Government Grants (Ind AS 20): Income vs Capital Approach
- Under Ind AS 20, a government grant is recognised only when there is reasonable assurance that conditions will be met and the grant will be received — not when cash arrives.
- Capital grants reduce the asset's carrying amount or sit as deferred income; income grants offset related expenses or appear as other income — the choice must be consistent and disclosed.
- Repayment of a grant is treated as a change in accounting estimate, not a prior-period error, which has a direct P&L impact in the year of repayment.
If your company receives government money — a subsidy for buying machinery, a wage-support scheme payout, or a grant to cover training costs — Ind AS 20 tells you exactly how to record it. The standard gives you two legitimate ways to handle the accounting, and choosing the wrong one (or switching without disclosure) can distort your balance sheet and invite auditor qualifications. Here is a plain-English walkthrough of both approaches, with numbers, so you can make an informed call.
What Ind AS 20 Actually Covers
Ind AS 20 (Accounting for Government Grants and Disclosure of Government Assistance) applies to all companies reporting under Indian Accounting Standards. It covers grants from central government, state governments, and government agencies — in the form of cash, concessional loans, land at below-market rent, or forgivable loans. It does not cover government participation in the equity of a company, tax credits or deductions under the Income Tax Act, or grants related to biological assets covered under Ind AS 41.
The Core Recognition Rule
A grant is recognised in the books only when both conditions are met:
- There is reasonable assurance that the company will comply with the conditions attached to the grant.
- There is reasonable assurance that the grant will actually be received.
Receipt of cash alone does not trigger recognition. If you get an advance from the government but have not yet met the performance conditions, you park it as a liability (deferred income) until you do. Conversely, if you have met the conditions and the money is yet to arrive, you book a receivable and recognise the grant.
Two Approaches: Capital vs Income
Ind AS 20 permits two presentations. The standard does not force one over the other, but you must apply your choice consistently and disclose it.
| Feature | Capital Approach (Asset Reduction) | Income Approach (Deferred Income) |
|---|---|---|
| Balance sheet presentation | Grant deducted from asset's gross carrying amount | Grant shown as deferred income under liabilities |
| P&L impact | Lower depreciation charge over asset life | Systematic release of deferred income credited to P&L |
| Gross asset visible? | No — asset appears net of grant | Yes — full cost of asset shown; grant released separately |
| Preferred by analysts? | Less preferred (understates asset base) | More preferred (transparent) |
| Common usage in India | Smaller entities, legacy practice | Listed companies, Ind AS adopters post-2016 |
Worked Example: Grant on Machinery Purchase
Suppose your company purchases a CNC machine for ₹60,00,000. The state government approves a capital subsidy of ₹15,00,000 subject to maintaining employment for three years. The machine has a useful life of 10 years (straight-line, zero residual value). You have reasonable assurance of compliance on the grant date.
Option A — Capital Approach (Asset Reduction)
Net cost of machine recorded: ₹60,00,000 − ₹15,00,000 = ₹45,00,000
Annual depreciation: ₹45,00,000 ÷ 10 = ₹4,50,000 per year
Journal entry on grant receipt:
- Dr Bank / Grant Receivable ₹15,00,000
- Cr Property, Plant & Equipment ₹15,00,000
Option B — Income Approach (Deferred Income)
Machine recorded at full cost: ₹60,00,000
Annual depreciation: ₹60,00,000 ÷ 10 = ₹6,00,000 per year
Grant credited to deferred income, then released over 10 years:
- Annual release to P&L: ₹15,00,000 ÷ 10 = ₹1,50,000 per year
- Net P&L charge after release: ₹6,00,000 − ₹1,50,000 = ₹4,50,000 per year
Both methods produce the same net P&L charge of ₹4,50,000 per year. The difference is only in how the balance sheet looks. Option B gives a cleaner, more transparent picture — analysts and lenders can see the full asset value.
