What proper reporting on government grants needs

Government grants are assistance in the form of transfers of resources to an organisation in return for past or future compliance with certain conditions relating to the operating activities of that organisation. They exclude transactions with governments that are not distinct from the usual trading activities of the organisation.

Government grants are provided to an organisation to help finance a specific asset or expenditure. These grants could take various forms and are sometimes referred to by other names such as subsidies, subventions, or premiums. Receiving a government grant may be significant to an organisation for two reasons.

Firstly, when resources are made available to an organisation, it must ensure that the appropriate accounting method is applied. Secondly, stakeholders must understand the level of magnitude an organisation has benefited from such assistance.

Among other things, this enables stakeholders to make the necessary assessments when evaluating the performance of an organisation and making comparisons with the financial performance of other organisations.

Reporting standard

IAS 20, accounting for government grants and disclosure of government assistance, is the financial reporting standard on government grants.

Government grants related to income tax, agriculture, or government participation in the ownership of an entity are not in the scope of IAS 20. Government grants are recognised in the income statement on a systemic basis over the periods in which the related costs they compensate are recognised as expenses in the profit or loss. They are two types of grants from a reporting perspective.

They are government grants related to assets and government grants related to income. Sometimes, it might be appropriate to allocate part of a grant on one basis (asset-related government grant) and the other (income-related government grant).

Grants related to assets

These are government grants, whose primary condition is that an organisation qualifying for them should purchase, construct, or otherwise acquire long-term assets.

Government grants related to depreciable assets are typically recorded as income in profit or loss over the periods and in proportions in which depreciation expenses on those assets occur.

Asset grants should be presented in the balance sheet either by setting up the grants as deferred income or by deducting these grants in arriving at the asset’s carrying amount on the balance sheet.

Grants related to income

These are government grants other than those related to assets. They are usually used to finance specific expenses of an organisation and are recognised in the profit or loss in the same period as the relevant expense.

There is some flexibility in the presentation of grant income in the income statement. Grants related to income (grant income) are sometimes presented as a credit in the income statement, separately or under a general heading such as ‘other income’.

Alternatively, they are deducted first before reporting the related expense. Whichever approach an organisation selects should be applied consistently to all similar grants.

Identifying government grants

One major challenge organisations face with government grants is identifying them. As noted earlier, there are three elements every organisation should look for in these types of arrangements and transactions. The first condition is the transfer of resources to the organisation.

It could be in the form of a receipt of an asset or a reduction in liability. How the relief or incentive is received does not affect the accounting treatment. Secondly, there must be past or future compliance with certain conditions.

The more substantive the required conditions are, the more likely the relief is a government grant.

Finally, the conditions must relate to the operating activities of the organisation to receive or become eligible for government assistance.

Awodumila, Associate Director at PwC Kenya