Accounting for Government Grants

Government grants are financial aid extended by government or similar bodies (such as the EU) and are typically in the form of cash or assets. The grants are given to entities that meet certain conditions related to their past or future operations.  

 IAS 20 provides guidance on accounting for government grants and other forms of assistance.  

Recognition 

Government grants are recognised once there is reasonable assurance that: 

(a) the entity will comply with the conditions attached to the grant; and 

(b) the grant will be received. 

How are grants recognised? 

IAS 20 stipulates that government grants should be recognised as income systematically over the periods that correspond to the expenses they are intended to compensate.  

A grant received as compensation for expenses already incurred, or for which there are no future related costs, should be recognised as income in the period in which it becomes receivable. 

Grants related to assets (non-monetary), can either be recorded as, 

1. Deferred income (recognising income over the useful life of the asset), or  
2. Deducted from the asset’s carrying amount. 

 If the fulfilment of conditions for a grant does not remain reasonably certain, then the repayment is treated as a change in estimate.  This means that,  

• In the case of grants related to income, the repayment is deducted from any remaining deferred income, with any excess amounts charged to the income statement as an expense; 
• With respect to grants related to assets, the repayment is treated as an increase to the asset’s carrying amount, with previously unrecognised depreciation being expensed immediately.   

Disclosures 

Entities must disclose: 

• Accounting policies adopted, including method of presentation in the balance sheet; 
• The nature and amounts of recognised grants;  
• Unfulfilled conditions and contingencies attaching to recognised grants. 

IFRS Vs GAPSME 

The key difference between GAPSME and IFRS relates to government loans at below-market interest rates.  

Under IFRS, the benefit is accounted for separately if the loan meets the definition of a government grant. The loan is recognised and measured in accordance with IFRS 9, while the grant is measured as the difference between the amount received and the loan’s fair value.  

In contrast, GAPSME classifies this as government assistance rather than a government grant, meaning that it does not require the same fair value adjustments.  

The new EU-funded grant schemes have been launched recently. Read our article on this here.