Objective
IAS 20 prescribes the accounting and disclosure requirements for government grants and other forms of government assistance to ensure that financial statements reflect the effects of government support on an entity’s financial performance and position.
Government grants are transfers of resources from government in return for past or future compliance with conditions, not in exchange for goods or services at market terms.
🧾 1. Scope
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Applies to all government grants and assistance, except:
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Grants related to income taxes (IAS 12)
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Government participation in a joint arrangement or business combination
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Grants can be monetary or non-monetary, conditional or unconditional.
💡 2. Key Definitions
| Term | Meaning |
|---|---|
| Government Grant | Transfer of resources from government for which no direct repayment is required. |
| Capital Grant | Grant related to assets, e.g., building, equipment. |
| Income Grant | Grant related to income or expense support, e.g., subsidies, wage support. |
| Repayable Grant | Becomes liability if conditions not met. |
⚙️ 3. Recognition Principles
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Recognize grant only when:
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Reasonable assurance that entity will comply with conditions
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Grant will be received
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Grants can be accounted for using two approaches:
A. Grants Related to Assets (Capital Grants)
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Reduce the asset’s carrying amount (“net of grant”)
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Cost of asset = cost less grant
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Example 1 – Capital Grant:
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Government grant received to buy machinery = $50,000
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Machinery cost = $200,000
Machinery recorded at $150,000; grant reduces asset cost.
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Deferred Income Approach
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Record grant as liability, recognize in P/L over asset’s useful life
B. Grants Related to Income (Revenue Grants)
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Recognized as income over periods necessary to match costs
Example 2 – Revenue Grant:
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Government grant to subsidize salaries = $30,000
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Salaries expense for period = $30,000
Grant can offsets related expense in the same period.
C. Non-Monetary Grants
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Recognize asset and grant at fair value, or nominal value if fair value not reliably measurable.
Example 3 – Free Land
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Land provided by government → fair value $100,000
D. Repayable Grants
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Recognize as liability if conditions for repayment exist.
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Account as a change in accounting estimate (IAS 8) if repayment becomes probable.
🔄 4. Presentation
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Grants related to assets:
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Deducted from asset carrying amount or shown as deferred income
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Grants related to income:
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Shown separately in profit or loss or deducted from related expense
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🧩 5. Disclosure Requirements
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Accounting policy for government grants
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Nature and extent of grants recognized
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Unfulfilled conditions and contingencies
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Grants related to assets: deferred income or net asset amount
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Grants recognized in P/L
Example Disclosure:
“During the year, the entity received a government grant of $50,000 for the purchase of machinery, recognized as deferred income to be amortized over 5 years. No grants were repayable as of year-end.”
📊 6. Summary Table
| Type of Grant | Recognition | Example | Accounting Treatment |
|---|---|---|---|
| Capital Asset | Reduce asset cost or deferred income | Machinery $200k, grant $50k | Net asset $150k or deferred income $50k |
| Income Grant | Recognize in income over related expense | Salary subsidy $30k | Offset salaries expense or other income |
| Non-monetary | Recognize at fair value | Free land $100k | Dr Land 100k / Cr Grant Income 100k |
| Repayable | Recognize liability if repayment probable | Grant repayable $20k | Dr Cash 20k / Cr Liability 20k |
🎯 7. Key Points
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Recognize grants only when reasonable assurance exists
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Differentiate between asset grants and income grants
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Non-monetary grants recognized at fair value
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Repayable grants treated as liabilities
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Proper disclosure of nature, extent, and conditions is required
More difference between IAS 12 and IAS 20 :
we must understand the scope difference:
✅ IAS 12 — Income Taxes
IAS 12 deals with current tax and deferred tax that arise from:
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Taxable profit
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Deductible temporary differences
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Taxable temporary differences
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Carry-forward losses/credits
👉 It applies when the tax effect arises from profit or timing differences.
✅ IAS 20 — Government Grants
IAS 20 covers government assistance / grants, including:
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Cash grants
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Support programs
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Tax incentives that are linked to actions, not to profit
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Tax reductions that function like a grant
👉 It applies when the government reduces tax as an incentive, not as part of the normal income tax system.
⭐ Key Distinction:
If the tax reduction is:
A. Related to taxable profits → IAS 12
Example:
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Lower corporate tax rate: 20% → 18%
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Tax loss can be used to offset future profit
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Allowance for depreciation (tax rules)
These are part of the tax calculation, so they belong in IAS 12.
B. Related to a government incentive program → IAS 20
Example:
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Government says: “If you buy new machinery worth $1 million, you get a tax credit of $100,000.”
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Government says: “If you hire 50 new employees, you get a tax reduction of $20,000.”
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Government gives tax holidays for investment in agriculture zones.
These are not linked to taxable profit.
They are like giving cash, but using tax instead.
✔ These are government grants, so IAS 20 applies.
⭐ Simple Rule to Remember
| Situation | Standard |
|---|---|
| Tax impact comes from normal tax rules (tax rate, taxable profit, temporary differences) | IAS 12 |
| Tax benefit comes from a government incentive program, NOT from profit | IAS 20 |
📌 Examples to make it simple
Example 1 — Corporate tax rate reduced from 25% to 20%
→ This affects all businesses
→ Change in normal tax system
→ IAS 12 applies
Example 2 — Government gives a tax credit of $50,000 if company buys solar equipment
→ It is an incentive
→ Condition-based benefit
→ It is a government grant → IAS 20
You treat the $50,000 like cash received.
Example 3 — Investment tax holiday for 5 years to companies operating in special economic zones
→ This is government grant
→ Not part of normal corporate tax rules
→ IAS 20 guidance applies
IAS 12 only calculates the resulting tax effect, but the assistance itself is under IAS 20.
🔍 Why IAS 20 includes tax reductions?
Because in practice, governments often give grants in the form of:
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Tax credits
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Tax exemptions
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Tax rebates
These benefits behave exactly like:
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cash receipts, or
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expense reductions
Therefore, IAS 20 treats such benefits as government grants.
✅ CASE 1: Tax Credit for Buying Machinery
Government incentive:
“If you buy new machinery worth $1,000,000, you get a tax credit of $100,000.”
➡️ This is a grant related to an asset.
➡️ The tax credit is treated like cash received (IAS 20).
You can use either method allowed by IAS 20:
✔ Method 1: Deferred Income (most commonly used)
On purchase of the machine
Recognize the tax credit as a grant
Each year amortize grant (if useful life = 10 years)
100,000 ÷ 10 = 10,000/year
✔ Method 2: Reduce Cost of Asset
Record asset cost net of grant
Machine: 1,000,000 – 100,000 = 900,000
✅ CASE 2: Tax Reduction for Hiring Employees
Government incentive:
“If you hire 50 new employees, you get a tax reduction of $20,000.”
➡️ This is a grant related to income (operating activity).
➡️ Recognize when reasonable assurance of:
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meeting condition (hiring)
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receiving benefit (tax reduction)
✔ Method 1: Show as Other Income
✔ Method 2: Deduct from related expense
If wages cost = $200,000:
Net cost = 200,000 – 20,000 = 180,000
✅ CASE 3: Tax Holiday for Investment in Agriculture Zone
Government incentive:
Company gets 0% tax for 3 years if it invests in an agricultural zone.
➡️ This is government assistance, not linked to normal profit calculation.
➡️ Treated as a grant related to income under IAS 20.
➡️ The benefit recognized each year is the tax saved.
Assume profit tax normally = $30,000 per year
During tax holiday:
Tax expense avoided = $30,000 → treat as government grant.
If the country has no “Income Tax Payable” because it’s 0%,
you may record it as: