[Para 1 and 2]
This Accounting Standard applies to Level I, II and III Entities
The Standard comes into effect in respect of accounting periods commencing on or after1.4.1992 and will be recommendatory in nature for an initial period of two years.
This Standard deals with accounting for government grants. Government grants are sometimescalled by other names such as subsidies, cash incentives, duty drawbacks, etc.
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.
Example of Disclosures under AS - 12:
Bharat Electronics Limited:
Interest subsidy fund
Interest subsidy for eligible borrowers received from the Ministry of Power, Govt. of India under Accelerated Generation & Supply Programme (AG& SP) on net present value (NPV) basis is credited to Interest Subsidy Fund on receipt and is passed on to the borrowers over the eligible period of loan on respective dates of interest demands. Any excess/shortfall in the Interest Subsidy Fund is refunded or adjusted/charged off at the completion of respective scheme.
Interest subsidy Fund is credited at the year-end with interest on the outstanding balance in the subsidy fund by debiting Profit & Loss Account, at rate specified in the Scheme.
Government refers to government, government agencies and similar bodies whether local,national or international.
Government grants are assistance by government in cash or kind to an enterprise for pastor future compliance with certain conditions. They exclude those forms of governmentassistance which cannot reasonably have a value placed upon them and transactions withgovernment which cannot be distinguished from the normal trading transactions of theenterprise.
The receipt of government grants by an enterprise is significant for preparation of the financialstatements for two reasons. Firstly, if a government grant has been received, an appropriate method ofaccounting therefor is necessary. Secondly, it is desirable to give an indication of the extent to whichthe enterprise has benefited from such grant during the reporting period. This facilitates comparison ofan enterprise's financial statements with those of prior periods and with those of other enterprises.
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 "incomeapproach", under which a grant is taken to income over one or more periods.
It is generally considered appropriate that accounting for government grant should be based onthe 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 moreappropriate in the case of other grants.
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 givenwith reference to the total investment in an undertaking or by way of contribution towards itstotal 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, sincethey are not earned but represent an incentive provided by government without relatedcosts.
Arguments in support of the "income approach" are as follows:
i. Government grants are rarely gratuitous. The enterprise earns them through compliancewith their conditions and meeting the envisaged obligations. They should therefore be takento income and matched with the associated costs which the grant is intended tocompensate.
ii. As income tax and other taxes are charges against income, it is logical to deal also withgovernment grants, which are an extension of fiscal policies, in the profit and lossstatement.
iii. In case grants are credited to shareholders' funds, no correlation is done between theaccounting treatment of the grant and the accounting treatment of the expenditure to whichthe grant relates.
Other Relevant Points:
1. 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). [Para 6.4]
2. 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). [Para 6.5]
3. It is fundamental to the "income approach" that government grants be recognised in the profit andloss statement on a systematic and rational basis over the periods necessary to match them with therelated costs. Income recognition of government grants on a receipts basis is not in accordance withthe accrual accounting assumption (see Accounting Standard (AS) 1, Disclosure of AccountingPolicies).
4. In most cases, the periods over which an enterprise recognises the costs or expenses related to agovernment grant are readily ascertainable and thus grants in recognition of specific expenses aretaken to income in the same period as the relevant expenses.
Government grants available to the enterprise are considered for
**Pursuant to AS 29, Provisions, Contingent Liabilities and Contingent Assets, becoming mandatory, all paragraphs of AS 4 that deal with contingencies stand withdrawn except to the extent they deal with impairment of assets not covered by other Accounting Standards.
inclusion in accounts:
i. where there is reasonable assurance that the enterprise will comply with the conditionsattached to them; and
ii. where such benefits have been earned by the enterprise and it is reasonably certain that theultimate collection will be made.
Mere receipt of a grant is not necessarily, aconclusive evidence that conditions attaching to the granthave been or will be fulfilled.
An appropriate amount in respect of such earned benefits, estimated on a prudent basis, iscredited to income for the year even though the actual amount of such benefits may be finally settledand received after the end of the relevant accounting period.
