1. Introduction
Government grants are an important element in the financial framework of many enterprises. They provide much-needed assistance to businesses and industries, especially during capital-intensive phases or in times of distress. To ensure uniformity in their treatment, the Institute of Chartered Accountants of India (ICAI) issued Accounting Standard (AS) 12 – Accounting for Government Grants, which prescribes the accounting treatment and disclosure requirements for such grants.
This article provides a detailed understanding of the standard’s scope, definitions, recognition, and accounting principles, along with expert commentary, practical illustrations, and critical implications for both practitioners and auditors.
2. Objective of AS 12
The objective of AS 12 is to prescribe the accounting treatment for:
– Government grants
– Assistance from government in cash or kind
It ensures that such assistance is properly recognized in financial statements to reflect the substance of the transaction rather than merely its legal form.
3. Scope of AS 12
AS 12 applies to:
– All forms of government grants
– Subsidies, cash incentives, duty drawbacks
– Promoter’s contributions and assistance related to specific assets
However, it does not apply to:
– Government assistance in the form of tax holidays, investment allowances, etc.
– Government participation in the ownership of the enterprise
4. Definitions as per AS 12
Government: Includes local, national or international agencies and similar bodies.
Government Grants: Assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions.
5. Types of Government Grants
AS 12 classifies grants into the following types:
A. Grants Related to Revenue
B. Grants Related to Specific Fixed Assets
C. Promoter’s Contribution
D. Non-Monetary Government Grants
6. Accounting Treatment as per AS 12
6.1. Revenue-Related Grants
These are recognized in the Profit & Loss Account either:
– Separately under ‘Other Income’, or
– Deducted from the related expense
Illustration 1:
A company receives ₹5,00,000 as a government grant to cover part of its R&D expenditure. The company incurs ₹12,00,000 on R&D in that year.
Treatment:
– Either show ₹5,00,000 as Other Income and ₹12,00,000 as expense, or
– Show net expense of ₹7,00,000 in R&D.
6.2. Capital Grants (Specific Fixed Assets)
These can be treated in two ways:
1. Deducted from Gross Value of Asset
2. Treated as Deferred Income
Illustration 2:
A company purchases machinery for ₹50,00,000. A government grant of ₹10,00,000 is received towards it.
Option 1: Asset shown at ₹40,00,000. Depreciation is charged on ₹40,00,000.
Option 2: Asset shown at ₹50,00,000. ₹10,00,000 treated as deferred income and amortized over the useful life of the asset.
6.3. Promoter’s Contribution
– Treated as Capital Reserve and not available for dividend distribution.
– It is not credited to P&L.
Illustration 3:
Government contributes ₹15 crore for setting up a manufacturing plant as part of an industrial development plan.
Accounting:
– Shown as Capital Reserve under Reserves&Surplus.
6.4. Refund of Government Grants
If a grant becomes refundable:
– Revenue-related grants: Reduce from unutilized portion or treat as expense.
– Capital grants: Increase the asset value or reduce capital reserve/deferred income.
– Depreciation may need to be recomputed retrospectively.
Illustration 4:
A company received ₹20 lakh for purchase of machinery but failed to meet conditions. The grant is refunded after 2 years.
– Increase the book value of asset
– Recalculate depreciation from the beginning
– Recognize the difference in P&L
7. Non-Monetary Grants
– If given free of cost – recorded at nominal value.
– If given at concessional rate – recorded at acquisition cost.
8. Disclosure Requirements under AS 12
Enterprises must disclose:
– Nature and extent of government grants recognized
– Accounting treatment adopted
– Conditions unfulfilled and any contingencies attached
– Impact of refunds, if any
9. Implications and Critical Commentary
9.1. Implication on Profitability
Revenue grants directly affect net profit and may inflate earnings unless matched prudently with related expenses.
9.2. Asset Valuation Impact
Choice between reducing the asset value vs. deferred income affects both:
– Depreciation base
– Profitability trends
9.3. Deferred Income Complexity
Deferred income needs continuous tracking, amortization schedules, and may complicate reporting especially for large infra projects.
9.4. Tax Implications
Though AS 12 is for accounting, taxability of grants may vary as per Income Tax Act. For example:
– Revenue grants are taxable
– Capital grants may be non-taxable if used for acquiring fixed assets, but subject to certain conditions under Section 2(24)(xviii) of the Act.
10. Comparison with Ind AS 20
While AS 12 governs non-Ind AS companies, Ind AS 20 governs Ind AS-compliant entities.
Key differences:
– Ind AS 20 mandates only net-off method for asset-related grants
– Recognition criteria are stricter under Ind AS
– Fair value concept is more dominant in Ind AS
11. Practical Challenges
– Interpreting conditions of grant agreements
– Matching grant recognition with actual compliance
– Monitoring of grant utilization to avoid future refund risks
– Complexity in multi-year deferred income recognition
12. Conclusion
AS 12 brings clarity and uniformity in accounting for government grants, offering multiple options based on nature and intent of the grant. However, the choice of treatment should reflect true and fair view, and must be applied consistently to ensure comparability.
For practitioners, a careful reading of the grant terms, matching the timing of recognition, and ensuring adequate disclosures are critical. From an audit standpoint, grants pose unique verification challenges due to possible refund obligations, compliance conditions, and their impact on earnings quality.
AS 12, while simple in structure, requires judicious application and professional judgment in practice.
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