How government grants and assistance are accounted for under IAS 20 and ASC 958-605.

Government grants represent transfers of resources from public authorities to entities in return for past or future compliance with certain conditions. They include cash subsidies, tax credits, forgivable loans, asset contributions, and research funding. Under IFRS (IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance) and US GAAP (ASC 958-605 for not-for-profit entities; ASC 105/450 and SEC guidance for business entities), recognition depends on when there is reasonable assurance (IFRS) or when conditions are substantially met (US GAAP) that the entity will comply and receive the benefit.

Both frameworks require systematic recognition in income over the periods that match the related costs or assets.

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How government grants arise.

Entities may receive public assistance to support:

• Purchase or construction of assets (e.g., renewable energy equipment).

• Research and innovation activities.

• Employment and training initiatives.

• Export or regional development programs.

• Environmental rehabilitation or decommissioning funding.

Grants may take the form of direct cash payments, tax relief, forgivable loans, or below-market interest rate loans (treated partly as a grant element).

Under both IFRS and GAAP, the key question is when to recognize the benefit and how to present it—either as income or as a reduction of related costs.

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Recognition and measurement under IFRS (IAS 20).

1) Recognition condition.Recognize a government grant when there is reasonable assurance that:

• The entity will comply with the grant conditions, and

• The grant will actually be received.

Grants are not recognized until both criteria are met, even if cash has been received in advance.

2) Measurement.Measure at the fair value of the asset or benefit received.— Non-monetary grants (e.g., land, equipment) are recognized at fair value or at a nominal amount if fair value cannot be reliably measured.— Loans with below-market interest are treated as containing a grant component, measured as the difference between proceeds and fair value of a comparable market loan.

3) Presentation options (IAS 20.24–29).

• Income approach: recognize the grant as other income systematically over the periods in which related costs are recognized.

• Netting approach: deduct the grant from the carrying amount of the related asset, reducing depreciation over time.

Example (IFRS – asset-related grant, income approach):Grant of 400,000 received to purchase equipment costing 2,000,000.Useful life: 10 years.Recognize income over the life of the asset.

At receipt:

• Debit: Cash 400,000

• Credit: Deferred Grant Income 400,000

Annual amortization:

• Debit: Deferred Grant Income 40,000

• Credit: Other Income – Government Grant 40,000

Alternative (netting approach):

• Debit: PPE 1,600,000

• Credit: Cash 2,000,000Grant offsets cost directly; depreciation based on reduced cost.

4) Expense-related grants.Recognize income in the same period as the expense it compensates.

Example (IFRS – wage subsidy):

• Debit: Cash 100,000

• Credit: Other Income – Government Grant 100,000

5) Forgivable loans.Treat as a grant when there is reasonable assurance that forgiveness conditions will be met.

6) Repayment of a grant.Account as a change in estimate:

• Asset grants → increase asset’s carrying amount or recognize loss if fully depreciated.

• Income grants → adjust deferred income balance or recognize immediate expense.

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Recognition and measurement under US GAAP (ASC 958-605 and related guidance).

1) For not-for-profit entities.ASC 958-605 applies explicitly. Government grants are nonreciprocal transactions (contributions) recognized when conditions are substantially met.

• If conditions remain outstanding → defer as refundable advance (liability).

• Recognize revenue when barriers are overcome and right of return lapses.

2) For business entities.No comprehensive standard; practice relies on analogies:

• ASC 450 (contingencies): recognize when realization is probable and estimable.

• IAS 20 analog (by policy election): many SEC registrants follow IAS 20 principles for comparability.

• Forgivable loans: treated as liability until formally forgiven.

• Tax credits: follow ASC 740 (income taxes) or specific guidance (e.g., investment tax credit model).

3) Presentation options (SEC guidance).Entities may present grants as:

• Other income,

• Offset to related expense, or

• Reduction in asset cost, if directly tied to an asset purchase.

Policy must be disclosed and applied consistently.

