KAS 7 ACCOUNTING FOR GOVERNMENT GRANTS

AND DISCLOSURE OF GOVERNMENT ASSISTANCE

EXPLANATORY NOTES

Explanatory Notes to Kosovo Accounting Standards are intended to provide

additional understanding of the Standards and technical guidance as to their use
and application. In case of any divergence between Explanatory Notes and
Standards, the Standards prevail.

1. The objective of KAS 7 is to prescribe the presentation, accounting

treatment, and disclosure of government grants and assistance. KAS 7 does not
deal with:
 government participation in the ownership of the enterprise;
 government assistance provided to the enterprise in the form of benefits
that are related to, determined, or limited by income tax liability. As
examples: tax credits and reduced tax rates; and
 government assistance provided only indirectly through actions that affect
the general economy, such as infrastructure development.

2. Government grants, or other types of government assistance are usually

provided to enterprises in order to encourage them to undertake activities that
the government considers desirable but that would not be economically feasible
without government support.

3. A Government grant is government assistance that entails the transfer of

resources to an enterprise in return for compliance with certain conditions
relating to its operating activities. For example, an enterprise may receive 30
percent of the cost of pollution control equipment from the government if the
equipment is installed and operated in accordance with government
requirements

4. Government assistance, on the other hand, is action that is intended to

provide an economic benefit to an enterprise or a class of enterprises that fulfill
certain criteria. For example, small enterprises may receive free tax or legal
advice in order to encourage their growth.

Government grants
5. There are two types of government grants:
 Grants related to assets; and
 Grants related to income

Grants Related to Assets

6. A grant related to assets is one whose primary condition is that the
enterprise qualifying for the grant must acquire, either by purchase or

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construction, a long-term asset or group of assets. The grant may also have
other conditions attached, such as the type, location, or the period of time during
which the asset must be acquired or held.

Grants Related to Income

7. Grants related to income are all government grants other than those
related to assets. Examples include:
 A government loan that is not required to be repaid if the enterprise
meets the terms for forgiveness of the loan;
 Government funds received to offset costs involved in implementing
government mandated programs; and
 Monetary assistance by the government to reduce expenses associated
with developing new technology in areas that are government supported

Recognition of government grants

8. Government grants are provided to the enterprise in return for past or
future compliance with certain conditions. Therefore, grants should not be
recognized until there is reasonable assurance that both of the following criteria
are met (KAS 7.7):

1. The enterprise will comply with the grant’s conditions, and

2. The grant(s) will be received.

The term “reasonable assurance” means that a sufficient degree of certainty

exists that both of the criteria will be met.

9. KAS 7.11-12 requires that government grants be recognized as income,

on a systematic and rational basis, over the periods necessary to match them
with the related costs that they are intended to compensate. They should not be
credited directly to shareholders’ interests and they should be accounted for on
an accrual, not a cash, basis.

10. KAS 7 lays down requirements for recognition of grants under the
following conditions:

1. Grants in recognition of specific expenses (KAS 7.13);

2. Grants related to depreciable assets (KAS 7.13);
3. Grants related to non-depreciable assets (KAS 7.14); and
4. Grants as compensation for expenses or losses already incurred (KAS
7.15)

Grants in recognition of specific expenses;

11. Grants in recognition of specific are recognized as income in the same
period as the relevant expense. This is because, in most cases, the periods over
which an enterprise recognizes the costs or expenses related to government
grants are readily ascertainable.

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Illustrations
12. Company A receives a grant of 2 million euros in order to reimburse it for
specific operating costs associated with the first four years of activity in an
underdeveloped area of the country. Actual costs incurred, and grant income
recognized over the four years are as follows:
Costs Income
Year Incurred Recognized

1 250,000 250,000
2 500,000 500,000
3 800,000 800,000
4 450,000 450,000
Total 2,000,000 2,000,000

13. If the grant is for a greater or lesser amount that the related costs, the
grant will be recognized in proportion to the costs incurred in each period. If, for
example, the grant totals 2 million euros and the related costs total 4 million
euros, the grant income will be recognized as follows:
Income
Year Cost Percent Recognized

1 500,000 12.5 250,000

2 1,000,000 25.0 500,000

3 1,600,000 40.0 800,000

4 900,000 22.5 450,000

4,000,000 100.0 2,000,000

Grants Related to Depreciable Assets

14. Grants related to depreciable assets, are usually recognized as income
over the same periods and in the proportions to depreciation charges on those
assets (KAS 7.13).

