How are government grants treated when related to asset purchases and what is their effect on income?

• A. Grants related to assets reduce the asset's cost or are recognized as deferred income and systematically recognised to match depreciation; if not tied to assets, they may be recognized as income.
• B. Grants related to assets always increase revenue in the period they are received.
• C. Grants are not recognized in financial statements.
• D. Grants are recognized as profit on the sale of asset.

Answer: (A)

Grants tied to asset purchases are not treated as ordinary income. Instead, they are either deducted from the asset’s cost or recorded as a separate deferred government grant liability. The grant is then recognised in the income statement over the asset’s useful life, in line with depreciation. This means the annual depreciation charge is effectively reduced by the amount of the grant (or the deferred grant is released to income gradually as depreciation is charged). If the grant isn’t linked to an asset, it can be recognised as income in the period when it becomes receivable.

So, the correct approach shows that asset-related grants shorten the asset’s carrying amount or create a deferred income that is amortised over the asset’s life, rather than instantly boosting revenue. The other options—granting immediate revenue in the period received, ignoring grants in financial statements, or treating them as profit on sale—don’t fit this treatment.