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AS 12 Accounting for Government Grants

CA P.S. Beniwal 9990301165

1.

Meaning of Govt:- Govt means Central Govt., State Govt., National body including local authority and international body.

2.

Meaning of Grants:- Grants means any assistance by the Govt., which value can be ascertained. Such assistance can be either in cash or in kind. Ex 1:- Delhi Govt. gives Rs. 5Crores to Sushil kumar for wining medal in Olympics is a grant because its value can be ascertained. Ex 2: Govt. of India gives Land to Adani group to set up a Mfg. unit is a grant because its value can be ascertained. Ex3:- Govt. of India issue license to X Ltd. for export within 1 month whereas normal processing period is 12 months, is not a grant because its value cannot be ascertained. Note: Vat exempt by State Govt. is not a grant.

3.

Recognition of Govt. Grant:- If following two condition are satisfied then Govt. Grants should be recognised. (i) Condition relating to grand has been fulfilled. And (ii) There should be Certainty of collection and consideration

4.

Type of Govt. Grants (i)

Govt Grant for any revenue exp.:- Such grant is received for the purpose of incurred specific revenue expenditure and considered as liability until not utilised. Journal entry (a) On receipt of Grant for exp. Bank A/C Dr. To Grant received for expense b) On expenses incurred Grant for expense A/C Dr. To Bank A/C (Being exp incurred)

XXX XXX XXX XXX

(ii) Receiving of Grant as income:- This grant is received as regard and credited into P&C A/c as and when received. Ex:- P.P Jewellers received a grant of Rs. 5 Crore from Govt. of India for best performance in export of diamonds. Journal Entry Bank A/c Dr. To P&L A/c

XXX XXX

(iii) Bailout Grant/Special Grant.:- This grant is received for reimbursements of losses of entity. This grant is credited into P&L A/c and shown as extra ordinary items. (iv) Grant for depreciable Assets (Grant for fixed Asset other than Land):- If Grant received for depreciable Asset then there are two alternative approaches for accounting of Grant for depreciable asset: (a) Additive approach (b) Deductive Approach (a) Additive Approach :- Under this approach following entries are journalized:(i)

(ii)

(iii)

Receipt of Govt. Grants Bank A/c Dr. To Deferred Govt. Grant A/c [Being Govt. Grants received] Purchase of fixed asset Fixed asset A/c Dr. To Bank A/c [Being fixed asset purchased] Charging of depreciation Depreciation A/c Dr. To fixed asset A/c [Being depreciation charged]

AS 12.1

AS 12 Accounting for Government Grants

CA P.S. Beniwal 9990301165

* At year end deferred Govt Grant will be amortised in the ratio of Dep. Deferred Govt. Grant A/c Dr. To Amortisation of deferred Govt, grant Notes:1. 2. 3.

At year end depreciation and amortisation of deferred govt. grant will be transfer into P&L A/c. In case there is any scrap value of fixed asset it will be refunded to the donor. In case fixed asset is received in kind then such asset is recorded at nominal value with corresponding credit into Capital reserve A/c.

(b) Deductive Approach:- Under deductive approach fixed asset has been shown at cost price as reduced by Govt. grant. Depreciation will be charged on such net amount. In case such value become zero, than asset will be shown at nominal value with corresponding credit into capital reserve Note: - In examination if question is silent regarding which approach is being followed then give the answer under both the approaches. (v) Govt. grant as promoters’ contribution: This grant is in the nature of promoter contribution and credited into capital reserve as and when received  This grant can be used either for revenue expenditure or capital expenditure.  This grant cannot be used for distribution of dividend (vi) Govt grants for current asset including land:- Such grants is credited into Capital Reserve account as and when received 5.

Refund of Govt. Grants:Nature of Grant 1. Grant for Revenue expenses. 2.

Grant as income

Treatment of Refund Debited grant for revenue expenses as appeared in B/S and any excess amount is debited into P&L A/c as extra ordinary item Debited into P&L A/C as extra ordinary item.

3.

Bail out grant

Debited into P&L A/C as extra ordinary item.

4.

Grant as promoter contribution or grant for current asset (including land) Grant for fixed asset as (a) additive approach

Debited capital reserve as appeared in B/S and any excess amount is debited into P&L A/c as extra ordinary item.

5.

(b) Deductive approach

6.

Debited deferred Govt. grants as appeared in B/S and any excess amount is transferred into P&L A/c as extra ordinary item. Debited fixed asset A/c at refund amount and depreciation will be charged on such revalued amount on fixed asset in the reaming useful life of asset.

