Government grants and concessions can have a significant financial impact upon the operations of enterprises, whether state owned or influenced or entirely privately owned. Governments use grants and concessions to implement fiscal and monetary policies and often to meet social objectives. The International Accounting Standards Committee's International Accounting Standard (IAS) 20 prescribes the accounting treatment and related disclosures of government assistance. National conformity with IAS 20 is increasing; however, some countries have recently developed national procedures which are not in harmony with the IAS 20, yet previous national practice did comply. Some countries offer very little governmental assistance and consequently accounting standards dealing with this issue are not highly developed. One of the contentious aspects of this topic is whether the assistance represents a capital item or more in the nature of revenue.
The following forms of government grants and assistance are within the usual scope of government grants and concessions:< (a) Government assistance is government action designed to convey an economic benefit to a particular enterprise or range of enterprises which qualify under certain criteria;< (b) Government concessions are incentives to encourage an enterprise to undertake some activity to which it might not otherwise have agreed;< (c) Grants are government assistance in the form of resource transfers to an enterprise in return for compliance with certain conditions specified within the agreement or offer.
Grants may relate to assets whereby an enterprise must purchase or construct fixed assets, or to the performance of certain services such as research and development, either theoretical or applied. Various terms and conditions are often associated with such grants. Alternatively, grants may relate to income, such as compensation for loss of income due to a particular government policy: for example, compensation for loss of income due to restrictions on the use of forest areas for logging purposes, or for restricting agricultural production.
Some transfers may be combinations of several types of assistance; hence it is essential to consider all characteristics of the transfer to determine the most appropriate treatment.
Other forms of indirect government assistance may include import protection in the form of duties and tariffs, or more subtle protection such as local regulations and licensing laws. It may be possible to calculate an estimate of the amount of assistance received if the rate of import duty is applied to the selling price of goods, although it would be a very approximate calculation and it is incorrect to assume that import duties affect the selling price in such a direct manner. Rules and regulations which inhibit or restrict foreign goods from entering the domestic market offer protection against competition and are therefore a form of assistance. However, it would be very difficult to measure in monetary terms the magnitude of this assistance. Additionally, governments often provide free advice or consultancy services, or promote goods for foreign trade, which all bestows benefits upon enterprises. To the extent that such forms of assistance have a material impact upon an enterprise's financial statements, the nature of the assistance should be disclosed and thoroughly explained.
Government grants and concessions may be considered as excluding:< (a) Entitlements, which are considered to be transfers made by the government to individuals or corporations which meet certain criteria: for instance unemployment benefits, family allowances and other forms of social welfare. These benefits are non-discretionary, meaning that government legislation specifies who is eligible for the transfer in addition to stating the amount;< (b) Government loans which are made on a commercial basis are also not considered, because they would normally be treated in an identical manner to an arms-length commercial transaction;< (c) Indirect government assistance, such as: a policy to procure from domestic producers and manufacturers, which can often direct substantial amounts of economic activity towards an enterprise; or the provision of government guarantees or underwritings. It is very difficult to determine the precise benefit to an enterprise from this preferential treatment. Although sales or income from the government can be readily identified and quantified, the issue is really the benefit of the "favouritism" bestowed upon the enterprise. The government under normal operating procedures may well have intended to procure from the enterprise in question, so there has been no government assistance as the transaction represents "business as usual'.
Financial institutions lend money to earn a return. Governments may do likewise, but governments also lend funds at minimal interests rates, often in the role of a "lender of last resort", or to implement a policy objective. Due to the differing nature of these loans, traditional accounting treatments may not truly present the most accurate presentation of transactions. For example, for the 1989/90 fiscal year, Canadian government loans at the national, provincial and territorial levels resulted in loans receivable in excess of Can$41,000 million. These loans consisted of amounts to be repaid through future government assistance and concessionary loans. Clearly, the Canadian government is heavily involved in lending to other statutory bodies, governmental bodies and the private sector. Accurate accounting techniques must be developed and used to record concessionary loans. Concessionary loans are usually issued to meet policy objectives and are often granted on terms other than commercial rates. Consider the differing value of a US$ 20 million loan on market terms over a period of 20 years, and a loan for the same period with an interest rate of 2 per cent with repayments scheduled to commence after 10 years. The loans have the same face value when they are originally issued; however, clearly, the value to the government and to the recipient is significantly different.
The traditional historical cost accounting model does not accurately present the transaction. Net present value techniques offer a more accurate valuation. If the full value of the loan was recorded, the loan would be repaid over time and the lower rate of return on the interest income would be recognized. However, the opportunity cost of the concession is not reflected in the financial statements and it should be disclosed by notation. An alternative treatment is to recognize the full cost of the concession when the loan is granted so that the cost of the decision to make the concession is not passed to future government administrations. Also, by booking the loan at the lower value, the government immediately recognizes that it has accepted an asset at a value less than the cash disbursed. Significant concessionary loans could be considered as having two components: the grant component which represents the cost of the concession, and the loan component. Present value techniques could be used to quantify the grant and loan components.
A government may also provide assistance to an enterprise to enable repayment of a loan from a third party or previously granted by the government itself. Such a loan cannot really be considered an asset by the government, because in a sense the government is really repaying itself by making such assistance available to the debtor. It may appear logical to write the loan off. However, this would not address the underlying substance of the transaction and the government's funding relationship with the borrower.