What does FASB Accounting Standards Update (ASU) 2025-10 change in US GAAP?

ASU 2025-10 establishes the first authoritative US GAAP guidance on recognizing, measuring, and presenting government grants received by business entities. Previously, GAAP lacked specific guidance, causing entities to analogize to IAS 20, Topic 450 (Contingencies), or not-for-profit guidance, resulting in inconsistent accounting treatments. This ASU creates a unified framework that improves comparability and reduces practice diversity by establishing clear recognition criteria, measurement approaches, and presentation requirements for government grants. - Recognition threshold: A government grant must not be recognized until: (1) it is probable the entity will comply with grant conditions and receive the grant, and (2) the entity meets specific recognition guidance for either a grant related to an asset or a grant related to income (ASC 832). - Grant-related-to-asset accounting (two permitted approaches): - Deferred income approach: Record grant as deferred income on the balance sheet; recognize in earnings systematically over periods the related asset costs are incurred. - Cost accumulation approach: Reduce the asset's cost basis; no separate subsequent earnings recognition (depreciation reflects the net amount). - Grant-related-to-income accounting: Recognize in earnings on a systematic and rational basis over periods in which the entity recognizes the compensated expenses (ASC 832).

What is the effective date and do entities have an early adoption option?

- Presentation: Grants related to income and asset grants using the deferred income approach must be presented in earnings either (1) separately under "other income" or (2) deducted from related expenses. - Scope exclusions: Guidance does not apply to income taxes, below-market-rate loans, or government guarantees. - Scope applicability: Applies to all business entities (excludes not-for-profit entities and employee benefit plans) receiving a government grant, defined as a nonexchange transfer of monetary or tangible nonmonetary assets from government to business entity. - Disclosure requirements: Entities must disclose the nature of grants received, accounting policies applied, and significant terms and conditions (consistent with ASU 2021-10).

Does the cost accumulation approach trigger any tax accounting or deferred tax implications under ASC 740?

1. Audit grant agreements and contracts: Identify all government grants received or anticipated; classify each as grant-related-to-asset or grant-related-to-income; extract conditions, timing, and compliance requirements. 2. Select and document accounting policies: Elect either the deferred income approach or cost accumulation approach for asset grants; document the policy choice in the accounting policy note and ensure consistent application. Consider tax and cash flow implications of each method. 3. Implement recognition and measurement controls: Establish procedures to assess probability of compliance and receipt; track grant-related costs and expenses by period; set up GL accounts and accrual schedules to recognize grants systematically; prepare for quarterly or annual testing of recognition criteria.

ASU 2025-10 Government Grants Accounting

What this ASU does

ASU 2025-10 establishes the first authoritative US GAAP guidance on recognizing, measuring, and presenting government grants received by business entities. Previously, GAAP lacked specific guidance, causing entities to analogize to IAS 20, Topic 450 (Contingencies), or not-for-profit guidance, resulting in inconsistent accounting treatments. This ASU creates a unified framework that improves comparability and reduces practice diversity by establishing clear recognition criteria, measurement approaches, and presentation requirements for government grants.

Key provisions

Recognition threshold: A government grant must not be recognized until: (1) it is probable the entity will comply with grant conditions and receive the grant, and (2) the entity meets specific recognition guidance for either a grant related to an asset or a grant related to income (ASC 832).

Grant-related-to-asset accounting (two permitted approaches):

- Deferred income approach: Record grant as deferred income on the balance sheet; recognize in earnings systematically over periods the related asset costs are incurred.

- Cost accumulation approach: Reduce the asset's cost basis; no separate subsequent earnings recognition (depreciation reflects the net amount).

Grant-related-to-income accounting: Recognize in earnings on a systematic and rational basis over periods in which the entity recognizes the compensated expenses (ASC 832).

Presentation: Grants related to income and asset grants using the deferred income approach must be presented in earnings either (1) separately under "other income" or (2) deducted from related expenses.

Scope exclusions: Guidance does not apply to income taxes, below-market-rate loans, or government guarantees.

Scope applicability: Applies to all business entities (excludes not-for-profit entities and employee benefit plans) receiving a government grant, defined as a nonexchange transfer of monetary or tangible nonmonetary assets from government to business entity.

Disclosure requirements: Entities must disclose the nature of grants received, accounting policies applied, and significant terms and conditions (consistent with ASU 2021-10).

Effective date

The ASU was issued in December 2025. The ASU document provided does not specify the effective date or early adoption provisions. Practitioners should consult the full ASU text or FASB announcements for transition effective dates and methods (likely to include options for early adoption and retrospective or prospective application).

Who is affected

Primary: Business entities of all sizes that receive government grants (federal, state, or local), including:

- Manufacturing companies receiving capital equipment subsidies

- Renewable energy companies receiving investment tax credits or grant funding

- Biotech/pharmaceutical companies receiving research grants

- Regional development entities with location-based incentives

Secondary: Auditors, internal control teams, and disclosure committees responsible for grant accounting and financial statement presentation.

Excluded: Not-for-profit entities (continue under Topic 958), employee benefit plans, and entities receiving only tax benefits, below-market loans, or guarantees.

What preparers should do

Audit grant agreements and contracts: Identify all government grants received or anticipated; classify each as grant-related-to-asset or grant-related-to-income; extract conditions, timing, and compliance requirements.

Select and document accounting policies: Elect either the deferred income approach or cost accumulation approach for asset grants; document the policy choice in the accounting policy note and ensure consistent application. Consider tax and cash flow implications of each method.

Implement recognition and measurement controls: Establish procedures to assess probability of compliance and receipt; track grant-related costs and expenses by period; set up GL accounts and accrual schedules to recognize grants systematically; prepare for quarterly or annual testing of recognition criteria.