Financial Reporting · Tangible non-current assets
IAS 20 Government Grants: Accounting for Capital and Revenue Grants
Updated 11 October 2026 · Fact-checked
IAS 20 says you recognise a government grant only when there is reasonable assurance you will meet its conditions and receive it. Recognise it in profit or loss over the periods the related costs are expensed. For asset grants, either set up deferred income or deduct the grant from the asset's cost.
Understand IAS 20 Government Grants
A government grant is assistance from government in return for past or future compliance with conditions relating to the entity's operations. IAS 20 sets out when to recognise a grant and how to present it.
The core idea is matching. A grant is not simply income when the cash arrives. You recognise it in profit or loss on a systematic basis over the periods in which you recognise the related costs that the grant is meant to compensate. You recognise it only when there is reasonable assurance that you will comply with the conditions and that the grant will be received.
Grants related to income (revenue grants) compensate for expenses. You either present them as other income, or deduct them from the related expense. If the grant covers costs already incurred, or gives immediate support with no future costs, recognise it in profit or loss in the period it becomes receivable.
Grants related to assets (capital grants) are given to buy or build non-current assets. IAS 20 allows two presentations. Under the deferred income method, the asset is shown at full cost and depreciated on full cost. The grant is a liability (deferred income), released to profit or loss over the asset's useful life, in line with depreciation. Under the deduction method, you deduct the grant from the asset's carrying amount. The asset is then depreciated on the reduced amount. Both give the same profit each year, but different statement of financial position figures.
If a grant becomes repayable, treat it as a change in accounting estimate under IAS 8. Repayment of an income grant is first set against any unamortised deferred income, with any excess charged to profit or loss immediately. Repayment of an asset grant increases the asset's carrying amount (or reduces the deferred income) and any extra cumulative depreciation that would have been charged is recognised immediately in profit or loss.
Key rules to remember
- Recognition condition
- Recognise grant only if reasonable assurance that (1) conditions will be met and (2) grant will be received
- Receiving cash alone is not enough. Conditions matter.
- Deferred income method: annual release
- Annual release to P&L = Grant ÷ Useful life
- Assumes the grant is released in line with straight-line depreciation. Split between current and non-current liabilities.
- Deduction method: carrying amount
- Carrying amount = Cost − Grant − Accumulated depreciation on (Cost − Grant)
- Depreciation = (Cost − Grant − Residual value) ÷ Useful life.
- Net P&L effect (both methods)
- Depreciation on full cost − Grant release = Depreciation on (Cost − Grant)
- Both methods give the same profit. Only the statement of financial position differs.
- Repayment of a grant
- Treat as change in estimate; set against unamortised deferred income first; balance to P&L
- For an asset grant under the deduction method, increase the carrying amount and charge catch-up depreciation immediately.
How to solve IAS 20 Government Grants questions
Use this method for any IAS 20 question, whether it is an objective test or a written part of a Section C answer.
- 1Identify whether the grant relates to income (costs) or to an asset.
- 2Check the recognition test: is there reasonable assurance of compliance and receipt? If not, recognise nothing yet.
- 3For an income grant, match it to the related costs. Recognise it over the same periods, or immediately if it covers costs already incurred.
- 4For an asset grant, note which method the question asks for, or which method the entity uses under its policy.
- 5Deferred income method: record the asset at full cost, depreciate on full cost, and release grant ÷ useful life each year. Show any unreleased amount as deferred income, split current and non-current.
- 6Deduction method: record the asset at cost less grant and depreciate that net figure.
- 7If the grant is repaid, treat it as a change in estimate. Work out the catch-up amount and take it to profit or loss immediately.
- 8Check your answer: net profit effect should be identical under both methods.
Quickest way: Deferred income in four lines
When to use it: Use in objective test questions asking for a statement of financial position or profit or loss figure at year end.
- Annual grant release = grant ÷ useful life (adjust for part-year if the asset is bought mid-year).
- Deferred income at year end = grant − cumulative release.
- Current portion of deferred income = next year's release. The rest is non-current.
- If the question says deduct from cost, take the grant off cost first, then depreciate the net figure.
Common mistakes in IAS 20 Government Grants
Crediting the whole grant to profit or loss when the cash is received.
Students link grant income with cash receipt.
Fix: Match the grant to the asset's life or related costs. Credit receipts to deferred income first for asset grants.
Depreciating the asset on full cost under the deduction method.
Students forget the grant has already reduced the asset's carrying amount.
Fix: Depreciate cost less grant. Only the deferred income method uses full cost.
Showing all deferred income as non-current.
Students forget the current and non-current split.
Fix: Next year's release is current. The balance is non-current.
Recognising a grant before there is reasonable assurance of compliance.
Students focus on the grant being approved.
