IAS 20 Government Grants: The Presentation Choice That Changes EBITDA But Not Profit

IAS 20 gives you a free choice about how to present a capital grant, and the choice changes nothing about profit or net assets. It changes EBITDA, gross assets, and every ratio built on either. That is the part almost nobody teaches, and it is the part a finance director actually cares about.

The standard is IAS 20 Accounting for Government Grants and Disclosure of Government Assistance. Note the two-part title: it governs the accounting for grants but only the disclosure of other assistance. That asymmetry is deliberate and routinely missed.

What is outside the standard

Paragraph 2 carves out four things, and three of them catch people out. IAS 20 does not apply to financial statements reflecting the effects of changing prices; to government participation in the ownership of the entity; to grants covered by IAS 41 Agriculture; or, critically, to government assistance provided in the form of benefits available in determining taxable profit or tax loss, or determined or limited on the basis of income tax liability.

That last exclusion is the one that matters in practice. Tax holidays, investment tax credits, accelerated capital allowances, reduced tax rates and research and development tax credits are all outside IAS 20. They belong to IAS 12. Bringing them inside IAS 20 is probably the single commonest error on this topic.

The definition in paragraph 3 is worth quoting because its limits do real work. Government grants are assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the entity.

Recognition: two limbs, not one

Paragraph 7 provides that government grants, including non-monetary grants at fair value, shall not be recognised until there is reasonable assurance that the entity will comply with the conditions attaching to them and that the grants will be received.

Both limbs. And paragraph 8 adds that receipt of a grant does not of itself provide conclusive evidence that the conditions have been or will be fulfilled. The consequences run in both directions, which is why students get it wrong twice over. Cash already in the bank, with conditions still at genuine risk, is a liability rather than income. A grant not yet received can be recognised where both limbs are satisfied. The trigger is assurance, not cash.

Paragraph 12 then sets the income recognition principle: government grants shall be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate. This is a matching model, not a performance obligation model, and that is the root of most criticism of the standard.

Where IFRS 9 comes in

Forgivable loans and below-market government loans are the area where two standards operate in sequence rather than as alternatives.

Under paragraph 10, a forgivable loan from government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness. Until that assurance exists it is simply a financial liability under IFRS 9.

Under paragraph 10A, the benefit of a government loan at a below-market rate of interest is treated as a government grant, and that benefit is measured as the difference between the initial carrying value of the loan determined in accordance with IFRS 9 and the proceeds received. So the loan never leaves IFRS 9: it is recognised initially at fair value, a market-rate discounted figure, and subsequently at amortised cost using the effective interest method. IFRS 9 measures the liability; IAS 20 accounts for the gap between that figure and the cash received. See our guide to IFRS 9 financial instruments for the measurement mechanics.

The presentation choice, and what it really changes

For grants related to assets, paragraph 24 permits presentation either by setting up the grant as deferred income or by deducting the grant in arriving at the carrying amount of the asset. Paragraph 25 states that the two methods are regarded as acceptable alternatives. For grants related to income, paragraphs 29 to 31 permit presentation either as income, separately or under a heading such as other income, or as a deduction from the related expense.

Take a machine acquired on 1 January 20X5 for £800,000, eight-year life, nil residual value, straight line, with a £200,000 grant received the same day conditional on the machine being retained and operated in a designated region for five years. Reasonable assurance exists, so paragraph 7 is satisfied.

Deferred income method

Cash of £200,000 is credited to deferred income. Depreciation is £800,000 over eight years, or £100,000 a year. The grant is released at £200,000 over eight years, or £25,000 a year. The net charge to profit or loss in 20X5 is £100,000 less £25,000, which is £75,000. At 31 December 20X5 the machine stands at £700,000 and deferred income at £175,000, split £25,000 current and £150,000 non-current. The net position is £525,000.

Deduction from the asset

The £200,000 is credited against property, plant and equipment, giving a carrying amount of £600,000 depreciated over eight years, or £75,000 a year. The net charge to profit or loss in 20X5 is £75,000. At 31 December 20X5 the asset stands at £600,000 less £75,000, which is £525,000.

The comparison

The net profit effect is £75,000 under both methods. Net assets are £700,000 less £175,000, or £525,000, under the first method, and £525,000 under the second. Identical, in every period, on both statements.