Journal entry on grant receipt under Option B:
- Dr Bank / Grant Receivable ₹15,00,000
- Cr Deferred Government Grant Income ₹15,00,000
Each year:
- Dr Deferred Government Grant Income ₹1,50,000
- Cr Other Income (Grant Recognised) ₹1,50,000
Revenue Grants (Non-Capital): How to Present Them
Not all grants buy assets. Some reimburse wages, training costs, or export expenses. For these income-related grants, Ind AS 20 allows two presentations:
- Net presentation: Deduct the grant from the related expense (e.g., show net employee cost after wage subsidy).
- Gross presentation: Show the full expense and the grant separately as other income.
Example: You receive ₹8,00,000 from a government skilling scheme to train workers. Your actual training cost is ₹12,00,000. Under net presentation, P&L shows training cost of ₹4,00,000. Under gross presentation, P&L shows training cost ₹12,00,000 and other income ₹8,00,000. Revenue is the same either way, but gross presentation is more informative.
What Happens if You Have to Return the Grant
If you breach a condition and must repay the grant, Ind AS 20 requires you to treat the repayment as a change in accounting estimate — not a prior-period error. This means you charge the repayment to P&L in the year it becomes repayable, with no restatement of past financials. Under the capital approach, you add the repayment back to the asset's carrying amount and recalculate depreciation prospectively. Under the deferred income approach, you reverse unamortised deferred income first; any excess goes to P&L immediately.
Common Mistakes to Avoid
- Recognising the grant on cash receipt alone. Many companies book the grant the day money hits the bank, ignoring whether conditions have been met. This inflates income prematurely and is non-compliant with Ind AS 20.
- Switching between capital and income approach without disclosure. Some companies switch to reduce depreciation in a tough year. This is an accounting policy change and requires specific disclosure under Ind AS 8, including retrospective impact — it is not a free pass.
- Treating a forgivable government loan as equity from day one. A concessional or forgivable loan is initially recorded at fair value under Ind AS 109. The below-market benefit (difference between fair value and proceeds) is the grant element and is accounted under Ind AS 20 — not simply written off to reserves.
- Ignoring deferred tax on deferred grant income. When you create a deferred income liability for the grant, there will usually be a temporary difference for Ind AS 12 purposes. Many preparers miss this and understate the deferred tax asset or overstate it.
- Netting grants against capital work-in-progress without proper tracking. During construction, companies reduce CWIP by the grant and then forget to adjust the depreciation base correctly once the asset is capitalised. This leads to wrong depreciation figures for years.
Disclosure and Practical Tips for FY 2026-27
Your financial statement notes must disclose: the accounting policy adopted, the nature and amount of grants recognised, and any unfulfilled conditions. If you use KyaTax Books for your accounting, you can tag grants as deferred income from day one and automate the systematic release — reducing the risk of year-end adjustment errors. For companies with multiple government grants across different schemes, maintain a separate grant register tracking conditions, timelines, and recognition status for each grant individually.
Do it yourself in minutes — free to try, no login needed.
Open KyaTax Books →Frequently asked questions
Can a company choose either the capital or income approach freely under Ind AS 20?
Yes, Ind AS 20 permits both approaches. However, once you choose one, you must apply it consistently for similar grants. Any change is an accounting policy change and must be disclosed under Ind AS 8 with the reason and impact.
Is a government subsidy on electricity bills treated as a capital grant or income grant?
An electricity subsidy reimburses a recurring operating cost, so it is an income-related grant. You either net it against power costs or show it as other income — not as a capital grant, since no long-term asset is acquired.
What if the government grant conditions are only partially met by year-end?
Recognise only the portion for which conditions have been met and reasonable assurance exists. The remaining portion stays as deferred income (liability) until the remaining conditions are satisfied.
How does Ind AS 20 differ from AS 12 (the older standard)?
AS 12 (used by non-Ind AS companies) does not permit the income approach for capital grants — it mandates the capital/deferred credit approach only. Ind AS 20 is broader, allows both approaches, and specifically requires fair-value treatment for below-market-rate government loans, which AS 12 does not address.
General information for FY 2026-27, not professional advice for your specific case. Rules change — verify against the latest notification or ask a KyaTax expert.
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