ACCA I Strategic Business Reporting (SBR) I IAS 20 - Govt Grants & Govt Assistance - SBR Lecture 11
Summary
TLDRLecture 11 of SBR covers IAS 20, focusing on accounting for government grants and disclosure of government assistance. The lecture explains key concepts such as government grants, which are recognized when certain conditions are met, and government assistance, which is not recognized due to its non-monetary nature. It details different accounting treatments for grants related to assets and income, and the conditions for recognizing, repaying, and disclosing grants. The video concludes with a practical example on how to account for a grant used to purchase a building.
Takeaways
- 📜 IS20 covers two main topics: government grants and government assistance.
- 🏛️ Government grants are recognized when specific conditions are met, usually in cash form, and can be reliably measured.
- ⚖️ Assistance from the government that cannot be valued is excluded from government grants.
- 💰 There are two types of grants: income-based and capital-based grants, each with distinct recognition methods.
- 🏢 Capital-based grants can either be deducted from the asset’s cost or treated as deferred income, spread over the asset's life.
- 💼 Income-based grants should be matched with the related expenses, especially if the grant is aimed at achieving non-financial goals.
- 🔄 Repayment of government grants is treated as a change in accounting estimates, as outlined in IS8.
- 💸 If repayment of a grant occurs, for income-based grants, it is debited to liabilities, while excess repayment is charged to profit.
- 🏗️ Government assistance that cannot be reliably valued (such as advisory services) is not recognized in financial statements but can be disclosed.
- 📝 Disclosure requirements for IS20 include accounting policies, presentation methods, and details about any unfulfilled conditions related to recognized grants.
Q & A
What is the main topic covered in the lecture on IS20?
-The main topic is accounting for government grants and the disclosure of government assistance as per the IS20 standard.
How does IS20 define government grants?
-IS20 defines government grants as transfers of resources to an entity in exchange for past or future compliance with certain conditions. They are typically given in the form of cash and exclude assistance that cannot be valued or that involves normal trade with the government.
What are the two conditions required for recognizing government grants under IS20?
-The two conditions are: (1) compliance with the conditions related to the grant and (2) reasonable assurance that the grant will be received.
How should income-based government grants be matched according to IS20?
-Income-based government grants should be matched with the related expense, especially when the grant is intended to subsidize specific expenditures.
What are the two types of grants related to assets as per IS20?
-The two types of grants related to assets are: (1) deducting the grant from the cost of the asset and depreciating the net cost, or (2) treating the grant as deferred income and releasing it over the life of the asset.
What happens if a government grant becomes repayable under IS20?
-If a government grant becomes repayable, it is accounted for as a revision of an accounting estimate. The repayment is treated similarly to changes in accounting estimates as outlined in IS8.
How is repayment handled for income-based grants under IS20?
-For income-based grants, repayment is debited to any liability for deferred income, and any excess repayment is charged to profit immediately.
What is the accounting treatment for capital-based grants when they are deducted from the cost of the asset?
-When a capital-based grant is deducted from the cost of the asset, the asset's cost increases upon repayment, leading to higher depreciation charges, which should be recognized immediately.
Why are government assistance programs not recognized in financial statements under IS20?
-Government assistance programs are not recognized in financial statements because it is often impossible to reliably place a value on the assistance provided, such as advice or infrastructure support, which cannot be measured in monetary terms.
What are the key disclosure requirements under IS20?
-The key disclosure requirements under IS20 include: (1) the accounting policy and presentation method for government grants, (2) the nature of the government grant, and (3) any unfulfilled conditions related to the grant that has been recognized.
Outlines
📝 Introduction to Government Grants and Assistance
This section introduces Lecture 11 of SBR on IAS 20, which covers the topics of accounting for government grants and disclosure of government assistance. It distinguishes between government grants (which are recognized in financial statements) and government assistance (which is not). Key areas include definitions, recognition, and disclosure, focusing on conditions that must be met to recognize a grant.
📊 Recognizing Government Grants and Matching with Expenses
IAS 20 explains that government grants are recognized only when specific conditions are met, and there is reasonable assurance of receiving the grant. The grant must be matched with the relevant expenses it supports. For income-based grants, the grant should match the expense it subsidizes, such as job creation, while asset-based grants can be deducted from the asset cost or treated as deferred income.
💼 Repayment of Government Grants and Accounting for It
This section focuses on the repayment of government grants, which is treated as a revision of an accounting estimate. It references IAS 8 for guidance on handling such changes. If the repayment is related to an income-based grant, the repayment reduces the liability and is charged to profit. For capital-based grants, the repayment increases the asset cost, raising depreciation, or reduces deferred income if applicable.
