Grant accounting

Barry
Barry Registered Posts: 101 ? ? ?
Can a grant be offset against the cost of a fixed asset? I think it can under IAS 21 but not sure about UK practices?

Comments

  • Steve Collings
    Steve Collings Registered Posts: 997
    IAS20/SSAP 4 does allows 2 permissible accounting treatments for capital-based grants: deduct from the cost of the asset (with the grant being recognised in the profit and loss account by way of reduced depreciation charges due to the base cost of the asset being reduced) OR recognise the unamortised portion of the grant as deferred income. However, legislation prevails and the Companies Act 2006 prohibits the recognition of a grant by way of deduction from the cost of the asset because the statutory definitions of "purchase cost" and "production cost" do not allow for any deductions from such costs.

    As a consequence, Ltd Co's will have to recognise unamortised capital-based grants as a liability (as deferred income). However, this ruling appears only to be for incorporated entities (those applying the Companies Act) and thus it can be argued that sole traders and partnerships that are not subject to Companies Act requirements could offset the grant against the cost of the asset. In reality, however, it's better to err on the side of safety and set up a deferred income account. The resulting end profit is still the same, it's just that the P&L account will be charged with higher depreciation charges.

    Kind regards
    Steve
  • stevef
    stevef Registered Posts: 258 ? ? ?
    Except in Local Government where grants with no conditions outstanding have to be recorded in the Consolidated I and E statement below the 'Cost of Service' line then transferred to Capital Adjustment Account through the Movement In Reseves Statement.
  • Gill Gittings
    Gill Gittings Registered Posts: 121 ? ? ?
    The resulting end profit is still the same, it's just that the P&L account will be charged with higher depreciation charges.

    Kind regards
    Steve

    Surely the profit will go down with higher depreciation so how can it not make a difference to profit?
  • beverly hudson
    beverly hudson Registered Posts: 95 ? ? ?
    Surely the profit will go down with higher depreciation so how can it not make a difference to profit?

    Quite. Depreciation charges are expenses and if expenses are more then profit is less so it DOES make a difference to profit , or losses.
  • Steve Collings
    Steve Collings Registered Posts: 997
    The OP asked the question whether a grant can be offset against the cost of an asset. Gill/Beverly - you are only considering 1 side of the entry.

    Facts:
    Cost of machine £20,000
    Grant towards cost £5,000
    Depreciation 5 yr straight line nil residual value
    Profit before depreciation £18,000

    Deduct grant from asset:
    Cost = £20k - £5k = £15k
    Depreciation = £15k / 5 years = £3k
    Profit therefore £18k - £3k = £15k.

    Grant deferral as required under Co Act 2006:

    Cost £20,000
    Depreciation = £20k / 5 years £4k
    Release of grant £5,000 / 5 years = £1k (to income)
    Profit = £18k less £4k dep'n plus £1k grant = £15k.

    Hence no impact on profit under both treatments as you are matching the income (the grant) against the expense to which it relates (the depreciation).

    Kind regards
    Steve
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