IAS 20 Government Grants: Recognition,…

IAS 20 Government Grants: Recognition, Presentation and Indian PLI Scheme Context

By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)

Lead Instructor, Global Fin X | www.globalfinx.in/manikanta

Government grants are one of those topics where the accounting looks straightforward until you sit with a real company trying to apply it. The standard has been around since 1983 and has barely changed. But the types of government support have multiplied significantly, and some of the newer forms, performance-linked incentives, forgivable loans, below-market rate financing, non-monetary asset transfers, do not fit neatly into the old framework.

In India specifically, the Production Linked Incentive scheme introduced in 2020 created a new recognition challenge for hundreds of manufacturing companies. PLI payments are performance-based, conditional on achieving incremental sales over a base year. They arrive in cash, after verification, with a one-year lag. Recognising them correctly under IAS 20 requires careful judgment about when reasonable assurance exists and how to match the income to the periods it relates to.

This post covers IAS 20 in full: the recognition criteria, the two presentation methods for asset grants and income grants, special cases (forgivable loans, non-monetary grants, below-market rate loans, government assistance outside the standard's scope), repayment, and disclosure. The PLI scheme context runs through the practical sections.

What IAS 20 Covers

IAS 20 covers accounting for government grants and disclosure of government assistance. Government assistance covers both.

A government grant is a transfer of resources to an entity in return for past or future compliance with conditions relating to the operating activities of the entity. The key word is transfer: there is an actual flow of resources, cash, assets, or forgiveness of a liability.

Government assistance is action by government designed to provide economic benefits to a specific entity or entities, but which does not include government grants as defined and the benefits of which cannot reasonably have a value placed on them. Examples: free technical advice, provision of government infrastructure that benefits the entity, guaranteed loan access, or tax holidays. IAS 20 requires disclosure of government assistance but does not require recognition in the financial statements because the value is difficult to measure reliably.

What is explicitly outside IAS 20's scope:

Government grants covered by IAS 41 Agriculture (biological asset grants)
Government assistance in the form of income tax benefits, whether through tax allowances, investment credits, or reduced tax rates. These are within IAS 12's scope.
Grants to employees (IAS 19 or IFRS 2 depending on nature)

This last exclusion matters for India. Tax incentives like Section 80-IC deductions for units in specified areas, or the concessional 15% tax rate for new manufacturing companies under Section 115BAB of the Income Tax Act, are not government grants under IAS 20. They are income tax benefits. IAS 12 governs their recognition. This distinction is frequently confused in practice.

Recognition: The Reasonable Assurance Test

A government grant is recognised only when there is reasonable assurance of two things simultaneously:

The entity will comply with the conditions attached to the grant
The grant will be received

Both conditions must be satisfied before recognition. Receipt of cash alone does not trigger recognition. An entity can receive a grant in cash and still not recognise it as income if the conditions have not been met or if there is material uncertainty about meeting them in the future.

Reasonable assurance is not defined precisely in IAS 20. It is generally understood to be a high level of confidence, less than absolute certainty but substantially more than probable. In practice, it sits close to the IAS 37 "virtually certain" threshold in terms of the degree of confidence required, though IAS 20 does not use that phrase.

The Timing Question: When Does Reasonable Assurance Exist?

This is the central judgment under IAS 20. The grant is recognised over the periods in which the entity recognises the costs the grant is intended to compensate, or over the periods in which the related assets are used.

The matching principle underpins this. A grant received to compensate for employee training costs incurred in year 1 is recognised in year 1, when those costs were incurred. A grant received to subsidise the purchase of manufacturing equipment is recognised over the asset's useful life, in line with the depreciation charge on that equipment.

Two important clarifications:

Cash received in advance: If cash is received before the recognition criteria are met, it is a liability (deferred grant income). It is not recognised as income until the conditions are satisfied and the related costs or assets are recognised.

Grant recognised before cash received: If conditions are met before cash arrives, the grant receivable is recognised as an asset (other receivables or debtors) and income is recognised in the period the conditions are met. The timing of cash receipt does not determine the period of income recognition.

