Government grant by way of forgivable loan
An entity participates in a government sponsored research and development programme under which it is entitled to receive a government grant of up to 50% of the costs incurred for a particular project. The government grant is interest-bearing and fully repayable based on a percentage (‘royalty’) of the sales revenue of any products developed. Although the repayment period is not limited, no repayment is required if there are no sales of the products.
The entity should account for this type of government grant as follows:
– initially recognise the government grant as a forgivable loan;
– apply the principles underlying the effective interest rate method in subsequent periods, which would involve estimating the amount and timing of future cash flows;
– review at each balance sheet date whether there is reasonable assurance that the entity will meet the terms for forgiveness of the loan, i.e. the entity assesses that the product will not achieve sales. If this is the case then derecognise part or all of the liability initially recorded with a corresponding profit in the income statement; and
– if the entity subsequently revises its estimates of future sales upwards, it recognises a liability for any amounts previously included in profit and recognises a corresponding loss in the income statement.