As you may know, there are two types of grants; revenue based grants (Grants relating to income) and capital grants (Grants related to assets).
In your career, you’ll need to be able to apply the provisions of relevant accounting standards in relation to accounting for government grants. IAS 20 Accounting for Government Grants and Disclosure of Government Assistance is the IFRS applicable to government grants.
Government Grants are
- Assistance by government.
- In the form of transfers of resources to an entity.
- In return for past or future compliance with certain conditions relating to the operating activities of the entity.
- They exclude those forms of government assistance which cannot reasonably have a value placed on them and which cannot be distinguished from the normal trading transactions of the entity.
- Government assistance that is provided for an entity in the form of benefits that are available in determining taxable income or are determined or limited to the basis of income tax liability.
- Government participation in the ownership of an entity.
- Government grants covered by IAS 41 – Agriculture.
Types of Grants
- Grants related to income
- Grants related to assets
Grants related to income
A grant receivable as compensation for costs:
Already incurred; or
For immediate financial support, with no future related costs.
Should be recognised as income in the period in which it is receivable.
A grant relating to income may be presented in one of two ways:
- Separately as ‘other income’; or
- Deducted from the related expense.
Grants related to assets
A grant relating to assets may be presented in one of two ways:
- As deferred income (and released to profit or loss when related expenditure impacts profit or loss), or
- By deducting the grant from the asset’s carrying amount.
Grants are recognised when there is reasonable assurance that:
- The entity will comply with the conditions attached to the grant, and
- The grant will be received.
The grant is recognised as income over the period necessary to match it with the related costs, for which it is intended to compensate on a systematic basis and should NOT be credited directly to equity.
If a grant becomes repayable, it should be treated as the revision of an accounting estimate.
- Accounting policy adopted for grants, including method of presentation in the Statement of Financial Position.
- Nature and extent of grants recognised in the financial statements.
- Unfulfilled conditions and contingencies attaching to recognised grants.
- Any government assistance whose value cannot be measured reliably (such as technical or marketing advice)
- Additional disclosure is required for profit-oriented entities.