IAS 20 Government Grants: Recognition, Disclosure, and IFRS 18 Changes

Under IAS 20, the accounting standard for government grants, a company recognizes a grant in profit or loss once it has reasonable assurance both that it will comply with the grant’s conditions and that the grant will be received, and then matches that income to the periods in which the related costs are recognized. Grants never go straight to equity. The standard applies to any entity reporting under IFRS, but several common forms of government help sit outside it.¹

What Counts as a Government Grant

IAS 20 defines a government grant as a transfer of resources from a government body in exchange for past or future compliance with conditions relating to the company’s operating activities. “Government” is read broadly, taking in local, national, and international bodies as well as government agencies and similar organizations.²

Several forms of government assistance are outside the standard’s scope:

Tax-based incentives, including income tax holidays, investment tax credits, accelerated depreciation, and reduced tax rates. These are handled under IAS 12.
General public infrastructure improvements that benefit a community rather than a specific entity.
Grants relating to biological assets measured at fair value less costs to sell, which fall under IAS 41. Biological assets carried at cost less depreciation and impairment stay within IAS 20.³
Assistance that cannot be reliably measured in monetary terms, such as free technical advice or government guarantees. These are not recognized as grants, though they may still require disclosure.

When to Recognize a Grant

Paragraph 7 of IAS 20 sets a two-part test. Before a grant appears on the financial statements, the company must have reasonable assurance that it will comply with the attached conditions, and reasonable assurance that the grant will actually be received.² Both conditions must be met. Receiving cash does not, on its own, prove the compliance side of the test.

In practice, the assurance usually comes from signed agreements, approved applications, or documented performance milestones. Companies commonly keep records of qualifying expenditures or headcount to evidence eligibility. The mechanism of receipt is irrelevant: a direct cash transfer and a reduction in a liability owed to government are accounted for the same way, because IAS 20 follows the substance of the transaction.

Grants Flow Through Profit or Loss

All government grants are recognized in profit or loss, never credited directly to shareholders’ equity. IAS 20 calls this the income approach. Its reasoning is that grants come from a source other than shareholders and are earned through compliance, so they belong in the income statement in the periods to which they relate.²

Grants for Costs Already Incurred

Where a grant compensates for expenses or losses already incurred, or provides immediate financial support with no related future costs, the full amount is recognized in profit or loss in the period the grant becomes receivable.² Disaster relief payments typically fall into this category. There is nothing to spread out because there are no future costs to match against.

Grants Related to Assets

When a grant funds the acquisition or construction of a long-term asset, IAS 20 permits two presentation methods. The chosen method must be applied consistently to similar assets across reporting periods.⁴

Under the deferred income method, the grant is recorded as a liability and released into profit or loss on a systematic basis over the asset’s useful life, matching the depreciation expense. A $100,000 grant on equipment with a five-year life yields $20,000 of grant income each year.

Under the net method, the grant is deducted from the asset’s cost. A $500,000 facility bought with a $100,000 grant is recorded at $400,000, and the benefit flows through smaller depreciation charges over the asset’s life rather than as a separate income line.

Both methods produce the same net effect on profit over the asset’s total life, though individual line items look different on the balance sheet.

Non-Depreciable Assets

Land does not depreciate, so there is no depreciation stream to match against. IAS 20 addresses this by tying recognition to whatever obligations the grant imposes. If the grant of land requires the company to build a factory on the site, the grant income is recognized over the useful life of the building.²

Grants Related to Income

Income-related grants compensate for specific operating expenses. The recognition rule mirrors the asset treatment: grant income is booked in profit or loss over the same periods as the costs it is meant to offset. A $50,000 grant covering two years of employee training is recognized proportionally as the training costs are incurred.²

Two presentation options are available. The grant can be shown as a separate credit under a heading such as “other income,” or it can be deducted from the related expense line, producing a smaller net cost figure for items like payroll or utilities.¹

Non-Cash Grants and Government Loans

Government assistance does not always arrive as cash. IAS 20 addresses several non-cash situations.

