ACCOUNTING STANDARD -12 ACCOUNTING FOR GOVERNMENT GRANTS MOTI THIRUMALA RAJU

RELEVANT DEFINITIONS RELEVANT DEFINITIONS Government grants are assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions but they exclude those forms of government assistance which cannot be valued. They also exclude the normal trading transactions of the enterprise with the government. Government refers to government, government agencies and similar bodies whether local, national or international. MOTI THIRUMALA RAJU

ACCOUNTING TREATMENT ACCOUNTING TREATMENT Government grants can be accounted either by using capital approach or by using income approach. Capital approach: The grant is treated as part of shareholder’s funds. Income approach: The grant is taken to income over one or more periods to match them with the related costs. MOTI THIRUMALA RAJU

RECOGNITION RECOGNITION Government grants should not be recognised until: There is reasonable assurance that the enterprise will comply with the conditions attached to them. The benefit has already been earned. Ultimate collection of the grant is certain. MOTI THIRUMALA RAJU

EXTRA ORDINARY GRANTS In certain circumstances, the grant is recognised in the income statement of the period in which it becomes receivable and wherever appropriate, such grants may be treated as an ‘extraordinary’ grant. Such circumstances may arise when a government grant is – Awarded for the purpose of giving immediate financial support to an enterprise with no further related costs. receivable by an enterprise as compensation for expenses or losses incurred in a previous accounting period. MOTI THIRUMALA RAJU

NON MONETARY GOVERNMENT GRANTS If the government grant is in the form of non-monetary assets given at concessional rates, the asset is recorded at the acquisition cost and the assets given free of cost are recorded at a nominal value i.e. Rs. 1. MOTI THIRUMALA RAJU

GRANTS RELATING TO SPECIFIC FIXED ASSETS GRANTS RELATING TO SPECIFIC FIXED ASSETS It may be shown in the Balance Sheet as a deduction from the gross value of the asset concerned, resulting in reduced depreciation charge in the profit and loss account. It may be treated as deferred income which is recognised in the profit and loss statement on a systematic basis over the useful life of the asset. The grant related to non depreciable assets are credited to capital reserve. If such grant requires the fulfillment of certain obligations, it is credited to income over the same period over which the cost of meeting such obligations is charged to income. MOTI THIRUMALA RAJU

GRANTS RELATED TO REVENUE Government grants with reference 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 are shown either separately in the profit and loss account under 'Other Income‘ or alternatively, they may be deducted from the related expense. MOTI THIRUMALA RAJU

GRANTS OF THE NATURE OF PROMOTERS CONTRIBUTION Grants given by way of contribution towards its total capital outlay are termed as government grants in the nature of promoters' contribution. If repayment is not expected, the grants are treated as capital reserve which can neither be distributed as dividend nor considered as deferred income. MOTI THIRUMALA RAJU

REFUND OF GOVERNMENT GRANTS The amount refundable in respect of a grant related to revenue should be applied first against any unamortized deferred credit remaining in respect of the grant and the excess over such deferred credit balance if any, should be charged to profit and loss statement. The amount refundable in respect of a grant related to 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. Amounts refundable in respect of a government grant in the nature of promoters' contribution should be reduced from the capital reserve. MOTI THIRUMALA RAJU

DISCLOSURE REQUIREMENTS The accounting policy adopted for government grants should be disclosed along with the methods of presentation in the financial statements. 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. The deferred income is suitably disclosed in the balance sheet. MOTI THIRUMALA RAJU