Financial Reporting · Government grants

Accounting for Grants Related to Income under IAS 20

Updated 11 October 2026 · Fact-checked

A grant related to income is a government grant that is not related to buying an asset. Under IAS 20 you recognise it in profit or loss over the periods in which the entity incurs the costs the grant is meant to compensate. Show it as other income or deduct it from the related expense.

Understand Accounting for Grants Related to Income

A grant related to income is a government grant other than one related to assets. It compensates the entity for costs such as wages, training, research or rent. It does not require the entity to buy or build a long-term asset.

IAS 20 uses the income approach. The grant is not credited to equity. It is income, and you recognise it in profit or loss. The key rule is matching: recognise the grant on a systematic basis over the periods in which the entity recognises the related costs as expenses.

You only recognise a grant when there is reasonable assurance of two things: the entity will comply with the conditions attached, and the grant will be received. Receiving cash alone does not prove the grant is earned. If cash arrives before the costs are incurred, the unearned part is a liability (deferred income) in the statement of financial position.

A grant can also be received for costs already incurred, or as immediate financial support with no future related costs. Then you recognise it in profit or loss in the period it becomes receivable.

For presentation, IAS 20 allows two methods. You can show the grant as other income, separately or under a general heading. Or you can deduct it from the related expense. Both give the same profit. You must be consistent and disclose the method and amounts.

Key rules to remember

Recognition condition: Recognise grant only if reasonable assurance of (1) compliance with conditions AND (2) receipt; Both conditions must be met. Cash receipt alone is not enough.
Matching rule: Grant income in the period = grant × (related cost expensed in the period ÷ total related costs); Use this when costs are spread unevenly. If costs are even, spread the grant evenly over the period.
Deferred income at the year end: Deferred income = grant received (or receivable) − grant recognised in profit or loss to date; Split between current and non-current liabilities where the amounts are material.
Presentation options: Dr Cash/Receivable Cr Other income OR Cr Related expense; Choose one policy and apply it consistently. Profit is the same either way.
Grant for costs already incurred or immediate support: Recognise in profit or loss in the period it becomes receivable; No future costs to match, so there is no deferral.

How to solve Accounting for Grants Related to Income questions

Use this method for any question on a grant related to income. It keeps the timing and the double entry clear.

1Confirm the grant is related to income: it compensates costs and is not for buying an asset.
2Check the recognition test: is there reasonable assurance of compliance with conditions and of receipt? If not, recognise nothing.
3Identify the costs the grant compensates and when they are expensed.
4Work out how much of the grant matches the costs of the year. Use time or the cost pattern, whichever fits the question.
5Post the double entry: Dr Cash or receivable, Cr Deferred income for the whole grant. Then Dr Deferred income, Cr Other income (or the expense) for the year's share.
6Follow the presentation required: other income or deduction from the expense. Apply the same policy to comparatives.
7Calculate the closing deferred income and say whether it is current or non-current. Add the disclosures if asked.

Quickest way: Grant slice and balance

When to use it: Use this for short Section A or OT case questions asking for the profit or loss credit or the liability at the year end.

Find the fraction of the grant that belongs to this year (months used ÷ total months, or costs incurred ÷ total costs).
Multiply to get the profit or loss credit.
Closing deferred income = total grant recognised as received or receivable − the credit made so far.
Check the wording: if the question says deduct from expense, the credit goes against the expense, not other income. Profit is unchanged.

