At a glance
- A grant settled directly with a vendor is still recognisable in the company’s own books — MFRS 120 states that the manner of receipt does not change the accounting.
- MPERS Section 24 recognises grants as income when receivable or when performance conditions are met, and gives none of MFRS 120’s options to defer a grant or net it against the asset.
- Tax-based support, including capital allowances and incentives, is outside both standards and is not accounted for as a government grant.
A company awarded a digitalisation or technology adoption grant usually treats the matter as closed once the claim is approved. The accounting question arrives later, and it is a different question from eligibility: when is the grant recognised, at what amount, and where does it appear in the financial statements. The answer is not the same under MFRS 120 Accounting for Government Grants and Disclosure of Government Assistance as it is under Section 24 of MPERS, and the difference is larger than most companies expect.
The point at which this most often goes wrong is mechanical. Many Malaysian grant schemes are settled by the agency paying the approved portion directly to the appointed vendor. The company pays only its own share, no grant money ever reaches its bank account, and the transaction is recorded net of an amount that is never identified as a grant at all. That treatment is wrong under MPERS, and incomplete under MFRS even where the net figure happens to be right.
The manner of receipt does not change the accounting
MFRS 120 addresses this directly. Its paragraph 9 states the principle that the way in which a grant is received does not affect the accounting method adopted for it, and that a grant is accounted for in the same manner whether it is received in cash or as a reduction of a liability. The definition in paragraph 3 points the same way: a government grant is assistance by government in the form of a transfer of resources in return for past or future compliance with conditions relating to the entity’s operating activities. Resources, not cash.
MPERS Section 24 reaches the same place by a different route. It requires grants to be measured at the fair value of the asset received or receivable. An asset received is not confined to money, and a settlement made on the company’s behalf that discharges its obligation to a supplier is a transfer of resources to the company as surely as a bank transfer would be. The absence of a cash receipt is not a reason to omit a grant; it is only a reason the grant is easy to miss.
What is, and is not, a government grant
Scope is worth settling before recognition, because several things a company might describe as government support fall outside both standards.
MFRS 120 expressly does not deal with government assistance provided as a benefit in determining taxable profit or tax loss, and it names income tax holidays, investment tax credits, accelerated depreciation allowances and reduced income tax rates as examples. A capital allowance, including an accelerated one, is therefore not a government grant and is not accounted for under this standard. Both standards also exclude assistance that cannot reasonably have a value placed on it — free technical or marketing advice, and undertakings by government to stand behind an entity’s obligations, are the standard’s own examples — and transactions with government that cannot be distinguished from the entity’s normal trading, such as a procurement policy responsible for part of its sales. Resources made available to a wide range of entities, such as public roads, are not entity-specific transfers and are not grants.
A government loan is not in itself a grant, because a repayable loan is a normal business transaction. Where the loan carries no interest or a below-market rate, however, the benefit of that rate is treated as a government grant under both frameworks, measured by the difference between the amount at which the loan is initially recognised and the amount received. A company that has taken a subsidised facility and recorded nothing but the loan has almost certainly missed a grant.
When the grant is recognised: two genuinely different models
Under MFRS 120, a grant is not recognised until there is reasonable assurance both that the entity will comply with the conditions attaching to it and that the grant will be received. The standard adds that receiving the grant is not of itself conclusive evidence that the conditions have been or will be fulfilled. Once recognised, the grant is taken to profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs the grant is intended to compensate. A grant compensating expenses or losses already incurred, or giving immediate financial support with no future related costs, is recognised in the period in which it becomes receivable.
MPERS Section 24 is not a simplified version of that model; it is a different one. A grant that imposes no specified future performance conditions is recognised in income when the grant proceeds are receivable. A grant that does impose specified future performance conditions is recognised in income only when those conditions are met. A grant received before the recognition criteria are satisfied is recognised as a liability. There is no systematic spreading over the periods that bear the related costs.
The consequence is practical rather than theoretical. The same grant on the same facts can produce a very different profit profile depending on which framework the company reports under. A grant towards equipment, with the conditions met on installation, is capable of being recognised in income in a single period under MPERS while being spread across the asset’s life under MFRS 120. Neither answer is a policy choice made for effect; each follows from the framework the company applies.
Presentation, and the option MPERS does not give you
MFRS 120 offers a choice for grants related to assets. The grant may be presented as deferred income, released to profit or loss on a systematic basis over the asset’s useful life, or deducted in arriving at the carrying amount of the asset, in which case it reaches profit or loss as a reduced depreciation charge. For grants related to income, the choice is between presenting the grant within profit or loss, separately or under a heading such as other income, and deducting it in reporting the related expense.
MPERS Section 24 gives none of these presentation alternatives. Government grants are income. A private entity applying MPERS cannot deduct a grant from the carrying amount of the asset it helped to buy, and cannot carry it as deferred income to be released over the asset’s life. This is where the vendor-settled grant does real damage: recording the equipment at the net amount paid is, on the face of it, one of the two treatments MFRS 120 permits, but it is not available at all under MPERS. Since MPERS is available to Malaysian private entities and is widely applied by them, the instinctive netting will be the wrong answer for many of the companies most likely to receive these grants.
Even under MFRS 120, netting is not the end of the matter. The presentation is an accounting policy that must be applied consistently and disclosed, together with the nature and extent of grants recognised, an indication of other government assistance from which the entity has directly benefited, and any unfulfilled conditions or other contingencies attaching to assistance already recognised. A grant that was never identified as a grant produces none of that disclosure, whatever the carrying amount happens to be.
Conditions do not end at recognition
Grant conditions typically run for a period after the money is spent — retaining the asset, maintaining employment, achieving a stated outcome. MFRS 120 treats a grant that becomes repayable as a change in accounting estimate, applied first against any unamortised deferred credit, with the excess recognised immediately in profit or loss; where the grant related to an asset, repayment increases the asset’s carrying amount or reduces deferred income, and the cumulative additional depreciation that would have been recognised without the grant goes to profit or loss at once. Under MPERS, a repayment obligation is recognised as a liability when it meets the definition of one.
The reporting consequence is that unfulfilled conditions need to be tracked after the grant has been recognised, not filed away with the approval letter.
Building the assessment
- Identify every form of government support received in the period, including amounts settled directly with a vendor and subsidised or interest-free borrowing, before considering how to account for any of them.
- Separate genuine grants from assistance outside the standards, notably tax-based benefits such as capital allowances and incentives, which are not accounted for as grants.
- Confirm which framework the company applies, since recognition timing and presentation differ materially between MFRS 120 and MPERS Section 24.
- Read the grant agreement for specified future performance conditions, and record which conditions attach to which amounts and when each is met.
- Measure the grant at the fair value of the asset received or receivable where the support is not cash, and document how that fair value was determined.
- Where MFRS 120 applies, select and disclose the presentation policy for asset and income grants, and apply it consistently.
- Maintain a record of unfulfilled conditions through to the end of the compliance period, so that a repayment obligation is identified when it arises rather than when it is demanded.
General-information limitation
This article is general information about the recognition and presentation of government grants under MFRS 120 and Section 24 of MPERS. It is not accounting advice for a particular entity, and it does not determine how any specific grant should be recognised, measured or presented, which depends on the terms of the award, the conditions attaching to it and the framework the entity applies. It does not address the eligibility criteria, quantum or application process for any current scheme, which change from year to year and should be taken from the administering agency. Confirm the current requirements against the standards published by the Malaysian Accounting Standards Board, and obtain advice on your own facts where the amount is material.
To discuss the treatment of grant funding in your financial statements, see Saifudin & Co’s accounting and financial reporting services.