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Financial Reporting · Government grants

Accounting for Grants Related to Assets under IAS 20

Updated 11 October 2026 · Fact-checked

A grant related to assets is given to buy or build a non-current asset. IAS 20 allows two presentations: record the grant as deferred income and release it to profit or loss over the asset's useful life, or deduct it from the asset's carrying amount. Profit is the same either way.

Understand Accounting for Grants Related to Assets

A government may give you cash to buy a machine or build a factory. The grant is not income on the day you receive it. You earn it by owning and using the asset. IAS 20 therefore says the grant must be matched to the periods in which you bear the asset's depreciation.

This is the accruals idea. The asset is depreciated over its useful life. The grant is recognised in profit or loss over the same life, on the same pattern. The grant is recognised only when there is reasonable assurance that you will comply with its conditions and that the grant will be received.

IAS 20 permits two methods. Under the deferred income method you show the asset at full cost and depreciate it on full cost. The grant sits in the statement of financial position as deferred income, split between current and non-current liabilities. Each year you release part of it to profit or loss.

Under the deduction method you subtract the grant from the asset's cost to get the carrying amount. Depreciation is then charged on the lower amount. The grant is in effect recognised through reduced depreciation.

Both methods give the same profit each year and the same net assets. Only the presentation differs. The asset is higher and a liability exists under the deferred income method. The asset is lower and no liability exists under the deduction method.

Key rules to remember

Deferred income method: annual depreciation
(Cost of asset − Residual value) ÷ Useful life
Depreciate on the full cost. Ignore the grant in this calculation.
Deferred income method: annual grant release
Grant ÷ Useful life (straight-line)
Release over the same period and pattern as the depreciation. Credit profit or loss (as other income or against depreciation).
Deferred income at year end
Grant − Cumulative amount released
Split into current liability (next year's release) and non-current liability (the rest).
Deduction method: carrying amount
Cost − Grant − Accumulated depreciation on the reduced cost
Depreciation = (Cost − Grant − Residual value) ÷ Useful life.
Net profit effect per year
Depreciation − Grant release = depreciation on (Cost − Grant)
With a nil residual value and straight-line pattern, both methods give this same net charge.
Journals on receipt and purchase (deferred income)
Dr Asset (cost); Cr Cash. Dr Cash; Cr Deferred income (grant)
Each year: Dr Depreciation expense; Cr Accumulated depreciation. Dr Deferred income; Cr Profit or loss.

How to solve Accounting for Grants Related to Assets questions

Use this order for any asset grant question. It works whichever method the question tells you to use.

  1. 1Read which method is required: deferred income or deduction from carrying amount. If the question gives a choice, state your policy.
  2. 2Check the grant is recognised: is there reasonable assurance of compliance and receipt? If not, no entry yet.
  3. 3Record the asset at its full cost on the purchase date and note the date to time-apportion in the first year.
  4. 4Calculate annual depreciation: on full cost for deferred income, on cost less grant for deduction.
  5. 5Calculate the annual grant release (deferred income method only) over the same useful life.
  6. 6Work out the closing balances: carrying amount of the asset and, for deferred income, the liability split into current and non-current.
  7. 7Write the journals or the statement extracts: asset, depreciation, grant release, deferred income.
  8. 8Cross-check: net charge to profit or loss should be the same under both methods.

Quickest way: Net charge shortcut

When to use it: Use when an objective test asks for the profit or loss charge or the carrying amount and you do not need the full journals.

  1. Compute depreciation on full cost per year, and grant release per year.
  2. For the deferred income method, the net P&L charge is depreciation minus release. For the deduction method, it is depreciation on cost less grant. Both match.
  3. Carrying amount at the year end under deduction = (Cost − Grant) × remaining life ÷ total life, when residual value is nil.
  4. Deferred income at year end = Grant × remaining life ÷ total life. Current portion = one year's release.
  5. Check that the asset (deferred income method) minus the deferred income equals the asset under the deduction method.

Common mistakes in Accounting for Grants Related to Assets

  • Crediting the whole grant to profit or loss in the year received

    Cash received feels like income, so students treat it like a sale.

    Fix: A grant for an asset is matched to depreciation. Credit deferred income or reduce the asset, then release over the useful life.

  • Depreciating the full cost under the deduction method

    Students forget the grant has already reduced the carrying amount.

    Fix: Under deduction, depreciation base is cost less grant. Under deferred income, base is full cost.

  • Not splitting deferred income into current and non-current

    The balance is treated as one amount.

    Fix: The current liability is the next year's release. The remainder is non-current.

  • Releasing the grant over the wrong period

    Students use the grant period or a different life from the asset.

