Government grants (IAS 20) - Repayment and disclosure

Learning Outcomes

After studying this article, you will be able to explain when a government grant under IAS 20 must be repaid, account for the repayment under both permitted capital grant methods, and summarise the main disclosure requirements for government assistance and grants. You will also be able to apply typical exam scenarios on repayment and explain the impact on financial statements.

ACCA Financial Reporting (FR) Syllabus

For ACCA Financial Reporting (FR), you are required to understand the accounting for government grants, particularly how to deal with their repayment and the disclosures required under IAS 20. The areas relevant for revision include:

• Applying IAS 20 rules for recognition and measurement of government grants
• Accounting for repayment of both capital and revenue grants, including impact on financial statements
• Recognising disclosure requirements for government grants and assistance

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Under IAS 20, when should a grant be repaid and how is it accounted for if the grant was originally deducted from the cost of a non-current asset?
2. A company received a capital grant using the deferred income method and is now required to repay part of it. What entries are needed?
3. What must be disclosed about government grants and assistance under IAS 20 in the financial statements?
4. True or false: Repayments of government grants may require reversal of previously recognised income in profit or loss.

Introduction

Entities often receive government grants for purchasing assets or covering certain expenses. IAS 20 provides guidance on how to handle grants—including situations requiring repayment if the conditions are breached. The standard also sets out the disclosures required to ensure transparency for users of the financial statements. Understanding the accounting treatment for repayment and correct disclosure is essential for both compliance and examination purposes.

Repayment of Government Grants

Government grants must sometimes be repaid if the conditions attached are not met. The timing and method of original recognition impact the accounting treatment for repayment.

Key Term: government grant
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 entity’s operating activities.

Key Term: capital grant
A government grant whose primary condition is that an entity should purchase, construct or otherwise acquire long-term assets.

Key Term: revenue grant
A government grant other than a capital grant; typically intended to subsidise operating expenses.

When Repayment Is Required

A grant must be repaid if there is a failure to comply with the attached conditions. This could be selling a subsidised asset earlier than allowed or not meeting employment-related targets for a grant.

Repayment is recognised when it is probable and can be reliably measured. In such cases, a liability is raised and the repayment is accounted for in line with the nature of the original grant.

Repayment of Capital Grants

IAS 20 permits two ways to account for capital grants at initial recognition:

1. Deduct from the carrying amount of the asset.
2. Recognise as deferred income and release systematically to profit or loss.

Repayment accounting

• If the grant was deducted from the asset:

  • The carrying amount is increased by the amount repayable.
  • The additional carrying amount is depreciated over the remaining useful life.
  • A liability is recognised for the repayment.

• If the grant was recognised as deferred income:

  • The outstanding deferred income balance relating to the repaid portion is removed.
  • Any amount already credited to profit or loss that exceeds the unamortised amount of the grant is recognised immediately as an expense.

Repayment of Revenue Grants

• Repayment is recognised by setting up a liability for the repayment amount.
• Any previously recognised income relating to the repaid amount is reversed and recognised as an expense in profit or loss.

Worked Example 1.1

A company received a $50,000 capital grant recognised using the deferred income method over 5 years, releasing $10,000 per year to profit or loss. At the start of year 3, it is required to repay the grant in full. What is the accounting treatment?

Answer:
At the end of year 2, $20,000 has already been recognised as income. The outstanding deferred income balance is $30,000. On repayment:

• Remove the $30,000 deferred income balance (Cr Deferred income, Dr Liability).
• Expense the previously recognised $20,000 grant income (Dr Profit or loss, Cr Liability).
• Total expense in year 3: $50,000.

Worked Example 1.2

If, in the above scenario, the grant had been netted off the asset, how is repayment accounted for?

Answer:
The carrying amount of the asset is increased by $50,000. The increased carrying amount is then depreciated over the asset’s remaining useful life. A liability is set up for $50,000, and no prior periods are adjusted.

Exam Warning

A common exam error is to forget that, for the deferred income method, any proportion of a grant already taken to income must be reversed and shown as an expense if repayment is required.

Disclosure Requirements

IAS 20 mandates transparent disclosure about government grants and other assistance.

Entities must disclose:

• The accounting policy adopted for grants and the methods used under IAS 20
• The nature and amounts of government grants recognised in the financial statements
• Unfulfilled conditions and other contingencies related to recognised grants
• Details about any government assistance received for which no value can be reasonably measured
• Any grant that is potentially subject to repayment, as well as actual repayments made in the period

Disclosures are made in the notes to the financial statements.

Worked Example 1.3

A business receives a government grant that may need to be repaid if certain conditions are unmet. Which disclosures are required?

Answer:
The company must disclose:

• The nature of the grant and related unfulfilled conditions,
• Potential liability for repayment,
• The total value of government assistance received.

Revision Tip

When revising IAS 20, link the method of initial grant recognition directly to the required treatment on repayment. Always check both the method and the amount to be reversed or adjusted.

Summary

Repayment of government grants under IAS 20 relies on the original accounting method used. For both capital and revenue grants, repayment requires setting up a liability and, under the deferred income method, reversing any amount previously taken to income. Disclosure in the notes is required for all material grants, repayments, and outstanding obligations.

Key Point Checklist

This article has covered the following key knowledge points:

• Outline when government grant repayment is required under IAS 20
• Account for repayment under both the deferred income and netting-off methods
• Recognise the impact of repayment on income and assets
• Disclose government grants, assistance, repayment liabilities, and any unfulfilled conditions in the notes

Key Terms and Concepts

• government grant
• capital grant
• revenue grant