International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 349
adopted. We believe lessees could apply IFRS 16.13-16 and allocate the consideration in
the contract, determined at lease commencement, to each lease and non-lease
component on the basis of the relative stand-alone price of the lease component on that
same date unless the practical expedient to account for each lease component and any
associated non-lease components as a single lease component is elected. See 3.2 above.
Other approaches with similar results may also be acceptable.
10.3.2.C
Leases previously classified as finance leases
For a lessee that applies the modified retrospective approach to leases that were
classified as finance leases applying IAS 17, the carrying amount of the right-of-use asset
1768 Chapter 24
and the lease liability at the date of initial application are the carrying amounts of the
lease asset and lease liability immediately before that date measured applying IAS 17.
For those leases, a lessee accounts for the right-of-use asset and the lease liability
applying IFRS 16 from the date of initial application. [IFRS 16.C11]. However, the guidance
will not be applicable beyond the date of initial application and thus a reassessment and
remeasurement may be necessary soon after the date of initial application. See 5.4 and
5.5 above.
10.4 Lessor
transition
With the exception of subleases (see 10.4.1. below), a lessor is not required to make any
adjustments on transition for leases in which it is a lessor and accounts for those leases
applying IFRS 16 from the date of initial application. [IFRS 16.C14].
10.4.1 Subleases
An intermediate lessor (an entity that is both a lessee and a lessor of the same
underlying asset):
• reassesses subleases that were classified as operating leases applying IAS 17 and are
ongoing at the date of initial application, to determine whether each sublease
should be classified as an operating lease or a finance lease. The intermediate
lessor performs this assessment at the date of initial application on the basis of the
remaining contractual terms and conditions of the head lease and sublease at that
date; and
• for subleases that were classified as operating leases applying IAS 17 but finance
leases applying IFRS 16, account for the sublease as a new finance lease entered
into at the date of initial application. [IFRS 16.C15].
10.5 Other
considerations
IFRS 16 provides specific guidance on transition for sale and leaseback transactions and
amounts previously recognised in a business combination. Such specific guidance is
applicable irrespective of the transition approach adopted (i.e. full retrospective and
modified retrospective approaches). Thus, lessees are required to follow the specific
guidance below even when adopting the full retrospective approach.
10.5.1
Sale and leaseback transactions
An entity does not reassess sale and leaseback transactions entered into before the date
of initial application to determine whether the transfer of the underlying asset satisfies
the requirements in IFRS 15 to be accounted for as a sale. [IFRS 16.C16].
If a sale and leaseback transaction was accounted for as a sale and a finance lease
applying IAS 17, the seller-lessee:
• accounts for the leaseback in the same way as it accounts for any other finance
lease that exists at the date of initial application; and
• continues to amortise any gain on sale over the lease term. [IFRS 16.C17].
If a sale and leaseback transaction was accounted for as a sale and operating lease
applying IAS 17, the seller-lessee:
Leases (IFRS 16) 1769
• accounts for the leaseback in the same way as it accounts for any other operating
lease that exists at the date of initial application; and
• adjusts the leaseback right-of-use asset for any deferred gains or losses that relate
to off-market terms recognised in the statement of financial position immediately
before the date of initial application. [IFRS 16.C18].
10.5.2
Amounts previously recognised in a business combination
If a lessee previously recognised an asset or liability applying IFRS 3 relating to
favourable or unfavourable terms of an operating lease acquired as part of a business
combination, the lessee derecognises that asset or liability and adjusts the carrying
amount of the right-of-use asset by a corresponding amount at the date of initial
application. [IFRS 16.C19]. As discussed at 10.5 above, this paragraph applies to all entities.
Therefore, even when an entity applies the standard retrospectively (in accordance with
IFRS 16.C5(a)), the acquirer does not reopen the purchase price allocation for a business
combination, but rather goes back to the date of acquisition of the acquiree and
determines the lease liability and right of use asset as if the lease were a new lease at
that date.
