IAS 20 Accounting for Government Grants and Disclosure of Government Assistance - Accounting for recoverable cash payments - Agenda paper 7

Recap

In November 2015 the Interpretations Committee received a request to clarify whether cash payments made by a government to assist an entity to 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.

The staff concluded that 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 noted that the appropriate accounting would depend on the specific terms and conditions of the cash payment received. The Interpretation Committee noted that for the scenario considered the payment was likely to be a forgivable loan in the first instance and that judgement would be required in making this assessment and in determining when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.

The Interpretation Committee tentatively decided that the issue should not be taken onto its agenda.

The purpose of this session was to analyse the comment letters received and discuss the staff recommendation.

Comment letters analysis

The majority of respondents agreed with the tentative agenda decision; however, some suggested amending the wording as follows: (i) include the basis for its conclusion that the cash payment was a financial liability; (ii) remove the reference to limited diversity in practice; (iii) clarify whether an entity took into account the forgivable character of the cash payment when determining its fair value; (iv) remove references to the fact that “many members agreed that…”, because only statements for which there was a consensus should be included; and (v) explain that the cash payment could meet the definition of both a forgivable loan and a financial liability.

The staff agreed with revising the wording to address those issues. The staff also concluded that the principles and requirements within IFRS 13 provided an adequate basis to enable an entity to make a determination of the fair value of the financial liability.

Staff recommendation

The staff recommended finalising the agenda decision with consideration of the proposed wording changes.

Discussion

The Interpretation Committee did not agree with the staff recommendation. It was decided that the topic would be discussed again at a future meeting with the following changes: (i) the fact pattern met the definition of a financial liability and not of a forgivable loan; and (ii) further analysis should be performed on the measurement of the gain or loss on day 1.

During the discussion there was general concern as to whether the transaction met the definition of both financial liability and forgivable loan. It was pointed out that the derecognition requirements in IFRS 9 and IAS 20 were different and accordingly an entity could not be expected to make judgement as to how to apply both Standards. The judgement should be focused on whether the transaction was a financial liability or a forgivable loan.

There was disagreement with the staff analysis that the Standards provided sufficient guidance to address the issue. 

Some Interpretation Committee members expressed disagreement as to whether the obligation was a forgivable loan because the obligation would not be waived under certain conditions as defined under IAS 20. Others believed that the fact pattern reflected an objective test.

Some Interpretation Committee members suggested finalising the agenda decision with no detailed analysis of the concerns raised and instead to state that management should make a judgement.

There was an extensive discussion about how to determine the fair value of the loan on day-one. The staff indicated that an entity would need to consider the probabilities of meeting or not the conditions. The staff also clarified that during the life of the loan the assessment should not be updated.  The Interpretation Committee members in general indicated that it was not clear how the mechanics would work.

The Chairman called a vote on particular aspects of the agenda decision. The majority of the Interpretations Committee members agree that:

1. the fact pattern met the definition of a financial liability;
2. all references to forgivable loan should be deleted; and
3. to address at a future meeting the measurement of a day 1 gain or loss

One Board member raised concern that the analysis should be done with caution because the application of IAS 20.10A was considered clear and its application should not be stretched.