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Government grants and aid are an Egyptian Accounting Standard No. 12 and International Standard No. 20 Standard, and this applies to all grants and government aid, apart from a set of the following points.
1- Any state tax exemptions given to companies like accelerated depreciation or a tax exemption for a temporary period.
If the government is a partner or shareholder in the company.2-
In cases of sharp decline in currency rates.3-
4- Any government grants in the field of agriculture because the agricultural standard is applied to it
Government grants and aid
This would be a form of aid or government aid provided by the state to companies in order to encourage them to invest in a specific field or governmental area for any purpose according to the state’s vision On the condition that these companies are bound by certain conditions relating to the activity of the company.
For example, investment in a specific field (it does not have many investments), and the government’s target, for example, is to encourage this type of investment in order to provide goods and services or with the aim of providing job opportunities in the area in which investment will be encouraged By giving grants and government aid'. "
It excludes any government aid that cannot be reasonably evaluated and deals with the government that is indistinguishable from normal corporate deals.
Transferable Loans / These are loans in which the lender promises to forfeit their recovery under certain circumstances.
Fair value / is the price that would be received when the asset was sold or purchased to settle a liability in an orderly transaction among market participants on the date of the transaction
Recognition of grants and government aid
In order for the grant to be recognized, whether it is a cash and non-monetary grant, the company must have the ability to adhere to the conditions of the granted grant and that it actually receives the grant, and the mere fact that the company obtains the grant is not in itself evidence that the conditions of the grant will be fulfilled. The general principle in the standard.
The government grants must be recognized as income in the periods in which the costs associated with the grant are recognized, such as machines, for example, the grant income is recognized when the depreciation of the asset is calculated, and the primary purpose is to apply the principle of matching revenues and expenditures, in the case of non-monetary grants, the accounting treatment is done.
For the grant and the original at fair value, the provision of infrastructure in the form of government improvements for road, communication and water networks is not considered government grants or assistance because they provide society with a public benefit.
Important information: that the government grants to which the International Standard No. 20 applies, must be related to employment activities
Types of grants and government aid
Grants related to assets 1-
Grants related to income 2-
1 Grants related to assets
The basic condition of government grants is that the company will buy or build this asset in return for that it will take this grant and that there will be certain conditions linked to the grant, such as determining the location of the assets and the period of time to the company to keep them with this original. Attached to the grant are grants related to assets, even if they are non-cash grants such as land (valued at fair value)
The Egyptian standard allowed in the accounting treatment to choose between two alternatives
1-Which the grant is considered deferred revenue and every year and every financial period a settlement is made for this deferred revenue with a record
Deferred Revenue / Account
To
Other account / income
That the value of the asset is reduced by the amount of the grant 2-
Which mean that the original cost is 500 thousand and a grant from the government took 50 thousand?
And his record became 450 thousand
The processors of the Egyptian Standard No. 12 allowed them to process government grants related to assets, and the International Standard No. 20 prefers to use the first method, which is the best way.
Because if a disclosure and explanation were used that the asset's value was reduced the ******.the grant amount
Information that interests you: Non-monetary grants such as land grants are valued at fair value, and the grant and principal are recorded at fair value, which is the usual treatment.
A second treatment is to prove the value of the grant and the asset in a nominal value
Government grants that will be refunded to the government as a result of the company’s failure to fulfill its obligations against the grant. They are treated as a change in the accounting estimate and dealt with in accordance with the standard for accounting policies and changes in accounting estimates.
Accounting treatment grants and government aid
We have two ways or two entrances to address Government Grants
The first method is the capital method
The second method is the income method or the revenue method
The first method is the capital method. Its main idea is that the grant value is added to the shareholders ’equity
Because it is considered one of the means of financing and therefore it deals with the accounting that it appears in the list of financial position.
Government grants are not considered as revenue, and therefore they should not be shown in the income statement because it is considered in the form of an incentive or grant, and therefore there is no expense or cost in return for it.
International Standard No. 20 uses this method, and the Egyptian standard has no objection to using this method
Article 34 of the executive regulations of Tax Law 91 of 2005 stipulates the following: Donated assets are not subject to tax and which are included in reserves
The donated assets shall not be subject to the depreciation stipulated in Articles 27-26-25 of the law, according to the circumstances and accounting restrictions
From the account / fixed assets
To
The capital account / reserve
Entry at the end of each year:
From the depreciation account / expense
To
Depreciation account / accumulator
The second method
Income method or revenue method
The grant is considered as revenue for the company that is recorded in the income statement and is recognized in more than one accounting period.
