ACCA SBR UK Syllabus C. Reporting The Financial Performance Of A Range Of Entities - Government grants - Notes 12 / 24
Government grants
Section 24 of FRS 102 deals with government grants, and differs from IAS 20 in the following ways:
| IAS 20 | FRS 102 Section 24 |
|---|---|
| As well as the income approach, IAS 20 allows the capital approach where government grants are deducted from the carrying amount of the related asset. | FRS 102 does not permit government grants to be deducted from the carrying amount of the asset. |
| IAS 20 requires government grants to be recognised on a systematic basis matching the related expenditure (which in practice means using a capital or income approach). | Under FRS 102, government grants may be recognised using either the performance model or the accrual model. This choice is made on a class by class basis. |
| IAS 20 provides specific guidance on the treatment of a repayment of a government grant. | FRS 102 does not provide any guidance on the treatment of a repayment of a government grant. |
| If an intangible asset is acquired by way of a grant, IAS 38 states that there is a choice of recognition at fair value or at the nominal value of the grant. | FRS 102 states that the cost of that intangible asset is its fair value at the date the grant becomes receivable. |
Performance model
Under the performance model grants are recognised as follows.
A grant that does not impose specified future performance-related conditions on the recipient is recognised in income when the grant proceeds are received or receivable.
A grant that imposes specified future performance-related conditions on the recipient is recognised in income only when the performance-related conditions are met.
Grants received before the revenue recognition criteria are satisfied are recognised as a liability.
Accrual model
Under the accrual model grants are classified as either a grant relating to revenue or a grant relating to assets.
Grants relating to revenue are recognised in income on a systematic basis over the periods in which the entity recognises the related costs for which the grant is intended to compensate.
A grant that becomes receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the entity with no future related costs is recognised in income in the period in which it becomes receivable.
Grants relating to assets are recognised in income on a systematic basis over the expected useful life of the asset.
Where part of a grant relating to an asset is deferred it is recognised as deferred income and not deducted from the carrying amount of the asset
Illustration: Government grant – performance model
On 1 September 20X4 a Govan Ltd received a government grant of $40,000 on the condition that it hired six new apprentices from a government retraining scheme.
A grant such as this is accounted for under the performance model. By 31 December 20X4 the company had hired three new apprentices.
Required:
How should the grant be accounted for under FRS 102 in the financial statements at 31 December 20X4?
Solution
The $40,000 grant should be shown under liabilities as deferred income. It cannot be recognised as income as the conditions attaching to the grant have not yet been met.
If the expectation is that the conditions will be met within the next 12 months, the deferred income amount should be classified as a current liability.
Activity: Government grant – accrual model
Grantham Ltd purchased an item of machinery for $500,000 on 1 April 20X5 at which time it received a government grant of 20% of the cost of the machinery.
The machinery is being depreciated at 25% pa on the reducing balance basis. Grants are accounted for under the accrual model.
Required:
Show how the machinery and the grant should be presented in the financial statements for the year ended 31 March 20X7 using the accrual model.