How are government grants accounted for under IAS 20, and what is the difference between the income approach and the capital approach?

IAS 20 provides two acceptable methods for recognizing government grants related to assets. Both are allowed under IFRS, but they produce different balance sheet presentations while arriving at the same net income over the asset's life.

Example:

SunVolt Energy receives a $1,200,000 government grant to help finance the construction of a solar panel manufacturing facility costing$5,000,000. The facility has a 20-year useful life and zero residual value.

Method 1: Deferred Income Approach (Gross Presentation)

The grant is recorded as deferred income (a liability) and amortized to income over the asset's useful life.

Year 0 — Grant receipt:
Cash	$1,200,000
Deferred Income (Liability)		$1,200,000

Each year — Asset depreciation:
Depreciation Expense	$250,000
Accumulated Depreciation		$250,000

Each year — Grant amortization:
Deferred Income	$60,000
Other Income (or offset to depreciation)		$60,000

Net annual charge to income = $250,000 -$60,000 = $190,000

Method 2: Capital Approach (Net Presentation)

The grant reduces the asset's carrying amount directly.

Net asset cost = $5,000,000 -$1,200,000 = $3,800,000

Annual depreciation = $3,800,000 / 20 = **$190,000**

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Impact comparison:

Item	Deferred Income	Capital Approach
Total assets	Higher ($5M asset)	Lower ($3.8M asset)
Total liabilities	Higher (deferred income)	Lower
Gross depreciation	$250,000	$190,000
Net income effect	$190,000 (net)	$190,000
Asset turnover ratio	Lower (higher assets)	Higher (lower assets)

Grants related to income:

If the grant compensates for expenses rather than asset purchases (e.g., a wage subsidy), it is recognized as income in the period the related expense is incurred. It can be presented as other income or netted against the expense.

Conditions attached to grants:

If there is reasonable assurance that the company will comply with the grant conditions, the grant is recognized when receivable. If conditions are not met and the grant must be repaid, the repayment is treated as a change in accounting estimate.

Exam note: US GAAP has no single comprehensive standard for government grants (though ASC 832 now provides guidance). IAS 20 is the primary framework tested on CFA Level I.

Learn more about IAS 20 in our CFA Level I FRA module.