What is the income approach to government grants?

The income approach to government grants allows for a systematic recognition of the grant in profit or loss over one or more periods. This method recognizes the income generated from the grant as the associated expenses or costs that the grant aims to subsidize are incurred.

For instance, if a government grant is received to support the cost of infrastructure that will generate revenue over several years, the recognition of that grant should correspond to the period in which the related costs are recognized in profit or loss. This matches the income from the grant with the expenses it is intended to offset, thus adhering to the matching principle in accounting. This approach ensures that the financial statements present a true and fair view of the entity's financial position and performance over the relevant periods.

The other answers do not accurately reflect the income approach's principles. Immediate recognition in equity does not provide useful information about the income or expenses related to the grant. Not recognizing the grant at all contradicts accounting standards that require the recognition of income in a manner that provides clarity in financial reporting. Similarly, adjusting the grant against future income tax does not align with standard practices for recognizing government grants, as they should typically be reflected in profit or loss rather than as an adjustment to tax obligations.