Section 24 of FRS 102 lets a business choose, class by class, between two ways of recognising government grants: the performance model, which recognises a grant once its performance conditions are met, and the accrual model, which matches the grant against the costs or assets it funds. Under either model nothing is recognised until there is reasonable assurance that the conditions will be complied with and the grant will be received, and a deferred capital grant is shown as deferred income, never netted off the asset.

What counts as a government grant?

The FRS 102 glossary defines a government grant as assistance by government in the form of a transfer of resources to an entity in return for past or future compliance with specified conditions relating to its operating activities. Paragraph 24.2 excludes assistance that cannot reasonably have a value placed on it, and transactions with government that cannot be distinguished from normal trading, such as a council buying services at a normal price.

Paragraph 24.3 also takes tax reliefs out of the section. Assistance given through deductions in computing taxable profit, or determined by reference to the tax liability, is accounted for under Section 29 Income Tax. The standard’s examples are income tax holidays, investment tax credits, accelerated depreciation allowances and reduced tax rates. So capital allowances are not grants, even though they are a form of government support. Public benefit entities account for other non exchange income, such as donations, under paragraphs PBE34.64 to PBE34.74 rather than Section 24.

When can a grant be recognised at all?

Paragraph 24.3A sets a threshold that applies before either model is used. A grant, including a non monetary grant, is not recognised until there is reasonable assurance that the entity will comply with the conditions attached and that the grant will be received. A grant is measured at the fair value of the asset received or receivable (paragraph 24.5), so a grant of property or equipment is brought in at its fair value rather than at nil.

If a grant later becomes repayable, for example because jobs were not created or an asset was sold within a clawback period, a liability is recognised when the repayment meets the definition of a liability (paragraph 24.5A).

How does the performance model work?

Paragraph 24.5B sets out three rules:

  • a grant that does not impose specified future performance related conditions is recognised in income when the proceeds are received or receivable;
  • a grant that does impose such conditions is recognised in income only when those conditions are satisfied;
  • a grant received before the conditions are satisfied is held as a liability.

The glossary defines a performance related condition as one under which entitlement to the resources depends on performing a specified activity, or delivering a particular level of service or units of output. A restriction, which only limits or directs how the money may be used, is defined separately and is not a performance related condition. This distinction drives the result: a capital grant that simply has to be spent on equipment, with no further output required, is recognised in full when receivable under the performance model, even though the equipment will be used for years.

How does the accrual model work?

Under the accrual model each grant, or each part of a grant, is classified as relating to revenue or relating to assets (paragraph 24.5C).

  • Revenue grants are recognised in income on a systematic basis over the periods in which the related costs they compensate are recognised (paragraph 24.5D).
  • Grants for costs already incurred, or for immediate financial support with no future related costs, are recognised in income in the period they become receivable (paragraph 24.5E).
  • Capital grants, including those relating to right of use assets, are recognised in income on a systematic basis over the expected useful life of the asset (paragraph 24.5F).

The deferred part of a capital grant is shown as deferred income and is not deducted from the carrying amount of the asset (paragraph 24.5G). The asset is therefore shown at full cost and depreciated in the normal way under Section 17, with the grant released to income alongside it.

How do the two models compare in practice?

Illustration only. A company buys a machine for £100,000 with a five year useful life and receives a £30,000 grant towards it. The only condition is that the money is spent on the machine.

Year 1 Accrual model Performance model
Depreciation charge £20,000 £20,000
Grant income £6,000 £30,000
Net charge to profit £14,000 Credit of £10,000
Deferred income at year end £24,000 Nil

Under the performance model, if the grant had instead required the company to deliver a specified level of output, the £30,000 would sit as a liability until that output was achieved.

A revenue example works the same way. If a £12,000 grant funds a training programme whose costs fall evenly over two accounting periods, the accrual model releases £6,000 in each period as the training costs are charged.

Which model should a business choose?

Paragraph 24.4 makes the choice a policy decision applied on a class by class basis, so a business could, for example, use the accrual model for capital grants and the performance model for another class. Within a class the policy must be applied consistently, and a later change is a change in accounting policy.

The accrual model generally gives a smoother profit pattern that matches the grant to the cost it funds. The performance model is closer to the legal position and is often simpler for grants with clear milestones. Micro entities have no choice: Section 19 of FRS 105 contains only the accrual approach, classifying grants as relating to revenue or to assets, with the same rule that deferred capital grants are not netted off the asset (paragraphs 19.6 to 19.10). See FRS 105 micro entity accounts.

What must be disclosed?

Paragraph 24.6 requires disclosure of:

  1. the accounting policy adopted under paragraph 24.4;
  2. the nature and extent of grants recognised;
  3. unfulfilled conditions and other contingencies attaching to grants that have been recognised in income;
  4. an indication of other forms of government assistance from which the entity has directly benefited, such as free technical or marketing advice and the provision of guarantees.

The third item is where clawback terms are explained. A grant recognised in income that could still be repaid if jobs are lost or an asset is sold early needs to be described, even if repayment is not expected.

How are grants treated for tax, and what goes wrong?

The accounting treatment does not settle the tax treatment. For capital allowances, section 532 of the Capital Allowances Act 2001 treats a person as not having incurred expenditure to the extent it is met directly or indirectly by a public body, so the grant funded part of the machine in the illustration would not qualify for allowances. Whether a revenue grant is taxable, and when, is covered in are business grants taxable, and the allowances themselves in capital allowances explained.

Common mistakes include:

  • netting a capital grant against the cost of the asset, which paragraph 24.5G prohibits;
  • recognising a grant on application or approval in principle, before reasonable assurance that conditions will be met;
  • treating a spending restriction as a performance related condition and deferring income the performance model would recognise immediately;
  • overlooking clawback terms in the disclosure of contingencies;
  • treating tax reliefs or reduced rates as grants, when paragraph 24.3 sends them to Section 29.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.