IAS 20

Government Grants

• the accounting for all government grants and the disclosure of government assistance apart from:

– Special problems arising from the effects of changing prices or in supplementary information of a similar nature

– Government assistance in the form of tax benefits

– Government participation in ownership of an entity

– Government grants covered in IAS 41, Agriculture

IAS 20 covers...

So what happens when government implements programs to support

development in certain industries or regions?

For example:

– Government support to operate in a certain industry

– Grants to start or continue running an operation in certain underdeveloped areas

SIC 10

The IASB addressed these types of schemes in SIC 10, Government Assistance – No specific relation to Operating Activities.

This interpretation states that the above assistance meets the definition of a government grant even though the only requirement is to operate in certain

industries or areas. As a result these are within the

scope of IAS 20.

More on recognition

• Two conditions both need to be met in order for a

grant to be recognised. These conditions are:

– That the entity will comply with the conditions attaching to the grant; and

– That the grant will be received.

• Note that the fact that a grant has been received does not in itself give evidence that the conditions will be met.

Govt Grants

• Government grants may come in various forms, for example:

– Cash

– Assets

– Reduction of a liability

• The manner in which the grant is received does NOT impact the accounting treatment

Recognition

• The general principle is that government grants are recognised in profit or loss on a systematic basis over the periods in which the entity recognises the related costs for which the grants are intended to compensate.

• Where a grant relates to amounts already expensed, or to provide financial assistance where there are no further related costs, these are recognised in profit and loss when receivable.

Measurement

• Government grants received in the form of non-monetary assets (such as land or other resources) are measured at:

– Fair Value or

– Nominal Amount

• Whereas it seems strange that there is a choice between these 2 methods, the standard does NOT prescribe one method and therefore either may be used.

Amendment!

In the IASB’s improvements project issued in May 2008, they made an amendment to IAS 20.

The old version of IAS 20 stated that any loans from government at zero interest or below market rates were a form of government grant but that the benefit did not need to be accounted for (i.e.: interest did not need to be imputed on the loan).

That has changed!

Amendment!

In terms of the change to IAS 20, such loans are to be accounted for under IAS 39, Financial Instruments: Recognition and Measurement.

As a result, the benefit of the below-market rate of interest shall be measured as the difference between:

• the initial carrying value of the loan (Fair value) and

• the proceeds received.

The difference will be accounted for under IAS 20.

This amendment was effective for loans received in years beginning on or after 1 January 2009.

Lets look at an example!Farmer Brown receives an interest free 5 year loan from the government of $100,000. The fair value of the loan on day 1 is $80,000 (discounted value using market interest rates).

The loan will be recognised as follows:

Dr: Cash 100,000

Cr: Government Grant (statement of financial position) 20,000

Cr: Loan (statement of financial position) 80,000

The loan will be recognised under IAS 39 using the effective interest rate method, and the government grant will be recognised as a grant.

IFRIC 12

Service Concession

Arrangements

Background…

• Many countries, public sector provides:– Roads, bridges

– Prisons

– Hospitals

– Airports

– Etc…

• IN many countries, governments are encouraging private sector participation in development, operation & maintenance of infrustructure

Common features…

• Government, or other public sector entity, grants a service arrangement to a private sector body

• Operator is responsible for at least some of the managementof the infrastructure & related services

• Contract sets prices and regulations revisions over the contract period

• Operator is obliged to hand over infrastructure in a specified condition at the end of the period

Scope

• IFRIC 12 governs accounting for the OPERATOR only

• Applies if:– Grantor controls/regulates

• what services the operator must provide;

• to whom it is provided; and

• at what price

– Grantor gets any significant residual interest in the infrastructure at the end of the contact period

Scope…(cont)

• Applies to both:

– Infrastructure operator constructs or acquires; and

– Existing infrastructure to which the grantor

gives the operator access for the purpose of the arrangement

Does grantor regulate What services; To whom; Price

Does grantor get any significant residual?

Are assets constructed/acquired by operator for the project?

Are the assets fully used over the life of the contract?

Are the assets existing assets of the grantor that are given to the operator for the purpose of the

arrangement?

OUTSIDE OF THE SCOPE OF IFRIC 12

IN THE SCOPE OF IFRIC 12

YES

YES

YESYES

NO

NO

NO

Consensus

• 1: Treatment of the operators rights over

the infrastructure

– Not recognise as PP&E

– Arrangement does NOT convey the right to

control the use of the assets to the operator

Consensus

• 2: Recognition & measurement of

arrangement revenue

– Operator acts as a service provider

– Therefore applies:

• IAS 18, Revenue

• IAS 11, Construction contracts

– If a single contract, allocate between the services

based on relative fair values

Consensus

• 3: Construction or upgrading

services

– Apply IAS 11, Construction contracts

– Consideration received is either:

• Financial Asset (IAS 39)

– Right to receive cash

• Intangible Asset (IAS 38)

– ‘Licence’ to charge users for public service

– NOT a right to receive cash as conditional on public using service

Consensus

• 4: Operation services

– Apply IAS 18, Revenue

– If there is an obligation to maintain the

asset or restore it to a specified condition

• Raise a provision under IAS 37 i.e.:

best estimate of expenditure that would be required to settle the present obligation at balance sheet date

Consensus

• 5: Borrowing costs

– Apply IAS 23, Borrowing costs

–EXPENSE – unless receiving an

intangible asset: Option to capitalise

• 6: Assets received from Grantor

– If assets received that do NOT need to be

returned – record at FV with liability in respect of unfulfilled obligations

– NOT a government grant (IAS 20)

Does the operator have a contractual

right to receive cash / another financial asset?

Recognise financial asset under IAS 39

Recognise intangible asset under IAS 38

OUTSIDE OF THE

SCOPE OF IFRIC 12

YES

NO

Does the operator have a contractual

right to charge users of the public

service?

NO

YES