Therefore, it cannot be recognized as equity, but is processed with in the income statement
International Standard No. 20 considers that this accounting treatment is the best, which is that it is considered as deferred revenue and it is settled over the accounting periods.
The grant is displayed as revenue in the income statement or deducted from related expenses
Likewise, we explained that the grants are given by the government in exchange for the company's commitment to implement certain conditions
Another point
The grants are treated in the income statement as revenue in order to offset the expenditures related to the implementation of the conditions and procedures related to the assignment
The most important question is how to be displayed in the income statement
Egyptian Standard No. 12 allowed a choice between the two methods of disclosure
A- It appears in a separate item or under the account of other revenues for the full amount of the grant
B- It appears net after deducting all related expenses
Some people may object on the basis of the inadmissibility of offsetting between revenues and expenditures in the income statement, but in another opinion they say that these expenses are related to this grant and therefore it can be deducted
How the grant is distributed and consumed
The revenue to be recognized and related to the grant is recorded on a regular basis, meaning that it is distributed at appropriate intervals according to the accrual accounting principle.
Assuming that the company took a grant of land in return to build a building on it, and as we know lands have no depreciation
The company distributes the grant amount over the building's useful life years
Assuming that the grant is one million pounds, the value of the land
The useful life of the building is 20 years
The amount of this grant will be distributed over 20 years
The government grants that the company receives in return for compensation for losses are considered other revenues in the income statement in the financial period that were obtained only, and of course in this case there are no future expenditures and therefore I cannot distribute them in this case as the value of the compensation or the grant over financial periods.
Also, if the government gave the company a grant for financial support as a result of the company’s stopping, for example, due to lack of financial problems, and this is considered compensation to the company for the losses it incurred in the previous period, and therefore the value of the grant is recognized during the financial period in which the company receives this grant because it has no future expenses. The same thing applies when the company has losses as a result of earthquakes, floods, or problems beyond the company's control
If the company received a grant, it is recognized as revenue during the period in which it received the grant because it has no obligations or future expenditures, and therefore it is recognized during the financial period in which it will receive the grant only
Government grants that are in the form of non-depreciable assets are recognized in the income statement during the financial periods related to the period and costs of implementing the obligations related to the grant.
It means if the government grants that the company will get are land and the condition of the grant is that it builds a building on it.
The value of the grant is distributed over the useful life of the building. Government aid, whose value cannot be reliably estimated, such as technical or professional advice, is excluded from the governmental grant criteria
Transferable government loans if there are appropriate assurances that the company meets the conditions for assigning the loan, in this case it is treated as government grants.
The statement of cash flows related to the purchase of the asset and the receipt of the grant must be disclosed separately because it has a relative importance in the statement of cash flows, especially when the value of the asset is reduced by the amount of the grant
Disclosure of grants and government aid
International Standard No. 20 clarified the disclosures related to government grants.
1-Disclosure shall be made of the accounting policy used in government grants and the method of presenting them in the financial statements
The nature and amount of government grants recognized in the financial statements.2-
3-Conditions and liability that the company was unable to fulfill and any other possible circumstances related to government grants...
Example 1 of grants and government aid
A company that received a grant of 30% of the cost of a new item of machinery, whose cost amounts to 300,000 Egyptian pounds, and the estimated useful life of the machines is 5 years, and the remaining value at the end of the life of the asset is zero pounds
For the facility, before accounting for the depreciation of the new machine or the grant, at an amount of 5,000,000 EGP per year over the life span.
The first method is the deferred revenue method, and it is the best way
He will register the assets at his cost, which is 300,000 thousand
Accounts / assets 300,000
To
Accounts / cash 210,000
Account / deferred revenue 90,000
And we distribute the 90,000 thousand to the useful life of the god, which is estimated at five years
That means. Every year, 18,000 thousand
In each year, the registration will be as follows
Accounts / deferred revenue 18,000
To
Accounts / other income 18,000
We will depreciate the asset every year
60,000 = 5/300,000
The entry is
Accounts / depreciation expense 60,000
To
Accounts / accumulated depreciation 60,000
Net profit during the year
=5,000,000 -60.000+180,000 = 4,958,000
The second method
Method of reducing the cost of an asset
The cost of purchasing the asset is 300,000, a reduction of 30% means 90,000
Cost of the asset = 210,000
Depreciation Premium = 210000/5 = 42000
The net profit during the year = 5000000 - 42000 = 4958000
Example 2 of grants and government aid
A company that obtained a government grants of 500 thousand pounds to finance the purchase of an asset. The cost of acquiring the asset amounted to one million pounds. The useful life of the asset is estimated at five years, and the depreciation is in a manner Fixed installment.