🏢 Example: Government Grant for Office Purchase
A practical example involving a government grant for an office building purchase is presented. The scenario details when the grant is recognized (upon purchasing the building), how to calculate depreciation (starting when the asset is ready for use), and the two options for accounting treatment: reducing the asset cost or recognizing deferred income. The corresponding calculations for depreciation and carrying amounts are explained.
🔄 Deferred Income Option for Government Grants
Here, the deferred income option is explored in detail, showing how a government grant can be treated as deferred income, amortized over the asset's useful life. It explains the distinction between amortization (for intangible assets) and depreciation (for tangible assets) and demonstrates how deferred income is recorded in the profit and loss account.
📜 Disclosure and Summary of IAS 20
The final section summarizes IAS 20, emphasizing that government assistance is not recognized in financial statements due to its intangible nature. For government grants, there are two key types—income-based and capital-based—each with different recognition and presentation methods. The section concludes by stressing the importance of proper disclosure, including accounting policies and any unfulfilled grant conditions.
Mindmap
Keywords
💡Government Grants
💡Government Assistance
💡Recognition
💡Deferred Income
💡Capital-based Grants
💡Income-based Grants
💡Disclosure
💡Repayment of Grants
💡Depreciation
💡Accounting Estimate
Highlights
Introduction to IS20, covering accounting for government grants and disclosure of government assistance.
Government grants involve the transfer of resources to an entity when certain conditions are met.
Grants are typically given in cash and exclude assistance that cannot be valued.
Government assistance is not recognized in financial statements as it cannot be reliably valued.
Government grants are recognized only when there is a reasonable assurance that the entity will comply with conditions and receive the grant.
Income grants should be matched with the related expenditure, such as job creation costs.
Grants related to assets can be deducted from the cost of the asset or treated as deferred income.
For asset-based grants, if deducted from the asset's cost, depreciation is based on the net cost.
Repayment of government grants is treated as a revision of accounting estimates, following IS8.
For income-based grants, repayment reduces the liability and excess repayment is charged to profit.
For capital-based grants, repayment increases the asset's cost and subsequently the depreciation.
Government assistance is disclosed but not recognized in financial statements due to the inability to assign reliable values.
Disclosure requirements include accounting policy, presentation methods, and any unfulfilled conditions of the government grant.
Grants related to building purchases are recognized when the purchase occurs, and depreciation starts when the asset is ready for use.
Deferred income from grants is amortized over the asset's useful life, and this amortization is treated differently from depreciation.
Transcripts
welcome to lecture 11 of SBR
the topic is is20
this is a very short standard and very
easy
to understand
so the topic is accounting for
government grants and disclosure of
government assistance there are two
things
that we are going to cover here one is
government grant and the other one is
garment assistance one is the recognized
the other one is not recognized okay so
here we are going to cover
definition
recognition garment assistance and
disclosure
what is Garmin grounds and assistance
is20 defines it as
Garmin grants are those okay that
requires transfer of resources to an
entity either because in the past they
have complied with some conditions or in
the future they are going to comply with
certain conditions
that means some conditions needs to be
met before government grants can be
given and normally it is given in a form
of cash
okay
this exclude assistance that cannot be
valued some form of assistance cannot be
valued government grants exclude those
it's not there
and also if there is any normal trade
with the government it is not taken as
government grants
okay
next government assistance government
assistance is a government action that
they do to helps
specific entity
okay any type of infrastructure
development and all
okay are indirect help it it does not
come under government assistance
they will clearly mention whether it's a
Garmin Grant or a government assistance
okay if it's a government grant remember
you need to recognize it with the way of
recognizing it is different the way you
present it
is 20 says
you cannot recognize a garment Grant
until the conditions for which that
receipt has been complied with
you need to comply with the condition
first and there should be a reasonable
assurance that you are going to receive
that Grant only of these two conditions
are met you can recognize government
grant
and grants should be matched with the
expenditure
okay
income Grant if you are receiving an
income Grant
you have to match it with expense
and if that income Grant is given to
subsidize expenditure
then it should be matched to the related
cost if the government grant is given to
achieve a non-financial goal such as to
create jobs if you if you have been
given a income Grant
then it need to it needs to match with
the cost related to meet that goal there
