How to Account for Government Grants (IAS 20)
Almost every government supports certain companies or business by providing grants or other kind of assistance.
As this is clear benefit and advantage comparing with other companies without such an assistance, it should be properly reported in the financial statements.
How?
Let’s explain the rules and then solve a simple example.
What do the rules say?
The most important standard dealing with government grants is IAS 20 Accounting for government grants and disclosure of government assistance.
It’s quite an old standard – it was issued in 1983 with the effective date from 1 January 1984 and there were no significant changes from that day.
The main objective of IAS 20 is to prescribe the accounting for and the disclosure of
- The government grants – simply speaking, these are the actual resources, whether monetary or non-monetary, transferred to an entity by a government, in most cases upon completion of some conditions;
- The government assistance – these are other actions of the government designed to provide some economic benefit to an entity, for example free marketing or business advices.
IAS 20 deals with almost all types of government grants, with the following exclusions:
- Government assistance in the form of tax reliefs (tax breaks, tax holidays, etc.),
- Grants related to agriculture under IAS 41;
- Grants in the financial statements that reflect the effect of changing prices and
- Government acting as a part-owner of the entity.
How to Account for Government Grants
Before we dig a bit more in details, let me stress that you should never ever credit the receipt of any grant directly in equity.
This capital approach is not permitted in IFRS.
Instead, IFRS prescribe so-called “income approach” – to recognize grants as income over the relevant periods to match them with the related expenditures or costs they should compensate.
Specific accounting treatment depends on the purpose of the grant received. An entity can receive a grant either for:
- Acquisition of an asset, or
- Reimbursement of costs.
Grant related to assets
If an entity receives the grant for acquisition of some assets, there are 2 options to present such grant in the financial statements:
- To present it as deferred income; or
- To deduct the grant from the carrying amount of an asset acquired.
In the example below, I show you both options.
Grant related to income (reimbursement of expenditures)
Here, you need to differentiate between the grants for past costs (already incurred) or the grants for current or future costs.
If the grant is provided to reimburse costs incurred in the past, then it is recognized immediately in profit or loss.
If the grant is provided to reimburse costs incurred or to be incurred at the present time or in the future, then the grant is recognized in profit or loss in the periods when the costs are incurred.
From the presentation point of view, there are 2 options:
- To present the grant income as a separate line item as “other income”, or
- To deduct the grant income from the related expense.
Let me illustrate it on a short example:
Government grants – question:
ABC receives the following government grants in 20X2:
- Grant of CU 40 000 to acquire a water cleaning station. The cost of the station was CU 100 000 and its useful life is 8 years. ABC acquired the station on 1 July 20X2 and recognized depreciation on a straight-line monthly basis.
- Grant of CU 10 000 to cover the expenses for ecological measures during 20X2 – 20X5. ABC assumes to spend CU 3 000 in 20X2-20X5 and CU 2 000 in 20X6 (CU 14 000 in total).
- Grant of CU 3 000 to cover the expenses for ecological measures made by ABC in 20X0-20X1.
Prepare the journal entries in the year ended 31 December 20X2.
Government grants – solution:
As there are 3 different grants, let’s solve them one by one.
Grant for a water cleaning station
This grant is a typical grant to acquire property, plant and equipment. As written above, we have 2 choices to present it:
Option #1: Deferred income
ABC can credit the grant to deferred income and amortize it over the useful life of a water cleaning station in order to match the grant income with the relevant costs (in this case depreciation charges).
In 20X2, ABC recognizes CU 2 500 in profit or loss (calculated as the grant of CU 40 000 divided by 8 years times 6 monhts in 20X2 divided by 12 months in a year).
Our journal entries are:
| Description | Amount | Debit | Credit |
| Receipt of the grant | 40 000 | SoFP – Cash/Bank account | SoFP – Deferred income |
| Recognition in P/L in 20X2 | 2 500 (40 000/8*6/12) | SoFP – Deferred income | P/L – Income from government grant |
Option #2: Deduction from an asset
ABC can deduct the grant amount to arrive at carrying amount of a water cleaning station. Then its recognition in profit or loss is automatically reflected in depreciation charges.