Illustration
15. Company A receives a grant of 1 million euros towards the purchase of
pollution abatement equipment for its factory. The cost of the equipment is 2
million euros and Company A depreciates it over 20 years, using the straight-line
method. The annual depreciation charge and grant income recognition is as
follows:

Annual depreciation Grant income recognized each year

(2,000,000€/20) = 100,000€ (1,000,000€/20) = 50,000€

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16. If the depreciation method used is other than straight-line, the grant
income continues to be recognized in proportion to the depreciation charges.

Illustration
17. Company A receives a grant of 1 million euros towards the purchase of
pollution abatement equipment for its factory. The cost of the equipment is 2
million euros. Company A uses an accelerated depreciation method with the
annual charges listed below for the first four years. The grant recognized each
year is as follows:
Income
Annual depreciation Percent Recognized
Year 1: 300,000 15.0 150,000
Year 2: 240,000 12.0 120,000
Year 3: 190,000 9.5 95,000
Year 4: 150,000 7.5 75,000
Subtotal 880,000 44.0 440,000

Grants Related to Non-depreciable Assets

18. Grants related to non-depreciable assets, such as land, may also require
the fulfillment of certain obligations and would then be recognized as income
over periods that bear the costs of meeting the obligations (KAS 7.14).

Illustration
19. Company A receives a grant of land with a fair value of 200,000€ on
condition that it clean ups the land’s entire area and plants trees on a specific
undeveloped portion. The grant amount is equal to the fair value of the land. If
Company A’s costs of cleaning up the land and planting trees occur over 3 years
in accordance with the schedule shown below, the grant income recognized each
year is as follows:
Income
Year Costs Percent Recognized
1: 75,000 50.0 100,000
2: 45,000 30.0 60,000
3: 30,000 20.0 40,000
150,000 100.0 200,000

Grants as Compensation for Expenses or Losses Already Incurred

20. A government grant that becomes receivable as compensation for
expenses or losses already incurred, or for the purpose of giving immediate
financial support to the enterprise with no future related costs, should be
recognized as income of the period in which it becomes receivable (KAS 7.15).

For example, a grant might be awarded to an enterprise to enable it to continue

in business in an economically disadvantaged location where, because of
operating losses, the enterprise would otherwise have been forced to discontinue
operations. This accounting method treats the grant as compensation for

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previous losses and not as providing assets or benefits that will be earned in a
future period. Therefore, the grant should be recognized as income in the period
that the enterprise becomes eligible to receive the grant.

21. When a grant represents compensation for losses that qualify for
treatment as extraordinary items under KAS 5, the grant should also be
presented as an extraordinary item in the financial statements. For example, if
an enterprise receives a grant for extraordinary losses from a massive flood that
is both highly unusual in nature and extremely rare in occurrence, both the flood-
related losses and the compensating grant should be reported in the income
statement as extraordinary items.

Grants as Part of a Package of Financial Aid

22. IAS 20.19 describes the accounting treatment for grants that are
sometimes received as part of a package of financial or fiscal aids to which a
number of conditions are attached. In such cases, care is needed to identify the
conditions giving rise to costs and expenses that determine the periods over
which the grant will be earned. It may, for example, be appropriate to allocate
one part of the grant on one and another part on a different basis.

Illustration
23. Company A is a medical facility and receives a grant totaling 6 million
euros. Two thirds of the grant is to construct a special new addition to its medical
building for cancer treatment and the remaining one third is to subsidize medical
charges for patients using the new services during the initial three years after
completion. The grant components are as follows:

Grant related to assets (2/3 x 6,000,000) = 4,000,000

Grant related to income (1/3 x 6,000,000) = 2,000,000

24. The grant related to assets for building the addition should be recognized
on the income statement over the useful life of the addition and in proportion to
depreciation charges. For example, if the addition is depreciated on a straight-
line basis over 20 years, 200,000€ (4,000,000€/20) of the grant will be
recognized each year.