The Two Categories: Asset Grants and Income Grants

IAS 20 distinguishes between grants related to assets and grants related to income. The distinction drives both the timing of recognition and the presentation options.

A grant related to an asset is one where the primary condition is that the entity purchases, constructs, or otherwise acquires a long-term asset.

Recognition timing: over the life of the asset, matching the depreciation charge. The grant is systematically recognised as income over the asset's useful life.

Two presentation methods (entity's accounting policy choice):

Method A: Deferred income. The grant is recognised as deferred income (a liability) on the balance sheet and released to profit or loss systematically over the asset's useful life. The asset is carried at its full cost on the balance sheet.

Method B: Deduction from asset. The grant is deducted from the cost of the asset. The asset is carried at its net cost (cost minus grant). Depreciation is charged on the reduced carrying amount. Income is implicitly recognised through reduced depreciation charges over the asset's life.

Both methods result in the same profit or loss impact over the asset's life. They differ in balance sheet presentation.

Worked example: Solar manufacturing equipment grant

A solar panel manufacturer under PLI receives a capital subsidy of Rs. 40 crore from the state government to set up a new manufacturing line. Equipment cost: Rs. 200 crore. Useful life: 10 years. Straight-line depreciation. Tax rate: 25%.

Method A: Deferred income

At acquisition:

Dr Equipment Rs. 200 crore | Cr Cash Rs. 200 crore
Dr Cash Rs. 40 crore | Cr Deferred grant income (liability) Rs. 40 crore

Annual entries:

Dr Depreciation Rs. 20 crore | Cr Accumulated depreciation Rs. 20 crore (Rs. 200 crore / 10 years)
Dr Deferred grant income Rs. 4 crore | Cr Grant income Rs. 4 crore (Rs. 40 crore / 10 years)

Net P&L impact per year: depreciation Rs. 20 crore expense, grant income Rs. 4 crore. Net charge: Rs. 16 crore.

Method B: Deduction from asset

At acquisition:

Dr Equipment Rs. 160 crore | Cr Cash Rs. 160 crore (net of Rs. 40 crore grant)
(Or: Dr Equipment Rs. 200 crore | Cr Cash Rs. 200 crore; Dr Cash Rs. 40 crore | Cr Equipment Rs. 40 crore)

Annual entries:

Dr Depreciation Rs. 16 crore | Cr Accumulated depreciation Rs. 16 crore (Rs. 160 crore / 10 years)

Net P&L impact per year: depreciation Rs. 16 crore. Identical net impact as Method A.

The balance sheet looks different. Under Method A, the equipment shows at Rs. 200 crore gross, and a deferred income liability appears on the liabilities side. Under Method B, the equipment shows at Rs. 160 crore (or Rs. 200 crore gross with Rs. 40 crore deducted), and there is no deferred income liability. Analysts comparing companies in the same sector that use different methods need to adjust for this presentational difference.

Which method do Indian companies use? Most large Indian companies use Method A (deferred income). The ICAI guidance and Ind AS 20 both permit both methods, but the deferred income presentation is more transparent: it shows the full cost of the asset and separately identifies the government contribution.

An income grant is one that is not related to the acquisition of an asset. It compensates for costs incurred, expenses to be incurred, or immediate financial support.

Two presentation options:

Option A: Gross credit. Recognised as income (other income or a specifically labelled line) separately from the related expense.

Option B: Net credit. Deducted from the related expense, reducing the net expense in profit or loss.

Both are permitted. Option A provides more transparency: users can see both the gross expense and the gross grant separately. Option B simplifies the income statement but makes it harder for users to understand the underlying cost structure.

The PLI Scheme: Recognition Under IAS 20

India's Production Linked Incentive scheme covers 14 sectors with a total outlay of Rs. 1.97 lakh crore. The scheme rewards manufacturers with incentives ranging from 4% to 18% of incremental sales over a base year of FY 2019-20, typically over a 5 to 6-year period. Disbursements are verified against audited sales data and compliance documents, with payments credited to the company's bank account after the verification cycle completes, typically one year after the relevant performance year.

