IAS 20: Government grants
When to recognise a grant, spreading capital grants over the asset’s life, and what happens if a grant must be repaid.
ACCA exams this helps with: FR Financial Reporting See the ACCA map
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What it is: Money from the government to help a business, for example towards buying machinery or employing apprentices.
The key idea: a grant is matched to the costs it helps pay for. A grant for an asset is spread over the asset’s life, not taken as income all at once.
Example. A £20,000 grant towards a machine that lasts 5 years is released to profit at £4,000 a year, alongside the machine’s depreciation.
Key words
- Government grant
- Help from government in the form of money or assets, given in return for meeting conditions.Example: £20,000 towards buying a new machine.
- Capital grant
- A grant related to buying or building a long-term asset.Example: A grant for 20% of the cost of new equipment.
- Revenue grant
- A grant related to income or running costs.Example: A grant towards the wages of trainees.
- Deferred income
- A liability for grant money received but not yet released to profit.Example: £16,000 of a £20,000 grant still to be released over the next 4 years.
Learn
When to recognise a grant
Only when there is reasonable assurance that the business will meet the conditions and that the grant will be received.
Capital grants: two allowed methods
| Method | How it works | Effect each year |
|---|---|---|
| Deferred income | Show the grant as a liability, and release it to profit over the asset’s life | Other income = grant ÷ life |
| Deduct from cost | Reduce the asset’s cost by the grant | Lower depreciation = (cost − grant) ÷ life |
Both give the same profit each year. They just present it differently.
Revenue grants
Recognise in profit in the same periods as the costs they cover, either as other income or by reducing the related expense.
Repaying a grant
If conditions are broken and the grant must be repaid, first use any deferred income still held. Any excess is an expense straight away.
Watch it explained
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Videos from YouTube tutors
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Worked example
A company buys a machine for £100,000 with a 5-year life and receives a government grant of £20,000 towards it. It uses the deferred income method.
| Working | £ |
|---|---|
| Grant received | 20,000 |
| Released to profit each year: 20,000 ÷ 5 | 4,000 |
| Deferred income at the end of year 1 | 16,000 |
| of which current (released next year) | 4,000 |
| of which non-current | 12,000 |
| Account | Dr £ | Cr £ |
|---|---|---|
| Cash | 20,000 | |
| Deferred income | 20,000 | |
| (Grant received) | ||
| Account | Dr £ | Cr £ |
|---|---|---|
| Deferred income | 4,000 | |
| Other income | 4,000 | |
| (Year 1 release of the grant) | ||
Practice questions
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