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Purchase of PP& subject to tax-free government grant

An entity acquires an item of PP& for €1 million subject to a tax free government grant of €350,000. The asset is also fully-tax deductible (at €1 million). IAS 20 permits the grant to be accounted for either as deferred income or by deduction from the cost of the asset. Whichever treatment is followed, a deductible temporary difference arises:

• If the grant is accounted for as deferred income, there is a deductible temporary difference between the liability of €350,000 and its tax base of nil (carrying amount €350,000 less amount not taxed in future periods, also €350,000).
• If the grant is accounted for as a reduction in the cost of the PP&, there is a deductible temporary difference between the carrying amount of the PP& (€650,000) and its tax base (€1 million).

IAS 12 emphasises that the initial recognition exception applies, and no deferred tax asset should be recognised. [IAS 12.33].