In our experience, most IAS 20 review notes come from one of two places. A controller who treats cash receipt as the recognition trigger, or a release schedule that follows the grant agreement’s project period instead of the asset’s depreciation profile. Both mistakes are easy to spot if you actually read the grant agreement. Both get missed when the working paper (WP) just ticks and bashes the deferred income balance against the prior-year (PY) spreadsheet. This is the finding that generates the most review notes on mid-tier engagement files, and it’s the one that nobody enjoys unpicking a week before the financial statements (FS) go out.
Here’s a scenario we see about once a quarter. Your client received a €1.2M regional development subsidy eighteen months ago. The grant funded a new production line that’s already running, but the balance still sits in deferred income with zero release to profit or loss. The financial controller (FC) tells you the grant “hasn’t been earned yet.” You open IAS 20 and realise the FC is confusing earning with spending.
IAS 20 requires entities to recognise government grants in profit or loss systematically over the periods in which they recognise the related costs as expenses ( IAS 20.12 ), provided reasonable assurance exists that the entity will comply with conditions and the grant will be received ( IAS 20.7 ).
Key takeaways
- How to test whether your client’s grant recognition policy matches the IAS 20.12 matching principle, not just the grant agreement timeline
- How to audit the two recognition conditions in IAS 20.7 (compliance and receipt) with specific procedures
- How to document the presentation choice between netting against the asset and showing gross income ( IAS 20.24 and IAS 20.26 )
- Why the forgivable loan rules in IAS 20 .10A catch more entities than you’d expect, and what to check
What IAS 20.7 actually requires before you recognise anything
IAS 20.7 sets two conditions for recognising a government grant. The entity must have reasonable assurance that it will comply with the conditions attached to the grant, and reasonable assurance that the grant will be received. Both conditions must be met. Receipt of the cash alone does not satisfy the standard.
The compliance condition is the one that generates audit findings. A grant agreement that requires the entity to maintain 50 FTE jobs for four years creates a condition that extends well beyond the date the money hits the bank account. Your audit work starts here. Obtain the full grant agreement (not just the award letter), list every condition and deadline, map each one to the current-period evidence, and test whether the entity can demonstrate ongoing compliance as of the reporting date. Our view: this is where you tick and bash the grant conditions against the current-period evidence, not the other way round. Start from the agreement text, not from the FC’s summary. IAS 20.8 reinforces the point. Receipt of a grant does not, by itself, provide conclusive evidence that the conditions have been or will be met.
Many entities treat cash receipt as the recognition trigger. It isn’t. We’ve seen this on about half the grant engagements we pick up, and we’ve yet to find a reviewer who accepts “appears reasonable. Waive further pursuit.” on a grant condition WP.
What does “reasonable assurance” mean in practice? The standard doesn’t define the term with precision, but it aligns with the threshold used elsewhere in IFRS: more likely than not, supported by evidence.
For a grant requiring the entity to employ 50 FTEs for four years, you’d want to see current headcount data and forward-looking workforce plans, supported by historical retention rates in the relevant division. If the entity has 48 FTEs at year-end and hasn’t replaced two recent leavers after six months, the evidence for reasonable assurance of compliance weakens. Document the analysis, not just the conclusion.
The receipt condition is usually straightforward for grants already in the bank. It becomes relevant for grants receivable at year-end and for multi-tranche subsidies where later payments depend on milestones. If payment of the second tranche depends on a progress report that the entity hasn’t yet submitted, you need evidence that the entity expects to meet the milestone. A signed-off progress report sitting in draft doesn’t count.
Look for submitted reports with acknowledgement of receipt from the granting authority, or at minimum a board minute confirming the entity intends to submit and has the documentation ready.
For Dutch entities, many grants come through RVO (Rijksdienst voor Ondernemend Nederland) or provincial agencies. These often have detailed milestone schedules and reporting deadlines. Missing a reporting deadline can trigger a clawback clause, which puts you squarely into the IAS 20.32 repayment territory discussed below. Obtain the complete grant agreement (not just the award letter) and map every condition and deadline.
