How do you account for different forms of government assistance?

© 2022 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.What’s the issue?To address the challenges posed by climate-related risks, governments around the world are introducing various measures to help companies reduce carbon emissions. These measures include programmes financing the move to new, greener technologies.Government assistance that meets the definition of a government grant is accounted for under the specific requirements of IAS 20 Accounting for Government Grants and Disclosure of Government Assistance.If a company receives government assistance, then it determines how to account for that assistance by asking the following questions.–Does the assistance meet the definition of a government grant?–When should the grant be recognised?–How should the grant be measured and presented in the financial statements?Companies that have not received government grants previously may need to develop new accounting policies and procedures. They may also need to apply significant judgement when assessing whether they will comply with the relevant conditions set out in government assistance programmes.Getting into more detailIdentifying government grantsIFRS® Standards include specific accounting requirements for government assistance in the form of a government grant. Therefore, companies need to consider the distinction between government grants and other forms of assistance carefully. IAS 20 defines a government grant as a transfer of resources in return for past or future compliance with certain conditions relating to the operating activities of the company.Government grants exist in many forms. For example, companies may receive grants in the form of emissions certificates, land for green projects, forgivable loans, below-market interest rate loans, waiver of expenses, investment tax credits and other subsidies. However, government assistance in the form of benefits that are available when determining taxable profit or tax loss, or are determined on the basis of a company’s income tax liability, are not in the scope of IAS 20. [Insights 4.3.10]Accounting for government grantsA company recognises a government grant when it has reasonable assurance that it will comply with the relevant conditions and the grant will be received. This may Irina IpatovaKPMG InternationalHow do you account for different forms of government assistance?1 February 2022“Significant judgement may be required to determine when and how to recognise government assistance programmes aiming to address the adverse impacts of climate-related risks.” © 2022 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.2 | How do you account for different forms of government assistance?require judgement, particularly when governments introduce new programmes that may require new legislation, or for which there is little established practice for assessing whether the conditions for receiving a grant are met.If the conditions are met, then a company recognises government grants in profit or loss on a systematic basis and in line with its recognition of the expenses that the grants are intended to compensate. Companies need to consider the conditions associated with the grant carefully to determine whether it compensates expenses already incurred or future costs. [Insights 4.3.40]Measurement and presentation of government grants depends on the nature of the grant and the company’s accounting policies. The accounting policy considerations for different types of grants are as follows.GrantExampleAccounting considerationIn the form of non-monetary assetsEmissions certificates or land for green projectsWhether to measure these assets at nominal amount or fair value [Insights 4.3.50]Related to assetsGrant for a purchase of new, greener machineryWhether to present these assets net or gross – i.e. whether to deduct the grant from the cost of the asset or present it separately as deferred income to be amortised over the useful life of the asset [Insights 4.3.130]Related to incomeWaiver of expensesWhether to present the grant net or gross – i.e. whether to offset the grant against the related expenditure, or to present it either separately or under a general heading such as ‘Other income’ [Insights 4.3.140]Government loans for climate-related initiativesA government may provide a loan at a below-market interest rate for a qualifying climate-related initiative – e.g. to a start-up in the renewable energy sector. 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 under IFRS 9 Financial Instruments. The benefit (i.e. the government grant) is measured as the difference between the fair value of the loan on initial recognition and the amount received.In some cases, a government may provide a loan that will be forgiven if certain conditions are met. A forgivable loan is treated as a government grant only when there i