This Accounting
Standard deals with the accounting of grants received by the company
from government. Grant means subsidy, cash incentives, duty drawback
etc. Grants are of three types,
1. grant for
specific fixed asset
2. grants in the
form of promoter's contribution.
3. grants for
revenue.
First take the
method of accounting when grant received for specific fixed asset.
Here we have a two choice to record government grant:
first method says grant should be shown as deduction from
fixed asset. Suppose a company purchased a fixed asset for 500,000
and government has given 100,000 as grant for that asset. So
according to the first method, fixed asset should be recorded in
balance sheet as 400,000 and automatically grant received has been
credited in p&l as reduced form of depreciation. Similarly, if
it purchased a machine of 200,000 and received grant of 80,000 for
that asset then 1,20,000 should be recorded in balance sheet. Entry
would be:
fixed asset dr 500,000
to, bank 500,000
(being purchased machinery in
cash)
bank dr 100,000
to, fixed asset 100,000
(being government grant received
for that machine)
Refund of
government grant :
if the government grant received is to be refund may be because of
non fulfillment of certain conditions then entry should be reversed
that is, asset is to be debited again with the amount of refund.
In the above example, if in the 3rd year, the company has
to refund the amount then, asset would be debited with 100,000. entry
would be:
fixed asset dr 100,000
to bank 100,000
(being the grant refunded and asset is
debited with the same amount)
after debiting the respective asset, depreciation is adjusted
accordingly. In the third year wdv of machine was
500,000-200,000(500,000/5 *2) =300,000. In the 3rd year
grant is refunded so asset will be debited with 100,000 and it should
be added with 300,000 total value will be 300,000+100,000=400,000 now
the year remaining is 3 more year and 400,000 should be divided by 3 so
depreciation will be 1,33,333 each 3 year.
Second method, says grant received should be recorded in the
liability as “deferred government grant” and should be
credited to p&l accordingly to the year of the fixed asset.
Suppose, a company purchased a fixed asset for 500,000 and received
government grant for 100,000 and the life of the asset is 5 year then
as per second method, 100,000 should be shown as “deferred
government grant” in the liability side and 100,000/5=20,000
should be credited to p&l for 5 year. And asset will be shown
with full amount 500,000.
Entry would be:
fixed asset dr 500,000
to, bank 500,000
(being asset purchased in cash)
bank dr 100,000
to, deferred
government grant 100,000
(being government grant
received)
at the end of first year, entry would be
deferred government grant dr 20,000
to profit&loss 20,000
(being the government grant credited
to p&l)
depreciation dr 100,000
to asset 100,000
(being depreciation charged)
p&l dr 100,000
to depreciation 100,000
(being depreciation charged to p&l)
Refund in second
method:
in case of refund and company is adopting the second method, then
first deferred government grant remaining in liability side should be
debited and then p&l will be debited.
In the above example, refund is made in 3rd year then,
60,000 remaining in liability side as government grant should be debited
and then p&l. Entry would be :
deferred government grant dr 60,000
p&l dr 40,000
to bank 100,000
(being the refund of govt grant adjusted from p&l
and deferred govt grant)
if grant is received for non-depreciable assets then it should be
transferred to capital reserve.
Grant in the
nature of promoter's contribution:
promoter's contribution means
by way of contribution towards its
total capital outlay and no repayment is ordinarily
expected in the
case of such grants. if grants are received in the nature of
promoter's contribution then it should be credited to capital
reserve.
Suppose, asset purchased 500,000 and government grant received
100,000 as promoter's contribution
Entry would be:
fixed asset dr 500,000
to capital reserve 100,000
to bank 400,000
(being government grant received as promoter's contribution
transferred to capital reserve)
Refund of govt
grant:
in case of refund in promoter's contribution capital reserve should
be debited.
Entry would be:
capital reserve dr ***
to bank ***
Presentation of Grants Related to Revenue
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.
Refund of govt
grant:
in case of revenue, p&l account will be debited and bank will be
credited.
Entry would be:
p&l dr ****
to bank ***
where grant is
received at free of cost it should be recorded at nominal value that
is, 1 rupees.
Disclosure
:
1. The accounting policy adopted for government grants, including the
methods of
presentation in the financial statements;
2. The nature and extent of government grants recognized in the
financial statements,
including grants of non-monetary assets given at a concessional rate
or free of cost.
This was all about government grant hope you all like it and if you
have any question regarding this please write me on the comment box .
