AS -12 Accounting for Government Grants

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 3^rd 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 3^rd 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 3^rd 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 .