Should funds received from government grants for the funding of capital expenditure be classified as operating activities, financing activities or investing activities in the cash flow statement? IAS 7 Statement of Cash Flows has very little information in this regard, so we provide more guidance in this in issue.

Government grants are financial aids provided by the government. Two types of government grants are dealt with in IAS 20. Operating grants are recognised when the expenditure is incurred. Capital grants are recognised over the life of the specific asset acquired. Both grants usually results in deferred income being recognised as a liability on the balance sheet and revenue being recognised later in profit or loss.

Properly accounting for these grants in the cash flow statement is essential for accurate financial reporting and preparers very often get this wrong. Important to note is that irrespective of the type of grant received, the grant is recognised in the cash flow statement at the amount received. Below is some guidance on how to classify government grants in the cash flow statement:

Classification of Operating Grants

Operating grants are intended to fund certain expenses of an entity. These grants will not meet the definition of either investing activities, as it does not relate to the acquisition or disposal of long-term assets or investments, or financing activities, as the funds are not borrowed funds and are not contributed equity. By default, these funds are operating cash flows even when all the expenditure are not incurred in the current financial year.

Classification of Capital Government Grants

Capital government grants are intended to support the purchase or construction of fixed assets such as buildings, machinery, or infrastructure. These grants are not meant for day-to-day operational expenses but is meant to fund the acquisition of long-term assets which will meet the definition of investing activities in IAS 7.

Disclosure example

Entity A obtained R50k from the local government to set up a research facility and to conduct research. R30k is earmarked to aid in the set-up of the facility and R20k is earmarked to assist with the operating expenditure relating to the specific research. The cost of setting up the facility was R100k, and the facility will be depreciated over 10 years. The facility was completed at the beginning of the year and expenses of R10k were incurred relating to research activities during the year. The budget for research is R15k for the next year.

Wendy Lesch (CA)SA, RA
Email: wendy.l@nexia-sabt.co.za