Government grants for manufacturers

Capital grants: an example presented both ways

A manufacturer buys a machine for 10,000,000 with a useful life of 10 years. A regional development agency pays a grant of 3,000,000, which must be repaid if the manufacturer does not keep 200 jobs at the site for five years. The manufacturer expects to meet the condition.

Profit is the same either way; the balance sheet differs. The cash flow statement usually shows the purchase of the machine and the receipt of the grant as separate items, whichever presentation is used.

When are government grants recognised?

Only when there is reasonable assurance that the manufacturer will comply with the conditions and that the grant will be received. Receiving the cash is not enough on its own: a grant paid upfront with conditions the manufacturer may not meet is held as a liability until the assurance exists. A grant that becomes receivable as compensation for costs already incurred, or for immediate financial support with no future costs, is income when it becomes receivable.

How are grants for wages and other costs treated?

A grant of 2,000 for each new employee, paid towards the first year's salary, is recognised over that year as the salaries are expensed, either as other income or as a reduction in staff costs. Training grants, energy cost subsidies and similar support follow the same matching principle.

What happens if a grant must be repaid?

Repayment is a change in accounting estimate, not an error. Suppose the manufacturer cuts jobs after 3 years and must repay the full 3,000,000. Under the deferred income approach, the repayment first uses the 2,100,000 of unreleased deferred income, and the remaining 900,000 is expensed at once. Under the deduction approach, the machine's carrying amount is increased by 3,000,000 and the 900,000 of extra depreciation that would have been charged without the grant is expensed at once. Either way, profit takes the same hit.

How are below-market loans treated?

The benefit of a government loan at a below-market rate is a grant. An interest-free loan of 5,000,000 repayable in five years, when the manufacturer's market rate is 8%, has a fair value of 3,402,916 under IFRS 9. The difference, 1,597,084, is a government grant, recognised in the same way as other grants, while the loan accrues interest at 8% back up to 5,000,000. Forgivable loans are grants once there is reasonable assurance the conditions for forgiveness will be met.

What about tax credits?

Investment and research tax credits delivered through the tax system are generally outside IAS 20 and within IAS 12, but some credits are payable in cash whether or not the manufacturer has taxable profits, and many companies account for those as grants. The terms of each scheme decide which treatment fits; see product development costs.

What does US GAAP require?

For years, US GAAP had no specific guidance for business entities, and many applied IAS 20 by analogy. ASU 2025-10, issued in December 2025, adds Topic 832 for grants of monetary and tangible assets. It requires recognition when it is probable the business will comply with the conditions and receive the grant, and offers a deferred income approach or a cost accumulation approach for asset grants. Below-market loans are outside its scope. It applies to public business entities for annual periods beginning after 15 December 2028, a year later for others, and may be adopted early.

What must be disclosed?

The accounting policy and presentation method, the nature and extent of grants recognised, other forms of government assistance received, and any unfulfilled conditions or contingencies attached to grants. See manufacturing accounting, plant useful lives and, for sector examples, feed-in tariffs and government funding for drug development.

This guide is general information. It is not tax or legal advice for your situation.