As a result, the new carrying amount of a water cleaning station upon initial recognition is CU 60 000 (cost of CU 100 000 less grant of CU 40 000) and the annual depreciation charge is CU 7 500 (CU 60 000 divided by 8) instead of CU 12 500 (CU 100 000 divided by 8). In the first year, it’s CU 3 750 (6 months only).
Our journal entries are:
| Description | Amount | Debit | Credit |
| Receipt of the grant | 40 000 | SoFP – Cash/Bank account | SoFP – PPE (Water cleaning station) |
| Recognition in P/L in 20X2 (within depreciation charge) | 3 750 (60 000/8*6/12) | P/L – Depreciation of water cleaning station | SoFP – PPE (water cleaning station) |
Note: SoFP = statement of financial position.
Grant for ecological measures in 20X2-20X5
Apparently, the second grant is provided to reimburse the expenses for ecological measures in 20X2 to 20X5. In other words, it is a grant for current and future expenses.
ABC needs to recognize the income from grant in the periods when relevant expenses are incurred.
In this example, we can calculate the portion recognized in P/L in 20X2 on a proportionate basis, i.e. assumed CU 3 000 in 20X2 divided by total assumed expenses of CU 14 000 times the grant of CU 10 000.
The credit entry goes in profit or loss, but here, ABC has a choice to present the grant income as a separate line item (that’s easier) or to deduct it from the expenses.
The journal entries are:
| Description | Amount | Debit | Credit |
| Receipt of the grant | 10 000 | SoFP – Cash/Bank account | SoFP – Deferred income |
| Recognition in P/L in 20X2 | 2 143 (3 000/14 000*10 000) | SoFP – Deferred income | P/L – Income from grants (or relevant expense) |
Grant for ecological measures in 20X0-20X1
The third grand relates to the expenses that had already been incurred in the previous years 20X0 and 20X1.
As a result, the grant is recognized immediately in profit or loss.
The journal entry is:
| Description | Amount | Debit | Credit |
| Receipt of the grant | 3 000 | SoFP – Cash/Bank account | P/L – Income from government grant |
You can watch a video about accounting for government grants here:
In my next article, I will try to clarify the biggest issues arising around government grants, so if you have any specific question, just leave me a comment and stay tuned! I’ll be happy if you share this article with your friends, thanks a lot!
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253 Comments
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This is very helpful. Thank you
Hello Silvia,
How can we treat a Grant of USD 20,000 which we have not received at the end of our accounting period i.e June 2019 but will be received in the next accounting period. when we have received a grant related journal is to DR-Cash/Bank and CR- Deffered Income, in the scenario i have asked which account will be debited and credited as grant is not yet received.
Would be interested to know also, i thought it would go to Grants receivable, but i stand to be corrected.
Hi Silvia,
Can you please advise what if there is a government grant as a forgivable loan, However one day the repayment for forgivable loan is required. Can you please advised how to record the repayment in grant of asset/expense? Is there any difference in IFRS and ASPE?
Thanks,
An
Hello Sylvia Thank you for the article… it really simplify the standard
Can you guide me with this? I’m so confuse—
Government A gives grant (cooperation agreement) to a company (a Bank, acting as implementing partner) for 90 USD (90% of the fund). With the purpose of giving loans to a specific person,(government A choice) Government A has a substantial participation on the implementation of the project. Bank also gives his portion of 10% 10 usd. Government A obliged the Bank to place in a Fiduciary (90% government donation, 10% Bank), to act as an administrator and the bank will act as trustor. Government A. will not participate on any profit that will be derived on the project, neither the Bank, but they will reimburse the 5% of what the bank had to give. The income that will be derived will be reinvested for the purpose of giving loans to specific person (purpose of the project)
My question is
1. Can the bank recognize the government grants as an income 90 usd even though it will be place in a fiduciary?
2. The 10 usd part of the fund, can the bank record it as an asset?,
3. How can the bank record the fiduciary, as assets? Bank will be the trustor (100 usd)
Please help me thanks
Hi Silvia,
Recently, I have joined a non-profit organization for Houbara bustards (birds) conservation, where we receive government grants for the operation of more than 30 years. My question “is there a possibility or chance that the grant amount is more than the reimbursement cost or amount to acquire an asset? If yes, what is the treatment of the excess grant and the related entries on this scenario?
