Accounting Treatment of Government Grants

Written by regina y. favors
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Accounting Treatment of Government Grants
Business enterprises must treat government grants as income. (accounts image by Alexey Klementiev from Fotolia.com)

The accounting treatment of government grants is a standard set of procedures for recording subsidies, duty drawbacks and cash incentives. The standard does not provide recommendations for other types of government assistance.

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Capital Vs. Income

Enterprises may use one of two accounting approaches for recording government grants: capital or income. With the capital approach, businesses treat the grant as one part of the shareholder's fund. In the other instance, they record the grant as income and include an entry in the profit and loss financial statement.

Recognition

Enterprises may record the government grant provided they agree to comply with, and fulfil, all the conditions of the grant and the granting agency. The enterprise may credit the government grant to income anytime during the present year and accounting period. The accounting treatment procedures include provisions for recognising grants in the income statement as receivables related to compensation for incurred losses and expenses of a previous accounting period.

Presentation and Fixed Assets

Government agencies may issue grants to enterprises for the purpose of purchasing, constructing or acquiring fixed assets. Enterprises may choose one of two methods for recording the grant in the profit and loss statement. They may treat the grant as a deduction or reduced depreciation from the asset's gross value or as deferred income over its useful life.

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