The Answer: The grant was considered deferred revenue
The entry is as follows
Accounts – cash 500,000
Deferred revenue accounts 500,000
And every year it is charged with its own revenue
The entry is as follows
Deferred revenue account 100,000
To
Grant income account 100,000
We calculate the year’s depreciation
And the depreciation entry is every year
Depreciation expense account 200,000
Accumulated depreciation accounts 200,000
This treatment is in line with the principle of matching revenues and expenditures
And of course the original is recorded at the cost of its purchase
There is a second treatment
Reducing the asset value by the amount of the grant
Fixed assets account 100,000
To
Cash 1,000,000
And after that, the value of the asset is reduced by the amount of the grant
Accounts / cash 500,000
To
Accounts / principal
Example 3 of grants and government aid
Al-Salam Company received a grant of 12 million to establish a silo, and the company estimated the cost of constructing this silo at 120 million, but there is a condition in this grant that the company must appoint workers from the area in which the silo resides and it must retain, after five years, a 1: 1 ratio of local workers to Foreign workers. The silo is destroyed by a straight line method over a period of ten years.
Answer: The first thing according to Standard of Grants and Government Aids No. 20
The grant received by the company is recognized over a period of ten years and every year its revenue is recognized in exchange for the depreciation for the period.
Entry proof of silo purchase or construction
Million accounts / fixed asset silo 120
To
Million h / cash or creditors 120
Proof entry of receiving the grant
Million accounts / cash 12
To me
Account / deferred revenue 12
Depreciation is deferred revenue each year following enrollment
Million accounts / deferred revenue
To
Million Accounts / Other Income - Grant Revenue
Every year for ten years
And the same idea in depreciation
Asset cost (120 million include. 12 million grants)
The entry is as follows
Million accounts / depreciation expense 10
To
Million accounts / accumulated depreciation 10
As for the requirement to maintain a ratio of 1: 1 from local workers to foreign workers, this condition needs to be disclosed and clarified in the financial statements for the following five years in which this condition applies.
. Example 4 grants and government aid
The government granted Al-Salam Company a land area of 3000 acres in Tasha, and there was a condition in this grant that the company cleaned this land, pave the roads, and hire workers from the region, and the government is the one who determines the workers' wages.
The fair value of the land is 120 million pounds, the government sells it for 100 million, and the company pays each year as follows
Million in the first year 20
Million in the second year 20
Million in the third year 60
Answer grants related to assets that are not subject to depreciation
There are some assets that are not subject to depreciation, such as land, and also there are conditions and obligations to fulfill the commitment to the grant, so in this case the grant is recognized as income over the periods in which the company operates the costs of paying the obligations
The company recognizes the fair value of the grant over a period of 3 years
And also with the cost of meeting the commitments of the grant
The scholarship will be in the range of 20 million
Ok, how will we admit it?
First year = 20/100 * 120 = 24 million
The grant during the first year = 24-20 = 4 million
Year Two = 20/100 * 120 = 24 million
The grant during the second year = 20-24 = 4 million
Third year = 60/100 * 120 = 60 million
The grant during the third year = 60-48 = 12 million
The accounting restrictions are as follows:
Million accounts / fixed asset – land 120
To me
Million Accounts / Creditors - Governmental liability 100
Million accounts / deferred revenue 20.
Every year, the government will be paid according to the payment agreement, as shown in each year, and as for the deferred revenue, it is consumed every year.
The first year
Million accounts / deferred revenue 4
To me
Million accounts / other revenues 4
The second year
Million accounts / deferred revenue 4
To me
Million accounts / other income 4
Third year
Million accounts / deferred revenue 12
To
Million accounts / other income 12
Example 5 of grants and government aid
A company that received a government grant of 500,000 pounds to finance the purchase of one of the fixed assets and the cost of its acquisition is 5 million pounds and its useful life is five years and is depreciated by the (straight-line) fixed method and after a year and a half have passed the grant was refunded because the company did not adhere to the terms of the grant.
Refund of grants and government aid
When the company does not abide by the conditions of the grant and it is considered an obligation on it that it pays the grant, a change in the estimate is processed and treated with a future effect and not retroactively. She was incurring and misleading the grant, as we said that the return of government grants is an adjustment in the accounting estimates.
And we have two types of response
Refund of grants related to revenues 1-
This is deducted from the credit balance of the deferred revenue - if there is no sufficient balance for the deferred revenue, we will return an expense in the income statement.