The matching principle in IAS 20.12 and where clients get it wrong
IAS 20.12 is the core measurement paragraph. Grants are recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the costs that the grants are intended to compensate. This is a matching principle, not an earning principle. The grant follows the expense, not the activity. We’ve found that getting the client to restate this as “the grant shadows the depreciation” (or, for income grants, “the grant shadows the cost”) saves about twenty minutes of arguing with the FC in every meeting.
The error you’ll see most often: a client receives a grant linked to capital expenditure and records the full amount in deferred income. The balance then only gets released to profit or loss when the underlying asset is fully depreciated or when the grant agreement’s “project period” ends. Neither approach complies with the standard. The release must follow the depreciation pattern of the asset, not the administrative timeline of the grant. If the asset depreciates over eight years on a straight-line basis, one-eighth of the grant hits income each year.
The grant agreement might say the project runs for four years. Irrelevant to recognition.
IAS 20.17 makes this even more explicit for asset-related grants. The grant is recognised in profit or loss over the periods and in the proportions in which depreciation expense on the related assets is recognised. Test this by comparing the grant release schedule in the deferred income roll-forward to the depreciation schedule of the related asset. The two should be proportional.
A subtler variant of this error appears when the entity uses a different depreciation method for tax purposes than for accounting purposes, and the grant release follows the tax depreciation rather than the book depreciation. In the Netherlands, fiscal depreciation for investment subsidies (like the EIA or MIA/VAMIL schemes) can differ substantially from accounting depreciation. IAS 20.12 follows the accounting depreciation. Confirm which schedule the client’s system is using.
Income-related grants and the timing trap
For income-related grants (subsidies linked to operating costs rather than capital expenditure), IAS 20.12 still applies but the matching works differently. The grant is matched against the specific costs it compensates, in the periods those costs hit profit or loss.
A wage subsidy covering six months of salary costs in 2024 is recognised as income across those six months, not in the month the cash arrives. This sounds obvious until you encounter a client who received the full twelve-month subsidy in January and recognised the entire amount in Q1 because “that’s when we got it.” The cash receipt date is not the recognition date.
What about grants with conditions attached to future spending? Suppose an entity receives €500,000 in November 2024 to fund a research programme running from January 2025 to December 2026. At 31 December 2024, zero of the related research costs have been incurred. The entire €500,000 sits in deferred income at year-end. The entity can only release the grant to profit or loss as the research costs are incurred in 2025 and 2026.
Grants received as compensation for expenses already incurred present the opposite timing issue. IAS 20.20 addresses this directly: grants that become receivable as compensation for expenses or losses already incurred, or for the purpose of giving immediate financial support with no future related costs, are recognised in profit or loss in the period in which they become receivable. No deferred income balance, no matching schedule. This is the exception to the general matching rule, and it applies to grants like emergency relief payments and one-off subsidies to compensate for prior period losses where there is no forward-looking cost condition.
Your WP should classify each grant into one of four categories: asset-related with future depreciation, income-related with future costs, income-related with past costs (immediate recognition under IAS 20.20 ), or a combination where the grant covers both capital and operating elements. Mixed grants are more common than textbooks suggest. A single award letter might fund both a capital purchase and the salary of the operator who runs it. Split the grant into its components and apply the appropriate recognition method to each part.
Asset-related grants: netting versus gross presentation under IAS 20.24 and IAS 20.26
IAS 20 gives entities a genuine choice for asset-related grants. Under IAS 20.24 , the entity presents the grant as deferred income and releases it to profit or loss over the asset’s useful life. Under IAS 20.26 , the entity deducts the grant from the carrying amount of the asset. Both methods are acceptable. Both produce the same net effect on profit or loss over time.
