According to IAS 20 government grants are simply assistance to the entity by the government to give or help entity get economic benefits. Such assistance can help either in acquiring or building certain asset easily in which case it is called (capital grant) or to cover certain expense (in which case it is termed as revenue grant). The way government grants are accounted and presented depends on how they have been applied in the course of business.
As mentioned earlier revenue grants or grants related to income are such assistance that help entity cover certain expense.
International Accounting Standard 20 permits either of the following two ways to account for grants related to income (revenue grant):
- Deduct from related expense; in which case the related expense will be reported on net basis in the financial statements. For example grant of 30 million was provided to cover 150 million of research expense. If this option is followed then research expense to be reported in the income statement is 120 million (150-30).
- Treat as ‘other income’; in which case grant will be a credit to the income statement and to reported separately from related expense. Taking the same example is above, 150 million of research expense will be recorded whereas 30 million will be reported on the face of income statement as “other income”.
Though standard allows the two treatments, which of the two better provides information for the users of financial statements is always a point of debate among accountants.
Followers of the first option find it better as it does not clutter the financial statements unnecessarily and also as grant was meant to reduce expense burden thus must reduce the connected expense as in reality entity had to bear only the expense over and above grant money. However, it does have accountants and those who like the second treatment over the first state that second provides more information as user can know what the real expenditure was and how much was the assistance and thus must be reported separately.
In short, it is up to management or those preparing financial statements that which option helps prepare more relevant and reliable financial statements.