Contents
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INTRODUCTION
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Paragraphs 1-3
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Definitions
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3
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EXPLANATION
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4-12
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Accounting
Treatment of Government Grants
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5-11
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Capital Approach
versus Income Approach
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5
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Recognition of
Government Grants
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6
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Non-monetary
Government Grants
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7
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Presentation of
Grants Related to Specific Fixed Assets
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8
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Presentation of
Grants Related to Revenue
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9
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Presentation of
Grants of the nature of Promoters’ contribution
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10
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Refund of
Government Grants
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11
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Disclosure
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12
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MAIN
PRINCIPLES
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13-23
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Disclosure
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23
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158 AS 12 (issued 1991)
Accounting
Standard (AS) 12
Accounting
for Government Grants
(This Accounting Standard
includes paragraphs set in bold italic type and plain type, which
have equal authority. Paragraphs in bold italic type indicate the main
principles. This Accounting Standard should be read in the context of the
General Instructions contained in part A of the Annexure to the Notification.)
Introduction
1.
This Standard deals with
accounting for government grants. Government grants are sometimes called by
other names such as subsidies, cash incentives, duty drawbacks, etc.
2.
This Standard does not deal with:
(i) 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;
(ii)
government assistance other than in the form of government
grants;
(iii)
government participation in the ownership of the enterprise.
Definitions
3.
The following terms are used in this Standard with the meanings specified:
3.1 Government refers
to government, government agencies and similar bodies whether local, national
or international.
3.2
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.
126 AS 12
Explanation
4. The receipt of
government grants by an enterprise is significant for preparation of the
financial statements for two reasons. Firstly, if a government grant has been
received, an appropriate method of accounting therefor is necessary. Secondly,
it is desirable to give an indication of the extent to which the enterprise has
benefited from such grant during the reporting period. This facilitates
comparison of an enterprise’s financial statements with those of prior periods
and with those of other enterprises.
Accounting Treatment of
Government Grants
5. Capital Approach versus
Income Approach
5.1 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.
5.2
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 recognise government grants in the profit
and loss statement, since they are not earned but represent an incentive
provided by government without related costs.
5.3
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.
Accounting for Government
Grants 127
(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.
5.4
It is generally considered
appropriate that accounting for government grant should be based on the nature
of the relevant grant. Grants which have
the characteristics similar to those of promoters’ contribution
should be treated as part of shareholders’ funds. Income approach may be more
appropriate in the case of other grants.
5.5 It is fundamental to the ‘income approach’ that government
grants be recognised in the profit and loss statement on a systematic and
rational basis over the periods necessary to match them with the related costs.
Income recognition of government grants on a receipts basis is not in
accordance with the accrual accounting assumption (see Accounting Standard (AS)
1, Disclosure of Accounting Policies).
5.6
In most cases, the periods
over which an enterprise recognises the costs or expenses related to a
government grant are readily ascertainable
and thus grants in recognition of
specific expenses are taken to income in the same period as the relevant
expenses.
6. Recognition of Government Grants
6.1 Government grants available to the enterprise are considered
for inclusion in accounts:
(i) where there is reasonable assurance that the enterprise will
comply with the conditions attached to them; and
(ii) where such benefits have been earned by the enterprise and it is
reasonably certain that the ultimate collection will be made.
Mere receipt of a grant is not necessarily a conclusive evidence
that conditions attaching to the grant have been or will be fulfilled.
6.2 An appropriate amount in respect of such earned benefits,
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.
6.3 A contingency related to a government grant,
arising after the grant
128 AS 12
has been recognised, is treated in accordance with Accounting
Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet
Date.
6.4 In certain circumstances, a government grant is awarded for the
purpose of giving immediate financial support to an enterprise rather than as
an incentive to undertake specific expenditure. Such grants may be confined to
an individual enterprise and may not be available to a whole class of
enterprises. These circumstances may warrant taking the grant to income in the
period in which the enterprise qualifies to receive it, as an extraordinary
item if appropriate (see Accounting Standard (AS) 5, Net Profit or Loss for the
Period, Prior Period Items and Changes in Accounting Policies).
6.5 Government grants may become receivable by an enterprise as
compensation for expenses or losses incurred in a previous accounting period.
Such a grant is recognised in the income statement of the period in which it
becomes receivable, as an extraordinary item if appropriate (see Accounting
Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies).
7. Non-monetary Government Grants
7.1 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.
8. Presentation of Grants
Related to Specific Fixed Assets
8.1 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.
