The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2025-10, Government Grants (Topic 832): Accounting for Government Grants Received by Business Entities. This new standard establishes authoritative guidance for recognizing, measuring, and presenting government grants for business entities that historically had no directly applicable U.S. generally accepted accounting principles (GAAP) guidance for grant recognition, with a few specific exceptions.
The objective is to increase consistency across business entities. In November 2021, for example, the FASB issued disclosure guidance in ASU No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which streamlined disclosures but did not address grant revenue recognition, measurement, and presentation.
Government grants to business entities are not uncommon. ASU No. 2025-10 fills a void in U.S. GAAP that became increasingly apparent when business entities struggled with the accounting for COVID-19 pandemic relief. Even after the pandemic, business entities continued to receive government grants, such as:
A business entity must recognize a government grant if it is probable that the entity will comply with the conditions attached to the government grant, and the government grant will be received.
Recognition is not triggered merely by receiving funds. An entity must evaluate recognition guidance specific to a grant related to an asset or income.
In the absence of a grant receipt, a receivable is not recognized until the guidance is met. Alternatively, if grant receipt has occurred but the recognition guidance has not been met, a liability must be recognized.
A forgivable loan becomes a government grant when it is probable that the entity will meet the forgiveness terms and the other recognition requirements are satisfied.
A grant related to an asset is conditioned on the purchase, construction, or acquisition of an asset such as equipment, inventory, land, or another long-lived asset. ASU 2025-10 permits two methods: the deferred-income approach or the cost-accumulation approach.
Under the deferred-income method (Fig. 1), the grant-funded capital investment is presented as a capital asset, and the grant is presented separately as a deferred income liability and recognized in earnings systematically over the periods in which the related asset costs are expensed. This would best fit companies that seek to demonstrate that an asset has been acquired or placed into service. Here is an example. A manufacturing company receives a grant for 20% of the cost of assembly equipment. The company records the equipment asset and a deferred grant liability on its balance sheet. Each period, the company records depreciation expense and correlating grant income. Twenty percent of the depreciation expense impact on net income would be offset by grant income. The grant income presentation may be separate under a heading such as “other income” or as a deduction from the related expense.
| Fig. 1: Asset Grant, Deferred-Income Approach | |||
|---|---|---|---|
| Account | Debit | Credit | |
| Equipment | $1,000,000 | ||
| Cash / A/P | $1,000,000 | ||
| Cash / grant receivable | $200,000 | ||
| Deferred grant income | $200,000 | ||
| Annual: depreciation expense | $100,000 | ||
| Annual: accumulated depreciation | $100,000 | ||
| Annual: grant income | $20,000 | ||
| Annual: other income or expense reduction | $20,000 | ||
Under the cost-accumulation approach (Fig. 2), the grant reduces the cost basis of the asset, lowering future depreciation or amortization. The policy choice affects leverage, EBITDA-style metrics, and fixed-asset records.
| Fig. 2: Asset Grant, Cost-Accumulation Approach | ||
|---|---|---|
| Account | Debit | Credit |
| Equipment | $1,000,000 | |
| Cash / A/P | $1,000,000 | |
| Cash / grant receivable | $200,000 | |
| Equipment | $200,000 | |
| Annual: depreciation expense | $80,000 | |
| Annual: accumulated depreciation | $80,000 | |
| The grant reduces asset cost; no separate grant income recognized later because the benefit flows through lower depreciation. | ||
A grant related to income is any grant that is not related to an asset and is designed to offset operating costs rather than fund capital investments. They often include reimbursements for wages, training, or other operating costs, and may be intended to provide immediate financial support. The grant is recognized in earnings on a systematic and rational basis over the periods in which the related costs are recognized. If the grant compensates for expenses or losses incurred, or provides immediate support with no future related costs, the income is recognized in the period the recognition guidance is met. Presentation may be separate under a heading such as other income or as a deduction from the related expense (Fig. 3).
| Fig. 3: Income Grant | |||
|---|---|---|---|
| Account | Debit | Credit | |
| Payroll expense | $120,000 | ||
| Cash / accrued payroll | $120,000 | ||
| Cash / grant receivable | $120,000 | ||
| Other income or payroll expense reduction | $120,000 | ||
| Recognition follows the related costs unless the grant reimburses past costs or provides immediate support with no future related costs. | |||
A company may encounter a situation where it must return grant funding. Repayment follows the original model.
For an income grant, repayment is applied first against any unamortized deferred income; any excess is recognized immediately in earnings.
For an asset grant, repayment increases the asset carrying amount under the cost accumulation approach or reduces deferred income under the deferred income approach. Under cost accumulation, catch-up expenses such as cumulative depreciation that would have been recognized in the absence of the grant, are recognized immediately. Under the deferred income approach, the repayment exceeding the unamortized deferred income is recognized in earnings.
Any revised carrying amounts of the capital asset should be considered for depreciation, impairment, and other subsequent accounting.
Public business entities must apply the new standard for annual reporting periods beginning after Dec. 15, 2028. All other entities must apply the standard for annual reporting periods beginning after Dec. 15, 2029. This includes interim periods within those annual periods.
Early adoption is permitted for related entities if the financial statements have not been issued or been made available for issuance. Interim adoption is applied as of the beginning of that annual reporting period.
Three implementation models are available and explained at a high level:
Implementation efforts should start with an inventory of government assistance arrangements and contracts. For each item, a company should determine:
ASU 2025-10 does not remove judgment, but it provides a robust framework for government grant recognition. Previously, companies commonly followed international accounting standards, U.S. GAAP for nonprofits, or the contingency guidance of Topic 450. The changes promulgated by ASU 2025-10 could significantly alter the impact of government grants on company financial statements, depending on what accounting policies a company followed prior to adoption.
Nicole K. Cradic, CPA, is a partner with Trout CPA in Mechanicsburg. She can be reached at ncradic@troutcpa.com.
A special thanks goes to Trout CPA interns Kaylie Groff, Annika Torkar, and Kyle Valentine for their contributions to this column.