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Statements of Accounting Standards
(AS 12)
Accounting for Government Grants
The following is the text of the Accounting
Standard (AS) 12 issued by the Council of the Institute of Chartered
Accountants of India on 'Accounting for Government Grants'.
The Standard comes into effect
in respect of accounting periods commencing on or after 1.4.1992
and will be recommendatory in nature for an initial period of
two years. Accordingly, the Guidance Note on 'Accounting for Capital
Based Grants' issued by the Institute in 1981 shall stand withdrawn
from this date. This Standard will become mandatory in respect
of accounts for periods commencing on or after 1.4.1994.
Introduction
1. This Statement deals with accounting
for government grants. Government grants are sometimes called
by other names such as subsidies, cash incentives, duty drawbacks,
etc.
2. This Statement 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 Statement 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.
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.
(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 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, Prior Period and Extraordinary 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, Prior Period and Extraordinary 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 grant
equals the 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 description, e.g., 'Deferred
government grants'.
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 of the expense without offsetting the grant may
therefore be misleading.
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 undertaking or by
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, Prior Period and Extraordinary
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 prospectively over the residual useful life
of the asset.
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 Standard
(The Accounting Standard comprises
paragraphs 13–23 of this Statement. The Standard should be read
in the context of paragraphs 1–12 of this Statement and of the
Preface to the Statements of Accounting Standards.)
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 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.
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 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, Prior Period
and Extraordinary Items and Changes in Accounting Policies).
19. A contingency related
to a government 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, Prior Period and Extraordinary
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 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.
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