Best regards
Dear Oscar,
it depends on the conditions of the grant. If you need to return it, then you will have a liability. If you do not have to refund it to the government, then it is your revenue. S.
Hi Silvia, in case of grant to cover past cost or expense, if it goes straight to the P/L it means it will have tax effect as Income is taxed at the end, and we pay taxes to the same body which gave us that grant (Government) can you please narrate a bit on that
Dear Silvia,
my company received in previous reporting periods a government grant related to building, which we amortized over their estimated useful lives. During 2019. this building was entered as share capital contribution in another entity in an amount of the carrying value as of the date. However, we still have deferred income, which we used to credit to profit or loss on a straight – line basis over the expected live of the building. Since we do not have the building anymore (we have shares) what should we do with the deferred income? Thanks for the input!
Kind regards,
Hello Silvia,
I’m working with Non Profit Organization and we received a total grant of 497,155$ in 2018 and spend 445,000$ and left with around 44,000$ , as per the agreement with our donor the unspent amount 44,000$ should be transfer to 2019 as a income, the question is that what type of adjustments are needed (closing and opening entries). Thanks
Hello Sylvia. Thanks for this great article.
I would to find out the appropriate Accounting treatment for a government grant money received to cover a particular activity for a given period. however during the period, the activity is cancelled to favour another activity after some part of the grant money has been used. Thanks
simply aware some
Hi silvia ,i am from Saudi Arabia , i have company dealing with governments , we have three contracts to selling him books , once they sign the contract and before they provide him with any books, they record the hole amount of contract
Dr Account receivable
Cr Unearned revenue
is this treatment correct
thank you for your time
Hi Mohammad,
does this company have the right to receive the full payment for the books immediately after signing the contract? If not, then this treatment is not correct, because the right to receive payment has not been established. S.
Hi Silvia,
If government has providing assistance in tax like refund of some output tax than what we have to treat it in books of account.
Hi Subodh, then maybe it is accounted for under IAS 12, not IAS 20. Read this article, maybe it will clear it out for you.
Hi, how do you account for grants in which the grantor makes payment directly to the service provider. this is a grant where the grantee provides 20% of the total grant amount and the grantor provides the 80%. The grantor is paying the service provider directly instead of giving the cash to the grantee to pay the service provider.
Hi, how do we account for inventory bought using grant funds e.g medical supplies especially if they are not fully consumed at the end of the reporting period. Do we release the Deferred income to the extent that the inventory is consumed or fully at the time when the whole lot of inventory is bought?
Hi Marie, I think this can help. S.
Hi Sylvia
With the deduction from asset method, on receipt of the grant you debited PPE and credited cash/bank. What if the asset was given to the company directly. I mean the company was not given money to buy it but rather it was bought and given to it by the grantor. Can i please know the entry
Samuel, I believe I did the entry vice versa – debited cash and credited PPE. If the company receives grant in the form of assets other than cash, well, you would need to account the receipt of the grant at its fair value. And yes, it can happen that under IAS 20 you would arrive to zero carrying amount of an asset if the asset was just given by the government, but it would not be the best presentation in the financial statements, because you are not showing the government grant and asset at all. Thus I would follow the first method via deferred income and the entry would be just Debit PPE Credit Deferred Income with the fair value of that asset.
Hello,
Where the grant is received in form of asset ,what would the entries be if the 2nd approach (not deferred income) is taken?
That is;
On receipt of the asset grant, PPE is debited and the grant account (under reserve/liability) is credited. PPE will then be depreciated. What happens to the amount in the grant account?
