Financial Reporting · Government grants

IAS 20 Scope and Definitions of Government Grants

Updated 11 October 2026 · Fact-checked

IAS 20 covers accounting for government grants and disclosure of other government assistance. A government grant is a transfer of resources in return for past or future compliance with conditions. You recognise a grant only when there is reasonable assurance that you will comply with the conditions and that the grant will be received.

Understand IAS 20 Scope and Definitions of Government Grants

A government can help a business in many ways. It may pay cash, give an asset, cut a tax rate or offer a loan at a low rate. IAS 20 sets out how to account for some of these and how to disclose the others.

Government assistance is the wider term. It means action by government to give an economic benefit to an entity or a range of entities that meet certain criteria. Government grants are a subset. A grant is assistance in the form of a transfer of resources to an entity, in return for past or future compliance with certain conditions relating to its operating activities.

Some assistance is not a grant for one of two separate reasons. Free technical advice or government procurement policy cannot reasonably have a value put on it. A government guarantee of a loan is different: it is not a transfer of resources. Neither kind is a grant to be recognised. Only disclosure applies.

Grants come in two types. Grants related to assets have a main condition that the entity buys, builds or otherwise acquires long-term assets. They may also carry extra conditions, such as the type or location of the asset. Grants related to income are all other grants. The split matters because it decides how the grant is presented and released to profit or loss. Those methods are covered in the later topics.

The key recognition test is reasonable assurance. You must be reasonably assured of two things: the entity will comply with the conditions attached, and the grant will be received. Receiving cash alone is not enough. If you have the cash but may have to give it back because conditions will not be met, you do not treat it as income.

Once the test is met, IAS 20 requires the income approach. The grant is recognised in profit or loss over the periods in which the entity recognises the related costs that the grant is meant to compensate. It is not credited directly to shareholders' interests.

IAS 20 does not deal with several areas. These include government assistance given only as a tax benefit, such as tax holidays, investment tax credits, accelerated depreciation allowances and reduced tax rates. It also excludes government participation in the ownership of the entity, and government grants covered by IAS 41 Agriculture. Accounting for income taxes itself is dealt with in IAS 12.

Key rules to remember

Government grant (definition): Transfer of resources to an entity in return for past or future compliance with conditions relating to its operating activities; Excludes assistance that cannot reasonably have a value placed on it (such as free advice) and normal trading transactions with government. A guarantee is also not a grant, but for a different reason: it is not a transfer of resources.
Government assistance (definition): Action by government to give an economic benefit to specific entities that meet certain criteria; Wider than grants. Includes forms not recognised in the financial statements, so disclosure is needed.
Recognition criteria: Recognise a grant only if: (1) reasonable assurance the entity will comply with the conditions AND (2) reasonable assurance the grant will be received; Both tests must be met. Receipt of cash alone does not prove the conditions will be met.
Grants related to assets: Primary condition = entity must purchase, construct or otherwise acquire long-term assets; Other conditions may be added, such as asset type, location or holding period.
Grants related to income: Grants related to income = all grants that are not grants related to assets; Presented as other income or deducted from the related expense.
Recognition principle: Recognise in profit or loss on a systematic basis over the periods in which the related costs are expensed; This is the income approach. IAS 20 does not allow grants to be credited directly to shareholders' interests.

How to solve IAS 20 Scope and Definitions of Government Grants questions

Use this order for any scope or definition question on IAS 20, whether it is an objective test item or a short scenario.

1Identify what the government has provided: cash, a non-monetary asset, a tax benefit, a loan, advice or a guarantee.
2Decide if the item is within IAS 20. Tax-only benefits (dealt with under IAS 12) and government grants covered by IAS 41 are outside its scope.
3Decide whether it is a government grant or only other government assistance. Ask whether resources are transferred and whether a value can reasonably be put on it.
4Read the conditions attached. Note whether they have been met yet or will be met in future.
5Apply the reasonable assurance test to both compliance and receipt. If either fails, do not recognise the grant.
6Classify the grant as related to assets (main condition is to acquire long-term assets) or related to income (everything else).
7State the consequence: recognise or not, and the type of grant, which drives the later accounting.

Quickest way: Three-question filter

When to use it: Use this for Section A and OT case questions where you have about three minutes per item.

Question 1: Is it within IAS 20 and a transfer of resources with conditions? If it is a tax-only benefit or an IAS 41 grant, stop: it is outside IAS 20. If it is advice or a guarantee, it is assistance for disclosure only, not a grant.
Question 2: Am I reasonably assured of both compliance and receipt? If not, no recognition yet.
Question 3: Is the main condition buying or building a long-term asset? Yes means asset grant, no means income grant.
Check the wording of each option against the exact definition. Options that say 'cash received so recognise immediately' are usually wrong.