The audit implication is disclosure and consistency. If the client deducts the grant from the asset ( IAS 20.26 ), the balance sheet shows a lower asset value and no deferred income line. The depreciation charge is also lower because the depreciable amount is the asset cost less the grant. If the client uses deferred income ( IAS 20.24 ), the balance sheet shows the full asset cost and a full depreciation charge, with a corresponding deferred income balance being released to income.
| Dimension | Deferred income (IAS 20.24) | Netting against asset (IAS 20.26) |
|---|---|---|
| Asset carrying amount | Full cost | Cost less grant |
| Depreciation charge | Based on full cost | Based on net cost (lower) |
| Balance sheet effect | Shows separate deferred income liability | No deferred income line |
| P&L release | Grant income over asset life | Lower depreciation expense |
| Typical use | Most mid-tier European clients | Entities with covenant sensitivity |
| Net P&L over time | Same | Same |
Either is fine, but the choice must be applied consistently and disclosed under IAS 20.39 (a).
Your WP needs to confirm which method the entity selected and verify consistency with PY. Check the disclosure separately. If the entity switched methods, IAS 8 applies (change in accounting policy, retrospective application). An unexplained switch between the two presentation methods is a red flag for earnings management, particularly in entities with debt covenants tied to specific balance sheet ratios.
Most mid-tier European clients use the deferred income method. It’s more visible to readers of the FS and simpler for the FC to track as a separate line item. But you’ll occasionally see the netting method in entities that received large grants relative to the asset cost, because it avoids showing a significant deferred income balance that raises questions from lenders reviewing covenant calculations.
IAS 20.39 also requires disclosure of the nature and extent of government grants recognised in the financial statements, an indication of other forms of government assistance from which the entity has directly benefited, unfulfilled conditions and contingencies attaching to government assistance, and the accounting method used for presentation. The third requirement is the one most often missed. If the grant agreement has a four-year employment condition and only two years have passed, the entity must disclose the unfulfilled condition. Check the disclosure note against the grant agreement conditions you identified in your IAS 20.7 assessment.
Forgivable loans and IAS 20 .10A
IAS 20 .10A catches more entities than you’d expect. A government loan with a below-market interest rate is treated as a government grant. The benefit is measured as the difference between the initial carrying amount of the loan (determined under IFRS 9 ) and the proceeds received. That difference is the grant element, and IAS 20 applies to it.
Many European SMEs received government-backed loans during 2020 and 2021 with interest rates at or near zero. If your client still carries one of these loans and hasn’t separated the grant element, the accounting is incomplete. The loan should have been recognised at fair value on initial recognition under IFRS 9 (discounted at a market rate for a comparable loan with similar terms and credit risk), with the difference between face value and fair value treated as a government grant. Honestly, this is the IAS 20 .10A finding we flag most often at firms like ours. Nobody enjoys backing out a four-year-old loan to separate the grant element, but skipping it is how reviewers find their way to the FD.
Forgivable loans add another layer. The standard states that the entity treats a forgivable government loan as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness. If the entity meets the conditions, the loan balance becomes a grant. If not, it remains a financial liability. Your audit work is binary: can the entity demonstrate it will meet the forgiveness conditions, yes or no?
If yes, apply IAS 20 to the full loan amount, which means determining whether the resulting grant is asset-related or income-related and applying the matching principle from IAS 20.12 accordingly.
If the answer is uncertain, the loan stays as a liability under IFRS 9 until the uncertainty resolves. The practical challenge is timing. A forgivable loan might have conditions spanning several years. At each reporting date, you reassess whether reasonable assurance exists. The entity might have reasonable assurance in year one and lose it in year two due to changed circumstances (then regain it in year three when the headcount recovers). Each reassessment requires evidence, and the WP should track the assessment at each reporting date with the supporting documentation obtained.
Repayment of government grants under IAS 20.32
IAS 20.32 covers what happens when a grant becomes repayable. The entity accounts for the repayment as a change in accounting estimate under IAS 8 . Not an error correction and not a change in policy. A change in estimate, applied prospectively.
For asset-related grants presented as deferred income ( IAS 20.24 ), the entity reverses the remaining unamortised deferred income and recognises any excess as an expense immediately. If the entity had netted the grant against the asset ( IAS 20.26 ), it increases the carrying amount of the asset by the amount repayable. The additional depreciation that would have been recognised had the grant never been received hits profit or loss immediately.