Non-Monetary Grants

When a government transfers a physical asset such as land or equipment, paragraph 23 allows two valuation choices: record both the asset and the grant at fair value, or record both at a nominal amount.² Fair value is used far more often, because a nominal figure understates both the asset and the assistance received.

Below-Market-Rate Loans

A loan from government at an interest rate below market carries an implicit grant. Under paragraph 10A, the company measures the loan at its initial carrying amount under IFRS 9, then treats the difference between that carrying amount and the cash received as the grant element accounted for under IAS 20.⁴

Suppose a government lends $1 million at zero interest when the market rate is 5%. The present value under IFRS 9 will be lower than $1 million, and the gap between the cash received and the present value is the grant benefit. The company then classifies that grant as asset-related or income-related and applies the recognition rules above.

Forgivable Loans

A forgivable government loan is treated as a grant once there is reasonable assurance the company will meet the forgiveness conditions.⁴ Until that threshold is met, the loan remains a financial liability. Intent to comply is not the same as evidence of compliance.

Repayment of Grants

If a company later has to repay a grant, IAS 20 treats the repayment as a change in accounting estimate rather than a correction of a prior-period error. Earlier financial statements are not restated.²

For income-related grants, the repayment is applied first against any remaining unamortized deferred credit for that grant. Any excess is recognized immediately as an expense in the current period.

For asset-related grants, the mechanics track the original presentation method. Under the deferred income method, the deferred income balance is reduced. Under the net method, the carrying amount of the asset is increased by the repayment. Either way, the cumulative additional depreciation that would have been recognized in the absence of the grant must be charged immediately as an expense.² That catch-up charge can be sizable when the repayment happens several years after the asset was acquired.

Disclosure Requirements

Paragraph 39 requires three categories of disclosure in the notes:²

The accounting policy adopted, including the presentation methods used for grants (deferred income or net method for asset grants; separate credit or expense deduction for income grants).
The nature and extent of grants recognized, and an indication of other forms of government assistance from which the company has directly benefited.
Unfulfilled conditions and contingencies attached to recognized government assistance.

Some government help, such as free technical advice or government guarantees, cannot be reliably measured. It is not recognized on the financial statements. Where the benefit is significant, the standard directs the company to disclose the nature, extent, and duration of the assistance so that the financial statements are not misleading.²

How IAS 20 Compares to US GAAP

US GAAP long lacked a dedicated standard for grants received by for-profit entities. In 2025, the FASB issued ASU 2025-10, creating Topic 832 for business entities receiving government grants.⁵ It takes effect for public companies in annual periods beginning after December 15, 2028, and for private companies a year later.⁶

ASC 832 closely mirrors IAS 20. It offers the same two presentation choices for asset-related grants (deferred income or cost accumulation) and the same two income statement options for income-related grants. It uses “probable” as its recognition threshold in place of IAS 20’s “reasonable assurance,” though the two are generally treated as equivalent.⁵

The main differences are in scope. ASC 832 applies only to business entities, excluding not-for-profits and employee benefit plans, and it explicitly excludes the benefit of below-market-rate government loans that IAS 20 does capture. Entities reporting under both frameworks, or transitioning between them, should pay particular attention if they receive subsidized government financing.

Upcoming Change Under IFRS 18

IFRS 18, issued in April 2024, amends IAS 20 as part of a wider redesign of financial statement presentation. The changes take effect on January 1, 2027, with early adoption permitted.⁷ Companies preparing for IFRS 18 should check how their existing grant presentation methods interact with the new profit or loss categories introduced by that standard.

1
IFRS. IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
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IFRS Foundation. IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
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IFRS Foundation. International Accounting Standard 41 Agriculture
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IFRS Foundation. IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
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Financial Accounting Standards Board. ASU 2025-10 Government Grants (Topic 832)
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Financial Accounting Standards Board. Effective Dates
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IFRS Foundation. Changes in This Edition 2025