Most governments provide grants or other assistance to support certain businesses and companies. There is an obvious benefit to this assistance compared to other Dubai, UAE companies. Audit firms in Dubai working for entities or company audit professionals should properly report it in financial statements.
How you may ask? Let’s go over the rules first to understand this concept well.
Does IAS 20 require audit firms in Dubai, UAE, and other auditing specialists?
IAS 20 Accounting and disclosure of government assistance is the most crucial standard for government grants.
It’s an old standard. It was first issued in 1983, with an effective January 1984. There have been no significant changes since then. IAS 20 aims to establish the accounting for and disclosure of IAS 20.
These are the essential resources that a government transfers to an entity. Most often, they do so after satisfying certain conditions. Government assistance is another government action that provides economic benefits to an organization, such as free marketing or business advice.
IAS 20 offers almost all types of government grants with the following exceptions:
The government assists with tax reliefs such as tax breaks and tax holidays.
IAS 41 Grants for Agriculture
In the financial statements, grants reflect the impact of changing prices. Government acts as a partial owner of the entity.
Read also: The Updated Audit Procedures Under ASC 842 in UAE
The Objective of IAS 20
This Standard aims to describe the accounting treatment for grants from the government and other sources.
Forms Of Government Assistance
There are many types of government assistance, each with its characteristics and conditions. They are often attached to it. It may be used to encourage a Dubai UAE entity’s decision to take a course. It will take action that it wouldn’t normally do if the assistance was not provided. It may be essential to receive government assistance from an entity to prepare financial statements.
There are two reasons:
- If resources have been transferred, Dubai, UAE financial audit specialists should use an accounting method that reflects the transfer of those resources.
- Company audit teams must indicate the extent to which an entity has benefited from such assistance during the reporting period.
This allows company auditing services to compare the entity’s financial statements with those from other periods or prior periods.
This standard shall apply to accounting for government grants and the disclosure thereof other forms of government aid
This standard doesn’t involve the following:
Accounting for government grants in a financial statement reflects the effects of changes in prices or additional information of a similar nature.
Government assistance is provided for an entity through benefits in calculating taxable profit and tax loss. Or they are determined on the basic income tax liability. There are many benefits, including income tax holidays and investment tax credits, and incentivized income tax rates
Participation of the government in a Dubai, UAE company ownership
Grants from the government that IAS41 Agriculture covers
How to Account for Government Grants
Before we jump into the details, Farahat & Co would like to stress that audit services should never credit any grant in equity.
IFRS does not allow capital approaches. Instead, it recommends the “income approach,” which recognizes grants as income over the relevant period to match them with related expenditures or costs. The purpose of the grant will determine the accounting treatment. A Dubai, UAE entity can receive a grant for either:
- Acquisition of an asset
- Grants related to assets
There are two options for presenting a grant to an entity in Dubai, UAE, to acquire assets.
- It can be presented as deferred income.
- To subtract the grant from an asset’s carrying value.
Internal auditors for Dubai entities will need to distinguish between grants for one-time costs (already incurred) and grants for future or current costs. If the grant is given to pay past expenses, it will be immediately recognized as profit or loss.
Suppose the grant is to reimburse costs incurred or expected to be incurred in the future or at present. In that case, the grant will be recognized as profit or loss for the period in which the costs were incurred.
There are two options from the point of presentation:
- You can present grant income separately as “other income.”
- To subtract the grant income from the associated expense.
Grants that are Associated With Income
Auditors will need to distinguish between grants for past costs (already incurred) and grants for future or current costs. If the grant is given to pay past expenses, it will be immediately recognized as profit or loss. Suppose the grant is to reimburse costs incurred or expected to be incurred in the future or at present. In that case, the grant will be recognized as profit or loss for the period in which the costs were incurred.
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