HKFRS 10 - Consolidated Financial Statements

HKAS 20 - Accounting for Government Grants and Disclosure of Government Assistance

SECTION 1: SCOPE AND OBJECTIVE

Scope (Paragraphs 1-2)

HKAS 20 applies to the accounting for and disclosure of government grants and the disclosure of other forms of government assistance.

The Standard does NOT deal with:

Key Point: The scope exclusion in (b) means that tax-related benefits are NOT accounted for under HKAS 20 but rather under HKAS 12 *Income Taxes*.

SECTION 2: DEFINITIONS (Paragraphs 3-6)

Key Terms Defined

Important Clarifications

Paragraph 4: Government assistance takes many forms, varying in nature and conditions attached. The purpose may be to encourage an entity to embark on a course of action it would not normally have taken without the assistance.

Paragraph 5: The receipt of government assistance is significant for financial statement preparation for two reasons:

Paragraph 6: Government grants are sometimes called subsidies, subventions, or premiums.

Critical Distinction: Government assistance is broader than government grants. Grants are a subset of assistance that involves transfers of resources with conditions attached. Assistance without measurable value or indistinguishable from normal trading is excluded from the definition of grants.

SECTION 3: RECOGNITION OF GOVERNMENT GRANTS (Paragraphs 7-11)

Recognition Criteria (Paragraph 7)

Government grants, including non-monetary grants at fair value, shall not be recognised until there is reasonable assurance that:

- (a) the entity will comply with the conditions attaching to them; AND

- (b) the grants will be received.

Paragraph 8: Receipt of a grant does NOT of itself provide conclusive evidence that the conditions have been or will be fulfilled.

Paragraph 9: The manner in which a grant is received does NOT affect the accounting method. A grant is accounted for the same way whether received in cash or as a reduction of a liability to the government.

Forgivable Loans (Paragraph 10)

A forgivable loan from government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.

Below-Market Rate Government Loans (Paragraph 10A)

The benefit of a government loan at a below-market rate of interest is treated as a government grant.

Recognition and Measurement:

Contingent Liabilities/Assets (Paragraph 11)

Once a government grant is recognised, any related contingent liability or contingent asset is treated in accordance with HKAS 37 *Provisions, Contingent Liabilities and Contingent Assets*.

SECTION 4: RECOGNITION IN PROFIT OR LOSS (Paragraphs 12-22)

Core Principle (Paragraph 12)

Government grants shall be recognised in profit or loss 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.

Two Broad Approaches (Paragraphs 13-16)

Paragraph 16: It is fundamental to the income approach that government grants should be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs. Recognition on a receipts basis is NOT in accordance with the accrual accounting assumption.

Practical Application (Paragraphs 17-19)

Paragraph 17: In most cases, the periods over which an entity recognises costs or expenses related to a government grant are readily ascertainable:

Paragraph 18: Grants related to non-depreciable assets may require fulfilment of certain obligations and would then be recognised in profit or loss over the periods that bear the cost of meeting the obligations.

Example: A grant of land conditional upon erecting a building on the site → recognise the grant in profit or loss over the life of the building.

Paragraph 19: When grants are received as part of a package of financial or fiscal aids with multiple conditions, care is needed in identifying the conditions giving rise to costs and expenses. It may be appropriate to allocate part of a grant on one basis and part on another.

Immediate Recognition (Paragraphs 20-22)

A government grant that becomes receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the entity with no future related costs shall be recognised in profit or loss of the period in which it becomes receivable.

Paragraph 21: Grants awarded for immediate financial support (rather than as incentive for specific expenditures) may warrant recognition in profit or loss of the period in which the entity qualifies to receive it, with disclosure to ensure its effect is clearly understood.

Paragraph 22: A grant receivable as compensation for expenses or losses incurred in a previous period is recognised in profit or loss of the period in which it becomes receivable, with disclosure.

SECTION 5: NON-MONETARY GOVERNMENT GRANTS (Paragraph 23)

A government grant may take the form of a transfer of a non-monetary asset, such as land or other resources.