Disclosure Requirement:(a) Govt. grant policy should be disclosed (b) In case any Govt. grant is refunded during the year, then reasons of such refund should be disclosed through notes to Account.

AS 12.2

AS 12 Accounting for Government Grants

CA P.S. Beniwal 9990301165 Practical Questions

Part I 1.

Explain the treatment of the following: (i) A firm acquired a fixed asset for Rs. 250 lakhs on which the government grant received was 40%. (ii) Capital subsidy received from the central government for setting up a plant in the notified backward region. Cost of the plant Rs. 300 lakhs, subsidy received Rs. 100 lakhs. (iii) Rs. 50 lakhs received from the state government for the setting up of water treatment plant. (iv) Rs. 25 lakhs received from the local authority for providing medical facilities to the employees. Answer:(i)

The total cost of the fixed asset is Rs. 250 lakhs and the grant is 40% i.e., Rs. 100 lakhs. In the balance sheet, the asset will be shown at the net amount (Rs. 250 lakhs –Rs. 100 lakhs) i.e, Rs. 150 lakhs only. This will depreciated over the life of the asset. Alternatively Additive approach can also be followed. (ii) In this case, the subsidy received for setting up a plant in the notified region, should be treated as a capital subsidy. The amount of subsidy i.e. Rs. 100 lakhs be added to the Capital Reserves and the plant should be shown at Rs. 300 lakhs. (iii) Rs. 50 lakhs received from state government for setting up of water treatment plant should be deducted fro the cost of the plant in the balance sheet. (iv) It is a case of revenue grant and should be shown in the profit and loss account. However, if the medical facilities are to be provided over a period of more than one year, it may be treated as deferred income and then taken to Profit and Loss Account on a systematic basis.

2.

Z Ltd. purchased a fixed asset for Rs. 50 lakhs, which has the estimated useful life of 5 years with the salvage value of Rs. 5,00,000. On purchase of the assets government granted it a grant for Rs. 10 lakhs. Pass the necessary journal entries in the books of the company for first two years if the grant amount is deducted from the value of fixed asset. Answer:Year 1st

2nd

Journal in the books of Z Ltd. Particulars Fixed Assets Account Dr. To Bank Account (Being Fixed Assets purchased)

Rs. (Dr.) 50,00,000

50,00,000

Bank Account Dr. To Fixed Assets Account (Being grant received from the government)

10,00,000

Depreciation Account To Fixed Assets Account (Being Depreciation charged on SLM)

7,00,000

Dr.

Rs. (Cr.)

10,00,000

7,00,000

Profit & Loss Account Dr. To Depreciation Account (Being Depreciation transf erred to P/L Account)

7,00,000

Depreciation Account To Fixed Assets Account (Being Depreciation charged on SLM)

7,00,000

Dr.

Profit & Loss Account Dr. To Depreciation Account (Being Depreciation transferred to P/L Account)

7,00,000

7,00,000 7,00,000 7,00,000

3.

How would you treat the Government grant received relating to a depreciable asset under the following cases as per AS12? Case i: Gross value of asset Rs.2 crores and Grant received Rs.20 lakhs only. Case ii: Gross value of asset Rs.2 crores and Grant received Rs.2 crores.

4.

A Government grant of Rs. 25 lakhs received 3 years ago in respect of a machinery which costs Rs. 200 lakhs, became refundable in March, 2008. (i) How the receipt of grant would have been recorded in the books of the recipient? (ii) How the refund of grant would be reflected in the books, at the time of its refund?

AS 12.3

AS 12 Accounting for Government Grants

CA P.S. Beniwal 9990301165

5.

X Ltd. purchased fixed assets for Rs. 10 lakhs for which it got grants from an international agency (which comes within the definition of government as mentioned in AS–12) Rs. 8 lakhs. X Ltd. decides to treat the grant as deferred income. Suggest appropriate basis for taking credit of the grant to Profit and Loss A/c. Take life of the assets 10 years. The company followed W.D.V method. Scrap value Rs. 2.5 lakhs. Rate of Depreciation is 12.95%.

6.

