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!
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218 Comments
Leave a Reply
i alway look forward to listening to your lectures.
Its always nice to read your Articles and refresh the knowledge…
Thanks for that beautiful write-up
Thumps up
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.
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.
Thank you so much. Your lectures are excellent.
Simply awesome 🙂 Thankx for sharing
A well balanced, specfic and comprehensive lecture.
when we received grants for purchase of inventory. the grants charge to income or deducted from inventory
Great article i enjoy reading your articles
very well explanied.Thank you for sharing
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 “
Thanks for clarification . Always we use one type of recognitions of government grant .
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.
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.
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.
Thanks
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! 🙂
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.
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.
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.
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.
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.
EXCELLENT
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…
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.
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?
Thanks alot for the video…very very helpful
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.
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
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.
Miss
How I will get ur next article on IAS 20?
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.
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.
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!
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.
Ok, thanks a lot!
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).
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.
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.
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.
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.
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,
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.
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
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!
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,
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 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.
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.
Hi Silvia
Appreciate your efforts. I have question in relation to capital grant that we received from donors.
If we receive grant from donor in relation to purchase of asset and at that time project useful life is 5 year so is the asset useful life. So we have opt 1st option and defer its grant in the balance sheet and each time when we charge dpreciation we used to release grant income. Now when subsequently the project get closed so waht will be the tratment should we release all the unspent grant as project is close or should we defer it till asset useful life. Secondly what UK GAAP FRS 102 tell regarding this?
Dear Muhammad,
what happens to the grant when the project is closed? Is it returned to the government? Can you keep it? If you can keep it, just continue as before (i.e. continue amortizing deferred income over asset’s useful life – if that asset is still in operation). If you need to return it, then you need to account for it as for the change in accounting estimate. S.
Hi, can I make following entry Dr. Grants receivable and Cr. Differed income when conditions for grants receivable are met but company didn’t receive any amount yet but will receive it in future
Hi, our company gets grant to do differnt constructions. but goverment acting as a part-owner of the entity. that mean we haven’t obligation to apply IFRS 20. Is that mean?
what is the accounting treatment if the entity have any outstanding government grants at the date of transition to IFRS?
Hi Silvia
Thanks for you work and materials. It would be great if you also touched in IAS 20 Government Grants the issue of government grants refund, when the entity does not comply with rules of a grant and government cancel that deal related to grant.
Dear silvia,
I am bit confused on refund of goverment grant related to assets, well i read many of the articles yours and others but actually i couldnt grab something good from there could u please give me short description about it and thanks in advance..
thank you so much l benefited a lot from you
thank u so much for you presentation, I have one question in my mind what about in developing countries situation. gov’t borrowed from other nation and distribute as a grant to some govt’ organization. so can we consider this as a grant? if yes, In what way we treat accounting principle; as income approach or capital approach?
Excellent!
Regards,
Wency from Philippines
I am doing financial statements for a school for the first time. The school put in a requisition for office furniture from the government. The government approved the requisition and buys the school the office furniture it required. How do we record this in the balance sheet? We would debit office furniture, what would be the contra account to credit?
Do we have to split the deferred income recognized in the statement of financial position into long term and short term portion?
Hi Silvia, if Company A bought an asset in year 20X2 and the grant only granted in year 20×3. So may i know is this fall under grants related to income or grants related to assets? When we are going to use grants related to assets? Can we use it even when we buy a computer if we classified computer as our asset.
Thank you.
Hi Silvia
Appreciate your efforts. I have question on how government grant given to state owned business enterprise is accounted under IFRS ? It has been scoped out from IAS20.
Thank you!
Hi Mam
I Manu from India can you please tell me when this 2 alternatives for Grant fixed assets be applied?
And if we adopt 2nd alternative where whole grant assets adjusted with Grants then Grant assets will be showing NIL balance in Financial Books; there will be mismatch between total Fixed Assets in Fixed Assets Register and Financial books due to this adjustment.
Hi Manu, if you deduct the amount of grant from the specific PPE to which it relates, then I don’t see the reason why there would be a mismatch between PPE in your accounts and fixed assets register. You are NOT adding or deducting any “grant asset”, instead, you are simply making adjustment of the cost of another item of PPE and you can make the same change in the fixed assets’ register, too. S.