might be some cost right there will be
some cost to create the job
so that income Grant needs to be matched
with that cost of creating the job
next
there are two types ground related to
assets ground related to income
if it's a grant that is related to
assets
okay
there are two ways there are two
accounting policies for this
okay number one you deduct the cost you
deduct the Grant from the cost of the
asset and then depreciate the net cost
second you can treat that Grant as a
deferred income and release it to the
profit or loss over the life of the
asset let's say you are receiving the
grant for two years so over the two
years you are going to release it in the
profit and loss as a deferring
okay
if you are receiving any ground relating
to asset okay for example government is
giving a grant
that if you want to purchase a
non-current asset
okay you are going to receive a grant so
this will be a record class over the
expected useful life of that related
asset for which you are getting the
grant
okay but the way you show it would be
different
either you deduct it from the cost of
the asset and then depreciate it or you
show it as a deferring the grant
and spread it over the life of the asset
next repayment sometimes you have to
repay back your Grant if repayment comes
what do you do for repayment okay you
need to know that a government grant
that becomes rebayable is accounted for
as a revision of an accounting estimate
what comes to your mind when you uh
read accounting estimate
some standard comes in your mind can you
recall yes we have finished the standard
as their email lectures also
is 8 exactly is it changes in accounting
estimates accounting policies and error
yes
so from there take the rule if there's a
change in accounting estimate how do you
deal with it I'm not going to repeat it
here I've already covered is 8. changes
in accounting estimate
okay
so the repayment is one of that
it's a change in accounting estimate
then there are three ways
income based ground if it's an income
based grant
okay for repayment you have to repay
back the grant that you have received
from the government back to the
government
and if it's an income based you debit
the repayment to any liability for
deferred income
whatever you have received
you are liable to pay back it to the
government right
so now because you are repaying it your
liability will reduce that's why you
have to debit the repayment to any
liability Lively is a credit if there is
a repayment it's like you are paying
back the loan so it has to be debited
debit the repayment
and if you have made some accessory
payment you charge it to profit
immediately because it's a profit for
you
if you are get giving repaying excess
repayment back to the government will
pay back that to you
and you charge it to profit immediately
this is for incompass ground number two
Capital based Capital based grant
if you deduct it from the cost
then you increase the cost of the asset
term earlier what what happened when you
receive the grant you deducted the cost
now you are repaying like the ground you
will increase the cost of the asset with
that repayment amount
because of your asset is going up your
depreciation will also go up
so you will increase the amount of the
depreciation also
and this should be recognized and
charged immediately the depreciation
number three capital based ground that
are treated as deferring
this is the same as the first one
incomplete Grant you debit the repayment
excess repayment charge to profit
immediately
so if it's income based ground and
capital based grant that is treated as
deferred income
the the the
recognition is same only Capital based
grant deductive from cost is different
right
see there are two types of Grant again
I'm repeating this income based grant
Capital based grant Capital based grant
can be shown in two ways deductive from
the cost of the asset or show it as a
deferred income
that's why we have three separate
condition a b and c
now
we are done with government grant
we are moving to government assistance
this is very easy because you do not
recognize it in the financial statements
why because you cannot Place reliable
values in this form of assistance
this is like you're helping government
assistants are like garments are helping
business through their advisors or some
other methods or their account Saving
right
so how can you know how can you put
values in this
this are not some kind of cash that you
can value it is through their advice
they're helping or some other method
because it is not reliable to place a
value on this government assistance are
not recognized in financial statements
but
you can disclose it
okay
that's why we are moving on to
disclosure is 20 requires the following
disclosure number one
what is your accounting policy and the
presentation methods adopted remember
for Capital Grant there are two ways
deduct from Capital cost of asset or
deferred income which presentation
method are you using you have to
disclose it and the accounting policy
also
second what is the nature of the Garmin
Grant
it's very important
number three
if there is any unfulfilled condition
that are relating to the government
grant
that has been recognized as Government
you have to disclose it
so that's it for uh
is 20.
now let us do a small question on is 20
before I summarize is 20.
test your understanding to clock so this
question okay here you are supposed to
discuss
the possible accounting treatment
for the year and the 31st December 2001.
