Accounting for government grants Q&As- FRS 102

Welcome to the Institute’s Financial Reporting Q&A pages. We have prepared these pages to address some of the commonly asked questions relating to financial reporting matters.

Whilst we hope that the below questions are beneficial to you, they are not a substitute for reading the relevant accounting standards in full and are not intended to replace the accounting standards. Users of these pages should be aware that different facts and circumstances may exist in relation to similar accounting matters which may significantly change the financial reporting implications, and as a result, these Q&As do not represent a "one size fits all" solution to financial reporting issues.

In these Q&As, we look at government grants under FRS 102 and some of the commonly asked questions.

1. What are government grants, as defined under FRS 102?
2. When should a government grant be recognised under FRS 102?
3. What accounting policy choices are available to entities who receive government grants?
4. If the performance model is selected, how should this be applied?
5. What is a “performance related condition”?
6. If the accruals model is selected, how should this be applied?
7. Are there any circumstances where the accruals model and the performance model cannot be used?
8. If an entity changes its accounting policy for grants how should this be accounted for?
9. What are the disclosure requirements for government grants under FRS 102?

1. What are government grants, as defined under FRS 102?

   Government grants are defined as follows;

   “Assistance by government in the form of a transfer of resources to an entity in return for past or future compliance with specified conditions relating to the operating activities of the entity.

   Government refers to government, government agencies and similar bodies whether local, national or international.”

   Therefore, government grants could include both national government and local bodies such as councils. The grant provider and the terms of the grant should always be understood in full so that the correct accounting treatment can be applied.

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2. When should a government grant be recognised under FRS 102?

   Government grants should not be recognised until there is reasonable assurance that;

   (a) The entity will comply with the conditions attaching to them; and

   (b) The grants will be received.

   Example

   GZ Limited is a science company, specialising in healthcare & medical products. It received a grant from the government to assist in the development of a new medical device designed to ensure a greater success rate in surgical procedures. It is a condition of the grant agreement that GZ Limited develops this device and brings it to market in 1 year.

   Separately, however, in the past year, the senior management of GZ Limited has decided to close down it’s medical devices division and specialise in medicines which is significantly more profitable for them. All ongoing medical devices projects will be ceased with immediate effect.

   In this instance, as GZ Limited did not meet the criteria for recognition noted above (ie. it knows it will not bring the device to the market within 1 year and therefore will not comply with the conditions), it cannot recognise the grant under FRS 102. The amount received from the government should be recognised as a liability.

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3. What accounting policy choices are available to entities who receive government grants?

   Government grants should be recognised using either the performance or accruals model. This is an accounting policy choice that should be applied on a class-by-class basis.

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4. If the performance model is selected, how should this be applied?

   If applying the performance model then it is important to establish whether the grant imposes specified future performance related conditions on the recipient.

   A grant which does not impose such performance related conditions should be recognised in income when the grant proceeds are received/receivable.

   A grant which imposes performance related conditions should be recognised in income only when the performance related conditions are met.

   If a grant is received before the revenue recognition criteria are met then the grant should be recognised as a liability.

   Example 1- No performance related conditions

   AA CLG is a charity. A government body has donated €20,000 to AA CLG. There are no conditions attaching to the donation and AA CLG is free to spend it as it wishes. AA CLG chooses to apply the performance model for grants.

   In this instance, the grant should be recognised as income in AA CLG when the proceeds are received.

   Example 2- Specified future performance conditions

   AA CLG also received a grant of €1,000,000 from a local government authority. The conditions of the grant are that it must be spent on the building of a new community centre. Another condition of the grant is that the community centre must host the annual provincial youth boxing championships for each of the next 10 years. There is no certainty as to whether AA CLG will host this tournament as they must tender for it each year. If these terms are not complied with, the local government authority can clawback the grant, with the amount that can be clawed back equal to €100,000 for each year the condition is not met. AA CLG immediately spend the money on building the community centre.

   In this instance, AA CLG should initially recognise the grant of €1,000,000 as a liability and then recognise €100,000 in income each year for the period of 10 years (when they meet the conditions each year). If AA failed to comply with the conditions of the grant then the balance repayable should be held as a liability until it is clawed back by the local government.

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5. What is a “performance related condition”?

   FRS 102 defines a performance related condition as follows;

   “A condition that requires the performance of a particular level of service or units of output to be delivered, with payment of, or entitlement to, the resources conditional on that performance.”

   A performance related condition could take many forms (such as the requirement to keep a service running for a number of years or a requirement to provide a certain number of courses) and it is important to fully understand the terms of the grant agreement to establish if there are performance conditions in place and whether the non-attainment of these conditions will result in the ability of the grantor to seek repayment.

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6. If the accruals model is selected, how should this be applied?

   If applying the accruals model, it is important to firstly clarify if the grant is a grant relating to revenue or a grant relating to assets.

   Grants related to revenue

   Grants related to revenue should be recognised in income on a systematic basis over the periods in which the entity recognises the related costs for which the grant is intended to compensate.

   So for example, if an entity receives a grant to cover the cost of wages for a charity then the grant should be recognised in income at the same time that the wages are recognised in expenses.

   A grant issued for expenses that have already been incurred should be recognised in income when it becomes receivable.

   Grants related to assets

   Grants related to assets should be recognised in income on a systematic basis over the expected useful life of the asset.

   So for example, if an entity receives a grant of €100,000 towards the cost of a building, then the grant should be recognised as income over its expected useful life (ie. If the useful life of the building is 50 years and the straight line depreciation method is used, then €2,000 should be recognised as income annually over 50 years).

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7. Are there any circumstances where the accruals model and the performance model cannot be used.

   An entity applying FRS 105 cannot apply the performance model.

   A charity applying the Charity SORP is not permitted to apply the accruals model.

   Entities should be mindful of whether a particular model can be used. In addition, where an entity transitions between financial reporting frameworks or decides to adopt the Charity SORP, they should consider whether this change in framework results in a transition adjustment in relation to how government grants are accounted for.

    

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8. If an entity changes its accounting policy for grants how should this be accounted for?

   Where an entity changes an accounting policy, it must ensure that the change is carried out in accordance with section 10 of FRS 102 and is carried out for the reasons set out in section 10.8 (see separate Q&As).

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9. What are the disclosure requirements for government grants under FRS 102?

   Under full FRS 102, an entity is required to disclose the following;

   • The accounting policy adopted for grants
   • The nature and amounts of grants recognised in the financial statements
   • Unfulfilled conditions and other contingencies attaching to grants that have been recognised in income; and
   • An indication of other forms of government assistance from which the entity has directly benefited

   As well as the above disclosures, entities should be mindful of any other disclosure requirements not contained in FRS 102 (for example, DPER Circular 13/2014 has specific financial statement disclosure requirements for entities in receipt of public exchequer funding).

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