Example of government subsidies
a) When they are granted to ensure a minimum return or to offset operating deficits: they are recognized as income in the year in which they are granted, unless they are intended to finance operating deficits in future years, in which case they are recognized in those years, and are recognized as income in the year in which they are granted.
In accordance with the aforementioned valuation standard, grants, donations and legacies are recorded as liabilities of the entity until they become non-refundable, for which three conditions must be met:
Once the grant is considered non-refundable, it will be recorded as income directly charged to equity, being recognized in the profit and loss account as income following a systematic and rational method.
Account 13: Amount of non-refundable grants, donations and bequests received by the entity and other income and expenses recorded directly in equity until they are transferred or charged to the income statement when the expenses are incurred.
Accounting account for liabilities for subsidies
Accounting for a grant consists of making certain entries, based on international valuation standards (IFRS), so as to reflect a true and fair view of the company’s economic, financial and equity structure.
The accounting of a grant, similar to that of a donation, consists of recording each phase of the grant, from award to payment. In this way, the company’s annual accounts will reflect all the aspects affected by the grant, especially the results and equity. The former, because it in turn has to do with the payment of taxes, and the latter, because it is the main information for investors.
It is important to know that the subsidy, by the so-called accrual principle, is accounted for when it is granted, regardless of the subsequent payment. This is so because at the moment we receive the notification, that income is guaranteed. In other words, it works in the same way as a sale or a purchase, which are later paid or collected and both moments must be accounted for, that of the income or expense and that of the collection or payment.
Accounting for government grants
There are two principles to be considered when accounting for grants. Firstly, the principle of prudence: they must be recorded when the conditions established for their award have been met and there are no reasonable doubts as to their receipt.
Once the grant has been recorded, it is necessary to determine how it will be recognized as revenue. At this point, the provisions of the PGC must be applied: “Grants, donations and non-refundable legacies shall be initially recorded, as a general rule, as income directly charged to equity and shall be recognized in the profit and loss account as income on a systematic and rational basis in a manner correlated with the expenses derived from the grant”.
The following example illustrates the effect on the annual accounts of applying one criterion or the other. Let us suppose that a cooperative undertakes an investment consisting of an investment in land on which it builds a supply warehouse and also buys stainless steel tanks. The cost and subsidies granted are shown below:
What are government grants
We are granted the subsidy for 30,000 euros. We must impute the subsidy directly to the company’s net, not to profit and loss. Being an SME, we have no problem to take the amount directly to the subgroup (13) DebitCredit(4708) H.P. Debtor for subsidies granted30,000 (139) Subsidies 30,000
For the tax effect assuming 25%. Actually, although we have received 30,000 euros, the increase in our net should be tax-free, i.e. 30,000 – 25% of 30,000 = 22,500. In addition, on the other hand, we know that the subsidy will be taxed in the corporate income tax for a total of 25% of 30,000, but not in this fiscal year, but in several years. We therefore have a liability with the Treasury. DebitCredit(139) Subsidies7,500 (479) Liability for D.T. 7,500
b) For the imputation to results of the subsidy, in proportion to the amortization. (i.e. 20% of 30,000) DebitCredit(139) Grants6,000 (746) Grants transferred to income for the year 6,000
For the allocation to income of the subsidy, in proportion to the amortization. (i.e. 20% of 30,000) DebitCredit(130) Grants6,000 (746) Grants Transferred to income for the year 6,000 Transferred to income For the year 6,000