Common mistakes in Accounting for Grants Related to Income

Crediting the whole grant to profit or loss when the cash is received.
Students link income to cash receipt instead of to the costs being matched.
Fix: Recognise income only as the related costs are expensed. Hold the rest as deferred income.
Recognising a grant when there is no reasonable assurance that conditions will be met.
Students forget the recognition test and focus on the amount announced.
Fix: Always check both parts of reasonable assurance first. Read the question for any condition at risk.
Deferring a grant given as compensation for costs already incurred.
Students apply the matching pattern automatically.
Fix: If the costs are already expensed, or the grant is immediate support, recognise it in full when it becomes receivable.
Thinking the two presentation methods change profit.
Students see different line items and assume a different result.
Fix: Both methods give the same profit. Only the gross line items differ.
Using the asset method (deduct from the asset or deferred income over asset life) for a revenue grant.
Mixing up grants related to income and grants related to assets.
Fix: Ask what the grant compensates. If it is running costs, use the cost pattern, not depreciation.
Leaving deferred income out of the statement of financial position.
Students stop after the profit or loss entry.
Fix: Always compute the closing balance and classify it as current or non-current.

Worked examples

Example 1

On 1 October 20X1 Delta receives a government grant of $120,000 towards staff training costs that will be incurred evenly over 24 months from that date. Delta has met the conditions. Its year end is 31 December. Show the amounts for the year ended 31 December 20X1 and the position at that date, using the other income method.

Show the solution

The grant compensates training costs, so it is related to income.
Reasonable assurance exists, so recognise the grant.
Costs are even over 24 months, so the grant is spread evenly: $120,000 ÷ 24 = $5,000 per month.
The year to 31 December 20X1 covers 3 months: 3 × $5,000 = $15,000 credited to other income.
Entry on receipt: Dr Cash $120,000, Cr Deferred income $120,000.
Year-end entry: Dr Deferred income $15,000, Cr Other income $15,000.
Closing deferred income = $120,000 − $15,000 = $105,000.
Of this, the next 12 months' share is 12 × $5,000 = $60,000 (current). The remaining $45,000 is non-current.

Answer: Other income $15,000. Deferred income $105,000, of which $60,000 is current and $45,000 is non-current.

Example 2

Echo receives a grant of $90,000 to compensate for research costs of $300,000 in total. Echo incurs $120,000 of the costs in the year ended 30 June 20X2 and $180,000 in the following year. Conditions are met and cash is received on 1 July 20X1. Echo deducts grants from the related expense. Show the effect in the year to 30 June 20X2.

Show the solution

The grant is related to income, matched to research costs expensed.
Costs in the year are $120,000 out of $300,000 total, which is 40%.
Grant recognised = $90,000 × 40% = $36,000.
On receipt: Dr Cash $90,000, Cr Deferred income $90,000.
Year end: Dr Deferred income $36,000, Cr Research expense $36,000.
Net research expense in profit or loss = $120,000 − $36,000 = $84,000.
Closing deferred income = $90,000 − $36,000 = $54,000, all current as the costs fall in the next year.

Answer: Net research expense $84,000. Deferred income $54,000, a current liability.

Exam tips

Read what the grant is for. Compensation for running costs means the income approach with matching. Purchase of an asset means a different method.
In OT cases, check whether the question says other income or deduction from expense. The answer to a profit question is the same, but a line-item question is not.
Look for conditions in the scenario. A grant at risk of being repaid or not earned may fail the reasonable assurance test.
In constructed response, show the deferred income entry and the closing balance. These carry marks even if the profit figure is wrong.
Explain matching in one sentence when asked to discuss. State that income is recognised in the same periods as the costs it compensates.

Practice questions from Government grants

Accounting for Grants Related to Income 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 Income: frequently asked questions

What is a grant related to income under IAS 20?

It is a government grant that is not related to the purchase of an asset. It compensates for costs such as wages, training or research. You recognise it in profit or loss as those costs are expensed.

Can I show a revenue grant as a deduction from expenses?

Yes. IAS 20 allows either other income or a deduction from the related expense. Profit is the same under both. You must choose a policy, apply it consistently and disclose it.

When is a grant for income recognised in full immediately?

When it compensates for costs already incurred, or gives immediate support with no future related costs. You recognise it in profit or loss in the period it becomes receivable.

What happens if I receive the cash before the costs are incurred?

The unearned part sits in the statement of financial position as deferred income, a liability. You release it to profit or loss as the related costs are expensed.