Accounting for Government Grants Under IFRS and GAAP

A government grant is financial assistance from a government body to an organization, given in exchange for past or future compliance with specific conditions. The purpose is often to encourage economic activity or support certain industries. This assistance can be cash, assets like land, or the forgiveness of a loan.

Specific accounting rules govern when and how this assistance is reflected in financial statements. These rules ensure the grant is recognized systematically, matching the economic reality of the transaction and the obligations attached to it.

Grant Classification and Recognition Criteria

Government grants are broadly categorized into two main types. Grants related to assets are those where the main condition is that the receiving entity must purchase, build, or otherwise obtain long-term assets. For example, a company might receive funds specifically to construct a new manufacturing facility in a designated economic zone.

The second category is grants related to income, which encompasses all grants that are not for assets. These are intended to subsidize certain expenses or support the general operations of an entity over a period. A common example is a grant to cover a portion of a company’s research and development costs or to offset payroll expenses.

A grant cannot be recorded in the financial statements upon receipt of cash. Recognition is only appropriate when there is “reasonable assurance” that two criteria are met, which prevents the premature recognition of income.

First, the entity must be reasonably assured that it will comply with all the conditions attached to the grant. Second, there must be reasonable assurance that the grant will be received, meaning the funding is probable and not subject to significant uncertainty.

Accounting Models under IFRS

International Financial Reporting Standards (IFRS), specifically IAS 20, provide a framework for accounting for government grants centered on an income approach. This approach requires that grants be recognized in profit or loss over the periods necessary to match them with the related costs they are intended to compensate.

For grants related to income, an entity has a choice of presentation in the income statement. The first option is to present the grant amount as “other income,” a separate line item distinct from revenue. Alternatively, the entity can choose to deduct the grant directly from the related expense.

When a grant is related to the purchase of an asset, IAS 20 also permits two methods. The first option is to record the grant as deferred income on the balance sheet, which is a liability. This deferred income is then gradually recognized in the income statement over the useful life of the asset, matching the grant income with the asset’s depreciation expense.

The second method for asset-related grants involves deducting the grant from the asset’s carrying amount. This results in a lower recorded cost for the asset on the balance sheet. Consequently, the annual depreciation charge for that asset will be lower over its useful life, which indirectly impacts the income statement.

Accounting Models under US GAAP

Grant accounting under U.S. Generally Accepted Accounting Principles (US GAAP) is more fragmented than under IFRS for for-profit entities. Because US GAAP lacks a single, comprehensive standard for these grants, companies must apply other guidance by analogy.

For-profit entities often analogize to IAS 20, the international standard. Other approaches include looking to guidance for not-for-profit entities under ASC 958-605, or accounting for the grant based on its substance, such as treating it as revenue under ASC 606 if it is a payment for goods or services.

For not-for-profit entities, US GAAP provides guidance in ASC 958-605, which distinguishes between conditional and unconditional contributions. A grant is conditional if it has both a barrier to overcome and a right of return if the barrier is not met. Revenue from a conditional grant is recognized only once the conditions have been substantially met.

Once a not-for-profit determines a grant can be recognized, it must classify the net assets as either with donor restrictions or without donor restrictions. If the grant is for a specific purpose, it is classified as with donor restrictions. These restrictions are released as the related expenses are incurred or the asset is placed in service.

Financial Statement Presentation and Disclosure

The presentation of grants on the financial statements reflects the accounting model chosen. For example, a grant treated as deferred income appears as a liability, often split between current and non-current portions. A grant deducted from an asset’s cost results in a lower reported value for Property, Plant, and Equipment.

Both IFRS and US GAAP require detailed disclosures in the notes to the financial statements. Companies must disclose their accounting policy for government grants, including the presentation method used.

Disclosures must also cover the nature and extent of recognized grants and their financial impact. An entity must also disclose any unfulfilled conditions or contingencies attached to recognized grants, as these could lead to future repayments.

Handling Grant Repayment

Occasionally, a government grant may become repayable, most often because the entity has failed to comply with the specified conditions. When this occurs, the accounting treatment is handled as a change in an accounting estimate. The effect of the repayment is accounted for in the current and future periods, rather than by restating prior period financial statements.

The accounting for the repayment depends on the grant’s original treatment. If the grant was recorded as deferred income, the repayment is first applied against any remaining unamortized balance of that deferred income.

If the repayment amount exceeds the remaining deferred income balance, the excess is recognized immediately as an expense. Similarly, if the grant was originally deducted from the cost of an asset, the repayment is treated as an increase in the asset’s carrying amount. If the grant was recognized in income immediately upon receipt, the full repayment is recorded as an expense.