Accounting for Government Grants Accounting Standard IND AS 20

The government permits entities for various purposes, which also includes industrial, geographic and social development, for facilitating the flow of foreign investments and promote entrepreneurship, as subsidies for reducing the prices of goods and services which are offered by these entities.

The grant could be of different types, e.g., monetary or non-monetary government grants.

Government grants might be significant for an entity. They would require appropriate treatment in the books of accounts and disclosures in financial statements for facilitating comparison with other entities and with prior periods. In Ind AS 20, Government Grants and Disclosure of assistance by the government accounting can be guided.

SCOPE  Accounting Standard IND AS 20

Applicability of Ind AS 20 should be applied for-

(a) Accounting and disclosure of government grants.

(b) Disclosure of several other forms of government assistance.

Non- Applicability Ind AS 20 does not deal with-

(a) The special problems that arises in accounting for government grants in financial statements reflect the effects of changing prices or supplementary information of a similar nature.

(b) Government assistance provided for an entity in the form of benefits available in the determination of taxable profit or tax loss or have been determined or limited based on income tax liability.

(c) Participation of government in the ownership of the entity.

(d) Government grants that Ind will cover AS 41, Agriculture.

DEFINITIONS Ind AS 20

The following definitions are relevant for the better understanding of Ind AS 20:

1. Government is referred as government, government agencies and similar bodies, whether local, national or international.
2. Government assistance is action by the government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria.

Government assistance for Ind AS 20 does not include benefits provided only indirectly through action affecting general trading conditions, such as the provision of infrastructure in development areas or the imposition of trading constraints on competitors.

Government assistance doesn’t include the provision of infrastructure by improving the general transport and communication network and the supply of improved facilities such as irrigation or water reticulation, which is available on an ongoing indeterminate basis for the benefit of an entire local community.

Government assistance takes many forms, both like the assistance given and in the conditions usually attached to it. The purpose of the assistance can be to encourage an entity for embarking on a course of action which it would not normally have taken if the assistance was not provided.

Receiving of government assistance Accounting Standard IND AS 20

The receiving of government assistance by an entity can be significant for preparing the financial statements for two reasons:

• First, if resources have been transferred, an appropriate method of accounting for the transfer must be found.
• Secondly, it is desirable to indicate the extent to which the entity has benefited from such assistance during the reporting period. It facilitates the comparison of an entity’s financial statements with those of prior periods and with those of other entities. The importance of the benefit in the above examples may be such that disclosure of the nature, extent and duration of the assistance is necessary so that the financial statements may not be misleading.

3. Government grants are those assisted by the government in the form of transfers of resources for an entity in return for past or future compliance with certain conditions which are relating to the operating activities of the entity.

They can exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with the government which cannot be distinguished from the normal trading transactions of the entity.

Sometimes Government grants are sometimes called by other names such as subsidies, subventions, or premiums.

4. Grants can also be related to assets. Which are government grants whose main condition is that an entity can be qualifying for them should purchase, construct or otherwise they can acquire long-term assets. Subsidiary conditions might also be attached by restricting the type or location of the assets or the periods during which they are to be acquired or held.
5. Grants related to income are government grants other than those related to assets.
6. Forgivable loans are loans which the lender undertakes to waive repayment of under certain prescribed conditions.
7. Fair value is the price that can be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (Ind AS 113, Fair Value Measurement).

RECOGNITION OF GOVERNMENT GRANTS Accounting Standard IND AS 20

Government grants which also includes non-monetary grants at fair value should be recognized only when there is a reasonable assurance that:

(a) The entity would be complying with the conditions which are attached to them

(b) The grants will be received.

A government grant is not recognized until there is reasonable assurance that the entity would be complying with the conditions attaching to it and that would receive the grant. Receipt of a grant does not itself provides conclusive evidence that the conditions attaching to the grant have been or will be fulfilled.

Forgivable loan:

A forgivable loan from the government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for the forgiveness of the loan.

