AS_12_Accounting for Government Grants

8/3/2019 AS_12_Accounting for Government Grants

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(AS 12)

Accounting forGovernment Grants


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Scope

This Statement does not deal with:

(i) the special problems arising in accounting forgovernment grants in financial statements

reflecting the effects of changing prices or insupplementary information of a similar nature;

(ii) government assistance other than in the

form of government grants;

(iii) government participation in the ownershipof the enterprise.


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Definitions

The following terms are used in this Statement with themeanings specified:

(i) Government refers to government, government

agencies and similar bodies whether local, national orinternational.

(ii) Government grantsare assistance by government incash or kind to an enterprise for past or future

compliance with certain conditions. They exclude thoseforms of government assistance which cannotreasonably have a value placed upon them andtransactions with government which cannot bedistinguished from the normal trading transactions of theenterprise.


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Accounting Treatment of Government

Grants

Capital Approach

(i) Many government grants are in the nature of promoters'contribution, i.e., they are given with reference to the total

investment in an undertaking or by way of contribution towardsits total capital outlay and no repayment is ordinarily expected inthe case of such grants. These should, therefore, be crediteddirectly to shareholders' funds.

(ii) It is inappropriate to recognise government grants in theprofit and loss statement, since they are not earned but representan incentive provided by government without related costs.


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Income Approach

(i) Government grants are rarely gratuitous. The enterprise earns them throughcompliance with their conditions and meeting the envisaged obligations. Theyshould therefore be taken to income and matched with the associated costswhich the grant is intended to compensate.

(ii) As income tax and other taxes are charges against income, it is logical todeal also with government grants, which are an extension of fiscal policies, inthe profit and loss statement

(iii) In case grants are credited to shareholders' funds, no correlation is done

between the accounting treatment of the grant and the accounting treatmentof the expenditure to which the grant relates.


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Government grants available to the enterprise are considered forinclusion in accounts:

(i) where there is reasonable assurance that the enterprise willcomply with the conditions attached to them; and

(ii) where such benefits have been earned by the enterprise and itis reasonably certain that the ultimate collection will be made.

Mere receipt of a grant is not necessarily a conclusive evidencethat conditions attaching to the grant have been or will befulfilled.

A contingency related to a government grant, arising after thegrant has been recognised, is treated in accordance with

Accounting Standard (AS) 4, Contingencies and EventsOccurring After the Balance Sheet Date.

Recognition of Government

Grants


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Government grants may take the form of non-monetary assets, such as land or other

resources, given at concessional rates. In thesecircumstances, it is usual to account for suchassets at their acquisition cost. Non-monetaryassets given free of cost are recorded at a

nominal value.

Non-monetary GovernmentGrants


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Grants related to specific fixed assets aregovernment grants whose primary

condition is that an enterprise qualifyingfor them should purchase, construct orotherwise acquire such assets. Otherconditions may also be attached restricting

the type or location of the assets or theperiods during which they are to beacquired or held.

Presentation of Grants Related

to Specific Fixed Assets


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First Method

Under one method, 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 lossstatement over the useful life of a depreciable

asset by way of a reduced depreciation charge.

Where the grant equals the whole, or virtually

the whole, of the cost of the asset, the asset isshown in the balance sheet at a nominal value.


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Under the other method, grants related to depreciable assets

are treated as deferred income which is recognised in the profitand loss statement on a systematic and rational basis over theuseful life of the asset. Such allocation to income is usuallymade over the periods and in the proportions in which

depreciation on related assets is charged. Grants related tonon-depreciable assets are credited to capital reserve underthis method, as there is usually no charge to income in respectof such assets. However, if a grant related to a non-depreciableasset requires the fulfillment of certain obligations, the grant iscredited to income over the same period over which the cost ofmeeting such obligations is charged to income. The deferred

income is suitably disclosed in the balance sheet pending itsapportionment to profit and loss account. For example, in thecase of a company, it is shown after 'Reserves and Surplus' butbefore 'Secured Loans' with a suitable description, e.g.,'Deferred government grants'.

Second Method


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The purchase of assets and the receipt ofrelated grants can cause major movements inthe cash flow of an enterprise. For this reasonand in order to show the gross investment in

assets, such movements are often disclosed asseparate items in the statement of changes infinancial position regardless of whether or notthe grant is deducted from the related asset forthe purpose of balance sheet presentation.


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Presentation of Grants Related to

Revenue

Government grants related to revenueshould be recognised on a systematic basisin the profit and loss statement over the

periods necessary to match them with therelated costs which they are intended tocompensate. Such grants should either be

shown separately under 'other income' ordeducted in reporting the related expense.


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Presentation of Grants of the

nature of Promoters' contribution

Government grants of the nature ofpromoters' contribution should becredited to capital reserve and treated as apart of shareholders' funds which canneither distributed nor considered as

deferred income.


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Government grants sometimes become refundablebecause certain conditions are not fulfilled. Agovernment grant that becomes refundable is treated asan extraordinary item (Accounting Standard (AS) 5,Prior Period and Extraordinary Items and Changes inAccounting Policies).

The amount refundable in respect of a government grantrelated to revenue is applied first against anyunamortised deferred credit remaining in respect of thegrant. To the extent that the amount refundable exceedsany such deferred credit, or where no deferred creditexists, the amount is charged immediately to profit andloss statement.

Refund of Government Grants


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The amount refundable in respect of a government grantrelated to a specific fixed asset is recorded by increasing thebook value of the asset or by reducing the capital reserve orthe deferred income balance, as appropriate, by the amountrefundable. In the first alternative, i.e., where the book value ofthe asset is increased, depreciation on the revised book value is

provided prospectively over the residual useful life of theasset.

Where a grant which is in the nature of promoters' contributionbecomes refundable, in part or in full, to the government on

non-fulfillment of some specified conditions, the relevantamount recoverable by the government is reduced from thecapital reserve.


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Disclosure in Financial Statements

The following disclosures are appropriate:

(i) the accounting policy adopted for government

grants, including the methods of presentation in thefinancial statements;

(ii) the nature and extent of government grants

recognised in the financial statements, includinggrants of non-monetary assets given at a concessionalrate or free of cost.


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Thank You

AS_12_Accounting for Government Grants

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