For a transportation public agency that receives government subsidies (to cover long-term capital expenditures like rail tracks etc), where should the subsidies be shown on the balance sheet? Should it be treated as contributed capital? Value of the assets built --> long terms assets
Cash balance --> unaffected since the subsidies are used immediately to pay off the rail track construction without accrual
Subsidies --> treated kind of like contributed capital
Government grants are treated as income. If the grants are meant to compensate a long term project then it is partly recognized as income in the P&L and the rest goes to balance sheet as deferred income ( a kind of liability). From there it is drawn every year to transfer to the income statement as other income in a manner similar to amortization.
That makes sense. How about cash flows? Assuming the indirect method (and no other changes in operating accounts), generally depreciation is ADDED back to net income to calculate operating cash flow. Will this require another line item (like amortization of deferred capital funding?)
There is no initial Cash flow because subsidies bypassed company’s bank account. In subsequent periods by indirect method there is depreciation adjustment. Periodical recognized part of deferred revenue is already in Net income.
In case of 1 period project, such subsidies will be recognized as revenue of current period with offset entry in current period expense. There will not be cost capitalization nor deferred revenue. There will not be impact on cash flow because subsidies are directly invested by bypassing company’s bank. Deferred position is used in multi period project with cost capitalization because of fundamental accounting principle of matching expenses and revenues in same period.