Hi Silvia,
I was hoping you can assist me in properly recording a government grant. We received 93,520.35 grant pay from the Dept. of Energy, which was used to pay an incurred expense related to the project for the Dept. of Energy we are working on for them. We paid the expense to our vendor on 06/28(wire transfer) and received the money for that expense from the DOE on 06/28(wire transfer) as well. I am unsure the journal entry, is this a pass through expense, is this pass through revenue, or a reimbursable expense. I was thinking the journal entry would be as follows.
Vendor Bill we entered:
DR-Cost of Goods sold
CR-A/P
Vendor bill we paid:
DR-A/P
CR-Cash
Government Grant Invoice:
DR-A/R
CR-Grant Revenue
Government payment received:
DR-Cash
CR-A/R
Please advise how to properly record this in compliance with IAS20, your help would be much appreciated, as I am racking my brain trying to properly record this, thanks in advance.
Dear Regina,
I think that’s pretty correct, if no further conditions are attached to the grant 🙂 S.
HI SILVIA,
our company received a land as a government grant , without any conditions and forever, how we can treatment this case in our books ? and can we recognition the total amount as revenue in the first year?
Dear Silvia,
For a 100% state-owned entity, how does one account for receipt of inventory from government free of charge under IFRS? How should these items be valued and where does the other side of the entry go? (deferred income, profit for the year, retained earnings, additional capital?) If the items in question are PPE and they are withdrawn from the entity by government several years later (again, with no consideration transferred), is it a loss, a reduction in retained earnings or a reduction in additional capital? What about accumulated depreciation and impairment losses accrued to date?
Hi
please can anyone help me to understand how to account for repayment of govt grant in all the 3 cases?
Thanks
Hemang
a company was first received a grant of 500000 to acquire an electricity plant, whilst a second grant of 50000 too was received for the training of electrical engineers on the electrical plant. please help me solve this madam, thank you.
Dear Madam,
A part of the machine cost is reimbursement by the supplier (not from Government ) after a certain period. Currently we treat reimbursement value as an Income in books and we not deduct the reimbursement value from asset value.
Please explain whether this treatment is correct.
Thank You
Rajee, I can’t tell for sure because it depends on the contract. In general, if you expect the reimbursement right in the beginning (you’re quite certain that it happens), you should really deduct it from the asset’s cost. S.
Hello Silvia,
I want to ask, if the company got a license to use the land for free for 70 years, is it consider as a grant (IAS 20) ? what’s the amount of asset to be recognized ? Is it considered as intangible asset ?
Thank you for your efforts.
It’s really pleasure to read various articles related to IFRS. Your articles and videos are so much helpful.
In our country, there is a declaration from Government that for export of ‘Paper & Paper Products’ a cash incentive @10% on invoice price will be paid. Such incentive is disbursed through bank account after auditing that takes about 6 or more months.
Now we are recording for such incentive:
Receivables for Cash Incentive-Dr.
Income from Cash Incentive-Cr.
My questions add-on
1. Whether the above mentioned treatment is correct?
2. Will it be shown in ‘ Other Comprehensive Income?
3. Is it fall under IAS-20?
I’ll be grateful if you give me a feedback.
Hi Hasan,
I think you’re getting it right currently. As the conditions have been already met, you can recognize the incentive in profit or loss as a revenue from grants and the grant receivable. No, it will not be shown in other comprehensive income, but in profit or loss. Yes, it falls under IAS 20. Best, S.
Thanks a lot.
Hello Silvia,
Is JICA, GIZ, WHO a government as per IAS 20?
Regards,
Ganesh Kadal
Hi Ganesh,
yes. The government is defined in IAS 20.3 as “government, government agencies and similar bodies, whether local, national or international”.
Does it mean any entity can be government for IAS 20?
Because I was of the feeling that WHO is not a government agency…
Not any entity, just those who meet the definition above (WHO does).
Hi Silvia, would a grant from another non-profit entity be fall under government grant from similar bodies? The Nature Conservancy for example.
Hi Silvia,
What if my company received a government grant for intangible assets with indefinite useful life? How can I calculate the grant to be recognized in profit or loss?
Looking forward to your reply.
Thank you!
Hi Karen,
In practical, the Government does not provide grants for intangible assets as these assets are either internally generated or by acquisitions. For the later, money comes from acquirer’s pocket and that government has nothing to do with that i.e. no implication for country’s developments.
