Chapter 10 Government grants

Question 1

1.1 IAS 20 Accounting for government grants and disclosure of government assistance

Answer 1

IAS 20 says government grants can be either related to assets (capital grants) or income (revenue grants). Capital grants primary condition is that an entity should purchase, construct or otherwise acquire long-term assets. Income grants are other grants not related to assets.

Question 2

1.2 Accounting for revenue grants

Answer 2

IAS 20 states government grants should only be recognised when there is reasonable assurance the entity will comply with the conditions of the grant and that the entity will receive the grant. The income is recognised over the periods in which the related costs are incurred. Revenue grants are either presented as a credit in the P+L or deducted from the related expense.

Question 3

1.3 Accounting for capital grants

Answer 3

IAS 20 permits two treatment the netting off method where you write off the grant against the cost of the non-current asset and depreciate the reduced cost or the deferred income method where you treat the grant as deferred income and transfer a proportion to the P+L each year over the assets useful life, so offsetting the higher depreciation charge on the original cost.

Question 4

1.4 Other issues

Answer 4

If the conditions of a grant are breached it may need to be repaid. For revenue grants reduce deferred income, if any, and recognise the balance of the repayment immediately as an expense. For capital grants under the netting off method increase the carrying amount of the asset by the amount of the repayment and recognise any cumulative depreciation that should have been charged to the P+L. for the deferred income method reduce the deferred income by the amount of the repayment and recognise the balance of the repayment immediately as an expense.

Question 5

1.5 Government assistance

Answer 5

Government assistance is not quantified and recognised in the accounts if there is no practical way to place a reasonable value on it. Examples are free technical/marketing advice and provision of guarantees. An indication of any forms of government assistance from which the entity has directly benefited should be disclosed.

Question 6

2.1 UK GAAP differences

Answer 6

Under FRS 102 section 24 grants should be recognised based on either the performance model or the accruals model. The choice is applied on a class-by-class basis.

Question 7

2.2 Performance model

Answer 7

Recognition depends on whether future performance related conditions apply. If no conditions, it is recognised when grant proceeds are received or receivable. If it has conditions only recognised as income when conditions are met. Any grants received before income can be recognised as a liability.

Question 8

2.3 Accrual model

Answer 8

Under the model, grants are classified as relating to revenue or assets. If the grant is related to income, the income is recognised as income over periods in which the related costs are incurred. If there are no future related costs, it is recognised as income in the period it becomes receivable.
If it is related to asset, the grant income is recognised as income over the expected useful life of the asset. Any part of the grant not recognised as income is recognised as deferred income and not offset against the carrying amount of the asset.