AS 12 - Accounting for Government Grants

Purpose

The receipt of government grants by an enterprise is significant for preparation of financial statements due to the following reasons:

• If a government grant has been received, an appropriate method of accounting for the same is necessary.
• It is desirable to give an indication of the extent to which the enterprise has benefited from such grants during the reporting period, thereby facilitating comparison of an enterprise's financial statements with those of prior periods and with those of other enterprises.

This statement deals with accounting for government grants which are also referred as subsidies, cash incentives, duty drawbacks etc. However, it is to be noted that this statement neither deals with the special problems arising in accounting for government grants in financial statements reflecting the effects of changing prices nor with government assistance other than in the form of government grants. This statement also does not deal with government participation in the ownership of the enterprise.

Definitions

• Government Grants are assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions but they exclude those forms of government assistance which cannot be valued reasonably. Further, they exclude transactions with government which cannot be distinguished from the normal trading transactions of the enterprise.
• Government refers to government, government agencies and similar bodies whether local, national or international.

Explanations

Accounting Treatment

1. Depending upon the nature of the relevant grant, government grants can be accounted either by using capital approach or by using income approach.
2. In capital approach, the grant is treated as part of shareholder's funds and in the income approach, the grant is taken to income over one or more periods to match them with the related costs.

Recognition

Government grants should not be recognised until there is reasonable assurance that the enterprise will comply with the conditions attached to them, the benefit has already been earned and ultimate collection of the grant is reasonably certain. However, mere receipt of a grant is not necessarily a conclusive evidence that conditions attached to the grant have been or will be fulfilled.

Further, an appropriate amount of such government grants earned (estimated on a prudent basis) is credited to income for the year even though the actual amount of such benefits may be finally settled and received after the end of the relevant accounting period.

In certain circumstances, the grant is recognised in the income statement of the period in which it becomes receivable, and wherever appropriate, such grants may be treated as an 'extraordinary' grant in accordance with AS-5 'Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies'. Such circumstances may arise when a government grant is:

1. awarded for the purpose of giving immediate financial support to an enterprise rather than as an incentive to undertake specific expenditure, and
2. receivable by an enterprise as compensation for expenses or losses incurred in a previous accounting period.

Non-Monetary Government Grant: If the government grant is in the form of non-monetary assets given at concessional rates, the asset is recorded at the acquisition cost and the assets given free of cost is recorded at a nominal value.

Presentation of Grants related to Specific Fixed Assets

If a grant is related to specific fixed asset then it may be shown as a deduction from the gross value of the asset concerned, resulting in reduced depreciation charge in the profit and loss account.

This grant may otherwise be 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. In this method, the grant related to non depreciable assets are credited to capital reserve. If such grant requires the fulfilment of certain obligations, the grant is credited to income over the same period over which the cost of meeting such obligations is charged to income. The deferred income is suitably disclosed in the balance sheet, for example, in the case of a company, it is shown after 'Reserves and Surplus' but before 'Secured Loans' with a suitable description, e.g., 'Deferred government grants'.

Presentation of Grants related to Revenue: Government grants related to revenue should be recognised on a systematic basis in the profit and loss statement over the periods necessary to match them with the related costs which they are intended to compensate. Such grants are shown either separately in the profit and loss account or under a general heading such as 'Other Income'. Alternatively, they may also be deducted in reporting the related expense.

Presentation of Grants of the Nature of Promoter's Contribution: Grants given with reference to the total investment in an undertaking or by way of contribution towards its total capital outlay are termed as government grants in the nature of promoters' contribution. If repayment is not expected, the grants are treated as capital reserve which can neither be distributed as dividend nor considered as deferred income.

Refund of Government Grant

Contingencies related to government grant, arising after the grant has been recognised, should be treated in accordance with AS 4, 'Contingencies and Events occurring after the Balance Sheet Date'. Further, grants that become refundable should be accounted for as an extraordinary item in accordance with AS-5 'Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies'.

The amount refundable in respect of a grant related to revenue should be applied first against any unamortised deferred credit remaining in respect of the grant and the excess over such deferred credit balance if any, should be charged to profit and loss statement.

The amount refundable in respect of a grant related to specific fixed asset should be recorded by increasing the book value of the asset or by reducing the capital reserve or the deferred income balance, as appropriate. If the book value of the asset is increased by such refundable amount, then depreciation on the revised book value should be provided prospectively over the residual useful life of the asset.

Amounts refundable in respect of a government grant in the nature of promoters' contribution should be reduced from the capital reserve.

Disclosures

1. The accounting policy adopted for government grants should be disclosed along with the methods of presentations in the financial statements.
2. Disclosure is also required of the nature and extent of government grants recognised in the financial statements, including grants of non-monetary assets at a concessional rate or free of cost.