IFRS for SMEs® Standard (2015) + Q&As

IFRS® Foundation—Supporting Material for the IFRS for SMEs Standard

Module 24—Government Grants

 IFRS® Foundation
Supporting Material
for the IFRS for SMEs® Standard
including the full text of
Section 24 Government Grants
of the IFRS for SMEs Standard
issued by the International Accounting Standards Board in October 2015

with extensive explanations, self-assessment questions and case studies

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 Contents

INTRODUCTION __________________________________________________________ 1
Which version of the IFRS for SMEs Standard? __________________________________ 1
This module ______________________________________________________________ 1
IFRS for SMEs Standard ____________________________________________________ 2
Introduction to the requirements ______________________________________________ 3
What has changed since the 2009 IFRS for SMEs Standard ________________________ 3
REQUIREMENTS AND EXAMPLES ___________________________________________ 4
Scope of this section _______________________________________________________ 4
Recognition and measurement _______________________________________________ 8
Disclosures _____________________________________________________________ 15
SIGNIFICANT ESTIMATES AND OTHER JUDGEMENTS _________________________ 18
Measurement ____________________________________________________________ 18
COMPARISON WITH FULL IFRS STANDARDS ________________________________ 19
TEST YOUR KNOWLEDGE ________________________________________________ 21
APPLY YOUR KNOWLEDGE _______________________________________________ 25
Case study 1 ____________________________________________________________ 25
Answer to Case study 1 ____________________________________________________ 26
Case study 2 ____________________________________________________________ 27
Answer to Case study 2 ____________________________________________________ 28

IFRS Foundation: Supporting Material for the IFRS for SMEs® Standard (version 2018–08) iv
Module 24 – Government Grants

The accounting requirements applicable to small and medium-sized entities (SMEs)

presented in this training module are set out in the IFRS for SMEs Standard, issued by
the International Accounting Standards Board (Board) in October 2015.
This module has been prepared by IFRS Foundation education staff.
The contents of Section 24 Government Grants of the IFRS for SMEs Standard are set
out in this module and shaded grey. The Glossary of terms of the IFRS for SMEs
Standard (Glossary) is also part of the requirements. Terms defined in the Glossary
are reproduced in bold type the first time they appear in the text of Section 24. The
notes and examples inserted by the education staff are not shaded. These notes and
examples do not form part of the IFRS for SMEs Standard and have not been
approved by the Board.

INTRODUCTION
Which version of the IFRS for SMEs® Standard?

When the IFRS for SMEs Standard was first issued in July 2009, the Board said it would
undertake an initial comprehensive review of the Standard to assess entities’ experience of
the first two years of its application and to consider the need for any amendments. To this
end, in June 2012, the Board issued a Request for Information: Comprehensive Review of the
IFRS for SMEs. An Exposure Draft proposing amendments to the IFRS for SMEs Standard was
subsequently published in 2013, and in May 2015 the Board issued 2015 Amendments to the
International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs
Standard).
The document published in May 2015 only included amended text, but in October 2015,
the Board issued a fully revised edition of the Standard, which incorporated additional
minor editorial amendments as well as the substantive May 2015 revisions. This module is
based on that version.
The IFRS for SMEs Standard issued in October 2015 is effective for annual periods beginning
on or after 1 January 2017. Earlier application was permitted, but an entity that did so
was required to disclose the fact.
Any reference in this module to the IFRS for SMEs Standard refers to the version issued in
October 2015.

This module

This module focuses on the accounting for and reporting of government grants and other
forms of government assistance applying Section 24 Government Grants of the IFRS for SMEs
Standard. It introduces the subject and reproduces the official text along with
explanatory notes and examples designed to enhance understanding of the requirements.
The module identifies the significant judgements required in accounting for and
reporting government grants and other forms of government assistance. In addition, the
module includes questions designed to test your understanding of the requirements and
case studies that provides an opportunity to apply the requirements for accounting for
government grants and other forms of government assistance applying the IFRS for SMEs
Standard.
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Module 24—Government Grants

Upon successful completion of this module you should, within the context of the
IFRS for SMEs Standard, be able to:
• distinguish government grants from other forms of government assistance and from
other forms of income;
• identify when a government grant qualifies for recognition in income;
• measure government grants;
• present and disclose government grants in financial statements;
• correctly disclose other forms of government assistance; and
• demonstrate an understanding of the significant judgements required in accounting
for government grants.

IFRS for SMEs Standard

The IFRS for SMEs Standard is intended to apply to the general purpose financial statements
of entities that do not have public accountability (see Section 1 Small and Medium-sized
Entities).
The IFRS for SMEs Standard is comprised of mandatory requirements and other
non-mandatory material.
The non-mandatory material includes:
• a preface, which provides a general introduction to the IFRS for SMEs Standard and
explains its purpose, structure and authority;
• implementation guidance, which includes illustrative financial statements and a table
of presentation and disclosure requirements;
• the Basis for Conclusions, which summarises the Board’s main considerations in
reaching its conclusions in the IFRS for SMEs Standard issued in 2009 and, separately, in
the 2015 Amendments; and
• the dissenting opinion of a Board member who did not agree with the issue of the
IFRS for SMEs Standard in 2009 and the dissenting opinion of a Board member who did
not agree with the 2015 Amendments.

In the IFRS for SMEs Standard, Appendix A: Effective date and transition, and Appendix B:
Glossary of terms, are part of the mandatory requirements.

In the IFRS for SMEs Standard, there are appendices to Section 21 Provisions and Contingencies,
Section 22 Liabilities and Equity and Section 23 Revenue. These appendices provide
non-mandatory guidance.

The IFRS for SMEs Standard has been issued in two parts: Part A contains the preface, all the
mandatory material and the appendices to Section 21, Section 22 and Section 23; and Part
B contains the remainder of the material mentioned above.

Further, the SME Implementation Group (SMEIG), which assists the Board with supporting
implementation of the IFRS for SMEs Standard, publishes implementation guidance as
‘questions and answers’ (Q&As). These Q&As provide non-mandatory, timely guidance on
specific accounting questions raised with the SMEIG by entities implementing the
IFRS for SMEs Standard and other interested parties. At the time of issue of this module
(August 2018) the SMEIG has not issued any Q&As relevant to this module.