For income-related grants, repayment is applied first against any unamortised deferred income balance and any excess is recognised as an expense.
This matters for entities with grants subject to multi-year conditions. A client that received a €400,000 subsidy with a five-year employment condition and breaches the condition in year three faces a partial or full clawback. The financial statements for year three must reflect this. If the grant agreement specifies a graduated clawback (100% repayment if breached in years one or two, 60% if breached in year three, 40% in year four), you need to determine the amount repayable and apply IAS 20.32 .
Test for this by checking whether the conditions you identified in your IAS 20.7 analysis are still being met at year-end. If any condition is borderline, confirm whether the grant agreement contains clawback provisions and quantify the maximum exposure.
Worked example: Hessels Productie B.V.
Hessels Productie B.V. is a Dutch manufacturing company with €38M revenue. In January 2024, Hessels received a €600,000 provincial subsidy (Provincie Zuid-Holland) for the purchase and installation of an automated packaging line. The grant agreement requires Hessels to keep the packaging line operational for five years and maintain at least 12 FTE positions in the packaging division. The packaging line cost €1.8M and Hessels depreciates it straight-line over ten years with no residual value. Hessels also received a €200,000 forgivable government loan at 0% interest, repayable only if fewer than 12 FTEs are maintained. The market rate for a comparable loan is 5.2%.
Test the two IAS 20.7 conditions for the €600,000 subsidy
The cash was received in January 2024 (receipt condition met). The engagement team obtains the grant agreement and identifies two conditions: keep the line operational for five years, maintain 12 FTEs. Headcount records show 14 FTE in the packaging division at year-end 2024. A signed management representation confirms intent to maintain the line. The team also verifies the packaging line was operational at the physical inventory count date by inspecting it during the site visit.
Documentation note: record the specific grant conditions in the WP, cross-reference to the headcount report obtained (WP ref), note the physical verification of the line’s operational status, and document the basis for concluding reasonable assurance of compliance under IAS 20.7 . Include the expiry dates for each condition (operational: January 2029, employment: January 2029).
Determine the recognition pattern under IAS 20.12 and IAS 20.17
The grant relates to a depreciable asset. IAS 20.17 requires recognition in profit or loss over the depreciation period. The packaging line depreciates straight-line over ten years, so the annual grant release is €60,000 (€600,000 / 10 years). At 31 December 2024, one year of depreciation has passed. The deferred income balance should be €540,000 and the income recognised should be €60,000.
The engagement team (EP and senior) notes that the grant agreement’s “project period” is five years, while the depreciation period is ten years. Hessels’ FC initially proposed releasing the grant over five years (€120,000 per year). The team explains that IAS 20.17 requires the grant release to follow the depreciation pattern, not the project period. The FC adjusts the schedule.
Documentation note: record the calculation, confirm the depreciation method and useful life match between the asset register and the grant release schedule. Note the discrepancy between the grant agreement’s project period (five years) and the depreciation period (ten years), and document why IAS 20.17 governs the recognition pattern. Record the adjustment proposed to the client.
Confirm presentation method under IAS 20.24
Hessels presents the grant as deferred income ( IAS 20.24 method). The balance sheet shows the packaging line at €1.62M (€1.8M less one year’s depreciation of €180,000) and deferred income of €540,000 separately. Prior year used the same method. The disclosure note under IAS 20.39 (a) names the deferred income method and discloses the unfulfilled conditions (maintain 12 FTE and keep the line operational until January 2029).
Documentation note: record which presentation method the entity selected, confirm consistency with PY, verify the IAS 20.39 (a) disclosure names both the method and the unfulfilled conditions. Cross-reference the disclosure to the conditions identified in Step 1.
Account for the forgivable loan under IAS 20.10A
The €200,000 loan at 0% is forgivable if 12 FTEs are maintained. The team already confirmed 14 FTEs in Step 1, so reasonable assurance of forgiveness exists. The loan is treated as a government grant. Fair value of the loan at inception at the 5.2% market rate over the five-year term is approximately €155,200 (€200,000 discounted at 5.2% for five years). The grant element is €200,000 minus €155,200 = €44,800.
