IFRS has specific requirements for government grants that apply to all entities; US GAAP has limited guidance for ‘business entities’.
From the IFRS Institute – May 31, 2019
Accounting for government grants under IFRS generally depends on the nature and conditions of the grant. As an overarching principle, the recognition pattern of the grant mirrors that of the costs incurred to fulfill the grant conditions. This assessment can be challenging and requires judgment. So let's start by discussing the recognition, measurement and presentation requirements for government grants under IFRS, the differences from US GAAP and the possibility of aligning the accounting under the two GAAPs.
What are government grants?
IAS 201 addresses the accounting and disclosure requirements for government grants and applies to all entities applying IFRS.
IAS 20 defines government grants as “assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity.” Typical examples include: R&D funding, forgivable or interest-free loans, grants of land or facilities and expense waivers. ‘Government’ includes government agencies and similar bodies, at a local, national or international level.
Not all government assistance meets the definition of a government grant. For example, if the assistance cannot reasonably have a value placed on it, or if it relates to a transaction with a government body that cannot be distinguished from a company’s normal operations (e.g. sales to a government body in the ordinary course of business), then it is not a government grant and is not in the scope of IAS 20.
Comparison to US GAAP
Unlike IFRS, US GAAP has specialized industry accounting requirements for not-for-profit entities (NFPs) that receive government grants. For other (business) entities, US GAAP does not contain specific guidance on the accounting for government grants. Consistent with historical practice, business entities might look to IAS 20 as a source of nonauthoritative guidance, or they might apply the US GAAP contribution accounting model in the Contributions Received Subsections of ASC 958 for NFPs. As a result, differences may arise in practice.
The FASB issued a proposed ASU2 in November 2015 that would apply to business entities that receive government assistance. While the proposed amendments do not address recognition and measurement of government grants, they would require disclosures that are generally consistent with IFRS – e.g. the nature, terms and conditions of the assistance and a description of the accounting policy selected. The proposed amendments would be effective for public business entities in fiscal years ending after December 15, 2020 and one year later for nonpublic business entities.
Following the issuance of the proposed ASU, there was no significant movement in this project due to other significant projects of the FASB. However, the FASB has resumed redeliberations and the staff is currently conducting outreach to gain additional information about the expected costs and benefits of the amendments. Read about the project status here.
When to recognize government grants?
Government grants are recognized when there is reasonable assurance that: (1) the recipient will comply with the relevant conditions and (2) the grant will be received. When assessing whether ‘reasonable assurance’ exists, it is important to consider all facts and circumstances. For government grants of a recurring nature, the assessment may be less challenging given historical experience.
After initial recognition, government grants are recognized in profit or loss on a systematic basis that mirrors the manner in which the company recognizes the underlying costs for which the grant is intended to compensate. The following table summarizes the timing of recognition.
|Grant related to||Timing of recognition in profit or loss|
|Depreciable asset||As the asset is depreciated/amortized.|
|Non-depreciable asset||Consistent with conditions related to the grant. For example, if a grant is related to the purchase of land on the condition that the company constructs and operates a building on that land, the grant is recognized in profit or loss as the building is depreciated.|
|Income – i.e. to compensate for expenses or losses already incurred, or for which there are no future related costs||When the grant becomes receivable.|
If a government grant meets the recognition criteria, IAS 20 generally allows either gross or net presentation on the balance sheet and/or income statement. For example, a company may elect gross presentation on its balance sheet and net presentation on its income statement.
|Grant related to||Gross presentation||Net presentation|
|Asset||Recognized as deferred income and amortized over the useful life of the asset.||Deducted from the cost of the asset.|
|Income||Recognized as other income.||Offset against the related expenditure.|
The presentation elected should be applied consistently by type of grant. For example, a company may elect gross presentation for all grants related to assets and net presentation for all grants related to income.
Example: Grant related to assets
Company receives a government grant of $50,000 to acquire machinery. The machinery costs $70,000 and has an estimated useful life of five years.
