In this article, we will take a look at government grants and how they are a critical aspect of property-related financial reporting. We will also discuss the definition of a government grant as well as when government grants are recognised in a financial statement. Government grants are beneficial to companies in a number of ways, but it is so important to ensure that they are disclosed and accounted for correctly.
What is a Government Grant?
It is assistance by the government in the form of the transfer of resources in return for compliance, past or future with certain conditions in relation to the activity of the company.
When is the Government Grant Recognised in the Financial Statements?
Government grants, including non-monetary grants, shall not be recognised until there is reasonable assurance that;
(a) the entity will comply with the conditions attaching to them; and ie; the conditions of the grant.
(b) the grants will be received.
Where in the Financial Statements should the Government Grant be recognised, if it is a monetary Grant?
This depends on whether the entity is using the performance model or the accrual model.
So what is the Performance model and what does it mean?
It means that, if an entity is applying the performance model, there are 3 options to consider and we have to look at the grant itself and the relevant conditions, if any.
(a) A grant that does not impose specified future performance-related conditions on the recipient is recognised in incomewhen the grant proceeds are received or receivable.
(b) A grant that imposes specified future performance-related conditions on the recipient is recognised in income only when the performance-related conditions are met.
(c) Grants received before the revenue recognition criteria are satisfied, are recognised as a liability.
So, the performance model is all about performance-related conditions.
What is the Accrual model and what does it mean?
It means that, if an entity is applying the accrual model it shall classify grants either as a grant relating to revenue or a grant relating to assets.
Grants relating to revenue shall be 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.
Grants relating to assets shall be 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 shall be recognised as deferred income and not deducted from the carrying amount of the asset
So, the accrual model is all about the matching concept, the grant recognised relates to the costs or depreciation recognised by the company in that accounting period.
What do we do next?
We are happy that the grant should be recognised, and we are happy that we have recognised it in the correct part of the financial statements. Now we want to ensure that our Financial Statements give a true and fair view, so we consider what disclosures we need to include about that Grant.
What disclosures should we include?
An entity shall disclose the following:
(a) the accounting policy adopted for the grant, so, for example, disclose that you have applied the performance model or the accruals model.
(b) the nature and amounts of grants recognised in the financial statements;
So, for example, disclose;
- Who awarded the Grant
- Whether the Grant relates to Revenue or Assets
- Whether the Grant is a monetary or non-monetary Grant
- The amount of the Grant awarded
- The amount of the Grant recognised in the Financial Statements
(c) unfulfilled conditions and other contingencies attaching to grants that have been recognised in income; and
This is important. You need to fully understand the conditions of the Grant so that you can clearly outline any unfulfilled conditions and other contingencies.
When the person reads these conditions or contingencies, they will look back to the accounting policy and check that you have applied the accounting policy correctly.
(d) an indication of other forms of government assistance from which the entity has directly benefited
Key Point – Make sure you understand the conditions of the Grant
The performance model is all about performance-related conditions.
The accrual model is all about the matching concept, the grant recognised relates to the actual costs or depreciation recognised by the company in that accounting period
Final Key Point - Where a Grant becomes repayable it shall be recognised as a liability when the repayment meets the definition of a liability.
If you require assistance or advice in relation to any of the above matters, please contact our team on 053 91 000 00 or email [email protected].
Please note this information is accurate as of the time of publication.