1. Accounting for Government Grants and Disclosure of Government Assistance: IAS 20

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5. Accounting for Government Grants and Disclosure of Government Assistance 5 Related standards IAS 20 Current GAAP comparisons Looking ahead End-of-chapter practice

6. Related Standards 6 IAS 41 Agriculture IAS 37 Provisions, contingent liabilities and contingent assets

7. IAS 20 - Overview 7 Objective and scope Accounting for government grants Government assistance Disclosure

8. IAS 20 – Objective and Scope 8 Government grant: a form of government assistance; a transfer from a government to an entity that requires compliance with certain conditions related to entity’s operating activities. Government assistance: government action to generate an economic benefit for entities that meet qualifying criteria.

9. IAS 20 – Objective and Scope 9 Excludes benefits provided by adjusting taxable profit or loss, or that are determined on the basis of the income tax liability - such as investment tax credits, income tax holidays, accelerated tax depreciation methods and reduced income tax rates

10. IAS 20 – Accounting for Government Grants 10 Recognition and Measurement: Recognize a government grant when there is reasonable assurance that 1. The grant will be received, and 2. The entity will comply with the conditions attached to the grant

11. IAS 20 – Accounting for Government Grants 11 Two general approaches: 1. Capital approach 2. Income approach * Apply this one * * Grants from government are not equity financing, they are non-shareholder- related increases in net assets and therefore items of income.

12. IAS 20 – Accounting for Government Grants 12 Income approach: recognize government grants in profit or loss in the same periods that the related expenses are recognized If for acquisition of assets – on the same basis as the depreciation on the assets If related directly to incurring specific expenditures – on the same basis as the expenditures

13. IAS 20 – Accounting for Government Grants 13 Presentation of grants related to assets: Companies have a choice – recognize as (a) deferred income or (b) as a reduction in the carrying amount of the related asset Example: Company A receives a $25 grant toward the purchase of new equipment that cost $100; equipment has a five year life and is depreciated on a straight-line basis

14. IAS 20 – Accounting for Government Grants 14 Entry when grant received: (a) Dr. Cash25 Cr. Deferred government grant25 Or (b) Dr. Cash25 Cr. Equipment25

15. IAS 20 – Accounting for Government Grants 15 Entry as asset is used: (a) Dr. Depreciation expense 20 Cr. Accumulated depreciation 20 Dr. Deferred government grant 5 Cr. Depreciation expense/grant income 5 Or (b) Dr. Depreciation expense 15 Cr. Accumulated depreciation 15 Depreciation: ($100 - $25) ÷ 5 = 15

16. IAS 20 – Accounting for Government Grants 16 Presentation of grants related to income: Example: Company B receives a government grant equal to 10% of the payroll costs incurred. Payroll costs incurred are $100. Entry when payroll costs incurred: Dr. Grant receivable10 Cr. Wages expense/grant income10

17. IAS 20 – Accounting for Government Grants 17 Repayment of grants: If grant becomes repayable – treat as a change in estimate If related to an asset: cumulative amount of additional depreciation that would have been recognized to date is recognized in P&L If related to income: any necessary adjustments are made to current year profit or loss

18. IAS 20 – Government Assistance 18 Grants exclude assistance that cannot reasonably be valued, and transactions between the government and the entity that are in the normal course of business. Other assistance (e.g., guarantee of loan, significant sales) may be of interest to financial statement readers if benefits are significant and recurring

19. IAS 20 Disclosure 19 Three types: 1. Accounting policy for grants and their presentation 2. Nature and extent of grants recognized, and information about other forms of assistance that have been beneficial 3. Information about contingencies or conditions not yet met related to assistance recognized

20. Looking Ahead 20 IAS 20 – part of short-term convergence project with FASB. IAS 20 shortcomings: 1. Inconsistent with the conceptual framework (deferred credits do not meet the definition of a liability) 2. Option allowed now understates an entity’s assets, reducing comparability of the entity’s financial statements (i.e., option to deduct grant from asset acquired)

21. Looking Ahead 21 Work on amending IAS 20 set aside pending outcome of related standards, such as IAS 37 Provisions, Contingent Liabilities and Contingent Assets and Conceptual Framework Project

22. End-of-Chapter Practice 22 14-1Iota Inc. receives a $100 government grant to be applied against the construction of a new building. The building is accounted for using the cost model, has an initial cost of $500, a useful life of 25 years and $0 residual value. Instructions (a)Prepare entries to account for the acquisition of the building and receipt of the government grant on Day 1, assuming Iota presents the grant as deferred income, and then assuming it is presented as a reduction of the asset’s cost. (b)Prepare the entry to record depreciation expense at the end of the first year of operations, as well as any other adjusting entries required under each assumption in (a) above. (c)In what respects will the statement of financial position and income statement differ under the two accounting presentations? Does it matter that they are different? Why?

23. End-of Chapter Practice 23 14-2 Refer to 14-1 above. Assume that after four years of operating in the new building, Iota Inc. decides to transfer its operations to a larger municipality. The original $100 grant is required to be repaid if Iota does not remain in the building for a minimum of seven years. Instructions (a)Prepare the entry(ies) to recognize the grant repayment liability at the end of year 4, assuming Iota recognized the grant originally as deferred income. (b)Prepare the entry(ies) to recognize the grant repayment liability at the end of year 4, assuming Iota recognized the grant originally as a reduction of the asset’s cost.

24. End-of Chapter Practice 24 14-3 Chi Corp. agreed to locate a new call center in an economically disadvantaged area in return for specific government assistance. The government provided $200 funding to a local college to bring the general education level of a number of residents to an acceptable minimum, $25 toward the cost of a four-week call center employee training program delivered by Chi Corp., and a $50 grant to offset the higher travel and administrative costs to be incurred by Chi over a five-year period. This grant is repayable at the rate of $10 per year for each year less than five years that Chi does not operate in the area. In addition, Chi Corp. is eligible for a 10% wage rebate at the end of each year in which an average of 20 people or more are employed at the operation. The company expects to have more than 23 employees on staff at any time and to operate in this location for a minimum of eight years. Assume the operation opens on July 2, 2009, at which time the $50 grant is received. The employee training program takes place from July 5 to August 3 and Chi receives the $25 grant in early September. The payroll for the first six months for the 27 full-time employees hired is $400. Instructions (a)Prepare all entries related to government assistance that need to be made by Chi Corp. from July 1 to December 31, 2009, Chi’s fiscal year end. Identify any situations where there are alternatives. (b)Identify the government assistance disclosures that are required for Chi’s December 31, 2009 financial statements.