This €44,800 follows the same recognition pattern as the asset grant (matched to the depreciation of the packaging line, releasing €4,480 per year over ten years). The remaining €155,200 is a financial liability measured at amortised cost under IFRS 9 , with interest expense of approximately €8,070 in year one (€155,200 × 5.2%).
At 31 December 2024, the grant element in deferred income is €44,800 less one year’s release of €4,480 = €40,320. The loan liability is €155,200 plus €8,070 accrued interest less zero cash payments = €163,270.
Documentation note: record the market rate used and its source (ECB reference rate plus a credit spread appropriate for a mid-tier manufacturing entity), the fair value calculation, the split between grant element and financial liability, and the IFRS 9 amortised cost schedule. Cross-reference to IAS 20 .10A. Include sensitivity analysis on the discount rate if the rate selection involves significant judgment.
Practical checklist
Common mistakes
- Releasing asset-related grants over the grant agreement’s project period rather than the asset’s depreciation period. IAS 20.17 is explicit. The AFM’s thematic reviews of grant accounting have flagged mismatches between subsidy release schedules and underlying asset depreciation in entities receiving RVO and provincial subsidies.
- Failing to separate the grant element from below-market government loans. IAS 20 .10A requires this separation, but many mid-tier entities that received government-backed COVID-era loans still carry the full nominal amount as a financial liability without recognising the below-market interest benefit as a grant.
Related content
- Government grants (glossary). Covers the IAS 20 recognition criteria and presentation options in a shorter format.
- IFRS 9 Expected Credit Loss Calculator. Relevant for measuring the fair value of below-market government loans when calculating the grant element under IAS 20 .10A.
Related ciferi content
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Frequently asked questions
When should a government grant be recognised under IAS 20 ?
IAS 20.7 sets two conditions: the entity must have reasonable assurance that it will comply with the conditions attached to the grant, and reasonable assurance that the grant will be received. Receipt of cash alone does not satisfy the standard. Both conditions must be met before recognition.
Should an asset-related grant be released over the grant agreement period or the depreciation period?
IAS 20.17 requires asset-related grants to be recognised in profit or loss over the periods and in the proportions in which depreciation expense on the related assets is recognised. The grant agreement’s administrative timeline or project period is irrelevant to the recognition pattern. The release follows the depreciation schedule of the underlying asset.
How do you account for a forgivable government loan under IAS 20 .10A?
A government loan with a below-market interest rate is treated as a government grant under IAS 20 .10A. The grant element is the difference between the initial fair value of the loan (discounted at a market rate under IFRS 9 ) and the proceeds received. If the loan is forgivable, the entity treats it as a grant when there is reasonable assurance that forgiveness conditions will be met.
What happens when a government grant becomes repayable?
IAS 20.32 requires repayment to be accounted for as a change in accounting estimate under IAS 8 , applied prospectively. For asset-related grants presented as deferred income, the entity reverses the remaining unamortised balance and recognises any excess as an expense immediately.
What are the IAS 20.39 disclosure requirements for government grants?
IAS 20.39 requires disclosure of the accounting policy adopted for grants, the nature and extent of grants recognised, an indication of other forms of government assistance from which the entity has benefited, and unfulfilled conditions and contingencies attaching to government assistance. The unfulfilled conditions disclosure is the one most often missed.
Further reading and source references
- IAS 20 , Accounting for Government Grants and Disclosure of Government Assistance: the source standard governing recognition, measurement, and presentation of government grants.
- IAS 8 , Accounting Policies, Changes in Accounting Estimates and Errors: governs the treatment of grant repayments as changes in estimate and switches between presentation methods.
- IFRS 9 , Financial Instruments: relevant for measuring the fair value of below-market government loans when calculating the grant element under IAS 20 .10A.
- IAS 16 , Property, Plant and Equipment: relevant for determining the depreciation schedule that drives asset-related grant recognition.