How to account for grants under FRS102
Steve Collings has examples about how to account for government grants under the current standard
Government grants are dealt with in FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland in Section 24 Government Grants. Section 24 of FRS 102 deals with the accounting requirements for all government grants. The term ‘government grants’ is defined in the Glossary to FRS 102 as: “Assistance by government in the form of a transfer of resources to an entity in return for past or future compliance with specified conditions relating to the operating activities of the entity. Government refers to government, government agencies and similar bodies whether local, national or international.”
Recognition and measurement
A reporting entity cannot recognise a government grant until the recognition criteria has been met. In order to meet the recognition criteria there must be reasonable assurance that:
- the entity will comply with the conditions attaching to the grant; and
- the grants will be received.
Accrual and performance models
An entity receiving (or expecting to receive) a government grant that meets the recognition criteria laid down in paragraph 24.3A of FRS 102 is required to recognise the grant based on the accrual model or the performance model. This is an accounting policy choice and must be applied on a class-by-class basis. Note – micro-entities reporting under FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime can only account for grants using the accrual model.
The accrual model of grant recognition will be the most familiar to accountants. This model requires the grant to be classified as either a revenue-based grant or a capital-based grant.
Grants which relate to revenue shall be recognised in income on a systematic basis over the periods in which the entity recognises the related costs for which the grant is intended to compensate.
Example: Capital-based grant
Autumn Ltd (Autumn) has purchased a new item of machinery for £100,000 outright in cash, which has an estimated residual value of £nil at the end of its useful economic life. The machine is being depreciated in accordance with the company’s accounting policy for such equipment, being ten years’ on a straight-line basis with a full year’s depreciation charge in the year of acquisition, but none in the year of disposal.
Summer applied for a government grant towards the cost of this asset and the government have confirmed that they will meet 20% of the cost of the equipment in the form of a grant (i.e. a grant of £20,000). This has been received by the company two weeks’ after the purchase of the machine.
The entries in the books of the company in respect of the new machine and the grant are as follows:
Purchase of the machine
Dr Property, plant and equipment additions £100,000
Cr Cash at bank £100,000
Being purchase of new machine
Dr Depreciation expense (profit and loss) £10,000
Cr Accumulated depreciation (balance sheet) £10,000
Being depreciation of new machine in year 1
Dr Cash at bank £20,000
Cr Deferred income £20,000
Being initial receipt of the government grant
Dr Deferred income £2,000
Cr Profit and loss account (other income) £2,000
Being 1/10th of the grant released to profit or loss
It should be noted that paragraph 24.5G of FRS 102 specifically prohibits the value of the capital-based grant from being deducted from the cost of the asset (i.e. Dr Bank, Cr PPE additions) and hence recognising the grant in profit and loss by way of reduced depreciation charges.
This is because such an accounting treatment is incompatible with company law as the statutory definitions of ‘purchase price’ and ‘production cost’ make no provisions for deductions from such amounts.
The performance model works by allowing a company to recognise a grant immediately in profit or loss; however, there are certain criteria that have to be considered as follows:
- A grant which does not impose specified future performance-related conditions on the recipient can be recognised in income when the grant proceeds are received or receivable.
- A grant which imposes specified future performance-related conditions on the recipient is recognised in income only when the performance-related conditions are met.
- Grants which are received before the revenue recognition criteria are satisfied are recognised as a liability.
Example – Performance-related conditions met
Winter Ltd has set up a new branch in a deprived area of the country and has an accounting reference date of 31 March each year and chooses to apply the performance model of grant recognition. In order to entice businesses to set up operations, the government have introduced a scheme whereby they will provide a grant to the company once certain conditions have been met. The conditions are as follows:
- The company must be trading to full capacity by 31 December 2018.
- The company must have successfully employed at least 150 people on a full-time basis by 31 January 2018.
- The company must take on at least 25 people under the age of 25 on an apprenticeship scheme.
The company successfully achieved all the conditions imposed on them by the government and the grant was duly received on 26 March 2018.
The financial controller is unsure whether to recognise the whole grant in profit or loss or defer it in the balance sheet.
The company has complied with all its performance-related conditions imposed on it by the government where the grant is concerned. Provided none of the grant is, or may become, repayable in the future, the entire grant can be recognised in income for the year-ended 31 March 2018.
- Steve Collings is a Partner at LWA Chartered Certified Accountants and Statutory Auditors
This blog is taken from the ICPA website. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at www.icpa.org.uk or email [email protected] or by phone on 0800-074-2896.