No direct credit to equity

Learning objectives

• Explain why a grant is not credited directly to equity.L1, L2

Normative references

• IAS 20 §12Income approach: the grant is recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grant is intended to compensate.
• IAS 20 §13There are two broad approaches: the capital approach, under which a grant is recognised outside profit or loss, and the income approach, under which it is recognised in profit or loss over one or more periods; the requirement adopted is set out in para. 12.
• IAS 20 §14Arguments put forward in support of the capital approach: the grant is a financing device to be dealt with in the statement of financial position and, having no related costs, it is not earned by the entity.
• IAS 20 §15Arguments in support of the income approach: the grant is received from a source other than shareholders, the entity earns it through compliance with its conditions, and it is an extension of fiscal policies whose effects pass through profit or loss.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

2 questions

• An entity receives from a ministry a grant that compensates training costs incurred over several years. Which treatment is consistent with IAS 20?L2
• During a training session, a participant states that there are two broad approaches to accounting for a government grant. Which description of these approaches, and of the one adopted by IAS 20, is correct?L1