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AS 12, Accounting for Government Grant
By A.B.Sonpal / For Ca. Final

Government Grant refers to assistance by Government in cash / kind to an enterprise in return


of past or future compliance with certain conditions.

Government grants should be considered only when it can be measured reasonably.

Those transactions with government which cannot be distinguished from normal trading
transaction are not to be considered as Government Grants.

Recognition of Government Grants

Government grants should be recognized when there is reasonable assurance that


1. Enterprise will comply with certain conditions applied on them and
2. Grant will be received.

Kinds of Government Grants

1. Monetary
2. Non- Monetary

Grants can be in the form of subsidy, tax holiday in backward area, government incentives etc.

Non- Monetary Grants

Grants in the form of Assets ( Plant and Machinery, Land, etc. ).

Grants received at concessional rates Record Asset at Acquisition cost


At free of cost Record Asset at Nominal Value
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Monetary Grants

Grants related to depreciable fixed Assets. There are two ways of showing this grant

1. Grant shown as a deduction from the Gross Value of Asset


2. Grant deferred income recognized in P/L account on a systematic basis over
the useful life of the asset.

If grant is shown as a shown as a deduction from the gross value of asset and if grant is equal to
the value of asset, then record the asset at Nominal value.

Grants related to related to depreciable Assets can be treated as deferred income. In case the
grants relate to non-depreciable assets like land, the amount should be credited to capital
reserve.

If conditions attached to grant is yet to be fulfilled, then grant is credited to income over the
period cost of meeting such condition is charged to income. Unapportion deferred income is
disclosed separately in financial statements.

Government grant related to revenue should be recognized on a systematic basis in statement


of p/l. Such recognition should spread over the periods necessary to match them with the
related cost, which the grant is intended to compensate. Such grants should be shown
separately under the head Other Income or as an item of deduction from related expense.

Government grant in the nature of promoters contribution ( eg. capital subsidy for a project )
should be credited to Capital reserve and treated as a part of shareholders fund, in as much as
no repayment is ordinarily expected in respect of such grants.

Grants Rendered Refundable

A government grant that becomes refundable is treated as an extra- ordinary item


under AS 5.
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Amount refundable to the government , should be accounted for by debit first to any
unamortised deferred credit remaining in respect of the grant. To the extent that
amount refundable exceeds any such deferred credit, the amount is charged
immediately to PL statement.

The amount refundable and relating to a specific fixed asset should be accounted for by
increasing the book value of the asset, or by reducing the capital reserve, or the
deferred income balance as appropriate.

Where the book value of the asset is increased, depreciation on revised book value is
provided PROSPECTIVELY over residual useful life of the asset.

Where a grant, which is in nature of promoters contribution, becomes refundable, in


part or in full, the relevant amount is reduced from relevant Capital reserve.

Disclosure requirements

o The accounting policy adopted, including method of presentation in financial


statements.
o Nature and extent of government grant recognized including grants of non-
monetary assets given at concessional rate or free of cost.

Examples

The company purchased on 01.04.95 a special purpose machinery for Rs. 25 lakhs. It received a Central
Government Grant for 20% of the price. The machine has an effective life of 10 years. Comment.

Solution

AS 12 Accounting for Government Grants regards two methods of presentation, of grants related to
specific fixed assets, in financial statements as acceptable alternatives. Under the first method, the grant
can be shown as a deduction from the gross book value of the machinery in arriving at its book value.
The grant is thus recognised in the profit and loss statement over the useful life of a depreciable asset by
way of a reduced depreciation charge. Under the second method, it can be treated as deferred income
which should be recognized in the profit and loss statement over the useful life of 10 years in the
proportions in which depreciation on machinery will be charged. The deferred income pending its
apportionment to profit and loss account should be disclosed in the balance sheet with a suitable
description e.g., Deferred government grants' to be shown after 'Reserves and Surplus' but before
'Secured Loans'.
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The following should also be disclosed:

(i) the accounting policy adopted for government grants, including the methods of presentation in the
financial statements;
(ii) the nature and extent of government grants recognised in the financial statement.

Eg.

A few days after the beginning of the year, the company acquired assets for Rs. 500 lacs on which it
received a government grant of 10%. Comment

Solution

Para 14 of AS 12 on Accounting for Government Grants regards two methods of presentation of grants
related to specific fixed assets in financial statements. Under the first method, the grant can be shown
as a deduction from the gross value of the fixed assets in arriving at its book value. Thus, only 90% of the
cost of fixed assets has been shown as addition after adjusting the grant amount. Alternatively, the
grant can be treated as a deferred income which should be recognized in the profit and loss statement
over the useful life of fixed assets in the proportions in which depreciation on the assets will be charged.