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Module 24—Government Grants

Introduction to the requirements

The objective of general purpose financial statements of a small or medium-sized entity is to

provide information about the entity’s financial position, performance and cash flows that is
useful for economic decision-making by a broad range of users who are not in a position to
demand reports tailored to meet their particular information needs. Such users include, for
example, owners who are not involved in managing the business, existing and potential
creditors and credit rating agencies.
The objective of Section 24 is to prescribe the accounting and reporting for government
grants and the requirements for disclosure of other forms of government assistance.
An entity shall account for a government grant as follows:
(a) a grant that does not impose specified future performance conditions on the recipient is
recognised in income when the grant proceeds are receivable;
(b) a grant that imposes specified future performance conditions on the recipient is
recognised in income only when the performance conditions are met;
(c) a grant received before the income recognition criteria are satisfied is recognised as a
liability.
An entity must measure government grants at the fair value of the asset received or
receivable.
Section 24 also requires an entity to provide specified disclosures about its government
grants and to indicate other forms of government assistance from which it has benefited
directly.

What has changed since the 2009 IFRS for SMEs Standard

This section of the IFRS for SMEs Standard was mainly unchanged by the 2015 Amendments.
However, this module may reproduce, but not highlight, minor changes or editorial
corrections.

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Module 24—Government Grants

REQUIREMENTS AND EXAMPLES

Scope of this section

24.1 This section specifies the accounting for all government grants. A government grant is
assistance by government in the form of a transfer of resources to an entity in return for
past or future compliance with certain conditions relating to the operating activities of the
entity.

Notes

The term ‘government’ includes government, government agencies and similar bodies
whether local, national or international. Grants received from non-governmental
development agencies or organisations—whether local, regional, national or
international—may be accounted for by analogy similarly to government grants. The
entity would need to consider the relevant facts and circumstances of the transaction
or arrangement.
Government grants are sometimes called subsidies, subventions or premiums. They
can take many forms, varying both in the nature of the resources transferred to an
entity and in the conditions attached to the grant. The purpose of the grant is often to
encourage an entity to act in a way it would not normally act had the assistance not
been provided.
If a government transfers resources to an entity in exchange for an equity interest in
the entity, the transaction is not a government grant and should not be accounted for
as such even if, as part of the transaction, the government imposes specific conditions
relating to the operating activities of the entity. Similarly, a government loan to an
entity does not constitute a grant in its own right. This is because an equity
contribution or a repayable loan are normal business transactions and are therefore
not in themselves ‘assistance’. However, an entity would need to consider whether the
arrangement in part constitutes assistance. Thus, the benefit of a government loan at
no interest or at a below market rate of interest could be treated as a government
grant if the other requirements are met. The benefit of a government loan at no
interest or at a below market rate of interest is the difference between the present
value of the loan discounted at its market rate and its nominal amount.
A government grant is an entity-specific transfer of resources. Resources that are made
available by a government to a wide range of entities, such as the right to use public
roads or other infrastructure, do not constitute a government grant under Section 24.
In some countries, government assistance to entities aims to encourage or support
business activities in certain regions or industry sectors. The conditions for receiving
such assistance may not relate specifically to the operating activities of the entity.
Examples of such assistance are transfers of resources by government to entities that:
• operate in a particular industry;
• continue operating in recently privatised industries; or
• start or continue to operate in underdeveloped areas or areas that lack basic
amenities or infrastructure.

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Module 24—Government Grants

Such government assistance is a government grant. A general requirement to operate

in particular regions or industry sectors to qualify for government assistance
constitutes a condition as specified in paragraph 24.1. Therefore, the requirements of
Section 24 regarding government grants shall apply.

Examples—government grants

Ex 1 On 1 January 20X7, as part of a scheme to provide support for projects to help

rural communities, the government announced a plan whereby during 20X7–
20X9, entities can apply for a grant to set up farming operations in a specified
rural area. Qualifying entities will receive an upfront cash payment of CU50,000(1)
to be used specifically for setting up farming operations in the specified area.
Entities must submit a completed application, their proposal and specified
documents, all of which the government will consider before issuing the grant.
The upfront cash payment is assistance from a government in the form of a transfer of
resources to the qualified entity. The requirement to set up farming operations in a
specified rural area is a future condition related to the operating activities of the entity
and is promised by the entity in return for the transfer of resources. Therefore, an
entity receiving the upfront payment would conclude that it is a government grant.
The entity will need to comply with the requirement regarding the establishment and
operation of the farm to obtain and retain the grant.

Ex 2 Entity A is a manufacturer of medical devices. In 20X7, it successfully applied for

financial support from the local government to fund research into a new type of
technology that could lead to a significant improvement in healthcare. The local
government agrees to reimburse Entity A 50% of specified project costs over a
two-year period. In accordance with the agreement, Entity A must meet specified
targets with regard to the performance of the technologies being developed.
The entity must also prepare six-monthly progress reports for the government.
If targets are met and progress is deemed satisfactory, the government is likely to
provide further support in the future.
The refund of a portion (50%) of the qualifying project costs by the government is
assistance from government in the form of a transfer of resources to the entity. The
requirement to meet specified targets with regard to the performance of the
technologies being developed is a future condition related to the operating activities of
the entity and is promised by the entity in return for the transfer of resources.
Therefore, an entity would conclude that the refund is a government grant.

Ex 3 To encourage entities to expand their operations in a specified development zone,

where it is difficult for entities to obtain financing for their projects at a
reasonable interest rate, the local government has offered interest-free loans for a
five-year period. In accordance with the local government scheme, Entity B
received a five-year interest-free loan from the local government to fund the
expansion of its cloth manufacturing plant. The loan agreement specifies that the
proceeds can only be used for those purposes.

(1) In this example, and in all other examples in this module, monetary amounts are denominated in ‘currency units (CU)’.
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Module 24—Government Grants

The interest-free element of the loan is a transfer of a resource from the government to
Entity B since the entity does not need to pay interest at market rates and the
government is forgoing interest income at market rates. The specified conditions that
Entity B must comply with are that the loan proceeds must be used to fund the
planned expansion of the business. Therefore, the interest element is a government
grant. The capital amount of the loan (excluding the interest-free element) is not a
government grant because, being a loan, the entity will be required to repay the
government.

Ex 4 On 31 December 20X7, an entity received CU40,000 from a national government

for not cultivating 40 acres of its land during 20X7.
The transfer of CU40,000 is a government grant—it is a resource transferred to the
entity from a government in return for past compliance with specified conditions
relating to the agricultural activities of the entity.

