Government grants: formula sheet

Key formulas

Government grant (definition)

Transfer of resources to an entity in return for past or future compliance with conditions relating to its operating activities

Excludes assistance that cannot reasonably have a value placed on it (such as free advice) and normal trading transactions with government. A guarantee is also not a grant, but for a different reason: it is not a transfer of resources.

Government assistance (definition)

Action by government to give an economic benefit to specific entities that meet certain criteria

Wider than grants. Includes forms not recognised in the financial statements, so disclosure is needed.

Recognition criteria

Recognise a grant only if: (1) reasonable assurance the entity will comply with the conditions AND (2) reasonable assurance the grant will be received

Both tests must be met. Receipt of cash alone does not prove the conditions will be met.

Grants related to assets

Primary condition = entity must purchase, construct or otherwise acquire long-term assets

Other conditions may be added, such as asset type, location or holding period.

Grants related to income

Grants related to income = all grants that are not grants related to assets

Presented as other income or deducted from the related expense.

Recognition principle

Recognise in profit or loss on a systematic basis over the periods in which the related costs are expensed

This is the income approach. IAS 20 does not allow grants to be credited directly to shareholders' interests.

Recognition condition

Recognise grant only if reasonable assurance of (1) compliance with conditions AND (2) receipt

Both conditions must be met. Cash receipt alone is not enough.

Matching rule

Grant income in the period = grant × (related cost expensed in the period ÷ total related costs)

Use this when costs are spread unevenly. If costs are even, spread the grant evenly over the period.

Deferred income at the year end

Deferred income = grant received (or receivable) − grant recognised in profit or loss to date

Split between current and non-current liabilities where the amounts are material.

Presentation options

Dr Cash/Receivable Cr Other income OR Cr Related expense

Choose one policy and apply it consistently. Profit is the same either way.

Grant for costs already incurred or immediate support

Recognise in profit or loss in the period it becomes receivable

No future costs to match, so there is no deferral.

Deferred income method: annual depreciation

(Cost of asset − Residual value) ÷ Useful life

Depreciate on the full cost. Ignore the grant in this calculation.

Deferred income method: annual grant release

Grant ÷ Useful life (straight-line)

Release over the same period and pattern as the depreciation. Credit profit or loss (as other income or against depreciation).

Deferred income at year end

Grant − Cumulative amount released

Split into current liability (next year's release) and non-current liability (the rest).

Deduction method: carrying amount

Cost − Grant − Accumulated depreciation on the reduced cost

Depreciation = (Cost − Grant − Residual value) ÷ Useful life.

Net profit effect per year

Depreciation − Grant release = depreciation on (Cost − Grant)

With a nil residual value and straight-line pattern, both methods give this same net charge.

Journals on receipt and purchase (deferred income)

Dr Asset (cost); Cr Cash. Dr Cash; Cr Deferred income (grant)

Each year: Dr Depreciation expense; Cr Accumulated depreciation. Dr Deferred income; Cr Profit or loss.

Repayment of an income grant

Repayment = reduction of deferred income (up to the unamortised balance) + excess to profit or loss immediately

Treated as a change in estimate, so no prior-period restatement.

Repayment of an asset grant

Extra cumulative depreciation caused by the repayment = expense immediately

The repayment increases the asset's carrying amount (or reduces deferred income). Depreciation that would have been charged to date is recognised at once.

Non-monetary grant

Asset and grant at fair value, or at a nominal amount

Choose one policy and apply it consistently.

Below-market government loan benefit

Benefit = proceeds received − fair value of loan (PV of payments at market rate)

Account for the benefit under IAS 20. Unwind the loan at the market rate.

Loan finance cost

Finance cost = opening carrying amount × market rate

Add the finance cost to the loan, and deduct any cash interest paid.

Quick revision

• Recognise a grant only when there is reasonable assurance of compliance with conditions and of receipt.
• Receiving cash does not by itself prove the grant is earned.
• Grants are recognised in profit or loss on a systematic basis over the periods the related costs are expensed.
• Grants related to assets have a main condition to buy, build or acquire non-current assets.
• Asset grant method one: deferred income, released to profit or loss over the asset's useful life.
• Asset grant method two: deduct the grant from the asset's carrying amount, giving a lower depreciation charge.
• Both methods give the same profit and net assets; only the presentation differs.
• Income grants may be shown as other income or deducted from the related expense.
• A grant for costs already incurred, with no future costs, is recognised as income in the period it becomes receivable.
• Repayment of a grant is a change in accounting estimate, not a prior period error.
• A non-monetary grant may be recorded at fair value or at a nominal amount.
• Disclose the accounting policy, the nature and extent of grants, and any unfulfilled conditions or contingencies.

Common mistakes

• Treating all government assistance as a government grant. Fix: Remember grants are a subset. Free advice and guarantees are assistance, disclosed but not recognised as grants. Tax-only benefits are outside IAS 20 altogether.
• Recognising a grant as income as soon as cash is received. Fix: Apply both tests first: reasonable assurance of compliance and of receipt. Cash with unmet conditions that may be repaid is not income yet.
• Crediting the whole grant to profit or loss when the cash is received. Fix: Recognise income only as the related costs are expensed. Hold the rest as deferred income.
• Recognising a grant when there is no reasonable assurance that conditions will be met. Fix: Always check both parts of reasonable assurance first. Read the question for any condition at risk.
• Crediting the whole grant to profit or loss in the year received Fix: A grant for an asset is matched to depreciation. Credit deferred income or reduce the asset, then release over the useful life.
• Depreciating the full cost under the deduction method Fix: Under deduction, depreciation base is cost less grant. Under deferred income, base is full cost.
• Restating prior years when a grant is repaid. Fix: Remember IAS 20 treats repayment as a change in estimate. Apply it in the current period only.
• Expensing the whole repayment immediately even when deferred income remains. Fix: Debit the unamortised deferred income first. Only the excess goes to profit or loss.

Exam tips

• Learn the definitions almost word for word. Objective test options often swap a single phrase, such as 'past or future compliance'.
• Always check for the two-part reasonable assurance test. A scenario that gives only receipt or only compliance is usually setting a trap.
• Look for the primary condition in the scenario to classify a grant as asset or income related. Do not be led by how the cash is spent.
• In Section C, name the standard and the criterion before calculating. A clear sentence on reasonable assurance earns easy marks.
• Spot exclusions quickly. Tax benefits and grants within IAS 41 scope are outside IAS 20.
• Read what the grant is for. Compensation for running costs means the income approach with matching. Purchase of an asset means a different method.
• In OT cases, check whether the question says other income or deduction from expense. The answer to a profit question is the same, but a line-item question is not.
• Look for conditions in the scenario. A grant at risk of being repaid or not earned may fail the reasonable assurance test.