5.03.2012

AS-12 ACCOUNTING FOR GOVERNMENT GRANTS


Applicability: Mandatory for all enterprises with respect from 01/04/1994.
Government Grants are assistance by government in cash or kind for past or future compliance with certain conditions.

Government grants may be received in following ways.

  • Grants related to acquisition of fixed assets
  • Grants related to revenue
  • Grants related to promoter’s contribution
  • Grants related to compensation for expenses

Government Grants should be recognised
Where there is reasonable assurance that the enterprise will comply with the conditions attached to them; and The grants will be received.

Amount of Grant:
Monetary Grant:

Amount earned should be the value of grant.

Non- Monetary Grant:

  • Where grants are given at concessional rate, then such assets are accounted for at their acquisition cost.
  • Where grants are given free of cost, then such assets are recorded at nominal value

Accounting Treatment:

Grants related to Depreciable assets:

  • EITHER, Grants are shown as deduction from Gross value of assets

Bank A/c Dr
To Government Grant

Government Grant  Dr
To Fixed Assets
(When grant is equal to book value of asset, fixed asset is shown at nominal value.)

  • OR, Grants are treated as deferred income

Bank A/c Dr
To Grant A/C
[In this case, Grants are recognised as profit in P&L A/c on a systematic and rational basis over the useful life of assets (i.e. in proportion to the amount of depreciation charged over period)]

{Net effect on Profit & Loss A/c will remain same in both cases}

Grants related to Non-Depreciable assets:

  • EITHER, Grants are shown as deduction from Gross value of assets

Bank A/c Dr
To Government Grant

Government Grant Dr
To Fixed Assets

(When grant is equal to book value of asset, fixed asset is shown at nominal value.)

  • OR, shown as reserves

When no future obligations are to be fulfilled

Bank A/c Dr
To Gov. Grant

Gov. Grant Dr
To Capital Reserve

When grant requires fulfillment of certain obligations:

Bank A/c Dr
To Gov. Grant

Gov. Grant Dr            
(Should be credited to income over the same period over which the cost of meeting such expense is charged to revenue)
To P&L A/c
(In respective years)

The deferred income balance should be separately disclosed in the financial statement.

Grants related to compensation for expenses

Government grants receivable as compensation for expenses or losses (with no further costs) should be  

  • recognised as an income in the year of receivable as an Extraordinary item.

REFUND OF GOVERNMENT GRANT

Government grants sometimes become refundable because certain conditions are not fulfilled. The grant refundable is treated as an extraordinary item

The amount refundable in respect of a government grant related to a specific asset is recorded by increasing the book value of the asset or by reducing the capital reserve or the deferred income balance, as appropriate, by the amount refundable. (Where the book value of asset is increased, the depreciation should be provided on new asset value prospectively.

Where the amount refundable is in respect of a government grant related to revenue, the refund is applied first against any unamortised deferred credit remaining in respect of the grant. Rest amount of refund should be charged to profit and loss account.

Where, the amount refundable is in respect of promoter’s contribution, the capital reserve should be reduced by the amount refundable.

Contingency related to Govt. Grant

A contingency related to Govt. grant receivable and refundable should be treated in accordance with AS-4.

Disclosures:

  • The accounting policy adopted
  • The nature and extent of gov. grants recognised in the financial statements.