Ex 5 The facts are the same as in Example 4. However, in this example, the entity
received the funds from the governing body of the regional economic union in
which the entity operates.
The transfer of CU40,000 is a government grant—it is a resource transferred to the
entity from a government-like body in return for past compliance with specified
conditions relating to the agricultural activities of the entity.

Examples—not government grants

Ex 6 A local government decided to privatise its ambulance service and published its
criteria in a public bidding document. The entity that won the bid has an
exclusive licence to provide ambulance services in the jurisdiction in exchange for
a fee for a five-year period and will earn revenue from the fees it charges.
The transfer of the licence is not a government grant. Although the winning bidder
must comply with the conditions in the public bidding document, this is a business
licence and not a government grant.

Ex 7 In 20X7, the entity transported its goods by truck on roads provided by the
national government. The roads are available to all free of charge.
The right to transport the entity’s goods by road in that jurisdiction is not a
government grant. Even though it may provide a significant benefit to the entity, the
resource—free road use—is available to all entities in that jurisdiction, regardless of
whether they comply with specified conditions relating to operating activities.

Ex 8 In 20X7, the entity received electricity from a government agency at a lower rate
per kilowatt than is available in neighbouring countries. The government agency
is, by law, the only supplier of electricity in the country. It supplies electricity to
all users of electricity in that jurisdiction at the same price.
The inexpensive electricity received by the entity is not a government grant, the
resource—inexpensive electricity—is available to all electricity users in that jurisdiction
at the same rate. The resource is not given in return for compliance with specified
conditions relating to the entity’s operating activities.
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Module 24—Government Grants

24.2 Government grants exclude those forms of government assistance that cannot reasonably
have a value placed upon them and transactions with government that cannot be
distinguished from the normal trading transactions of the entity.

Example—distinguishing from normal trading transactions

Ex 9 In 20X7, an entity provided catering and cleaning services to the government under
a contract that produced 30% of its revenue for the year. The government uses the
services of this entity on the condition that at least one-third of the entity’s
workforce comprises adults with physical disabilities. The entity provides services
to the government at a premium to the rate it charges its other large customers as a
result of its negotiation process. Further, the entity was entitled to an additional
fee amounting to 10% of the rate it negotiated with the government.
The premium paid by the government over the normal market rate as a result of its
negotiation process is not a government grant. Unless the entity can clearly distinguish
that such premium is not a normal trading transaction, this is excluded from Section 24.
The additional 10% fee is a government grant. It is a transfer of resources to the entity in
return for compliance with conditions relating to the employment of disabled
employees.

24.3 This section does not cover government assistance that is provided for an entity in the form
of benefits that are available in determining taxable profit or tax loss, or are determined or
limited on the basis of income tax liability. Examples of such benefits are income tax
holidays, investment tax credits, accelerated depreciation allowances and reduced income
tax rates. Section 29 Income Tax covers accounting for taxes based on income.

Examples—government assistance in Section 29 Income Tax

Ex 10 In 20X7, the entity erected a factory building in a development zone. In accordance

with a government incentive scheme designed to encourage investment in
manufacturing capacity in development zones, the entity was granted an
immediate write-off of the cost of the building in the determination of its taxable
income for the year ended 31 December 20X7.
Outside the development zone, depreciation of factory buildings is recognised as an
expense in the determination of taxable profit on the straight-line basis over 40
years.
The entity depreciates the building on the straight-line basis over its estimated
useful life of 50 years to a nil residual value (see Section 17 Property, Plant and
Equipment).
The government assistance (accelerated tax allowance) is not accounted for as a
government grant. It is accounted for in accordance with Section 29 Income Tax.

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Ex 11 The facts are the same as in Example 10. However, in this example, the entity is
entitled to write off 150% of the cost of the building immediately for the purpose of
determining its taxable income for the year ended 31 December 20X7.
The government assistance (immediate tax deduction equal to 150% of the cost of the
factory building) is not accounted for as a government grant. It is accounted for in
accordance with Section 29 Income Tax.

Ex 12 The facts are the same as in Example 10. However, in this example, instead of an
accelerated tax allowance, the entity is entitled to a tax holiday (that is, the entity
is not required to pay income tax on what would otherwise be its taxable income)
for the tax years ended 31 December 20X7 and 31 December 20X8.
The government assistance (tax holiday) is not accounted for as a government grant. It is
accounted for in accordance with Section 29 Income Tax.

Ex 13 The facts are the same as in Example 10. However, in this example, instead of an
accelerated tax allowance, the entity is entitled to pay tax at a lower rate (20%
instead of 40%) for the tax years ended 31 December 20X7 and 20X8.
The government assistance (reduced tax rate) is not accounted for as a government
grant. It is accounted for in accordance with Section 29 Income Tax.

Ex 14 The facts are the same as in Example 10. However, in this example, instead of an
accelerated tax allowance, the entity was granted 100% tax relief on all import and
transactional taxes otherwise incurred in erecting the factory.
The government assistance (100% tax relief on all import and transactional taxes) is
accounted for as a government grant in this Section. Import and transactional taxes are
not based on taxable profits as determined in accordance with the rules established by
the taxation authorities (see the Glossary of terms of the IFRS for SMEs Standard). Thus, it
is not an income tax applying Section 29.

Recognition and measurement

24.4 An entity shall recognise government grants as follows:

(a) a grant that does not impose specified future performance conditions on the recipient is
recognised in income when the grant proceeds are receivable;
(b) a grant that imposes specified future performance conditions on the recipient is
recognised in income only when the performance conditions are met; and
(c) grants received before the revenue recognition criteria are satisfied are recognised as
a liability.

