Government Grants Part 1

NotesVideoQuiz

Government grants are a form of government assistance.

When can you recognise a government grant?

When there is reasonable assurance that:

  • The entity will comply with any conditions attached to the grant and

  • the grant will be received

However, IAS 20 does not apply to the following situations:

  1. Tax breaks from the government

  2. Government acting as part-owner
     of the entity

  3. Free technical or marketing advice

Accounting treatment of government grants

Dr Cash

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

There are 2 approaches - depending on what the grant is given for:

  • Capital Grant approach:
     
    (Given for Assets - For NCA such as machines and buildings)

    Recognise the grant outside profit or loss initially:

    Dr Cash

    Cr Cost of asset
    or
    Cr Deferred Income

  • Income Grant approach:

    (Given for expenses - For I/S items such as wages etc)

    Recognise the grant in profit or loss

    Dr Cash 
    Cr Other income (or expense)

Capital Grant approach - accounting for as "Cr Cost of asset"

  • Dr Cash Cr Cost of  asset

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

  • An Example

    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

Capital Grant approach - accounting for as "Cr Deferred Income"

  • 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

    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

That's all I'll say here as it is best seen visually and practically in the video :)

NotesVideoQuiz