By June 2025, cumulative incentive disbursements under PLI schemes had reached approximately Rs. 21,534 crore across multiple sectors.

Is PLI a Government Grant Under IAS 20?

Yes. PLI payments are transfers of resources from the government in return for compliance with specific conditions (achieving incremental sales targets, maintaining investments, producing in specified categories). They are grants related to income because the primary condition is achieving a sales performance threshold, not acquiring an asset.

The capital investment conditions in some PLI sectors (minimum investment thresholds) might suggest a mixed character, but the dominant condition across most PLI schemes is the incremental sales performance. The grant is tied to what you sell, not what you buy.

When Does Reasonable Assurance Exist for PLI?

This is where IAS 20 judgment is most demanding for PLI beneficiaries.

PLI incentives are conditional on:

Achieving incremental sales over the base year
Maintaining the minimum prescribed investment
Manufacturing in specified product categories
Meeting any sector-specific additional requirements (for example, domestic value addition thresholds in some schemes)

Reasonable assurance exists when the entity has sufficient evidence that it will meet these conditions. For PLI, this means the entity must assess at each reporting date:

Has the incremental sales threshold been achieved for the year?
Has the minimum investment been maintained throughout the period?
Have the product category and domestic value addition requirements been met?

If the answer to all is yes, and the entity has no reason to doubt the government will disburse, reasonable assurance exists and the PLI income should be accrued in the year the performance occurred, even if cash has not yet been received.

The one-year lag problem: PLI payments are typically received one year after the relevant performance year. A company that achieved the PLI threshold in FY2024-25 receives the disbursement in FY2025-26. Under IAS 20, the income should be recognised in FY2024-25 when the conditions were met, with a corresponding receivable (other receivable or government grant receivable) on the balance sheet.

This is not how all Indian companies have historically accounted for PLI. Some companies, particularly in the early years of PLI, recognised the income only on receipt of cash. Under IAS 20, if reasonable assurance existed at the FY2024-25 year end, deferring recognition to the receipt year is incorrect. The income belongs to FY2024-25.

Worked Example: PLI for a Pharma Company

A bulk drug manufacturer under the pharmaceutical PLI scheme achieves incremental sales of Rs. 500 crore above the base year in FY2024-25. The applicable PLI incentive rate is 10%. The government verification process takes approximately 12 months. The company has a strong track record of PLI compliance and no pending issues with the scheme administrators.

PLI income for FY2024-25: Rs. 50 crore (Rs. 500 crore × 10%).

Assessment of reasonable assurance at 31 March 2025:

Incremental sales threshold: achieved (Rs. 500 crore incremental sales confirmed)
Investment threshold: maintained throughout FY2024-25
Product category and domestic value addition: compliant
Historical pattern: company has received PLI payments in prior years without issues
Conclusion: reasonable assurance exists at 31 March 2025

Accounting entries at 31 March 2025:

Dr Government grant receivable Rs. 50 crore

Cr Grant income / Other income Rs. 50 crore

The Rs. 50 crore is recognised as income in FY2024-25. The receivable sits on the balance sheet until cash is received in FY2025-26.

What if there is uncertainty? If the company is in its first year of PLI participation with no established track record, or if there are ongoing compliance questions with the scheme administrator, the reasonable assurance threshold may not be met at 31 March 2025. In that case, no income is recognised until the conditions are substantially resolved. This is not a free choice to defer income. It requires a genuine assessment of whether the conditions are met.

Presentation of PLI Income

Most Indian pharma and electronics companies present PLI income as "other income" in the income statement (Option A, gross credit). This is appropriate because the PLI payment is not directly tied to a specific operating expense. It compensates for the overall performance of meeting sales thresholds, not for a specific cost incurred.

