Grants

It sounds like you should capitalise the cost but I don't have all the details.

You can either net off the grant against the FA or probably best to show it as a separate line in the FAR (1) IE as a credit or carry it forward in deferred income (2). In both cases you will need to match the income against the depreciation. If in FA then release the credit balance over the depreciation term so this will in affect be negative depreciation.

(1) EG FA Cost £10,000, grant c/f £(5000) so NBV is £5000 (your cost). Say depreciation is 5 years you would depreciate the 10k in year 1 by £2000 and the grant by (£1000) so the NBV at the end of year one would be 10000-2000, -5000+1000 = £4000 (which is your cost less 1 years of dep'n).

(2) You credit the £5000 to deferred income instead of FAR and release the grant over the same period of the depreciation. So depreciation would still be £2000 but you credit £1000 of the £5000 grant into the P & L to match on an accruals basis. £4000 will be c/f in deferred income at the end of year 1.

If you net the grant off against the actual cost in FA the grant is hidden which is not really correct.

Profit & Loss

If it's not a capital expense then match it in the P & L under grants received in the same period.

Hope this helps.

Steve