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AS 12 Accounting For Government Grants Summary PDF

AS 12 Accounting For Government Grants Summary PDF. In the previous articles, we have given AS 7 Construction Contracts and AS 13 InvestmentsToday we are providing the complete details of Accounting Standard – 12 accounting for government grants I;e definitions, accounting treatment, Presentation of Grants Related to Revenue, Presentation of Grants of the nature of Promoters contribution, Presentation of grants in the form of Non-monetary assets, refund, and disclosure. You can also download AS 12 accounting for government grants notes by ICAI at the end of this article. This notes is also useful for CA IPCC students.

AS 12 Accounting For Government Grants Summary PDF

AS 12 Accounting For Government Grants Best Summary Notes

Government Grants are assistance by government in cash or kind for past or future compliance with certain conditions.This Statement deals with accounting for government grants.Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, etc.

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

Accounting Treatment of Government Grants

Capital Approach versus Income Approach

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.

Those in support of the ‘capital approach’ argue as follows:

(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 towards its total capital outlay and no repayment is ordinarily expected in the case of such grants. These should, therefore, be credited directly to shareholders’ funds.

(ii) It is inappropriate to recognize government grants in the profit and loss statement since they are not earned but represent an incentive provided by government without related costs.

Arguments in support of the ‘income approach’ are as follows:

(i) Government grants are rarely gratuitous. The enterprise earns them through compliance with their conditions and meeting the envisaged obligations. They should, therefore, be taken to income and matched with the associated costs which the grant is intended to compensate.

(ii) As income tax and other taxes are charges against income, it is logical to deal also with government grants, which are an extension of fiscal policies, in the 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 treatment of the expenditure to which the grant relates.

Government grants should not be recognized until there is reasonable assurance that

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

A contingency related to a government grant, arising after the grant has been recognized, should be treated in accordance with Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date.

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

(In this case, Grants are recognized 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.

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.

Presentation of grants in the form of Non-monetary assets

Government grants in the form of non-monetary assets, given at a concessional rate,should be accounted for on the basis of their acquisition cost. In case a non-monetary asset is given free of cost, it should be recorded at a nominal value.

Refund of Government Grants

1) Government grants sometimes become refundable because certain conditions are not fulfilled. A government grant that becomes refundable is treated as an extraordinary item (see Accounting Standard (AS) 5, Prior Period and Extraordinary Items and Changes in Accounting Policies 5 ).

2) The amount refundable in respect of a government grant related to revenue is applied first against any unamortized 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.

3) 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 capital reserve or 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.

4) 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.

Disclosure

The following disclosures are appropriate:

  • the accounting policy adopted for government grants, including the methods of presentation in the financial statements;
  • the nature and extent of government grants recognized in the financial statements, including grants of non-monetary assets given at a concessional rate or free of cost.

Click Here to download AS 12 accounting for government grants notes by ICAI.

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