Some companies argue that PLI effectively subsidises production costs and should be deducted from cost of goods sold (Option B, net credit). Either is permitted under IAS 20, but the presentation must be consistent period to period and disclosed as an accounting policy.

For large PLI recipients like Dixon Technologies (electronics), Natco Pharma, or Divi's Laboratories (pharmaceuticals), the PLI income is material. Dixon's PLI income in recent years has been significant relative to operating profit. Presenting it as other income separately from operating profit makes the recurring operating performance visible to analysts. Netting it against cost of goods sold would obscure this distinction.

Forgivable Loans: When a Loan Becomes a Grant

A forgivable loan is a loan that the lender (the government) has committed to waive repayment of, provided the entity meets specified conditions. Under IAS 20, a forgivable loan is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness.

Until reasonable assurance of forgiveness exists, the loan is recognised as a financial liability under IFRS 9.

The transition point: when reasonable assurance of forgiveness is achieved, the carrying amount of the liability is derecognised and the difference between the liability's carrying amount and any consideration still payable is recognised as grant income.

Indian context: The government's interest subvention scheme for MSME exporters operates similarly. Government reimburses a portion of interest paid by MSMEs on export credit. Before the reimbursement is confirmed and the conditions are met, the MSME carries the full interest cost. On confirmation, the reimbursement is a government grant (income related) recognised in the period the related interest cost was incurred.

The COVID-era Emergency Credit Line Guarantee Scheme (ECLGS) loans are a separate question. ECLGS provided government-guaranteed loans to businesses, but the loans were not forgivable (they required repayment). These are loans, not grants. The government guarantee itself is government assistance, which IAS 20 requires disclosure of but does not require recognition of.

Below-Market Rate Loans

When the government provides a loan at a below-market interest rate, the benefit of the below-market rate is a government grant under IAS 20. Since the 2008 amendment, this benefit must be measured and accounted for under IAS 20 and IFRS 9 together.

Mechanics:

The loan is initially recognised at fair value using the market interest rate for a comparable loan
The difference between the cash received and the fair value at initial recognition is a government grant benefit
Thereafter, the loan is carried at amortised cost using the effective interest method
The grant benefit is recognised as income following IAS 20's matching principles

Worked example: State government infrastructure loan

An Indian infrastructure company receives a state government loan of Rs. 100 crore at 3% interest, repayable in 5 years. Market rate for a comparable loan: 9%.

Fair value at initial recognition using 9% discount rate: approximately Rs. 76.7 crore (present value of Rs. 100 crore at 9% over 5 years, plus present value of Rs. 3 crore annual interest).

Item	Amount
Cash received	Rs. 100 crore
Fair value of liability at 9%	Rs. 76.7 crore
Government grant benefit	Rs. 23.3 crore

The grant of Rs. 23.3 crore is recognised as deferred income and released to profit or loss over the 5-year period in a pattern consistent with the costs or asset it was intended to support. The liability is carried at amortised cost at 9%, unwinding the discount over 5 years.

This accounting can be significant for Indian infrastructure companies and PSUs that have access to concessional government financing. Recognising the below-market benefit as a grant requires knowing the market rate for comparable non-concessional financing, which itself requires judgment.

Non-Monetary Grants

A non-monetary grant involves the transfer of an asset (land, equipment, environmental credits) rather than cash. Two approaches are permitted:

Fair value approach: both the asset and the grant are recognised at the fair value of the asset. The asset is recognised at its fair value. The grant (deferred income) is also recognised at the same fair value and released to income over the asset's useful life (for depreciable assets) or on disposal (for non-depreciable land).

Nominal value approach: both the asset and the grant are recognised at a nominal amount (typically Rs. 1 or nil). This approach is heavily criticised because it results in material understatement of both the asset base and the grant benefit. The IASB has acknowledged this but has not yet eliminated the option.

Indian context: State governments frequently allocate land to industrial companies at concessional rates or for free as part of investment promotion packages. Under the fair value approach, the land received would be recognised at market value with a corresponding deferred income or retained earnings credit (depending on the conditions attached). Under the nominal value approach, the land sits on the balance sheet at Re. 1.

