FINANCIAL

REPORTING
06
Definitions

Economic benefits

Transfer of resources
 Grant to acquire or construct assets

Compensation for past expenses or immediate financial support

Compensation for future expenses

Waiver of loans or provision of loan at below market rates

Grants are often provided in business start-up phase as it

creates jobs and a larger base of tax payers
Examples: Govt. offer grant to companies for operations and
investments in the deprived areas of the country. A company
Danisco A/S (DEN) receives government grant for items like
research, development and carbon-dioxide allowances and
investment
 DIFFERENCE BETWEEN ASSISTANCE & GRANT
• Assistance can take many forms, i.e. legal, technical or product
advice or being supplier for company’s goods or services.
• Whereas in Grants, government assistance is provided through
transfer of resources. Normally, a government grant is often some
type of asset (like Cash, securities, PPE or use of facilities) provided
as a subsidy to company. A forgiven debt or provision of debt below
market rate is also treated as a grant. Assets provided can be
monetary or non-monetary i.e. license for business start-up, direct
provision of PPE etc.
CONCLUSION;
All government grants are assistances but all sort of assistances will
not be treated as grants
Govt. grants can sometimes be called by other names like subsidies,
subventions or premiums
 RECOGNITION
Government grants, including non-monetary grants at fair value,
shall NOT be recognized unless there is reasonable assurance
that;
• The entity will comply with the conditions attached to them
• The grants will be received
• Receipt of grant does not of itself provide conclusive evidence
that the conditions attaching to the grant have been or will be
fulfilled.
• The manner in which grant is receive does not affect the
accounting treatment. So, grant received in cash or as a
reduction in liability will be treated in the same manner
 ACCOUNTING TREATMENT
• When PPE are acquired through government
grants, they should be booked at Fair value
• So Asset is debited by Fair value but the
question is What to credit?
• There are two approaches to deal with this
situation
I. Capital (Equity) approach
II. Income approach
 ACCOUNTING APPROACHES
According to Capital (Equity) Approach, credit entry should go
directly to equity as no repayment of grant is expected and they
are given as incentive, not as normal business operations;
therefore, it should not offset expenses of operations in the
income statement
As per Income approach, credit should be reported as a revenue
in income statement not to equity as government is not a
shareholder. Further, most grants have conditions attached
which affect future expenses. Therefore, grant should be treated
as grant revenue /deferred grant revenue and MATCHED with
associated future expenses to be incurred due to grant
 IFRS REQUIREMENTS
• IFRS require INCOME APPROACH which can be applied
through either of the following two ways for an asset like
PPE;
• Record grant as a deferred grant revenue, which is
recognized as income on a systematic basis over the
useful life of asset (1st approach- DIRECT income
approach) preferred OR
• Deducting the grant from carrying amount of assets
received from grant, in which case the grant is
recognized in income as a reduction from depreciation
expense (2nd approach- INDIRECT income approach)
TEST YOURSELF (GRANT FOR LAB EQUIPMENT)
• AG company received $500,000 subsidy to
purchase lab equipment on Jan2, 2015
• Cost of equipment= $2,000,000 with a useful life
of 5 years and is depreciated on a straight line
basis
Requirement;
Record this grant by using income approach
 SOLUTION (1ST APPROACH)
• Credit Deferred grant revenue (liability) for the
subsidy and amortize the deferred grant revenue
over the 5 year period
• Total grant = $500,000
• Useful life = 5 years
• Grant revenue for the current year= 500,000 / 5=
$100,000
• Deferred grant revenue as a liability= 500,000-
100,000= $400,000
 SOLUTION (1ST APPROACH)
ACCOUNTING ENTRIES
Lab equipment 2,000,000
Deferred grant revenue 500,000
A/P or Cash 1,500,000

Deferred grant revenue 100,000

Grant revenue 100,000

Depreciation 400,000
Acc. Dep. 400,000
(2,000,000 / 5)
 SOLUTION (1ST APPROACH)
Statement of Financial position
Non-current Assets
Equipment 2,000,000
Less: Acc. Dep. 400,000 1,600,000
Non-current liabilities
Deferred grant revenue 300,000
Current liabilities
Deferred grant revenue 100,000
Income statement
Grant revenue for the year 100,000
Depreciation expense for the year 400,000
Net income / (expense) (300,000)
 SOLUTION (2ND APPROACH)
• The company can choose to reduce the cost of lab equipment
at (2,000,000- 500,000)= $1,500,000
• Now this cost can be depreciated over the useful life of asset
(1,500,000 / 5)= $300,000
ACCOUNTING ENTRIES
Lab equipment 1,500,000
A/P or Cash 1,500,000

