This document summarizes the key principles and guidance from MFRS 120 on accounting for government grants. It discusses: 1) The general principles of prudence and matching grants with related expenditures. 2) Definitions of key terms like government, government assistance, and government grants. 3) Guidance on recognizing and presenting revenue grants, including presenting as a credit or deducting from expenses. 4) Guidance on recognizing and treating capital grants, including deducting from asset costs or treating as deferred income.

1. MFRS 120 – Accounting
for Government Grants
Dayana Mastura, FCCA (UK), CA(M)
CORPORATE REPORTING

2. Introduction
Governments often provide money or
incentives to companies to export their
goods or to promote local employment.
Government grants could be:
· revenue grants, e.g. contribution
towards payroll costs
· capital grants, e.g. contribution
towards purchase of non-current assets.

3. General
Principles
MFRS120 follows two general principles
when determining the treatment of
grants:
Prudence: grants should not be
recognised until the conditions for
receipt have been complied with and
there is reasonable assurance the grant
will be received.
Accruals: grants should be matched
with the expenditure towards which
they were intended to contribute.

4. Definitions
'Government refers to government,
government agencies and similar
bodies whether local, national or
international.'
'Government assistance is action by
government designed to provide an
economic benefit specific to an
entity or range of entities qualifying
under certain criteria' e.g. the grant
of a local operating licence.

5. Definitions…continued
'Government grants are assistance by
government in the form of transfers of resources
to an entity in return for past or future
compliance with certain conditions relating to
the operating activities of the entity.'
'Grants related to assets are government grants
whose primary condition is that an entity
qualifying for them should purchase, construct or
otherwise acquire long-term assets.'
'Grants related to income are government grants
other than those related to assets – known as
revenue grants.'

6. Revenue
Grants
The recognition of the grant will depend upon
the circumstances.
· If the grant is paid when evidence is
produced that certain expenditure has been
incurred, the grant should be matched with
that expenditure.
· If the grant is paid on a different basis, e.g.
achievement of a non- financial objective,
such as the creation of a specified number of
new jobs, the grant should be matched with
the identifiable costs of achieving that
objective.

7. Presentation of Revenue Grants
• MFRS120 allows such grants to either be:
• presented as a credit in the statement of profit or loss, or
• deducted from the related expense.

8. Revenue Grant presentation: Presentation as credit
in the statement of profit or loss
• Supporters of this method 'claim that it is inappropriate to net
income and expense items, and that separation of the grant from
the expense facilitates comparison with other expenses not
affected by a grant'

9. Revenue grant presentation: Deduction from
related expense
• It is argued that with this method, 'the expenses might well not
have been incurred by the entity if the grant had not been
available, and presentation of the expense without offsetting the
grant may therefore be misleading'

10. Capital
Grants
MFRS120 permits two treatments:
Write off the grant against the cost
of the non-current asset and
depreciate the reduced cost.
Treat the grant as a deferred credit
and transfer a portion to revenue
each year, so offsetting the higher
depreciation charge on the original
cost.

11. Treatment of
Capital
Grants:
Method 1
Grants for purchases of non-current assets
should be recognised over the expected
useful lives of the related assets.
MFRS120 permits two treatments. Both
treatments are equally acceptable and
capable of giving a fair presentation.
Method 1
On initial recognition, deduct the grant
from the cost of the non-current asset and
depreciate the reduced cost.

12. Treatment of Capital Grants: Method 2
• Method 2
• Recognise the grant initially as deferred income and transfer a portion to
revenue each year, so offsetting the higher depreciation charge based on the
original cost.
• Method 1 is obviously far simpler to operate. Method 2, however, has the
advantage of ensuring that assets acquired at different times and in different
locations are recorded on a uniform basis, regardless of changes in government
policy.
• In some countries, legislation requires that non-current assets should be stated
by companies at purchase price and this is defined as actual price paid plus any
additional expenses. Legal opinion on this matter is that enterprises subject to
such legislation should not deduct grants from cost. In such countries Method 1
may only be adopted by unincorporated bodies.

13. Repayment of Grants
In some cases grants may need to be repaid if the conditions of the grant are breached.
If there is an obligation to repay the grant and the repayment is probable, then it should be provided for in
accordance with the requirements of MFRS137.
If the deferred income method for capital grants has been used, then the remaining grant would be repaid to the
government. Any amounts released to profit or loss may also need to be reversed, depending on the level of
repayment required.
If the netting-off method for capital grants has been used, then the cost of the asset must be increased to
recognise the full cost of the asset without the grant. A liability will be set up for the grant repayment.

14. Thank you 