BDO’s US GAAP and IFRS Comparison Series: Government Grants

ASU 2025-10 applies to all business entities and does not apply to not-for-profit entities and employee benefit plans.

A government grant is defined as a transfer of a monetary asset or a tangible nonmonetary asset, other than in an exchange transaction (including an exchange transaction that may be at a significant discount to fair value), from a government to an entity in scope of ASC 832.

Forgivable loan proceeds that meet specified recognition criteria (described below), are in scope when it is probable that the entity will meet the forgiveness terms.

The ASU excludes the following transactions from its scope: 

• Exchange transactions (including those in scope of ASC 606, Revenue from Contracts with Customers, and ASC 610-20, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets)
• Transactions in scope of ASC 740, Income Taxes
• Benefits of below-market interest rate loans 
• Government guarantees 
• Grants of intangible assets and services 
• Reductions of liabilities such as tax abatements 
• Transactions in which a government entity obtains an ownership interest in a business
• Contributions to businesses from nongovernmental sources that are within the scope of ASC 958-605, Not-for-Profit Entities — Revenue Recognition

IAS 20 addresses different types of government assistance, without any restriction on the types of entities.

Government grants are defined as assistance by government in the form of a transfer of resources in return for past or future compliance with conditions relating to the operating activities of the entity.

A forgivable loan from government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.

IAS 20 excludes the following transactions from its scope: 

• Transactions which cannot be distinguished from the normal trading transactions of the entity
• Transactions in scope of IAS 12, Income Taxes
• Benefits provided only indirectly through actions affecting general trading conditions (such as infrastructure development or trading constraints on competitors)
• Forms of government assistance which cannot reasonably have a value placed upon them
• Transactions covered under IAS 41, Agriculture
• Transactions in which a government entity obtains an ownership interest in a business

Recognized when all the following conditions are present:

• It is probable²that the entity will both: 
  • Comply with the conditions attached to the grant.
  • Receive the grant. 
• The entity incurs the costs and expenses associated with grant.

ASU 2025-10 identifies two categories of grants: grants related to assets and grants related to income. 

Grants related to assets

Elect an accounting policy to recognize the grant as the entity incurs the related costs using either: 

• Deferred income approach: record deferred income for the grant amount received. An entity subsequently recognizes the grant in earnings on a systematic and rational basis as it recognizes the related expenses (for example, depreciation). 
  • A grant of a tangible non-monetary asset is initially measured at fair value. 
• Cost accumulation approach: reduce the asset’s carrying amount for the grant amount received. An entity subsequently recognizes depreciation and impairments based on the reduced carrying amount. 
  • A grant of a tangible non-monetary asset is recognized at the entity’s cost.

Grants related to income

Recognize the grant in profit or loss on a systematic basis over the periods in which the entity recognizes (as expenses) the related costs for which the grants are intended to compensate. 

If a grant compensates an entity for previously incurred expenses, it must recognize the grant in profit or loss when it meets the recognition criteria. 

If an entity receives a grant before it incurs the related expenses, it must record deferred income to reflect the proceeds. 

Recognized when all the following conditions are present:

• There is reasonable assurance²that the entity will both: 
  • Comply with the conditions attached to the grant.
  • Receive the grant. 

IAS 20 identifies two categories of grants: grants related to assets and grants related to income.

Grants related to assets

Elect an accounting policy to recognize the grant as the entity incurs the related costs using either: 

• Deferred income approach: record deferred income for the grant amount received. An entity subsequently recognizes the grant in earnings on a systematic and rational basis as it recognizes the related expenses (for example, depreciation). 
• Cost accumulation approach: reduce the asset’s carrying amount for the grant amount received. An entity subsequently recognizes depreciation and impairments based on the reduced carrying amount. 

For grants of non-monetary assets, both the grant and asset are accounted for at either the fair value of the asset or at the nominal amount, as an accounting policy election.

These accounting policy elections should be consistently applied to all grants related to assets.

Grants related to income

Recognize the grant in profit or loss on a systematic basis over the periods in which the entity recognizes (as expenses) the related costs for which the grants are intended to compensate. 

For grants related to expenses or losses already incurred or with no future related costs, the grant is recognized in profit or loss in the period it becomes receivable.

If an entity receives a grant before it incurs the related expenses, it must record deferred income to reflect the proceeds.

Grants related to assets

Depending on the accounting policy election made for recognition and measurement, either:

• Deferred income approach: present as deferred income on the balance sheet. An entity may elect an accounting policy to present the grant as one of the following on the income statement: 
  • Separately, using a financial statement caption such as other income; or 
  • Deducted from the related expense (for example, depreciation). 
• Cost accumulation approach: reduce the asset’s carrying amount. There is no separate presentation in profit or loss because the grant reduced the asset’s carrying amount. 

Cash flows are classified based on the nature of the grant in accordance with ASC 230, Statement of Cash Flows 

Grants related to income

• Elect an accounting policy to present the grant either: 
  • Separately, using a financial statement caption such as other income. 
  • Deducted from the related expense (for example, research & development). 

Cash flows are classified based on the nature of the grant in accordance with ASC 230.

Grants related to assets

In the statement of financial position: either as deferred income or as a deduction from the carrying amount of the asset.

In the statement of profit or loss: either as ‘other income’ on a systematic basis over the life of the asset or as a reduction to depreciation/amortization expense.

In the statement of cash flows: often as a separate line item (since the receipt of the grant can cause significant movements in cash flows).

Grants related to income

In the statement of financial position as deferred income (depending on timing of receipt and period/expense grant relates to).

In the statement of profit or loss either separately or as ‘other income’ or deducted from the related expenses (the expenses the grant is intended to compensate for).

In the statement of cash flows often as a separate line item (since the receipt of the grant can cause significant movements in cash flows)

Benefits of below-market interest rate loans are specifically excluded from the scope of ASC 832.

The difference between the initial carrying value of the loan determined in accordance with IFRS 9 Financial Instruments and the proceeds received is recognized as a government grant.