Fix: Check the conditions in the scenario. If compliance is uncertain, recognise nothing yet.
Treating grant repayment as a prior period adjustment.
Students think it corrects an error.
Fix: IAS 20 says it is a change in estimate under IAS 8, so it is applied prospectively with the catch-up in the current year.
Worked examples
Example 1
On 1 January 20X1 Zeta Co buys equipment for ₹10,00,000 with a useful life of 5 years and no residual value. It receives a government grant of ₹2,00,000 on the same date. Zeta depreciates straight line. Show the statement of financial position and profit or loss effects for the year ended 31 December 20X1 under both methods.
Show the solution
- Deferred income method: depreciation on full cost = ₹10,00,000 ÷ 5 = ₹2,00,000.
- Grant release = ₹2,00,000 ÷ 5 = ₹40,000, credited to profit or loss.
- Asset carrying amount at 31 December 20X1 = ₹10,00,000 − ₹2,00,000 = ₹8,00,000.
- Deferred income at 31 December 20X1 = ₹2,00,000 − ₹40,000 = ₹1,60,000. Current portion ₹40,000, non-current ₹1,20,000.
- Net profit or loss charge = ₹2,00,000 − ₹40,000 = ₹1,60,000.
- Deduction method: asset cost = ₹10,00,000 − ₹2,00,000 = ₹8,00,000.
- Depreciation = ₹8,00,000 ÷ 5 = ₹1,60,000. Carrying amount = ₹8,00,000 − ₹1,60,000 = ₹6,40,000.
- Check: net charge to profit or loss is ₹1,60,000 in both cases. Net assets also agree: ₹8,00,000 − ₹1,60,000 = ₹6,40,000.
Answer: Deferred income method: depreciation ₹2,00,000, grant income ₹40,000, asset ₹8,00,000, deferred income ₹1,60,000. Deduction method: depreciation ₹1,60,000, asset ₹6,40,000. Net profit effect is a ₹1,60,000 charge under both methods.
Example 2
Using the deferred income method, Kappa Co received a grant of ₹3,00,000 on 1 January 20X1 towards a machine costing ₹12,00,000 with a useful life of 6 years and no residual value. On 1 January 20X3 the grant becomes repayable in full because conditions were breached. Show the accounting at 1 January 20X3.
Show the solution
- Annual release = ₹3,00,000 ÷ 6 = ₹50,000.
- Release for 20X1 and 20X2 = ₹1,00,000.
- Unamortised deferred income at 1 January 20X3 = ₹3,00,000 − ₹1,00,000 = ₹2,00,000.
- Repayment is a change in estimate. Amount repayable = ₹3,00,000.
- Debit deferred income ₹2,00,000 to eliminate the unamortised balance.
- The excess of ₹3,00,000 − ₹2,00,000 = ₹1,00,000 is charged to profit or loss immediately. This equals the cumulative grant income already recognised.
- Credit liability to government (or cash) ₹3,00,000.
- From 20X3 onwards, no further grant release is recorded. Depreciation continues at ₹2,00,000 a year on full cost (₹12,00,000 ÷ 6).
Answer: Dr Deferred income ₹2,00,000, Dr Profit or loss ₹1,00,000, Cr Liability/cash ₹3,00,000. No further grant release arises.
Exam tips
- Always state which method you are using. In a Section C answer, label your workings clearly so marks are available even if a number is wrong.
- In objective tests, calculate the year-end deferred income and the current/non-current split before reading the options. Wrong answers often use the other method.
- Watch for part-year ownership. Adjust both depreciation and the grant release by the same time fraction.
- If the question mentions conditions that may not be met, think reasonable assurance first.
- Mention that both methods give the same profit. It shows understanding and is a quick check on your figures.
Practice questions from Tangible non-current assets
IAS 20 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 Government Grants: frequently asked questions
What is the difference between the deferred income method and deducting the grant from asset cost?
Under the deferred income method, the asset stays at full cost and the grant sits as deferred income, released to profit or loss over the asset's life. Under the deduction method, the grant reduces the asset's carrying amount, so depreciation is lower. Net profit is the same under both.
How do you account for a capital grant in ACCA FR?
Check that there is reasonable assurance of compliance and receipt. Then either credit deferred income and release it over the asset's life, or deduct the grant from the asset's cost. Depreciate the asset accordingly.
How is repayment of a government grant accounted for under IAS 20?
It is treated as a change in accounting estimate. For an income grant, set it against any unamortised deferred income first, then charge the excess to profit or loss. For an asset grant, adjust the asset or deferred income and take any extra cumulative depreciation to profit or loss immediately.
When do you recognise a government grant?
Only when there is reasonable assurance that the entity will comply with the conditions and that the grant will be received. Even then, the income is recognised in profit or loss over the periods the related costs are expensed.