PRESENTATION ON
ACCOUNTING STANDARD – 12
ORGANISED BY
ON
AUG 05, 2008
AT
ONGC
Presented by:
CA Verendra Kalra
ACCOUNTING STANDARD – 12
OVERVIEW
INTRODUCTION
EXCLUSIONS
ILLUSTRATIONS
SIGNIFICANCE
DISCLOSURES
AS 12
REFUND
DEFINITIONS
RECOGNITION
ACCOUNTING
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INTRODUCTION
•
•
AS-12 came into effect in respect of accounting periods
commencing on or after 1.4.1992, but has become
mandatory for accounting period commencing on or
after 1.4.1994.
The statement deals with the accounting
government grants.
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EXCLUSIONS FROM THE AS
The Accounting Standard does not deal with:
•
•
Government assistance other than in the form of
government grants. i.e. tax holiday in backward area, tax
exemption in notified area
Government participation in the ownership of the
enterprise. i.e. investment by the Government as equity
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MEANING OF ‘GOVERNMENT GRANTS’
•
•
•
Government Grants are assistance by the Govt. in the form
of cash or kind to an enterprise in return for past or future
compliance with certain conditions
Government assistance, which cannot be valued reasonably,
is excluded from Government Grants
Those transactions with Government, which cannot be
distinguished from the normal trading transactions of the
enterprise, are not considered as Government Grants.These
are sometimes called as subsidies, cash incentives, duty
drawbacks etc.
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MEANING OF ‘GOVERNMENT GRANTS’
•
Government refers to government, government agencies
and similar bodies whether local, national or international.
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SIGNIFICANCE OF THE AS
The receipt of government grants by an enterprise is
significant for preparation of the financial statements
because:
•
•
If a government grant has been received, an appropriate
method of accounting is necessary
It is desirable to give an indication of the extent to which
the enterprise has benefited from such grant during the
reporting period
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TYPES OF GOVERNMENT GRANTS
Monetary Grants
• Eg: Grants related to
depreciable fixed assets
Non Monetary Grants
• Eg:Grants in the form of
assets such as land,
plant & machinery etc.
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APPROACHES TOWARDS TREATMENT
OF GOVERNMENT GRANTS
Capital Approach
•
Income Approach
The grant is treated as a
•
The grant is taken as
part of the shareholder’s
income for one or more
funds
periods
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ARGUMENTS IN SUPPORT OF CAPITAL
APPROACH
There are many arguments as to which approach is the correct
accounting treatment of the government grants. Following are
the arguments in support of capital approach -
•
Many government grants are given with reference to the
total investment in an undertaking or by way of contribution
towards its total capital outlay and no repayment is ordinarily
expected. Therefore, these should be credited directly to
shareholders’ funds.
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ARGUMENTS IN SUPPORT OF CAPITAL
APPROACH
•
•
It is inappropriate to recognize government grants in the
profit and loss statement, since they are not earned but
represent an incentive provided by government without
related costs.
Government grants are rarely gratuitous. The enterprise
earns them through compliance with their conditions and
meeting the envisaged obligations. Therefore, they should be
taken to income and matched with the associated costs
which the grant is expected to compensate.
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ARGUMENTS IN SUPPORT OF
INCOME APPROACH
•
•
As income tax and other taxes are charges against income,
government grants should also be dealt in the profit and
loss statement, as they are an extension of fiscal policies.
In case grants are credited to shareholder’s funds, no
correlation is done between the accounting treatment of
the grant and the accounting treatment of the expenditure
to which the grant relates.
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•
ACCOUNTING TREATMENT OF
GOVERNMENT GRANTS
Accounting for government grant should be based on the
nature of the relevant grant. Grants which have the
characteristics similar to those of promoter’s contribution
should be treated as part of shareholder’s funds. Income
approach may be more appropriate in the case of other
grants.
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ACCOUNTING TREATMENT OF
GOVERNMENT GRANTS
•
In case of Income approach, Government grants should be
recognized in the profit and loss statement on a systematic
and rational basis over the periods necessary to match
them with the related costs. Income recognition of
government grants on a receipt basis is not in accordance
with the accrual accounting assumption.
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•
RECOGNITION OF GOVERNMENT
GRANTS
Government grants are considered for inclusion in
accounts:
o Where there is reasonable assurance that the
enterprise will comply with the conditions attached
to them, and
o Where such benefits have been earned by the
enterprise and it is reasonably certain that the
ultimate collection will be made
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•
•
RECOGNITION OF GOVERNMENT
GRANTS
Mere receipt of a grant is not necessarily a conclusive
evidence that conditions attaching to the grant have
been or will be fulfilled
An appropriate amount in respect of such earned benefits,
estimated on a prudent basis, is credited to income for the
year even though the actual amount of such benefits may be
finally settled and received after the end of the relevant
accounting period. This means that grants are recorded on
accrual basis.
