The IFRS accounting standard for grant income is IAS 20 'Accounting for Government Grants and Disclosures of Government Assistance'. It is an old accounting standard that has the matching concept at its heart.
The matching concept is to match income and expenditure. This means that grant income tends to be deferred (deferred income on the balance sheet is a liability) until the entity receiving the grant income incurs eligible expenditure, which the grant then covers. This 'automatic' deferral is not necessarily in line with the IFRS Conceptual Framework since it may not meet the definition of a liability, depending on the circumstances.
A liability is defined as a present obligation arising from a past event resulting in an outflow of resources. IAS 20 states that an entity must comply with the grant conditions in order to recognise it but does not stipulate whether these conditions include an obligation to return the grant if those conditions are not met (hence there may not be an outflow of resources).
UK Government application of IAS 20The UK government applies IFRS, which are adapted to suit their accounting requirements; the following amendments to IAS 20 have been made in order to reduce mismatches between the treatment of government grants between donating entities and public sector recipients: 1. Entities are not permitted to deduct capital grants from the carrying value of the assets (option 2 in the comparison table); and 2. Income can only be deferred if there is a condition attached to the grant. The condition must be a requirement that the grant be used in a particular way as specified by the grant provider or it must be returned. The removal of the option to deduct the grant from the capital asset is to ensure comparability across government entities. Asset values would not be comparable and the depreciation charge in the P&L would also be affected, thus further reducing comparability. The second amendment generally ensures that donating entities and public sector recipients recognise government grants as an expense and income in the same period. Either grants are recognised immediately by both donor and recipient or they are both deferred as a prepayment and deferred income in the respective accounts until the conditions are met. |
In some cases, government assistance to entities may be aimed at long-term support of business activities either in certain regions or industry sectors. SIC-10 states that government assistance to entities will meet the definition of a grant as per IAS 20 even if there are no conditions specifically relating to the operating activities of the entity (other than operating in certain regions or industry).
Find out more
Follow these links for a detailed look at other areas of Government Grants: