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Recognition and measurement
Extract from FRS102: Section 24.3A – 24.5
24.3A Government grants, including non-monetary grants shall not be recognised until there is reasonable assurance that:
(a) the entity will comply with the conditions attaching to them; and
(b) the grants will be received.
24.4 An entity shall recognise grants either based on the performance model or the accrual model. This policy choice shall be applied on a class-by-class basis.
24.5 An entity shall measure grants at the fair value of the asset received or receivable.
OmniPro comment
See application of 24.3A below:
Example 1: Recognition as a receivable
Company A has been approved to receive a government grant of CU50,000 to contribute towards the cost of employing 20 staff on a new department opened by the company. Approval was obtained during year 1. A condition as part of the grant is that the entity must create a non-distributable reserve equal to the amount of the grant to be received and the employees must be kept on for a minimum of 3 years. At the end of year 1 the company has employed the 20 employees but at year end has not created the non-distributable reserve. The company has sufficient distributable reserves to allow for the recognition of the non-distributable reserve. The company will receive the grant when the claim is made by the company. During year 2, the non-distributable reserve was created and the formal claim was made to the government authority.
Given that the company has met the employee number requirement and all that had to be done was to create the non-distributable reserve and the company has the reserves to do this, it is reasonable for the company to assume that the conditions of the grant will be complied with and the grant will be received. In this case it may be appropriate to recognise the CU50,000 as a receivable at the year end of year 1. Whether this income can be recognised in the profit and loss or deferred on the balance sheet will depend on whether the performance model or the accruals model has been adopted by the company.
Fair value
A government grant should be recognised at fair value of the asset received or receivable. It would normally be the amount of cash received but it may also include non-cash benefits e.g. land.
Fair value as defined in Appendix I of FRS 102 is ‘the amount for which an asset could be exchanged, between knowledgeable, willing parties in arm’s length transaction.
There are instances where governments will provide some non-cash items such as licences, if this is the case, then the licenses should be recognised at their fair value together with the associated liability for the repayment of the grant under certain conditions if applicable.
Accounting policy choice
The accruals model or performance model whichever is applied should be applied consistently to each class of grant. If a change in policy is made this would require a prior year adjustment to be made under Section 10.
Performance model
Extract from FRS102: Section 24.5B.
24.5B An entity applying the performance model shall recognise grants as follows:
(a) A grant that does not impose specified future performance-related conditions on the recipient is recognised in income when the grant proceeds are received or receivable.
(b) A grant that imposes specified future performance-related conditions on the recipient is recognised in income only when the performance-related conditions are met.
(c) Grants received before the revenue recognition criteria are satisfied are recognised as a liability.
OmniPro comment
Appendix I of FRS 102 defines a performance-related condition as ‘a condition that requires the performance of a particular level of service or units of output to be delivered, with payment of, or entitlement to, the resources conditional on that performance.
In essence the grant can be recognised as income in the profit and loss when the performance condition is met. See examples below for further consideration
Example 2: Performance related model – revenue grant
Company A has been approved to receive a government grant of CU50,000 to contribute towards the cost of employing 20 staff for a new department opened by the company. Approval was obtained during year 1. A condition as part of the grant is that the employees must be kept on for a minimum of 3 years and the entity must create a non-distributable reserve equal to the amount of the grant to be received.
The company made a formal claim for the CU50,000 during year 2 and the grant was received.
Given the condition of the grant is that the employees must be retained for a minimum of 3 years and a non-distributable reserve should be created, the CU50,000 cannot be recognised in the profit and loss until the performance conditions are met.
Therefore on receipt of the CU50,000 in year 2, the grant would be deferred as the 3 year condition has not been met. The journal to be posted would be:
|
|
CU |
CU |
|
Dr Bank |
50,000 |
|
|
Cr Deferred Revenue |
|
50,000 |
Only at the end of year 3, can the CU50,000 be recognised as a credit in the profit and loss. Although the non-distributable reserve has been created before then not all conditions of the grant has been met.
Example 3: Performance related model – revenue grant – conditions
Take example 2, and assume the conditions are such that the amount repayable is reduced by 1/3 for every year elapsed.
In this situation, assuming the likelihood of meeting the conditions and obtaining the grants is reasonable at the end of year 1 (as required by Section 23.3A and illustrated in example 1), then the amount equal to CU16,667 (CU50,000/3) should be credited to the profit and loss each year.
Example 4: Performance related model – revenue grant – no conditions
Take example 2, and assume there are no conditions attached to the grant, the full CU50,000 can be recognised in year 1.
Example 5: Performance related model – capital grant -conditions
Company A received a grant of CU100,000 towards the cost of constructing a factory. A condition of the grant is that the Company continues to utilise the manufacturing plant for a period of 20 years. The useful life of the plant itself is 50 years. Under the conditions of the grant the amount repayable if the 20 year condition is not met is reduced for every year the company stays in the factory.
