Why does government give government grant?

What are non-monetary grants?

Depreciation method

Government grant

Assistance by government in the form of resources to an entity in return for part of future compliance
with certain conditions relating to the operating activities of the business. It can also be called as
subsidy, subvention, or premium.

- Basically, there’s a transfer of resources coming from the government going or granting an
entity
- The government have condition that we need to comply
- The compliance is related to the entity’s activity

Measurement (The principle is still ACCRUAL BASIS)

- Fair value (Including Non-monetary grant)

Classification of Government grant – Classification normally is based on the conditions

1. Gran related to asset

Condition: Purchase, Construct or otherwise acquire long-term asset

2. Grant related to income - EXPENSES

Residual Definition: Grant other than grant related to asset

Accounting for government grant

1. Grant in recognition of specific expenses shall be recognized as income over the period of the
related expenses.
- The classification of this Grant is related to income because we’re talking about expenses. Incase
we received Grant because the government want us to spend it on something – Related
expenses – example they want the entity to clean something. Therefore, the grant is recognized
as income over the period of that related expense.
The point is the moment you received the government grant – It’s assistance, right? – you will
not recognize it as income IMMEDIATELY. Why? Because there is a condition or restriction.
Therefore, in initial measurement, normally the government grant is a liability because there is a
condition. But, if you gradually fulfill or you already fulfilled the condition, the former liability
will be income. That’s why that one approach in accounting for government grant is called
Deferred income approach. Because firstly it was liability – Deferred income – but later oon it
will be reclassified to income account.
Example

The grant you received is cash

1. Receipt of Grant

Cash XXX

Deferred Grant income XXX

So, what if the government wants you to incurred certain expenses

2. Fulfillment of obligation

Expense XXX

Cash XXX

Because you partly fulfilled the condition the deferred income will be reduced. We have to amortize it

3. Amortization of grant

Deferred income XXX

Grant income XXX

Because we fulfill the condition

Now, do we recognize the 100% of the deferred income? The answer is IT DEPENDS. The question is how
many percent did you fulfill?

You need to develop fraction in relation with the expenses that you project in the period where the
government has condition to you

2. Grant related to depreciable asset shall be recognized as income over the periods and in
proportion to the depreciation of the related asset.

So, this is connected to the GRANT RELETED TO ASSET because the condition to you is asset.

Example

1. Receipt of grant

Cash XXX

Deferred Grant income XXX

2. Cost of Building

Building XXX

Cash XXX
Probably there will be an entry of

Depreciation XXX

Accumulated depreciation XXX

So the amount you paid to construct the build can be the grant you received.

C. Transfer the deferred grant income to the life of the related asset

Again, it sayas here that “It shall be recognized as income over the periods and in proportion to the
depreciation of the related asset”. Let’ say the Building have a useful life if 10 years, therefore your
recognition of Deferred grant income is also 10 YEARS because It’s in the condition.

3. Grant related to non-depreciable asset requiring fulfillment of certain conditions shall be recognized
as income over the periods which bear the cost of meeting the conditions.
- On this case, the grant that you’ll received from the government is non-depreciable asset
(Means you didn’t receive cash e.g., Land). But the credit side is still deferred grant income

So, how do we amortize this deferred income? It says here it still depends on the condition that is
imposed on you.

Example

The reason the government is giving you a land is for you to construct a building on that land (let’s say
refinery or etc…). Therefore, what’s your entry?

Refinery XXX

Cash XXX

The cash that is credited here is not from the government because you received LAND.

Now, how do we recognize the income (deferred income)?

It’s the same as the number 2 because we also have to know the useful life of the related condition; and
that is the construction of building.

It says here, income shall be recognized over the period which bear the cost of the meeting the
conditions. If the useful life is 10years

The entry is sill be

Depreciation XXX

Accumulated depreciation XXX

If the useful life is 10 years, you also amortized the deferred grant income going to income account for
10 years.

4. A government 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 further
related costs shall be recognized as income of the period in which it becomes receivable.

If you make this simple, it is different from 1, 2, and 3. Why? Because there’s no condition here. It says
that there is an immediate giving of financial support with no further related cost. What are you going
to do?

Upon receipt of the grant, you will recognize immediately the income

For example, you received cash

Cash XXX

Grant income XXX

Immediately

Do you have fulfillment of obligation? The answer is no!

Do you have amortization? It’s also NO because you immediately recognized it as Income

What is the situation where the government doesn’t give condition to the grant they giving?

For example, there’s a catastrophe and your business got hit. The government want to give you help so
that you can still continue your business. So, is there any condition? It’s NONE, therefore the immediate
treatment for that is INCOME. (SUBSIDY)

https://www.grantthornton.global/en/insights/supporting-you-to-navigate-the-impact-of-covid-19/
ifrs---government-grants/

https://www.ifrs.org/issued-standards/list-of-standards/ias-20-accounting-for-government-grants-and-
disclosure-of-government-assistance/

https://www.investopedia.com/terms/g/government-grant.asp#:~:text=A%20government%20grant
%20is%20a%20financial%20award%20given%20by%20the,some%20type%20of%20beneficial
%20project.

https://www.mca.gov.in/Ministry/notification/pdf/AS_12.pdf

https://www.pkf.com/media/8d891e805314162/ias-20-accounting-for-government-grants-and-
disclosure-of-government-assistance.pdf
https://www.icaew.com/technical/public-sector/public-sector-financial-reporting/financial-reporting-
insights-listing/ipsas-vs-ifrs-government-grants/accounting-for-grant-income-ifrs

https://www.cpdbox.com/ias-20-government-grants/

https://www.scribd.com/presentation/488076882/Government-grants

https://www.scribd.com/doc/80827913/Chapter-12-Government-Grants

https://www.studocu.com/ph/document/university-of-caloocan-city/bachelor-of-science-in-
accounting-information-system/valix-ia-1-2020-ver-government-grant/14338262

https://www.coursehero.com/file/95888302/VALIX-IA-1-2020-ver-Government-Grantdocx/

https://www.coursehero.com/file/108169987/VALIX-Intermediate-Accounting-1-2020-version-Chapter-
24xlsx/

https://www.investopedia.com/terms/t/transferpayment.asp

https://www.youtube.com/watch?v=bXU7uRcRXNA

https://www.youtube.com/watch?v=c56VoZHNoVk