Loans that are less than the market rate of interest:

The interest of a government loan at a below-market interest rate can be treated as a government grant. The loan should be recognized and measured following Ind AS 109, Financial Instruments. The interest of the below-market rate of interest should be measured as the difference between the initial carrying value of the loan determined in accordance with Ind AS 109 and the proceeds received.

The interest is accounted for in accordance with Ind AS 20. The entity should consider the conditions and obligations that have been or must be, met when identifying the costs for which the benefit of the loan is intended to compensate.

ACCOUNTING OF GOVERNMENT GRANT Accounting Standard IND AS 20

There are two approaches to the accounting of government grant: „capital approach‟ or „income approach‟. Under the capital approach, a grant is recognized outside profit or loss, i.e., the grant is credited directly to equity. In contrast, under the income approach, the grant is recognized in profit or loss over one or more periods.

The Standard rejects the capital approach and prescribes only the income approach despite the following arguments in favour of capital approach:

(a) Government grants are considered as a financing device and should be dealt with as such in the balance sheet rather than be recognized in profit or loss to offset the items of expense that they finance. Since no repayment is expected, such grants should be recognized outside profit or loss.

(b) It is inappropriate for recognizing government grants in profit or loss because they are not earned but represent an incentive provided by the government without related costs.

The income approach has been prescribed because of the following arguments in its favour:

(a) Because government grants are the receipts from a other source than shareholders, they should not be recognized directly in equity but should be recognized in profit or loss inappropriate periods.

(b) Government grants are rarely unjustified. The entity can earn them through compliance with their conditions and meeting the envisaged obligations. They should therefore be recognized in profit or loss over the periods in which the entity recognizes as expenses the related costs for which the grant is intended to compensate.

(c) Since income and other taxes are expenses, it is logical to deal also with government grants, which are an extension of fiscal policies, in profit or loss.

Principle: Accounting Standard IND AS 20

Thus, government grants should be recognized in profit or loss on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grant is intended to compensate.

In most cases, the periods over which the entity recognizes the costs or expenses which are related to a government grant are readily ascertainable. Thus grants in recollection of specific expenses are recognized in profit or loss in the same period as the applicable expenses. Similarly, grants are also related to depreciable assets are usually recognized in profit or loss over the periods and in the proportions in which depreciation expense on those assets is recognized.

Whether receipts basis permissible:

Identification of government grants in profit or loss on a receipts basis cannot be in accordance with the accrual accounting assumption (Ind AS 1, Presentation of Financial Statements) and would

be acceptable only if no basis existed for allocating a grant to

periods other than the one in which it was received.

Grants related to non-depreciable assets:

Grants can be related to non-depreciable assets, which may be also require for the fulfilment of certain obligations and would then be recognized in profit or loss over the periods that bear the cost of meeting the obligations.

Conditional Grants received as part of a package of financial or fiscal aids:

In such cases, attention is needed for identifying the conditions which are giving rise to costs and expenses, which can determine the periods over which the grant would be earned. It might be appropriate for the allocation part of a grant on one basis and part on another.

Grant for expenses or losses already incurred and grant as an immediate financial support:

A government grant that is becoming receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the entity with no future related costs should be recognized in profit or loss of the period in which it becomes receivable.

In certain circumstances, a government grant can be awarded for the purpose of giving instant financial support to an entity rather than as an incentive for undertaking specific expenditures. Such grants can be confined to a particular entity and may not be available to a whole class of beneficiaries. These circumstances may warrant recognizing a grant in profit or loss of the period in which the entity qualifies to receive it, with appropriate disclosures to ensure that its effect is clearly understood.

A government grant might become receivable by an entity as compensation for expenses or losses which are incurred in a previous period. Such a grant can be recognized in profit or loss of the period in which it is becoming receivable, with disclosure to ensure that its effect is clearly understood.

Non-monetary government grants of Accounting Standard IND AS 20

A government grant can be taken in 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, the fair value of the non-monetary asset is assessed, and both grant and asset are accounted for at that fair value. Alternatively, an entity may measure both asset and grant at nominal value.

