Ind AS 20

What is Ind AS 20?

Ind AS 20, Accounting for Government Grants and Disclosure of Government Assistance, is an Indian Accounting Standard that prescribes the accounting treatment and disclosure requirements for government grants and other forms of government assistance. It ensures that businesses recognize and present the benefits received from the government in their financial statements in a consistent and transparent manner. Essentially, it dictates how companies should record subsidies, incentives, and other forms of support provided by governmental bodies, impacting their reported assets, liabilities, income, and expenses.

Tracing the Roots: The Genesis of Ind AS 20

Ind AS 20 derives its principles directly from IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, which is an International Accounting Standard issued by the International Accounting Standards Board (IASB). India’s journey towards convergence with International Financial Reporting Standards (IFRS) led to the notification of Indian Accounting Standards (Ind AS) by the Ministry of Corporate Affairs (MCA) under Section 133 of the Companies Act, 2013. Ind AS 20 was formulated as part of this convergence effort, ensuring that Indian companies adopting Ind AS prepare financial statements that are comparable with those prepared under IFRS globally, thereby promoting transparency and attracting international investment. The standard came into effect for specified classes of companies along with other Ind ASs, marking a significant shift from the previous Generally Accepted Accounting Principles (GAAP) in India.

Unpacking Ind AS 20: Core Principles and Practices

Ind AS 20 establishes the framework for how entities should account for government grants, which are defined as 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. It also covers disclosure requirements for other forms of government assistance.

Scope of the Standard

Ind AS 20 primarily covers all government grants and forms of government assistance. However, it specifically excludes:

• Government assistance that falls under Ind AS 41, Agriculture (e.g., grants related to biological assets).
• Government participation in the ownership of the entity.
• Grants that are not readily distinguishable from the entity’s normal trading operations.
• Government assistance provided in the form of tax benefits or reductions in corporate taxes (these are dealt with by Ind AS 12, Income Taxes).

Key Definitions

• Government: Refers to government, government agencies, and similar bodies whether local, national, or international.
• 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.
• Government Assistance: Action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria. This is a broader term, encompassing grants and other non-grant forms of assistance.

Recognition of Grants

A government grant is 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 grant is intended to compensate. Crucially, a grant is NOT recognized until there is reasonable assurance that:

1. The entity will comply with the conditions attaching to the grant.
2. The grants will be received.

Mere receipt of a grant does not, by itself, justify recognition in profit or loss.

Presentation of Grants

Ind AS 20 provides specific guidance on how to present grants in the financial statements:

• Grants Related to Assets (Capital Grants): These are grants whose primary condition is that an entity should purchase, construct, or otherwise acquire long-term assets. They can be presented in two ways:
  • Deferred Income Approach: The grant is recognized as deferred income and recognized in profit or loss on a systematic basis over the useful life of the asset. This is the more common and generally preferred approach under Ind AS.
  • Reducing Carrying Amount of the Asset: The grant is deducted in arriving at the carrying amount of the asset. The grant is then recognized in profit or loss over the life of the depreciable asset by way of a reduced depreciation charge.
• Grants Related to Income (Revenue Grants): These are grants other than those related to assets. They are presented either:
  • As part of “Other Income” in the statement of profit and loss.
  • Deducted in reporting the related expense (e.g., deducting a grant towards wages from the ‘Salaries and Wages’ expense). The standard encourages presenting it as “other income” for better transparency.

Repayment of Grants

When a government grant becomes repayable, it is accounted for as a change in accounting estimate. The repayment of a grant related to income is applied first against any unamortized deferred credit recognized in respect of the grant. To the extent that the repayment exceeds any such deferred credit or if no deferred credit exists, the repayment is recognized immediately in profit or loss.

Repayment of a grant related to an asset is recorded by increasing the carrying amount of the asset or reducing the deferred income balance. The cumulative additional depreciation that would have been charged to profit or loss to date in the absence of the grant is recognized immediately in profit or loss.

Disclosure of Government Assistance

Beyond grants, Ind AS 20 requires disclosure of the nature and extent of other forms of government assistance received, even if no value is assigned to them. This ensures comprehensive transparency regarding governmental support.

Why Ind AS 20 Matters for Your Business

Understanding and correctly applying Ind AS 20 is crucial for businesses for several reasons:

• Accurate Financial Reporting: Ensures that financial statements present a true and fair view of a company’s financial position and performance, reflecting the impact of government support accurately.
• Compliance and Risk Mitigation: Adherence to Ind AS 20 is mandatory for companies falling under the Ind AS regime. Non-compliance can lead to regulatory penalties, restatements of financial statements, and reputational damage.
• Investor Confidence and Transparency: Transparent reporting of government grants allows investors, creditors, and other stakeholders to understand the true underlying profitability and financial health of the business, independent of or in conjunction with government support.
• Strategic Decision-Making: Correct accounting helps management assess the actual cost of projects, the net benefit from government schemes, and plan future investments and operational strategies more effectively.
• Comparability: Ensures that financial statements are comparable across different periods and with other companies, both domestically and internationally, especially those following IFRS.