Notes

A performance condition is a requirement that entitles a government to either (1) not

transfer the granted resource, or (2) if the resource has already been granted, then to
return the granted resource in the event that a specified condition is failed. Any such
requirement should have commercial substance to be regarded as a performance
condition.
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Module 24—Government Grants

Examples—recognition

Ex 15 On 1 January 20X7, an entity received CU500,000 from a national government as an

incentive to establish a manufacturing plant in a designated development zone.
The incentive is conditional on the plant being erected in the development zone,
meeting certain specifications and commercial production having started on or
before 31 December 20X8. If any one (or more) of these conditions are not met, the
entity will be liable to refund the entire CU500,000 to the national government.
All the performance conditions were satisfied on 30 March 20X8 when the entity
began commercial production at the plant.
The CU500,000 government grant must be recognised as a liability on 1 January 20X7
(debit cash and credit liability)—see paragraph 24.4(c).
On 31 March 20X8, the CU500,000 government grant must be recognised in income and
the liability must be derecognised (debit liability and credit income)—see paragraph
24.4(b).
Considering the performance conditions in this example, the entire grant is at risk if any
one of the conditions is not met. Consequently, it is not appropriate to recognise the
income on a proportionate basis.
Paragraph 24.4(b) explicitly require that a grant is recognised in income when future
performance conditions are met. Consequently, it is not appropriate to reduce the
carrying amount of the plant by the CU500,000 government grant.

Ex 16 The facts are the same as in Example 15. However, in addition to the previous
conditions, the entity must also keep employment at a specified level for three
years from the date production commences (30 March 20X8). The full grant must be
repaid if the entity fails to meet any of the conditions.
The grant cannot be recognised in income until all the conditions are satisfied, and
therefore will only be recognised at the end of the three-year period provided the
employment criteria were not breached at any time during that three-year period).

Ex 17 The facts are the same as in Example 15. However, in addition to the previous
conditions, the entity must also keep employment at a specified level for three
years from the date production commences (30 March 20X8). The amount repayable
in the event of breaching the employment condition proportionately reduces with
the passage of time.
The grant would be recognised in profit or loss as the grant becomes non-repayable
(evenly over the three-year period).

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Module 24—Government Grants

Ex 18 The facts are the same as in Example 15. However, in this example, assume the
grant is conditional upon the plant remaining in commercial production for
five years from the date on which it was first brought into use, and that in the
event of any condition being unmet, the entire amount of the grant is refundable.
The entity undertook commercial production at the plant for six years before
selling the plant to an independent third party on 1 April 20Y4.
The CU500,000 government grant received must be recognised as a liability on 1 January
20X7 (debit cash and credit liability).
On 31 March 20Y3 the entity satisfies all the performance conditions—the plant was used
in commercial production for a period of five years (from 31 March 20X8 to 31 March
20Y3). Accordingly, on 31 March 20Y3 the CU500,000 government grant must be
recognised in income and the liability must be derecognised.
On 1 April 20Y4 the entity accounts for the sale of the plant (see
Section 17 Property, Plant and Equipment).

Ex 19 The facts are the same as in Example 15. However, in this example, assume that the
entity becomes unconditionally entitled to CU100,000 of the grant at the end of
each of the first five years of commercial operation of the plant.
The CU500,000 government grant received must be recognised as a liability on 1 January
20X7 (see paragraph 24.4(c)). The entity satisfied the performance condition in order to
receive CU100,000 of the grant on each of the first five 12-month anniversaries of the
start of commercial production at the plant. Accordingly, on 31 March 20X9, and on 31
March for each of the next four years, the entity must derecognise CU100,000 of the
liability and recognise it in income (see paragraph 24.4(b)).

Ex 20 On 1 January 20X7, a local government granted the entity, free of charge, a licence
to broadcast TV content in a particular city for a 10-year period. The terms of the
grant of the licence require the entity to broadcast specific types of TV programmes
for at least 20 hours a day throughout the licence period. Furthermore, if the entity
does not meet this performance condition, the licence will be revoked immediately.
For simplicity, assume there are 365 days a year in each of the 10 years.
On 1 January 20X7, the entity must recognise, at fair value, a liability for the
government grant (see paragraph 24.5) and an asset for the licence (see paragraph
24.4(c)). For each day the entity satisfies the performance conditions—broadcasting the
specified types of programmes for at least 20 hours—1/3,650 of the liability recognised
for the grant must be derecognised and recognised in income (see paragraph 24.4(b)).

24.5 An entity shall measure grants at the fair value of the asset received or receivable.

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Module 24—Government Grants

Examples—measurement

Ex 21 On 1 January 20X1 a local government issued three identical licences to broadcast

in a particular city for a ten-year period. Two licences were sold by public auction
to independent third parties from outside the local community for CU100,000 each.
To encourage local ownership, the third licence was granted to a local entity free of
charge.
The local entity that received the third broadcasting licence must measure the
government grant at fair value on initial recognition. The price paid by the independent
third parties of CU100,000 is strongly indicative of fair value, however consideration
should be given to all of the evidence available.
The licence is an intangible asset that should be recognised in the financial statements
in accordance with Section 18 Intangible Assets.

Ex 22 In 20X7 an entity provided catering and cleaning services under a contract with the
local government that amounted to 30% of its annual revenue. The government
uses the services of this particular entity on the condition that at least one-third of
the entity’s workforce comprises adults with physical disabilities. The government
pays for the services at an hourly rate that is 50% above the rate charged to other
customers of the entity. The total amount received from the government in 20X7 is
CU150,000. The entity has to report its roster of employees on a quarterly basis to
the government. In any given quarter, should the specified condition not be met,
this automatically reduces the rate the entity receives comparable to its other
customers.
The excess paid by the government over the normal market rate (CU50,000) is a
government grant. It is a transfer of resources to the entity in return for compliance
with conditions relating to the employment of disabled employees.
In accordance with Section 23 Revenue the rest of the amount paid by the government
(CU100,000) is treated as revenue arising from the rendering of services.

Ex 23 To encourage entities to expand their operations in a specified development zone,

where it is difficult for entities to obtain financing for their projects, the
government provides interest-free loans to fund the purchase of manufacturing
equipment.
In accordance with the development scheme, an entity receives an interest-free loan
of CU500 from the government for a period of three years. The market rate of
interest for similar loans is 5% per year (the market rate of interest for a similar
three-year loan to the entity).
There are no future performance conditions attached to the interest-free loan.
Applying Section 11 Basic Financial Instruments the entity measures the loan on initial
recognition at CU431.92, which is the present value of the loan (financial liability)—
CU500/(1.05)3.
CU68.08, the difference between the CU500 received (the loan’s face value) and
CU431.92, is a government grant and is recognised immediately as there are no specified
future performance conditions.

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The amount recognised on day one will accrete to CU500 over the three-year term using
the effective interest method.
The journal entry on initial recognition is:

Dr Cash CU500.00
Cr Loan (financial liability) CU431.92
Cr Income (profit or loss) CU68.08
To recognise the interest-free loan at fair value and the receipt of a government grant.