It will be amortized in profit or loss in line with the depreciation (I mean method, not amounts).
hi
sylvia,
can we clarify the difference between capital approach and income approach for accounting of government grant,any one can reply to this
Well, capital approach is accounting for grants in equity and income approach is accounting for grants in profit or loss. Capital approach is not permitted by IAS 20, income approach is required.
Thankyou this is insane the asnwer.
Good summary but note IFRS doesn’t really prescribe one approach over the other. The capital approach is not explicitly banned. IAS 20 just implies that in most instances, it would be more applicable for most entities to use the Income approach most sorts of government grants.
I beg to disagree. IAS 20 directly prescribes that the government grants SHALL be recognized in profit or loss… IAS 20 par. 12. IAS 20 explains that there are 2 broad approaches, including capital approach, but then it explains why income approach has been selected. And, if IAS 20.12 says that you SHALL apply income approach, it does NOT mean that capital approach is not banned – in fact, it is.
Maybe it’s just the American auditor in me but I took the word “SHALL” to mean “presumptively mandatory”, not necessarily an unconditional requirement. At least that’s how the US auditing guides define the word “shall”. I would argue that if an entity could display and justify valid reasoning behind recognizing the grant directly in equity, then it could theoretically be allowed. That said, I do see where you are coming from Silvia.
I don’t want to sound harsh, but I believe that if anyone would interpret the word “shall” just as you do, the standards would be very vague and useless, not even talking about the mess in the financial reporting. No, you cannot recognize the grant in equity – unless the government is a shareholder and in such a case the transaction might not (or might, depending on the situation) fall under IAS 20. And, by the way, what did you mean by your last sentence? I can’t decide whether that’s offensive or not.
No I wasn’t being offensive – I was just saying that I understood your point-of-view as well. This is a classic American vs International way of looking at things as here in the US, the word “shall” is actually explicitly defined by the audit boards. You’re correct here too as shall is considered here “an unconditional requirement”. I was thinking of the world “should” which has a different meaning than “shall” in the U.S. audit guides.
Here: https://pcaobus.org/Rulemaking/Docket009/2003-10-07_Release_2003-018.pdf
Learning every day. Have a good day.
Thanks, I am learning every day, too! 🙂 Best, S.
Dear Sylvia,
What if the utility receives a grant for paying the operation expenses without specifying the period to be covered , i am wondering,Is it necessary to amortize it or we can immediately recognize it (all amount) as the income in one year?
Dear Sylvia,
the goverment assisted my company in repayment of loans during the year by giving us a monetary grant. How should we treat this monetary grant? Thanks!
Hi Silvia,
What if the government has granted a land or building to a wholly owned governmental entity without any conditions or special rules. Does the governmental entity recognize the grant as an income or an equity transaction?
I found it very challenging to determine.
Thanks in advance.
Omar K
If the government is a shareholder, then it is a transaction in equity.
Dear Silvia,
should non-government grans related to assets (from EBRD for example) be treated the same as government grants?
Thanks!
Yes.
Dear Silvia,
my company received an incentive one time payment since we were able to assure the financier that we compliance with the procedures, related to the project in which we build a new plant. Since the whole project is related to property, plant and equipment, should we treat this one time incentive payment as income in profit or loss statement or as a deferred income? Thanks!
Jane, if this is related to the property, plant and equipment and the incentive supports its construction, then it’s deferred income (or deduction from PPE’s cost).
Very descriptive article, I loved that a lot. Will there be a part 2?
Dear Silvia
What would be accounting treatment for a repayment e.g. 10% of the total grant (required by law) in 3 years.
Dear Silvia,
can you please describe the accounting treatment related to sale of assets which were part of the government grant, but at the time of sale they are still not fully depreciated?
if someone receive a land as government grant and in return the receiver of grant is required to built infra structure to make it export process zone how to account for such transaction in books of account and if land is required to be recorded what will be the value as receiver has not paid any amount
Very useful information, thanks.
Have a doubt , request your help.
