IAS-20

GOVERNMENT
ASSISTANCE
AND GRANTS
 DEFINITIONS AND SCOPE
• Government refers to government, government
agencies and similar bodies whether local,
national or international.
Example 01:
As per IAS 20, the following may be considered
“Government” if providing financial assistance to an entity:
1 Federal 5 Small and Medium Enterprises
. governments . Development Authority
2 Provincial 6 United Nations
. governments .
3 District 7 International Monetary Fund
. governments . (IMF)
4 Federal/State 8 World Health Organisation
. Banks .
 DEFINITIONS
AND SCOPE

• Government assistance is action by

government designed to provide an
economic benefit specific to an entity or
range of entities qualifying under certain
criteria.
• However, government assistance 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/quotas on
competitors.
Example 02:
JK Limited constructed its factory few years ago in Gwadar. Since then the government has
provided infrastructure by improvement to the general transport and communication network
and the supply of improved facilities including water reticulation which is available on an
ongoing indeterminate basis for the benefit of an entire local community including JK Limited
factory. The business of JK Limited has become much more profitable since provision of these
facilities.
Required: State whether the actions by government in above circumstances are considered
government assistance in accordance with IAS 20.
⯈ Answer:
The above actions affecting general trading conditions are not government assistance as per
IAS 20.
DEFINITIONS AND
SCOPE

• Government grants are assistance by

government in the form of transfers of
resources to an entity in return for past
or future compliance with certain
conditions relating to the operating
activities of the entity.
• However, they exclude those forms of
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 entity.
• Government grants are sometimes called by
other names such as subsidies, subventions, or
premiums.
⯈ Example 03:
The government provided following to XYZ Limited:
(i) Free technical advice

(ii) Free marketing advice for export to Central Europe

(iii) Free provision of guarantees for export trade with European Countries.

(iv) Supportive government procurement policy that is responsible for significant sales

by XYZ Limited.

Required: Briefly explain whether the above benefits provided by government will be considered as government
grant.

⯈ Answer:
A
Items (i) to (iii) are not government grants as these are government assistance that cannot reasonably
T
have a value placed upon them.
A
Item (iv) is not government grant as it cannot be distinguished from general trading conditions.
G
L
A
N
C
Grants related to
assets
• Grants related to assets are
government grants whose
primary condition is that an
entity qualifying for them
should purchase, construct or
otherwise acquire long- term
assets. Subsidiary conditions
may also be attached
restricting the type or
location of the assets or the
periods during which they
are to be acquired or held.
 Grants related to income

Grants related to income are government

grants other than those related to assets.
⯈ Example 04:
Identify the following government grants as either “related toSPassets” or “related to income”.
• Grant by Federal Government on condition to import and install
OT
LI new power generation plant
in Pakistan.
G
HT

• Grant by Provincial Government on condition of construction and operation of factory in a

specific rural area.
• Grant by sports ministry for conducting a Football League for next three years.
• Grant by ministry of manpower for maintaining low labour turnover in last five years.

Answer:
Item (i) and (ii) are grant related to assets while item (iii) and (iv) are grant related to income.
ST
IC
K
Y
N
OT
ES
RECOGNITION

1. Recognition criteria [IAS 20: 7 & 8]

Government grants, including
non- monetary grants at fair value, shall not
be recognized until there is reasonable
assurance that:
a) the entity will comply with the conditions
attaching to them; and
b) the grants will be received.
Receipt of a grant does not of itself
provide conclusive evidence that the
conditions attaching to the grant
have been or will be fulfilled.
Approaches to recognition

Capital Under this approach, grant is recognised outside

approach profit or loss (e.g. directly in equity). IAS 20 does
not allow this approach.
Income Under this approach, a grant is recognized in
• There are two broad approaches to approach profit or loss over one or more period. This
the accounting for government grants: approach is applied in accordance with IAS 20.
 Period of recognition

