This means that merely receiving a grant does not necessarily authenticate that the enterprise has complied or will comply with the conditions attached to such a grant. Furthermore, there is a reasonable certainty that the enterprise will collect such a grant.
The enterprise complies with the conditions attached to such government grants and.In such cases, no relationship exists between the accounting treatment of a grant and accounting treatment of expense to which it associates.Īs per the definition, the enterprise must account for the government grants only where: There may be entities that may follow capital approach and treat grants as part of shareholders’ fund.Just like income tax or other taxes are charged against income in the P&L statement, the government grants should also be treated in the same way. This is because these form part of the fiscal policies of the government. Government grants are similar to the income tax or other taxes charged against the income of the enterprise.Therefore, it is logical to consider the government grants as income and match such income with the costs that such a grant tends to compensate. Thus, grants are not given without any reason. As per the definition of government grants mentioned above, government grants refer to the assistance that an enterprise receives from the government on complying with the conditions and meeting the prescribed obligations.Following are the arguments that support the income approach for accounting treatment of government grants: Therefore, grants related to specific expenses are treated as income in the same period in which such expenses are recognized.Īs per the income approach, the government grants are treated as income over one or more periods. Mostly, the costs and expenses related to a government grant that needs to be recognized over a number of periods, is typically determined with ease. This is because such a grant is not an income as per the accrual accounting assumption. Such income must be matched with the related cost in a reporting period.įurthermore, government grants received on receipt basis cannot be recognized as income in P&L statement. Accordingly, government grants treated as income must be recognized in the P&L statement. While other set of grants must be treated as income. Thus, grants that have attributes similar to those of promoters’ contribution must be treated as a part of the shareholders’ fund. It must be noted that the accounting treatment of a government grants must be based upon the nature of grant itself. This is important because it facilitates an enterprise to compare current financial statements with that of prior periods as well as undertake inter company comparisons.Īccounting Treatment of Government GrantsĪn enterprise can adopt any two of the accounting approaches to undertake the accounting treatment of government grants. an enterprise needs to indicate the amount of benefit derived from such government grants during the reporting period.the enterprise has to adopt an appropriate accounting method to account for the government grants thus received.There are two reasons that make the receipt of government grants significant for an enterprise: Thus, receipt of government grants is an important issue to be considered while preparing financial statements for an enterprise. the ones that cannot be separated from the normal trading transactions of an enterprise.However, these grants do not include any form of government support: Such grants are given for an enterprise to meet past or future compliance along with certain conditions. Government grants refer to the support given by the government to an enterprise either in cash or kind.