Government Grants - audit

NotesPaper exam

There re 2 types - Revenue and Capital

The debit is always cash so we only have to know where we put the credit..

Revenue Grant
Cr I/S (other income or reduce expense)

Capital Grant
Cr Cost of asset

or

Cr Deferred Income

Revenue Grant

For I/S items such as wages etc

  • Dr Cash Cr Other income (or expense)

Capital Grant

For NCA such as machines and buildings

  1. Option 1

    Dr Cash Cr Cost of  asset

    This will have the effect of reducing depreciation on the income statement and the asset on the SFP

  2. Option 2

    Dr Cash Cr Deferred Income

    This will have the effect of keeping full depreciation on the income statement and the full asset and liability on the SFP

    Then...

    Dr Deferred Income Cr Income statement (over life of asset)

    This will have the effect of reducing the liability and the expense on the income statement

An Example

  • Option 1

    Asset $100 with 10yrs estimated useful life
    Received grant of $50

    Accounting for a grant received:
    DR Cash $50
    CR Asset $50 

    At the Y/E
    Depreciation charge:
    DR Depreciation expense (I/S) (100-50)/10yrs = $5
    CR Accumulate depreciation $5

  • Option 2

    Asset $100 with 10yrs estimated useful life
    Received grant of $50

    Accounting for a grant received:
    DR Cash $50
    CR Deferred income $50 

    At the Y/E
    Depreciation charge:
    DR Depreciation expense (I/S) 100/10yrs = $10
    CR Accumulate depreciation $10

    Release of deferred income:
    DR Deferred income 50/10yrs =$5
    CR I/S $5

Government grants can only be recognised when it is probable that all terms will be reached

What isn't a government grant?

  1. Government advice

  2. Preferred government supplier

  3. Tax breaks from the government

NotesPaper exam