Accounting for Government Grants: A Simple Guide to Get It Right

How to Properly Record and Report COVID-19 Support, Grants & Funding

72% of businesses that received COVID-19 grants made accounting errors in their initial reporting. Follow this guide to ensure full compliance with FRS 102 and IAS 20 standards.

What Are Government Grants?

Government grants are financial assistance provided to businesses to support specific activities, including:

Job retention schemes (e.g., furlough payments)
Capital investment incentives
Research & development funding
COVID-19 recovery grants
Regional development funds

Key Accounting Standards

Standard	Applies To	Key Requirements
IAS 20	IFRS reporters	Performance method preferred
FRS 102	UK GAAP reporters	Accrual model required
Section 24	Micro-entities	Simplified treatment

How to Account for Grants: 3 Methods

1. Accrual Accounting Method (FRS 102)

Recognize the grant when there is reasonable assurance it will be received
Match the grant income to related expenses
Defer unearned portions as deferred income

EXAMPLE

A £50,000 equipment grant is received in March 2025 for machinery purchased in January 2025. Under FRS 102, £10,000 is recognized in 2024/25 (matching 2 months’ depreciation) and £40,000 is deferred to future periods.

2. Performance Method (IAS 20)

Recognize when conditions are met
Record as other income or deduct from related expense

3. Cash Basis (Micro-entities)

Record when cash is received
Show as other income

Common Grant Types & Treatment

Grant Type	Accounting Treatment	Tax Treatment
Revenue Grants (e.g., furlough payments)	Income when conditions met	Taxable as received
Capital Grants (e.g., equipment funding)	Defer and match to asset life	May reduce capital allowances
COVID-19 Support (e.g., bounce back loans)	Debt until forgiven	Taxable if forgiven

WARNING

Improper grant accounting can lead to HMRC investigations, with 42% of COVID grant recipients facing compliance checks in 2024. Always maintain detailed records of:

Grant award letters
Proof of qualifying expenditures
Bank statements showing receipt
Calculations for deferred amounts

Step-by-Step Accounting Process

Identify grant conditions and requirements
Determine proper accounting standard (FRS 102/IAS 20)
Create separate general ledger accounts for grants
Record initial receipt as deferred income if needed
Recognize income as conditions are met
Disclose in financial statements with proper notes

Pro Tip: Use separate GL accounts for each grant type (e.g., “Deferred Income – COVID Grants”, “Grant Income – R&D”) to simplify tracking and audit preparation.