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Accounting for

Government Grants &

Disclosure of Government

Assistance

LKAS - 20

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Learning OutcomesLearning Outcomes

Identify the Scope of the Standard.

Describe the background material and

implementation guidance of the Standard.

Discuss the practical scenarios.

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Scope of the Standard

1. This standard applies to accounting

for, and in the disclosure of all

government grant and other form of

government assistant.

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2) This Standard does not deal with

Government participation in the ownership of

the enterprise.

Government grants covered by LKAS 41

Agriculture.

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2) This Standard does not deal with Cont’t…

Government assistance that is provided for an

enterprise in the form of benefits that are

available in determining taxable income or are

determined or limited on the basis of income tax

liability (such as, Tax holidays, investment tax

credits, accelerated depreciation allowances and

reduced income tax rates)

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Definitions

Government assistance

Government assistance is action by

government designed to provide an

economic benefit specific to an enterprise

or range of enterprises qualifying under

certain criteria.

Eg. Custom duty waiver at the point of important. 6

Government assistance Cont’d….

Government assistance for the purpose of

this Standard does not include benefits

provided indirectly through action affecting

general trading conditions.

Eg. provision of infrastructure in

development areas or the imposition of

trading constraints on competitors.

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Definitions Cont’d…

Government Grant

Government Grants are assistance by

government in the form of transfer of

resource to an enterprise in return for past

of future compliance with certain condition

relation to the operation activates of the

enterprise 8

Example:The government wants to encourage

investment in industrial machinery.

It offers a 10% cash grant for purchase of a range of machines.

The conditions are:All machines must be used in the country. All machines must be bought within a 2-

year period to qualify for the grants.

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Government Grant Cont’d…

They exclude

Government assistance which cannot

reasonably have a value placed upon them.

and

Transactions with government which

cannot be distinguished from the normal

trading transactions of the enterprise.10

Forms of Government Grants

Grant related to assets

Grant related to Assets are government

grants whose primary condition is that an

enterprise qualifying for them should

purchase , construct of otherwise acquire

long term assets.

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Grant related to assets Cont’d…

Subsidy conditions may also be attached

restrecting the type or location of the assets

or the during which they are to be acquired

or held.

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Example:The government wants to encourage

investment in industrial machinery.

It offers a 10% cash grant for purchase of a range of machines.

The conditions are:All machines must be used in the country. All machines must be bought within a 2-

year period to qualify for the grants.

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Grant related to income

Grant related to income are government

grants other than those related to assets.For example, if the government wishes to encourage

training in companies it may offer 25% reimbursement of cost for each training course undertaken from an approved list.

Forgivable loans

Forgivable loans are loans which the lender

undertakes to waive repayment of under

certain prescribed conditions.14

Government loan at a below-market rate of interest

The benefit of a government loan at a

below-market rate of interest (BMRI)is

treated as a government grant. The loan shall

be recognised and measured in accordance

with LKAS 39 Financial Instruments:

Recognition and Measurement.

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Government loan at a below-market rate of interest Cont’d…

The benefit of the below-market rate of

interest shall be measured as the difference

between the initial carrying value of the

loan determined in accordance with LKAS

39 and the proceeds received.

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Recognition of Government Grants

A government grant is recognized

only when they there is reasonable

assurance that,

1.The enterprise will comply with any

condition attached to the grant and

2.The grant will be received

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Approaches to Account for Government

Grants

Capital Approach

Grant is credited directly to shareholders

interest

DR- Asset

CR-Government Grant

Government grant will be treated as a source of

finance & it will be there for an indefinite period

of time, even after the asset’s life is over.

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Argument in Support of Capital Approach

a)Financing Device

b)No repayment

c)Not earned income

d)Incentive provided by

Government

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Income Approach

Grant is taken to income over one

or more periods.

DR-Asset

CR- Deferred Income

Deferred income will be charged to

income statement on a systematic

basis over the life of the assets.20

Argument in Support of

Income Approach

a)Receipt from a source other than

Shareholders

b)Earns them through compliance

with their conditions

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Non-monetary Government Grants

Transfer of Non- Monitory asset,

land or other resources.

Valuation at Fair value

Or

Record at a nominal value

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Presentation of Grants Related to Assets

Government grants related to assets,

including non-monetary grants at fair

value, could be presented in the balance

sheet in two ways.

1st Method

Setting up the grant as deferred income

which is recognized as income on a

systematic and rational basis over the

useful life of the asset. 23

Presentation of Grants Related Presentation of Grants Related to Assets to Assets Cont’d….Cont’d….

2nd Method

The grant is recognized as income

over the life of a depreciable asset

by way of a reduced depreciation

charge.

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Presentation of Grants Related to Income

Either separately or under a

general heading (such as other

income)

Alternatively

Deduct from related expenses.

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Repayment of Government

Grants

Repayable on non compliance

with the condition laid down.

(Applicable LKAS 8-Accounting

policies, changes in accounting

estimates and errors)

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Repayment of a grant related Repayment of a grant related to Incometo Income

Applied first against any unamortized

deferred credit.

If the repayment exceeds any such

deferred credit, or where no deferred

credit exists,

recognized immediately as an

expense.27

Repayment of a grant related to an asset

Increasing the carrying amount of

the asset

or

Reducing the deferred income

balance by the amount repayable.

Cumulative additional depreciation

recognize immediately as an expense28

Other forms of Government Other forms of Government AssistanceAssistance

Free technical advices

Marketing advices

Provision of Guarantees

Disclose the nature, extent and

duration of the assistant

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Other forms of Government Assistance Cont’d….

Does not include the provision of

infrastructure by improvement to

General Transport

Communication Network

Irrigation

Water reticulation

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Disclosure

The accounting policy adopted

for government grants.

Methods of presentation adopted

in the financial statements.

The nature and extent of

government grants recognized.

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Disclosure

An indication of other forms of

government assistance from which

the enterprise has directly benefited.

Unfulfilled conditions and other

contingencies attaching to

government assistance that has

been recognized

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Example 01On April 2009 Benevolent Hospitals Ltd,

revived a government grant of Rs 4,000,000 for the purchase of a machine which will be used for Kidney transplanting. The total cost of the machine was Rs.10,000,000 with an estimated life of five years. The company depreciated its machinery by the straight line method.

You are required to advice the management as to the correct accounting treatment of this government grant with reference to LKAS 20.

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Example 02

The company received Government Grant of

40% of the cost of a machine purchased on 1st

April 2009. The purchase price of the machine

was Rs 12million. The machine is expected to

have a useful life of 5 years, depreciation

being charged on straight line method.

What is the charge to the profit and loss account

for year ended 31st March 2010 on account of

depreciation and grant amortization.

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Thank You