Loan at less than market rates of interest
The local government of an underdeveloped region is trying to stimulate investment by allowing local companies to retain the value added tax (VAT) on their sales. An entity participating in this scheme is entitled to retain an amount up to 40% of its investment in fixed assets. The retained VAT must be paid to the local government after 5 years. The deferred VAT liability is comparable in nature to an interest free loan. The entity can reasonably place a value on the government assistance using the principles in IAS 39 and the benefit will be accounted for as government grants.