Section 24: Government Grants
Section 24 deals with the recognition, measurement and disclosures for government grants. Government grants are assistance in the form of a transfer of resources to an entity in return for past or future compliance with specific conditions. It excludes transactions with governments that cannot be distinguished from the normal trading transactions of the entity.
What is new?
Government grants are recognised when there is reasonable assurance the entity will comply with the conditions to the grant and the grants will be received. This contrasts with old GAAP, where they could only be recognised when all the conditions for receipt had been complied with. This will allow an entity to recognise grants earlier.
Section 23 allows the grant to be recognised on the performance model or the accruals models. Old GAAP (SSAP 4) only allowed the use of the accrual model. The policy choice shall be applied on a class by class basis.
What is different?
Section 24 is narrower than SSAP 4 as Section 24 applies to government grants only. Section 24 does not apply to any other form of government assistance.
What are the key points?
The government grant is recognised at their fair value when there is reasonable assurance the entity will comply with the conditions of the grant and that the grant will be received.
There is a choice to utilise the performance model or the accruals model for recognition of income.
Performance model allows recognition of the grant:
- On receipt of proceeds where the grant does not impose performance related conditions; and
- When the performance related conditions are met.
Accruals model allows recognition of the grant:
- Over the expected life of the asset and the amount deferred shown as a liability on the balance sheet; or
- Over a systematic basis over the period the entity recognises the cost where the grant is revenue in nature.
Where the performance model is chosen on transition, the method would need to be applied retrospectively, considering any existing grants receivable at the date of transition and whether performance conditions have been met.
What do accountants need to do?
Be aware of the differences between old GAAP and Section 23 and advise clients of the differences.
Highlight the policy choice available and advise clients on which model is most appropriate depending on the circumstances.
Where the performance model is adopted advise clients that this will require more judgement and a transition adjustment may be required. Advise clients of the benefit of this method where entities are eager to show positive results.
What do companies need to do?
Be aware of the differences between old GAAP and Section 24.
Determine whether to adopt the performance model for accounting for government grants. This will escalate gains to the profit and loss which can be attractive for companies who want to maintain profits. However, they need to consider the transition adjustment if grants have been received prior to the date of transition. This may have a positive impact on distributable reserves.