XYZ Limited received a grant of Rs. 25 lakhs under the Government's Subsidy Scheme, for acquiring an imported machinery for setting up new plant. The entire grant received is credited to Profit and Loss Account. (CA final auditing) Answer:- According to AS 12, “Accounting for Government Grants” where grant is received for the acquisition of a specific fixed asset, the same cannot be credited to Profit and Loss Account since it fails to match revenue with the cost. As per AS 12, such grants should be presented in the balance sheet showing the grant as a deduction from the gross value of the asset concerned (in arriving at its book value). Alternately, the grants related to a depreciable fixed asset may be treated as deferred income which should be recognised in the profit and loss account on a systematic and rational basis over the useful life of the asset. By crediting the entire amount of grant to profit and loss account, the company has treated it as a revenue income which is not in accordance with the requirements of the accounting standard. Therefore, the statutory auditor would have to qualify appropriately that the income has been overstated to the extent of the amount of grant net of proportionate credit that would have been worked out.

7.

A company receives a grant from a state government as compensation for loss of stocks due to unseasonal floods. The entire grant received is credited to “Capital Reserve”. Comment.

8.

Top & Top Limited has set up its business in a designated backward area which entitles the company to receive from the Government of India a subsidy of 20% of the cost of investment. Having fulfilled all the conditions under the scheme, the company on its investment of Rs. 50 crore in capital assets, received Rs. 10 crore from the Government in January, 2005 (accounting period being 2004-2005). The company wants to treat this receipt as an item of revenue and thereby reduce the losses on profit and loss account for the year ended 31st March, 2005. Keeping in view the relevant Accounting Standard, discuss whether this action is justified or not. Answer:- As per para 10 of AS 12 ‘Accounting for Government Grants’, where the government grants are of the nature of promoters’ contribution, i.e. they are given with reference to the total investment in an undertaking or by way of contribution towards its total capital outlay (for example, central investment subsidy scheme) and no repayment is ordinarily expected in respect thereof, the grants are treated as capital reserve which can be neither distributed as dividend nor considered as deferred income. In the given case, the subsidy received is neither in relation to specific fixed asset nor in relation to revenue. Thus it is inappropriate to recognise government grants in the profit and loss statement, since they are not earned but represent an incentive provided by government without related costs. The correct treatment is to credit the subsidy to capital reserve. Therefore, the accounting treatment followed by the company is not proper.

9.

X Ltd. received a grant of Rs. 2 crores from the Central Government for the purpose of a special Machinery during 1998-99. The cost of Machinery was Rs. 20 crores and had a useful life of 9 years. During 2002-03, the grant has become refundable due to non fulfillment of certain conditions attached to it. Assuming the entire grant was deducted from the cost of Machinery in the year of acquisition. State with reasons, the accounting treatment to be followed in the year 2002-03.

10.

On 1.4.2001 ABC Ltd. received Government grant of Rs. 300 lakhs for acquisition of a machinery costing Rs. 1,500 lakhs. The grant was credited to the cost of the asset. The life of the machinery is 5 years. The machinery is depreciated at 20% on WDV basis. The Company had to refund the grant in May 2004 due to non-fulfillment of certain conditions. How you would deal with the refund of grant in the books of ABC Ltd.? (4 marks each) (PE-II – May 2005) Answer: According to para 21 of AS 12 on Accounting for Government Grants, the amount refundable in respect of a grant related to a specific fixed asset should be recorded by increasing the book value of the asset or by reducing deferred income balance, as appropriate, by the amount refundable. Where the book value is increased, depreciation on the revised book value should be provided prospectively over the residual useful life of the asset. (Rs. in lakhs) 1st April, 2014 Acquisition cost of machinery (Rs. 1,500 – Rs. 300) 1,200.00 31st March, 2015 Less: Depreciation @ 20% (240.00) Book value 960.00 31st March, 2016 Less: Depreciation @ 20% (192.00) Book value 768.00 31st March, 2017 Less: Depreciation @ 20% (153.60) 1st April, 2017 Book value 614.40 May, 2017 Add: Refund of grant 300.00

AS 12.4

AS 12 Accounting for Government Grants

CA P.S. Beniwal 9990301165

Revised book value

914.40

Depreciation @ 20% on the revised book value amounting Rs. 914.40 lakhs is to be provided prospectively over the residual useful life of the asset i.e. years ended 31st March, 2015 and 31st March, 2016. 11.

A fixed asset is purchased for Rs. 20 lakhs. Government grant received towards it is Rs. 8 lakhs. Residual Value is Rs. 4 lakhs and useful life is 4 years. Assume depreciation on the basis of Straight Line method. Asset is shown in the balance sheet net of grant. After 1 year, grant becomes refundable to the extent of Rs. 5 lakhs due to non compliance with certain conditions. Pass journal entries for first two years.

