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Week 5 Library Assignment

Library Assignment – Accounting in Government Summary

The article chosen for this assignment is named “118 Journal of Accounting and Public Policy”. In the article, it covers several points that deal with governmental issues in accounting at different levels.

The focus of the article is set on government grants and their relationship to assets. The question becomes whether the policy choice is directed towards the balance sheet, or if the corresponding number changes the amount the asset is reduced, or if it affects the balance of deferred income.

During the time when the IASC (International Accounting Standards Committee) were creating the IAS 41, it was obvious that there were issues with the grants. This raised the question of how it would be possible to measure a biological asset at fair market value and still show the current market value, less the historical grant? The resolution to the problem was to initiate another proposed treatment for unconditional grants. Quick note, during this time, they found that other countries used different methods and came up with different results, and some of those methods were illegal according to other countries GAAP standards. Further, the Chinese used a method from their GAAP that was like the IFRS version. This method had no netting option for the sample year and the deferred income practice was used (Christian Stadler, 2018).

The authors state that there is a lot of difficulty trying to navigate through the policies and standards to find a clear definition of which method to use. “For example, ‘unconditional’ refers to the absence of stipulations such as that the asset must not be sold or moved to another location within a certain period.9 The G4+1 report was unable to arrive at a definite conclusion on how to account for grants which do have conditions” (Westwood and Mackenzie, 1999, pp. 32-38).

They go on to note that during their research, they did not find any previous analysis of international differences in accounting regulations on grants. That research included IASB documents and anything that was affected by the IFRS. Through this research, they have concluded that there is not much difference in the two methods. But they continued to find that different countries had discontinued the use of the netting option.

Typically, government grants are not used in the U.S., so there are no requirements in the U.S. GAAP. However, their general practice is to use one of the two choices located in IAS 20 (Ernst & Young, 2005, p. 581). An example they provide refers to a salesman whom is paid commissions prior to doing the work for a project. This is logged in the books of the balance sheet as assets to be matched against future costs. “The issue is that it doesn’t meet the definition of asset because they are not a resource controlled by the entity” (Christian Stadler, 2018).

Conclusion

“Although the published framework, and others which derive from it such as the IASB’s), give supremacy to the definitions of asset and liability, there is a continuing tension in accounting practice between that approach and matching.

The context is that the treatment of government grants is related to major unresolved controversies, in particular: (i) the extent to which financial reporting reflects a pure asset/liability view rather than involving matching of costs with incomes, and (ii) the measurement and recognition of contingencies” (Christian Stadler, 2018).

References

Christian Stadler, C. W. (2018). Accounting for government grants: Standard-setting and Accounting Choice. Journal of Accounting and Public Policy, 113-129.

Ernst & Young, 2005. IFRS/US GAAP Comparison. Lexis Nexis, London.

Westwood, M., Mackenzie, A., 1999. Accounting by Recipients for Non-reciprocal Transfers, excluding Contributions by Owners. Financial Accounting Standards Board for G4+1, Norwalk, CT.