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Grant associated with investment property

The government provides a grant to an entity that owns an investment property. The grant is intended to compensate the entity for the lower rent it will receive when the property is let as social housing at below market rates. That means that future rental income will be lower over the period of the lease which, at the same time, reduces the fair value of the investment property.

If the entity accounts for the investment property under the IAS 40 cost model then it could be argued that the government grant should be recognised over the term of the lease to offset the lower rental income.

Alternatively, if the entity applied the IAS 40 fair value model then the cost being compensated is the reduction in fair value of the investment property. In that case it is more appropriate to recognise the benefit of the government grant immediately.

If, instead of a grant, the government subsidises a loan used by the entity to acquire the property, then the loan will be brought in at its fair value. The difference between the face value and fair value will be a government grant and the arguments above will apply to its treatment.

If the government imposes conditions, e.g. that the building must be used for social housing for ten years, this does not necessarily mean that the grant should be taken to income over that period. Rather, it should apply a process similar to that in above. The entity assesses whether there is reasonable assurance that it will meet the terms of the grant and, to that extent, treat an appropriate amount as a grant as above. This should be reviewed at each balance sheet date and adjustments made if it appears that the conditions will not be met.