Government grants (IAS 20) - Presentation: income method vs ...

Learning Outcomes

After completing this article, you will be able to explain the allowed methods for presenting government grants in financial statements under IAS 20, distinguish between the income method and the deferred income method for both revenue and capital grants, and apply these methods when constructing statement extracts for ACCA FR exam scenarios.

ACCA Financial Reporting (FR) Syllabus

For ACCA Financial Reporting (FR), you are required to understand the recognition and presentation of government grants in accordance with IAS 20. You should be prepared to:

• Explain the two acceptable methods of presenting government grants in the financial statements
• Apply and compare the income method and the deferred income method for capital (asset-related) grants
• Present revenue grants in line with IAS 20 options, including both the statement of profit or loss and deduction from expense
• Identify the correct presentation in constructed response questions and interpret financial statement extracts involving government assistance

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Under IAS 20, what are the two permitted methods for presenting a capital grant in the financial statements?
2. If an asset grant is netted off against the asset's carrying amount, how does this affect depreciation expense?
3. When is grant income recognised under the deferred income method?
4. True or false: A revenue grant must always be credited to income as 'other income' in the statement of profit or loss.
5. Briefly describe when a grant should be recognised as income according to IAS 20.

Introduction

Many entities receive government grants to support business activities or to assist with the cost of acquiring non-current assets. IAS 20 sets out how such grants should be recognised and presented in financial statements. For ACCA FR, you are expected to understand the two main presentation methods— the income method and the deferred income method— and to know when each applies to revenue grants and capital grants.

IAS 20's presentation requirements exist to ensure comparability and clarity for users of financial statements. It is important to be able to justify and correctly apply each method for the exam.

Key Term: government grant
Assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity.

Government Grants: Classification and Recognition

Government grants under IAS 20 are classified either as:

• Grants related to income (revenue grants); or
• Grants related to assets (capital grants).

A grant should only be recognised when there is reasonable assurance that the entity will comply with the conditions and the grant will be received.

Key Term: revenue grant
A government grant other than one related to assets—usually a grant to cover operating or wage expenses.

Key Term: capital grant
A government grant where the primary condition is that the entity acquires, constructs, or purchases long-term assets.

Presentation of Revenue Grants

Revenue grants may be presented by either:

• Credit to a separate line of income in the statement of profit or loss (commonly named ‘other income’)
• Deduction from the related expense in the profit or loss (e.g., reducing wage costs)

Both presentations are allowed under IAS 20 and, for exam purposes, you may use either unless a question specifies otherwise.

Presentation of Capital Grants

For grants related to assets, IAS 20 permits two methods:

1. Income method (Netting off): The grant is deducted from the carrying amount of the related asset, and depreciation is charged on the net amount.
2. Deferred income method: The grant is presented as deferred income (a liability) in the statement of financial position and released to profit or loss over the useful life of the asset, matching the increased depreciation charge.

Entities must use only one method consistently for each class of grant.

Comparison Table

Worked Example 1.1

Question:
A company acquires machinery costing $100,000 and receives a government grant of $20,000 towards the purchase. The machinery has a 5-year useful life with straight-line depreciation and no residual value. The entity chooses to apply the deferred income method. Show extracts for the statement of profit or loss and the statement of financial position for the first year.

Answer:

• Depreciation expense: $100,000 / 5 = $20,000
• Grant income recognised: $20,000 / 5 = $4,000
• Statement of profit or loss (extract):
  • Depreciation: ($20,000)
  • Grant income: $4,000
• Statement of financial position (extract at year-end):
  • Machinery (cost): $100,000
  • Accumulated depreciation: ($20,000)
  • Carrying amount: $80,000
  • Deferred income (liability): $16,000

Worked Example 1.2

Question:
Using the same scenario as above, how would the accounting differ under the income method (netting off)?

Answer:

• Machinery shown at cost less grant: $100,000 - $20,000 = $80,000
• Depreciation: $80,000 / 5 = $16,000 per year
• No separate grant income line— the benefit is reflected in lower depreciation expense.

Capital Grants: Exam Procedure

In exams, pay attention to how the question asks you to present the grant—be ready to demonstrate both methods in statement extracts or explain the effect on key ratios. Importantly, grant income should only be recognised as conditions are satisfied, not merely on receipt.

Exam Warning

A frequent error is to credit the entire grant to profit or loss up front, or to fail to spread the grant over the asset’s life. The exam may penalise if grant income and asset depreciation are mismatched.

Capital Grants: Deferred Income—Liability Split

Grants released to profit or loss within 12 months of the reporting date are classified as current liabilities (portion of deferred income); the remaining balance is classified as non-current.

Revenue Grants: Practical Application

If a grant relates to wages and is received in advance for costs to be incurred over a period, match the grant income to the related expense during the qualifying periods, not simply when the cash is received.

Repayment of Grants

If grant conditions are breached and repayment becomes likely, the financial statements must reverse any unearned grant income or increase the asset’s carrying amount accordingly (depending on the presentation method originally used).

Summary

IAS 20 allows flexibility in the presentation of government grants, with key differences in how capital grants affect asset values, depreciation, and income recognition. The chosen method must be applied consistently and matched with the correct treatment in profit or loss and the statement of financial position.

Key Point Checklist

This article has covered the following key knowledge points:

• Explain the two permitted IAS 20 methods for grant presentation: income method and deferred income method
• Apply each method for capital (asset-related) and revenue grants
• Show statement of profit or loss and financial position extracts for both methods
• Recognise the treatment of grant repayment and liability classification
• Spot common errors in exam scenarios on government grant presentation

Key Terms and Concepts

• government grant
• revenue grant
• capital grant