Common mistakes in IAS 20 Scope and Definitions of Government Grants

Treating all government assistance as a government grant.
The two terms sound the same and are used loosely in business.
Fix: Remember grants are a subset. Free advice and guarantees are assistance, disclosed but not recognised as grants. Tax-only benefits are outside IAS 20 altogether.
Recognising a grant as income as soon as cash is received.
Students link income with cash flow instead of the recognition criteria.
Fix: Apply both tests first: reasonable assurance of compliance and of receipt. Cash with unmet conditions that may be repaid is not income yet.
Testing only whether the grant will be received.
The word receipt draws attention away from the compliance condition.
Fix: Always write both: will we comply and will we receive. Both are required.
Classifying a grant as an asset grant just because cash is used to buy an asset.
Students look at how the money is spent, not the condition attached.
Fix: Look at the primary condition. It is an asset grant only if the grant is conditional on acquiring long-term assets.
Applying IAS 20 to tax holidays or reduced tax rates.
Tax breaks feel like government help, so they seem to belong with grants.
Fix: IAS 20 excludes assistance given only as a tax benefit. That is dealt with under IAS 12.
Crediting a grant directly to equity.
Students confuse grants with capital contributions from owners.
Fix: Government is not acting as an owner. IAS 20 uses the income approach: grants go through profit or loss on a systematic basis, not directly to shareholders' interests.

Worked examples

Example 1

A government gives Tulsi Co ₹40,00,000 to support its payroll costs, on condition that Tulsi Co keeps at least 200 employees for the next two years. At the reporting date, Tulsi Co has announced a plan to close a factory within that period, which will reduce staff to 150. Management still expects to receive the cash. Can Tulsi Co recognise the grant? Classify it too.

Show the solution

The government transfers cash in return for compliance with conditions relating to the entity's operating activities, so this is a government grant.
The condition looks to the future: Tulsi Co must keep at least 200 employees for two years.
The announced closure will cut staff to 150 within those two years, so the entity plans to breach the condition.
There is therefore no reasonable assurance that Tulsi Co will comply, even though receipt of the cash is expected.
Both tests must be met, so the grant fails the recognition criteria and is not recognised as income.
Classification: the main condition is not about acquiring long-term assets, so it is a grant related to income.

Answer: Tulsi Co cannot recognise the grant, because there is no reasonable assurance it will comply with the staff retention condition. If it were recognised, it would be a grant related to income.

Example 2

For each item, state whether it is a government grant within IAS 20 or other government assistance: (a) ₹25,00,000 cash given to buy a machine in a designated region; (b) free consultancy advice from a government agency; (c) a government guarantee over a bank loan. Classify (a) as asset or income related.

Show the solution

(a) Cash is a transfer of resources with conditions, so it is a government grant.
(a) The main condition is to acquire a long-term asset, a machine, so it is a grant related to assets. The region condition is an additional condition.
(b) Advice has no reasonable value that can be put on it. It is government assistance but not a grant to be recognised. It needs disclosure only if significant to understanding the financial statements.
(c) A guarantee is government assistance, but it is not a transfer of resources, so it is not a grant. It is other assistance, disclosed where needed to understand the financial statements, and not recognised as a grant.

Answer: (a) Government grant, related to assets. (b) Government assistance only. (c) Government assistance only.

Exam tips

Learn the definitions almost word for word. Objective test options often swap a single phrase, such as 'past or future compliance'.
Always check for the two-part reasonable assurance test. A scenario that gives only receipt or only compliance is usually setting a trap.
Look for the primary condition in the scenario to classify a grant as asset or income related. Do not be led by how the cash is spent.
In Section C, name the standard and the criterion before calculating. A clear sentence on reasonable assurance earns easy marks.
Spot exclusions quickly. Tax benefits and grants within IAS 41 scope are outside IAS 20.

Practice questions from Government grants

IAS 20 Scope and Definitions of Government Grants in other exams

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

IAS 20 Scope and Definitions of Government Grants: frequently asked questions

What is the difference between government assistance and a government grant?

Government assistance is any action by government to give an economic benefit to specific entities. A government grant is the part of assistance that transfers resources in return for compliance with conditions. Some assistance, like free advice, cannot be valued, so it is not a recognised grant.

What does reasonable assurance mean in IAS 20?

It means you are reasonably confident that you will meet the conditions attached to the grant and that the grant will be received. Both parts must be satisfied before recognition. Cash received does not on its own prove the conditions will be met.

How do you tell a grant related to assets from a grant related to income?

A grant related to assets has a primary condition that the entity buys, builds or otherwise acquires long-term assets. Any grant that is not of this kind is related to income. The classification affects how the grant is presented and released to profit or loss.

Does IAS 20 cover tax holidays and reduced tax rates?

No. IAS 20 excludes government assistance given only as a benefit in determining taxable profit or tax liability. Those items are dealt with under IAS 12 on income taxes.