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 income 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
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?
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.