Y No 1 is Helping Me in F7

[Asif]

y no 1 is helping me in F7,,,i cn understand IAS 20 grants, showing a liability when it is not is illogical. And wht to do if the grant is actually a liability ?? can ne1 tell me the accounting treatment in that case under 2 methods of IAS 20.

[Geetanjali]

Hi Asif,

Our subject expert will get back to you with the answer to your query on monday.

Geetanjali

[Acid]

y no 1 is helping me in F7,,,i cn understand IAS 20 grants, showing a liability when it is not is illogical. And wht to do if the grant is actually a liability ?? can ne1 tell me the accounting treatment in that case under 2 methods of IAS 20.

Hey Asif,

Whats your question man ? let me know , I have no covered this part of the syllabus !


Acid

[Asif]

the ques is. showing liability of grant is not logical when its not a liability..i understand the matching concept but its not logical to show them as liability. This is over stating liability. And what will the accounting treatment if it is actually a liability (if i have to give grnts back to government) ???

[Acid]

I have no idea that who told you that a GRANT is a Liability and should be stated as one!

[Snehal P]

Hi,

International accounting standards have been framed using the balance sheet approach.

 only those items which do not qualify for recognition as an asset are recognised as expenses and
 only those items which do not qualify for recognition as a liability are recognised as incomes

However, some requirements in a few standards deviate from the balance sheet approach.

IAS 20 allows two approaches, the income approach and the capital approach.

Under the capital approach the grant is reduced from the asset or directly credited to the statement of comprehensive income or reduced from the related expense.

Under the income approach (this relates to your question) the amount of grant is taken to the statement of comprehensive income over the periods necessary to match them with the related costs they intend to compensate i.e matching principle. The arguments in favour of this treatment are:
1) Government grants are obtained after fulfilling certain terms and conditions. They should therefore be recognised as income and matched with the associated costs which the grant is intended to compensate.
2) as income and other taxes are charges against income, it is logical to deal also with government grants, which are an extension of fiscal policies, in the same manner.

Hence grants can be treated as deferred income. Hope this answers the first part of your query.

If the grant is an actual liability and has to be repaid, then it will be accounted for in the same manner as we account for a loan – the only difference being hopefully  there is no interest charge on this grant.

Hope this helps
Snehal P

[siddharth]

Hi Asif,

Grants are accounted based on two concepts

1. prudence - should be recognised only when conditions for receipt are complied.

2.accruals - grants should be matched with respective expenditure (matching concept)

If conditions are breached, then grants needs to be repaid. so provisions should be created under ias 30.

There are 3 conditions to be satisfied for creating provisions

1. present obligations

2. probable ouflow of resources

3.reliable estimate

Since it satisfies all the 3 conditions of provisions. provisions can be created

Journal entry goes like this

P&L a/c Dr.
To Provision for government grants Cr.

therefore Provision for government grants will show a credit balance which will shown as a liability in balance sheet


Hope this helps

Regards