I am an amateur (Finalist), pardon me if I am wrong. Your question has a very valid point to question upon. I look forward to hearing from Miss Silvia to give some light..
Very useful information, thanks.
Have a doubt , request your help.
Our jobworker (agent- who manufactures on my behalf) has received government grant in cash and shared 50% of the grant with me, Though he is not compelled to share the grant with me but did considering long term relationship.
Can you advice how to account the same.
if someone receive a land as government grant and in return the receiver of grant is required to built infra structure to make it export process zone how to account for such transaction in books of account and if land is required to be recorded what will be the value as receiver has not paid any amount
Dear Silvia,
can you please describe the accounting treatment related to sale of assets which were part of the government grant, but at the time of sale they are still not fully depreciated?
Dear Silvia
What would be accounting treatment for a repayment e.g. 10% of the total grant (required by law) in 3 years.
Very descriptive article, I loved that a lot. Will there be a part 2?
Dear Silvia,
my company received an incentive one time payment since we were able to assure the financier that we compliance with the procedures, related to the project in which we build a new plant. Since the whole project is related to property, plant and equipment, should we treat this one time incentive payment as income in profit or loss statement or as a deferred income? Thanks!
Jane, if this is related to the property, plant and equipment and the incentive supports its construction, then it’s deferred income (or deduction from PPE’s cost).
Dear Silvia,
should non-government grans related to assets (from EBRD for example) be treated the same as government grants?
Thanks!
Yes.
Hi Silvia,
What if the government has granted a land or building to a wholly owned governmental entity without any conditions or special rules. Does the governmental entity recognize the grant as an income or an equity transaction?
I found it very challenging to determine.
Thanks in advance.
Omar K
If the government is a shareholder, then it is a transaction in equity.
Dear Sylvia,
the goverment assisted my company in repayment of loans during the year by giving us a monetary grant. How should we treat this monetary grant? Thanks!
Dear Sylvia,
What if the utility receives a grant for paying the operation expenses without specifying the period to be covered , i am wondering,Is it necessary to amortize it or we can immediately recognize it (all amount) as the income in one year?
Good summary but note IFRS doesn’t really prescribe one approach over the other. The capital approach is not explicitly banned. IAS 20 just implies that in most instances, it would be more applicable for most entities to use the Income approach most sorts of government grants.
I beg to disagree. IAS 20 directly prescribes that the government grants SHALL be recognized in profit or loss… IAS 20 par. 12. IAS 20 explains that there are 2 broad approaches, including capital approach, but then it explains why income approach has been selected. And, if IAS 20.12 says that you SHALL apply income approach, it does NOT mean that capital approach is not banned – in fact, it is.
Maybe it’s just the American auditor in me but I took the word “SHALL” to mean “presumptively mandatory”, not necessarily an unconditional requirement. At least that’s how the US auditing guides define the word “shall”. I would argue that if an entity could display and justify valid reasoning behind recognizing the grant directly in equity, then it could theoretically be allowed. That said, I do see where you are coming from Silvia.
I don’t want to sound harsh, but I believe that if anyone would interpret the word “shall” just as you do, the standards would be very vague and useless, not even talking about the mess in the financial reporting. No, you cannot recognize the grant in equity – unless the government is a shareholder and in such a case the transaction might not (or might, depending on the situation) fall under IAS 20. And, by the way, what did you mean by your last sentence? I can’t decide whether that’s offensive or not.
No I wasn’t being offensive – I was just saying that I understood your point-of-view as well. This is a classic American vs International way of looking at things as here in the US, the word “shall” is actually explicitly defined by the audit boards. You’re correct here too as shall is considered here “an unconditional requirement”. I was thinking of the world “should” which has a different meaning than “shall” in the U.S. audit guides.
Here: https://pcaobus.org/Rulemaking/Docket009/2003-10-07_Release_2003-018.pdf
Learning every day. Have a good day.
Thanks, I am learning every day, too! 🙂 Best, S.
hi
sylvia,
can we clarify the difference between capital approach and income approach for accounting of government grant,any one can reply to this
Well, capital approach is accounting for grants in equity and income approach is accounting for grants in profit or loss. Capital approach is not permitted by IAS 20, income approach is required.
