Measurement of Government Grant
Facts of the case:
Company 'X' engaged in City Development Project. Received Grant for Development.
The company invested the grant (project and revenue) in term deposit and earned certain Interest.
Company classifies the Grant in other Non-current Liabilities.
Grants are received for Project expenses and for revenue expenses. Further, company going to receive certain more grants
Issue/Query:
Whether Interest received needs to be recognised as income or added to Grant?
What will be treatment for interest received from revenue grant as well as project grant?
Whether grants which are receivable needs to accounted at present value?
Response:
Interest received cannot be added to grant. Interest shall be recognised on effective interest method in profit or loss.
Interest on investment in term deposit shall be recognised on effective interest method in profit or loss irrespective of whether the money invested has been received by way of revenue grant or project grant.
Grants which are receivable and have significant time value element shall be discounted to present value.
Basis for Response:
Paragraph 3 of Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance defines Government grant as under:
“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 operating activities of the entity. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the entity.”
Receipt of government grant and investment in term deposit of the money received as grant are two separate events. Interest from investment in term deposit is compensation by the financial institution for time value of money and credit risk. Therefore, interest on term deposit cannot be added to grant received from government.
Term deposit provides a contractual right to receive cash and is, therefore, a financial asset in accordance with Ind AS 32 Financial Instruments: Presentation. The contractual terms of term deposit, assumed in absence of details, give rise to cash flows on specified dates that are solely payments of principal and interest on the principal amount outstanding. Therefore, the term deposit shall be measured at amortised cost and interest receivable on the term deposit shall be recognised on effective interest method in profit or loss in accordance with Ind AS 109 Financial Instruments.
Ind AS 32 Financial Instruments: Presentation defines Financial Instrument as a contract that gives rise to financial asset to one entity and a financial liability or equity of another entity. In case of government grant, there is normally no contract between the government and the company. Therefore, government grants receivable are normally not a financial asset. A government grant is a non-exchange transaction. The conditions attached to the receipt of the grant are to satisfy social obligations of the government rather than having any economic benefit to the government as such. Ind AS 20 does not provide any principle on measurement of government grants except for non-monetary Government grants.
In this regard, paragraphs 10 to 12 of Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors provide the required guidance as under:
“10 In the absence of an Ind AS that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is:
Relevant to the economic decision-making needs of users; and
Reliable, in that the financial statements:
Represent faithfully the financial position, financial performance and cash flows of the entity;
Reflect the economic substance of transactions, other events and conditions, and not merely the legal form;
Are neutral, ie free from bias;
Are prudent; and
Are complete in all material respects.
11 In making the judgement described in paragraph 10, management shall refer to, and consider the applicability of, the following sources in descending order:
(a) the requirements in Ind ASs dealing with similar and related issues; and
(b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework.
12 In making the judgement described in paragraph 10, management may also first consider the most recent pronouncements of International Accounting Standards Board and in absence thereof those of the other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources in paragraph 11.”
Ind AS 109 and Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets require assets and liabilities involving significant time value of money to be discounted to present value. Therefore, if the government grant receivable is a monetary asset, it shall be measured at present value if it involves significant time value of money.
If the government grant receivable is in the form of a non-monetary asset, it shall not be measured at present value. Paragraph 23 of Ind AS 20 provides the following requirements for measurement of non-monetary Government grant:
“A Government grant may take the form of a transfer of a non-monetary asset, such as land or other resources, for the use of the entity. In these circumstances, it is usual to assess the fair value of the non-monetary asset and to account for both grant and asset at that fair value. An alternative course that is sometimes followed is to record both asset and grant at a nominal amount.”
Therefore, if the Government grant is a non-monetary, the same shall be measured in accordance with the requirements of paragraph 23 of Ind AS 20 reproduced above.