Treatment of government subsidies in financial statements

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


Since subsidies have been directly invested into long term asset position and this is supposed to be depreciated over longer period,

given principle of matching off expenses (depreciation) with revenues in same period,

1.initial recognition in BS of subsidy receiver

  • asset (debit) + deferred revenue (credit) next periods by depreciation of asset in BS

  • asset depreciation (credit) - partial recognizing of deferred revenue (debit)

P/L entries

+depreciation expense +partial deferred revenue recognized as current in period and matched with depreciation expense

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.

Gotcha. Thanks.

Let me know if this is correct: If this were a 1-period problem instead of a long-term project (i.e. $1M in subsidies spent in $1M in CapEx in the same year), then the entries would be as follows:

In the BS, Assets = $1M, Liabilities = 0, Equity = $1M (retained earnings). This erodes to 0 over time due to depreciation.

In P/L, Amortized Deferred Revenue = $1M, and net income = $1M In CF, CFO = $1M, CFI = -$1M, CFF = $0, net cash flows = 0.

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.

But it’s not an operating expenditure, so shouldn’t it be capitalized even if it’s a 1-period project?

No it shouldn’t be capitalized if is referred to 1 period.

Interesting case I was hoping you could help on.

Kri Kri Milk (Greece):

  • Receiving govt grant for multi period CAPEX, amortisation of the grant recorded in the income statement and subsequently stipped out in the OCF line (non cash benefit to PBT reversed).
  • Receiving grant income through CFI.

Could you possibly help explain the cash movement of the subsidy? I.e. the movement between the subsidy CF-> grant liability recognised on the BS-> amortisation etc.