IAS 20 *Accounting for Government Grants and Disclosure of Government Assistance* establishes the framework for recognising and measuring government grants. The core principle is that grants should not be recognised until there is reasonable assurance that the entity will comply with the conditions attached to them and that the grants will actually be received (IAS 20.7).

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The Two-Stage Recognition Test

Before recognising any grant, an entity must have reasonable assurance of two things:

• The entity will comply with the conditions attached to the grant.
• The grant will be received.

This threshold is deliberately lower than "virtually certain," meaning some degree of judgement is always involved. Recognition is not triggered simply by cash receipt — a grant received before conditions are met is treated as a deferred liability (IAS 20.12).

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Types of Grants and Their Treatment

• Grants related to assets — These relate to the acquisition or construction of long-term assets. They can be presented either by deducting the grant from the asset's carrying amount (reducing future depreciation) or by recognising the grant as deferred income and releasing it systematically over the asset's useful life (IAS 20.24–IAS 20.27).

• Grants related to income — These compensate for expenses already incurred or for future costs. They are recognised in profit or loss on a systematic basis over the periods in which the related costs are recognised (IAS 20.29). They may be presented either as other income or netted against the related expense (IAS 20.29–IAS 20.31).

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Systematic and Rational Matching

The overarching recognition principle is that grants should be matched to the costs they are intended to compensate (IAS 20.12). This means:

• A grant to reimburse costs already incurred is recognised immediately in profit or loss.
• A grant for future expenditure is deferred and released as those expenditures are incurred.
• A grant for purchasing an asset is spread over the useful life of the asset, mirroring the depreciation pattern.

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Non-Monetary Grants

When a government grant takes the form of a non-monetary asset (e.g., land or other resources), both the asset and the grant are recorded at fair value. Alternatively, entities may record both at a nominal amount (IAS 20.23), though fair value presentation is more informative.

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Repayment of Grants

If a grant becomes repayable (e.g., due to breach of conditions), it is treated as a change in accounting estimate (IAS 20.32):

• Repayment of an income-related grant reduces any unamortised deferred credit first, with any excess recognised immediately in profit or loss.
• Repayment of an asset-related grant increases the carrying amount of the asset or reduces the deferred income balance, with any impairment assessed under IAS 36.

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Disclosure Requirements

IAS 20.39 requires entities to disclose:

• The accounting policy adopted for grants.
• The nature and extent of grants recognised.
• Unfulfilled conditions and other contingencies attached to recognised grants.

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Key Takeaway: The recognition model under IAS 20 is fundamentally income-based — grants flow through profit or loss in line with the costs they compensate, ensuring faithful representation and matching rather than immediate recognition upon receipt.