Post a grant

accounting

Accounting for a grant consists of making certain notes, based on international valuation standards (IFRS), so that the true image of the company is reflected in its 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 the granting to the payment. In this way, the company in its annual accounts will reflect all those aspects that it affects, especially results and net worth. The first, because in turn it has to do with the payment of taxes, the second, because it is the main information for investors.

Post a grant. Capital or exploitation

Normally, companies can receive a subsidy to finance the purchase of fixed assets, for example machinery, or to finance specific moments of liquidity or some phase of their operating cycle. Both are accounted for somewhat differently. It is true that there are a series of peculiarities depending on the country, but all of them can be grouped into these two. In the last section we will see some examples.

  • Capital grants are long-term, this coinciding with the useful life of the fixed asset that it finances. Thus, when we receive a capital grant, we must calculate the amortization period of the good that we have acquired. On this basis we calculate the part of the subsidy that each year must go as income to the income statement (and pay taxes). The rest remains accounted for in the net worth of the company, since the subsidy increases it.
  • In the second case, the subsidy either finances a specific liquidity problem, or some part of the production cycle, for example the sale. Subsidies for aid to employment or entrepreneurship are also included, since their objective is exploitation and not investment. These always go to the income statement in the year in which they are granted.

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 time we receive the notification, that income is guaranteed. That is to say, it works in the same way as a sale or a purchase, which are then paid or collected and both moments, the income or expense and the collection or payment, must be accounted for.

An example of a capital grant

Before showing some examples of subsidies by country, we will show, in a simple way, how the calculations are carried out in the case of capital subsidies. Operating grants do not have any additional complications and are accounted for as any income and receipts from the company. Let's see how to calculate allocations to annual results.

As we see in the image, the process is simple and can be carried out with a spreadsheet. In the example we see the acquisition of a machinery worth € 100,000 and that is subsidized by 10%, that is, with € 10,000. The calculation for each year is made by dividing these amounts by the years of useful life. In this way, the amortization will be € 20,000 per year and the subsidy to be attributed to results would be € 2,000. Be careful because this income must pay taxes annually on the business tax or income statement.

Some grants by country

  • In Spain, the government grants a multitude of subsidies to companies every year. Among them, there is one to entrepreneurship that is completely lost, although it must meet some conditions. You must spend a minimum of two years trading as a self-employed person and you must invest at least 2,000 in fixed assets. It is really an operating grant, since it is an aid to start a business. It must be declared to the Treasury in the year it is granted.
  • In Argentina there is also a great variety of aid. One of them is for consumption, especially basic necessities. In this case, a phase of the production process is being financed, normally the sale, so that the price for the end customer is lower. It would be an operating subsidy and must be accounted for in the year in which it is produced and the corresponding taxes paid.
  • In Puerto Rico, one of the best known aids is for innovation, usually with the acquisition of technology. If, for example, you buy computer software, which would be in the category of intangible or fictitious fixed assets, we would be talking about a capital grant. This would be accounted for as we have seen in the previous section, depending on the useful life or the years of amortization of the asset.

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