In Singapore, there are two broad approaches to accounting for government grants: the income approach and the capital approach (SFRS(I)1-20:13).
Under the capital approach, such grants are recognised outside the profit or loss, whereas under the income approach, grants are recognised in profit or loss over one or more periods.
SFRS(I) 1-20:12 requires government grants to be recognised in the profit or loss on a systematic basis over the periods (ie income approach) in which the entity recognises as expenses the related costs for which the grants are intended to compensate. In other words, it disallows the use of the capital approach.
For government grants related to assets specifically, SFRS(I) 1-20:24 provides two presentation methods:
- The grant is set up as deferred income that is recognised in profit or loss on a systematic basis over the useful life of the asset (SFRS(I)1-20:26).
- The grant is deducted in calculating the carrying amount of the asset and is recognised in profit or loss over the life of a depreciable asset as a reduced depreciation expense (SFRS(I)1-20:27).
For tax purposes, grants are revenue in nature and taxable if they are given to supplement trading receipts or to defray operating expenses of the entity. On the other hand, grants are capital in nature and not taxable if they are given for the purpose of acquiring capital assets of the entity.
Capital allowance will no longer be given on expenditures funded by capital grants approved on or after 1 January 2021
Capital expenditures incurred on the acquisition of assets funded by capital grants that were approved prior to 1 January 2021 were eligible for a capital allowance (CA) claim, provided the qualifying conditions for a CA claim are met (refer to IRAS e-tax guide, Machinery and plant: Section 19/19A of the Income Tax Act).
However, as announced in the Singapore Budget 2020, CA will no longer be given on such expenditures funded by capital grants that are approved on or after 1 January 2021.
The following example illustrates the accounting for tax effects of capital grants approved prior to and on or after 1 January 2021, based on the two acceptable presentation methods.
Example
ABC Ltd buys a piece of machinery for S$1m, which is partially funded by a government grant of S$0.3m. The grant is capital in nature and not taxable. The machinery qualifies for a CA claim. The following journal entries will be prepared regardless of when the capital grant is approved.
Under presentation 1 method, machinery account is debited S$1m and cash credited S$1m, cash is debited S$0.3m and deferred income credited S$0.3m, with the deferred income recognised in profit and loss as the machinery is depreciated.
Under presentation 2 method, machinery account is debited S$1m and cash credited S$1m, cash is debited S$0.3m and machinery is credited S$0.3m.
Grants pre-2021
Presentation method 1: government grant set up as deferred income
The entire S$1m capital expenditure on the machinery is eligible for a CA claim. The tax base of the machinery and its carrying amount are both S$1m upon initial recognition, thereby giving rise to no temporary difference.
In accordance with SFRS(I) 1-12:8, the tax base of deferred income is its carrying amount (S$0.3m in this case) less any amount of the income that will not be taxable in future periods (S$0.3m in this case). Hence, the tax base of deferred income is $nil, while its carrying amount is S$0.3m, thereby giving rise to a deductible temporary difference (DTD) of S$0.3m.
However, in accordance with the requirement of SFRS(I) 1-12:33, no deferred tax asset (DTA) shall be recognised upon initial recognition and subsequently.
SFRS(I) 1-12 does not permit the recognition of DTA for this DTD as it arises from the initial recognition of the liability (deferred income in this case). Any DTA, if recognised in such a case, would have to be set off against the carrying amount of the related liability, and such adjustment will make financial statements less transparent (SFRS(I) 1-12:22(c)). It may also be noted that since this item will not affect the future tax bills of the company, DTA should not be accounted for (SFRS(I) 1-12:10).
Presentation method 2: government grant deducted in calculating the carrying amount of the asset
The entire S$1m capital expenditure on the machinery is eligible for a CA claim. The tax base of the machinery is S$1m, while its carrying amount is only S$0.7m, thereby giving rise to a DTD of S$0.3m.
However, in accordance with the requirement of SFRS(I) 1-12: 33, no DTA shall be recognised upon initial recognition and subsequently since it arises on the initial recognition of an asset.
SFRS(I) 1-12 does not permit the recognition of DTA for this DTD, as any DTA recognised in such a case would have to be added to the carrying amount of the related asset (machinery in this case), and this will make financial statements less transparent.
Grants post-2021
CA will no longer be given on expenditures funded by capital grants from the government or statutory boards that are approved on or after 1 January 2021. This change seeks to eliminate double-incentivisation, where the capital grants are not taxed while the expenditures funded by these grants are eligible for a CA claim.
Presentation method 1: government grant set up as deferred income
Only the capital expenditure that is not funded by the government grant is eligible for a CA claim. Hence the tax base of the machinery is S$0.7m, while its carrying amount is S$1m, thereby giving rise to a taxable temporary difference (TTD) of S$0.3m.
The tax base of deferred income is S$nil, while its carrying amount is S$0.3m, thereby giving rise to a DTD of S$0.3m.
However, in accordance with the requirement of SFRS(I)1-12:15, neither the deferred tax liability (DTL) nor the DTA shall be recognised upon initial recognition and subsequently in this case.
SFRS(I) 1-12 does not permit the recognition of DTL (DTA) for this TTD (DTD) as it arises from the initial recognition of the asset (liability). Any DTL (DTA), if recognised in such a case, would have to be adjusted against the carrying amount of the related asset (liability), and such adjustment will make financial statements less transparent (SFRS(I) 1-12:22(c)).
It may also be noted that since this item will not affect the future tax bills of the company, DTL (DTA) should not be accounted for (SFRS(I) 1-12:10).
Presentation method 2: government grant deducted in calculating the carrying amount of the asset
The tax base of the machinery and its carrying amount are both S$0.7m upon initial recognition, thereby giving rise to no temporary difference.
Conclusion
Under presentation method 1, although the TTD associated with the machinery increases from S$0 to S$0.3m upon change in tax treatment, no DTL shall be recognised. Regardless of when capital grants are approved, no DTA shall be recognised for the DTD associated with the deferred income.
Under presentation method 2, no DTA shall be recognised for the DTD associated with the machinery for capital grant approved prior to 1 January 2021. Such DTD does not arise in respect of capital grant approved on or after 1 January 2021, hence there is no deferred tax implication.
In short, there is no deferred tax to account for under both presentation methods, regardless of when capital grants are approved.
