Accounting & Payroll Department Director at RSM Poland
There are different ways entrepreneurs finance their fixed assets. One of the methods of financing the purchase of fixed assets is a grant, i.e. non-returnable financial assistance the entity obtains either from government or European Union programmes. A grant is discretionary; hence the entity applying for support must, as a rule of thumb, meet pre-defined conditions set by the body that provides grants. In Poland, entrepreneurs often apply for designated grants for the purchase of fixed assets. EU grants allow them to invest in state-of-the-art fixed assets, and eventually to foster their business development and have a competitive edge on the market. Fixed assets purchased under EU projects must be property designated: designation obligations are provided for in the concluded project financing contracts.
Any grant must be accounted for, and it is not tax-neutral, as it affects both revenues and tax-deductible costs.
GRANT IN TAX SETTLEMENTS
In the case of PIT taxpayers, a grant for the acquisition or production of fixed assets is not taxable revenue, whereas in the case of CIT taxpayers, it is taxable revenue, yet it is exempt from tax. At the same time, the depreciation of grant-financed assets is not considered a tax-deductible cost, both for CIT and PIT taxpayers. As regards fixed assets financed both by a grant and from the entity’s funds, depreciation is recognised as a cost only in its portion that pertains to the non-subsidised initial value of fixed asset. During the project, it may turn out that some of the incurred expenses cannot be reimbursed from EU funds, and this affects the initial value of fixed asset. Then, such expenses are covered by the beneficiary, and the depreciation of this portion is considered tax-deductible cost.
Projects may involve costs that do not affect the initial value of the fixed assets, and they may be recognised as tax-deductible costs or not, depending on whether these are eligible or non-eligible costs. In the case of the expenditure being a non-eligible cost, it can be included in the tax-deductible costs as an indirect cost on the date the cost was incurred. The cost of preparing a grant application is an example of such a cost. However, if the incurred cost is eligible, it cannot be recognised as a tax-deductible cost.
ACCOUNTING FOR A GRANT
If an entity involved in an EU-financed project receives a grant from EU funds, it is obliged to separately account for operations related to the received grant. It requires relevant changes, namely introducing additional general ledger and sub-ledger accounts that allow to present the information required by financial reporting and control of a given project. These decisions should be described in the organisation’s accounting policy, which – as we have discussed earlier on our blog – should be a genuine showpiece of a reliable company.
INITIAL VALUE OF FIXED ASSETS
Determining the initial value of grant-financed fixed assets is no different from determining the value of fixed assets financed in other ways. According to the Accounting Act, the price of acquisition and the cost of production of capital work in progress, fixed assets and intangible assets cover the total costs incurred by the entity over the period of construction, assembly, preparation and improvement, until the balance sheet date or the date of commissioning the assets, including:
1) non-recoverable value added tax and excise duty;
2) cost of handling liabilities incurred to finance them and related exchange rate differences, minus related revenue.
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HOW TO RECORD A GRANT CREDITED TO THE BANK ACCOUNT
A grant that is awarded and credited to the bank account is classified as deferred income. The amounts recognised as deferred income shall gradually increase other operating income, matching depreciation charges. If fixed assets have been commissioned, and their depreciation started before the grant was credited to the entity’s bank account, the amount equal to depreciation charges made to date is recognised in other operating income when the grant is credited to the bank account.
The grant credited to the bank account shall be posted on the following accounts:
Dt Bank account
Ct Deferred income.
Together with depreciation charges, you make entries of corresponding amounts under:
Dt Deferred income
Ct Other operating income.
Revenue from a grant for the purchase or production of fixed assets is exempt from tax; hence it shall be recognised as non-taxable revenue.
DEPRECIATION OF GRANT-FINANCED FIXED ASSETS
Regardless of when the grant is credited to the bank account, grant-financed fixed assets, either purchased or produced, shall be depreciated according to Article 32 of the Accounting Act, under which depreciation shall commence no earlier than once the fixed asset has been commissioned, and shall cease no later than once accumulated depreciation has reached the initial value of the fixed asset, or when this asset is intended for decommissioning or sale or is identified as missing, taking the expected net selling price of the remains of the fixed asset upon decommissioning into account, if necessary. In practice, depreciation usually starts from the month following the month in which the fixed asset was commissioned, which is a solution that reflects the tax regulations.
Since depreciation charges of the portion of initial value that is grant-financed do not constitute tax-deductible costs, a portion of depreciation costs that is proportionate to the grant-financed initial value should be separated and excluded from tax-deductible costs.
If the grant for fixed assets is transferred after the depreciation of these fixed assets has commenced, part of the depreciation charges shall be excluded from the tax-deductible costs upon receipt of the grant.
DISCLOSURE OF RECEIVED AND SETTLED GRANT IN FINANCIAL STATEMENTS
Grants for the acquisition or production of fixed assets that have already been received are disclosed on the liabilities side of the balance sheet under “Other accruals and deferred income” as a net value, i.e. the received amount is reduced by write-downs matching the depreciation. In the profit and loss account, write-downs are disclosed alongside the matching depreciation as other operating income.
Entities preparing their financial statements according to Appendix 1 to the Accounting Act shall disclose the received grant under additional information and explanations par.1 item 14 as a list of material items of prepayments and accruals, provided that the entity considers these items to be material, and par. 2 item 6 under the settlement of differences between the income tax base and the financial result.
If you have any questions about accounting for a grant or you are wondering whether your grant has been properly recognised in revenues and tax deductible costs, please contact us.
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