• Government grants shall 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 grants are intended to
compensate
 Period of recognition
The application of above principle may be summarized as follows:
Grant related to income Grants in recognition of specific expenses
These are recognized in profit or loss in the same period as the relevant
expenses.
Compensation of expenses already incurred or immediate financial support
A government grant that becomes 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 shall
be recognized in profit or loss of the period in which it becomes
receivable.
Grant related to assets Grants related to depreciable assets
These are usually recognised in profit or loss over the periods and in the
proportions in which depreciation expense on those assets is recognised.
Grants related to non-depreciable assets
These may also require 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. As an example, a grant of land may be
conditional upon the erection of a building on the site and it may be
appropriate to recognize the grant in profit or loss over the life of the
building.
 ⯈ Example 05:
State the time of recognition of income related to following government grants:
a) The grant was received for maintaining good working conditions in the past.
b) The grant was received for maintaining certain working conditions for next three years.
c) The grant was received for installation of a plant that has useful life of 15 years and being depreciated
using 30% reducing balance method.
d) The grant was awarded to facilitate the acquisition of land subject to condition of building a factory
thereon.
e) The grant was awarded to facilitate the acquisition of land for dairy farming subject to condition of
maintaining minimum 70% local employment for next 10 years.
Answer:

a) Recognize immediately in profit or loss

b) Recognize in profit or loss over next three years
c) Recognize in profit or loss over 15 years in proportion to depreciation expense recognized using
30% reducing balance method.
d) Recognize in profit or loss over the useful life of building.
e) Recognize in profit or loss over next 10 years.
Forgivable loan
• Forgivable loans are loans which the lender
undertakes to waive repayment of under
certain prescribed conditions.
• A forgivable loan from government is
treated as a government grant when there is
reasonable assurance that the entity will
meet the terms for forgiveness of the loan.
Until then, such a loan is treated as a liability
in accordance with IFRS 9.
⯈ Example 06:
ABC Pharmaceutical Company received cash from government for a research and
development project of a children vaccine. As per the terms of the loan, the cash received
from the government shall be waived, if the entity is able to develop the vaccine within 3
years and sell it free of cost for 5 years.
Required: Briefly explain the accounting treatment of the above loan?

⯈ Answer:

This is forgivable loan as the repayment shall be waived, under prescribed conditions
i.e. ability to develop vaccine within 3 years and sell it free of cost for 5 years.
If there is reasonable assurance to meet the conditions of waiver, this forgivable loan
shall be recognized as government grant.
However, if there is expectation that it will take more time than three years in the
development or there is expectation of selling the vaccine for a price before 5 years, the loan
shall be recognized as a liability in accordance with IFRS 9
Benefit of loan at below-market rate of interest

• The benefit of a government loan at a below

market rate of interest is treated as a
government grant. The benefit of below market
rate of interest shall be measured as the
difference between the cash receipt under the
government loan and the initial carrying
amount of the loan measured and recognized in
accordance with IFRS 9.
• The entity shall 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.
Example 07:
On 1 January 2023, MZ Limited received a loan under government support scheme
whereby the loan of Rs. 100,000 is provided at a mark-up rate of 5% per annum
whereas market rate of interest for similar loan is 12% annum. The loan is for immediate
financial support and is repayable on 31 December 2023.
MZ Limited has determined the initial carrying amount of loan in accordance with IFRS 9 at Rs.
93,750 (i.e. Rs. 100,000 + 5% x 100,000 = Rs. 105,000 x 1.12-1)
Required: Prepare the journal entry on 1 January 2023 on receipt of the above loan

Answer:

