While the 2024 Periodic Review amendments to FRS 102 do not change the core accounting treatment for government grants, they do provide clarification, including confirming the treatment of grants related to right-of-use assets, to align with lease accounting requirements.
Government grants are a form of financial assistance provided by government bodies to support specific activities or objectives, such as investment, innovation or employment. Under FRS 102 Section 24, they are defined as transfers of resources from government in return for past or future compliance with specified conditions relating to the entity’s operating activities.
Certain forms of government assistance such as tax reliefs, reduced tax rates, and capital allowances, are excluded from Section 24 and instead fall within Section 29 Income Tax.
The standard distinguishes grants based on their substance and purpose, rather than strict legal form, and allows entities to choose between two approaches when determining when to recognise a grant.
Performance model
Under the performance model, the timing of recognition depends on whether the grant is conditional. Where a grant does not impose specified future performance-related conditions, it is recognised in income as soon as it is receivable or received.
If a grant is subject to performance conditions, income is only recognised once those conditions have been met. Until that point, any amounts received are recorded as a liability, reflecting the obligation to fulfil the conditions before the grant can be recognised as income.
Accrual model
Under the accrual model, grants are classified based on their purpose, either as revenue grants or asset-related grants.
Revenue grants are recognised in income on a systematic basis over the same periods as the related costs they are intended to offset. Where a grant provides immediate financial support or compensates for costs already incurred, it is recognised in full when it becomes receivable.
Asset-related grants, including those linked to right-of-use assets, are recognised in income over the useful life of the asset. Any portion of the grant that is deferred is presented as deferred income, rather than being deducted from the carrying amount of the asset.
Under the accrual model, revenue grants may be presented either as income or offset against the related expenditure, depending on the entity’s accounting policy.
Why the accounting model matters
Government grants remain an important source of funding for many businesses. FRS 102 requires grant income to be recognised in line with the substance of the arrangement, whether this is driven by meeting specific conditions or by matching the grant to related costs or assets over time. The choice between the performance model and the accrual model can therefore significantly affect the timing of income recognition and reported results.
How Crowe UK can help
For further advice on how to accurately record government grants, please get in touch with your usual Crowe UK contact.
Contact us
