New Government Grant Accounting for Businesses
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Summary
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-10, Accounting for Government Grants Received by Business Entities, to establish authoritative guidance on accounting for government grants received by businesses. ASU 2025-10 incorporates principles from International Accounting Standard 20, Accounting for Government Grants and Disclosure of Government Assistance (IAS 20) into U.S. GAAP with targeted improvements.
Background
Prior to ASU 2025-10, ASC 832, Government Grants, included only disclosure requirements. The lack of recognition, measurement, and presentation guidance in U.S. GAAP led to diversity in practice in accounting for government grants received by businesses. In response to stakeholder feedback, the FASB developed accounting guidance for such grants to reduce diversity in practice and align U.S. GAAP with the predominant approach used in practice, IAS 20.
Main Provisions
Scope
ASU 2025-10 applies to all business entities and does not apply to not-for-profit entities and employee benefit plans. A government grant is defined as a transfer of a monetary asset or a tangible nonmonetary asset, other than in an exchange transaction (including an exchange transaction that may be at a significant discount to fair value), from a government to an entity in scope of ASC 832. Examples of government grants include:
- Cash transfers to fund or reimburse expenditures such as wages, training, research and development, or other operating expenses
- Transfers of tangible long-lived assets, such as a buildings, land, or equipment
- Forgivable loan proceeds that meet specified recognition criteria (described below), when it is probable that the entity will meet the forgiveness terms
- Refundable tax credits not accounted for under ASC 740, Income Taxes
The ASU excludes the following transactions from its scope:
- Exchange transactions (including those in scope of ASC 606, Revenue from Contracts with Customers, and ASC 610-20, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets)
- Transactions in scope of ASC 740
- Benefits of below-market interest rate loans
- Government guarantees
- Grants of intangible assets and services
- Reductions of liabilities such as tax abatements
- Transactions in which a government entity obtains an ownership interest in a business
- Contributions to businesses from nongovernmental sources that are within the scope of ASC 958-605, Not-for-Profit Entities — Revenue Recognition
Recognition, Measurement, and Presentation
An entity must not recognize a government grant until all the following conditions are present (the “recognition criteria”):
- It is probable that the entity will both:
- Comply with the conditions attached to the grant.
- Receive the grant.
- The entity incurs the costs and expenses associated with grant.
An entity can recognize proceeds from a forgivable loan as a government grant when it is probable that the entity will meet the above criteria and will satisfy the loan’s forgiveness terms.
ASU 2025-10 identifies two categories of grants: grants related to assets and grants related to income. The table in BDO's Bulletin describes each type of grant and summarizes the accounting and presentation requirements for each, after an entity has concluded that the grant meets the recognition criteria.
Repayment of a Government Grant
If a government grant becomes repayable, an entity must account for the repayment as follows:
- Grant related to an asset: increase the asset’s carrying amount (if the cost accumulation approach was used) or reduce the deferred income balance (if the deferred income approach was used). An entity must immediately recognize in earnings any cumulative additional depreciation or change in prior gain, loss, or impairment that it would have recognized to date had the grant not been received.
- Grant related to income: first, apply the repayment against any remaining deferred income from the grant. If the repayment exceeds the remaining deferred income or no deferred income exists, an entity records the repayment immediately in earnings.
Government Grant-Related Assets and Liabilities Acquired in a Business Combination
ASU 2025-10 introduces a new exception to the recognition and measurement principles in ASC 805, Business Combinations, for liabilities arising from grants related to income. For such grants:
- If the acquiree has not complied with all conditions of the grant at the acquisition date, the acquirer recognizes and measures deferred income in accordance with ASC 832.
- If the acquiree has fully complied with the conditions of the grant at the acquisition date, the acquirer does not recognize any deferred income.
An entity must identify and measure all other grant-related assets and liabilities in accordance with ASC 805.
Disclosures
After the adoption of ASU 2025-10, an entity within the scope of ASC 832 is required to disclose annually:
- The nature and a general description of grants received.
- Accounting policies used to account for grants, including the accounting approach used for a grant related to an asset and income statement presentation approach for each type of grant.
- For asset-type grants accounted for using the deferred income approach and all income-type grants, the line items on the balance sheet and income statement affected by the grant and the amounts applicable to each financial statement line item in the current reporting period.
- For asset-type grants accounted for using the cost accumulation approach, only in the period(s) in which the grant is recognized on the balance sheet, both of the following:
- Line items on the balance sheet affected by the grant and the amounts applicable to each financial statement line item.
- Useful life of any related depreciable or amortizable asset.
- The fair value of a grant of a tangible nonmonetary asset, only in the period(s) in which the grant is recognized on the balance sheet, regardless of the accounting approach used.
Effective Date and Transition
The following table summarizes transition for ASU 2025-10:
| Public Business Entities | All Other Entities | |
|---|---|---|
| Effective date | Annual reporting periods beginning after December 15, 2028, including interim reporting periods within those annual reporting periods. | Annual reporting periods beginning after December 15, 2029, including interim reporting periods within those annual reporting periods. |
| Early adoption | Allowed for interim and annual financial statements that have not yet been issued (or been made available for issuance). If an entity adopts ASU 2025-10 in an interim period, the entity must apply ASU 2025-10 as of the beginning of the annual reporting period that includes that interim period. | |
| Transition | An entity may select one of the following transition approaches:
| |
| Transition disclosures | An entity must provide specific disclosures based on the transition method selected:
| |
Link to ASU 2025-10