The journal entry a year after initial recognition is:

Dr Finance cost (profit or loss) CU21.60(a)

Cr Loan (financial liability) CU21.60
To recognise accretion of time value on the financial liability.
(a) CU431.92 x 5%

The journal entries at the end of years 2 and 3 are follows:

Year 2
Dr Finance cost (profit or loss) CU22.68(a)
Cr Loan (financial liability) CU22.68
To recognise accretion of time value on the financial liability.
(a) CU453.52 (CU431.92, initial carrying amount + CU21.60, first year accretion) x 5%

Year 3
Dr Finance cost (profit or loss) CU23.80(a)
Cr Loan (financial liability) CU23.80
To recognise accretion of time value on the financial liability.
(a) CU476.20 (CU453.52 + CU22.68) x 5%

Dr Loan (financial liability) CU500.00

Cr Cash CU500.00
To recognise repayment of the loan to the government.

Immediately after all the accretions are recognised, the carrying amount of the loan is
equal to its face value of CU500, which is also the amount payable to the government.

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Ex 24 The facts are the same as those in Example 23. However, in this example, instead of
the loan being interest-free the government charges 2% per year interest on the
loan (CU10 per year).
The present value of the loan (financial liability) is CU459.15. The present value is
calculated using the market rate of 5% as follows:
Cash payable Discount factor (5%) Present value
Time A B AxB
Year 1 10 0.9524 9.52
Year 2 10 0.9070 9.07
Year 3 10 0.8638 8.64
Year 3 500 0.8638 431.92
Total 459.15

The difference between CU500 and CU459.15 of CU40.85 is a government grant and is
recognised immediately, as there are no specified future performance conditions.
In accordance with Section 11 Basic Financial Instruments the entity measures the loan on
initial recognition at CU459.15. This amount will accrete to CU500 over the three-year
term using the effective interest method.
The journal entry on initial recognition is:

Dr Cash CU500.00
Cr Loan (financial liability) CU459.15
Cr Income (profit or loss) CU40.85
To recognise the interest-free loan at fair value and the receipt of a government grant.

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Ex 25 The facts are the same as those in Example 23. However, in this example, there is a
future performance condition attached to the interest-free loan. The entity is
required to use local materials in its manufacturing process during the term of the
loan.
On initial recognition, applying Section 11, the loan is recognised at the present value of
future payments. The difference between this amount and the cash received is a
government grant, but instead of recognising the government grant as income, the
entity will recognise it as a liability. Subsequently, assuming the future condition is
met evenly, the government grant of CU68.08 will be recognised as income evenly over
three years.
The journal entry on initial recognition and subsequent accounting of the government
grant is:

At initial recognition:
Dr Cash CU500.00
Cr Loan (financial liability) CU431.92
Cr Deferred government grant (nonfinancial CU68.08
liability)
To recognise the interest-free loan at fair value and the receipt of the conditional government grant.

Subsequent measurement:
Dr Deferred government grant (nonfinancial liability) CU22.69(a)
Cr Income (profit or loss) CU22.69
To recognise the government grant as income over the future performance condition.
(a) CU68.08 divided over three years

Dr Finance cost (profit or loss) CU21.60(a)

Cr Loan (financial liability) CU 21.60
To accrete the difference on the loan using the effective interest method.
(a) CU431.92 x 5%

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Module 24—Government Grants

Disclosures

24.6 An entity shall disclose the following:

(a) the nature and amounts of government grants recognised in the financial statements;
(b) unfulfilled conditions and other contingencies attaching to government grants that have
not been recognised in income; and
(c) an indication of other forms of government assistance from which the entity has directly
benefited.

Example—disclosures

Ex 26 An entity can make the following disclosures related to the government grants it
has received:

Reference in
IFRS for SMEs
Standard

XYZ Ltd.
[Extract from] Consolidated statement of financial position

at 31 December at 31 December
20X2 20X1

Note CU CU

…
Current liabilities
Deferred 15 40,000 60,000 24.6(a)
government grant
…
XYZ Ltd.
[Extract from] Consolidated statement of comprehensive income
for the year ended for the year ended
31 December 20X2 31 December 20X1
Note CU CU
…
Profit before tax (a) 28 180,000 130,000 24.6(a)
…

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XYZ Ltd. Reference in

IFRS for SMEs
[Extract from] Notes
Standard

Note 2 Accounting policies

Government grants
Government grants are recognised at the fair value of the asset
received or receivable. A grant without specified future performance
conditions is recognised in income when the grant proceeds are
received or receivable. A grant that imposes specified future
performance conditions is recognised in income when those
conditions are met.
Government grants are presented separately from the assets to which
they relate. Government grants recognised in income are presented
separately in the notes. Government grants received before the
income recognition criteria are satisfied are presented as a separate
liability in the statement of financial position.
No amount is recognised for those forms of government assistance
that cannot reasonably have a value placed on them. However, the
entity discloses information about such assistance.

Note 15 Government grants and other forms of government assistance

In 20X0 the entity received CU100,000 from a local government as an

incentive to operate a local-language film-making studio.
The incentive is conditional on the entity producing at least one
local-language film in each of the next five years. If in any of the five
years of the grant, the entity does not produce a local-language film,
it is required to refund to the local government one-fifth of the
CU100,000 grant for each year a film is not produced. 24.6(a) & (b)
In 20X2 the entity’s managers attended the Cannes film festival to
promote the entity’s latest local-language film. To promote overseas
interest in the film, the local government provided free support to
management, which involved helping the entity promote its film to the
attendees. No amount was recognised for this government assistance,
as this form of assistance cannot reasonably have a value placed on it. 24.6(c)

Note 28 Profit before tax

The following items have been recognised as expenses (income) in

determining profit before tax:
for the year ended for the year ended
31 December 20X2 31 December 20X1

CU CU

Government grant for producing

local-language films (20,000) (20,000) 24.6(a)
(a) Depending on the materiality of the government grant against other items of profit or loss, an entity
may present the grant recognised as income as a separate line item in the statement of
comprehensive income.
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24.7 For the purpose of the disclosure required by paragraph 24.6(c), government assistance is
action by government designed to provide an economic benefit specific to an entity or range
of entities qualifying under specified criteria. Examples include free technical or marketing
advice, the provision of guarantees and loans at nil or low interest rates.