10.5.3
References to IFRS 9
If an entity applies IFRS 16 but does not yet apply IFRS 9, any reference in IFRS 16 to
IFRS 9 should be read as a reference to IAS 39 – Financial Instruments: Recognition
and Measurement. [IFRS 16.C20].
10.6 Disclosure
If an entity applies IFRS 16 in full retrospectively, it is required to apply certain disclosures
under IAS 8 regarding the effect of the initial application (see Chapter 3 at 4.4).
If an entity applies the modified retrospective approach above, the lessee discloses
information about initial application required by paragraph 28 of IAS 8, except for the
information specified in paragraph 28(f) of IAS 8, which relates to the amount of the
adjustments. Instead of the information specified in paragraph 28(f) of IAS 8, the
lessee discloses:
• the weighted average lessee’s incremental borrowing rate applied to lease liabilities
recognised in the statement of financial position at the date of initial application; and
• an explanation of any difference between:
• operating lease commitments disclosed applying IAS 17 at the end of the
annual reporting period immediately preceding the date of initial application,
discounted using the incremental borrowing rate at the date of initial
application; and
• lease liabilities recognised in the statement of financial position at the date of
initial application. [IFRS 16.C12].
If a lessee uses one or more of the specified practical expedients in paragraph C10
(see 10.3.2.A above), it discloses that fact. [IFRS 16.C13].
1770 Chapter 24
1771
Chapter 25
Government grants
1 INTRODUCTION ........................................................................................... 1773
1.1
Overview of IAS 20 .............................................................................................1773
1.2
Terms used in this chapter ............................................................................... 1774
2 SCOPE OF IAS 20 ........................................................................................ 1775
2.1
Government assistance ....................................................................................... 1775
2.2
Government
grants
..............................................................................................
1775
2.2.1
Grants with no specific relation to operating activities
(SIC-10) ................................................................................................. 1776
2.3
Scope exclusions ................................................................................................. 1776
2.3.1
Investment tax credits ........................................................................ 1777
3 RECOGNITION AND MEASUREMENT .......................................................... 1779
3.1
General requirements of IAS 20 ...................................................................... 1779
3.2 Non-monetary
grants
.........................................................................................
1780
3.3 Forgivable
loans .................................................................................................. 1780
3.4
Loans at lower than market rates of interest ................................................. 1781
3.5
Recognition in the income statement ............................................................. 1783
3.5.1
Achieving the most appropriate matching .................................... 1784
3.5.2
The period to be benefited by the grant ........................................ 1786
3.5.3 Separating
grants
into elements ....................................................... 1786
3.6
Repayment of government grants ................................................................... 1786
3.7 Government
assistance ...................................................................................... 1787
4 PRESENTATION OF GRANTS ....................................................................... 1787
4.1
Presentation of grants related to assets .......................................................... 1787
4.1.1
Cash flows ............................................................................................ 1788
4.1.2 Impairment
testing of assets that qualified for government
grants ..................................................................................................... 1788
4.2
Presentation of grants related to income ....................................................... 1789
1772 Chapter 25
5 GOVERNMENT GRANTS RELATED TO BIOLOGICAL ASSETS IN THE
SCOPE OF IAS 41 ........................................................................................ 1790
6 DISCLOSURES.............................................................................................. 1790
6.1
Government assistance ...................................................................................... 1792
List of examples
Example 25.1:
Government grant by way of forgivable loan ............................... 1780
Example 25.2:
Interest-free loan from a government agency ............................... 1781
Example 25.3:
Entity allowed to retain amounts owed to government ............. 1782
Example 25.4:
Grant associated with investment property .................................. 1785
Example 25.5:
Government assistance...................................................................... 1787
Example 25.6:
Grant relating to biological assets carried at fair value ............... 1790
1773
Chapter 25
Government grants
1 INTRODUCTION
IAS 20 – Accounting for Government Grants and Disclosure of Government
Assistance – applied for the first time in 1984. [IAS 20.41]. The only substantive
amendment since issue was in 2008, requiring entities to quantify the benefit of a
government loan at a below-market rate of interest. [IAS 20.10A, 43]. The standard pre-
dates the IASB’s Conceptual Framework and, as the IASB itself has noted, it is
inconsistent with it,1 resulting in the recognition in the statement of financial position of
deferred credits that do not meet the Framework’s definitions of liabilities and allowing
alternatives to initial measurement at fair value that could result in an asset being
understated by reference to the Framework.
