IAS 20 distinguishes between two main types of grants:
- grants relating to income and
- grants relating to assets.
Government grants should only be recognised in the financial statements if there is reasonable assurance that the entity will comply with all relevant conditions in relation to grant. Grants relating to income are credited in the SCI or deducted from the related expense. Grants in relation to assets can be treated as deferred income and a transfer made (on a systematic basis) to the SCI over the useful life of the asset.
Alternatively, the grant can be deducted from the carrying amount of the asset. This will result in reduced depreciation charges over the asset’s useful life. Investment properties IAS 40 is applicable to property, which is acquired as an investment rather than for use, is not consumed in the entity’s operations and does not have a useful life. Examples of investment properties provided in IAS 40 include: land held for long-term capital appreciation and buildings leased out under one or more operating leases. It should be noted that property being constructed or developed for third parties is covered by IAS 11 Construction Contracts and property leased under a finance lease is covered by IAS 17 Leases. If the property is owner-occupied then IAS 16 applies. Once it has been ascertained that the property is an investment property, IAS 40, similar to IAS 16, allows a choice of two models; the ‘fair value model ‘ or the ‘cost model’. If the fair value model is used then any gain or loss arising from a change in the fair value of the investment property must be recognised in the calculation of profit and loss in the SCI for the period in which it arises. This is in contrast to the IAS 16 treatment of revaluation gains and losses discussed earlier, which requires revaluation gains to be excluded from profit. In addition, under the fair value model, no deprecation is charged on investment properties.
Learners preparing for examinations in corporate reporting should be aware that IAS 16 is interrelated with several other key IFRS’s including: IAS 20 Accounting for Government Grants, IAS 23, Borrowing Costs, IAS 40 Investment Properties, and IAS 36 Impairment of Assets (not examinable at Corporate Reporting 1, Professional 1 Stage). Accounting issues in relation to these standards are often included in examination questions which require the preparation of financial statements.