Refund of grants related to assets 2-
The book value of the asset increases and the deferred revenue balance decreases by the value to be refunded. Also, the expenses are charged with the value of the accumulated depreciation that the company should have borne in the event that it did not receive the grant
Deferred revenue method
/ cash 500,000 accounts
/ deferred revenue 500,000 account
At the end of the year
/ deferred revenue 100,000 account
To
( 100,000 account / Other income (grant income
Depreciation entry
EGP / Depreciation expense 1,000,000
To
1,000,000 account / compound depreciation
Of course, if we are running regular accounts, we are working on monthly deferred revenue settlement
Means to 100,000, we divide it by 12 so that we know that every month we carry it by how much revenue = 8333.33
In our example, he said, after a year and a half, he will return the grant under the deferred revenue adjustment
So 6-30 = 50,000
And the entry is as follows
Accounts / deferred revenue 50,000
Account / Grant Income - Other Income 50,000
And the balance of deferred revenue = 500000-150000 = 3500000
After a year and a half after the grant was refunded, the deferred revenue reduction
pounds 35*100,000) = 350,000)
Accounts / deferred revenue 3,500,000
Accounts / other expenses 1,500,000
To
500,000 account / cash or account / creditors 500,000
The second method
Proof of original entry
Million accounts / principal 5
To
Million accounts / cash or creditors 5
In case of reducing the asset value by the amount of the grant
We will record the receipt of the grant first
Accounts / cash 500,000
To
Account / Other Income Grant income 500,000
After that, the value of the asset is reduced by the value of the grant income
/ grant income 500,000 account
To
Accounts / fixed assets 500,000
The asset I have its cost = 5 million - 500 thousand = 4,500,000
The depreciation entry will be = 4500000/5 = 900000
And the normal depreciation entry is from the expense to the collector
Depreciation for half the year = 450 thousand (900000/2)
We will refund the grant after a year and a half
The entry is
Accounts / fixed assets 500,000
To
Accounts / creditors 500,000
When we return the grant, this means that the cost of the asset will increase (by the value of the grant refund that was made)
Thus, the cost of the asset is 5 million
It is assumed that the annual depreciation will be = 5 million / 5 = one million
So the depreciation of a year and a half = 1 +5 million. One million = 1.5 million
It is assumed that it is the depreciation that I had before returning the grant
450,000 = 1,350,000+ 900,000
The difference = 150,000 more is an expense
This difference is handled
Accounts / depreciation expense 150,000
To
Accounts / accumulated depreciation 150,000
Example 6 of grants and government aid
A company that received a government grant of 30 million and used 60% of it to build an electronics factory at a cost of 100 million and the remaining 40% to purchase raw materials and pay wages for a period of 5 years
If the company took a government grants (part of it to create a fixed asset and another part related to income
In this case, the first part of the fixed asset is recognized as deferred revenue over the useful life of the asset, and the second part is deferred revenue over the life of the grant.
The 60% of the 30 million = 18 million
We will make deferred revenue over the productive life of the factory building, let it be 20 years
It means that the entries will be as follows
Income method - revenue
18,000,000 Accounts / cash
To me
18,000,000 Account / deferred revenue
And every year, we settle the deferred revenue of 900,000 annually
900,000 Account / deferred revenue
To
900,000 Account / other income - grant income
The original, of course, is registered with a value of 100 million, regardless of the method of purchase, whether in cash or on credit
It depreciates 100 million over the useful life of the asset
The remaining 40%, which is 12 million
It's recognized as deferred revenue perished over the life of the grant
12 Million accounts / bank cash
To
12 Million deferred accounts / receipts
The 12 million will be destroyed over the grant life of 3 years
Each year there are 4 million
4 Million deferred accounts / receipts
To
4 Million accounts / other revenues
This entry is annually throughout the life of the grant
Example 7 for grants and government aid
Al-Salam Company received a grant of 6 million to compensate it for bearing the costs of planting trees over a period of five years
The total costs I've incurred over five years are 30 million
The company bears the costs as follows
First year = 2 million
The second year = 4 million
Third year = 6 million
Fourth year = 8 million
Fifth year = 10 million
The answer
6 Million accounts / cash
To
6 Million account / deferred revenue
The grant is recognized as income over the period in which the cost is recognized
Mean that the overall costs / total costs are the total grants which
Year 1 = 2/30 * 6 = 400,000
The entry is as follows
Account / deferred revenue 400,000
To
Grant Account / Income 400,000
The second year
6*30/4=800,000=
The entry is as follows
Accounts / deferred revenue 800,000
To
800,000 account/grant income
Thus, every year, the grant revenue is recognized in the period that pertains to it within the limits of the costs that are recognized, the revenue in the spirit of the income statement and the deferred revenue balance in the budget