Debit Credit
Date Particulars Rs. Rs.
1 Jan 2023 Cash/Bank 100,000
Government grant (profit or loss) 6,250
Loan (liability) 93,750
 PRESENTATION & DISCLOSURE
Presentation method Journal entries
Presentation: grants Present the grant as other On receipt/accrual of grant
related to income income Debit Cash/Receivable
Credit Deferred grant
Grants related to income On recognition of grant as income in profit or loss
are presented as part of Debit Deferred grant
profit or loss, either Credit Other income (PL)
separately or under a
general heading such as
‘other income’; Present the grant as On receipt/accrual of grant
deduction from related
alternatively, they are Debit Cash/Receivable
expense
deducted in reporting the Credit Deferred grant
related expense. On recognition of grant as income in profit or loss
Debit Deferred grant
Credit Expenses (PL)
Example 09:
On 31 December 2020, JKL Limited received grant of
Rs. 50,000 towards the cost of training young
apprentices. The training program is expected to last
for two years.
Actual total cost of training was Rs. 200,000 (70%
incurred in year 2021 and 30% incurred in year 2022
as originally planned).

Required: Prepare financial statement extracts under

both methods of presentation. Year end is 31
December.
 Presentation method: Other income 2020 2021 2022
Statement of financial Position (extracts) Rs. Rs. Rs.
Non-current liabilities: Deferred grant 15,000 - -
Current liabilities: Deferred grant 35,000 15,000 -
Statement of profit or loss (extracts)
Training costs - (140,000) (60,000)
Other income: training grant - 35,000 15,000

Answer: Presentation method: Net expense

Statement of financial Position (extracts)
Non-current liabilities: Deferred grant
2020
Rs.
15,000
2021
Rs.
-
2022
Rs.
-
Current liabilities: Deferred grant 35,000 15,000 -
Statement of profit or loss (extracts)
Training costs (net) - (105,000) (45,000)
 Presentation method Journal entries
Setting up the grant On acquisition of asset
Presentation: as deferred income Debit Non-current asset (PPE, etc.)

grants related to Credit Bank

On receipt/accrual of grant

assets Debit Cash/Receivable Credit

Deferred grant
Period end depreciation expense
Debit Depreciation expense
• Government grants Credit Accumulated depreciation (PPE, etc.)

related to assets,
Period end amortization of deferred grant
Debit Deferred grant Credit
including non- monetary Profit or loss

grants at fair value, shall be

presented in the statement Deducting the grant On acquisition of asset
of financial position either in arriving at the Debit Non-current asset (PPE, etc.)
carrying amount of an
by setting up the grant as Credit Bank
asset
On receipt/accrual of grant
deferred income or by Debit Cash/Receivable
deducting the grant in Credit Non-current asset (PPE, etc.)
arriving at the carrying Period end depreciation expense (reduced)
amount of the asset Debit Depreciation expense
Credit Accumulated depreciation (PPE, etc.)
 Example 10
on 1 January, 2021 ABC Limited acquired a plant at a cost of Rs. 600 million and
received a grant of Rs. 60 million on the same date.
The plant is to be depreciated on straight line basis over its useful life of 3 years and Rs.
120 million residual value. There is reasonable assurance that conditions of the grant
shall be complied with.

Required: Prepare financial statement extracts under both methods of

presentation. Year end is 31 December.
 Presentation: Separate deferred income 2021 2022 2023
Answer: Statement of financial Position (extracts)
PPE (Cost)
Rs. m
600
Rs. m
600
Rs. m
600
Accumulated depreciation (160) (320) (480)
440 280 120
Presentation: Separate deferred income 2021 2022 2023
Statement of financial Position (extracts) Rs. m Rs. m Rs. m
Non-current liabilities: Deferred grant 20 - -
Current liabilities: Deferred grant 20 20 -
Statement of profit or loss (extracts)
Depreciation [(600 – 120) / 3 years] (160) (160) (160)
Other income: grant [60 / 3 years] 20 20 20

Method 2: Deduct from asset’s carrying 2021 2022 2023

amount
Statement of financial Position (extracts) Rs. m Rs. m Rs. m
PPE (Cost) [600 – 60] 540 540 540
Accumulated depreciation (140) (280) (420)
400 260 120
Statement of profit or loss (extracts)
Depreciation [(540 – 120) / 3 years] (140) (140) (140)
 The following matters shall be disclosed
a) the accounting policy adopted for government grants,
including the methods of presentation adopted in the
financial statements;
b) the nature and extent of government grants
recognized in the financial statements and an
indication of other forms of government assistance
Disclosure from which the entity has directly benefited; and
unfulfilled conditions and other contingencies attaching to
government assistance that has been recognized.

