Government Grants
AS – 12
Contents
Ø Applicability & Nature
Ø Definations
Ø Recognition of Govt Grants
Ø Types of Govt grants
Ø Refund of Grants
Ø Disclosures
Applicability & Nature
Applicable : 01-04-1994
Nature : Mandatory
Meaning of Government
Govt may include Central Govt , State Govt, Local Authority or Foreign Govt.
Meaning of Grant
As pre Accounting Standard, Grant is a financial assistance which is provided by Govt to fulfillment of certain conditions attached to it. The following points should be considered for the meaning of the grant:-
(i) Amount of grant should not be related to trading & operating benefits. It means that benefits of grant should be arisen in addition to trading benefits. For example Income tax benefits, Excise benefits or any other tax benefits can not be recognized as Govt grant because these benefits are related to operating activities.
(ii) Financial assistance may be in cash or kind.
Recognition of Grants
As Per AS any enterprise can recognize amount of any grant in its books only if the following two conditions are satisfied.
(i) It should be certain that the attached conditions will be fulfilled by the enterprise.
(ii) It should also be certain that ultimate collection of the grant will be completed.
At the time of recognition of grant the following journal entries shall take place.
Cash/Bank/Grant Receivable Dr.
To Govt Grant
Types of Grants
(i) Grant related to the Promoters Contribution
(ii) Grant related to Expenses
(iii) Grant related to Fixed Assets
(iv) Non-monetary Grants
(i) Grant related to Promoters Contribution
If any grant is direct related to capital investment then such benefit should be recognized as capital profits & to be taken to capital reserve.
(a) Cash/Bank/Grant Receivable Dr
To Govt Grant
(b) Govt Grant Dr
To Capital Reserve
Note: Amount of capital reserve can’t be used for the distribution of dividends, bonds or any other recognized use. Amount of capital reserve shall be disclosed in the Balance Sheet under the heading of Reserve & Surplus on Permanent basis.
(ii) Grant related to Expenses
As per AS if any enterprise has received any grant from Govt towards expenses then amount of expense should not be transferred to P&L A/c, but to be adjusted against grant amount.
Note: If amount of expense is lower than amount of grant the difference should be disclosed in B/S under the head of Reserve & Surplus.
(a) Cash/Bank/Grant Receivable Dr
To Govt Grant
(b) Exp A/c Dr
To Cash/Bank
(c)
To P&L A/c (Reverse)
(d) P&L A/c Dr
To Expenses
As per disclosure requirements adjustments of expense should not be made directly to grant, but such transaction should be adjusted by way of P&L A/c. Amount of expense should be recorded in debit side of P&L A/c and amount of grant should be recorded in credit side of P&L A/c.
Refund of Grants: It may be possible that the conditions which are related to grant are not fulfilled by enterprise. In such case refund of grant which was previous recognized shall take place. The journal entry should be recorded:
Refund of Promoters Contribution
Capital Reserve Dr
To Bank/Cash
Refund of Expense
To Cash/Bank
(If enterprise has recorded the total benefit in P&L A/c then complete reversal should be made to P&L A/c)
Non-Monetary Grants (Assets at Concessional rate)
As per AS, if any asset is provided by Govt at concessional rate then cost of asset in the books of enterprise should be recognized at concessional rate. No separate recognition of Govt grant is recognized. There will be no refund in case of discounted assets.
(If any asset is provided by Govt at Free of cost then such asset should be disclosed in the balance sheet separately, but amount of disclosure will be Nominal Nil value.)
(iii) 
Grant related to Fixed Assets
Grant related to Fixed Assets |
Depreciable Non-Depreciable
Non-depreciable Asset: If any grant related to non-depreciable asset than benefit should be transferred to capital reserve:
(a) Cash/Bank/Grant Receivable Dr
To Govt Grant
(b) Govt Grant Dr
To Capital Reserve
Refund: Capital Reserve Dr
To Cash/Bank/Receivable Grant
Depreciable Assets: |
Net Approach Gross Approach
Net Approach: Amount of grant which is related to depreciable fixed assets should be adjusted directly to the cost of assets. After such adjustment cost of assets will be reduced. It can also be said that benefit of grant should be adjusted in P&L A/c by reducing amount of depreciation expenses.
(a) Cash/Bank/Grant Receivable Dr
To Govt Grant
(b) Fixed Assets Dr
To Cash/Bank
(c) Govt Grant Dr
To Fixed Assets
Note: On adjustments of grant after date of purchase, it may be possible that benefit of grant is not provided by the Govt on the date of purchase of fixed assets but such benefits is to be recognized after the date of purchase. If such situation arise adjustment of grant in the book value of asset should be made after/or the date of recognition and amount of Depreciation should also be adjusted on prospective basis.
Refund of Grant:- As per AS, Refund of grant under Net Approach method should be recorded by reversal of book value of Fixed assets.
Fixed Assets Dr
To Cash/Bank/Grant Receivable
After such reversal amount of depreciation will be reduced on prospective basis.
Ex. Plant Purchased = Rs.10,00,000/- Useful life = 10 year
P.A. Depreciation = Rs. 1,00,000/- Amount of Grant = Rs. 5,00,000
(1) Benefit of Grant to be recognized in the beginning of 4th year.
(2) Refund of Grant to be recorded in the beginning of 8th year.
Calculate amount of depreciation after recognition of grant as well as refund of Grant.
Sol:
W.N. Book Value on the date of receipt of grant = 10,00,000
Less: Depreciation = 3,00,000
7,00,000
Calculation of Depreciation after Recognition of Grant
Book Value 4th year = 7,00,000
Less: Grant = 5,00,000
Adjusted Book Value = 2,00,000
Remaining Life of assets = 7 year
Depreciation p.a. = 2,00,000 / 7year = 28,571/-
Calculation of Depreciation after Refund of Grant
Book Value 4th year = 2,00,000
Less: Depreciation (28,571 x 4) = 1,14,284
85,716
Add: Refund of Grant = 5,00,000
5,85,716
Remaining Life of Asset = 3 year
Depreciation p.a. = 5,85,716 / 3 year = 1,95,239
Grant Related to Depreciable Asset (Gross Approach)
As per AS, Grant related to depreciable asset can also be recorded by gross approach. The following points should be considered at the time of accounting of grant as per gross approach.
(1) Amount of grant should not be adjusted directly to fixed assets but such amount should be transferred to a separate account in the name of Deferred Grant a/c.
(2) Amount of Deferred grant a/c should be taken to P&L A/c in the ratio of depreciation saving as calculated under Net Approach.
(3) Journal Entries
(i) Cash/Bank/Grant Receivable Dr
To Govt Grant
(ii) Grant A/c Dr
To Deferred Grant A/c (It is transferred to reserve &surplus)
(iii) Deferred Grant A/c Dr
To P&L A/c
Refund of Grant:
Deferred Grant A/c (O/s Bal) Dr
P&L A/c (which is already used) Dr
To Cash/Bank/Grant Receivable
Note: At the time of refund of grant total benefit should be reversed in the current period in total irrespective the effect of these transaction on current year profits.
Disclosure:
(i) Accounting policy should be disclosed separately in relation to classification of nature of grant.
(ii) If any refund has been made during the period then amount of refund should be also disclosed.
Difference between AS/IAS/US GAAP:
If any grant is related to promoter’s contributions then accounting of such grant should be made as capital profits as per as-12. The same grant should be recognized as revenue profits as per other statements. Revenue profits should be recognized on deferred basis as per management intention.
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