ESMA comment letter on tentative agenda decision on IAS 20 — Recoverable cash payments
04 Feb, 2016
The European Securities and Markets Authority (ESMA) has commented on the IFRS Interpretations Committee's publication in the November IFRIC Update of the tentative decision not to take onto the Committee's agenda a request for clarification of whether a cash payment made by government to fund a research project that is repayable only if the entity decides to commercialise the project's output should be characterised as a financial liability (on the basis that it is a forgivable loan as defined in IAS 20 'Government Grants') or a government grant.
ESMA agrees that arrangements described in the submission give rise to a financial liability but “considers that an analysis of the fact pattern, as described in the submission, should include an assessment whether there is a benefit of a government loan at below market rate”. ESMA notes that paragraph 10 of IAS 20 indicates that a forgivable loan should only be treated as a government grant “once there is reasonable assurance for forgiveness”. However it also highlights that paragraph 10A of IAS 20 states that government grants at below market rates of interest are treated as government grants.
Based upon staff analysis (in their paper on the draft agenda decision) ESMA indicates that it could be argued that forgivable loans, as described in the submission, “are loans from the government at below market rate of interest”.
ESMA recommends that the analysis in the agenda decision is amended and that the IFRS IC clarify whether the forgivable nature of a loan should be taken into account when determining the fair value of the loan at initial recognition (i,e. whether the benefit provided by the government's recoverable cash payments compared to a financing arrangement from other sources with similar terms and conditions (but without forgivable character) should be accounted for as a government grant under IAS 20).
The full comment letter is available on the ESMA website.