    Fix: Use the asset's useful life and the same pattern as depreciation, unless the question states conditions that say otherwise.

  • Time-apportioning depreciation but not the grant release

    The two calculations are done separately and one step is missed.

    Fix: If the asset is bought part way through the year, apply the same fraction of the year to both depreciation and release.

  • Writing the grant into reserves or equity

    The credit is seen as a capital contribution.

    Fix: IAS 20 does not allow grants to be credited directly to equity. Use deferred income or deduct from the asset.

Worked examples

Example 1

On 1 April 20X1 Orla Co buys a machine for $500,000 with a useful life of 5 years and nil residual value. It receives a government grant of $100,000 on the same date, with reasonable assurance of compliance. The year end is 31 March. Show the extracts for the year ended 31 March 20X2 using the deferred income method.

Show the solution
  1. Annual depreciation = $500,000 ÷ 5 = $100,000, on full cost.
  2. Annual grant release = $100,000 ÷ 5 = $20,000.
  3. Carrying amount of machine at 31 March 20X2 = $500,000 − $100,000 = $400,000.
  4. Deferred income at 31 March 20X2 = $100,000 − $20,000 = $80,000.
  5. Current liability = next year's release = $20,000. Non-current liability = $80,000 − $20,000 = $60,000.
  6. Journals on purchase: Dr Machine $500,000, Cr Cash $500,000. On receipt: Dr Cash $100,000, Cr Deferred income $100,000.
  7. Year-end journals: Dr Depreciation expense $100,000, Cr Accumulated depreciation $100,000. Dr Deferred income $20,000, Cr Profit or loss $20,000.
  8. Net charge to profit or loss = $100,000 − $20,000 = $80,000.

Answer: Profit or loss: depreciation $100,000 charged, grant release $20,000 credited (net charge $80,000). Statement of financial position: machine $400,000; deferred income $80,000 (current $20,000, non-current $60,000).

Example 2

Using the same facts, account for the grant by deducting it from the carrying amount of the machine. Show the profit or loss charge and carrying amount at 31 March 20X2 and 31 March 20X3, and confirm the result agrees with the deferred income method.

Show the solution
  1. Initial carrying amount = $500,000 − $100,000 = $400,000.
  2. Annual depreciation = $400,000 ÷ 5 = $80,000.
  3. At 31 March 20X2: carrying amount = $400,000 − $80,000 = $320,000.
  4. At 31 March 20X3: carrying amount = $320,000 − $80,000 = $240,000.
  5. Journals: Dr Machine $500,000, Cr Cash $500,000. Dr Cash $100,000, Cr Machine $100,000. Each year: Dr Depreciation expense $80,000, Cr Accumulated depreciation $80,000.
  6. Check against the deferred income method: net charge was $100,000 − $20,000 = $80,000. This agrees.
  7. Check net assets at 31 March 20X2: deferred income method gives asset $400,000 less liability $80,000 = $320,000. This equals the carrying amount under deduction.

Answer: Depreciation charge is $80,000 each year. Carrying amount is $320,000 at 31 March 20X2 and $240,000 at 31 March 20X3. No deferred income liability is shown. Profit and net assets match the deferred income method.

Exam tips

  • Look for the words in the requirement: 'deferred income' means show a liability, 'deducted from carrying amount' means reduce the asset. Do not mix them.
  • In objective questions, work out the net charge and the closing balance first. Two of the four options are usually traps from forgetting the split or the grant base.
  • In Section C, show the journals or a clear extract of profit or loss and the statement of financial position. Label current and non-current deferred income separately.
  • If the asset is bought mid-year, time-apportion both depreciation and the grant release. Show your fraction so you can earn method marks.
  • Remember that a later repayment of a grant is a change in estimate. Check the repayment rules before answering such a question.

Practice questions from Government grants

Accounting for Grants Related to Assets in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Accounting for Grants Related to Assets: frequently asked questions

Which method is better under IAS 20, deferred income or deduction?

Both are permitted for grants related to assets. Profit is the same under each. Deferred income shows the asset and the grant separately, which many find clearer. Unless the question states a method, say which you are using.

Is the grant for an asset recognised when the cash is received?

Recognition depends on reasonable assurance that you will meet the conditions and receive the grant, not on the cash date. Once recognised, it is not taken to profit at once. It is released over the asset's useful life.

How do I show deferred income in the statement of financial position?

Split it into a current liability and a non-current liability. The current part equals the amount you will release in the next twelve months. The rest is non-current.

Does the grant change the depreciation on the asset?

Under the deferred income method, no. Depreciation is on full cost. Under the deduction method, yes, because depreciation is on cost less the grant. The net effect on profit is the same.