IAS 20 is a fairly straightforward standard.

Grants are not recognized until there is reasonable assurance that the conditions will be complied with and the grants will be received. We have two main categories of grants.

Grants relating to income

Grants relating to income are shown in profit or loss either separately or as part of “other income” or alternatively deducted from the related expense.

Grants relating to assets

Government grants relating to assets are presented in the statement of financial position either:

  • As deferred income; or
  • By deducting the grant in calculating the carrying amount of the asset.

The deferred income is amortized to profit or loss over the asset’s useful life.

A government grant that becomes repayable is accounted for as a change in accounting estimate in accordance with IAS 8.

Example 1

On 1 January 2018 ABC Ltd opened a new factory in an area designated by the Government as an economic development area.

On that day the Government provided ABC Ltd with a grant of $25m to assist it in the development of the factory. This grant related to the following:

  • $7m of the grant was a payment by the Government as an inducement to ABC Ltd to begin developing the factory. No conditions were attached to this part of the grant.
  • $18m of the grant related to the construction of the factory at a cost of $44m. The land was leased so the whole of the $44m is depreciable over the estimated 20 year useful life of the factory.

Solution 1

The accounting should be as follows:

  • There are no conditions attached to the $7m, so there are no costs to match the money to. Hence, the $7m should be recognized in P/L straight away.
  • The $18m relates to the costs of the factory and should be matched to them. The costs occur over the 20 year useful life, and IAS 20 allows the grant to be matched to them in two ways:
    1. The grant could be used to reduce the cost of the asset and subsequent depreciation charges.
      • The cost would have been $44m, but this would be reduced by the grant of $18m to a net amount of $26m.
      • Depreciation charge would be $1,3m ($26m/20) per annum.
    2. The other treatment would be to show the grant separately as deferred income, matching the income to the depreciation of the factory.
      • The factory would remain at $44m cost with $2,2m ($44m/20) depreciation per annum.
      • Income of $0.9m (= $18m/20 years) would be recognized in the statement of profit or loss, with the remaining $17,1m ($18m – $0,9m) being shown as deferred income in the statement of financial position.