In general, government aid is considered to be a grant. Accounting policies have not changed in this respect and thus the accounting treatment is governed by general regulations of Act No. 563/1991 Coll., on Accounting, as amended (hereinafter the “Accounting Act”), Regulation No. 500/2002, providing implementation guidance on certain provisions of the Accounting Act, as amended (hereinafter the “Regulation”), and Czech Accounting Standards for entities maintaining accounting records under the Regulation (businesses), as amended (hereinafter “CAS”).

What a grant is

Pursuant to Section 47 (6) of the Regulation, a grant is a free-of-charge supply provided directly or indirectly from government or European budgets or funds under special legal regulations for a pre-defined purpose. A grant includes a waiver of a portion of fees if a legal regulation allows to do so and a relevant body defines the waived portion of fees as a grant. There are operating and investment grants differentiated by the purpose for which the grant is provided.

Operating grants

Operating grants are used to settle expenses or other economic detriment. In this case, the outflow of economic benefits covered by the grant remains to be recognised in current operating expenses and the use of the grant is accounted for as other operating income, or other financial income, if a grant covers, for example, interest expense, bank charges or other financial expenses. The method of grant accounting is explicitly defined in Section 25 of the Regulation. IFRS allow for reducing the relevant operating expenses for which the grant was used by the amount of the grant, which is not possible under CAS.

The above shows that compliance with the accrual principal, i.e. matching the relevant expenses and income, will be crucial. This eliminates impacts on the profit or loss in the period in which the expenses incurred are covered by a grant. In practice, the accrual principle collides with the prudence principle and professional accountants often have to apply their judgement: a grant is recognised when there is an unquestionable legal title to use the grant, i.e. when an entity meets all of its obligations pertaining to the grant application and, at the same time, it is certain rather than probable that the grant will be provided to the entity. The borderline between probability and certainty is very narrow and any grant and approval process needs to be assessed individually. In addition, even though there is a legal title, uncertainty may relate to the amount of the grant to be received. Certain grant titles depend on the number of grant applications and the volume of related projects resulting in a limited budget for grant provision.

CAS No. 017 – Accounting relations explicitly stipulates that an unquestionable legal title to a grant is debited to the relevant account of account group 37 – Sundry receivables and payables and credited to the relevant account of account group 34 – Tax and grant accounting. The use of a grant to settle expenses or other economic detriment is debited to the relevant account of account group 34 – Tax and grant accounting and credited to other operating or financial income on an accrual principle to match the expenses incurred for the defined purpose as illustrated by the double entries below:

Unquestionable legal title to a grant:

• Debit Sundry receivables 37*
• Credit Grant accounting 34*

Using a grant to settle expenses:

• Debit Grant accounting 34*
• Credit Sundry operating (financial) income

Grant receipt on an account:

• Debit Bank account 22*
• Credit Sundry receivables 37*

 Investment grants

Investment grants are contributions provided to acquire fixed assets and are subject to Section 47 (6) of the Regulation. The very nature of a contribution received to settle an investment in the form of fixed assets clearly indicates that the grant will not be reflected in the profit or loss in a single moment, or in a single reporting period, but its positive effect will rather be distributed to a period over which the related assets are depreciated. The acquisition cost of assets, or technical improvement of assets, needs to be reduced by the grant provided and the annual monthly depreciation charges will be calculated based on the reduced acquisition cost. IFRS, specifically IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance, allow for accounting for investment grants through deferred income in addition to the above procedure.

CAS No. 017 – Accounting relations explicitly defines that an unquestionable legal title to a grant is debited to the relevant account of account group 37 – Sundry receivables and payables and credited to the relevant account of account group 34 – Tax and grant accounting. The use of a grant to acquire intangible or tangible fixed assets and technical improvements and a grant to settle interest included in the acquisition cost are debited to the relevant account of account group 34 – Tax and grant accounting with a corresponding entry credited to the relevant account of account class 0 – Fixed assets as illustrated by the double entries below:

Unquestionable title to a grant:

• Debit Sundry receivables 37*
• Credit Grant accounting 34*

Use of a grant to reduce the acquisition cost of assets:

• Debit Grant accounting 34*
• Credit Fixed assets 0**

Grant receipt on an account:

• Debit Bank account 22*
• Credit Sundry receivables 37*

The moment of unquestionable title to a grant may be disputable. Will we reduce the acquisition cost of assets when applying for the grant if we know that all requirements are met or after the receipt of a written notification from the approving authority that the grant for the entity has been approved? Under the interpretation of the National Accounting Board (NÚR) I-14, it is irrelevant, for example, which authority makes a decision on the application, how demanding the approval process is, what the results of historic applications for grants are or whether the application relates to a grant from the government or from the European funds. In any case, an entity has to assess any grant application individually and may account for the grant only when it knows for sure that it will receive it. This should be taken into consideration because accounting for the reduction of an acquisition cost requires extensive documentation (e.g. an entry as part of classification protocols, recognition in the accounting system, comments in the notes to the financial statements) and any possible reversal or corrections might be sometimes difficult to make. Attention should also be paid to the conditions under which a grant is provided and that should be met in future.  A ban on the sale of assets acquired from a grant for a certain period may serve as an example.

Sometimes, grants are provided for assets that have already been classified and depreciated. Such a situation occurs when a grant is applied for after the assets are put in use or when the approval of the grant takes a long time but an entity uses the assets for its economic activity and has met the conditions for classification and thus the assets need to be duly classified and depreciated. The unquestionable title to the grant has yet to be established. In this case, the acquisition cost of the assets is adjusted only when a decision on the grant is made. As of that date, accounting depreciation is recalculated using the new, i.e. reduced, acquisition cost. Depreciation is not adjusted retrospectively as of the date of asset classification. The acquisition cost is reduced by the grant both for accounting and tax purposes in order to ensure that a reporting entity only applies depreciation of the cost financed by the entity.

This should be distinguished from a situation in which an entity has erroneously not reflected a grant received by reducing the acquisition cost of fixed assets. This is an accounting error and depreciation should be corrected retrospectively. If it relates to previous accounting periods, the correction should be accounted for through an entry in line Other profit or loss of prior years 08*/42* and the figures for the prior year(s) should be duly adjusted in the financial statements for comparability reasons and commented in the notes to the financial statements.

Please note that the sub-ledger accounts of assets (register of assets) include, apart from other data, the information that a grant was provided to acquire the assets and the amount of the grant. Assets and technical improvements for which a 100% grant was received are retained off balance sheet. These obligations are stipulated by CAS No. 017 in section Accounting procedure and CAS No. 013 in section Sub-ledger and off balance sheet accounts.

Disclosure in the financial statements

Entities are also required to disclose in the financial statements all grants and assistance received including their amounts and purposes. If grant rules are not met in respect of received grants, an entity is required to disclose this fact and all resulting obligations in the notes to the financial statements in order to meet the requirement to disclose all significant facts that are not apparent individually from financial statement lines pursuant to Section 39 of the Regulation.