Hi Sylvia
With the deduction from asset method, on receipt of the grant you debited PPE and credited cash/bank. What if the asset was given to the company directly. I mean the company was not given money to buy it but rather it was bought and given to it by the grantor. Can i please know the entry
Samuel, I believe I did the entry vice versa – debited cash and credited PPE. If the company receives grant in the form of assets other than cash, well, you would need to account the receipt of the grant at its fair value. And yes, it can happen that under IAS 20 you would arrive to zero carrying amount of an asset if the asset was just given by the government, but it would not be the best presentation in the financial statements, because you are not showing the government grant and asset at all. Thus I would follow the first method via deferred income and the entry would be just Debit PPE Credit Deferred Income with the fair value of that asset.
Hello,
Where the grant is received in form of asset ,what would the entries be if the 2nd approach (not deferred income) is taken?
That is;
On receipt of the asset grant, PPE is debited and the grant account (under reserve/liability) is credited. PPE will then be depreciated. What happens to the amount in the grant account?
It will be amortized in profit or loss in line with the depreciation (I mean method, not amounts).
Hi, how do we account for inventory bought using grant funds e.g medical supplies especially if they are not fully consumed at the end of the reporting period. Do we release the Deferred income to the extent that the inventory is consumed or fully at the time when the whole lot of inventory is bought?
Hi Marie, I think this can help. S.
Hi, how do you account for grants in which the grantor makes payment directly to the service provider. this is a grant where the grantee provides 20% of the total grant amount and the grantor provides the 80%. The grantor is paying the service provider directly instead of giving the cash to the grantee to pay the service provider.
Hi Silvia,
If government has providing assistance in tax like refund of some output tax than what we have to treat it in books of account.
Hi Subodh, then maybe it is accounted for under IAS 12, not IAS 20. Read this article, maybe it will clear it out for you.
Hi silvia ,i am from Saudi Arabia , i have company dealing with governments , we have three contracts to selling him books , once they sign the contract and before they provide him with any books, they record the hole amount of contract
Dr Account receivable
Cr Unearned revenue
is this treatment correct
thank you for your time
Hi Mohammad,
does this company have the right to receive the full payment for the books immediately after signing the contract? If not, then this treatment is not correct, because the right to receive payment has not been established. S.
simply aware some
Hello Sylvia. Thanks for this great article.
I would to find out the appropriate Accounting treatment for a government grant money received to cover a particular activity for a given period. however during the period, the activity is cancelled to favour another activity after some part of the grant money has been used. Thanks
Hello Silvia,
I’m working with Non Profit Organization and we received a total grant of 497,155$ in 2018 and spend 445,000$ and left with around 44,000$ , as per the agreement with our donor the unspent amount 44,000$ should be transfer to 2019 as a income, the question is that what type of adjustments are needed (closing and opening entries). Thanks
Dear Silvia,
my company received in previous reporting periods a government grant related to building, which we amortized over their estimated useful lives. During 2019. this building was entered as share capital contribution in another entity in an amount of the carrying value as of the date. However, we still have deferred income, which we used to credit to profit or loss on a straight – line basis over the expected live of the building. Since we do not have the building anymore (we have shares) what should we do with the deferred income? Thanks for the input!
Kind regards,
Hi Silvia, in case of grant to cover past cost or expense, if it goes straight to the P/L it means it will have tax effect as Income is taxed at the end, and we pay taxes to the same body which gave us that grant (Government) can you please narrate a bit on that
Hi Silvia,
Recently, I have joined a non-profit organization for Houbara bustards (birds) conservation, where we receive government grants for the operation of more than 30 years. My question “is there a possibility or chance that the grant amount is more than the reimbursement cost or amount to acquire an asset? If yes, what is the treatment of the excess grant and the related entries on this scenario?
Best regards
Dear Oscar,
it depends on the conditions of the grant. If you need to return it, then you will have a liability. If you do not have to refund it to the government, then it is your revenue. S.
