New Guidance on Accounting for Government Grants: What ASU 2025-10 Means for Business Entities

Before ASU 2025-10, U.S. GAAP did not contain comprehensive guidance on accounting for government grants for business entities. As a result, entities commonly analogized to the accounting for government grants model under IAS 20 or the not-for-profit contribution model under ASC Subtopic 958-605, among others. This analogizing approach led to inconsistent recognition patterns and disclosures across entities.

In November 2021, the FASB issued disclosure guidance for business entities receiving government assistance in ASU 2021-10; however, stakeholders continued to identify the absence of clear guidance on recognition, measurement, and presentation as an area needing attention, with concerns about comparability and transparency. Accordingly, the FASB developed ASU 2025-10 to establish dedicated recognition, measurement, and presentation guidance in Topic 832 Government Assistance for business entities that receive a government grant related to an asset or a grant related to income.

The amendments in the Update were passed by majority vote of four members of the FASB board; however, three board members dissented primarily due to comparability concerns with the multiple accounting approaches permitted under the new standard, among other reasons.

Main Provisions of ASU 2025-10

ASU 2025-10 applies to all business entities that receive qualifying government grants. The guidance does not apply to not-for-profit entities or employee benefit plans.

Under the ASU, a government grant is generally defined as a transfer of a monetary asset or a tangible nonmonetary asset from a governmental entity to a business entity in a transaction other than an exchange transaction (exchange transactions conducted at a significant discount to fair value would also be excluded from the definition of a government grant).

Common examples include:

Cash grants to fund or reimburse operating expenses such as payroll, training, or research and development.
Transfers of tangible long-lived assets such as land, buildings, or equipment.
Forgivable loan proceeds when it is probable that the entity will meet the forgiveness conditions.

The ASU excludes several types of arrangements from its scope, including exchange transactions (such as those accounted for under ASC 606), grants of intangible assets, below-market interest rate loans, government guarantees, and income tax credits within the scope of ASC 740.

Recognition

Under ASU 2025-10, an entity recognizes a government grant when the following conditions are met:

It is probable that the entity will comply with the conditions attached to the grant.
It is probable that the grant will be received.
The business entity meets the recognition guidance for a grant related to an asset or a grant related to income.

Grants Related to Income

Grants intended to compensate for specific costs are recognized systematically over the periods in which the related expenses are recognized, consistent with the matching principle.

A grant related to income that is intended to compensate for expenses or losses previously incurred shall be recognized into earnings as soon as the entity meets the criteria for grant recognition as provided in ASC 832-10-25-1.
If an entity is required to subsequently repay any portion of the grant, the repayment shall first be applied against the unamortized deferred income balance, and any amount exceeding that is recognized immediately in earnings.
For a grant related to income acquired in a business combination, an acquirer shall recognize deferred income at the acquisition date in accordance with Topic 832, unless the acquiree has already fully complied with the conditions attached to the grant, in which case no deferred income would be recognized.

Grants Relating to Assets

A grant related to the purchase, acquisition, or construction of an asset (for example, a long-lived asset or inventory) should be recognized on the balance sheet as a business entity incurs the related costs for which the grant is intended to compensate, and may be accounted for using either:

A deferred income approach, where an asset is recorded (cash, receivable, or asset) and a corresponding deferred income liability is recorded.
- Under this approach, the entity shall recognize the deferred income into earnings on a systematic and rational basis over the periods in which the entity recognizes as expenses the related costs for which the government grant is intended to compensate. These expenses could include depreciation, gain or loss on the sale of the asset, or impairment.
- A government grant related to a nondepreciable asset (for example, land) that uses the deferred income approach shall be subsequently recognized in earnings on a systematic and rational basis over the periods in which the entity incurs the costs to which the grant relates.
- Tangible nonmonetary assets received and accounted for under the deferred income approach will initially measure the grant at fair value.
- If an entity is required to subsequently repay any portion of the grant, the repayment shall first be applied against the unamortized deferred income balance, and any amount exceeding that is recognized immediately in earnings.
A cost accumulation (netting) approach, whereby the grant reduces the carrying amount of the related asset. This approach will result in a reduced cost basis in the asset.
- The reduced cost basis shall be used to determine the depreciation or other subsequent accounting for the asset, based on the nature of the asset.
- Tangible nonmonetary assets received and accounted for under the cost accumulation approach shall be recognized at the cost, if any, to the entity (in many cases, this will result in a zero cost basis).
- In the event that an entity is required to subsequently repay any portion of the grant, the repayment shall increase the carrying amount of the asset, and all related expenses that would have been recognized in earnings to date in the absence of the grant (such as cumulative depreciation or a change in previously recognized gain or loss on sale) should be immediately recognized in earnings. The new carrying amount of the asset should be used for purposes of future subsequent accounting (e.g., depreciation, impairment, etc.).

Entities are required to apply the selected accounting policy consistently for similar types of grants.

Presentation and Disclosure

ASU 2025-10 provides guidance on financial statement presentation but allows flexibility, provided the presentation is clear and meaningful. Disclosures are designed to enable users to understand:

The nature and significant terms and conditions of government grants received.
The accounting policies applied.
Significant judgments and estimates related to grant recognition.
- Note: If a tangible nonmonetary asset is received as a government grant, the fair value must be disclosed, whether or not the cost accumulation approach is applied.
The amounts recognized and where they are presented in the financial statements.
- Note: Grants accounted for under the deferred income approach may either be recognized in earnings under a separate heading such as other income or netted against the related expense.

The update also modifies certain existing disclosure requirements in Topic 832 to better align with the new recognition and measurement model.

Effective Date and Transition

The effective dates vary by entity type:

Public business entities: Annual periods beginning after December 15, 2028, including interim periods.
All other entities: Annual periods beginning after December 15, 2029, including interim periods.

Early adoption is permitted for any period for which financial statements have not yet been issued or made available for issuance.

Entities may apply the guidance using one of the following transition methods:

Modified prospective approach – Amendments applied on a prospective basis to government grants entered into on or after the effective date, and to government grants that are not complete as of the effective date. No cumulative-effect adjustment is recorded under this approach.
Modified retrospective approach – Amendments applied to government grants entered into on or after the effective date, and to government grants that are not complete as of the earliest period presented. A cumulative-effect adjustment is made to opening equity as of the beginning of the earliest period presented.
Full retrospective approach – Amendments applied to all government grants through a cumulative-effect adjustment to opening equity as of the beginning of the earliest period presented.

Preparing for Adoption: Turning ASU 2025-10 into Action

While ASU 2025-10 brings much‑needed clarity, adoption may still require entities to reassess existing government grant arrangements, accounting policies, and transition options. Organizations that previously analogized to IAS 20 or ASC 958 should evaluate whether current recognition and presentation practices remain appropriate and consistently applied. Early planning — particularly around policy elections, disclosures, and transition methodology — can help reduce implementation risk and avoid surprises as the effective date approaches.

Eide Bailly’s audit and assurance professionals can help you adapt to new standards as they arise, so you can streamline financial processes, reduce the risk of errors, and make informed decisions.