Government assistance may be significant so that

disclosure of the nature, extent and duration of the
assistance is necessary in order that the financial
statements may not be misleading
 • REPAYMENT OF GOVERNMENT GRANT
Change in accounting estimate:

A government grant that becomes repayable shall be accounted for as a change in accounting estimate. It means that
repayment is to be recorded in the year the grant becomes repayable and prior period adjustments are not made
Repayment of a grant
related to income.

Journal entry

Debit: Deferred grant (to the

• First, debit unamortized balance of
extent of unamortized
deferred grant, and any excess is
recognized as expense in profit or loss balance)
Debit: Profit or loss (excess, if
any)
Credit: Bank
Example 10
On 1 January 2021 Jam Limited (JL) received a cash grant of Rs. 1.5 million towards
the cost of employing a blockchain analyst on a new project for a 5 years’ period.
The grant is repayable in full if the project is not completed. The analyst was
employed and the project commenced from the 1 January 2021.
On 20th January 2023, the project was cancelled and the grant had to be repaid in full
Required: Journal entries from 1 January 2021 till the date of repayment.
Answer: Journal entries
Debit Credit
Rs. Rs.
Date Particulars
1 Jan 2021 Cash 1,500,000
Deferred grant 1,500,000
31 Dec Deferred grant 300,000
2021
Profit or loss 300,000
31 Dec Deferred grant 300,000
2022
Profit or loss 300,000
20 Jan 2023 Deferred grant [1,500,000 – 300,000 x 2 900,000
years]
Profit or loss (balancing) 600,000
Cash 1,500,000
Repayment of grant
related to asset
• Repayment of a grant related to an
asset shall be recognized by increasing
the carrying amount of the asset or
reducing the deferred income by the
amount repayable.
• The cumulative additional depreciation
that would have been recognized in profit or
loss to date in the absence of the grant shall
be recognized immediately in profit or loss
Repayment of grant Presentation method Journal entries on repayment

related to asset Setting up the grant as

deferred income
Debit Deferred grant (balancing
figure)
Debit Profit or loss
(cumulative
additional
depreciation)
• Circumstances giving rise to Credit Bank
repayment of a grant related to an
asset may require consideration to be
given to the possible impairment of the Deducting the grant in Debit Non-current asset
new carrying amount of the asset arriving at the carrying (balancing figure)
amount of an asset Debit Profit or loss
(cumulative
additional
depreciation)
Credit Bank
Example 11:
Adeel Limited (AL) imported and installed a plant at total cost of Rs. 250 million on 1 January 2021. The plant has
useful life of 3 years. The residual value of plant at the end of useful life has been estimated at Rs. 128 million.
Based on this AL has correctly determined depreciation rate of 20% under reducing balance method that it uses
for depreciating plant and machineries
On the same date, AL also received a government grant of Rs. 60 million towards this plant. It is reasonably
certain that AL will comply with the conditions of this grant. AL has policy to present the plant and grant
separately in its financial statements.
AL year-ends on 31 December.

Required: Prepare journal entries in the books of AL in respect of above plant from 1 January 2021 to 31
December 2023 (Journal entry for disposal of plant is not required)
Answer:
journal entries;
Date Particulars Debit Credit
Rs. m Rs. m
1 Jan 2021
Property, plant & equipment 250
Bank 250
Bank 60
Deferred government grant 60
31 Dec 2021 Depreciation 50
Accumulated depreciation 50
Deferred government grant 24.59
Profit or loss 24.59
31 Dec 2022 Depreciation 40
Accumulated depreciation 40
Deferred government grant 19.67
Profit or loss 19.67
31 Dec 2023 Depreciation 32
Accumulated depreciation 32
Deferred government grant 15.74
Profit or loss 15.74