Two broad approaches may be followed for the accounting treatment of government grants:
- the ‘capital approach’, under which a grant is treated as part of shareholders’ funds
- ‘income approach’, under which a grant is taken to income over one or more periods.
Those in support of the ‘capital approach’ argue as follows:
- Many government grants are in the nature of promoters’ contribution, i.e., they are given by way of contribution towards its total capital outlay and no repayment is ordinarily expected in the case of such grants.
- They are not earned but represent an incentive provided by government without related costs.
Arguments in support of the ‘income approach’ are as follows:
- The enterprise earns grants through compliance with their conditions and meeting the envisaged obligations. They should therefore be taken to income and matched with the associated costs which the grant is intended to compensate.
- As income tax and other taxes are charges against income, it is logical to deal also withgovernment grants, which are an extension of fiscal policies, in the profit and loss statement.
- In case grants are credited to shareholders’ funds, no correlation is done between the accounting treatment of the grant and the accounting treatment of the expenditure to which the grant relates.
It is generally considered appropriate that accounting for government grant should be based on the nature of the relevant grant. Grants which have the characteristics similar to those of promoters’ contribution should be treated as part of shareholders’ funds. Income approach may be more appropriate in the case of other grants.
