Revenue Recognition of FR&D Grants
I was recently digging into the accounts of a company that had reported the value of R&D grants as revenue upon receipt in the form of a cash rebate. Essentially they received approximately 30% of the payroll cost of engineers employed on an approved project as a cash rebate, subject to approval by the agency that qualified the grant application. Given that the Company sells a hardware product rather than engineering services I believe that the rebate should have been treated as an offset against engineering payroll expense rather than revenue. The company claimed that since they had been treating the rebates as revenue for several years, and their accounts had been audited, their policy must be correct. Has anyone out there experienced this situation and willing to provide guidance as to what they have seen in the way of grant treatments- revenue or expense offset?
Answers
Company: Packaging Dynamics
We have these also and have these related to captial projects as well as expenses. We have used the grants as offsets to expense as well as reductions in capital expenditures. While no perfect guidance, we found nothing to support posting these to revenue. If it's really a segment of your business, then maybe it could be revenue, but most likley not. Our big four firm was made aware of this treatment and was in agreement. We received a significant amount of cash for grants.
Company: Moonscoop LLC
I agreed with Patrick,R&D grants are costs rebate therefore they should be used to offset costs, whether or not those costs were capitalized or expensed. Our company have obtained lots of grants and we reduced costs upon receipt; to us revenue are actual sales you made. However, under IFRS grants are considered as revenue that you could recognize a portion of it each year proportionate to costs amortize for that year.
Company: TTX
Revenue accounting rules have some seams, including distinguishing when activities are "ordinary and recurring services" - indicating revenue treatment - or "incidental" and non-recurring and those suggesting a netting with associated expenses. Independent accountants have permitted offsetting usually only when the level of activity is small enought to be considered "incidental" or a service not generally sold. SEC regulations tend to discourage netting, but do not always prohibit the practice. The new proposal for GAAP/IFRS does not fully resolve this issue as definitions in the proposal use not fully consistent descriptions.