THE FINANCIAL REPORTING WORKSHOP 25 TH TO 29 TH JUNE 2014 HILLTON HOTEL, NAIROBI IAS 20 ACCOUNTING FOR GOVT. GRANTS AND DISCLOSURE OF GOVT. ASSISTANCE 1

Content 1. Definitions 2. Key issue on govt. grants 3. Types of government grants and accounting treatment 4. Repayment of government grants 5. Disclosures of government assistance and grants. 2

1. Definitions Government: Refers to government, government agencies and similar bodies whether local, national or international. 3

1. Definitions Government grants : Government grants 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. 4

1. Definitions Government assistance Government assistance is action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria. For example the provision of technical or marketing and guarantees. 5

2. Key Issue of Govt. grants Should we report a government grant as income in the profit or loss for the period or should we report directly in the retained profits outside the profit or loss for the period? 6

2. Key Issue of Govt. grants Reporting directly in the income statement is called the income approach and reporting directly in retained profits outside profit or loss is called the capital approach. 7

2. Key Issue of Govt. grants Arguments for Income approach are: 1.Government grants are receipts form sources other than owners and lenders, so the accounting treatment should be consistent with other incomes. 8

2. Key Issue of Govt. grants 2.Most government grants have conditions attached. To fulfill these conditions, an entity may incur expenses. Hence it is recommended that the grant be reported as income to match with the related expenses. 9

2. Key Issue of Govt. grants 3. Income and other taxes are expenses. It is therefore logical to deal also with government grants, which are an extension of fiscal policies, in profit or loss. 10

2. Key Issue of Govt. grants Arguments for Capital approach: 1. Government grants are a financing device and should be dealt with as such in the statement of financial position rather than be recognized in profit or loss. 11

2. Key Issue of Govt. grants 2. It is inappropriate to recognize government grants in profit or loss, because they are not earned but represent an incentive provided by government without related costs. 12

2. Types of govt. grants 1. Grants related to assets Grants related to assets are government grants whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire long-term assets. Conditions may also be attached restricting the type or location of the assets and even period of use. 13

2. Types of govt. grants For a grant related to assets an entity can either: 1.Transfer the grant initially to a liability account called deferred government grant. Then report as income over the period of use of asset and as conditions are met. 14

2. Types of govt. grants 2.Offset the grant against the cost of asset. The asset will be stated net of the grant and depreciation provided on the reduced amount over the period of use of the asset. This second method is “not fair”. 15

2. Types of govt. grants 2. Grant related to income IAS 20 defines this grant as any other grant not related to an asset. The grant is basically in two forms: 1. A lump sum to cover certain operating expenses over a given period of time. 16

2. Types of govt. grants The lump sum is transferred to a liability account and called deferred government grant. It is then reported as income over the period expenses are incurred and as the entity meets the conditions attached to the grant. 17

2. Types of govt. grants 2. The grant can be reimbursed after the entity incurs the expense. In this case report as income when the grant becomes receivable and if the conditions attached to the grant are met. 18

2. Types of govt. grants 3. Forgivable loan This is a loan in which the lender undertakes to waive repayment if certain prescribed conditions are met. The loan should be reported initially as a liability and then as income when the loan is forgiven. 19

3. Repayment of government grant If the entity does not fulfill the conditions attached to the grant, then the “govt.” may require the part or the whole of the grant to be paid back. The accounting treatment will depend on the type of the grant: 20

3. Repayment of government grant 1. If the grant was initially reported as deferred govt. grant then the repayment should first be offset against the balance in the deferred govt. grant. Any additional payment should be expensed. 21

3. Repayment of government grant 2. If the repayment relates to a grant that was used to offset the cost of an asset, then increase the carrying amount of the asset with the repayment. Understated depreciation as a result of the offset needs to be expensed. 22

3. Repayment of government grant 3. If the grant was initially a reimbursement of expenses (in which case a refund may not happen), then the amount to be paid back is expensed. 23

3. Repayment of government grant 4. In case it is a forgivable loan, then the amount payable should be offset against the liability. 24

4. Government Assistance Government assistance should be disclosed: Recall, these includes technical or marketing services. Disclosures should include the nature, extent and duration of the assistance that is necessary in order that the financial statements may not be misleading. 25

4. Government grants - disclosure 1. The accounting policy adopted for government grants, including the methods of presentation adopted in the financial statements; 26

4. Government grants - disclosure 2. The nature and extent of government grants recognized in the financial statements and an indication of other forms of government assistance from which the entity has directly benefited; and 27

4. Government grants - disclosure 3. unfulfilled conditions and other contingencies attaching to government assistance that has been recognised. 28