Two Acceptable Methods:

SECTION 6: PRESENTATION OF GRANTS RELATED TO ASSETS (Paragraphs 24-28)

Required Presentation (Paragraph 24)

Government grants related to assets, including non-monetary grants at fair value, shall be presented in the statement of financial position either by:

- (a) Setting up the grant as deferred income; OR

- (b) Deducting the grant in arriving at the carrying amount of the asset

Method 1: Deferred Income (Paragraph 26)

Method 2: Deducting from Asset Carrying Amount (Paragraph 27)

Cash Flow Statement (Paragraph 28)

The purchase of assets and receipt of related grants can cause major movements in cash flow. Such movements are often disclosed as separate items in the statement of cash flows regardless of whether the grant is deducted from the related asset for presentation purposes.

Comparison of Methods:

SECTION 7: PRESENTATION OF GRANTS RELATED TO INCOME (Paragraphs 29-31)

Presentation Requirements (Paragraph 29)

Grants related to income are classified and presented in the statement of profit or loss in accordance with HKFRS 18 *Presentation and Disclosure in Financial Statements*. They are included in profit or loss either:

- As income; OR

- As a deduction in reporting the related expense

Arguments for Each Method (Paragraph 30)

As income: It is inappropriate to net income and expense items; separation facilitates comparison with other expenses not affected by a grant.

As deduction from expense: The expenses might not have been incurred if the grant had not been available; presentation of expense without offsetting may be misleading.

Paragraph 31: Both methods are regarded as acceptable. Disclosure of the grant may be necessary for proper understanding. Disclosure of the effect of grants on any item of income or expense required to be separately disclosed is usually appropriate.

SECTION 8: REPAYMENT OF GOVERNMENT GRANTS (Paragraphs 32-33)

Accounting for Repayment (Paragraph 32)

A government grant that becomes repayable shall be accounted for as a change in accounting estimate (see HKAS 8).

Repayment of a grant related to INCOME:

Repayment of a grant related to an ASSET:

Impairment Consideration (Paragraph 33)

Circumstances giving rise to repayment of a grant related to an asset may require consideration of possible impairment of the new carrying amount of the asset.

Repayment Flowchart:

Grant Related to Income:

Grant Related to Asset:

SECTION 9: GOVERNMENT ASSISTANCE (Paragraphs 34-38)

Exclusions from Definition of Government Grants (Paragraph 34)

Excluded from the definition of government grants are:

Examples (Paragraphs 35-36)

Assistance that cannot reasonably have a value placed upon them:

Assistance that cannot be distinguished from normal trading transactions:

Paragraph 36: The significance of such benefits may require disclosure of the nature, extent and duration of the assistance to ensure financial statements are not misleading.

Infrastructure Exclusion (Paragraph 38)

Government assistance does NOT include the provision of infrastructure by improvement to the general transport and communication network and the supply of improved facilities such as irrigation or water reticulation available on an ongoing indeterminate basis for the benefit of an entire local community.

SECTION 10: DISCLOSURE (Paragraph 39)

Required Disclosures

The following matters shall be disclosed:

- (a) The accounting policy adopted for government grants, including the methods of presentation adopted in the financial statements

- (b) The nature and extent of government grants recognised in the financial statements and an indication of other forms of government assistance from which the entity has directly benefited

- (c) Unfulfilled conditions and other contingencies attaching to government assistance that has been recognised

SECTION 11: TRANSITIONAL PROVISIONS AND EFFECTIVE DATE (Paragraphs 40-49)

Effective Date (Paragraph 41)

This Standard becomes operative for financial statements covering periods beginning on or after 1 January 2005. Earlier application is encouraged.

Key Amendments Timeline

SECTION 12: BASIS FOR CONCLUSIONS

Background (BC1-BC2)

The Basis for Conclusions summarises the IASB's considerations in amending IAS 20 as part of *Improvements to IFRSs* issued in May 2008. IAS 20 was originally developed by the International Accounting Standards Committee in 1983.

Below-Market Rate Government Loans (BC3-BC5)

The Problem: An apparent inconsistency existed between IAS 20 and IAS 39 (now HKFRS 9):

The Solution: The Board decided to remove this inconsistency by amending IAS 20 to require:

Transition: The amendment should be applied prospectively to new loans to avoid requiring entities to measure fair value of loans at a past date.

KEY TAKEAWAYS SUMMARY