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1.6 Government and non-customer incentives (capital projects)
Publication date: 22 Feb 2024
us PP&E and other assets guide
Many government agencies have established programs that encourage capital investment through financial assistance programs, and these incentives can take a variety of forms. For example, a local government may offer cash grants as an incentive for a company to build a new manufacturing facility within its municipality. Alternatively, tax incentives may be provided by the municipality to achieve the same goal.
Navigating the proper accounting treatment for government incentives can be challenging. For example, tax credits and other program incentives, including grants in lieu of tax credits, may have unique accounting issues. Reporting entities should understand the nature and conditions attached to program benefits to ensure appropriate accounting and compliance.
While government incentives can exist in many different forms and incentivize various activities, this section only discusses grants associated with projects when costs are incurred for the construction of long-lived assets that are not accounted for as income tax credits. Refer to TX 1.2.4 for tax considerations regarding government and non-customer incentives. Additionally, refer to FSP 3.10 for presentation and disclosure requirements relating to government assistance.
1.6.1 Accounting for government incentives (capital projects)
A number of foreign and domestic governmental agencies provide investment grants based on certain types of capital expenditures. Realization of these types of grants is not usually dependent on taxable income, but the grants may contain provisions requiring the fulfillment of certain operating requirements over a specified period. For example, the government may require that the recipient employ a minimum number of employees and utilize the assets to which the grant relates for a minimum period of time.
There is no specific authoritative US GAAP accounting guidance for government grants applicable to for-profit enterprises. In practice, many for-profit entities refer to IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, for guidance in determining the appropriate accounting for government grants relating to capital projects.
1.6.1.1 Initial recognition of government incentives (capital projects)
IAS 20 provides guidance regarding the initial recognition of government grants that considers conditions attached to the grants.
IAS 20, paragraph 8
A government grant is not recognised until there is reasonable assurance that the entity will comply with the conditions attaching to it, and that the grant will be received. Receipt of a grant does not of itself provide conclusive evidence that conditions attaching to the grant have been or will be fulfilled.
IFRS does not define reasonable assurance. Under US GAAP, it would be difficult to justify recognition of a government grant unless the reporting entity believes it is probable that it will comply with the conditions attached to the grant and that the grant will be received. The use of “probable” is generally interpreted to be consistent with the definition of probable within ASC 450, Contingencies.
Specific facts and circumstances of each grant arrangement should be considered when determining whether it is probable that the reporting entity will comply with the conditions of the grant and that the grant will be received. Some questions to consider in determining when a grant should be recognized include:
- Conditions of the grant
Have all grant conditions been met? Is there a process in place to comply with ongoing requirements and is continued compliance probable?
- Compliance audit
If applicable, has an external audit been completed that supports the amount of the grant and compliance with grant conditions?
- Government oversight
Are amounts received subject to audit? Are amounts received subject to adjustment after funds have been disbursed?
Depending on the type of grant, reporting entities may be subject to audit and other types of review and scrutiny by the disbursing agent at various points in the process. Timing of recognition of these awards will be based on individual facts and circumstances and will depend on the reporting entity’s individual assessment of compliance with the requirements of the government grant.
1.6.1.2 Subsequent recognition - government incentives (capital projects)
Government grants should be recognized in income over the period for which the grants are intended to compensate the grantee. For capital projects, grants are generally recognized in the income statement by the lower depreciation expense resulting from recording the grant as a reduction to the cost of an asset or amortizing it as deferred credit.
IAS 20, paragraph 12
Government grants shall be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate.
IAS 20, paragraph 17
In most cases the periods over which an entity recognises the costs or expenses related to a government grant are readily ascertainable. Thus grants in recognition of specific expenses are recognised in profit or loss in the same period as the relevant expenses. Similarly, grants related to depreciable assets are usually recognised in profit or loss over the periods and in the proportions in which depreciation expense on those assets is recognised.
It may be difficult to match the grant and related expense when the grant’s terms do not specify the expenditure to which it relates. Project grants may be related, for example, to the project’s capital expenditure costs and the number of jobs created or safeguarded. In some circumstances, the expenditures that makes the reporting entity eligible for a grant may be all of the costs incurred that are directly attributable to the project (i.e., all of the capital expenditures associated with the long-lived asset). The terms of the grant should be carefully examined to establish whether the intent is to defray costs or to establish performance conditions (e.g., local job retention). If performance conditions exist, the reporting entity should assess when those conditions have been satisfied before recognizing any income.
If grants are received based solely on a capital expenditure, they should be credited to income over the expected useful life of the asset for which the grant was received. This can be accomplished by either:
- reducing the cost of the asset by the amount of the grant, or
- treating the amount of the grant as a deferred credit.
Grants recorded as a reduction to the cost of the asset would be recognized over the useful life of a depreciable asset as reduced depreciation expense. Grants recorded as a deferred credit should be amortized over the useful life of the related asset on the same basis being used to depreciate the asset. Amortization of the deferred credit could be classified in the income statement as a component of operating expenses (e.g., depreciation) or other income.
Refer to Example PPE 1-8 for further details on recognition of a government grant for a capital project.
EXAMPLE PPE 1-8
Recognition of a government grant for a capital project
Recognition of a government grant for a capital project
Manufacturing Corp receives a grant from a local municipality in exchange for constructing a manufacturing facility within the municipality. The grant is intended to help promote local production and create local jobs. There are no specific terms regarding employment of residents within the local municipality and the only term of the grant is that Manufacturing Corp completes construction of the manufacturing facility.
How should Manufacturing Corp account for the government grant?
Analysis
The grant obtained from the local municipality is linked to the construction of the manufacturing facility. Since there are no specific terms within the grant regarding employment, Manufacturing Corp should record the government grant as either a reduction of the fixed asset balance or a deferred credit, which would then be amortized over the useful life of the facility.
1.6.2 Conditions attached to government grants (capital projects)
When there are conditions attached to a grant, an evaluation of the conditions for retaining the grant without risk of repayment must be made to determine whether it is probable that the recipient will be able to retain the grant proceeds. This determination should initially be made at inception and continue to be evaluated throughout the operating performance period. If it is subsequently determined that the conditions for retaining the grant are no longer probable, the reporting entity should reverse the previously recorded impacts of the grant in the current period.
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