Government funding for drug development

Governments and global health bodies fund a large share of research on vaccines, antimicrobials and treatments for neglected diseases, and the pandemic brought billions of dollars of advance purchase agreements. The arrangements look similar, cash from a public body to a drug developer, but the accounting depends on whether the government is a donor, a lender or a customer. This guide sets out the test, works through a company with a grant and an advance order, and covers loans, refundability, presentation and US GAAP.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. 3 minute read.

Short answer

Government funding for drug development is accounted for according to what the government gets in return. A grant that funds research without buying anything is government assistance under IAS 20: it is recognised when there is reasonable assurance the company will meet the conditions, and matched against the costs it funds. A contract under which a government agency buys doses, or pays for research it will own or direct, is a contract with a customer under IFRS 15, so payments in advance are contract liabilities. Forgivable loans become grants when forgiveness is reasonably assured, and the benefit of a below-market loan is a grant. In this guide's example, a US$ 30 million research grant gives 12 million of grant income in a year when 40% of the funded costs are incurred, while a 20 million advance order waits as a contract liability.

At a glance

Grant for research
IAS 20, matched with costs
Government buys doses or R&D
IFRS 15, government is a customer
Advance payments
Contract liability
Forgivable loan
Grant once forgiveness assured
Below-market loan
Benefit is a grant
Repayable on success
Financial liability
Government funding for drug developmentGrant for research: IAS 20, matched with costs; Government buys doses or R&D: IFRS 15, government is a customer; Advance payments: Contract liability; Forgivable loan: Grant once forgiveness assured; Below-market loan: Benefit is a grant; Repayable on success: Financial liability.KEY FACTS AT A GLANCEGovernment funding for drug developmentGrant for researchIAS 20, matched withcostsGovernment buys doses or R&DIFRS 15, government is acustomerAdvance paymentsContract liabilityForgivable loanGrant once forgivenessassuredBelow-market loanBenefit is a grantRepayable on successFinancial liabilityTax BakersGovernment funding for drug developmentGrant for research: IAS 20, matched with costs; Government buys doses or R&D: IFRS 15, government is a customer; Advance payments: Contract liability; Forgivable loan: Grant once forgiveness assured; Below-market loan: Benefit is a grant; Repayable on success: Financial liability.KEY FACTS AT A GLANCEGovernment funding for drugdevelopmentGrant for researchIAS 20, matched with costsGovernment buys doses or R&DIFRS 15, government is a customerAdvance paymentsContract liabilityForgivable loanGrant once forgiveness assuredBelow-market loanBenefit is a grantRepayable on successFinancial liabilityTax Bakers
Key facts at a glance, as set out in this guide.

Is the government a donor or a customer?

IAS 20 covers assistance from government in return for past or future compliance with conditions relating to the company's operations, where the government receives nothing in exchange. IFRS 15 applies when the government contracts to obtain goods or services from the company's ordinary activities. A grant to support a Phase II trial, where results belong to the company, is assistance. A contract to deliver vaccine doses, or to perform research on a product the government will own or license, is a sale. Many arrangements combine both and need to be split. See government grants.

Government funding: a grant and an advance purchase

A vaccine developer receives a US$ 30 million grant towards development costs of 30 million, conditional on running the agreed trials, and a 20 million advance payment from a health agency for doses to be delivered if the vaccine is approved, refundable if it is not. In the year, it incurs 12 million of the funded development costs.

Two kinds of government moneyTwo kinds of government moneyTOPICResearch grantPurchase agreementGovernment receivesNothingDoses or R&DStandardIAS 20IFRS 15In profitAs costs incurredOn deliveryBefore thenDeferred incomeContract liability
Whether the government buys something decides the standard.
US$ millionResearch grantAdvance purchase agreement
Cash received3020
StandardIAS 20IFRS 15
Recognised in profit this year12, matching the costs incurredNone
Balance at year endDeferred income 18Contract liability 20

The grant is recognised in profit as the funded costs are incurred, either as other income or deducted from research and development expense, under the company's policy. The advance payment is revenue only when doses are delivered; because it is refundable if approval fails, it stays a liability until then, and if delivery is expected more than a year after payment, a significant financing component may apply.

How are government loans treated?

A forgivable loan is treated as a grant when there is reasonable assurance the company will meet the terms for forgiveness; until then it is a liability. A loan at a below-market interest rate is recognised at fair value under IFRS 9, and the difference from the cash received is a grant. In the example, a 10 million interest-free loan repayable in 5 years, when the market rate is 8%, has a fair value of 6.8 million, so 3.2 million is a grant, recognised as the funded costs are incurred, while the loan accretes interest up to 10 million.

What if funding is repayable if the drug succeeds?

Some funders, including government agencies and charities, require repayment, often as royalties, if the drug reaches the market. A contractual obligation to pay cash on success, which the company cannot avoid once the drug is sold, is usually a financial liability under IFRS 9, measured at the expected repayments, rather than a grant. Funding repayable only if the company chooses to commercialise can need careful analysis of whether it can avoid paying.

When is a grant recognised?

Only when there is reasonable assurance that the company will comply with the conditions and that the grant will be received. Cash received before then is a liability. If conditions are later breached and repayment becomes due, the repayment is a change in estimate, recognised immediately.

How does US GAAP differ?

US GAAP has historically had no specific standard for grants to business entities, and many applied IAS 20 by analogy. ASU 2025-10, which adds Topic 832, applies to public business entities for annual periods beginning after 15 December 2028, with early adoption allowed. Contracts with government agencies for goods or services are within ASC 606. See pharma accounting.

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Questions people ask

Is government funding for drug research a grant or revenue?

A grant under IAS 20 if the government receives nothing in exchange; revenue under IFRS 15 if it buys doses or research it will own or direct.

How is a vaccine advance purchase payment accounted for?

As a contract liability until doses are delivered, especially if it is refundable on failure; then as revenue.

How is a below-market government loan accounted for?

At fair value under IFRS 9, with the difference from the cash received treated as a grant.

Is funding repayable on success a grant?

Usually not; an obligation to pay if the drug is sold is generally a financial liability.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
  2. IFRS Foundation: IFRS 15 Revenue from Contracts with Customers
  3. IFRS Foundation: IFRS 9 Financial Instruments

Rules and fees change. If you are reading this long after October 8, 2026, confirm the figures with the source before you rely on them.

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