Notes

In cases where a loan is repayable on demand at a nil or low interest rate, no

government grant is recognised because the fair value of the loan is equal to the
amount received (see paragraph 12.11).

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Module 24—Government Grants

SIGNIFICANT ESTIMATES AND OTHER JUDGEMENTS

Applying the requirements of the IFRS for SMEs Standard to transactions and events often
requires the exercise of judgement, including making estimates. Information about significant
judgements made by an entity’s management and key sources of estimation uncertainty are
useful when assessing an entity’s financial position, performance and cash flows.
Consequently, in accordance with paragraph 8.6, an entity must disclose the judgements—
apart from those involving estimates—that its management has made when applying the
entity’s accounting policies and that have the most significant effect on the amounts
recognised in the financial statements.
Furthermore, applying paragraph 8.7, an entity must disclose information about the key
assumptions concerning the future, and other key sources of estimation uncertainty at the
reporting date, that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year.
Other sections of the IFRS for SMEs Standard require disclosure of information about particular
judgements and estimation uncertainties.

Measurement

An entity that applies the IFRS for SMEs Standard model of accounting for government grants
must measure government grants at the fair value of the asset received or receivable. In many
cases the entity will receive cash or a refund of expenses, so little difficulty will be
encountered in determining the fair value. However, preparers may need to apply significant
judgement in measuring the fair value of a government grant in certain circumstances (for
example, if a non-cash asset or service received by way of government grant is not traded in an
active market and there have been no recent arm’s length exchange transactions between
knowledgeable, willing buyers and sellers, involving similar assets or services).

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COMPARISON WITH FULL IFRS STANDARDS

When accounting for and reporting government grants and other forms of government
assistance for periods beginning on 1 January 2017, the main differences between the
requirements of full IFRS Standards (see IAS 20 Accounting for Government Grants and Disclosure of
Government Assistance) and the IFRS for SMEs Standard (see Section 24 Government Grants) are:
• The IFRS for SMEs Standard is drafted in simple language with less application guidance
than is provided in full IFRS Standards.
• In the IFRS for SMEs Standard, Section 24 applies to all government grants. In full
IFRS Standards, IAS 41 specifies requirements for government grants that are related to a
biological asset measured at fair value less costs to sell; IAS 20 applies to all other
government grants.
• For a government grant that is related to a biological asset measured at fair value less costs
to sell, the requirements under the IFRS for SMEs Standard are consistent with the
requirements of IAS 41.
• For other government grants (those within the scope of IAS 20), recognition and
measurement principles in full IFRS Standards differ from those in the IFRS for SMEs
Standard as follows:
o IAS 20 contains numerous options for accounting for government grants. The
IFRS for SMEs Standard contains only one option for accounting for all government
grants.
o IAS 20 requires that government grants should not be recognised until there is reasonable
assurance that the entity will comply with the conditions attaching to them and the
grants will be received. Under Section 24, a government grant is not recognised until
the conditions are actually satisfied.
o IAS 20 requires government grants to be recognised as income on a systematic basis
over the periods in which the entity recognises as expenses the related costs for which
the grants are intended to compensate. Section 24 requires government grants to be
recognised as income when specified future performance conditions are met
independent of the entity’s recognition of the related costs for which the grants are
intended to compensate.
o under IAS 20, an entity that receives a non-monetary grant is permitted to measure
both the asset and the grant either at a nominal amount (often zero) or at the fair
value of the non-monetary asset. Under Section 24 all government grants, including
non-monetary government grants, must be measured at the fair value of the asset
received or receivable. Section 24 does not contain any requirements for the
measurement and recognition of the related asset and hence that asset should be
accounted for under the applicable section of the IFRS for SMEs Standard (intangible
assets received by way of government grant are accounted for under Section 18
Intangible Assets other than Goodwill).

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• For other government grants (those within the scope of IAS 20) the presentation
requirements in full IFRS Standards differ from those in the IFRS for SMEs Standard as
follows:
o IAS 20 contains specific requirements for the presentation of government grants.
IAS 20 permits two methods for presenting government grants related to assets in the
statement of financial position—either setting up a government grant as deferred
income or deducting the government grant in arriving at the carrying amount of the
related asset. IAS 20 also permits two methods for presenting government grants
related to income in the statement of comprehensive income—either separately (or
under a general heading such as ‘other income’) or deducted when reporting the
related expense.
The IFRS for SMEs Standard does not specify any methods for presenting government grants.
However, deducting a government grant in arriving at the carrying amount of the related
asset in the statement of financial position (one of the options under IAS 20) would be
inconsistent with the requirements in other sections of the IFRS for SMEs Standard for
accounting for those assets. In any case, the IFRS for SMEs Standard requires entities to disclose
how government grants are presented in financial statements.

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Module 24—Government Grants

TEST YOUR KNOWLEDGE

Test your knowledge of the requirements for accounting for and reporting government grants
and other forms of government assistance applying the IFRS for SMEs Standard by answering
the questions provided.
You should assume that all amounts mentioned are material.
Once you have completed the test, check your answers against those set out beneath it.

Mark the box next to the most correct statement.

Question 1

A government grant is:

(a) assistance from the government in the form of a transfer of resources to an entity in
return for past or future compliance with specified conditions relating to the
operating activities of the entity.
(b) unconditional assistance from the government in the form of a transfer of resources
to an entity.
(c) any type of assistance from the government to the entity from which the entity has
benefited directly.

Question 2

The recognition and measurement requirements of Section 24 exclude:

(a) those forms of government assistance that cannot reasonably have a value placed
upon them.
(b) transactions with government that cannot be distinguished from the normal trading
transactions of the entity.
(c) both (a) and (b).
(d) neither (a) nor (b).

Question 3

An entity shall measure all government grants:

(a) at the amount of cash or cash equivalents received.
(b) at the amount of cash or cash equivalents received or receivable.
(c) at the fair value of the asset received or receivable.
(d) applying any of the above.

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Question 4

An entity must recognise a government grant that does not impose specified future
performance conditions on that entity (the recipient):
(a) in income when the grant proceeds are receivable.
(b) in income over the periods necessary to match it with the related costs for which it is
intended to compensate, on a systematic basis.
(c) in either (a) or (b) depending upon the accounting policy adopted by the entity.
(d) none of the above.

