Accounting Standard 12 - Accounting for Government Grants

AS-12 ACCOUNTING FOR GOVERNMENT GRANTS

1. Introduction

To help discharge this duty, the government undertakes promotional activities, provides incentives and grants to businesses. The grants received from the government are in various forms such as subsidies, incentives, duty drawbacks among others. AS 12 deals with grants given by the government but does not covers:

i) The accounting for grants which reflect the effect of price changes ii) Assistance by the government other than grants like tax exemption, etc iii) Participation of government in organization’s ownership

2. Meaning of Government Grant

The assistance was given by the government in cash or kind with certain specific conditions. These do not include such grants from the government which cannot be measured reasonably. Also, the transactions with the government which cannot be separately identified from normal trading of the organization are not considered as a grant. For eg:- Receipt of cash on the sale of packaged drinking water to railways by ‘Bisleri’.

3. Methods of Accounting for Government Grants

There are two methods outlined by the AS to account for the government grants:

I. Capital approach 

II. Income / Revenue approach

The method of accounting for any grant is always based on the nature of the grant received. The grants are recognized only where certainty exists for the fulfillment of conditions and ultimate collection of such grants.

3.I. Capital Approach

To state simply, these grants are treated as a part of capital or shareholder’s funds. These are such grants which are given as a proportion of total investment in a business. Ordinarily, the government does not expect repayment of such grants. Due to this reason, such grants are credited to the capital or shareholder’s funds. These grants are divided primarily into three types:

A) Non-monetary grants 

B) The proportion of capital in a business 

C) For specific fixed assets

3.I.A. Accounting of grants as a Proportion of total capital in a business The non-monetary grants are those which are given in form of resources such as land, building. These grants are usually given at a concessional rate or for free. These grants should be accounted for at the acquisition cost or nominal value (if given free of cost). 

3.I.B. Accounting of grants as a Proportion of total capital in a business Where grants are of such nature that they are treated as a proportion to total capital in a business, they are treated as Capital Reserves and shown as Capital Reserve in the Balance Sheet. This way the amount received will not have any effect on Income Statement or Fixed Assets carrying amount. This means that such amounts cannot be distributed as a dividend to shareholders. Also, they are not eligible to be considered as a deferred income. 

3.I.C.  Accounting of grants for Specific fixed assets These are such grants which have a primary condition attached to them:

i. The organization receiving such grants must either Construct, Acquire or Purchase such specific fixed assets for which such grant is given.

ii. Other conditions may also be imposed as the type of assets, location of assets, period of acquisition, etc.

3.II. Income Approach

Grants which relate to revenue are credited to the profit and loss account as ‘Other Income’. They can also be deducted from the related expenses in the profit and loss account. For example:- Grants for electricity expenses of a manufacturing entity.

4. Disclosure Requirements

Accounting policy adopted inclusive of the method of presentation ii. Nature and extent of government grant recognized in financial statements

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Text source: ClearTax.