25. The grant related to income should be recognized over three years. If
services occur evenly over the three years, one third of the grant is recognized
each year (2,000,000€/3 = 666,667€). If services exhibit some other distinct
pattern, then the grant should be recognized on a systematic and rational basis
that takes into consideration the timing and costs of the services that are
subsidized by the grant.

Non-monetary Government grants

26. A government grant need not necessarily be in cash or cash equivalents.
Sometimes, it may take the form of a non-monetary asset, such as land,

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buildings, or equipment. The usual accounting treatment, according to KAS 7.18,
is to account for both the grant and the asset at the fair value of the non-
monetary asset. An alternative treatment, referred to in IAS 20.23, which KAS
7.18 does not exclude, is to record both the asset and the grant at a nominal
amount.

Accounting for Grants Related to Income

27. The appropriate accounting for grants related to income can be
determined by analyzing the terms of the assistance when funds are received or
eligibility determined.

The accounting treatment for the following types of grants follows:

 Assistance toward current period expenses or revenues;
 Assistance relating to expenses of future periods; and
 Forgivable loans

Assistance toward current expenses or revenues.

28. Assistance toward current period expenses or revenues should be
accounted for in the determination of net income for the current period,
regardless of when the grant was received. This complies with the principle of
accrual accounting.

Illustration
29. Following is an illustration of transaction recording when funds are
received and expenses incurred during the same reporting period. Company A
received a vendor’s invoice totaling 10,000€ for expenses incurred during
February, XXX1 for a government required employee training program. The
training costs were eligible for reimbursement under a grant. Company A
recorded the following transaction in February to recognize the expense:

Debit Employee training expenses 10,000

Credit Accounts payable 10,000

30. Because the expense is eligible for reimbursement under a grant and
Company A has met the conditions for reimbursement, the following transaction
is also recorded when the expenses are incurred. Note that Company A has
determined that it will record the grant as a reduction of the related training
expense:

Debit Grants receivable 10,000

Credit Employee training expenses 10,000

31. When the grants funds are received, the following transaction is recorded:

Debit Cash 10,000

Credit Grants receivable 10,000

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On the income statement for XXX1, the employee training expenses will be
reported net of the grant amount. Because the grant funds were received during
XXX1, there will not be any amount for grants receivable on the balance sheet.

32. The basic accounting entries are the same when the eligible expenses are
incurred in one period and the grant funds are received, in a subsequent
reporting period. The only difference is that Company A would show a Grants
Receivable amount of 10,000€ on its balance sheet until receipt of the grant
funds.

Accounting for Assistance Relating to Expenses of Future Periods

33. When grant funds are received before the related expenses are incurred,
the amount relating to future periods should be deferred and transferred to
income as the grant-related expenses are incurred.

Illustration
34. The following example illustrates the recording of assistance related to
expenses of future periods. In XXX1, Company A received 360,000€ as a grant
that will be used to offset the higher costs of utilizing a new source of electrical
power for the next three years. Company A made the following accounting entry
when the grant was received:

Debit Cash 360,000

Credit Deferred grant income 360,000

35. The balance in the deferred grant income account must be amortized on a
systematic and rational basis that matches the pattern of the related expenses. If,
for example, the expenses are incurred evenly over the three years, at the end of
the first year, one-third, or 120,000€ of the grant income, will be included in the
income statement while the remaining balance of 240,000€ will appear as
deferred grant income in the liabilities section of the balance sheet.

The monthly accounting entry to amortize the grant is:

Debit Deferred grant income 10,000
Credit Grant revenue 10,000

Accounting for Forgivable Loans

36. Forgivable loans should be recognized when there is reasonable
assurance that the enterprise will meet any required terms. That is to say,
forgivable loans should be accounted for when the firm becomes entitled to
receive the loan, not when it is forgiven. Any amount not yet forgiven should be
disclosed by means of a note to the financial statements.