Our jobworker (agent- who manufactures on my behalf) has received government grant in cash and shared 50% of the grant with me, Though he is not compelled to share the grant with me but did considering long term relationship.
Can you advice how to account the same.
Hi Silvia,
What if my company received a government grant for intangible assets with indefinite useful life? How can I calculate the grant to be recognized in profit or loss?
Looking forward to your reply.
Thank you!
Hi Karen,
In practical, the Government does not provide grants for intangible assets as these assets are either internally generated or by acquisitions. For the later, money comes from acquirer’s pocket and that government has nothing to do with that i.e. no implication for country’s developments.
I am an amateur (Finalist), pardon me if I am wrong. Your question has a very valid point to question upon. I look forward to hearing from Miss Silvia to give some light..
Hello Silvia,
Is JICA, GIZ, WHO a government as per IAS 20?
Regards,
Ganesh Kadal
Hi Ganesh,
yes. The government is defined in IAS 20.3 as “government, government agencies and similar bodies, whether local, national or international”.
Does it mean any entity can be government for IAS 20?
Because I was of the feeling that WHO is not a government agency…
Not any entity, just those who meet the definition above (WHO does).
Hi Silvia, would a grant from another non-profit entity be fall under government grant from similar bodies? The Nature Conservancy for example.
It’s really pleasure to read various articles related to IFRS. Your articles and videos are so much helpful.
In our country, there is a declaration from Government that for export of ‘Paper & Paper Products’ a cash incentive @10% on invoice price will be paid. Such incentive is disbursed through bank account after auditing that takes about 6 or more months.
Now we are recording for such incentive:
Receivables for Cash Incentive-Dr.
Income from Cash Incentive-Cr.
My questions add-on
1. Whether the above mentioned treatment is correct?
2. Will it be shown in ‘ Other Comprehensive Income?
3. Is it fall under IAS-20?
I’ll be grateful if you give me a feedback.
Hi Hasan,
I think you’re getting it right currently. As the conditions have been already met, you can recognize the incentive in profit or loss as a revenue from grants and the grant receivable. No, it will not be shown in other comprehensive income, but in profit or loss. Yes, it falls under IAS 20. Best, S.
Thanks a lot.
Hello Silvia,
I want to ask, if the company got a license to use the land for free for 70 years, is it consider as a grant (IAS 20) ? what’s the amount of asset to be recognized ? Is it considered as intangible asset ?
Thank you for your efforts.
Dear Madam,
A part of the machine cost is reimbursement by the supplier (not from Government ) after a certain period. Currently we treat reimbursement value as an Income in books and we not deduct the reimbursement value from asset value.
Please explain whether this treatment is correct.
Thank You
Rajee, I can’t tell for sure because it depends on the contract. In general, if you expect the reimbursement right in the beginning (you’re quite certain that it happens), you should really deduct it from the asset’s cost. S.
a company was first received a grant of 500000 to acquire an electricity plant, whilst a second grant of 50000 too was received for the training of electrical engineers on the electrical plant. please help me solve this madam, thank you.
Hi
please can anyone help me to understand how to account for repayment of govt grant in all the 3 cases?
Thanks
Hemang
Dear Silvia,
For a 100% state-owned entity, how does one account for receipt of inventory from government free of charge under IFRS? How should these items be valued and where does the other side of the entry go? (deferred income, profit for the year, retained earnings, additional capital?) If the items in question are PPE and they are withdrawn from the entity by government several years later (again, with no consideration transferred), is it a loss, a reduction in retained earnings or a reduction in additional capital? What about accumulated depreciation and impairment losses accrued to date?
HI SILVIA,
our company received a land as a government grant , without any conditions and forever, how we can treatment this case in our books ? and can we recognition the total amount as revenue in the first year?
Hi Mam
I Manu from India can you please tell me when this 2 alternatives for Grant fixed assets be applied?
And if we adopt 2nd alternative where whole grant assets adjusted with Grants then Grant assets will be showing NIL balance in Financial Books; there will be mismatch between total Fixed Assets in Fixed Assets Register and Financial books due to this adjustment.