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•
•
RECOGNITION OF GOVERNMENT
GRANTS
A contingency arising after the grant has been recognized, is
treated in accordance with Accounting Standard (AS) 4,
Contingencies and Events Occurring After the Balance Sheet
Date.
In certain circumstances, a government grant is awarded for
the purpose of giving immediate financial support to an
enterprise rather than as an incentive to undertake specific
expenditure. In this case, the grant can be taken as income in
the period in which the enterprise qualifies to receive it, as an
extraordinary item
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•
•
RECOGNITION OF GOVERNMENT
GRANTS
Government grants may become receivable by an
enterprise as compensation for expenses or losses
incurred in a previous accounting period. Such a grant is
recognized in the income statement of the period in which
it becomes receivable, as an extraordinary item
If the government grants take the form of non-monetary
assets, such as land, given at concessional rates, then such
assets are accounted for at their acquisition cost.
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RECOGNITION OF NON-MONETARY
GOVERNMENT GRANTS
•
Non-monetary assets given free of cost are recorded at a
nominal value.
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ILLUSTRATION
Example 2
Suppose an asset with Rs.10 lakhs fair value is supplied by
Government at -
•
Concessional rate of Rs.3 lakhs, the accounting entry will beFixed Asset
Dr. 3,00,000
To Bank
3,00,000
(If it is depreciable fixed asset depreciation will be charged
on Rs.3 lakhs).
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ILLUSTRATION
•
Free of Cost, the accounting entry will beFixed Asset
Dr. 1.00(nominal value)
To Profit and loss account
1.00
(Asset will be shown at nominal value in the books till
remains with the organization. When it is disposed it will be
written off to profit and loss account).
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GRANTS RELATED TO SPECIFIC FIXED
ASSETS
•
Sometimes, government grants related to specific fixed
assets have conditions like an enterprise qualifying for
them should purchase, construct or otherwise acquire such
assets or they may restrict the type or location of the assets
or the periods during which they are to be acquired or held.
There are two methods for presentation of such grants
related to specific fixed assets in financial statements.
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METHOD 1 FOR SPECIFIC FIXED
ASSETS GRANTS
•
The grant is shown as a deduction from the gross value of
the asset concerned in arriving at its book value. The grant
is thus recognized in the profit and loss statement over the
useful life of a depreciable asset by way of a reduced
depreciation charge. Where the grant equals the whole, or
virtually the whole, of the cost of the asset, the asset is
shown in the balance sheet at a nominal value.
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•
METHOD 2 FOR SPECIFIC FIXED
ASSETS GRANTS
The grants related to depreciable assets are treated as deferred
income which is recognized in the profit and loss statement on a
systematic and rational basis over the useful life of the asset, for
example, in the proportions in which depreciation on related
assets is charged. Grants related to non-depreciable assets are
credited to capital reserve, as there is usually no charge to
income in respect of such assets. However, if certain obligations
are to be fulfilled, the grant is credited to income over the same
period over which the cost of meeting such obligations is charged
to income. The deferred income is to be disclosed in the balance
sheet as Deferred Govt. Grants after Reserves but before Loans.
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•
GRANTS RELATED TO SPECIFIC FIXED
ASSETS
The purchase of assets and the receipt of related grants can
cause major movements in the cash flow of an enterprise.
For this reason and in order to show the gross investment in
assets, such movements are often disclosed as separate
items in the statement of changes in financial position
regardless of whether or not the grant is deducted from the
related asset for the purpose of balance sheet presentation
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GRANTS RELATED TO REVENUE
•
Government grants related to revenue should be recognized
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 should
either be shown separately under 'other income' or deducted
in reporting the related expense.
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GRANTS IN THE NATURE OF
PROMOTER’S CONTRIBUTION
• Where the government grants are of the nature of
promoter’s contribution, they are treated as capital
reserve which can be neither be distributed as dividend
nor considered as deferred income
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ILLUSTRATION
Example 1
Suppose a fixed asset is purchased for Rs. 20 lakhs, and
government grant received towards it is Rs. 8 lakhs. The
asset is depreciable with Rs. 2 lakhs residual value and 4
years life, the accounting entries will be If it is a non-depreciable asset and no obligation are
attached, thenBank Account
Dr. 8,00,000
To Fixed assets/Capital Reserve
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8,00,000
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ILLUSTRATION
Example 1
•
If it is a non-depreciable asset and there is an obligation to
incur expenses over 4 years, thenBank Account
Dr. 8,00,000
To Deferred Government Grant
8,00,000
(The deferred grant will be written off to profit and loss
account in 4 years i.e. Rs2 lakhs each year).