Gross balance sheet presentation
The machinery is presented on the balance sheet at its cost of $70,000, and the $50,000 grant is presented separately as deferred income. Company recognizes annual depreciation of the machinery of $14,000 ($70,000 / 5), and annual amortization of deferred income of $10,000 ($50,000 / 5) as other income.
Instead of presenting the amortization of deferred income as ‘other income’, Company could choose an accounting policy, to be applied consistently, to present it as a reduction of the related depreciation expense. This would result in annual depreciation expense of $4,000.
Net balance sheet presentation
The machinery is shown at its net cost of $20,000 ($70,000 - $50,000). Company recognizes annual depreciation of the machinery of $4,000 ($20,000 / 5).
Comparison to US GAAP
Company may elect to analogize to an NFP and apply the guidance in the Contributions Received Subsections of ASC 958. Company may also look to IAS 20 as a source of nonauthoritative guidance, however, net balance sheet presentation under US GAAP may not be appropriate.
Specific application issues
At first glance, accounting for government grants may appear to be relatively straightforward. However, in practice, a number of challenges can arise, some of which we consider here.
Grants related to R&D activities
Often governments help fund a company’s qualifying R&D expenditure. Under IFRS, the qualifying R&D spend that relates to research activities is expensed as incurred. The spend that relates to development activities is capitalized as an intangible asset when the criteria in IAS 383 are met.
It follows that the grant must also be allocated between research and development, which requires tracking and monitoring the costs that the grant is intended to compensate. Once the grant recognition criteria are met and the grant is allocated between the R&D components, it is recognized as follows.
For more information on accounting for R&D costs, read KPMG’s article, IFRS vs. US GAAP: R&D costs.
If a government grant is in the form of a nonmonetary asset (e.g. a grant of land), the company chooses an accounting policy, to be applied consistently, to recognize the asset and the grant at either the fair value of the nonmonetary asset received or the nominal amount paid (which is zero in most cases).
Example: Grant of a non-monetary asset
Government grants land to Company on the condition that Company constructs and operates a manufacturing facility on the land. The fair value of the land is $100,000. No consideration is exchanged.
Under IFRS, Company can elect a policy to recognize the grant of the land (a nonmonetary asset) at its fair value of $100,000. Deferred income is recorded for the same amount and subsequently recognized in profit or loss systematically as the facility is depreciated. Alternatively, Company can recognize the land and the grant at their nominal value (zero).
Comparison to US GAAP
Under US GAAP, the fair value approach generally would be applied.
Investment tax credits
IFRS does not define investment tax credits (ITCs) or say how they should be accounted for. ITCs are usually government incentive schemes delivered through the tax system – e.g. in the form of an income tax liability reduction or increase of tax-deductible expenses.
In practice, companies apply either IAS 124 or IAS 20 by analogy, depending on whether the substance of the ITC is more akin to an income tax allowance or a government grant. This assessment typically requires judgment. When IAS 12 is followed, the grant is recognized in profit or loss as a reduction of income tax expense (for the credit claimed in the current period) or as a deferred tax asset (for the unused portion of the credit) that is subsequently amortized to income tax expense.
If some, or all, of a government grant becomes repayable (e.g. due to non-fulfillment of the grant conditions), then the repayment is accounted for prospectively as a change in accounting estimate. The effect of the change in estimate is recognized in the period in which management concludes that it is no longer reasonably assured that all of the grant conditions will be met. A corresponding financial liability is recognized for the amount of the repayment.
In our view, the repayable portion of the credit previously recognized for the grant should be reversed against the line item that was credited.
The reversal of a credit previously recognized as a reduction in the cost of an asset will increase the asset’s carrying amount. A company should consider whether the change in circumstances that triggered the grant repayment may indicate that the asset, whose carrying amount has increased, is impaired.
The takeaway for dual reporters
It is important for grant recipients to examine the terms and all conditions of a grant to determine whether the reasonable assurance recognition threshold is met.
Dual reporters may be able to limit GAAP differences by electing to apply IAS 20 by analogy under US GAAP, where possible. However, these companies should be aware that depending on the nature of the grant, US GAAP may require specific accounting that differs from IAS 20.
In addition, all grant recipients should have appropriate processes and controls in place for monitoring compliance with grant conditions.
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