Should the loan for some reason become repayable, this event should be
accounted for prospectively and not as a prior period adjustment.

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Illustration
37. The following example illustrates accounting for a forgivable loan.
Company A received a forgivable government loan of 200,000€ as
encouragement to use a new nonpolluting energy source. The loan stipulates
that 50,000€ will be forgiven each year for four years if Company A’s overall
pollution measurements are less than maximum allowed amounts each year.

38. When the loan is received, there is reasonable assurance that Company A
will meet the conditions for forgiveness and the amount is recorded as follows:

Debit Cash 200,000

Credit Forgivable loan 200,000

The following entry is made to recognize the loan forgiveness for the first year.

Debit Forgivable loan 50,000

Credit Grant revenue 50,000

39. During the second year, Company A’s pollution measurements exceed the
maximum amount allowed and the loan is no longer forgiven. Company A makes
the following entry to reclassify the remaining amount of the loan:

Debit Forgivable loan 150,000

Credit Government loan payable 150,000

40. Company A should also begin to accrue any interest payable that is
required on the loan. The notes to the financial statements should include
information on the loan including conditions and repayment terms.

Financial Statement Presentation

41. The financial statement presentation of grants differs the two types of
grant:
 Grants related to assets (KAS 7.19-21)
 Grants related to income (KAS 7.22-23)

Presentation of Grants Related to Assets

42. (a) Presentation on the balance sheet.

Government grants related to assets, including non-monetary grants at fair value,
should be presented in the balance sheet by deducting the grant in arriving at the
carrying amount of the asset, This is referred to as the “net method”.

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Illustration
43. The net method of presenting grants related to assets is illustrated by the
following example. Company A receives a government grant of 200,000€
towards the purchase of an asset costing 800,000€. Under the net method, the
grant is deducted from the gross book value of the asset in arriving at the
carrying amount of 600,000€ (800,000€ minus 200,000€) shown on Company A’s
balance sheet.

44. Under the net method, depreciation is calculated and reported based on
the carrying amount of 600,000€. Because the carrying value has been reduced
by the grant, the annual depreciation charge is lower than it would have been
without the grant, and income is correspondingly higher. In other words, the grant
is recognized as income over the life of a depreciable asset through the reduced
depreciation charge.

45. (b) Presentation on the cash flow statement

The receipt of grants related to assets in the form of cash, and the purchase of
any grant-related assets should be separately disclosed in the investing
activities section of the cash flow statement (KAS 7.21). That is, the
inflow of grant funds may not be netted against the purchase amount of
the asset on the cash flow statement, even though the net method is
used in the balance sheet.

Illustration
46. The following example illustrates the disclosure of grants related to assets
in the cash flow statement prepared under the direct method in accordance with
KAS 8:

Company A
Cash Flow Statement
For the period 01 January -31 December XXXX

Cash flows from operating activities

Cash receipts from customers 1,560,000
Cash paid to suppliers and employees (1,150,000)
Cash generated from operations 410,000
Interest paid (100,000)
Income taxes paid (70,000)
Net cash from operating activities 240,000

Cash flows from investing activities:

Purchase of fixed assets (800,000)
Receipt of grant 200,000
Proceeds from sale of other financial assets 290,000
Net cash used in investing activities (310,000)

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Cash flows from financing activities:
Proceeds from long-term borrowings 150,000
Dividends paid (120,000)
Net cash provided by financing activities 30,000

Net decrease in cash (40,000)

Cash at beginning of period 260,000
Cash at end of period 220,000

Presentation of Grants Related to Income

47. Grants related to income are presented as a credit in the income
statement, either separately or under a general heading, such as “other income”
(KAS 7.22). If the grant amount is not shown separately on the income
statement, it must be disclosed in the notes to the financial statements.

48. It is not appropriate to disclose only the net income or expenses related to
grants. Grant income and expenses should be reported separately so as to
facilitate comparison with other expenses that are not affected by a grant (KAS
7.23).

