This article is the twenty-fifth in a series of articles that takes our readers on a journey through International Financial Reporting Standards (IFRS) with a special focus on the standards’ quintessential feature: they are principles-based. In this article, we provide an overview of some of the most significant differences between IFRS and U.S. generally accepted accounting principles (GAAP) with regard to accounting for government grants. Actual differences in the accounting treatment between the two frameworks depend on specific circumstances.
Under IFRS the main accounting standards dealing with the accounting treatment of government grants are International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, IAS 41, Agriculture, and SIC-10, Government Assistance - No Specific Relation to Operating Activities. Unlike IFRS, U.S GAAP does not include specific guidance on government grants. However, there are some standards that deal with “contributions” in various ways, such as FASB Statement No. 116, Accounting for Contributions Received and Contributions Made (FASB ASC 958), Statement No. 143, Accounting for Asset Retirement Obligations (FASB ASC 410-20), and AICPA Statement of Position No. 96-1, Environmental Remediation Liabilities (FASB ASC 410-30), etc. Under U.S. GAAP, the manner in which government grants are recognized depends on the specific facts and circumstances of each individual transaction. As a result, it is difficult to compare the two frameworks unless a specific transaction is identified.
IAS 20 distinguishes between government grants and government assistance. Government assistance is an economic benefit specific to an entity or range of entities provided by the government and qualifying under certain criteria. Government grants are assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity.
Government grants are recognized when there is reasonable assurance that the entity will comply with the conditions attached to them and the grants will be received. The basic principle of IAS 20 is that government grants are recognized in profit or loss on a systematic basis over the periods in which the entity recognizes as expense the related costs for which the grants are intended to compensate. Government grants related to assets are presented in the statement of financial position either by setting up the grant as deferred income or by deducting the grant in arriving at the carrying amount of the asset. Grants related to income are presented as a credit in the statement of comprehensive income, either separately or under a general heading such as “other income” or, alternatively, they are deducted in reporting the related expense. Government assistance is not recognized, but is disclosed in terms of the nature, extent, and duration of the assistance provided.
IAS 41 includes a specific accounting model for recognizing government grants specifically for the agricultural industry which distinguishes between conditional and unconditional grants. An unconditional grant is recognized in income when the grant is receivable, and a conditional grant is recognized in income when the conditions are met. Grants are measured at the fair value of the asset received or receivable, and grants received before the income recognition criteria are satisfied are recognized as deferred income. The model of IAS 41 has been adopted by IFRS for SMEs. As a result, entities applying IFRS for SMEs will apply the IAS 41 model for all types of grants.
The way government grants are recorded under IFRS is not exempt from criticism. As a result, the IASB is undertaking a project to revise the accounting for government grants. This project focuses on eliminating inconsistencies with the Framework and eliminating options that can reduce the comparability of financial statements.
For further information, please contact Bob Dohrer (robert.dohrer@rsmi.com) or Marco Marcellan (marco.marcellan@rsmi.com) in our International Assurance Services Group. |
