Technical Alert—ASU 2025-10

  

In December 2025, the FASB issued ASU 2026-10, Government Grants (Topic 832) Accounting for Government Grants Received by Business Entities. Prior to the issuance of this ASU, business entities did not have guidance from the FASB on how to recognize, measure, and present grants received from a government. Lacking specific guidance, business entities analogized to International Accounting Standard 20, ASC 150, or ASC 958-605. 

 

Guidance

 

Entities should prepare for implementation by 

• Reassessing their current accounting policies,

• Analyzing their current grants, and

• Evaluating transition choices.

The ASU applies to all business entities with qualifying grants, but not to not-for-profit entities or employee benefit plans. (ASC 832-10-15-2) The ASU defines government grants as a transfer of a monetary asset or a tangible non-monetary acid from a governmental entity to a business entity in a transaction other than an exchange transaction. Exchange transactions are conducted at a significant discount to fair value. They are also excluded from the definition of a government grant. Examples of a government grant are:

• Cash grants to fund a reimburse operating expenses, such as payroll, training, or researching development,

• Transfers of tangible, long-lived assets, such as land, buildings, or equipment, and

• Forgivable loan proceeds when it is probable that the entity will meet the forgiveness conditions.

The ASU excludes some arrangements from its scope, including:

• Exchange transactions, such as those accounted for under ASC606,

• Grant of intangible assets or provision of a service,

• Below-market interest rate loans,

• Government guarantees, and

• Income tax credits within the scope of ASC 740.

(ASC 832-10-15-4a)

Recognition

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

1. It is probable that the entity will comply with the conditions attached to the grant.

2. It is probable that the grant will be received.

3. The business entity meets the recognition guidance for a grant related to an asset or a grant related to income.

(ASC 832-10-25-1)

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. (ASC 832-10-25-9) 

• 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 Related 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: 

• Deferred income approach. Under this approach, an asset is recorded (cash, receivable, or asset) and a corresponding deferred income liability is recorded.

  • Under this approach, the entity should 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. (ASC 832-10-25-4) 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. (ASC 832-10-25-5)

  • Tangible nonmonetary assets received and accounted for under the deferred income approach will initially measure the grant at fair value. (ASC 832-10-25-6)

  • If an entity is required to subsequently repay any portion of the grant, the repayment should first be applied against the unamortized deferred income balance, and any amount exceeding that is recognized immediately in earnings.

• Cost accumulation (netting) approach. Under this approach, 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 should 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 should 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 will 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

The current disclosure requirements in ASC 832 for the most part will continue to apply to government grants. 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

For public business entities (PBEs):

• ASU 2025-10 is effective for fiscal years beginning after December 15, 2028, including interim periods within those fiscal years. 

For non-PBEs: 

• The ASU is effective for fiscal years beginning after December 15, 2029, including interim periods within those fiscal years. 

Early adoption is permitted.

(ASC 832-10-65-2)

Transition

Entities should apply the guidance in ASU 2025-10 by using one of the following transition methods:

• Modified prospective approach — Under this approach, the amendments in the ASU are applied to government grants that are not complete as of the adoption date (i.e., the beginning of the adoption period) and to any new government grants entered into after that date. There is “no cumulative-effect adjustment to the opening balance of retained earnings” under the modified prospective approach.

• Modified retrospective approach — Under this approach, the amendments in the ASU are applied to “government grants that are not complete as of the beginning of the earliest period presented” upon adoption and to any new government grants entered into after that date. Entities should record a “cumulative-effect adjustment to the opening balance of retained earnings” and restate all prior periods on the basis of their adjustments.

• Full retrospective approach — Under this approach, the amendments in the ASU are applied to all government grants. Entities must record a “cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the earliest period presented.”

(ASC 832-10-65-2)