A contingency related to a government grant, arising after the grant has been recognised, istreated in accordance with Accounting Standard (AS) 4, Contingencies and Events Occurring After theBalance Sheet Date. **
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 theiracquisition cost. Non-monetary assets given free of cost are recorded at a nominal value.
Meaning of grants related to specific fixed assets:
Grants related to specific fixed assets are government grants whose primary condition is that anenterprise qualifying for them should purchase, construct or otherwise acquire such assets. Otherconditions may also be attached restricting the type or location of the assets or the periods duringwhich they are to be acquired or held.
Presentation in the financial statements:
Two methods of presentation in financial statements of grants (or the appropriate portions ofgrants) related to specific fixed assets are regarded as acceptable alternatives.
I. Under one method, the grant is shown as a deduction from the gross value of the assetconcerned in arriving at its book value. The grant is thus recognised in the profit and loss statementover the useful life of a depreciable asset by way of a reduced depreciation charge. Where the grantequals the whole, or virtually the whole, of the cost of the asset, the asset is shown in the balancesheet at a nominal value.
II. Under the other method, grants related to depreciable assets are treated as deferred incomewhich is recognised in the profit and loss statement on a systematic and rational basis over the usefullife of the asset. Such allocation to income is usually made over the periods and in the proportions inwhich depreciation on related assets is charged. Grants related to non-depreciable assets are creditedto capital reserve under this method, as there is usually no charge to income in respect of such assets.
Grants in relation to non-depreciable assets:
However, if a grant related to a non-depreciable asset requires the fulfillment of certain obligations, thegrant is credited to income over the same period over which the cost of meeting such obligations ischarged to income. The deferred income is suitably disclosed in the balance sheet pending itsapportionment 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 description, e.g., "Deferredgovernment grants".
The purchase of assets and the receipt of related grants can
Example of Disclosures under AS - 12:
Accounting for subsidies from Welfare Commissioner
The company has constructed / under construction some labour quarters, for which the company is receiving subsidy from Welfare Commissioner. Since the land on which such quarters are constructed is surrendered to the Welfare Commissioner and the property (quarters constructed) vests with the Welfare Commissioner, the entire expenditure incurred by the company is charged to and the subsidy received is also credited to revenue in the year in which the expenditure is incurred / subsidy is received.
cause major movements in the cashflow of an enterprise. For this reason and in order to show the gross investment in assets, suchmovements are often disclosed as separate items in the statement of changes in financial positionregardless of whether or not the grant is deducted from the related asset for the purpose of balancesheet presentation..
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 deductedin reporting the related expense.
Supporters of the first method claim that it is inappropriate to net income and expense items andthat separation of the grant from the expense facilitates comparison with other expenses not affectedby a grant. For the second method, it is argued that the expense might well not have been incurred bythe enterprise if the grant had not been available and presentation of the expense without offsetting thegrant may therefore be misleading.
Where the government grants are of the nature of promoters' contribution, i.e., they are given withreference to the total investment in an undertaking or by way of contribution towards its total capitaloutlay (for example, central investment subsidy scheme) and no repayment is ordinarily expected inrespect thereof, the grants are treated as capital reserve which can be neither distributed as dividendnor considered as deferred income.
Government grants sometimes become refundable because certain conditions are not fulfilled. Agovernment grant that becomes refundable is treated as an extraordinary item (see AccountingStandard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in AccountingPolicies).
The amount refundable in respect of a government grant related to revenue is applied first againstany unamortised deferred credit remaining in respect of the grant. To the extent that the amountrefundable exceeds any such deferred credit, or where no deferred credit exists, the amount is chargedimmediately to profit and loss statement.
The amount refundable in respect of a government grant related to a specific fixed asset isrecorded by increasing the book value of the asset or by reducing the capital reserve or the deferredincome balance, as appropriate, by the amount refundable. In the first alternative, i.e., where the bookvalue of the asset is increased, depreciation on the revised book value is provided prospectively overthe residual useful life of the asset.
Where a grant which is in the nature of promoters' contribution becomes refundable, in part or infull, to the government on non-fulfillment of some specified conditions, the relevant amount recoverableby the government is reduced from the capital reserve.
The following disclosures are appropriate:
i. the accounting policy adopted for government grants, including the methods of presentationin 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.