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1
Accounting for
Government Grants &
Disclosure of Government
Assistance
LKAS - 20
1
Learning OutcomesLearning Outcomes
Identify the Scope of the Standard.
Describe the background material and
implementation guidance of the Standard.
Discuss the practical scenarios.
2
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.
3
2) This Standard does not deal with
Government participation in the ownership of
the enterprise.
Government grants covered by LKAS 41
Agriculture.
4
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)
5
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.
7
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.
9
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.
11
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.
12
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.
13
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.
15
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.
16
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
17
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.
18
Argument in Support of Capital Approach
a)Financing Device
b)No repayment
c)Not earned income
d)Incentive provided by
Government
19
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
21
Non-monetary Government Grants
Transfer of Non- Monitory asset,
land or other resources.
Valuation at Fair value
Or
Record at a nominal value
22
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.
24
Presentation of Grants Related to Income
Either separately or under a
general heading (such as other
income)
Alternatively
Deduct from related expenses.
25
Repayment of Government
Grants
Repayable on non compliance
with the condition laid down.
(Applicable LKAS 8-Accounting
policies, changes in accounting
estimates and errors)
26
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
29
Other forms of Government Assistance Cont’d….
Does not include the provision of
infrastructure by improvement to
General Transport
Communication Network
Irrigation
Water reticulation
30
Disclosure
The accounting policy adopted
for government grants.
Methods of presentation adopted
in the financial statements.
The nature and extent of
government grants recognized.
31
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
32
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.
33
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.
34
Thank You