Accounting Standard (AS) 12: Accounting for Government Grants
AS 12 deals with accounting for government grants such as subsidies, cash incentives, duty drawbacks, etc. and specifies that the government grants should not be recognised until there is reasonable assurance that the enterprise will comply with the conditions attached to them, and the grant will be received.
The standard also describes the treatment of
- non-monetary government grants;
- presentation of grants related to specific fixed assets and
- revenue and those in the nature of promoters’ contribution; treatment for refund of government grants etc.
This Standard does not deal with:
- The special problems arising in accounting for government grants in financial statements reflecting the effects of changing prices or in supplementary information of a similar nature.
- Government assistance other than in the form of government grants.
- Government participation in the ownership of the enterprise.
Government grants are assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the enterprise.
Accounting Treatment of Government Grants
Two broad approaches may be followed for the accounting treatment of government grants:
- the ‘capital approach’, under which a grant is treated as part of shareholders’ funds, and
- the ‘income approach’, under which a grant is taken to income over one or more periods.
Recognition of Government Grants
A government grant is not recognised until there is reasonable assurance that:
- the enterprise will comply with the conditions attaching to it; and
- the grant will be received.
Receipt of a grant is not of itself conclusive evidence that the conditions attaching to the grant have been or will be fulfilled.
Non-monetary Government Grants
Government grants may take the form of non-monetary assets, such as land or other resources, given at concessional rates. In these circumstances, it is usual to account for such assets at their acquisition cost. Non-monetary assets given free of cost are recorded at a nominal value.
Presentation of Grants Related to Specific Fixed Assets
Grants related to specific fixed assets are government grants whose primary condition is that an enterprise qualifying for them should purchase, construct or otherwise acquire such assets. Other conditions may also be attached restricting the type or location of the assets or the periods during which they are to be acquired or held.
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.
Where the grant equals the whole, or virtually the whole, of the cost of the asset, the asset is shown in the balance sheet at a nominal value.
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.
Grants related to non-depreciable assets are credited to capital reserve under this method, as there is usually no charge to income in respect of such assets.
If a grant related to a non-depreciable asset 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.
Presentation of Grants Related to Revenue
Grants related to revenue are sometimes presented as a credit in the profit and loss statement, either separately or under a general heading such as ‘Other Income’. Alternatively, they are deducted in reporting the related expense.
Presentation of Grants of the Nature of Promoters’ Contribution
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.
Refund of Government Grants
Government grants sometimes become refundable because certain conditions are not fulfilled and are treated as an extraordinary item (AS 5).
The amount refundable in respect of a government grant related to revenue is applied first against any unamortised deferred credit remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount is charged immediately to profit and loss statement.
The amount refundable in respect of a government grant related to a specific fixed asset is recorded by increasing the book value of the asset or by reducing the deferred income balance, as appropriate, by the amount refundable. In the first alternative, i.e., where the book value of the asset is increased, depreciation on the revised book value is provided prospectively over the residual useful life of the asset.
Where a grant which is in the nature of promoters’ contribution becomes refundable, in part or in full, to the government on non-fulfillment of some specified conditions, the relevant amount recoverable by the government is reduced from the capital reserve.
- The accounting policy adopted for government grants, including the methods of presentation in the financial statements;
- The nature and extent of government grants recognised in the financial statements, including grants of non-monetary assets given at a concessional rate or free of cost.