Real-World Impact: Where Ind AS 20 Applies

Ind AS 20 has broad applicability across various industries and scenarios where businesses receive support from the government:

• Infrastructure Projects: Grants received by construction companies for building roads, bridges, power plants, or public utilities.
• Manufacturing Sector: Subsidies for setting up manufacturing units in specific regions (e.g., ‘Make in India’ incentives), or grants for adopting environmentally friendly production processes.
• Research and Development (R&D): Government funding provided to pharmaceutical companies, technology firms, or research institutions for innovation and development of new products or technologies.
• Export Incentives: Subsidies or duty drawback schemes provided to exporters to boost international trade.
• Agriculture and Food Processing: Grants for promoting specific crops, cold storage facilities, or food processing units.
• Job Creation Subsidies: Incentives for companies to create employment in economically backward regions.
• Environmental and Renewable Energy Projects: Grants for installing solar panels, wind turbines, or for waste management initiatives.

Navigating the Landscape: Related Concepts

To fully grasp Ind AS 20, it’s helpful to understand its relationship with other accounting principles and terms:

• IAS 20: The international counterpart that Ind AS 20 is converged with.
• IFRS (International Financial Reporting Standards): The global accounting framework that Ind AS aligns with.
• Ministry of Corporate Affairs (MCA): The Indian governmental body responsible for notifying and enforcing Ind AS.
• Deferred Income/Deferred Grant: A liability account used to recognize a grant received but not yet earned or recognized in profit or loss, typically for grants related to assets.
• Accrual Basis of Accounting: The fundamental principle underlying Ind AS 20, which dictates that revenues and expenses are recognized when earned or incurred, regardless of when cash is exchanged.
• Ind AS 1 (Presentation of Financial Statements): Provides general guidance on how financial statements, including disclosures related to grants, should be presented.
• Capital Grants vs. Revenue Grants: A common classification that differentiates grants tied to asset acquisition from those related to day-to-day operations or expenses.

Current Perspectives and Ongoing Relevance

Ind AS 20 remains highly relevant in India’s current economic climate, particularly with the government’s focus on various sectoral incentives, production-linked incentive (PLI) schemes, and initiatives to boost specific industries. Companies continually assess and apply Ind AS 20 for these programs. While there haven’t been frequent major amendments to Ind AS 20 itself in recent times, its consistent application across industries is crucial. The complexities often arise in interpreting the ‘conditions’ attached to grants and determining the ‘systematic basis’ for recognition, especially for grants with multiple or evolving conditions. The emphasis remains on ensuring the financial statements reflect the economic substance of the government’s support, not just its legal form.

Who Needs to Know? Key Departments Affected

The implications of Ind AS 20 extend beyond just the accounting team:

• Finance and Accounts Department: This is the primary department responsible for the actual application of Ind AS 20, including recognition, measurement, presentation, and disclosure of grants.
• Legal Department: Involved in reviewing grant agreements, understanding the conditions attached, and ensuring compliance with legal terms, which directly impacts the accounting treatment.
• Tax Department: Needs to understand the accounting treatment of grants as it may have implications for income tax computations, deferred tax, and tax planning.
• Treasury Department: Manages the cash flow related to receiving and potentially repaying grants, requiring an understanding of when funds are expected or due.
• Project Management/Operations: For large projects heavily reliant on government funding, project managers need to be aware of the conditions for receiving and retaining grants to ensure operational activities align with compliance requirements.
• Senior Management/Board of Directors: Responsible for overall financial strategy, compliance oversight, and understanding how government grants impact the company’s financial performance and valuation.

The Road Ahead: Future Trajectories

The future landscape concerning Ind AS 20 is likely to see several trends:

• Increased Scrutiny: With greater focus on corporate governance and transparency, the accounting for government grants will likely face more scrutiny from auditors, regulators, and stakeholders.
• Digitalization and Automation: As government grant applications and reporting processes become more digital, there might be a push for more automated systems to track and account for grants in compliance with Ind AS 20.
• Sector-Specific Interpretations: While Ind AS 20 provides general guidance, specific industries or complex grant structures might lead to more industry-specific interpretations or frequently asked questions (FAQs) from regulators to ensure consistent application.
• Alignment with ESG (Environmental, Social, and Governance) Goals: As governments increasingly offer grants for projects aligned with ESG objectives, accounting for these specific types of grants will become more prevalent and potentially more complex, requiring careful application of Ind AS 20.
• Continued Global Alignment: Any future amendments or clarifications to IAS 20 at the international level would likely be mirrored in Ind AS 20, maintaining the convergence with global accounting standards.