FAR - Chapter 8 - Government grants

What is a capital grant?

‘government grants whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire long-term assets’

e.g. money towards a machine.

Relates to assets

What is a revenue grant?

‘government grants other than those related to assets’ e.g. money towards wages

Related to income

When is the only time that government grants should be recognised, according to IAS 20?

when there is reasonable assurance that:

• the entity will comply with the conditions of the grant

• the entity will receive the grant.

How should grant income be recognised?

as income over the periods in which the related costs are incurred (usually straight-line basis)

Which 2 ways does IAS 20 allow revenue grants to be treated?

1. Presented as a credit in the statement of profit or loss (SPL)

DR Deferred Income X

CR Income X

2. Deducted from the related expense

DR Deferred Income X

DR Wages expense X

CR Cash X

What is the netting off method? Which type of grant is it used for?

Write off the grant against the cost of the non­current asset and depreciate the reduced cost.

Capital

What is the deferred income method? Which type of grant is it used for?

Treat the grant as deferred income and transfer a portion to the SPL each year over the asset's useful life, offsetting the higher depreciation charge against the original cost

Capital

What are the 2 main disadvantages of the netting-off method?

1. It may reduce the amount of expense category for the year and make it appear excessively low compared to others

2. May reduce comparability with similar entities that haven’t received grants

What are the debits and credits for the netting off method?

1. Account for initial cost of asset

DR NCA X
CR Cash X

2. Adjust asset cost by grant

DR Cash X

CR NCA X

3. Calculate reduced cost and charge depreciation

DR Depreciation expense X

CR Accumulated Depreciation X

What are the debits and credits for the deferred income method?

1. Account for full asset cost

DR NCA X

CR Cash X

2. Account for full grant

DR Cash X

CR Deferred Income X

3. Release some of the deferred income (each year)

DR Deferred Income X

CR Other Income X

! Remember that the SFP should show remaining deferred income in sections: non-current liabs and current liabs

When may a grant need to be repaid?

If the conditions of a grant are breached

How do you repay a revenue grant?

Reduce deferred income, if any, and recognise the balance of the repayment immediately as an expense.

How do you repay capital grants using the netting off method?

Increase the carrying amount of the asset by the amount of the repayment and recognise any cumulative depreciation that should have been charged to the SPL.

How do you repay capital grants using the deferred income method?

Reduce deferred income by the amount of the repayment and recognise the balance of the repayment immediately as an expense

Is government assistance to be quantified and recognised? Give examples

NO. Government assistance is not to be quantified and recognised in the financial statements if there is no practical way to place a reasonable value on it

e.g. free technical/marketing advice, preferred supplier status & provision of guarantees.

An indication of any forms of government assistance from which the entity has directly benefited should be disclosed.

What 2 models are grants recognised under UK GAAP?

1. Performance model

2. Accruals model

Is the netting off method allowed under UK GAAP?

NO

When are grants recognised under the performance model?

UK GAAP

Recognition depends on whether future performance­-related conditions apply:

• no conditions – recognised when grant proceeds are received or receivable

• conditions – only recognised as income when conditions are met.

What will any grants received before income can be recognised, be recognised as?

A liability

What are grants classified as under the accruals model?

as relating to revenue or assets.

How should grant relating to revenue be recognised under UK GAAP?

as income over the periods in which the related costs are incurred

If there are no future related costs, it should be recognised as income in the period it becomes receivable

How should grant relating to assets be recognised under UK GAAP?

The grant income shall be recognised as income over the expected useful life of the asset.

Any part of the grant not recognised as income should be recognised as deferred income and not offset against the carrying amount of the asset.