Final answer:
A government grant is recognized as income over the same period as the relevant expense (option 1), following the matching principle in accounting. This ensures an accurate representation of financial performance in relation to the specific costs the grant is intended to compensate.
Step-by-step explanation:
A government grant in recognition of specific costs is recognized as income over the same period as the relevant expense. This method aligns the grant income with the expenses for which the grant is intended to compensate. According to accounting principles, this approach reflects the matching principle, which states that expenses should be recognized in the same period as the revenues they help generate.
Using this approach, if a company receives a government grant to cover equipment costs, the grant income is recognized over the useful life of the equipment, which matches the depreciation expense of the equipment. This method ensures financial statements present an accurate picture of the company's financial performance and position over time.
It contrasts with methods like recognizing the grant income immediately, which may not accurately reflect the financial activity if the expenses occur over a longer period. Furthermore, the options of spreading the grant income over a maximum period of 5 years, either using the straight-line method or sum of digits, are not standard accounting practices for government grants relating to specific expenses.