Eg.

Top & Top Limited has set up its business in a designated backward area which entitles the company to
receive from the Government of India a subsidy of 20% of the cost of investment. Having fulfilled all the
conditions under the scheme, the company on its investment of Rs. 50 crore in capital assets, received
Rs. 10 crore from the Government in January, 2005 (accounting period being 2004-2005). The company
wants to treat this receipt as an item of revenue and thereby reduce the losses on profit and loss
account for the year ended 31st March, 2005. Keeping in view the relevant Accounting Standard, discuss
whether this action is justified or not.

Solution

As per para 10 of AS 12 Accounting for Government Grants, where the government grants are of the
nature of promoters contribution, i.e. they are given with reference to the total investment in an
undertaking or by way of contribution towards its total capital outlay (for example, central investment
subsidy scheme) and no repayment is ordinarily expected in respect thereof, the grants are treated as
capital reserve which can be neither distributed as dividend nor considered as deferred income.

In the given case, the subsidy received is neither in relation to specific fixed asset nor in relation to
revenue. Thus it is inappropriate to recognise government grants in the profit and loss statement, since
they are not earned but represent an incentive provided by government without related costs. The
correct treatment is to credit the subsidy to capital reserve. Therefore, the accounting treatment
followed by the company is not proper.
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Eg.

A company purchased on April 1, 2010 a special purpose machinery for ` 1 crore, and received Central
Government subsidy for 25% of the price. Effective life of the machinery is 8 years. Explain the accounting
treatment and quote the relevant AS.

Solution

As per para 8 of AS 12 Accounting for Government Grants, two methods of presentation in financial
statements of grants related to specific fixed assets are regarded as acceptable alternatives. According
to the first alternative, the grant is shown as a deduction from the gross value of the asset concerned in
arriving at its book value. The grant is thus recognised in the profit and loss statement over the useful
life of a depreciable asset by way of a reduced depreciation charge. Therefore, on the basis of this
alternative, the cost of special purpose machinery will be recorded in the books after reducing it by the
amount of government subsidy of `25 lakhs. Thus the depreciable value of the machinery recorded in
the books will be Rs75 lakhs (i.e. Rs1 crore Rs25 lakhs). Depreciation of Rs9.375 lakhs (i.e. Rs75 lakhs /
8 years) will be charged on it every year on straight line method.

Under the second alternative, grants related to depreciable assets are treated as deferred income which
is recognised in the profit and loss statement on a systematic and rational basis over the useful life of
the asset. Such allocation to income is usually made over the periods and in the proportions in which
depreciation on related assets is charged. Accordingly, machinery will be recorded in the books by 1
crore and depreciation will be charged on it for `12.5 lakhs (i.e. 1 crore / 8 years) per year on straight
line method. Government subsidy of `25 lakhs will be treated as deferred income which will be
recognized as income in the statement of profit and loss every year by Rs 3.125 lakhs (i.e. 25 lakhs / 8
years).

Eg.

Fixed asset purchased for Rs 20 lac. Government grat received is 8 lac ( useful life is 4 years and residual
value is Rs. 4 lacs ). Grant becomes refundable in year 3 to the tune of Rs 6 lacs. Show accounting under
different alternatives assuming SLM method of depreciation.

Solution

A. Non Depreciable Fixed Asset

Fixed Asset / Capita reserve A/c Dr. 6 lac


To Bank A/c 6 lac

If grant was credited to deferred Government Grant

Deferred govt grant A/c Dr. 4 lac


P/L Account Dr. 2 lac
To Bank 6 lac
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B. Depreciable Fixed Asset

If grant is credited to fixed asset at the time of receipt

Fixed Asset A/c Dr.6 lac


To Bank 6 lac

( The balance of fixed asset after 2 years depreciation was 8 lacs and now it will become 14 lacs,
assuming same residual value and remaining life 2 years, Rs 5 lac depreciation shall be charged
in remaining 2 years )

If grant is credited to deferred grant or income at the time of receipt

Deferred govt grant A/c Dr. 4 lac


P/L Account Dr. 2 lac
To Bank 6 lac

( Deferred Government grant will become NIL. The fixed asset will continue to be depreciated at 4 lac
per annum )

Thats it, Thank you

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