What happens to grants that relate to assets but are not expensed immediately?

When grants relate to assets and are not expensed immediately, they are typically recognized as a deduction from the carrying amount of the asset. This means that as the asset is depreciated over its useful life, the grant is effectively recognized in the income statement in alignment with the depreciation expense of the asset.

In this context, the grant reduces the overall cost of the asset on the balance sheet, leading to a lower depreciation expense. As the asset wears down or is used over time, the benefit of the grant is also realized, which is why it is closely tied to the useful life of the asset. This approach aligns with the matching principle in accounting, ensuring that income (in this case, the benefit from the grant) is recognized in the same period as the related expenses (the depreciation on the asset).

The other options do not accurately represent the treatment of such grants:

• Transferring to equity would imply that the grant has no ongoing impact on profits, which isn’t the case here.
• Recognizing as a current liability does not reflect the nature of the grant since it is not an obligation but rather a benefit associated with an asset.
• Remaining unrecognized until asset sale contradicts the notion of matching income with expenses, as grants should reflect