Difference Between IAS 20 Under Going Concern and IAS 20 Under Liquidation

Introduction

IAS 20, “Accounting for Government Grants and Disclosure of Government Assistance,” outlines the accounting treatment for government grants and the disclosure of government assistance. This report explores the key differences in applying IAS 20 under a going concern assumption and during liquidation.

IAS 20 Under Going Concern

Core Principle

Under IAS 20, the core principle is to recognize government grants only when there is reasonable assurance that the entity will comply with the conditions attached to them and that the grants will be received. Government grants are recognized in profit or loss on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate.

Recognition of Government Grants

Government grants related to assets are recognized as deferred income and systematically credited to profit or loss over the useful life of the asset. Alternatively, the grant can be deducted from the carrying amount of the asset.

Example: A manufacturing company receives a government grant of R500,000 for the purchase of machinery. The machinery has a useful life of 10 years. The grant is recognized as deferred income and credited to profit or loss at R50,000 per year over the useful life of the machinery.

Government grants related to income are recognized in profit or loss over the periods necessary to match them with the related costs.

Example: A company receives a government grant of R200,000 to cover training costs. The training costs are incurred over two years, and the grant is recognized as income at R100,000 per year.

Presentation in Financial Statements

Government grants related to assets can be presented either by setting up the grant as deferred income or by deducting the grant from the carrying amount of the asset. Government grants related to income are presented as a credit in profit or loss, either separately or under a general heading such as “Other Income.”

Example: A company receives a government grant related to research and development expenses. The grant is presented as “Other Income” in the financial statements.

Compliance with Conditions

Entities must ensure they comply with the conditions attached to government grants to avoid repayment. Continuous monitoring and compliance are essential to maintain the recognition of grants.

Example: A company receives a government grant to promote employment. It must maintain a certain level of employment for three years. The company continuously monitors its employment levels to ensure compliance.

IAS 20 Under Liquidation

Core Principle

During liquidation, the focus shifts to the immediate realization and settlement of obligations, including government grants. The recognition and measurement of government grants may be affected by the urgency to comply with grant conditions or the potential need to repay grants if conditions are not met.

Recognition of Government Grants

Government grants may need to be reassessed during liquidation to ensure compliance with conditions. If the entity cannot fulfill the conditions due to liquidation, the grants may need to be repaid, or their recognition adjusted.

Example: A company in liquidation received a government grant for building a new facility with the condition of maintaining operations for five years. If the company cannot meet this condition, the grant may need to be repaid or derecognized.

Presentation in Financial Statements

During liquidation, government grants related to assets and income are reassessed for immediate recognition and potential repayment. Any remaining deferred income related to government grants must be evaluated for compliance and potential adjustment.

Example: A company in liquidation has deferred income of R300,000 related to a government grant for equipment. The company reassesses whether it can meet the conditions and may need to recognize a liability for repayment.

Compliance with Conditions

Entities in liquidation must carefully review the conditions attached to government grants to determine if compliance is still possible. If not, they must recognize a liability for repayment and disclose the potential impact on financial statements.

Example: A technology company in liquidation received a grant for innovation with the condition of achieving specific milestones. If the company cannot achieve these milestones due to liquidation, it must recognize a liability for the grant repayment.

Immediate Settlement and Repayment

Liquidation may accelerate the settlement and repayment of government grants. Entities must recognize the full liability for any grants that cannot be complied with and disclose the impact on the financial statements.

Example: A construction company in liquidation received a grant for infrastructure development with a condition to complete the project within three years. If the project cannot be completed, the company must recognize a liability for the full amount of the grant and disclose the impact in the financial statements.

Conclusion

The application of IAS 20 under a going concern assumption and during liquidation involves the same fundamental principles but different practical considerations. Under going concern, the focus is on systematic recognition and compliance with conditions over the grant period. In contrast, during liquidation, the emphasis shifts to immediate realization and settlement of obligations, reassessment of compliance with grant conditions, and potential repayment of grants. Entities must carefully reassess their government grant obligations and make necessary adjustments to ensure accurate and transparent financial reporting during liquidation. This adjustment ensures that stakeholders receive a true and fair view of the entity’s financial position and performance during the liquidation process.

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