As a response to the COVID-19 global pandemic, governments around the world are implementing measures to help businesses and economies get through it. The nature of government grants can take on various forms such as below market rate loans, short-time working subsidies, relief funds, income-based tax credits to name just a few.
While many forms of government assistance should be accounted for by applying IAS 20 ‘Accounting for Government Grants and Disclosure of Government Assistance’ because they meet the following definition, others should be addressed by other standards such as IAS 12 ‘Income Taxes’.
Entities will therefore need to assess the economic substance of any government assistance they are receiving to determine what is the appropriate accounting treatment. Indicators to consider include:
- the amount of tax incentive is independent of taxable profit or tax liability
- the expenditure must be made on a particular activity or asset and other substantive conditions may be attached to the tax incentive relating to the operating activity of the entity.
In this article we discuss in more depth four key questions to consider prior to determining the appropriate accounting treatment:
- Is the government assistance in the scope of IAS 20 or another standard?
- What is the correct recognition and measurement?
- Is it recognised in the correct period?
- How should the assistance received from governments be presented in the financial statements?