IAS 12

Accounting Standard (AS) 12

(issued 1991)

Accounting for Government Grants

Contents

INTRODUCTION Paragraphs 1-3

Definitions 3

EXPLANATION 4-12

Accounting Treatment of Government Grants 5-11

Capital Approach versus Income Approach 5

Recognition of Government Grants 6

Non-monetary Government Grants 7

Presentation of Grants Related to Specific Fixed Assets 8

Presentation of Grants Related to Revenue 9

Presentation of Grants of the nature of Promoters’ contribution 10

Refund of Government Grants 11

Disclosure 12

ACCOUNTING STANDARD 13-23

Disclosure 23

1568 AS 12 (issued 1991)

Accounting Standard (AS) 12

(issued 1991)

Accounting forGovernmentGrants

(This Accounting Standard includes paragraphs 13-23 set in bold italic

type and paragraphs 1-12 set in plain type, which have equal authority.

Paragraphs in bold italic type indicate the main principles. This

Accounting Standard should be read in the context of the Preface to the

Statements of Accounting Standards1.)

The following is the text of theAccounting Standard (AS) 12 issued by

theCouncilof the Institute ofCharteredAccountants 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, theGuidanceNote on ‘Accounting

for CapitalBasedGrants’ issued by the Institute in 1981 shall standwithdrawn

from this date. This Standard will become mandatory in respect of accounts

for periods commencing on or after 1.4.1994.2

Introduction

1. This Statement dealswith 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

1Attention is specifically drawn to paragraph 4.3 of the Preface, according to which

Accounting Standards are intended to apply only to items which are material.

2 Reference may be made to the section titled ‘Announcements of the Council

regarding status of various documents issued by the Institute of Chartered

Accountants of India’ appearing at the beginning of this Compendium for a detailed

discussion on the implications of the mandatory status of an accounting standard.

Accounting for Government Grants 177

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 assistancewhich 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.

178 AS 12 (issued 1991)

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

andmatched with the associated costswhich the grant is intended

to compensate.

(ii) As income tax and other taxes are charges against income, it is

logical to deal alsowith 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).

Accounting for Government Grants 179

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 enterprisewill 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.3

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

3 Pursuant to AS 29, Provisions, Contingent Liabilities and Contingent Assets,

becoming mandatory in respect of accounting periods commencing on or after 1-4-

2004, 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 Indian

Accounting Standards. Reference may be made to Announcement XX under the

section titled 'Announcements of the Council regarding status of various documents

issued by the Institute of Chartered Accountants of India' appearing at the beginning

of this Compendium.

180 AS 12 (issued 1991)

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 Policies4).

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 itemif appropriate (seeAccounting

Standard (AS) 5, Prior Period and Extraordinary Items and Changes in

Accounting Policies4).

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

4 AS 5 has been revised in February 1997. The title of revised AS 5 is ‘Net Profit or

Loss for the Period, Prior Period Items and Changes in Accounting Policies’.

Accounting for Government Grants 181

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 firstmethod claimthat it is inappropriate to net income

and expense items and that separation of the grant fromthe 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

182 AS 12 (issued 1991)

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 Policies5).

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, orwhere 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.

5 See footnote 4.

Accounting for Government Grants 183

Accounting Standard

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

184 AS 12 (issued 1991)

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

Policies6).

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.7

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

Policies8).

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,

6 See footnote 4.

7 See footnote 3.

8 See footnote 4.

Accounting for Government Grants 185

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.