In India, there are many entities receiving government grants or government assistance each year. As per Indian GAAP and Ind As there are specific treatment for accounting of Government Grants and Government Assistance. Entity has to follow the same in the preparation of financial statements according to Indian Accounting Standards or earlier GAAP whatever applicable to the entity.
Let’s us understand the treatment of Government Grants and Government Assistance as per Ind As:
Ind As 20 ‘Accounting for Government Grants and Disclosures of Government Assistance’ deals with the principal of recognition of government grants including non-monetary grants, presentation requirements of grants related to assets and income and accounting for repayment of government grants.
What is Government Grants?
Government grants are assistance by government in the form of transfers of resources in return for past or future compliance with certain conditions relating to the operating activities of an entity.
(Government refers to Central Government, government agencies and similar bodies whether local, national or international.)
When should the entity record the government grant ?
Government grants including non-monetary grants at fair value, should be recorded only when there is reasonable assurance that;
a) The entity will comply with the conditions attaching to them; and
b) The grants will be received.
Basic Principle of recognition of government grant – government grant should be recognized in profit or loss on a systematic basis over the periods in which the entity recognizes as expenses in related costs of which the grants are intended to compensate.
Grants Related to Assets:
> Recognized in profit or loss over the periods matching with depreciation expense on those assets. Alternatively, deduct the value of grant from the cost of the asset and charged depreciation on reduced amount.
> Non monetary grants recognized at fair value. Alternatively, entity may measure these grants at nominal value.
Grants Related to Income:
> Recognized in profit or loss in which the specific expenses are incurred. > Grants relating to past expenses or losses or for giving immediate
financial support with no further cost should be recognized in profit or
loss in the period in which it becomes receivable.
Presentation of Government Grants:
Related to Assets – Either presented in Balance sheet by setting up grant as deferred income or Deducted from the cost of the asset
Related to Income – Presented as part of profit or loss, either seperatly or showing as ‘other income; Alternatively, deducted in reporting related expense;
Repayment of Government Grant – In certain situations entity may have to repay government grants where the conditions attached to it are not fulfilled by the entity. A government grant that becomes repayable should be accounted for as a change in accounting estimate and be treated in accordance with Ind As 8
The following steps should be followed in repayment of a grant related to income:
(a) The repayment should be applied first against any unamortised deferred credit recognised in respect of the grant.
(b) To the extent that the repayment exceeds any such deferred credit, or when no deferred credit exists, the repayment should be recognised immediately in profit or loss.
The repayment of a grant related to an asset should be recognised either by reducing the deferred income balance by the amount repayable or by increasing the carrying amount of the asset
What is Government Assistance?
Government Assistance is action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria.
The receipt of government assistance by an entity may be significant for the preparation of the financial statements for two reasons:
Firstly, if resources have been transferred, an appropriate method of accounting for the transfer must be found.
Secondly, it is desirable to give an indication of the extent to which the entity has benefited from such assistance during the reporting period. This facilitates comparison of an entity’s financial statements with those of prior periods and with those of other entities.
It is only important for the disclosure in the financial statements so that the statements may not be misleading.
Major Difference between the treatment as per Ind As 20 and AS 12:
|Particulars||Ind AS 20||AS 12|
|1.||Government assistance not falling within the definition of government grants||Requires an indication of other forms of government assistance from
which the entity has directly benefited and should be disclosed in the financial statements.
|Does not deal with government assistance.|
|2.||Grants in the nature of promoter’s contribution||Silent on this category (and, by implication, requiring recognition as income)||To be credited to capital reserve and to be treated as shareholders’ funds|
|3.||Loan at concessional rate of Interest||Loan to be measured at fair value and recognize as per Ind as 109 – Value of concession, i.e. difference between proceeds received and valuation done to be recognized as grant||No treatment for these.|
|4.||Monetary grants related to non- depreciable assets||Taken to profit and loss account assuming that all grants have conditions attached to it. Specifically prohibits recognition of grants directly in the shareholders’ funds||Credited as capital reserve.
If such grant requires fulfilment of certain obligations, credit the grant amount to income
|5.||Non-monetary government grant given at a
|Accounted for at fair value or at nominal value||Accounted for on the basis of their acquisition cost Non-monetary assets given free of cost are recorded at a nominal value|