Answer: Year Particulars

Journal Entries

1

Dr.

Fixed Asset Account To Bank Account (Being fixed asset purchased)

Rs. in lakhs (Dr.) 20

20

Bank Account Dr. To Fixed Asset Account (Being grant received from the government reduced the cost of fixed asset)

2

12.

Rs. in lakhs (Cr.)

8 8

Depreciation Account (W.N.1) Dr. To Fixed Asset Account (12-4)/4 (Being depreciation charged on Straight Line method)

2

Profit & Loss Account Dr. To Depreciation Account (Being depreciation transferred to Profit and Loss Account at the end of year 1)

2

Fixed Asset Account Dr. To Bank Account (Being government grant on asset partly refunded which increased the cost of fixed asset)

5

Depreciation Account (W.N.2) (10+5-4)/3 Dr. To Fixed Asset Account (Being depreciation charged on SLM on revised value of fixed asset prospectively)

3.67

Profit & Loss Account Dr. To Depreciation Account (Being depreciation transferred to Profit and Loss Account at the end of year 2)

3.67

2

2

5

3.67

3.67

Daya Ltd. acquired a machine on 1-1-2004 for Rs. 10,00,000. The useful life is 5 years. The company had applied on 14-2004, for a subsidy to the tune of 80% of the cost. The sanction letter for subsidy, was received in November 2007. The company’s Fixed Assets Account as at 31-3-2008 shows a credit balance as under: Machine (original cost) Accumulated depreciation (from 2004-2005 to 2006-2007 at straight line method)

10,00,000

(6,00,000) 4,00,000 Less: Grant received (8,00,000) (4,00,000) How should the company deal with this asset in its account for 2007-08? Does it need to charge depreciation or negative depreciation for 2007-08? Can it credit Rs. 4,00,000 to capital reserve?

AS 12.5

AS 12 Accounting for Government Grants

CA P.S. Beniwal 9990301165

Answer: In respect of depreciable assets, AS 12 does not permit the crediting of the grant or any part thereof to capital reserve. The company has only two options – reduce the grant from the cost of fixed assets or treat it as deferred income. It appears that company follows the first option. Out of the Rs. 8,00,000 that has been received, Rs. 4,00,000 is the balance in Machinery account and so Rs. 4,00,000 should be credited to the Machinery account. The balance Rs. 4,00,000 may be credited to profit & loss account as already the cost of the assets to the tune of Rs. 6,00,000 has been debited to profit and loss account in the earlier years and Rs. 4,00,000 transferred to profit & loss account would be partial recovery of that cost. There is no need to provide depreciation for 2007-08 or 2008-09 as the depreciable amount is now Nil. 13.

Yogya Ltd. received a specific grant of Rs. 300 lakhs for acquiring the plant of Rs. 1,500 lakhs during 2010-11 having useful life of 10 years. The grant received was credited to deferred income in the balance sheet. During 2016-2017, due to non -compliance of conditions laid down for the grant of Rs. 300 lakhs, the company had to refund the grant to the Government. Balance in the deferred income on that date was Rs. 210 lakhs and written down value of plant was Rs. 1,050 lakhs. (i) What should be the treatment of the refund of the grant and the effect on cost of the fixed asset and the amount of depreciation to be charged during the year 2016-2017 in the Statement of Profit and Loss? (ii) What should be the treatment of the refund if grant was deducted from the cost of the plant during 2010-11? Assume depreciation is charged on assets as per Straight Line Method. Answer. As per para 21 of AS 12, amount refundable in respect of a grant related to revenue should be applied first against any unamortised deferred credit remaining in respect of the grant. To the extent the amount refundable exceeds any such deferred credit, the amount should be charged to profit and loss statement. (i)

In this case the grant refunded is Rs. 300 lakhs and balance in deferred income is Rs. 210 lakhs, therefore, Rs. 90 lakhs shall be charged to the profit and loss account for the year 2016-2017. There will be no effect on the cost of the fixed asset and depreciation charge will be same as charged in the earlier years. (ii) As per para 21 of AS 12, the amount refundable in respect of grant which was related to specific fixed assets should be recorded by increasing the book value of the assets by the amount refundable. Where the book value of the asset is increased, depreciation on the revised book value should be provided prospectively over the residual useful life of the asset. Therefore, in this case the ...