New issue – Accounting for recoverable cash payments

The Interpretations Committee received a request to clarify whether cash payments made by a government to assist an entity finance a research and development project should be accounted for as a liability (i.e. a forgivable loan as defined in IAS 20) or as revenue (i.e. a government grant as defined in IAS 20) when received.  In the scenario presented, the cash payments were repayable to the government if the entity decided to exploit and commercialise the results of the research phase of the R&D project.  The submitter cited current divergence in practice.

Staff recommendation

Having performed analysis and outreach on the issue, the staff considered there was sufficient guidance in IAS 20 and other Standards to assist an entity in determining the appropriate treatment for the cash payments and that diversity in practice was limited.  The staff highlighted that the appropriate accounting would depend on the specific terms and conditions of the cash payment received, and included in the paper a list of factors that an entity should consider in determining the appropriate accounting for the cash payment.  These factors were also set out in the tentative agenda decision and related to (a) whether the assistance gave the government ownership in the entity; and, if it did not, whether it was a loan at favourable terms.  The staff concluded that for the scenario considered the payment was likely to be a forgivable loan in the first instance.

The staff recommended that the issue was not taken onto the Interpretations Committee’s agenda and proposed wording for a tentative agenda decision.  The Interpretations Committee was asked whether they agreed with the conclusion of the staff, and with the wording in the tentative agenda decision.

Interpretations Committee discussion and decision

There was general agreement amongst the Committee members on the proposed direction the IASB staff had taken on this issue, with observations made that the facts and circumstances and terms and conditions of these transactions vary greatly; judgement is required in determining the appropriate accounting treatment; and that predominant practice is to account for them as forgivable loans.

Commenting on the staff view in paragraph 45 of the agenda paper that “this loan should be accounted for under IFRS 9 until there is reasonable assurance that the R&D project will not be successful and the entity will abandon the project and meet the terms for forgiveness for all or a portion of the loan”, several Committee members questioned what “reasonable assurance” meant and at what stage this would be achieved.  It was observed that determining whether there was “reasonable assurance” would be a matter of judgement, and a Committee member suggested including this point in the agenda decision to make it clear that this was not at a specific point in any arrangement.  The ESMA representative present supported this edit, adding that this was a key element in the analysis and therefore, worth mentioning in the agenda decision.  The point was also raised that if a loan was being accounted for under IFRS 9, one would need to meet the derecognition criteria in IFRS 9 to move away from accounting for the liability under IFRS 9.

Several Committee members observed that the agenda decision picked up some peripheral issues around government participation and below-market rate loans, and noted that these were considerations that would need to be applied in any circumstances, and did not address the question actually asked.  They expressed concern that inclusion of these issues could result in more questions rather than contributing to the solution, and suggested that these items were removed and that the agenda decision focused solely on whether there was a forgivable loan or not.

The Interpretations Committee tentatively agreed to move forward with the agenda decision, subject to the edits being made as discussed above.