How Government Grants Related to Income Are Presented in the Income Statement

Graziano Stefanelli
Oct 8
3 min read

Government grants related to income represent financial assistance provided by public authorities to support specific business activities, such as research and development, employment, or sustainability initiatives. These grants reduce related expenses or provide additional income in the reporting period, reflecting the economic benefit received. Their presentation in the income statement depends on the nature of the grant and whether it offsets specific costs or is recognized as other income.

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How government grants related to income arise

Companies often receive income-related grants from national or local governments to encourage investment, innovation, or job creation. Such grants differ from capital grants, which relate to asset purchases, because they target income or operational performance.

Common examples include:

Wage subsidies and training reimbursements.
R&D project funding or innovation vouchers.
Environmental or sustainability incentives.
Export promotion or energy efficiency reimbursements.

For example, if a manufacturing firm receives a grant of 100,000 to support staff training expenses of 500,000, it recognizes the benefit either as a reduction in expense or as other income in the same period.

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Presentation in the income statement

Under IFRS and US GAAP, income-related grants can be presented in one of two ways:

As other income: The grant is shown separately as “Government Grant Income” or “Other Operating Income.”
As a deduction from related expenses: The grant directly reduces the expense it was intended to offset, such as salaries or R&D costs.

Example:

Item	Amount (USD)
Revenue	2,000,000
Cost of Goods Sold	(1,200,000)
Gross Profit	800,000
Research and Development Expense	(500,000)
Less: Government Grant Income	100,000
Net R&D Expense	(400,000)
Operating Income	400,000

This approach aligns the grant’s benefit with the expenses it supports.

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Journal entries for income-related grants

When the grant is received:

Debit: Cash 100,000
Credit: Deferred Income (Liability) 100,000

When the related expenses are incurred:

Debit: Deferred Income 100,000
Credit: Other Income (or offset R&D Expense) 100,000

If the grant is conditional, revenue recognition is deferred until conditions are satisfied.

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Standards under IFRS and US GAAP

IFRS (IAS 20 – Accounting for Government Grants): Income-related grants are recognized in profit or loss on a systematic basis over the periods in which the entity recognizes the related expenses. The presentation may be as a separate line of income or as a deduction from related expenses, but must be applied consistently.
US GAAP (ASC 958-605 and ASC 832): Similar treatment applies, though classification under “other income” is more common. Recognition occurs when compliance with grant conditions is reasonably assured and collection is probable.

Both frameworks prohibit netting grants against revenue, as grants do not arise from ordinary customer transactions.

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Impact on financial performance and ratios

Government grants improve profitability by lowering expenses or increasing other income. However, since these inflows are non-recurring or conditional, analysts often adjust earnings to exclude them when evaluating core performance.

For example, if a company reports an operating margin of 20 percent that includes a one-time government grant covering 3 percent of operating income, adjusted profitability may be only 17 percent. Transparency in reporting helps prevent misinterpretation of performance.

Furthermore, large or frequent grants may signal reliance on public support, influencing risk assessments and long-term sustainability analysis.

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Disclosures required for government grants related to income

Entities must disclose:

The nature and extent of government assistance.
Unfulfilled conditions or contingencies attached to grants.
The method of presentation in the income statement.
The accounting policy used for recognition.

These disclosures provide clarity on whether the grants are recurring or one-time and how they affect operational results.

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Operational considerations

Government grants can significantly support operational resilience, especially in industries such as energy, research, and agriculture. However, their accounting requires careful monitoring to ensure compliance with eligibility conditions and accurate matching with related expenses. Misapplication of recognition criteria can lead to overstated earnings or regulatory scrutiny.

For management, transparency and consistency in presentation build credibility with investors and auditors. For stakeholders, separating recurring operational income from grant-related income offers a clearer view of underlying profitability.

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DATA STUDIOS

.....[datastudios.org]