IAS 20 defines government grants in terms of assistance given to an entity in return
for meeting certain conditions relating to the operating activities of the entity.
[IAS 20.3]. SIC-10 – Government Assistance – No Specific Relation to Operating
Activities – was issued in 1998 to clarify that IAS 20 applies even if the only
condition is a requirement to operate in certain regions or industry sectors
(see 2.2.1 below).
Government grants related to biological assets are excluded from the scope of IAS 20
and are dealt with in IAS 41 – Agriculture (see 5 below and Chapter 38 at 3.3).
[IAS 20.2(d)].
1.1
Overview of IAS 20
Government grants are transfers of resources to an entity in return for past or
future compliance with certain conditions relating to the entity’s operating
activities. [IAS 20.3]. Such assistance has been available to businesses for many
years, although the exact nature of such support will vary from country to country
and over time as governments and their priorities change. The purpose of
government grants, which may be called subsidies, subventions or premiums,
[IAS 20.6], and other forms of government assistance is often to encourage a private
sector entity to take a course of action that it would not normally have taken if the
assistance had not been provided. [IAS 20.4]. As the standard notes, the receipt of
government assistance by an entity may be significant for the preparation of the
financial statements for two reasons:
1774 Chapter 25
• if resources have been transferred, an appropriate method of accounting for the
transfer must be found; and
• it is desirable to give an indication of the extent to which an entity has benefited from
such assistance during the reporting period, because this facilitates comparison of its
financial statements with those of prior periods and with those of other entities. [IAS 20.5].
The main accounting issue that arises from government grants is how to deal with the
benefit that the grant represents. IAS 20 adopts an income approach, whereby grants
are recognised in profit or loss in the same periods as the costs that the grants are
intended to compensate. [IAS 20.12]. Accordingly, grants relating to specific expenses are
recognised in profit or loss in the same periods as those expenses, and grants relating to
depreciable assets are recognised in profit or loss in the same periods as the related
depreciation expense. [IAS 20.17]. This approach is applied regardless of whether the
benefit is received in the form of cash; by a transfer of a non-monetary asset; or as a
reduction of a liability to the government. [IAS 20.9, 23].
The standard recognises that an entity may receive other forms of government
assistance, such
as free technical or marketing advice and the provision of guarantees,
which cannot reasonably have a value placed upon them. Rather than prescribe how
these should be accounted for, it requires disclosure about such assistance. [IAS 20.35, 36].
1.2
Terms used in this chapter
The following terms are used in this chapter with the meanings specified:
Term Definition
Government
Government, government agencies and similar bodies whether local,
national or international. [IAS 20.3].
Government assistance
Action by government designed to provide an economic benefit specific to
an entity or a range of entities qualifying under certain criteria.
Government assistance does not include benefits provided only indirectly
through action affecting general trading conditions, such as the provision
of infrastructure in development areas or the imposition of trading
constraints on competitors. [IAS 20.3].
Government grants
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. This excludes 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. [IAS 20.3].
Government grants are sometimes called by other names such as subsidies,
subventions, or premiums. [IAS 20.6].
Grants related to assets
Government grants whose primary condition is that an entity qualifying
for them should purchase, construct or otherwise acquire long-term assets.
Subsidiary conditions may also be attached restricting the type or location
of the assets or the periods during which they are required to be acquired
or held. [IAS 20.3].
Grants related to income
Government grants other than those related to assets. [IAS 20.3].
Government
grants
1775
Forgivable loans
Loans which the lender undertakes to waive repayment under certain
prescribed conditions. [IAS 20.3].