Hello Sylvia Thank you for the article… it really simplify the standard
Can you guide me with this? I’m so confuse—
Government A gives grant (cooperation agreement) to a company (a Bank, acting as implementing partner) for 90 USD (90% of the fund). With the purpose of giving loans to a specific person,(government A choice) Government A has a substantial participation on the implementation of the project. Bank also gives his portion of 10% 10 usd. Government A obliged the Bank to place in a Fiduciary (90% government donation, 10% Bank), to act as an administrator and the bank will act as trustor. Government A. will not participate on any profit that will be derived on the project, neither the Bank, but they will reimburse the 5% of what the bank had to give. The income that will be derived will be reinvested for the purpose of giving loans to specific person (purpose of the project)
My question is
1. Can the bank recognize the government grants as an income 90 usd even though it will be place in a fiduciary?
2. The 10 usd part of the fund, can the bank record it as an asset?,
3. How can the bank record the fiduciary, as assets? Bank will be the trustor (100 usd)
Please help me thanks
Hi Silvia,
Can you please advise what if there is a government grant as a forgivable loan, However one day the repayment for forgivable loan is required. Can you please advised how to record the repayment in grant of asset/expense? Is there any difference in IFRS and ASPE?
Thanks,
An
Hello Silvia,
How can we treat a Grant of USD 20,000 which we have not received at the end of our accounting period i.e June 2019 but will be received in the next accounting period. when we have received a grant related journal is to DR-Cash/Bank and CR- Deffered Income, in the scenario i have asked which account will be debited and credited as grant is not yet received.
Would be interested to know also, i thought it would go to Grants receivable, but i stand to be corrected.
This is very helpful. Thank you
Dear Ms. Silvia,
Hope you are fine and doing well,
I highly appreciate if you answer the below question of mine:
Assume World Bank has given 3 vehicle valued 100,000 USD, and a an intangible asset valued 50,000t USD to an entity as a grant. there is not cash/bank transaction. how should treat it under IAS 20.
I look forward for your kind response!
thanks
Thanks, Sylvia.
You are a valuable expert!
Hello MS Silvia, i am from Ethiopia and its my pleasure to read and listen your articles. it is helpful and very interesting. i would like to Thank you.
Thanks for your article on treatment of government grants, my area of interest is on grants for assets and the issues with the treatments; deferred income approach means the organisation will be recognizing income in the future even if it does not carry out any activity. There will be an income tax implication. If one adopts deduction from PPE, means company assets will be understated, especially if these assets form a substantial part of the total assets. I have a similar situation in my books and I’m trying to see which option is better
Hi Silvia,
What would be the appropriate way to present a shareholder capital grant? I believe it shall not be presented under NCL and amortized but to be presented as an Investment subsidy under equity. These capital grants are provided by the shareholder to acquire initial capital assets ( shareholder is not a government entity or related ). Appreciate if you could confirm. Thanks in advance.
Hi TR, I think this article can give some hints. S.
If a public sector company gets interest free loan from Govt and it is sure that company will not be able to pay repay the loan. Since the loan is payable but the timing of the loan repayment is uncertain. Under this situation, should this loan be amortized or not?
Hello Silvia
Explain the treatment to be given when an entity after enjoying government grants can not pay the capital and interest
Thanks.
That depends on the grant terms/contract/official document related to the grant. You should look what happens and then decide on the accounting. IFRS do not solve the general issue related to this.
Sylvia,
The Government is providing a grant to a fund a partial credit guarantee scheme, should i capitalise this grant and amortise it to meet the operations cost when these cost are incurred?
Hi Silvia
How to account for below market rentals charged by government entities? How to account for fair value and the actual rental paid?
Thank you. ?
Hi Silvia, i have a question, as you probably aware due to pandemic Govt’s are issuing interest free loan partly or fully to companies to pay employee payroll for next 2 to 3 months. So should this be considered as Govt grant and would this grant go under other income (after operating income) or reduce payroll exp under salaries expense account. Thanks
Thank you so much. Your lectures are very educative
Hello silvia , How to account for percentage of employees salaries that government will pay monthly because of covid 19 ?
In my opinion that is the grant to cover operating expenses in that year, so recognize in profit or loss as a revenue.
Government has announced to pay less social security than the normal scenario due to this covid-19. example: usually the company accounts 100 as expense and remit it to government in normal scenario. but due to this pandemic, government announced to pay only 60. whether as per ias20, 100 to be accounted as expense and take 40 as income (or) account only 60 as expense..?
Dear Silvia,
My church was donated with land and building without any condition, What the church did was as follows:
1. Dr Land and Building
Cr Capital grant
2. Dr Depreciation of building to pl
Cr accumulated depreciation
3. Dr Pl
Cr Capital grant
– with the annual depreciation charged on building
What happens at the end of it, the capital grant of the building element became zero and only remains amount for the land in the capital grant. Also, a result of this entry the depreciation charged for the year is cancelled and there is no effect in the pl. May i know whether such treatment is correct. If no, what is the correct treatment?