Depreciation 300,000
Acc. Dep. 300,000
 SOLUTION (2ND APPROACH)
Statement of Financial position
Non-current Assets
Equipment 1,500,000
Less: Acc. Dep. 300,000 1,200,000

Income statement
Depreciation expense for the year (300,000)
 Comparison of both Methods
1st approach 2nd approach
Income statement
Net income / expense (SAME) 300,000 300,000

Balance sheet
NBV of assets 1,600,000
Liabilities 400,000

NBV of assets 1,200,000

Cash- A/P (SAME) 1,500,000 1,500,000

TEST YOURSELF (GRANT FOR PAST LOSSES)
• Flyaway Airlines has incurred substantial operating
losses during the last five years. The company is
considering bankruptcy
• The City government does not want to lose airline
service and agrees to provide cash grant of
$1000,000 for airline to pay off the creditors and
continue operations
Requirement;
How to record this grant in the books?
 SOLUTION
• In this question, grant is provided to pay off creditors for past
losses.
• If the conditions of the grant indicate that Flyaway must satisfy
some future obligations related to this grant, then it is appropriate to
credit Deferred grant revenue and amortize it over the appropriate
period in the future
• Since no conditions are attached with this grant and the company is
paying off creditors for past losses, so the entire grant will be
treated as income of the current year and the following entry will be
recorded;
Cash 1,000,000
Grant revenue 1,000,000
 TEST YOURSELF
• AG company received $500,000 subsidy to
purchase lab equipment on Jan2, 2015
• Cost of equipment= $2,000,000 with a useful life
of 5 years and is depreciated on a straight line
basis
• For some reasons grant is forfeited on Dec 31 st,
2016
Requirement;
Record this grant by using INDIRECT income
approach
 SOLUTION
2/1/2015 Equipment 1,500,000
Cash 1,500,000
Grant received and carrying amount of asset decreased

31/12/15 Depreciation 300,000

Acc. Depreciation 300,000
1500000/5
Depreciation for 2015 recorded

31/12/16 Depreciation 300,000

Acc. Depreciation 300,000

1500000/5
Depreciation for 2016 recorded
 Grant was forfeited on the same date
Balance
1) sheet presentation
Difference of Equipment
in the carrying amount of Equip. for 2 years
Recorded Actual
Cost 1,500,000 2,000,000
Y1
Acc.dep.for Y2
2 years Y3
(600,000) Y4
(800,000) Y5
Cost 1,500,000 1,500,000 1,800,000
Carrying amount 900,000 1,800,000 1,800,000
1,200,000
Increase Increase the equipment by 300,000
in value - 300,000 - - -
Cost2) 1,500,000 1,800,000
Difference in depreciation1,800,000 1,800,000
if the company 1,800,000
was not able to
Acc.dep. (300,000)
get the grant(600,000) (1,000,000) (1,400,000) (1,800,000)
Carrying Recorded Actual
amount 1,200,000 1,200,000 800,000 400,000 -
Dep. For 2 years 600,000 800,000
Increase depreciation expense by 200,000

31/12/16 Equipment 300,000

Depreciation 200,000
Cash 500,000

Note: Acc. Dep. Will not be credited here

Govt. Grants
PRACTICE QUESTIONS
Test yourself
Solution
 Test Yourself
A company receives a cash loan of $100,000 on Jan 1, 2015, 40% of
which is forgivable from the date On which certain conditions are met.
Interest is charged at the market rate of 10% and is payable annually .
The year end is Dec 31st.
B)
A) Jan 1st ,2015
a) Show
Jan 1st journal
,2015 entries assuming thatBank the condition were met on Jan1,
100,000
2015
Bank 100,000 Loan 100,000
b) Show journal entries assuming
Grant income 40,000 that the condition were met on Sep 30,
2015 Loan 60,000 Sep 30th, 2015
Loan 40,000
Dec 31st, 2015 Grant income 40,000
Interest expense 6,000
Bank 6,000 Dec 31st, 2015
Interest expense 9,000
Bank 9,000
 GENERAL DISCUSSION
• Where does “Grant income” is presented in the
Statement of comprehensive income?

• What happens if later on conditions of grant are not

fulfilled?

• What will be the accounting treatment if the grant is

given as a package? i.e. $1,000 are provided for
purchase of assets & $500 for immediate financial
expenses