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Quick Reference on Accounting Standard (AS) 12

Download Quick Reference on Accounting Standard (AS) 12 Accounting for Government Grants

This Standard deals with accounting for government grants. Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, etc.

Government grants are assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions.

Exclusions: 

  • Forms of government assistance which cannot reasonably have a value placed upon them
  • Transactions with government which cannot be distinguished from the normal trading transactions of the enterprise

Recognition: Government grants should not be recognised until there is reasonable assurance that:

  • the enterprise will comply with the conditions attached to them, and
  • the grants will be received.

Government grant types and their accounting treatment: (Para 6 to 11)

Non-monetary assets given free of cost: Recorded at a nominal value.

Monetary grants given for depreciable fixed assets: 

  • Option 1: Grant to be deducted from gross value of asset
    • Treatment for receipt: Grant to be deducted from gross value of asset and depreciation to be provided on net value (Where the grant equals the whole or virtually the whole of the cost of the asset, show the asset at the nominal value).
    • Treatment if grant becomes refundable: Book value of asset to be increased by the amount refundable to Government and depreciation to be provided on revised book value prospectively over the remaining useful life.
  • Option 2: Deferred income
    • Treatment for receipt: Treated as deferred income which is recognised in the Statement of Profit and Loss on a systematic and rational basis over the useful life of the asset.
    • Treatment if grant becomes refundable: Amount refundable to be reduced from unamortised deferred income balance. Excess amount to be charged to the Statement of Profit and Loss.

Monetary grant given for non-depreciable assets:

  • When the grant does not require fulfillment of certain obligations:
    • Treatment for receipt: Credited to capital reserve.
    • Treatment if grant becomes refundable: Amount refundable to be reduced from Capital Reserve.
  • When the grant requires fulfillment of certain obligations
    • Treatment for receipt: Credited to income over the same period over which cost of meeting such obligation is charged to income.
    • Treatment if grant becomes refundable: Amount refundable to be reduced from unamortised deferred income balance. Excess amount to be charged to the Statement of Profit and Loss.

Monetary grant related to revenue :

  • Treatment for receipt: Recognised on a systematic basis in the Statement of Profit and Loss over the periods necessary to match the grants with related costs they are intended to compensate.
  • Treatment if grant becomes refundable: Unamortised deferred credit of grant to be first utilised. Excess amount to be charged to the Statement of Profit and Loss.

Monetary grant of the nature of promoters’ contribution (They are given with reference to the total investment in an undertaking or by way of contribution towards its total capital outlay and no repayment is ordinarily expected in the case of such grants.)

  • Treatment for receipt: Credited to capital reserve.
  • Treatment if grant becomes refundable: Amount refundable to be reduced from Capital Reserve.

Monetary Government grants that are receivable as compensation for expenses or losses incurred in a previous accounting period or for the purpose of giving immediate financial support to the enterprise with no further related costs, should be recognised and disclosed in the Statement of Profit and Loss of the period in which they are receivable, as an extraordinary item if appropriate as per AS 5.

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