Question 5

An entity must recognise a government grant that imposes specified future performance
conditions upon that entity:
(a) in income when the grant proceeds are receivable.
(b) in income over the periods necessary to match it with the related costs for which it is
intended to compensate, on a systematic basis.

(c) in income only when the performance conditions are met.

(d) none of the above.

Question 6

An entity must recognise a government grant received before the income recognition criteria
are satisfied:
(a) in income when the grant proceeds are received.
(b) in equity—deferred income.
(c) as a liability.
(d) none of the above.

Question 7

On 1 January 20X1 an entity acquired a transferable nine-year taxi licence by way of government
grant when the fair value of the licence was CU90,000. The licence is given, free of charge, to
the entity because of the entity’s performance and there are no future performance conditions
attached to the grant.
The entity shall account for the government grant by:
(a) recognising CU90,000 in income on 1 January 20X1.
(b) recognising CU90,000 in income evenly over the nine-year period of the licence—
CU10,000 per year.
(c) crediting CU90,000 directly to retained earnings on 1 January 20X1.

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Question 8

On 1 January 20X1 an entity acquired, free of charge, a non-transferable nine-year taxi licence
by way of government grant when the fair value of the taxi licence was CU90,000. In accordance
with the terms of the licence the entity must operate at least 10 taxis in a deprived
neighbourhood of the capital city during that nine-year period. Failure to do so will result in
the taxi licence being revoked immediately.
The entity shall account for the government grant by:
(a) recognising CU90,000 in income on 1 January 20X1.
(b) recognising CU90,000 in income evenly over the nine-year period of the licence—
CU10,000 per year when the performance condition of the government grant is met.
(c) crediting CU90,000 directly to retained earnings on 1 January 20X1.
(d) recognising CU90,000 in income on 31 December 20X9.

Question 9

On 1 January 20X1 an entity acquired, free of charge, a herd of 100 cattle by way of government
grant when the fair value of the herd was CU1,000,000. On average, the remaining life of the
cattle is expected to be 10 years. The grant does not impose future performance conditions on
the entity.
The entity shall account for the government grant by:
(a) recognising CU1,000,000 in income on 1 January 20X1.
(b) recognising CU1,000,000 in income evenly over the 10-year expected remaining life of
the cattle—CU100,000 per year.
(c) crediting CU1,000,000 directly to retained earnings on 1 January 20X1.
(d) none of the above.

Question 10

In 20X1 the management of a private entity attended one of the world’s biggest trade fairs for
that entity’s industry to promote and demonstrate its latest products. To promote overseas
trade for that industry, the national government provided free support to the management
including helping them design their display, secure a space at the event and make travel and
logistical arrangements. The government also provided free advice on what the management
should say and what promotional literature the management should give to those attending
the fair. This government assistance cannot reasonably have a value placed on it.
The entity must:
(a) determine the fair value of the government assistance and recognise income equal to
that fair value for the year ended 31 December 20X1.
(b) disclose the fact that the entity has benefited directly from marketing support from
the national government at the trade fair (by indicating the nature of government
assistance received in its 20X1 financial statements).
(c) neither recognise nor disclose the government assistance received during the year.
(d) recognise in equity the fair value of the assistance received directly during 20X1.

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Answers

Q1 (a) See paragraph 24.1.

Q2 (c) See paragraph 24.2. For government assistance upon which a value cannot reasonably
be placed, the disclosure requirements in paragraph 24.6(c) apply.
Q3 (c) See paragraph 24.5.
Q4 (a) See paragraph 24.4(a).
Q5 (c) See paragraph 24.4(b).
Q6 (c) See paragraph 24.4(c).
Q7 (a) See paragraph 24.4(a) and 24.5.
Q8 (b) See paragraph 24.4(b) and 24.5. The value of the government grant is derived from
the activities the entity is allowed to exclusively engage in (taxi services), in each of the
future nine years. This value is thus granted and consumed in each of the years as the
entity performs those activities. If, at any point, the entity fails to meet the conditions of
the licence, the licence is revoked in its entirety and the entity would lose all its future
benefits after that point. However, even though it loses the whole of the licence, it does
lose the past business benefits it had from operating under the licence. Accordingly, the
entity may recognise an asset and a liability at the time the license is granted and
reverse the liability to income evenly over each of the nine-year term.
Q9 (a) See paragraph 24.4(a) and 24.5.
Q10 (b) See paragraph 24.2 and 24.6(c).

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APPLY YOUR KNOWLEDGE

Apply your knowledge of the requirements for accounting for and reporting government
grants and other forms of government assistance applying the IFRS for SMEs Standard by
completing the case studies provided.
Once you have completed a case study, check your answers against those set out beneath it.

Case study 1

On 1 January 20X7, SME A received a CU1,000,000 grant from the national government as an
incentive to establish and operate a manufacturing plant in a development zone.

CU600,000 of the grant is conditional on SME A erecting a plant costing at least CU2,000,000 in
the development zone and the plant commencing commercial production on or before
31 December 20X8. Certain conditions are attached to the type of expenditure making up the
CU2,000,000. If these conditions are not met, SME A will be obliged to refund CU600,000 to the
national government.

CU400,000 of the grant is conditional on SME A maintaining commercial production at the

plant for a period of four years from the date commercial production begins. SME A will
become unconditionally entitled to CU100,000 at the end of each of the first four years of the
commercial operation of the plant.

During 20X7, SME A constructed the plant at a cost of CU2,100,000, all of which met the type
of expenditure specified under the conditions of the grant. On 31 December 20X7, the funds
related to the grant are remitted to SME A.

During the first quarter of 20X8, SME A tested the plant’s manufacturing process.

On 1 April 20X8, SME A began commercial production at the plant.

SME A assessed the useful life of the plant as 20 years from 1 April 20X8 with a nil residual
value. The straight-line method is assessed as the most appropriate basis for depreciating the
plant.

At 31 December 20X8 and 31 December 20X9, SME A’s assessment of the plant remained
unchanged.

Since production began, the plant has operated profitably. SME A intends to continue
operating the plant on a commercial basis for the foreseeable future.

Prepare accounting entries to record the information set out above in the accounting
records of SME A for the years ended 31 December 20X7, 20X8 and 20X9.

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Answer to Case study 1

During 20X7

Dr Property, plant and equipment—cost CU2,100,000

Cr Cash CU2,100,000
To recognise the cost of plant constructed.

