Question 1 Difficulties of identifying the related expense that is intended to compensate for a grant

Difficulties of identifying the related expenses that are intended to compensate for the grant may arise where the grant’s terms do not specify the expenditure towards which it is intended to contribute. In practice, grants may be awarded to defray project costs comprising both income and capital expenditure. Project grants may be related, for example, to the project’s capital expenditure costs and the number of jobs created or safeguarded. In such circumstances, the expenditure eligible for grant aid may be all the costs incurred that are directly attributable to the project. The terms of the grant itself often need to be carefully examined whether the intent is to defray costs or to establish a condition relating to the grant’s entire amount.

Example − Asset or income grant? An entity obtains a grant from an industrial development agency for an investment project. The project is a building to house a manufacturing plant. The principal terms are that the grant payments relate to the level of capital expenditure and the grant’s intention is to help ensure that imports of the product can be replaced with products produced in the country and to safeguard 500 jobs. The grant will have to be repaid if there is an underspend on capital or if the jobs are not safeguarded until 18 months after the date of the last fixed asset purchase. This grant is related to capital expenditure. Thus, under IAS 20 it is an asset related grant. The employment condition should be seen as an additional condition to prevent replacement of labour by capital, rather than as the reason for the grant. If the grant were income related, it would be related to income expenditure such as a percentage of the payroll cost or a fixed amount per job safeguarded.