Government Grants, Deferred Tax and Business Valuation
A company that receives a government subsidy, a capital grant, or a tax incentive doesn't just get a one-time cash benefit. It gets an accounting treatment that can shape reported earnings for years, and a deferred tax consequence that sits quietly on the balance sheet until it's actually asked about. Both matter to anyone valuing the business, and both are easy to overlook if the valuer works from a summary income statement rather than the actual notes.
How Government Grants Are Actually Accounted For
Under Ind AS 20 grants that are connected to assets. When the condition is that the company has to buy, build or get a long-term asset. Can be shown in two ways. One way is to record it as income and then add it to the profit and loss statement, over the life of the asset. The other way is to subtract it from the value of the asset, which reduces the depreciation costs in the future. Grants related to income are recognised in profit or loss over the periods needed to match them against the costs they're meant to compensate for, rather than being taken to income the moment cash is received.
This presentation choice matters more than it looks. Two companies that received economically identical grants can report meaningfully different EBITDA, depending purely on which of the two permitted presentations they chose, and a valuer comparing their multiples without adjusting for this will be comparing numbers that aren't actually comparable.
Why This Creates a Deferred Tax Difference
Grants frequently create a gap between an asset's carrying value for accounting purposes and its tax base, because tax rules and accounting standards don't always treat the grant the same way. Where a grant reduces an asset's book value but tax depreciation continues to be calculated on the full, ungranted cost, or vice versa, a temporary difference arises, and Ind AS 12 requires that difference to be recognised as a deferred tax asset or deferred tax liability.
This isn't a minor footnote item. A deferred tax liability sitting on the balance sheet represents tax the company will genuinely pay in future periods as the temporary difference reverses, and a deferred tax asset represents a genuine future tax benefit, provided the company is expected to generate enough taxable profit to use it. Both are real economic claims on or against future cash flow, not accounting noise to be ignored.
Why This Matters for a DCF Valuation
A DCF valuation should be built on genuine, projected cash flow, not simply on however grants happen to be presented in the historical income statement. When a grant is treated as income over years using the deferred income method a valuer must figure out the real cash timing. That is, when the grant money was actually received and when it is being recorded as profit. If a discounted cash flow model uses the accounting recognition pattern of the actual cash flow dates the valuation can be off even if only a little. It's important to match the timing of the cash with the discounting process to avoid misstating the value.
Deferred tax balances deserve separate, explicit treatment as well. A meaningful deferred tax liability building up because of asset-related grants represents a real future cash outflow that a valuation built purely off projected operating cash flow, without reference to the balance sheet, can miss entirely.
Why This Matters for Comparable Company Analysis
Grant accounting choices, and the resulting deferred tax positions, can differ meaningfully across companies that are otherwise genuinely comparable — one operating in a state offering significant capital subsidies, another operating without equivalent support. Applying a peer group multiple without adjusting for these differences risks either overstating or understating the subject company's value, depending on which side of the grant benefit it happens to sit on.
A Recent Development Worth Noting
This isn't only an Ind AS issue. In December 2025, the US Financial Accounting Standards Board issued its first-ever explicit US GAAP guidance on accounting for government grants received by businesses, an area where US companies had previously applied IAS 20 by analogy in the absence of dedicated guidance. For any cross-border valuation involving both Indian and US entities, this is a genuinely new point of divergence worth checking, rather than assuming the two frameworks still align the way they did before.
Government grants and the deferred tax they create aren't a footnote to skim past. They shape reported earnings, create genuine future cash flow obligations or benefits, and can distort comparability between otherwise similar companies. A valuation that looks through the accounting presentation to the real underlying cash flow and tax position is considerably more reliable than one that takes the headline income statement at face value.
