Governments around the world are considering a broad range of possible actions to provide assistance to companies in the current conditions caused by the COVID-19 coronavirus pandemic.
Under IFRS® Standards, the accounting for government assistance depends on the nature of the assistance. The requirements of the standards differ significantly on when to recognise that assistance and how to measure it. Companies therefore need to identify which specific standard applies to determine the appropriate accounting.
Accounting for government assistance will differ significantly depending on its nature and type – e.g. whether it is a grant, loan, tax benefit or guarantee. Identifying the specific accounting requirements that apply will be crucial.
The accounting treatment of some common forms of government assistance is as follows. This list is not exhaustive.
A government grant is a transfer of resources in return for past or future compliance with certain conditions relating to a company’s operating activities. A company applies IAS 20 Accounting for Government Grants and Disclosure of Government Assistance to account for government grants.
Under IAS 20, a company recognises a government grant when it has reasonable assurance that it will comply with the relevant conditions and the grant will be received. A company recognises a government grant in profit or loss on a systematic basis and in line with its recognition of the expenses that the grant is intended to compensate. [Insights 4.3.40]
Government assistance in the form of benefits that may impact a company’s taxable profit or its income tax liability – e.g. tax reliefs for certain types of income, additional tax deductions, a reduced tax rate or an extended period to use tax losses carried forward – are generally accounted for under IAS 12 Income Taxes, not IAS 20.
For example, if a government plans to amend income tax legislation to reduce corporate tax rates, then a company recognises and measures the effect of the amendment in accordance with the detailed requirements of IAS 12. This includes considering whether any deferred tax assets are recoverable . A company accounts for the change in tax rate only when the amendment to the legislation is substantively enacted. [Insights 3.13.480]
Government ownership interests
Government participation in the ownership of a company is not itself in the scope of IAS 20. For example, if a government acquires an ownership interest in a subsidiary, then the parent company applies IFRS 10 Consolidated Financial Statements to assess whether it should continue to consolidate the subsidiary or, if appropriate, to account for a disposal or partial disposal.
If a government provides support to a company and is also a shareholder in that company, then the company needs to assess whether the government is acting in its capacity as shareholder or as government. This will determine how the company accounts for the government support. [Insights 4.3.10]
Supplies of goods and services
Transactions with governments that cannot be distinguished from the normal trading activities of a company are not government grants.
For example, if a company supplies goods or services to a government that are an output of its ordinary activities, then it will generally apply IFRS 15 Revenue from Contracts to Customers. This will include accounting for revenue only when the contract existence criteria in IFRS 15 are met.
Government loans and guarantees
A company generally accounts for the benefit of a government loan at a below-market interest rate as a government grant under IAS 20. It accounts for the loan in accordance with IFRS 9 Financial Instruments. The benefit that is the government grant is measured as the difference between the fair value of the loan on initial recognition and the amount received. Similar considerations apply to a government guarantee of a new loan issued by a company.
For example, suppose a company issues a loan that is guaranteed by government. The company receives proceeds of 100 from the lender. The fair value of the loan without the government guarantee is 90. On initial recognition, the company records a financial liability measured at 90 and a government grant measured at 10.
Companies apply the disclosure requirements in the applicable standards. For example, if a company receives a government loan at a below-market interest rate, then it provides the disclosures required by IAS 20 and those required by IFRS 7 Financial Instruments: Disclosures. If a government is also a shareholder, then additional related party disclosures may be required under IAS 24 Related Party Disclosures.
Additional disclosures explaining the company’s use of government assistance may also be needed under IAS 1 Presentation of Financial Statements.
References to ‘Insights’ mean our publication Insights into IFRS
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