ACCA Strategic Business Reporting (SBR) Practice Exam

When should a government grant be recognized in financial statements?

1. When the grant is announced

2. Upon the completion of the project funded by the grant

3. When there is reasonable assurance that conditions will be met and the grant will be received

4. Only after the entity has received the funds

The correct answer is: When there is reasonable assurance that conditions will be met and the grant will be received

Government grants should be recognized in financial statements when there is reasonable assurance that the conditions attached to the grant will be met and that the grant will be received. This approach aligns with the principles set out in the applicable accounting standards, such as IAS 20 - Accounting for Government Grants and Disclosure of Government Assistance. Recognizing the grant at this juncture ensures that the entity has a reliable basis for accounting, as it indicates that the organization has a legal right to the funds and is likely to meet any conditions imposed by the grantor. This timing reflects a balance between prudence and the need for relevant information in the financial statements. Prior to this point, simply announcing a grant or having completed a related project does not guarantee that the conditions for receiving the funds have been met, making it inappropriate to recognize the grant earlier. In this context, waiting until the funds are received would be too late for financial reporting purposes, as it could lead to a misrepresentation of income in the periods leading up to the receipt.