Accounting for grants

What it means

Accounting for grants determines how a grant or EU funds support appears in the books. The basic principle is that a grant should not be shown as one-off income in the year the money arrives, but in the periods in which the costs it covers arise. That keeps a true and fair picture of the result.

A grant for operating purposes, such as wages, training or services, is taken to income in the period the related costs arise. A grant for acquiring long-term assets is recorded as deferred income and released to income gradually, in line with the depreciation of the subsidised asset. The depreciation expense and the grant income thus offset each other.

Entitlement to a grant is recognised only once receiving it is reasonably certain, usually after the contract is signed and conditions met. Until the money arrives, a receivable from the provider is carried. Details are set out in the accounting procedures and, under IFRS, in a separate standard on government grants.

How it works in practice

In an EU-funded project, the asset acquisition is recorded at full cost and the grant entitlement recognised at the same time. When the grant is received, it is moved to deferred income and each month a portion is released to income equal to the grant's share of depreciation. This requires careful records at the level of individual asset cards.

For tax, grants are treated separately. An asset grant enters the tax base gradually in line with tax depreciation, an operating grant in line with the costs. If tax and accounting depreciation differ, differences arise that must be tracked. For eligible expenditure with VAT, input tax is deducted under the normal rules.

If the provider reclaims part of the grant, for example for breaching sustainability conditions, a liability arises together with an expense or reduction in deferred income. Such a risk must be assessed at year-end and a provision made if repayment is probable. Information about grants also belongs in the notes.

What to watch out for

The most common mistake is taking the whole asset grant to income at once. The result in the year of receipt is then artificially high and in later years low, since depreciation has no offset. The company may pay tax earlier than necessary and distort the picture for the bank or investors.

Take care with accruals in projects where assets are acquired gradually and the grant comes in several payments. It must be matched precisely which part of the grant relates to which asset. Errors often surface only in the provider's check or an audit, when they are hard to correct.