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Accounting for Government Grants

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31.1

Government grants is a type of assistance by government in the form of transfers of resources to an entity in return for past/future compliance with certain terms & conditions, which are related to the operating activities of an entity.

IAS 20 guides on how to account for government grants and other assistance.

Recognition Criteria
All Government grants including non-monetary grants at fair value shall not be recorded until there’s reasonable assurance that:

  • Entity will comply with all the conditions attaching to them; and
  • No uncertainty in relation to grants will be received.

The forgivable loan from government shall be treated as government grant only if there is reasonable assurance that the entity will meet all the conditions for the loan.

The benefit of loan by government at a below-market rate of interest is treated as a government grant. This loan shall be recognized and measured as per the Ind AS 39 Financial Instruments:

Government grants needs to be recognized in profit or loss on a systematic basis over the period during which the entity recognizes as expenses the related costs for which the grants are intended to be provided is fulfilled.

It is fundamental to the income approach to recognize the government grants in profit or loss on a systematic basis over the period/year in which the entity recognizes as expenses the related costs for which the grant is meant to compensate. Recognition of any government grants in profit or loss on a receipts basis will not be in accordance with the accrual accounting assumption.

A government grant which becomes receivable from government as compensation for expenses or losses already incurred or with the aim of giving immediate support to the entity with no future related costs will be recognized in profit or loss of the period in which it is being received.

If an action designed by government to provide an economic benefit specific to entity or range of entities qualifying under certain conditions are Government Assistance.

Accounting Treatment of Government grants

Capital Approach Income Approach
under which a grant is recognized outside profit or loss Under which a grant is recognized in profit or loss in appropriate periods.
Not Prescribed by Ind AS 20 Prescribed by Ind AS 20
Grants are not earned by entity but represent an incentive that is being provided by government without related costs. The entity earns them through compliance with their conditions and obligations.


Presentation of Grants

  • Grants related to assets: Present the grant as deferred income which is recognized in the profit or loss account on a systematic and rational basis over the useful life of the asset. Alternatively, they are deducted in arriving the carrying amount of the asset.
  • Non-Monetary government grants: The fair value of the non-monetary asset should be assessed and the asset and grant should be accounted for at fair value. Grant is to be presented as Deferred Income.
  • Grants Relating To Income
    • Gross Disclosure: Present grant received in income statement, either separately or under a general heading such as “Other Income”;
    • Net Disclosure: Alternatively, they are deducted in reporting the related expenses.
  • Government loan at below market rate: Benefit of government loans with below market rate of interest should be accounted for as government grant-measured as the difference between the initial carrying amount of the loan determined in accordance with IFRS 9 (Financial Instruments) and the proceeds received.

Repayment of government grants
The grant which becomes repayable shall be accounted for as change in accounting estimates as per Ind AS 8.

  • Repayment of a grant related to income
    • First adjusted against any unamortized deferred credit.
    • Balance shall be recognized immediately in profit or loss.
  • Repayment of a grant related to an asset & non-monetary assets
    • Reduce the deferred income balance by the amount repayable.
    • Balance shall be recognized immediately in profit or loss

Disclosure Requirements

  • The accounting policy adopted for government grants, along with the method of presentation adopted in the financial statement ;
  • Unfulfilled conditions and contingencies attaching to grants which has been recognized;
  • The nature and extent of government grants recognized with in the financial statements;
  • Other sorts of government assistance from which the entity has directly benefited;

Here at AJSH we do assist our clients, in accounting and bookkeeping services. If you have any questions or want to know more on treatment of government grants, please click here.

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