Recognise two amounts at inception
Ind AS 20 paragraph 10A treats the benefit of below-market government financing as a government grant. Recognise and measure the liability under Ind AS 109. Measure the benefit as proceeds received less the initial carrying amount of the liability under Ind AS 109. This is the amount of the grant benefit; recognition remains subject to Ind AS 20’s conditions. The face amount or contractual cash interest is not, by itself, the grant. Verify the financing terms, the nature of the government assistance and the conditions attached to the benefit.
Read the applicable text: MCA Ind AS 20: paragraphs 7, 10, 10A and 12 MCA Ind AS 109: initial measurement and effective interest.
Model the loan on supported terms
Identify contractual cash flows and use a supportable market benchmark for comparable risk, term, currency, security and repayment profile. The examples assume amortised-cost liabilities, annual periods and no transaction costs or other components. At initial recognition, use fair value and account for directly attributable transaction costs in accordance with Ind AS 109. Reconcile effective interest separately from contractual payments. A zero coupon can still produce an accounting finance cost.
Match the grant to its purpose
Under Ind AS 20 paragraphs 7 and 12, evaluate reasonable assurance of receipt and compliance and recognise grant income systematically over the periods of the costs it is intended to compensate. Receipt alone does not prove conditions will be met. Document the intended costs. Present an asset-related grant as deferred income or deduct it from the asset’s carrying amount. For an income-related grant, present the amount separately or under a general heading such as other income, or deduct it from the related expense. Disclose the accounting policy, nature and extent of assistance, and unfulfilled conditions or other contingencies as required by paragraph 39. The loan amortisation schedule is not automatically the grant release schedule.
Distinguish forgiveness from a cheap loan
Paragraph 10 addresses a forgivable government loan when there is reasonable assurance the terms for forgiveness will be met. Review the specific conditions and avoid recognising a forgiveness benefit twice. Assess loan modification or derecognition separately under Ind AS 109. If an already recognised grant becomes repayable, apply the change-in-estimate treatment in Ind AS 20 paragraph 32. Determine the income-tax treatment separately.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: One-year zero-coupon loan
Government advances ₹110 lakh, repayable in one year at ₹110 lakh. At a supported 10% market rate, the initial liability is ₹100 lakh and the benefit ₹10 lakh. Effective interest of ₹10 lakh brings the liability to ₹110 lakh before repayment.
Illustrative example 2: Two-year bullet
₹121 lakh is advanced and repayable after two years without coupons. Discounting at 10% gives ₹100 lakh liability and ₹21 lakh benefit. Annual effective interest is ₹10 lakh then ₹11 lakh.
Illustrative example 3: Below-market coupon
₹100 lakh is received; a single ₹104 lakh payment is due in one year. At 8%, the initial liability is ₹96.30 lakh and the benefit ₹3.70 lakh, rounded. Effective interest is ₹7.70 lakh. Of the ₹104 lakh cash payment, ₹4 lakh is the contractual coupon and ₹100 lakh is principal. The carrying amount increases by ₹3.70 lakh from effective interest net of the coupon, before the principal repayment reduces it to nil.
Illustrative example 4: Match operating costs
A recognised ₹12 lakh benefit compensates eligible costs of ₹20 lakh in year one and ₹10 lakh in year two, with the grant matching that cost pattern on the facts. Release ₹8 lakh and ₹4 lakh respectively.
Illustrative example 5: Separate cash interest
A liability opens at ₹80 lakh and accrues effective interest at 10%. Contractual cash interest of ₹3 lakh is paid and no principal is repaid that year. The closing liability is ₹85 lakh, and the year’s finance cost is ₹8 lakh.
Illustrative example 6: Repayment bridge
A loan’s carrying amount immediately before its scheduled repayment is ₹42 lakh and the company pays ₹42 lakh. The liability closes at nil. An independently supported ₹5 lakh deferred grant balance is not automatically released merely because the loan was repaid.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Read the financing terms | Agreement, government counterparty and cash-flow dates. |
| 2 | Identify grant conditions | Scheme, compliance obligations and funding purpose. |
| 3 | Confirm assurance | Evidence of receipt and compliance. |
| 4 | Build the cash-flow model | Principal, coupon and instalments. |
| 5 | Benchmark market terms | Comparable rate and credit assumptions. |
| 6 | Reconcile initial recognition | Cash, financial liability and benefit. |
| 7 | Roll the loan forward | Effective interest, cash payments and balance. |
| 8 | Match grant income | Eligible cost periods and presentation policy. |
| 9 | Track later events | Terms, forgiveness, conditions and repayment. |
| 10 | Approve disclosures | Liability and grant schedules, policy and conditions. |
Sixteen practitioner FAQs
1. Is the whole loan a grant?
No. Separate the liability from the benefit under paragraph 10A where applicable.
2. What is the benefit at inception?
Proceeds less initial carrying value under Ind AS 109.
3. Can the contractual rate be used as the market benchmark without evidence?
No. Support a comparable market rate.
4. Can a zero-coupon liability have finance cost?
Yes. Effective interest can accrete its discounted carrying amount.
5. Should principal repayment be treated as grant expense?
No. It normally reduces the loan liability.
6. Does receiving the money prove compliance with grant conditions?
No. Assess reasonable assurance separately.
7. When is grant income recognised?
Match it systematically to the intended related costs under paragraph 12.
8. Must grant release equal effective interest every year?
No. Their recognition bases differ.
9. Does a low-rate private loan automatically fall under Ind AS 20?
This paragraph addresses the benefit of a government loan.
10. How do I distinguish a forgivable loan?
Assess the contractual forgiveness conditions and paragraph 10 separately.
11. Can the same benefit be recognised twice on forgiveness?
No. Reconcile the prior accounting and new facts.
12. What if there are transaction costs?
Apply Ind AS 109 and reassess the model rather than copying the examples.
13. Does early loan repayment automatically release deferred grant income?
No. Check conditions and the applicable grant recognition basis.
14. What if funds support an asset rather than operating costs?
Present the grant as deferred income or deduct it in determining the carrying amount of the related asset under paragraph 24.
15. Do rounded journal amounts replace the underlying model?
Retain exact calculations and reconcile posted rounding.
16. Does the accounting grant amount determine income tax?
No. Apply the relevant tax rules separately.