ACCA Applied Skills · Financial Reporting

Government Grants (IAS 20) for ACCA Financial Reporting

IAS 20 says you recognise a government grant only when there is reasonable assurance that you will meet its conditions and receive it. You then take it to profit or loss on a systematic basis, matching the costs it is meant to cover. Asset grants are shown either as deferred income or deducted from the asset's carrying amount.

What this chapter covers

This chapter covers IAS 20 Accounting for Government Grants and Disclosure of Government Assistance. It is a short standard. It tells you when to recognise a grant, where to put it in the financial statements and how to release it to profit or loss.

The core idea is matching. A grant is not income just because cash arrives. You recognise it over the periods in which you incur the costs the grant is meant to compensate. For income-related grants that means the period of the expenses. For asset grants it means over the life of the asset, through lower depreciation or a release of deferred income.

The chapter links to several other parts of the Financial Reporting paper. Asset grants connect to property, plant and equipment and depreciation under IAS 16. Presentation links to the statement of financial position and the statement of profit or loss. Repayment of a grant is treated as a change in accounting estimate, which connects to IAS 8. Expect it in Section A and B objective questions, and as a part of a longer Section C question on a single entity's financial statements.

Government grants are a compact, rule-based topic, so you can learn it quickly and answer with confidence. Objective test questions are marked all or nothing, and grant questions usually test one clean calculation, such as the deferred income balance at the year end. Get the method right and those marks are reliable. The same skills also support Section C questions, where a grant adjustment is often one of several adjustments you must make to non-current assets and profit. Examiners also like the choice between the two presentation methods, so knowing both protects you from losing marks on a small detail.

Government grants: topics in the order to study them

1IAS 20 Scope and Definitions of Government GrantsStart here because you must know what counts as a grant, what is excluded and the key terms before applying any accounting.
2Accounting for Grants Related to IncomeThis comes next because it is the simpler case: match the grant to the expenses it compensates and choose a presentation method.
3Accounting for Grants Related to AssetsStudy this after income grants, since it builds on matching but adds depreciation, deferred income and two presentation methods with calculations.
4Repayment, Non-Monetary Grants and DisclosuresLeave this to last because it covers the exceptions and extras, and it needs the earlier accounting methods to be secure.

How to prepare Government grants

This chapter rewards method more than memory. Spend your time on short calculations and on being able to explain the matching idea in a sentence.

Read the definitions first and write your own one-line meaning for grant, grant related to assets and grant related to income.
Learn the recognition test: reasonable assurance that the entity will comply with the conditions and that the grant will be received.
Practise income grants with a timeline, showing which periods carry the related costs and how much of the grant belongs to each.
Practise asset grants both ways. Do the deferred income method and the deduct-from-asset method on the same numbers and check that profit before tax comes out the same.
Work out the statement of financial position figures, splitting deferred income into current and non-current parts where required.
Do repayment questions by treating the repayment as a change in estimate and catching up the cumulative effect in the current period.
Finish with mixed objective questions under time pressure, then one Section C style question where the grant is one of several adjustments.

Common mistakes in Government grants

Taking the whole grant to profit in the year the cash is received.
Fix: Ask which costs the grant is meant to cover and release it over those periods only.
Using the full cost of the asset for depreciation after choosing the deferred income method, or the reduced cost after choosing the deduction method, in the wrong place.
Fix: Pick one method at the start. With deferred income, depreciate the full cost and release the grant separately. With deduction, depreciate cost less grant.
Showing all deferred income as non-current.
Fix: Split the closing balance: next year's release is current, the rest is non-current.
Treating a repayment as an error and restating prior periods.
Fix: Remember it is a change in estimate. Account for it in the current period, with any cumulative extra expense recognised immediately.
Ignoring the recognition test and booking a grant that has unmet conditions.
Fix: Read for conditions and doubt about compliance. If assurance is lacking, do not recognise the grant yet.
Applying the wrong start date to the release of an asset grant.
Fix: Release the grant over the same useful life and in the same pattern as the asset's depreciation.

Last-day revision: Government grants

Recognise a grant only when there is reasonable assurance of compliance with conditions and of receipt.
Receiving cash does not by itself prove the grant is earned.
Grants are recognised in profit or loss on a systematic basis over the periods the related costs are expensed.
Grants related to assets have a main condition to buy, build or acquire non-current assets.
Asset grant method one: deferred income, released to profit or loss over the asset's useful life.
Asset grant method two: deduct the grant from the asset's carrying amount, giving a lower depreciation charge.
Both methods give the same profit and net assets; only the presentation differs.
Income grants may be shown as other income or deducted from the related expense.
A grant for costs already incurred, with no future costs, is recognised as income in the period it becomes receivable.
Repayment of a grant is a change in accounting estimate, not a prior period error.
A non-monetary grant may be recorded at fair value or at a nominal amount.
Disclose the accounting policy, the nature and extent of grants, and any unfulfilled conditions or contingencies.

Government grants practice questions

Government grants in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Government grants: frequently asked questions

What is the main rule in IAS 20?

Recognise a government grant only when you have reasonable assurance that you will comply with its conditions and receive it. Then recognise it in profit or loss on a systematic basis over the periods in which you incur the related costs.

How do I account for a grant related to an asset?

You can present it as deferred income and release it to profit or loss over the asset's useful life. Alternatively, you can deduct it from the asset's carrying amount, so depreciation is lower. Both give the same profit and net assets.

What happens if a government grant has to be repaid?

The repayment is treated as a change in accounting estimate under IAS 8. You account for it in the current period. Any cumulative extra expense that would have been recognised to date is charged immediately.

How are government grants tested in the ACCA FR exam?

They appear in objective test questions that ask for a figure such as deferred income or the carrying amount of an asset. They can also appear as one adjustment inside a longer Section C question on financial statements.