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ILLUSTRATION
Example 1-choice1
 If it is a depreciable asset, then there are two choices,
 Credit the grant to fixed assetsBank Account
Dr. 8,00,000
To Fixed Assets
8,00,000
(The book value is reduced to Rs.12 lakhs. The estimated
scrap value is Rs.4 lakhs and life is 4 years, hence
depreciation to be charged on the asset every year will be
Rs.2 lakhs).
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ILLUSTRATION
[Depreciation = (12 - 4)/4 = 2]

Net approach distorts the value of the asset and shows a
comparatively lower asset base and higher return, which
may mislead investors.
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ILLUSTRATION
Example 1-choice 2
 Credit the grant as deferred incomeBank Account
Dr. 8,00,000
To Deferred government grant
8,00,000
(The book value of asset is Rs.20 lakhs, residual value is Rs.4
lakhs and life is 4 years, hence depreciation to be charged on
Rs.4 lakhs per annum for 4 years).
Deferred government grant
To Profit and Loss
Dr. 2,00,000
2,00,000
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ILLUSTRATION
(The grant has to be recognized in profit and loss account
over the life of asset in proportion to depreciation.
Depreciation is Rs4 lakhs per annum for 4 years, hence grant
to be written off will be Rs.2 lakhs per annum for a year).
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REFUND OF GOVERNMENT GRANTS
When certain conditions are not fulfilled, government grants
becomes refundable. A government grant that becomes
refundable is treated as an extraordinary item.
•
Refund of grants related to revenue
o The amount refund should be adjusted against any
unamortized ‘deferred government grants’, if any.
o The remaining balance amount of refund should be
charged to Profit and Loss Account.
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•
REFUND OF GOVERNMENT GRANTS
Refund of grants in nature of promoter’s contribution
o Where a grant which is in the nature of promoter’s
contribution becomes refundable on non-fulfillment of
some specified conditions, the relevant amount
recoverable by the government is reduced from the capital
reserve.
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REFUND OF GOVERNMENT GRANTS
•
Refund of grant related to specific assets:
o The refundable amount should be recorded by increasing
the book value of the asset. Here the depreciation on the
revised book value is provided prospectively over the
residual useful life of the asset, or
o The refundable amount should be recorded by reducing
the capital reserve, or the refundable amount should be
adjusted with unamortized deferred income, as may be
appropriate.
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ILLUSTRATION
Example 3
A fixed asset purchased for Rs.20 lakhs, government grant
is received Rs.8 lakhs (useful life is 4 years, residual value
Rs.4 lakhs).Grant becomes refundable in the 3rd year to the
extent of Rs.6 lakhs. The accounting treatment under
different alternatives will be-
•
Non-Depreciable fixed asset
o Fixed Asset/ Capital Reserve
Dr. 6,00,000
To Bank
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6,00,000
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ILLUSTRATION
Example 3
•
Depreciable fixed asset
o Fixed Asset
Dr. 6,00,000
To Bank
6,00,000
(The balance of fixed asset a/c after 2 years depreciation was
Rs.8 lakhs and now it will become Rs.14 lakhs. Assuming same
residual value and remaining life of 2 years, Rs.5 lakhs
depreciation will be charged in remaining 2 years).
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ILLUSTRATION
o Deferred Government grant
Profit and loss Account
Dr.4,00,000
Dr.2,00,000
To Bank
6,00,000
(Deferred grant a/c will become nil. The fixed asset will
continue to be depreciated at Rs.4 lakhs p.a.).
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DISCLOSURES
The following disclosures are to be made in the financial
statements:
•
•
The accounting policy adopted for government grants,
including the methods of presentation in the financial
statements, and
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.
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•
RELEVANCE
As per point 3 of Schedule 27 of the previous year’s audited
financial statements the following disclosure was made:
“Government grants for acquisition of fixed assets are
initially treated as Capital Reserve and are subsequently
recognized as income in the P & L on a systematic basis over
the useful life of the assets in the proportion in which
depreciation on those assets is charged.”
•
As per Schedule 2 of Reserves & Surplus an amount of Rs.
25.97 million is being recognized as addition made to
Government grants during the year.
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Thank You
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