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Hello Open Tuition
Some help here!An organization was awarded a grant of $ 126 million by the American government on 1 December, 2016 to cover child health outreach program for 16 months period ending 31 March 2018. However, this activity was cancelled to favour the reproductive health program after $29 million had been spent on child outreach.
The question is to explain the treatment of the above transactions in the financial statements of the entity for the year ended 31.March 2018.
In my opinion, i think the grant is related to income.
On receipt, i debit bank $126 million, and credit deferred grant income $126 million.$126 million should be recognized as income on a systematic basis over 16 months period ie $ 7,875,000 (monthly). On cancellation $ 29 million had been spent (approximately 4 months income). The balance of $ 97 million should be recognized as income in full (12 months period) for the year ended 31 March,2018.
I am right or something missing? Thanks.
In the absence of any information about the purchase of assets with the grant it appears to be related to income and would be recognised in profit or loss, either separately e.g. as ‘Other income’ or as a reduction in the related expense. Systematic does not necessarily mean straightline – as the related costs should be ascertainable (so the grant could be recognised in proportion to the costs). It is difficult to come up with a definitive answer without more information – is the grant supposed to cover the costs of the programme entirely or only contribute towards the costs? $126m x 4/16 = $31.5m – but only $29 has been spent. Does the organisation get to keep the grant? Unlikely unless it will provide the services under the new programme. If the unspent amount is repayable it will be a liability, not income.
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