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FASB Adds Guidance to GAAP on Accounting for Government Grants by Businesses

For the first time in decades, GAAP now includes official rules for how businesses must account for government grants. On December 4, the Financial Accounting Standards Board released a new Accounting Standards Update that finally replaces years of inconsistent practice and loose analogies to IAS 20. This change gives companies a clear, authoritative framework for recognizing, measuring and presenting government grants in financial statements.

Author

Hannah Olsen
December 04, 2025

Why This Update Matters

Before this ASU, GAAP offered no formal guidance for business entities receiving government grants. Companies relied on international standards or nonprofit rules, often applying them inconsistently. Investors, auditors and CFOs have long asked FASB to clean this up. This new standard finally establishes a single model that reduces judgment calls and improves comparability across companies.

Who Must Follow the New Guidance

The ASU applies to all business entities that receive a government grant. It does not apply to not-for-profit entities or employee benefit plans. Any business receiving federal, state or local grant funding must apply this new GAAP model.

How the ASU Defines Government Grants

The standard separates grants into two categories that determine how they are recorded and presented.

These are grants conditioned on purchasing, building or acquiring an asset such as equipment, property or inventory.

These grants reimburse operating costs or general business activities that are not tied directly to acquiring an asset.

Recognition Rules

Companies cannot recognize a government grant until both conditions are probable.

  1. The business will comply with the grant’s terms

  2. The business will receive the grant

Once both criteria are satisfied, the company must evaluate whether the grant is tied to assets or income and apply the corresponding accounting model.

Businesses must choose one of two permitted approaches.

Deferred income approach

The grant is recorded as deferred income on the balance sheet and recognized in earnings over the same period the related asset costs are recognized.

Cost accumulation approach

The grant reduces the carrying amount of the asset. No separate grant income is recognized. Depreciation naturally reflects the lower cost.

Companies must apply their chosen method consistently.

Income-related grants are recognized in earnings on a rational and systematic basis aligned with the periods in which the related expenses occur.

Companies may either
• present the grant as other income
• net it against the related expense

Both approaches are permitted under GAAP.

Disclosure Requirements

Businesses must disclose
• the nature of government grants received
• the accounting policies applied
• significant terms and conditions

These disclosures help investors understand how grants affect earnings and assets.

Effective Dates for the New Standard

Public business entities must adopt the amendments for annual periods beginning after December 15, 2028.
Private companies must adopt for annual periods beginning after December 15, 2029.
Early adoption is permitted. If adopted during an interim period, the company must apply the guidance from the start of that fiscal year.

What This Means for CPAs and Finance Leaders

This is a significant change for controllership, audit and financial reporting teams. Companies will need to update accounting policies, adjust financial statement presentation, revise disclosures and train staff on the new rules. The standard also ends reliance on IAS 20, which means auditors and preparers must transition to the new GAAP model before the effective date.

Grant tracking processes, internal controls and depreciation schedules may all need adjustments depending on which method a business selects for asset-related grants.

FAQ

Does this replace IAS 20 guidance for US businesses
Yes. This ASU becomes the authoritative US standard.

Can businesses early adopt
Yes. Early adoption is allowed for any period where statements have not yet been issued.

Do companies have to use the same approach for all asset grants
Companies must apply their chosen policy consistently across similar grants.

Does this apply to not-for-profit entities
No. Not-for-profits follow separate guidance.

Does this apply to forgiven relief loans
If they meet the GAAP definition of a government grant, the ASU applies.