Illustration
49. The following example illustrates the presentation of grants related to
income in the income statement.
Company A receives a grant of 50,000€ in return for hiring and training local
unskilled workers for its new factory. All expenses are incurred, and grant funds
received, in XXX1. Company A records the grant as follows:

Debit Cash 50,000

Credit Grant revenues 50,000

50. The grant revenue may be presented in either of the following ways on the
income statement:

Alternative One- As a Separate Revenue Alternative Two- AS an Other Income

Item Item
Company A Company A
Income Statement for the Year XXX1 Income Statement for the Year XXX1

Revenue from sales Revenue from sales

Revenue from grants

Less: Materials Less: Materials

Wages Wages
Other expenses Other expenses
Depreciation Depreciation
Interest expense Interest expense

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 Plus: Other income
Operating Income Before Taxes Operating Income Before Taxes
Income Tax Expense Income Tax Expense
Net Income Net Income

Government Grant Repayments

51. A government grant may become repayable if, for example, the enterprise
does not comply with the grant conditions after receiving the funds. A government
grant that becomes repayable should be accounted for as a change in
accounting estimate (refer to KAS 5, Net Profit or Loss for the Period,
Extraordinary Items, Changes in Accounting Estimates, Changes in Accounting
Policies, and Fundamental Errors).

52. Accounting for grant repayments depends upon whether the grant is
related to income or to assets.

Repayment of grants related to income

53. If all or part of a grant related to income becomes repayable, the required
accounting treatment (KAS 7.24) is to eliminate the repayable amount against
any remaining balance of deferred credit set up for the grant.

54. If there is no deferred credit, or the repayment exceeds the balance of

deferred credit, the repayable amount should be recognized immediately as an
expense.

Illustrations:

55. 1. Company A received a grant for 50,000€ that was intended to cover
training expenses for disadvantaged workers. Company A made the following
accounting entry when the grant was received:

Debit Cash 50,000

Credit Deferred government grant 50,000

The deferred government grant was reported as a liability in the balance sheet.

56. Before any expenses were incurred, Company A decided not to hire or
train disadvantaged workers. The grant became repayable since the enterprise
did not comply with the required conditions. Company A made the following
accounting entry to record its liability to repay the grant:

Debit Deferred government grant 50,000

Credit Grant repayable 50,000

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57. 2. Company A received a grant for 50,000€ that was intended to cover
expenses for training disadvantaged workers for employment in specified skilled
positions. Company A made the following accounting entry when the grant was
received:

Debit Cash 50,000

Credit Deferred government grant 50,000

58. Company A hired an initial group of workers and incurred 20,000€ in

training expenses. The enterprise made the following accounting entry to
recognize the portion of the grant associated with the training costs:

Debit Deferred government grant 20,000

Credit Grant revenue 20,000

Following this transaction, the remaining balance in the deferred government

grant account was 30,000€ (50,000€ minus 20,000€).

59. The government audited Company A’s hiring and training program and
determined that Company A was not in compliance with the terms of the grant
because the trained workers had not been placed in the skilled positions as
required. Consequently, the entire grant became repayable

60. Company A made the following accounting entry to eliminate the

remaining balance in the deferred government grant account, recognize the
remaining grant repayment as an expense and record the liability to repay the
grant:
Debit Deferred government grant 30,000
Debit Grant expense 20,000
Credit Grant repayable 50,000

Repayment of grants related to assets

61. If all or part of a grant related to assets becomes repayable, the required
accounting treatment (KAS 7.24) is to increase the carrying amount of the asset
by the amount repayable. The cumulative amount of additional depreciation that
would otherwise have been recorded in the absence of the grant should be
recognized immediately as an expense.

Illustration
62. Company A received a grant for 150,000€ that was intended to offset a
portion of the cost of acquiring new low-polluting machinery costing 450,000€.
The grant required that for the next five years, Company A’s measured pollution
output should not exceed certain levels or otherwise the entire grant would be
repayable.

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63. Company A made the following accounting entry when the grant was
received:

Debit Cash 150,000

Credit Machinery – Government grant 150,000

After acquisition, the machinery’s carrying value amounted to 300,000€

(450,000€ minus 150,000€). Company A used the straight-line method to
depreciate the machinery over ten years with no salvage value. Therefore,
annual depreciation was 30,000€ (300,000€/10).

