CIMA F3 Syllabus D. Business valuation - Impact of government incentives on entity value - Notes ^{15 / 15}

Government incentives such as capital or revenue grants will have an impact on the valuation of an entity

1. Capital grants 

   are often available in many countries to provide assistance with the cost of assets such as plant and machinery.

2. Revenue grants

   are often available to assist with the costs of revenue expenditure, ie running costs.

lAS 20 Accounting for Government Grants

requires grants to be credited to the statement of financial position (SFP) and then recognised as income on the same basis as the related expenditure on the asset, ie depreciation. 

The method of recognition in the SFP can be:

1. to deduct the grant from the carrying value of the asset, or

2. to credit the grant to deferred income.

In a net assets valuation

consideration should be given to the value of the asset to use, whether to use

• the replacement cost or

• realisable value of the asset, rather than

• the reduced carrying value of the asset. 

  Furthermore, consideration should be given to any potential liability to pay back the grant in the event that the conditions of the grant are not complied with.

Revenue grants

are recognised as income on the same basis as the expenditure to which they relate is incurred. 

This can either be in 'other income' or deducted from the related expenditure. 

This should be taken into account in the figures used in earnings valuations.