Most sophisticated Indian companies use the fair value approach. It is more informative. However, some older industrial companies with legacy land grants on their books at nominal values have not revisited the accounting even after transitioning to Ind AS.

Emission credits: Under India's carbon credit and renewable energy certificate framework, some entities receive carbon credits from the government as part of environmental schemes. These may be non-monetary grants. The fair value approach requires measuring the carbon credit at its market value on the date of receipt. Accounting for emission credits under IAS 20 remains an area of ongoing discussion globally, with no specific IFRS interpretation issued.

Repayment of Government Grants

If a grant becomes repayable, the repayment is accounted for as a change in accounting estimate under IAS 8, not as a correction of an error or a prior period restatement.

For income grants: repayment reduces any related deferred income first. Any excess repayment beyond the remaining deferred income balance is recognised as an expense immediately.

For asset grants (deferred income method): the repayment increases the carrying amount of the related deferred income liability (if any balance remains). If the repayment exceeds the remaining deferred income, the excess is recognised as an expense.

For asset grants (net asset method): repayment increases the asset's carrying amount by the amount repaid, with the increase recognised as an expense only to the extent the asset's recoverable amount is not exceeded. The remaining increased carrying amount is depreciated prospectively over the asset's remaining useful life.

PLI repayment scenario: A PLI beneficiary in the electronics sector received Rs. 80 crore of PLI incentives over three years, all recognised as income. In year 4, the government conducts a compliance audit and determines the company overstated incremental sales in year 1 by Rs. 150 crore. It demands repayment of Rs. 15 crore (the excess incentive). Under IAS 20, the Rs. 15 crore is recognised as an expense in the year the repayment obligation is established, not as a restatement of year 1.

Disclosure Requirements

IAS 20 requires the following disclosures:

Accounting policy adopted for government grants, including the methods of presentation adopted in the financial statements
Nature and extent of government grants recognised in the financial statements and an indication of other forms of government assistance from which the entity has directly benefited
Unfulfilled conditions and other contingencies attaching to recognised government assistance

For PLI beneficiaries, this means disclosing the nature of the PLI scheme, the recognition policy (when reasonable assurance is assessed as met), the total PLI income recognised in the period, the amount of any PLI receivable on the balance sheet, and any conditions not yet fully satisfied that could affect future recognition.

In practice, the disclosure quality varies significantly. Large companies like Dixon Technologies and Divi's Laboratories provide reasonable granularity on PLI income recognition. Smaller PLI beneficiaries often provide minimal disclosure. As PLI amounts grow in materiality, the disclosure pressure from auditors and analysts will intensify.

Ind AS 20 vs IAS 20: Differences

Ind AS 20 is based on IAS 20 and is substantially converged. Two differences are worth knowing.

Area	IAS 20	Ind AS 20
Below-market government loans	Benefit recognised as grant per IFRS 9 fair value approach	Same as IAS 20; below-market benefit is a grant
Non-monetary grants at nominal amount	Permitted as an accounting policy	Permitted
Government grants for expenses yet to be incurred	Recognised over the periods the costs are incurred	Same
Interaction with Schedule III	Not applicable	Ind AS 20 grants are presented as other income or netted against expense; Schedule III does not specify a separate line for grants, so most companies include within other income
Interaction with IAS 12 / Ind AS 12	Tax benefits excluded from IAS 20 scope	Same exclusion; Ind AS 12 covers tax incentives

One India-specific nuance: some Indian state government incentive schemes involve a refund of GST paid or a refund of electricity duty. These are refunds of taxes paid, structured as incentives. The question is whether they are government grants (IAS 20) or simply a reduction in tax expense (IAS 12). The answer depends on whether the incentive is based on tax liability (IAS 12, outside IAS 20) or based on operating performance (IAS 20 applies). GST refund-based incentive schemes tied to investment and production targets are generally IAS 20 grants because they are conditioned on operating activity, not determined by the tax liability itself.

