Accounting for grant payment.

mastrypuncher

A client has bought an asset for £4k. As he has just started up he managed to obtain a grant to pay for some of the asset ie circa £1700. What would the accounting entries be on this? Should it be offset against the value of the asset, or put in a suspense account until the asset is disposed of?

Monsoon

My gut feeling is it's Dr Asset £4k, Cr bank £4k

Cr Grant £1700 Dr Bank £1700

The two are separate. As to whether the grant is taxable depends on the specifics of the grant.

I do recall something about grants paying for assets, and there's a very tiny suspicion that there may be a different treatment, but the only practical example I can think of treated it as per my gut feeling, above.

mastrypuncher

Yes that was my gut feeling too. I'll have to check the grant paperwork to see if the payment is taxable. Thanks for that.

paulstafford

I believe SSAP 4 is still the relevant accounting standard if you are dealing with a small entity.

The initial entry for the receipt of the grant should be.

Dr Bank
Cr Deferred income

The deferred income is released to the p&l over the estimated useful life of the asset.

Monsoon

paulstafford wrote: »

I believe SSAP 4 is still the relevant accounting standard if you are dealing with a small entity.

The initial entry for the receipt of the grant should be.

Dr Bank
Cr Deferred income

The deferred income is released to the p&l over the estimated useful life of the asset.

Thanks Paul, that sounds like the niggling thing I knew I'd read about, couldn't remember what it was and whether it was an accounting or tax treatment. Ta!

Steve Collings

SSAP 4 does permit the grant to be offset against the cost of the equipment BUT only if you are an unincorporated business. Companies Act 2006 prohibits the grant being offset against the asset(s) and requires a deferred income account to be set up instead.

Best regards
Steve

PGM

Steve Collings wrote: »

SSAP 4 does permit the grant to be offset against the cost of the equipment BUT only if you are an unincorporated business. Companies Act 2006 prohibits the grant being offset against the asset(s) and requires a deferred income account to be set up instead.

Best regards
Steve

We net the costs off, and we're a CIC (community interest company).

I thought a CIC would be treated the same way as Ltd?

Steve Collings

I would agree PGM.

The references are to paragraphs 17 and 27 of schedule 1 to SI 2008/410. This states that fixed assets should be stated at their purchase price or production cost. In law the definition of 'purchase price' or 'production cost' does not make any provision for deductions from the amounts giving rise to purchase price or production cost.

There was a lot of debate about this type of treatment and despite the standard permitting the use of 'offsetting' the capital grant against the cost of the asset, SSAP 4 does warn that Counsel's opinion is that the deduction from cost is unlawful and should not be used by companies who are required to apply Schedule 1 SI 2008/410.

Regards
Steve

PGM

Thanks Steve, I shall be careful the next time we do so!

mastrypuncher

Thanks for all your answers. Very informative. However there is something else I was not aware of at the time to throw into the mix. The asset was purchased in June 2010. However unbeknown to me he incorporated end of August. The grant money didn't actually hit the bank account until mid September.

I will be drawing up his sole trader accounts until the end of August, then transfer or 'sell' the value of it to the new ltd co. So would I still just account for it as deferred income and charge it to the p&l over the useful life of the asset?