8.2 Two methods of presentation in financial statements of grants
(or the appropriate portions of grants) related to specific fixed assets are
regarded as acceptable alternatives.
8.3 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 loss statement over the useful life of a
depreciable asset by way of a reduced depreciation charge. Where the
Accounting for Government
Grants 129
whole, or virtually the whole, of the cost of the asset, the
asset is shown in the balance sheet at a nominal value.
8.4 Under the other method, 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.
Such allocation to income is usually made over the periods and in the
proportions in which depreciation on related assets is charged. 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. However, if a
grant related to a non -depreciable asset requires the fulfillment 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 pending its apportionment to profit
and loss account. For example, in the case of a company, it is shown after
‘Reserves
and Surplus’ but before ‘Secured Loans’ with a suitable
8.5 The purchase of assets and the receipt of related grants can
cause major movements in the cash flow of an enterprise. For this reason and in
order to show the gross investment in assets, such movements are often
disclosed as separate items in the statement of changes in financial position
regardless of whether or not the grant is deducted from the related asset for
the purpose of balance sheet presentation.
9. Presentation of Grants
Related to Revenue
9.1
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.
9.2
Supporters of the first
method claim that it is inappropriate to net income and expense items and that
separation of the grant from the expense facilitates comparison with other
expenses not affected by a grant. For the second method, it is argued that the
expense might well not have been incurred by the enterprise if the grant had
not been available and presentation
10. Presentation of Grants of the nature of
Promoters’ contribution
10.1 Where the government grants are
of the nature of promoters’ contribution, i.e., they are given with reference
to the total investment in an
130 AS 12
undertaking or b y 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.
11. Refund of Government
Grants
11.1
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, Net Profit or Loss for the Period, Prior
Period Items and Changes in Accounting Policies).
11.2
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.
11.3
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
11.4
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.
12. Disclosure
12.1
The following disclosures are appropriate:
(i)
the accounting policy
adopted for government grants, including the methods of presentation in the
financial statements;
(ii) 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.
Accounting for Government
Grants 131
Main Principles
13. Government grants
should not be recognised until there is reasonable assurance that (i) the
enterprise will comply with the conditions attached to them, and (ii) the
grants will be received.
14. Government grants related to specific fixed assets should be
presented in the balance sheet by showing the grant as a deduction from the
gross value of the assets concerned in arriving at their book value. Where the
grant related to a specific fixed asset equals the whole, or virtually the
whole, of the cost of the asset, the asset should be shown in the balance sheet
at a nominal value. Alternatively, government grants related to depreciable
fixed assets may be treated as deferred income which should be recognised in
the profit and loss statement on a systematic and rational basis over the
useful life of the asset, i.e., such grants should be allocated to income over
the periods and in the proportions in which depreciation on those assets is
charged. Grants related to non-depreciable assets should be credited to capital
reserve under this method. However, if a grant related to a non-depreciable
asset requires the fulfillment of certain obligations, the grant should be
credited to income over the same period over which the cost of meeting such
obligations is charged to income. The deferred income balance should be
separately disclosed in the financial statements.
15. Government grants
related to revenue shoul d 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 should either be shown
separately under ‘other income’ or deducted in reporting the related expense.
16. Government grants of the nature of promoters’ contribution
should be credited to capital reserve and treated as a part of shareholders’
funds.
17. 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.
18. 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
132 AS 12
costs, should be
recognised and disclosed in the profit and loss statement of the period in
which they are receivable, as an extraordinary item if appropriate (see
Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period
Items and Changes in Accounting Policies).
19. A contingency
related to a governmen t grant, arising after the grant has been recognised,
should be treated in accordance with Accounting Standard (AS) 4, Contingencies
and Events Occurring After the Balance Sheet Date.
20. Government grants
that become refundable should be accounted for as an extraordinary item (see
Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period
Items and Changes in Accounting Policies).
21. 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. To the extent that the amount refundable
exceeds any such deferred credit, or where no deferred credit exists, the
amount should be charged to profit and loss statement. The amount refundable in
respect of a grant related to a 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, 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 should be provided prospectively over
the residual useful life of the asset.
22. Government grants in the nature of promoters’ contribution
that become refundable should be reduced from the capital reserve.
Disclosure
23. The following should be disclosed:
(i) the accounting policy adopted for government grants, including
the methods of presentation in the financial statements;
(ii)
the natur e and exten t of government grants recognised in the financial
statements, including grants of non-monetary assets given at a concessional
rate or free of cost.
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