So say that you received a government grant and having been compliant with all the conditions, you receive the grant. You will now recognize it within the financial statements, only you don’t exactly know how to do it. For an example let’s say that the grant itself was for acquiring new equipment for your production. 

Usually there would be two methods for treating grants relating to assets.

Option number 1 entails recognizing a deferred income liability from the grant. This liability is then recognized as a part of your profit or loss on a systematic basis over the useful life of the asset. The liability should reach to zero at the end of the useful life of the asset.

By applying option number 2 you should deduct the grant to reach to the carrying amount of the asset. Under this method when initially recognizing the asset in its cost, you reduce the cost by the grant. By using this method the grant is effectively still recognized as a part of your income statement, only it’s done in the form or reduced depreciation expense that arises from the asset.