Under the performance model, the grant can be recognised evenly in the profit and loss over the 20 years of CU5,000 (i.e. CU100,000/20 years).
Example 6: Performance related model – capital grant – no conditions
Take example 5, and assume the full amount is repayable if the company vacates within the 20 years.
In this case the CU100,000 would remain as a liability on the balance sheet for 20 years and then released.
Example 6A: Performance related model – capital grant – no conditions
Take example 5, and assume there are no conditions attached to the grant, the full CU100,000 can be recognised in year 1.
Accrual model
Extract from FRS102: Section 24.5C – 24.5G
24.5C An entity applying the accrual model shall classify grants either as a grant relating to revenue or a grant relating to assets
24.5D Grants relating 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.
24.5E A grant that becomes receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the entity with no future related costs shall be recognised in income in the period in which it becomes receivable.
24.5F Grants relating to assets shall be recognised in income on a systematic basis over the expected useful life of the asset.
24.5G Where part of a grant relating to an asset is deferred it shall be recognised as deferred income and not deducted from the carrying amount of the asset.
OmniPro comment
As per above, the accruals model recognises the grant so as to match it with the costs incurred. So for revenue type grants such as training grants, the grant could be recognised in income in any of the following ways:
- Matched against direct training costs
- Taken over a period of time against salary for the employees expected to benefit from the training
- Taken systematically over a straight line basis
- Taken when cash is received
As can be seen there will be judgement required as to which best meets the company requirements. It is vital that the company applies the policy chosen consistently and discloses this in the accounting policies.
Example 7: Accruals model – revenue grant
Company A has been approved to receive a government grant of CU50,000 to contribute towards the cost of employing 20 staff for a new department opened by the company. Approval was obtained during year 1. A condition as part of the grant is that the employees must be kept on for a minimum of 3 years and the entity must create a non-distributable reserve equal to the amount of the grant to be received. The cost of the employees for each of the three years remain the same.
Under the accruals model, it may be appropriate to recognise the CU16,667 (CU50,000/3 yrs) in income each year so as to match the costs.
If we assume that the wage cost would increase by 10% per annum, then the release of the grant would be lower in year 1 than in year 2 and year 3 as higher costs are incurred in those years. Here the grant received would be recognised in proportion to the years cost over the total cost over the three years if this type of policy is chosen.
Example 8: Accruals model – revenue grant
Company A obtained a grant for the cost of relocation. This grant is repayable if the company moves within 3 years.
Under the accruals method, Company A would recognise the grant income in year one so as to match the costs charged for relocation.
If at the end of year one it was not reasonable to assume that the grant would be fully collectible or all conditions had been met then a receivable could not be recognised for the grant even though the costs were incurred. If in year 2, a grant was received, the full grant would be recognised in year 2. This would be included prospectively no prior year adjustment is required as it was a change in estimate. Based on facts and circumstances at the end of year 1 it was not reasonable the grant would be received.
Example 9: Accruals model – capital grant – depreciable asset
Company A received a grant of CU100,000 towards the cost of constructing a factory. A condition of the grant is that the Company continues to utilise the manufacturing plant for a period of 20 years. The useful life of the plant itself is 50 years. Under the conditions of the grant the amount repayable if the 20 year condition is not met is reduced for every year the company stays in the factory.
In this case, the amount to be recognised each year will be based on the 50 year life as this is the life that the asset is depreciated over. Hence there is a matching of the depreciation charge on the property with amortisation of the grant. The total grant to be released each year is CU2,000 (CU100,000/50yrs). The journals required are:
|
|
CU |
CU |
|
Dr Bank |
100,000 |
|
|
Cr Deferred Revenue/Grant Liability |
|
100,000 |
Being journal to recognise receipt of the funds
|
|
CU |
CU |
|
Dr Accumulated Amortisation on Grant Liability |
2,000 |
|
|
Cr Grant Amortisation – Admin Expenses |
|
2,000 |
Being journal to recognise the release of the grant each year for 50 years.
Note the CU2,000 release per year should be included in the same line item in the profit and loss account as where the deprecation was charged.
If the above was a grant on land, which is non-depreciable, it is likely that this should be released over the terms of the building constructed on it.
Example 10: Accruals model – capital grant
Company A received a grant of CU100,000 towards the cost of constructing a factory. A condition of the grant is that the Company continues to utilise the manufacturing plant for a period of 20 years. As part of the grant they are required to maintain employment for 3 years.
In this particular case, judgement will have to be made as to whether in substance this is a capital grant or a revenue grant. All facts would have to be reviewed. However, given the large grant and the fact that it is principally towards the cost of the plant, in this particular case it would be treated as a capital grant and accounted for accordingly.
Classification in the profit and loss
It would be usual for revenue grants to shown in the ‘Other operating income’ line in the profit and loss account. However it may be appropriate to net the grant against the costs to which they relate and instead disclose the grant credited in the notes to the financial statements.
For capital grants, the amortisation of the grant would usually be posted within the same line item as the depreciation was posted on the asset to which it relates.
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