A grant means that a public body transfers resources to another entity in return for past or future compliance with certain conditions. “If you behave well, I will give you money.” Government grants are also called subsidies, subventions, or premiums.
Assistance is broader: It is a government action that provides an economic benefit to entities qualifying under certain criteria.
How are government grants accounted for?
A grant is only recognized if there is reasonable assurance that the receiving entity will comply with its conditions.
- Income approach: Recognizing a grant in profit or loss makes sense because grants are rarely gratuitous. In addition, as it is not a funding source from shareholders, one can argue that they should not be recognized in equity.
- Capital approach: Recognizing a grant on your balance sheet makes sense because the government usually doesn’t expect repayment and because grants are not “earned” by the firm.
In practice, IAS 20 suggests a rather simple solution:
- If related to assets, grants are recognized in the statement of financial position, either through deferred income or through deducting the grant from the asset to state its carrying amount only.
- If related to income, grants are accounted for as profit or loss, either separately or under a general heading such as “Other Income”.
How is government assistance accounted for?