What differs is the gross presentation. The deferred income method reports £700,000 of gross property, plant and equipment and £25,000 of other income. The netting method reports £525,000 and no income. So the method changes EBITDA, because other income sits above the depreciation line while the netted version simply reduces depreciation. It changes gross asset values, and therefore return on assets, asset turnover and any covenant or ratio keyed to either. A group selecting a presentation method is making a decision about its own reported metrics, not just a bookkeeping choice.

One further point from paragraph 28, which almost nobody reads: purchases of assets and receipts of related grants are often disclosed as separate items in the statement of cash flows regardless of which presentation method is used. Netting in the statement of financial position does not license netting in the cash flow statement.

Non-monetary grants

Under paragraph 23, where a grant takes the form of a non-monetary asset such as land, the usual treatment is to assess the fair value of the asset and account for both grant and asset at that fair value. An alternative sometimes followed is to record both at a nominal amount. Both are permitted. This is a genuine choice, not a default with an exception.

Repayment, and the charge people forget

Paragraph 32 treats repayment of a government grant as a change in accounting estimate under IAS 8. That means prospective treatment and no restatement of comparatives, which is the first thing students get wrong here.

For an income-related grant, the repayment is applied first against any unamortised deferred credit, with any excess recognised immediately in profit or loss. For an asset-related grant, the repayment is recorded by increasing the carrying amount of the asset or reducing the deferred income balance, and the cumulative additional depreciation that would have been recognised to date in the absence of the grant is recognised immediately in profit or loss.

Return to the machine. On 1 January 20X7, after two full years, the entity relocates it, breaches the condition, and the whole £200,000 becomes repayable.

Under the deferred income method the balance is £200,000 less two years at £25,000, or £150,000. The repayment exceeds that by £50,000, which is expensed immediately.

Under the netting method the £200,000 is added back to the asset, and the catch-up is calculated: depreciation actually charged was £75,000 for two years, or £150,000, against £100,000 for two years, or £200,000, had there been no grant. The £50,000 difference is expensed immediately. The cost basis becomes £800,000, accumulated depreciation £200,000, and the carrying amount £600,000, which is exactly the position had the grant never existed. From 20X7 the charge reverts to £100,000 a year on a remaining six-year life.

Both methods charge the same £50,000 to profit or loss. Paragraph 33 adds that the circumstances giving rise to repayment may require consideration of the possible impairment of the new carrying amount, which brings IAS 36 into play.

Is IAS 20 being replaced? No.

It is worth being precise here, because commentary often overstates the position. IAS 20 is long-standing, with an original effective date of 1 January 1984, and it is widely criticised, principally for its matching-based income recognition and its reasonable assurance threshold, both of which sit oddly beside the control and performance obligation thinking in IFRS 15 and the Conceptual Framework.

But as at late 2026 there is no replacement standard, no exposure draft and no active IASB project. Government grants does not appear on the IASB work plan. Nor is there an imminent route onto it: in September 2025 the Board revised its approach to the Fourth Agenda Consultation and deferred publishing a request for information to 2027, extending the Third Agenda Consultation period to the conclusion of concurrent consultations with the ISSB in 2028. The realistic window for IAS 20 to be reconsidered is 2027 to 2028, and nothing is committed.

The FRS 102 divergence is real, and it is a recognition difference

This is the largest IFRS to UK GAAP gap on this topic, and it is not merely presentational.

Section 24 of FRS 102 offers two models and the entity chooses. The accrual model was added based on IAS 20 and works in the familiar way: classify the grant as relating to revenue or to assets, and recognise it over the periods in which the related costs are recognised, or over the expected useful life of the asset.

The performance model has no IAS 20 equivalent at all. A grant with no specified future performance conditions is recognised in income when the proceeds are received or receivable. A grant with performance conditions is recognised in income only when those conditions are met, with amounts received beforehand held as a liability. So under FRS 102 a capital grant carrying no performance conditions can hit income immediately and in full, a result IAS 20 would never produce.

And there is a hard prohibition. Under 24.5G a grant relating to an asset cannot be deducted from the asset carrying amount; the deferred portion must be presented as deferred income. IAS 20 netting option is simply not available under FRS 102. Anyone moving between the two frameworks should expect to meet that error. Section 24 was not substantively changed by the periodic review amendments effective for periods beginning on or after 1 January 2026.