Us Government Grants And Loans

Us Government Grants And Loans – In response to the global COVID-19 pandemic, governments around the world are implementing measures to help businesses and economies overcome it. The nature of government grants can take many forms such as below-market loans, short-term employment subsidies, relief funds, income-based tax credits to name a few. only a few.

Although many forms of government assistance must be accounted for by applying IAS 20 ‘Accounting for Government Grants and Disclosure of Government Assistance’ because they meet the following definition, others must be met by other criteria such as IAS 12 ‘Income Taxes’.

Us Government Grants And Loans

Government grants are government assistance in the form of transfers of resources to an entity in exchange for past or future compliance with certain conditions related to the entity’s operational activities. They exclude forms of government assistance that cannot reasonably be attributed to them and government transactions that cannot be distinguished from the entity’s normal trading transactions (IAS 20.3).

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Therefore, entities will need to assess the economic substance of any government assistance they receive to determine what is the appropriate accounting treatment. Indicators to consider include:

In this article, we discuss in more depth four key questions that must be considered before determining the appropriate accounting treatment:

In applying the definition of government grant set out in IAS 20, entities need to consider what is within the scope of the definition and what is to be regarded as other forms of assistance.

To assist an entity’s determination of whether a particular form of government assistance falls under IAS 20 or IAS 12, IAS 20 states that ‘government assistance provided for an entity in the form of benefits available to determination of taxable profit or tax loss, or determined or limited based on income tax liability. Examples of such benefits are income tax holidays, investment tax credits, accelerated deduction allowances and reduced income tax rates.’ (IAS 20.2(b)).

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For a transaction to be classified as a government grant, the issuer must be a government entity. Several types of government grants given to landlords for the benefit of tenants have been proposed, including land tax holidays or refunds, which may or may not be directed by a government body. If a government body provides financial assistance (such as land tax refunds) for the benefit of individual tenants (e.g. as rent reduction), one can reasonably conclude that the grant is received from to the government and is therefore within the scope of IAS 20.

Contrast this with benefits directed to use for tenants as a class, such as a landlord providing assistance, at its discretion, directly to tenants. Would that fall within the scope of IAS 20? Our view, is that the benefits received are due to the relationship with the lessor rather than the result of government assistance. In such a case, lease modification accounting may be applied unless the IASB’s recently published practical guidance is used. Please refer to our article ‘Accounting for Lease Modifications’ which explains the practical benefit provided to tenants.

Entities that have not previously received a government grant may need to develop an accounting policy related to the aid received and how it is reflected in the entity’s financial statements. In some instances, significant judgment may be required from those charged with governance to determine which accounting standard best reflects the economic substance of the assistance received by the reporting entity.

Where government grants are received, the grant is generally recognized on the date it is reasonably certain that an entity will comply with the conditions attached; and b grants will be received. (IAS 20.7)

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In many cases, the reporting entity does not need to wait for formal confirmation from the granting government agency before recognizing the economic assistance provided.

The method of receiving the grant does not affect the accounting of the grant, (for example, if it is received in cash or by reducing the liability to the government). In addition, the way it is accounted for must be consistent with how the costs are recognized or the costs for which the grant is intended to be paid. Therefore, it is important to identify the nature and the primary purpose of the government-provided COVID-19 assistance rather than its legal form.

Generally, the fair value of the consideration is directly observable – for example, cash received. For other forms of subsidies, the determination of the fair value of the benefit granted may need to be calculated using observable inputs. For financing provided at below-market rates, the fair value of the government grant is determined by reference to the relative fair value of the debt when the value was fair in the absence of the government grant.

The measurement of government grants depends on the nature of the grant and the accounting policy of the entity. For example, property-related grants or income-related grants. See below for presentation options.

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IAS 20.12 applies: ‘Government grants shall be recognized in profit or loss on a systematic basis in the periods in which the entity recognizes as expenses the related costs for which the grants are intended to be paid.’

Revenue is recognized in profit or loss as conditions are met – for example, for subsidized wages, this may be the period of service for the wage. Care must be taken to align the assistance received with the requirements of the government agency providing economic assistance (ie, cash received for wage subsidies must not be used against any other expenses unless specifically authorized to do so). If the government grant comes in the form of subsidized construction costs, then the financial support received may relate to the construction period.

When considering loans issued by financial institutions to construction companies, with a credit guarantee for that loan provided by the government, financial statement preparers need to assess whether, without the guarantee, the loan may never be granted due to financial difficulties. the entity encounters or the degree of uncertainty surrounding its capacity to quickly recover from the current situation. If this situation exists, a subsidy can be argued to be spread over the loan period as an interest adjustment.

Alternatively, others may think that since the loan is intended to cover a cash shortfall due to a significant drop in income levels, the subsidy is intended to cover another type of cost or expense and therefore it would be reasonable to recognize it in profit. or loss immediately. Before making a final determination, a careful assessment and analysis of all the facts and circumstances must take place.

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The presentation of government grants depends on whether it is an income-related grant or an asset-related grant. Although government grants are more common in the form of revenue, there is the potential for entities to receive grants related to the purchase, acquisition or construction of assets.

Income-related grants must be presented as part of profit or loss, either separately or under a general heading such as ‘Other income’. Alternatively, they are deducted from the reporting of the related expense (IAS 20.29).

Note that grants are not income and should not be shown as such, even though they may have resulted as a direct decrease in earnings

Therefore there is a policy decision available to entities as to how the grant is presented on the profit or loss front.

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Our preference is that grants be presented separately in profit or loss and not netted against the related cost if it has predictive value. Showing expenses without discounting this way reflects the uniqueness of the COVID-19 pandemic and its impact on its financial performance during the reporting period.

Disclosure of the effect of the grant on any item of income or expense that is required to be separately disclosed is generally appropriate.

For grants relating to assets, IAS 20.12 (as mentioned above), and the following paragraphs, allow for such a grant to either: a reduce the carrying amount of the asset acquired; or b is recognized as deferred income and systematically amortized over a period corresponding to the useful life of the acquired asset.

While this may not be as common as income-related grants, we have seen additional funding allocations from some governments go towards purchasing ventilators and other respiratory support equipment for hospitals dealing with consequences of COVID-19.

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The first provides simpler accounting, while the second clearly shows the relative benefit received and historical value of the acquired asset. Either presentation is suitable, but approach b) is generally preferred.

RetailCo was severely affected by the drop in foot-traffic and closed its stores on 15 March 2020. Economic and regulatory circumstances changed on 30 June 2020 such that RetailCo wishes to reopen its stores, however the significant period of time without cash inflow resulted in insufficient working capital to meet its lease obligations.

RetailCo received a two-year interest-free loan from the government of