When acquiring and appraising long-lived tangible assets, one of the major issues is the logging of grants into accounting records.
It can be very difficult to determine at what point a grant should be logged, how it should be logged, and what should be done when a grant needs to be returned.
In the Czech Republic, while acquiring long-lived assets, their accounting appraisal is subject mainly to the Accounting Act No. 563/1991 Coll., implementing Decree No. 500/2002 Coll. for Entrepreneurs, and Czech Accounting Standards for Entrepreneurs. Accounting units must keep accounting records in a way where the company’s financial statements reflect the actual state of assets and liabilities in accordance with the principle of a fair and honest representation of reality. Accounting units can receive various forms of grants from different sources, based on various legal regulations. Act No. 218/2004 Coll. on budgetary rules or drawing grants from European programs can serve as examples.
From an accounting point of view, we consider a grant to be a gratuitous performance provided directly or indirectly for a specified purpose from public sources of the Czech Republic or from abroad from the funds of the European Union, or from public budgets of a foreign state according to a special legal regulation.
When Is the Right Moment to Log a Grant into Accounting Records?
An important role in this matter is played by the moment when the entitlement to receiving a corresponding grant is shown. Since the Czech accounting regulations do not specify this accounting complexity in detail, this issue is addressed further in the Interpretation of the National Accounting Board (Interpretace Národní účetní rady) 1-14.
The first step to obtain a grant is to submit an application. Sometimes a promise of its provision can be issued based on the submitted application. However, this document is not a definitive approval of the grant. Therefore, the grant cannot be logged into the accounting records yet. It is also not relevant when the grant is paid; what matters is when the provision of the grant is beyond doubt. In most cases, this happens when the decision on the provision of the grant has been issued. However, as there is no uniformly defined procedure for a grant’s acquisition, it is necessary for the accounting unit to review the process of the grant’s approval and to decide what accounting period the grant falls into & if and when the indisputable claim to accepting the grant came into existence.
How To Log a Specific Grant Into Accounting Records
When a claim for accepting a donation comes into existence, the corresponding accounting unit logs it as a receivable from the grant provider, and at the same time, it reduces the acquisition cost of the long-term assets. The company may receive a grant to cover interests, which can only be deducted from the assets’ appraised price provided that they were included in the assets’ purchase price. If it is not the case, the grant will be logged into financial revenues. Grants also affect the calculation of deprecations, as the accounting unit depreciates the asset from the acquisition cost of the asset reduced by the grant. Through the reduced deprecations costs, it enters the net income. If logging the grant reduces the assets’ acquisition price below the limit for classifying the assets as long-lived, the corresponding accounting unit will decide whether the assets will no longer be classified as long-lived, or if they will, in which case, deprecations will continue.
How To Deal With Returning a Grant in Accounting
To receive a grant, certain conditions must be met. If these conditions are violated, the company must return all of or a part of the grant. This issue is also addressed by the Interpretation of the National Accounting Board 1-14 and 1-28. If the grant has already been logged, but it will not be financially settled, or a higher amount was logged than the amount that will actually be received, the accounting unit will adjust the accounting of the grant in the period in which the fact became certain, and it will be logged as a new accounting case. If the company in question violates the conditions for receiving the grant, it will again be logged in the period in which this fact was discovered.
An important question in the above-mentioned issue is whether the accounting unit can demonstrate that it learned about the obligation to return the grant only after compiling the financial statements for the period in which the grant was received. If the accounting unit is unable to prove that, this will be considered an accounting error and it will have to be corrected retrospectively. The grant will be recorded as a liability due to the obligation to return the grant. It is also necessary to adjust the acquisition cost of the assets and deprecations, so that they correspond to reality after corrections have been made, as if the grant was never received.
Conclusion
How to deal with grants while acquiring long-lived assets can be a tricky question for accountants. The moment when the claim to accepting the grant is showed plays a major role. The accounting unit can start logging it into accounting records only after determining the moment of unequivocal approval based on the decision to provide the grant. The company will log the receipt of the grant as a reduction in the acquisition cost of the long-term assets, and at the same time, it will be charged to the account of receivables from the grant provider. If the accounting unit fails to meet the conditions stemming from receiving the grant, the grant will have to be returned. In such a case, what matters is when the accounting unit learns about the grant having been returned. If it learned about it after compiling the financial statements and is able to prove it, the grant will be logged in the standard accounting period. However, if it cannot be proven, it will have to be corrected retrospectively in the period in which the grant was received.
Download PDF: How to deal with grants while appraising long-lived assets