Hello Silvia,
What is the treatment when government granted land with no condition?
Regards,
Hello,
We have such case : Company received government grant in the form of cash, for continuing operation as normal course of business, without conditions attached to it. For accounting purpose ,what conditions have to be met in order to account grant in operational activities in the statement of cash flow ?
Regar
Hello,
We have such case : Company received government grant in the form of cash, for continuing operation as normal course of business, without conditions attached to it. For accounting purpose ,what conditions have to be met in order to account grant in operational activities in the statement of cash flow ?
Dear Ms. Silvia
I hope my e-mail finds you fine. I am trying to write a paper about ISA 20. You mentioned that ISA 20 was issued in 1983 and became an effective 1984. It is highly appreciated if you could send me the document for this information
Best wishes
Mohammed
Hello,
In the current pandemic situation, most of the government has provided the relief in the time frame for depositing VAT and other tax liability. Can we address this as “Government assistance” under IAS 20 and required to disclose the same in FS. Please help with the treatment.
Hi Mayank, sometimes you need to apply IAS 12 for income tax, sometimes IAS 20. However, I don’t see the direct accounting implications other than disclosure in the notes.
Hi Silva
on Question 2
The grant of CU 10,000 is for cost on ecological measures incurred from 2000 to 2005 and in that period the company incurred only CU 12,000. Do we have to extend the grant to cover for costs incurred in 2006 year as you have done by your calculation?
Awaiting your response
Good day! My question is that in Pakistan we have financing facility for exporters at concessional rate of interest (Export Refinance). IFRS is applicable in Pakistan, but exporting entity availing such finance treat this as normal financing arrangement. Shouldn’t they have applied IAS 20?.
Hi Silvia, I have a question om government grant funding and grant funding in general.
For government grant funding I’d government gives you funding to construct an asset and as you incur costs they approve the costs of the assets can you say that the method of income approach is more applicable as once you perform their work totheir satisfaction they approve these past project costs. As apposed to the asset based approach.
2.what happens if you receive a grant that is a mix of funding, some for assets and some for expense which you are not completely aware at the start or thr audit can you apply a hybrid deferred income release until thr conditions of thr grants are met.. Eg based on a proxy of thr assert depreciation and release to the income statement.. This is a very grey area in thr standard. This is really vexing and I would sincerely appreciate your input
Hi, How are we going to account a grant received from the government which will be used to repay a company’s liabilities
Thanks
Dear Silvia,
I have a question. One of Government Agencies transferred the raw material with no charged to another government agency and that agency used the raw material in the production process. I would like to know whether that raw material should be recognized as grant related assets or grant related income. I’m waiting for your kind response.
Thanks in advance.
It depends on the inventory’s production cycle. See, you should match the grant income with the related expenses – that’s the main point. So, if inventory was consumed right away, then recognize the grant as income immediately.
Thank you so much, dear Silvia. It is very helpful to me.
Hi,
Thats a great explanation. but i have still some doubt onHow to treat grant for non depreciable asset.. weather monetary or non monetary grant.
Thanks and regards
Rushang soni
I still couldn’t figure out what journal entries would be for receipt of Revenue grant. If you know please reply I would appreciate it. Thanks.
How to account for a grant of land in the Financial statements???
This is exactly what I’m trying to figure out as the land is non depreciable.
All right guys. So, take a look at paragraph IAS 20.18. It says that if the grant is provided to acquire non-depreciable assets, then it may require fulfilment of certain obligations and in this case, it needs to be recognized in profit or loss over the periods bearing the cost of meeting these obligations. Let’s say you get a grant to acquire the land, but you have to make certain improvements on that land within 3 years, so in this case you need to recognize the grant in profit or loss over that period. You get the point. It is very rare that you get the grant to acquire land with no further conditions or obligations – if this is still the case, then well, maybe it would be appropriate to account the grant’s income in profit or loss when you acquire that land.
Thank you for the clarification, I think the response you have provided relates to getting the grant to acquire non-depreciable asset. What happens when the Govt provides the non-depreciable asset? How is it initially recognized? Do we have to assess the fair value of the non-monetary asset and to account for both grant and asset at that fair value? Or is it ok to record both asset and grant at a nominal amount?