Government Assistance with no Specific Relation for Operating Activities:

In some countries, assistance of government to entities may be aimed at encouragement or long -term support of business activities either in certain industry sectors or regions. Conditions for receiving such assistance may not be specifically related to the operational activities of the entity.

Examples of such assistance can be transfers of resources by governments to entities which:

(a) Operate in a particular industry.

(b) Continue operating in recently privatized industries.

(c) Start or continue for running their business in those areas which are underdeveloped.

The problem is whether such government assistance is a “Government grant‟ within the scope of Ind AS 20 and, therefore, should be accounted for in accordance with Ind AS 20.

In this regard, Appendix A to Ind AS 20 provides that government assistance for entities for meeting the definition of government grants in Ind AS 20, even if there are no conditions which are specifically relating to the operating activities of the entity other than the requirement for operating in certain industry sectors or regions. Therefore, such grants shouldn’t be credited directly to shareholders‟ interests and should be recognized in profit or loss on a systematic basis.

PRESENTATION OF GRANTS RELATED TO ASSETS

Presentation in the Balance Sheet:

Government grants can be related to those assets which should be presented in the balance sheet by setting up the grant as deferred income. The non-monetary grants at fair value should be presented in a similar manner.

Alternatively, it can be presented in the balance sheet by deducting the grant in arriving at the carrying amount of the asset.

The grants are set up as deferred income is recognized in profit or loss on a systematic basis over the useful life of the asset.

The other method is to deducts the grant by calculating the carrying amount of the asset. The grant can be recognized in profit or loss over the life of a depreciable asset as a reduced depreciation expense.

Disclosure in the statement of cash flows:

The acquire of assets and the receipt of related grants can cause major movements in an entity’s cash flow. For this reason and in order for showing the gross investment in assets, such movements can be disclosed as separate items in the statement of cash flows. This presentation is done irrespective of the fact that the grant is deducted or not from the related asset, for the purpose of presentation in the balance sheet.

PRESENTATION OF GRANTS RELATED TO INCOME Accounting Standard IND AS 20

Two methods are prescribed for the presentation of grants related to income. The grant could be:

(A) First method- Presented as a credit in the statement of profit and loss, either separately or under a general heading such as „Other income‟; or

(B) Second method- Deducted in reporting the related expense. The first method lays its foundation on the base-

(a) That it is inappropriate to net income and expense items.

(b) That separation of the grant from the expense facilitates comparison with other expenses not affected by a grant.

It is argued for the second method:

(a) That the expenses might well not have been incurred by the entity if the grant had not been available.

(b) Thus, presentation of the expense without offsetting the grant may therefore be misleading.

Both the methods are regarded as acceptable for the presentation of grants which are related to income. Disclosure of the grant might be necessary for a genuine understanding of the financial statements. Disclosure of the result of the grants on any item of income or expense which is required to be separately disclosed is usually appropriate.

In accordance to the above, presentation of grants are related to the income under both the methods which are as follows:

Method 1: Crediting in the statement of profit and loss

The entity can recognize the grant as income on a straight-line basis, i.e., 2,00,000 per annum in the statement of profit and loss which can either be separated or can be taken under the head “Other Income”.

The supporters of this method can consider it inappropriate for presenting income and expense items on a net basis and that “separating the grant from the expense which can facilitates comparison with other expenses which are not affected by a grant‟.

Method 2: As a deduction in the related expenses reported

Since the grant can be related to the environmental expenses which are incurred or to be incurred by the entity, it can be presented as the grant by reducing the grant amount every year from some related expense like environmental expense.

The promoter of this method are of the view that the expenses might haven’t been incurred by the entity if the grant haven’t been available and presentation of the expense without balancing the grant may therefore be misleading.

The Standard regards both the methods can be acceptable for the presentation of grants which is related to income. However, method 2 can be more appropriate when the company is relating the grant for a specific expenditure.

The Standard is also providing that disclosure of the grant which may be important for a proper understanding of the financial statements. Disclosure of the impact of the grants on any item of income or expense which is necessary is needed to be separately disclosed is usually appropriate in Accounting Standard IND AS 20.