Grants Related to Income PDF

## Grants Related to Income At the end of every reporting period, the annual grant income of $5 million will be recognized as income in the profit or loss. This will be part of other income or used to reduce cost or expense items that contain depreciation. **Statement of Profit or Loss Extract for...

## Grants Related to Income At the end of every reporting period, the annual grant income of $5 million will be recognized as income in the profit or loss. This will be part of other income or used to reduce cost or expense items that contain depreciation. **Statement of Profit or Loss Extract for the Ended 31 December** | Item | 20x2 ($'000) | 20x3 ($'000) | |---|---|---| | Operating Expenses | | | | Depreciation Charges | 30,000 | 30,000 | | Govt. Grant Income Earned (Tutorial note 4) | (5,000) | (5,000) | | | | | | **Total**| 25,000 | 25,000 | **NB:** Alternatively, the annual grant income of $5 million can be recognized separately as part of other income rather than being used to reduce the operating expenses (i.e., depreciation charges). **Statement of Financial Position Extracts as at 31 December** | Item | 20x2 ($'000) | 20x3 ($'000) | |---|---|---| | Non-Current Asset | | | | PPE (Equipment) at Cost Value | 300,000 | 300,000 | | Accumulated Depreciation | (30,000) | (60,000) | | Carrying Amount | 270,000 | 240,000 | | Non-Current Liability | | | | Deferred Grant Income (Tutorial note 5 & 6) | 40,000 | 35,000 | | Current Liability | | | | Deferred Grant Income | 5,000 | 5,000 | As earlier stated, these are all forms of government grants (under IAS 20) other than those related to assets. ## Accounting for Grants Related to Income Grants related to income should be recognized as income in the statement of profit or loss of the period that it relates to once the associated conditions are met. However, the amount received in respect of grants related to income for which the associated conditions are not yet met, should be recognized as deferred income (i.e., a liability) in the statement of financial position. ## Government Loans at Below-Market Interest Rate Basically, this is a situation where a government loan is obtained at a rate below the market interest rate. The loan received is recognized as a financial liability and measured in line with IFRS 9 "Financial Instruments" using the amortized cost method. The difference between the value of the financial liability upon initial recognition using the amortized cost method (i.e., fair value less transaction cost if any) and the loan proceeds received represents the loan benefit or incentive. The benefit or incentive arising from the lower rate on a government loan represents a government grant and should be recognized in the statement of profit or loss on a systematic basis over the periods in which the related cost (i.e., the cost for which the grant is intended to compensate) are recognized. * If the loan benefit was obtained to subsidize training costs, then the benefits will be recognized on a straight-line basis over the training periods. * If the loan benefit was obtained as a rescue measure for the purpose of giving immediate financial support, then the loan benefit should be recognized immediately as income in the profit or loss. * If the loan benefit was obtained to finance a depreciable asset, then the loan benefit will be treated as a grant related to an asset either as a deduction to asset cost or set up as deferred grant income.