Hi Silvia,
First of all great post! I’m just a little confused regarding the application of a grant for an asset. For example, if the asset was already purchased and paid for before the government grant is received, would we still be able to apply both the options mentioned above for the method regarding assets?
Hi Silvia,
We received a monetary grant from one of our shareholders, and as per the shareholder’s agreement, we must utilize this monetary grant to procure certain capital assets. In this case, can we record this monetary grant as differed income and amortize it over the useful lifetimes of the capital assets?
Thanks In advance- Ranawaka
Hi Ranawaka,
in general no, because the shareholders are neither government nor similar body and thus IAS 20 does not apply (or are they?) Please take a look here, maybe you will find a different way.S.
Hi Silvia,
Recently my employer received a government grant amounting $200,000 to finance a certain project with a clause “grant of option” to grant the government body to subscribe 10% pf the shares (the “option shares”) and this option may be exercised any time within a-5-year-period.
Should i still account for S$200,000 as government grant income? and how to treat this 10% as per IFRS?
Thanks Silvia 🙂
Hi Silvia
I want to ask about the accounting treatment of furlough where the employees are on temporary leave due to covid , as such the employers can claim under certain conditions certain amount from the government . My question is whether the accounting treatment then would be similar to grants related to future or present expenditure in this case .
thank you
Hi Silvia,
Thanks for your comprehensive video. However i have some confused .
For Example I received a grant $1mil today (which consist of a) salary incurred for the past year before 2021 $500K, b) professional fee incurred this year 2021 April $100K and c) equipment $400K which total equipment cost $1.5mil acquired on in year 2017 and capitalized in assets over 5years) but government only subsidy $400K),
so my accounting entities will be:
DR cash $1mil
CR P/L $500K matched with salary expense or P/L-other income-Grant ?
CR P/L $100K match with professional fee expense or P/L -other income-Grant?
CR Deferred Income $400K and amortized it over the PPE useful life , JV entry will be DR Deferred Income DR P/L depreciation expense or Other Income -grant?
I will really appreciate it if you can advise me ( PS: we have fullfiled the grant condition )
Thanks
Agnis
Hi Silvia,
How to account for land received from government as a Non-monetary grant?
I think this question is quite well answered by this article.
Hi Silvia,
My apologies if this question pops up a second time. I am not sure if the first one was posted as I cannot find it anywhere.
My question is in relation to the accounting treatment of WIP and grant received.
If I receive a grant today to finance a construction project over the next 3 years, would my initial journal entry be DR Bank/CR WIP?
And subsequently, DR WIP/ CR PPE.
After the project is finished and the asset is available for use, I would start depreciation.
Would this be the correct treatment? I am a bit confused, as crediting WIP would mean that I have a negative WIP balance.
Could you please help to bring some light into the dark :)?
Many thanks in advance!
Tania
Hi Tania,
I personally prefer the fist method of accounting for grants – treating as a deferred income, because the grant is shown clearly. However, I do understand why the second method is used – it brings CAPEX down, and EBIDTA looks better, too.
OK, but as you selected the second choice, here’s my view on your issue: Clearly, you have not spent the cash on your WIP and you received more money from the government than you spent at that moment. I assume that the grant was only for the acquisition of that PPE, and not for anything else. Hence, at that moment of the grant receipt, you did not meet the full conditions of the grant (ie spending that fully on PPE) and thus you should not deduct it from WIP, but recognize it as some liability Dr Cash/Cr Liabilities from grant.
And only when you actually spend that cash for WIP, you pass the entry Dr Liabilities from grant / Cr WIP. And, if it happens that you spend less than you received in a form of a grant and government is happy with that and does not ask for repayment (have a paper on that!!!), then you would recognize the remaining grant liability straight in profit or loss.
Hi Silvia
We are following the deferred income approach.
1. What do we do to the deferred grant income when there is a disposal of an asset which still had a carrying amount (not fully depreciated)?
2. for multi year construction projects – does the WIP/ AUC affects the deferred income (before depreciation kicks in)?
Hi Fortunate, 1) It depends on the terms in the contract related to the grant; if that’s not repayable back to government then you should simply recognize the remaining balance of deferred income in profit or loss. 2) I don’t think so since no P/L is affected.