on 1st of June 2001 clock received
written confirmation from a local
government agency that it would receive
1 million Grand towards the
purchase price of a new office building
the grant becomes receivable on the day
that clock transfers this 10 million
purchase price to the vendor
okay
on 1st of October 2001
clock paid 10 million in cash for his
new office building which which is
estimated to have a useful life of 50
years by 1st of December 2001
the building was ready for use clock
received the common ground on 1st of
June Jan 2002. okay
you have to account for the year-end
31st December 2001 date is very
important how do you account for this
government grant
first you need to understand at which
stage the grant becomes you need to
recognize the ground
okay it's very important see
Garmin Grant is recognized when there's
a reasonable assurance
that entity will comply with the
condition and
Grant will be received
right
so here if you see the only condition
okay that they are going to receive the
grant is what
it is when you purchase the new office
so you purchase the new office
first of October 2001 isn't it because
this is the day when you paid it in cash
and you got the new office building so
this is the day you have to recognize
your Grant
you are going to recognize your Grant on
1st of October 2001.
because this is the day you are going to
purchase the new office building
the grant is
is on the condition that you have to buy
the new office building isn't it and it
is on 1st of October 2001.
so this is the day you are going to
recognize the ground
now
there are two conditions
you can present it as
okay
reduce the cost reduce this 1 million
from the building
okay reduce the cost of the building
by
dollar one million because this is the
grand
okay so in this case tell me the cost of
the building
is 10 million Grand is 1 million so what
happens is you deduct 10 minus 1 it
becomes 9 million you divide this by 50
years for the depreciation and C for
depreciation they told
there is a condition
you have to start depreciating when the
building is ready for use
for depreciation there's another rule
you need to go through is 16 for this is
16 says clearly when depreciation starts
it starts from the day when your
non-current asset is ready for use and
the building is ready for use from 1st
of December 2001.
so from first that means it's only the
depreciation is only for one month
because your year end is 31st December
so from 1st of December to 31st decem
only one month of depreciation you have
to
account for
so here you divide it by 50 and you
multiply it by 1 over 12 because only
for one month
so your depreciation will be
depreciation charge will be 15 000.
you see
this will be this will go in the profit
and loss
now
what would be the carrying amount of the
building
what would be the carrying amount of the
building this also will reduce
because of the depreciation in the
statement of financial position it would
be okay you have to deduct it from what
9 million see 1 million is deducted
because of the grant
so 10 minus 1 becomes 9 then from 9
million you have to deduct the
depreciation
9 million
Okay so 0.15
deduct of 15 000.
okay
nine million sorry 9 million
0.015
so it becomes
8 million
okay 800 sorry 900 and 85 000. this
becomes the value of your building now
as a 31st December 2001 this will go in
your statement of financial position
okay
now coming to B There is second way of
presenting
that is
you recognize
deferred income
you recognize deferred income of one
million
now in this case what happens see
building will be recognized at 10
million okay building at 10 million
depreciation will be 10 divided by 50
into 1 over 12.
so the depreciation will be
okay
sixteen six six seven
okay
and the carrying amount will be
in your statement of financial position
it will be 10 million minus this
sixteen six six seven so it will be
equal to
9 9 8
3
3
3.
carrying one of the building
now
what about piano
in your p l
okay
deferred
income
will be amortized
they will be
amortized
to
p l account
over the building's useful life
so what is the Deferred income
1 million divide this by 50 years
and take one for one month only
because you're amortizing it
why
why are you amortizing it not
depreciating it because deferred income
is not a tangible asset you only
depreciate for tangible assets
recall is 16. intangible asset
amortized tangible asset depreciate so
deferred income is not a tangible asset
it is taken as an intangible answer so
you amortize it
that's why amortization is also same
like depreciation only for one month
that's why we are taking one divided by
12.
so it will be one six six seven
this will be the income
okay
this will do the income recorded
what about the carrying amount of the
Deferred income
so caring
see the answer is there
okay in your textbook that's why I'm not
writing the full answer
you can go through the explanation
always in detail later on but just check
how you derive that answer okay so
carrying amount of Library sorry
carrying amount of deferred
it will be it will be uh in your
statement of financial position it will
be shown as a liability only
okay
so in the statement of financial
position carrying amount will reduce by
the amortization so it will be
one million minus one six six seven
which will give you
nine nine eight
three three
is the same as this
we have got
is the same same amount I think
sorry there is just one
yeah it's the same amount that you will
get through both the ways only the
presentation is different
so that's it for is20 now let us
summarize the is20
so the summary of is20 is
government assistance if it's a
government assistance do not recognize
any financial statements and if it's a
government grant there are two ways
income based grant
capital-based Grant if it's a capital
based ground there are two ways either
you deduct it from the cost of the asset
or you treat it as a deferred income and
we have just previously done a question
on both of this so that's it for is20
thank you for watching and
see you in the next lecture that is is21
the effect of the foreign exchange rates
meanwhile don't forget to subscribe to
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