ACCA I Strategic Business Reporting (SBR) I IAS 20 - Govt Grants & Govt Assistance - SBR Lecture 11

Summary

Lecture 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

00:00

📝 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.

05:02

📊 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.

10:02

💼 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.

15:05

🏢 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.

Keywords

💡Government Grants

Government grants are financial aid provided by a government to an entity, typically with the requirement that certain conditions are met. In the video, it is explained that government grants are usually given in cash and can be recognized in financial statements once the recipient complies with the conditions set by the government. For example, a grant may be given to an entity after it purchases a building, and the accounting for it depends on whether the grant relates to income or assets.

💡Government Assistance

Government assistance refers to various forms of non-financial help provided by governments, such as advisory services or other forms of support that do not involve direct cash transfers. The video highlights that government assistance is not recognized in financial statements because it is often difficult to assign a reliable value to this form of aid. However, disclosures related to government assistance may still be required.

💡Recognition

Recognition in accounting refers to the process of recording an item in the financial statements. The video explains that government grants can only be recognized when there is reasonable assurance that the conditions for the grant have been or will be met. For example, a grant related to the purchase of an asset can be recognized once the asset is acquired and the grant conditions are satisfied.

💡Deferred Income

Deferred income refers to revenue that has been received but not yet earned, and it is recorded as a liability until it is recognized as income over time. In the context of government grants related to assets, the video discusses that one accounting method is to treat the grant as deferred income, which is then released to profit and loss over the life of the asset.

💡Capital-based Grants

Capital-based grants are government grants given to help purchase non-current assets, such as buildings or machinery. The video explains two accounting methods for these grants: either deducting the grant from the asset’s cost and depreciating the reduced cost, or treating the grant as deferred income and releasing it over the asset’s useful life. This distinction is crucial in determining how the grant impacts the financial statements.

💡Income-based Grants

Income-based grants are grants provided to subsidize expenses rather than to purchase assets. In the video, it is stated that these grants should be matched with the relevant expenditure and recognized in the financial statements as income. For example, if a grant is received to create jobs, the income from the grant should be matched with the costs of job creation.

💡Disclosure

Disclosure refers to the requirement to provide specific information in the financial statements about certain transactions or policies. The video outlines that entities must disclose their accounting policies for government grants, the nature of the grants, and any unfulfilled conditions related to recognized grants. Even if government assistance is not recognized, it may still require disclosure.

💡Repayment of Grants

Repayment of grants refers to situations where a government grant must be returned because the entity failed to meet the conditions of the grant. In the video, it is explained that when a grant becomes repayable, it is treated as a revision of an accounting estimate, and the repayment is recognized by adjusting the liability or increasing the cost of the related asset if it was a capital-based grant.

💡Depreciation

Depreciation is the systematic allocation of the cost of an asset over its useful life. The video explains that for grants related to assets, depreciation must be calculated based on the asset's net cost (after deducting the grant) or the full cost if the grant is treated as deferred income. For example, if a building is purchased with a government grant, depreciation begins when the building is ready for use.

💡Accounting Estimate

An accounting estimate is an approximation of a financial item in cases where exact amounts are uncertain. The video mentions that if a government grant becomes repayable, this is treated as a change in accounting estimates under IAS 8. This means the entity must adjust its financial statements to reflect the repayment, impacting asset values or liabilities.

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

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