Hi Manu, if you deduct the amount of grant from the specific PPE to which it relates, then I don’t see the reason why there would be a mismatch between PPE in your accounts and fixed assets register. You are NOT adding or deducting any “grant asset”, instead, you are simply making adjustment of the cost of another item of PPE and you can make the same change in the fixed assets’ register, too. S.
Hi Silvia,
I was hoping you can assist me in properly recording a government grant. We received 93,520.35 grant pay from the Dept. of Energy, which was used to pay an incurred expense related to the project for the Dept. of Energy we are working on for them. We paid the expense to our vendor on 06/28(wire transfer) and received the money for that expense from the DOE on 06/28(wire transfer) as well. I am unsure the journal entry, is this a pass through expense, is this pass through revenue, or a reimbursable expense. I was thinking the journal entry would be as follows.
Vendor Bill we entered:
DR-Cost of Goods sold
CR-A/P
Vendor bill we paid:
DR-A/P
CR-Cash
Government Grant Invoice:
DR-A/R
CR-Grant Revenue
Government payment received:
DR-Cash
CR-A/R
Please advise how to properly record this in compliance with IAS20, your help would be much appreciated, as I am racking my brain trying to properly record this, thanks in advance.
Dear Regina,
I think that’s pretty correct, if no further conditions are attached to the grant 🙂 S.
Hi Silvia
Appreciate your efforts. I have question on how government grant given to state owned business enterprise is accounted under IFRS ? It has been scoped out from IAS20.
Thank you!
Hi Silvia, if Company A bought an asset in year 20X2 and the grant only granted in year 20×3. So may i know is this fall under grants related to income or grants related to assets? When we are going to use grants related to assets? Can we use it even when we buy a computer if we classified computer as our asset.
Thank you.
Do we have to split the deferred income recognized in the statement of financial position into long term and short term portion?
I am doing financial statements for a school for the first time. The school put in a requisition for office furniture from the government. The government approved the requisition and buys the school the office furniture it required. How do we record this in the balance sheet? We would debit office furniture, what would be the contra account to credit?
Excellent!
Regards,
Wency from Philippines
thank u so much for you presentation, I have one question in my mind what about in developing countries situation. gov’t borrowed from other nation and distribute as a grant to some govt’ organization. so can we consider this as a grant? if yes, In what way we treat accounting principle; as income approach or capital approach?
thank you so much l benefited a lot from you
Dear silvia,
I am bit confused on refund of goverment grant related to assets, well i read many of the articles yours and others but actually i couldnt grab something good from there could u please give me short description about it and thanks in advance..
Hi Silvia
Thanks for you work and materials. It would be great if you also touched in IAS 20 Government Grants the issue of government grants refund, when the entity does not comply with rules of a grant and government cancel that deal related to grant.
what is the accounting treatment if the entity have any outstanding government grants at the date of transition to IFRS?
Hi, our company gets grant to do differnt constructions. but goverment acting as a part-owner of the entity. that mean we haven’t obligation to apply IFRS 20. Is that mean?
Hi, can I make following entry Dr. Grants receivable and Cr. Differed income when conditions for grants receivable are met but company didn’t receive any amount yet but will receive it in future
Hi Silvia
Appreciate your efforts. I have question in relation to capital grant that we received from donors.
If we receive grant from donor in relation to purchase of asset and at that time project useful life is 5 year so is the asset useful life. So we have opt 1st option and defer its grant in the balance sheet and each time when we charge dpreciation we used to release grant income. Now when subsequently the project get closed so waht will be the tratment should we release all the unspent grant as project is close or should we defer it till asset useful life. Secondly what UK GAAP FRS 102 tell regarding this?
Dear Muhammad,
what happens to the grant when the project is closed? Is it returned to the government? Can you keep it? If you can keep it, just continue as before (i.e. continue amortizing deferred income over asset’s useful life – if that asset is still in operation). If you need to return it, then you need to account for it as for the change in accounting estimate. S.