What Big 4 Auditors Focus On

Reasonable assurance assessment completeness. Auditors challenge whether entities have properly assessed all conditions attached to a grant, not just the primary condition. A PLI company that confirmed incremental sales but is borderline on domestic value addition requirements needs to have assessed both before recognising income.

Timing of recognition vs cash receipt. A systemic audit test is comparing grant income recognised to cash received in the period. Entities that recognise grant income only when cash arrives, ignoring accrual-based recognition under IAS 20, understate income in performance years and overstate it in receipt years.

Repayment risk assessment. For PLI specifically, compliance audits by the scheme administrator can result in clawback demands. Auditors assess whether any correspondence or audit notices from scheme administrators indicates a repayment risk that should be disclosed as a contingent liability under IAS 37.

Consistency of presentation method. An entity cannot switch between gross (other income) and net (deducted from expense) presentation without a justified accounting policy change under IAS 8.

Dip IFRS Exam Angle

IAS 20 appears in Dip IFRS primarily through scenario-based questions. The most tested aspects:

Recognition timing: given a scenario where cash is received before conditions are met, or conditions are met before cash arrives, determine when and how much is recognised. Know the deferred income treatment for advance receipts and the receivable treatment for accrued grants.

Asset grant presentation: given an asset grant, prepare extracts of the balance sheet and income statement under both Method A (deferred income) and Method B (net asset). Know that net P&L impact is identical under both methods.

Forgivable loans: given a loan with a forgiveness condition, determine when it transitions from a financial liability to a government grant. Know the trigger is reasonable assurance of meeting forgiveness conditions.

Repayment: given a scenario where a grant becomes repayable, calculate the impact on the income statement and balance sheet. Know it is a change in estimate under IAS 8, not a restatement.

FAQ

Is a tax holiday a government grant under IAS 20?

No. Benefits determined by reference to taxable profit or the income tax liability are outside IAS 20's scope. They fall under IAS 12. A five-year income tax holiday for a new manufacturing unit is accounted for under IAS 12, not IAS 20.

What if the grant conditions span multiple years?

The grant is recognised over the periods in which the costs or performance it is intended to compensate are incurred or achieved. If a grant covers three years of export performance, income is recognised in each year as the export targets are met, subject to reasonable assurance at each year end.

Can an entity change its accounting policy from gross to net presentation for income grants?

Yes, but only if the change results in more reliable and relevant information under IAS 8. The change must be applied retrospectively. Changing presentation solely because net presentation produces a better-looking gross margin is not a valid policy change.

How is a PLI grant receivable classified on the balance sheet?

As a current asset if expected to be received within 12 months (typical for PLI given the one-year verification cycle). As a non-current asset if the verification timeline extends beyond 12 months. The classification reflects the realistic cash receipt timing based on the specific scheme's disbursement history.

Is government guarantee on a bank loan a government grant?

No. A government guarantee does not transfer resources to the entity. It is government assistance. IAS 20 requires disclosure of the guarantee but not recognition as a grant.

What if the fair value of a non-monetary grant cannot be reliably measured?

IAS 20 permits nominal value recognition when fair value cannot be reliably measured, though this is heavily criticised. In practice, for significant non-monetary grants like land, an independent valuation is the appropriate approach. The inability to reliably measure fair value should be rare for land in India, given active property markets in most geographies.

How does PLI interact with IAS 37 contingent liabilities?

If PLI income has been recognised but a compliance audit is ongoing or the scheme administrator has raised queries, the potential repayment obligation should be assessed under IAS 37. If a repayment is probable and estimable, a provision is recognised. If merely possible, a contingent liability is disclosed.

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This is Post 15 of the Global Fin X IFRS Series. Previous: IFRS 15 Part 4: IFRS 15 in Indian IT, Telecom and Real Estate. Next: IFRS 15 vs IAS 18: What Changed When IAS 18 Was Replaced and Why It Mattered.

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