64. At the end of four years, the machinery had a carrying amount of
180,000€, calculated as follows:
Net acquisition cost 300,000
Accumulated depreciation, 30,000€ x 4 120,000
Carrying amount 180,000

65. During the fifth year, Company A’s measured pollution exceeded the
amount allowable under the grant and the entire grant therefore became
repayable.

Company A made the following accounting entry to record its liability to repay the
grant:
Debit Machinery – Government grant 150,000
Credit Grant repayable 150,000

66. In addition, Company A had to immediately recognize additional

cumulative depreciation as an expense. The acquisition cost of the machinery
exclusive of the grant was 450,000€ so, in the absence of the grant, annual
depreciation would have been 45,000€ (450,000/10). Over a four-year period,
depreciation on the gross carrying amount would be been 60,000€ higher
(45,000€ minus 30,000€ = 15,000€ times 4 = 60,000€) than on the net carrying
amount.

67. Company A made the following accounting entry to recognize the

additional cumulative depreciation as an expense:
Debit Depreciation expense 60,000
Credit Accumulated depreciation 60,000

Following the depreciation adjustment, the machine has a carrying value of

270,000, as follows:
Acquisition cost 450,000
Accumulated depreciation, 45,000 x 4 180,000
Carrying amount 270,000

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68. Beginning with year five, annual depreciation of 45,000€ will be
recognized and the remaining carrying value of 270,000€ will be depreciated to
zero by the end of the machine’s expected ten-year life.

Certain Government Assistance

69. The definition of government grants excludes certain forms of government

assistance that:
 cannot reasonably have a value placed on them, such as free technical
and other professional advice; and
 government benefits that cannot be distinguished from the enterprise’s
normal trading transactions. Although the benefit might not be disputed,
attempts to quantify it might be arbitrary or not feasible.

70. If the benefits from the above types of government assistance are
significant, the nature, extent, and duration of the assistance must be disclosed
so that the financial statements are not misleading (KAS 7.27).

Disclosure
71. KAS 7.30 requires the following disclosures:

 The accounting policy adopted for government grants, including the

methods of presentation adopted in the financial statements;
 The nature and extent of government grants recognized in the financial
statements and an indication of other forms of government assistance
from which the enterprise has directly benefited; and
 Unfulfilled conditions and other contingencies attaching to government
assistance that has been recognized.

Summary:

72. A summary of the common forms of grants, and recognition methods

follows.
 Grants related to depreciable assets should be amortized over the
periods, and in proportion to, the depreciation charged on the assets.
 A grant of land may be conditional upon the construction of a depreciable
asset, such as a building, on the site. The grant is recognized as income
over the life of the depreciable asset.
 A grant may become receivable from the government as compensation for
expenses or losses that were already incurred, or for the purpose of giving
immediate financial support to the enterprise. If no future related cost is
expected, the grant is recognized as income of the period it becomes
receivable and, if appropriate, is treated as an extraordinary item. If future
related costs are expected, the grant is recognized as income as an offset,
and in direct proportion, to the costs.

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 Grants may be intended to offset specific costs. When such a grant is
received, it should be recognized on the income statement over the same
periods and in proportion to the relevant expense that it is offsetting. If the
grant amount is a greater or lesser than the related costs, the grant will be
recognized in proportion to the costs incurred in each period.
 Grants may require the enterprise to comply with special conditions.
When such a grant is related to a non-depreciable asset such as land, the
grant should be recognized on the income statement over the period and
in proportion to the costs of meeting the required obligations.
 Some grants are part of a package that includes several different
conditions and purposes. The terms of such a grant must be reviewed so
that the various components may be accounted for properly by
apportioning the grant into its separate elements and recognized each
element appropriately.
 Forgivable loans should be recognized when there is reasonable
assurance that the enterprise will meet any required terms. They are
accounted for when the firm becomes entitled to receive the loan by
meeting the eligibility requirements, not when it is forgiven

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