Prior to initial recognition, a reporting entity should assess whether there is reasonable assurance that it will be able to comply with the grant requirements and that the grant will be received.
IAS 20, paragraph 8
A government grant is not recognised until there is reasonable assurance that the entity will comply with the conditions attaching to it, and that the grant will be received. Receipt of a grant does not of itself provide conclusive evidence that the conditions attaching to the grant have been or will be fulfilled. [Emphasis added]
Initial recognition of a government grant should occur once a reporting entity believes it is probable that it will comply with the grant conditions and that it will be received. This may occur at various points in the process, potentially even after the funds are received, depending on the specific criteria of the grant and the reporting entity’s individual facts and circumstances. Factors to consider in making this assessment include:
• Conditions of the grant
Has the reporting entity performed sufficient procedures to ensure that all grant conditions have been met? Are there adequate internal controls in place over amounts submitted as part of the grant process? Is there a process in place to comply with ongoing requirements?
• External audit
If applicable, has an external audit been completed that supports the amount of the grant and compliance with grant conditions?
• Government oversight
What is the government oversight process prior to granting funds? Are amounts received subject to audit? Are amounts received subject to adjustment after funds have been disbursed?
Depending on the type of grant, reporting entities may be subject to audit and other types of review and scrutiny by the disbursing agent at various points in the process. An audit may identify compliance violations and could clawback portions of the grant. As a result, the amount of the grant may be subject to change.
The timing of recognition of grants may involve judgment because of the lack of agency scrutiny or audit prior to receipt of the funds. In general, funds may be received prior to required compliance audits or any other audits conducted by the granting agency. In addition, certain grants may have ongoing requirements that subject the reporting entity to recapture or return of the grant if the reporting entity fails to meet the stipulations in a future period. Therefore, in addition to assessing compliance prior to initial recognition, a reporting entity should ensure that it has sufficient controls in place over the funds submitted for reimbursement and compliance requirements. Further, reporting entities should implement ongoing monitoring procedures, if applicable, based on the grant requirements.
In summary, reporting entities should ensure that they have met all terms and conditions and consider all available evidence prior to recognition of a grant. If recognition occurs before payment, the reporting entity should record a receivable.
How is the “reasonable assurance” threshold in IAS 20 interpreted?
Paragraphs 7 and 8 of IAS 20 indicate that a government grant should not be recognized until there is reasonable assurance that the grant will be received and that the reporting entity will comply with the specified conditions. Reasonable assurance is not defined within IFRS literature, and there are no bright lines when considering this requirement. We believe it would be difficult to justify recognition of a grant unless the reporting entity believes it is probable that it will comply with the conditions attached to the grant and that the grant will be received.
If a reporting entity believes it meets the criteria for recognition of a grant after the end of the reporting period but before the financial statements are issued, should the grant be recognized in those financial statements?
Generally, no. Although the potential for receiving the grant was known as of the balance sheet date, if a reporting entity has not yet met the criteria for recognition as of the balance sheet date, we believe subsequent receipt of the grant is a nonrecognized subsequent event. In these situations, reporting entities should consider disclosing the status and expected impact of the grant.
, Subsequent Events
, provides guidance on whether to recognize subsequent events.
Excerpt from ASC 855-10-25-1
An entity shall recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements.
Excerpt from ASC 855-10-25-3
An entity shall not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued.
As discussed in Question 16-2, we believe reporting entities that prepare financial statements under U.S. GAAP should be able to assert that it is probable funds will be received and that all conditions will be met prior to recognition of a grant. In general, the conditions attaching to a grant (e.g., approval after an audit) are not perfunctory. Therefore, such grants would be recognized in the period in which the recognition criteria are met.
However, the reporting entity should consider disclosure of significant nonrecognized events.