Example (US GAAP – income approach):Grant of 400,000 for equipment costing 2,000,000.

At receipt (conditions met):

• Debit: Cash 400,000

• Credit: Deferred Grant Income (Liability) 400,000

Annual recognition:

• Debit: Deferred Grant Income 40,000

• Credit: Other Income – Government Grant 40,000

Example (US GAAP – conditional grant):Cash received but conditions unmet:

• Debit: Cash 400,000

• Credit: Refundable Advance (Liability) 400,000

Recognize revenue when conditions are satisfied:

• Debit: Refundable Advance 400,000

• Credit: Other Income – Government Grant 400,000

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Comparative table: IFRS vs US GAAP.

Aspect	IFRS (IAS 20)	US GAAP (ASC 958-605 / Analogy)
Recognition trigger	“Reasonable assurance” conditions will be met	“Substantially met” or “probable and estimable”
Scope	Explicit for business entities	Explicit for not-for-profits; analogy for others
Presentation options	Income or netting approach	Similar options (income, offset to expense, or asset reduction)
Non-monetary grants	At fair value or nominal amount	At fair value if measurable
Forgivable loans	Recognized as grant when forgiveness reasonably assured	Liability until legally forgiven
Repayments	Adjust asset/deferred income or recognize expense	Adjust liability or recognize expense
Tax credits	Follow IAS 12 or IAS 20	ASC 740 (taxes) or specific credit guidance
Disclosure emphasis	Nature, conditions, unfulfilled contingencies	Policy, unfulfilled conditions, repayment contingencies

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Presentation and disclosures.

Example presentation (IFRS – income approach):

Statement of Financial Position	Amount (USD)
Non-Current Assets
Property, Plant and Equipment	2,000,000
Deferred Grant Income (Liability)	360,000

Income Statement (Extract)	Amount (USD)
Depreciation Expense	(200,000)
Other Income – Government Grant	40,000

Disclosure requirements under both frameworks:

• Accounting policy and basis of presentation.

• Nature and extent of grants recognized.

• Unfulfilled conditions and contingencies.

• Amounts of deferred income and grants repayable.

• For forgivable loans: terms, conditions, and probability of forgiveness.

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Journal entries for common scenarios.

1) Receipt of grant before conditions are met:

• Debit: Cash xx

• Credit: Deferred Income / Refundable Advance xx

2) Recognition when conditions satisfied:

• Debit: Deferred Income / Refundable Advance xx

• Credit: Other Income – Government Grant xx

3) Reduction of asset cost (alternative method):

• Debit: PPE xx

• Credit: Cash xx

• Credit: Government Grant (offset) xx

4) Repayment of grant (IFRS):

• Debit: Deferred Grant Income 100,000

• Credit: Cash 100,000

If asset fully depreciated, recognize immediate expense.

5) Forgivable loan forgiven (GAAP):

• Debit: Liability – Forgivable Loan 250,000

• Credit: Other Income – Forgiven Loan 250,000

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Impact on financial performance and ratios.

Government grants influence EBITDA, asset base, and debt ratios:

• Under the income approach, grant income improves EBITDA as recognized.

• Under the netting approach, depreciation is reduced, lowering cost of sales and boosting operating profit.

• Timing differences affect cash flow from operations (if treated as operating receipts) or financing (if viewed as capital support).

• Analysts adjust for grant income to compare organic performance across periods.

Grants related to capex-heavy sectors (energy, manufacturing, infrastructure) often appear in other income but require reconciliation to underlying EBITDA for comparability.

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Operational considerations.

Entities must track grant agreements centrally, including eligibility conditions, reporting requirements, and clawback provisions. Accounting teams should:

• Reconcile grants to related expenditures.

• Review auditable evidence of compliance.

• Reassess probability of meeting conditions each reporting date.

• Coordinate with tax teams when grants affect taxable income or credits.

Clear documentation ensures consistent recognition and defensible disclosures, especially for multi-year or conditional assistance programs.

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