AS 12 Accounting for Government Grants, Accounting Standard 12

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

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AS 12 – Accounting for Government Grants

Recognition

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.

Applicability of Accounting Standard 12

This standard is not applicable to

1. The special circumstances 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 government grants.

3. Government’s participation in the ownership of the enterprise. for example government has stakes in many companies.

Government grants

Government Grants are assistance by the government in cash or kind for past or future compliance with some conditions attached to the grants.

Must Read – Accounting Standard 13

Reasonable assurance

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

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

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.

Treatment in financial statements :

Grants for acquiring assets :

1. 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.

2. 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.

3. 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.

4. 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 fulfilment 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.

5. The deferred income balance should be separately disclosed in the financial statements.

Must Read – Accounting Standard 16 – Accounting for Borrowing Costs

Revenue grants :

Government grants related to revenue should 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.

Grants as Promoter’s contribution :

Government grants of the nature of promoter’s contribution should be credited to capital reserve and treated as a part of share holders’ funds.

(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.

Non monetary grants :

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 at free of cost, then it should be recorded at a nominal value.

Must Read – Accounting Standard 15: Accounting for Retirement Benefits

Grants as compensation :

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 related 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.

Refund of grants :

Government grants sometimes become refundable because certain conditions are not fulfilled. In such situations thehe grant refundable should be treated as an extraordinary item.

Government grants related to specific assets become refundable :

The amount refundable in respect of a government grant related to a specific asset is to 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. Where the book value of asset is increased, the depreciation should be provided on new asset value prospectively.

Revenue grants become refundable :

Where the amount refundable is in respect of a government grant related to revenue, the refund is applied first against any unamortised deferred credit remaining in respect of the grant. Balance amount of refund should be charged to profit and loss account.

Grants towards promoter contribution becomes refundable :

Where, the amount refundable is in respect of promoter’s contribution, the capital reserve should be reduced by the amount refundable.

Disclosure requirements :

• 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.

Recommended Read –  

• Download Accounting Standard 22
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• AS 1 Disclosure of Accounting Policies
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