profit or loss.
Repayment of Grant Related to Asset	Treated as a change in estimate (IAS 8). Applied prospectively. If grant was deducted from asset cost: Increase carrying amount of the asset. Cumulative additional depreciation that would have been recognized to date is recognized immediately in profit or loss. If grant was treated as deferred income: Reduce the deferred income balance. If repayment exceeds balance, recognize excess immediately in profit or loss.

Situation (Grant Becomes Repayable)

Accounting Treatment

Repayment of Grant Related to Income

Treated as a change in accounting estimate (IAS 8). Applied prospectively.
First, apply against any unamortized deferred credit related to the grant.
To the extent repayment exceeds deferred credit, or if none exists, recognize immediately in profit or loss.

Repayment of Grant Related to Asset

Treated as a change in estimate (IAS 8). Applied prospectively.
If grant was deducted from asset cost: Increase carrying amount of the asset. Cumulative additional depreciation that *would have* been recognized to date is recognized immediately in profit or loss.
If grant was treated as deferred income: Reduce the deferred income balance. If repayment exceeds balance, recognize excess immediately in profit or loss.

Example – Income Grant

Entity receives $100,000 cash grant on Jan 1, Year 1 to support specific employee training costs expected to be incurred evenly over Year 1 and Year 2.

Assume reasonable assurance criteria met.

Accounting (Matching Principle): Recognize grant income systematically as training costs are incurred.

P&L Impact per year (Years 1 & 2): Recognize $50,000 grant income, either as:

Other Income of $50,000; OR

A reduction of Training Expense by $50,000.

Example – Asset Grant

Entity receives $200,000 cash grant on Jan 1, Year 1 towards acquiring a machine costing $1,000,000. Conditions met. Machine useful life = 10 years (straight-line depreciation, nil residual value).

Method 1: Deferred Income

Jan 1, Year 1: Dr Cash $200k, Cr Deferred Income $200k.

Each year (Years 1-10):

Dr Depreciation Expense $100k ($1M/10), Cr Accum Dep'n $100k.

Dr Deferred Income $20k ($200k/10), Cr Grant Income (or reduce Dep'n Exp) $20k.

Net P&L impact each year = $80k expense.

Method 2: Deduct from Asset Cost

Jan 1, Year 1: Dr Machine $800k ($1M - $200k), Cr Cash/Payable $1M, Cr Cash (from Grant) $200k (effectively).

Each year (Years 1-10):

Dr Depreciation Expense $80k ($800k/10), Cr Accum Dep'n $80k.

Net P&L impact each year = $80k expense.

Non-Monetary Grants

Grants may take the form of a transfer of non-monetary assets, such as land or other resources, for the use of the entity.

Account for both the grant and the asset at the fair value of the non-monetary asset received.

Alternatively (less common), record both asset and grant at a nominal amount.

Subsequent accounting follows rules for asset-related grants (usually deferred income method based on fair value).

Government Assistance (Disclosure Only)

Nature and Examples:

Actions by government providing economic benefits specific to an entity/group, but not involving resource transfer (or value cannot be reasonably assigned).

Examples: Free technical or marketing advice, provision of guarantees, significant procurement contracts, improved infrastructure benefiting the entity.

Accounting Treatment:

Disclosure required if the assistance is significant and beneficial to the entity.

No recognition in the primary financial statements as income or reduction of cost, as it doesn't meet the definition of a grant (no resource transfer).

Disclosures Required

Disclosure Requirement	Explanation / Detail
Accounting Policy	Methods of presentation adopted for grants (gross vs net for income grants; deferred income vs asset deduction for asset grants).
Nature and Extent of Grants	Description of the nature and extent of government grants recognized in the financial statements. Indication of other forms of government assistance from which the entity has directly benefited.
Unfulfilled Conditions / Contingencies	Details of unfulfilled conditions and other contingencies attaching to grants that have been recognized.
Impact on Financial Statements	How the recognition of grants has affected reported income, expenses, assets, and liabilities.
Government Assistance	Nature, extent, and duration of government assistance (non-grants) recognized as directly benefiting the entity, if material.

Summary Table - Grant Treatment

Type of Grant	Recognition Basis	Presentation in Statements
Income-related	Systematic basis matching related expense	P&L: As 'Other income' (Gross) OR Deduction from related expense (Net)
Asset-related	Systematic basis over asset's useful life	Balance Sheet: Deferred Income (Liability) OR Deduction from Asset Cost P&L: Amortization of deferred income OR Reduced depreciation expense
Non-monetary (e.g., Land)	Recorded at Fair Value (or nominal amount)	Balance Sheet: Asset recognized. Grant treated as asset-related (usually Deferred Income method).
Repayments	Prospectively (Change in Estimate - IAS 8)	P&L: Immediate expense OR Balance Sheet: Adjust Asset / Deferred Income first.

Key Judgments and Estimates

Assessing reasonable assurance that conditions will be met and the grant received.

Determining the periods over which to recognize grant income to match the related costs.

Estimating the useful life of assets for amortizing asset-related grants.

Measuring the fair value of non-monetary grants or assistance if applicable.

Assessing likelihood and timing of potential grant repayments.

_{Disclaimer: These IFRS summaries are provided for educational purposes only.}

_{Imad Uddin is deeply passionate about IFRS and has founded Analyqt, a consulting firm dedicated to helping clients navigate complex accounting and financial reporting challenges. In addition to his advisory work, Imad is committed to education and knowledge-sharing, which led to the creation of IFRSMasterclass.com, a platform offering high-quality IFRS training and resources.}

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