IFRS Accounting Considerations of the COVID-19 Related to Government Grant
IAS 20 applies to the accounting for, and the disclosure of, government grants and to the disclosure of other forms of government assistance. The distinction between government grants and other forms of government assistance is important because the standard’s accounting requirements only apply to the former. Government grants are a specific form of government assistance and relate to the transfers of resources to an entity in return for past or future compliance with certain conditions relating to the entity’s operating activities. The purpose of government grants, which may be called subsidies, subventions or premiums, and other forms of government assistance, is often to encourage a private sector entity to take a course of action that it would not usually have taken if the assistance had not been provided. SIC-10 Grants with no specific relation to operating activities address the situation in some countries where government assistance is provided to entities but without any conditions specifically relating to their operating activities other than to operate in specific regions or industry sectors.
Government grants should be recognized as an asset only when there is reasonable assurance that the entity will comply with the conditions and that the grants will be received. For example, when the government has decided to give special subsidies to the affected entities, government grants can be recognized only when it is confirmed that an entity is eligible to receive the subsidy and that any conditions attached to these subsidies are met. In cases where subsidies relating to the coronavirus pandemic are given to entities without any specified conditions, an asset can be recognized when reasonably sure that the grants will be received. Nevertheless, it is essential to note that the receipt of a grant does not provide conclusive evidence that the conditions attached to the grant have been, or will be, fulfilled.
Government grants must be systematically recognized in profit or loss over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate. Care is needed to identify the conditions giving rise to the costs and expenses which determine the periods over which the grant should be recognized in income. It may also be appropriate to allocate part of the grant on one basis and part on another. In cases where a grant relates to expenses or losses already incurred or gives immediate financial support to the entity with no future related costs expected to be incurred, the grant should be recognized in income when it becomes receivable. If such a grant is recognized as income of the period it becomes receivable; the entity should disclose its effects to ensure that these are clearly understood. The government may decide to stimulate economic activity by providing subsidies on investments by entities. Suppose these subsidies are related to investments that the entities will use over a longer term. In that case, the grant should be recognized in profit or loss over the useful lives of those related acquired assets.
Direct cash assistance or subsidies will be measured at their fair value. However, government grants can take other forms. For example, when a government grant takes the form of a low-interest government loan, the loan should be recognized and measured by IFRS 9 (at its fair value), and the difference between this initial carrying value of the loan and the proceeds received is treated as a government grant. A forgivable loan from the government, the repayment of which will be waived under certain prescribed conditions, is initially accounted for as a financial liability under IFRS 9 and would only be treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness. When government grants take the form of a transfer of non-monetary assets, such as plants and equipment, for the entity’s use, entities may apply an accounting policy choice to account for such grants at the fair value of the non-monetary assets or a nominal amount.
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- Deloitte. (2022). IAS 20 — Accounting for Government Grants and Disclosure of Government Assistance. https://www.iasplus.com/en/standards/ias/ias20
- Ernest & Young. (2021). Applying IFRS IFRS accounting considerations of the Coronavirus pandemic.
- IFRS. (2022). IFRS 9 Financial Instruments. https://www.ifrs.org/issued-standards/list-of-standards/ifrs-9-financial-instruments/