31 December 20X7

Dr Cash CU1,000,000
Cr Liability-deferred government grant CU1,000,000
To recognise as a liability the government grant received before the income recognition criteria are satisfied.
1 April 20X8

Dr Liability CU600,000
Cr Profit or loss—other income, government grant CU600,000
To recognise as income the part of the government grant for which the performance conditions are satisfied
(plant costing in excess of CU2,000,000 of qualifying expenditure was constructed and brought into use in the
development zone).

During 20X8

Dr Profit or loss—depreciation (operating expenses) CU78,750(a)

Cr Property, plant and equipment—accumulated depreciation CU78,750
To recognise depreciation expense for the nine-month period ended 31 December 20X8.

1 April 20X9

Dr Liability-deferred government grant CU100,000

Cr Profit or loss—other income, government grant CU100,000
To recognise as income the part of the government grant for which the performance conditions are satisfied
(the plant was operated commercially for 12 months).

During 20X9

Dr Profit or loss—depreciation (operating expenses) CU105,000(a)

Cr Property, plant and equipment—accumulated depreciation CU105,000
To recognise depreciation expense for the 12-month period ended 31 December 20X9.

The calculations and explanatory notes below do not form part of the answer to this case study:
(a) CU105,000(b) depreciation for a year x 9/12 months (April to December) = CU78,750 depreciation for 9
months.
(b) CU2,100,000 depreciable amount ÷ 20-year useful life = CU105,000 depreciation per year.

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Case study 2

On 1 January 20X7, SME B received CU1,000,000 from a national government as an incentive to

establish and operate a manufacturing plant in a development zone. Funds are remitted from
the government to SME B when SME B incurs the expenditure.

CU600,000 of the grant is conditional on the entity erecting a plant costing at least
CU2,000,000 in the development zone and the plant commencing commercial production on
or before 31 December 20X8.

CU400,000 of the grant is conditional upon SME B maintaining commercial production at the
plant for a period of four years from the date on which commercial production begins—SME B
will become unconditionally entitled to CU8,333.33 at the end of each month for the first 48
months of the commercial operation of the plant.

If these conditions are not complied with, SME B will be obliged to refund the national
government proportionately for each month the performance condition is not met
(CU8,333.33 per month).

During 20X7, SME A constructed the plant at a cost of CU2,100,000, all of which met the type
of expenditure specified under the conditions of the grant.

During the first quarter of 20X8, SME B tested the plant’s manufacturing process.

On 1 April 20X8, SME B began commercial production at the plant.

SME B assessed the useful life of the plant as 20 years from 1 April 20X8 with a nil residual
value. Furthermore, the straight-line method was assessed as the most appropriate basis for
depreciating the plant.

At 31 December 20X8 and 31 December 20X9, SME B’s assessment of the plant remained
unchanged.

Since production began, the plant has operated profitably. SME B intends to continue
operating the plant on a commercial basis for the foreseeable future.

During 20X8, in accordance with the national government’s incentive scheme to increase the
export of goods manufactured in the country, SME B received marketing support free of
charge from the national government at trade fairs in Frankfurt, Johannesburg, London,
New York and Tokyo.

Draft an extract showing how the government grants could be presented and disclosed in
the consolidated financial statements of SME B for the year ended 31 December 20X9.

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Answer to Case study 2

SME B
[Extract from] Consolidated statement of financial position
at 31 December 20X9

Note 20X9 20X8

Non-current liabilities
(a) (b)
Deferred government grant 20 CU125,000 CU225,000

Current liabilities
(c) (c)
Deferred government grant 20 CU100,000 CU100,000

[Extract from] Notes to SME B financial statements for the year ended
31 December 20X9

Note 1 Basis of preparation and accounting policies

Government grants

Government grants are measured at the fair value of the asset received or receivable.
A grant without specified future performance conditions is recognised in income when the
grant proceeds are receivable. A grant that imposes specified future performance conditions is
recognised in income when those conditions are met.
Government grants are presented separately from the assets to which they relate. Grants
recognised in income are presented separately in the notes. A grant received before the income
recognition criteria are satisfied is presented as a separate liability in the statement of financial
position.

Note 5 Profit before tax(g)

The following items have been recognised as expenses (income) in determining profit before tax:

20X9 20X8

CU CU

Government grant received for the construction of new plant – (600,000)

(d) (e)
Government grant received for the operation of new plant (100,000) (75,000)

A grant of CU100,000 (20X7: CU75,000) from Government X was recognised in income during
20X8. The grant is for operating a new plant on a commercial basis in Jurisdiction Z. This grant
is in addition to the CU600,000 recognised in income in 20X7 for constructing the plant (see
note 20).

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Module 24—Government Grants

Furthermore, to encourage export from Jurisdiction Z, the entity received free promotional
support from Government X for exhibiting its products at various international trade fairs.
No income or expense has been recognised in respect of this government assistance as the
assistance cannot reasonably have a value placed on it.

Note 20 Government grant

On 1 January 20X7, a grant of CU1,000,000 was received from Government X for constructing
and operating a new plant in Jurisdiction Z. The portion of the grant that related to the
construction of the plant was recognised in income in 20X8 when the plant started commercial
production. The CU400,000 balance of the grant is conditional on the new plant remaining in
commercial production for a continuous period of four years. It is recognised in income as the
entity becomes unconditionally entitled to it. At 31 December 20X9, 27 months of the grant
period remain.

These calculations illustrate the workings only and are not part of the actual disclosures in the financial
statements.
(a) 48-month grant period minus 21 months recognised to 31 December 20X9 = 27 months remaining.
27 months x CU8,333.33(f) = CU225,000 total. CU225,000 minus CU100,000(c) current portion =
CU125,000 non-current portion.
(b) 48-month grant period minus 9 months recognised to 31 December 20X8 = 39 months remaining. 39
months x CU8,333.33(f) = CU325,000 total. CU325,000 minus CU100,000(c) current portion = CU225,000
non-current portion.
(c) 12 months in the next year x CU8,333.33(f) = CU100,000.
(d) 12 months in commercial production in 20X9 x CU8,333.33(f) = CU100,000.
(e) 9 months in commercial production 20X8 x CU8,333.33(f) = CU75,000.
(f) CU400,000 ÷ 48 months = CU8,333.33 per month.
(g) Depending on the materiality of the government grants against other items of profit or loss, an entity may
present the grants recognised as income as a separate line item in the statement of comprehensive
income.

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