Accounting for government subsidies

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Startups and general companies can receive various forms of government subsidies in the course of conducting business activities. Government subsidies appear as financial support, tax benefits, cost subsidies, loan exemptions, etc., and directly and indirectly affect the financial status and management performance of companies. Accordingly, government subsidies are recognized as important items in corporate accounting, and accurate accounting standards and disclosures are required.

Since 2011, Korea has been mandatorily introducing International Financial Reporting Standards (IFRS) to listed companies and financial institutions, while other unlisted small and medium-sized enterprises are applying the General Accounting Principles (K-GAAP). These two standards have some things in common regarding government subsidies, but they differ in the way they are handled, the timing of recognition, and the method of disclosure. This time, we will compare and analyze the provisions related to government subsidies in the two accounting standards and examine the impact of the differences on corporate financial statements.

1. Definition

1) IFRS

In the International Accounting Standards IAS 20 (Accounting for Government Grants and Disclosure of Government Assistance), “government grants” are defined as transfers of resources provided by governments that meet or are subject to the satisfaction of certain conditions. Governments include central government, local governments, and related agencies.

2) General Accounting Principles (K-GAAP)

The General Accounting Standards define government subsidies as “funds, assets, etc. provided by the government to meet specific conditions or support specific activities.” It is basically similar to IFRS, but the General Accounting Standards are structured around more practical guidelines.

2. Criteria for Recognition of Government Subsidies

1) IFRS

Government grants are recognized when there is reasonable certainty, that is, when there is reasonable assurance that the entity will receive the government grant and meet the conditions of the grant.

'Reasonable assurance' at this time requires a level of confidence that is almost certain.

Subsidies are recognized as revenue, and in the case of asset acquisition subsidies, they are deducted from the carrying amount of the asset or treated as deferred revenue and then recognized as revenue over the useful life of the relevant asset.

2) General Accounting Principles (K-GAAP)

Government subsidies are recognized when receipt is confirmed or significant uncertainty is resolved.

Since general corporate accounting standards apply a more conservative recognition standard of ‘confirmed’, there is a possibility that recognition will occur later than IFRS.

Asset acquisition subsidies are treated as deferred income and then recognized as revenue in proportion to the depreciation expense according to the useful life of the asset.

3. Accounting method for government subsidies

1) IFRS

Income Approach: Recognize government subsidies as revenue by offsetting them against related expenses or in a systematic and rational manner.

Asset Approach: Asset acquisition subsidies are deducted from the carrying amount of the asset or recorded as deferred income and then recognized as revenue over the depreciation period.

Companies may elect to use either approach, and whichever approach they choose must be applied consistently.

2) General Accounting Principles (K-GAAP)

Asset acquisition subsidies are basically treated as deferred income, and expense subsidies are recognized as revenue in proportion to the expenses incurred. K-GAAP emphasizes consistency by providing a clear treatment method in practice without leaving room for choice.

 
4. Publication of government subsidies

1) IFRS

The nature, terms, accounting treatment, and impact on financial statements of government subsidies are disclosed, and IAS 20 places great importance on transparency in disclosure, requiring users to clearly understand the impact of government subsidies on the company's financial performance through financial statements.

2) General Accounting Principles (K-GAAP)

Depending on the importance and amount of government subsidies, the details of subsidies, purpose of receipt, conditions, period, and accounting treatment method are disclosed in notes. However, the specific detailed requirements for disclosure are relatively relaxed compared to IFRS, so the level of disclosure may vary from company to company.

Government subsidies are important financial support and economic benefits for companies, and depending on how they are recognized and processed, a company's financial statements can show significant differences. International Financial Reporting Standards (IFRS) require more principle-based and flexible accounting based on economic substance and reasonable assurance. On the other hand, the General Accounting Principles (K-GAAP) are conservative and practice-oriented, and focus on providing more consistent and stable financial information.

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