This document summarizes Accounting Standard 12 regarding accounting for government grants. It defines government grants as cash or in-kind assistance from the government with compliance to certain conditions. Government grants can be accounted for using either the capital approach by treating it as shareholder funds, or the income approach by recognizing it over periods matching related costs. Grants should be recognized when reasonable assurance of compliance with conditions exists and the benefit has been earned. Extraordinary grants may be recognized as income in the period receivable. The standard provides guidance on treatment of various types of grants and disclosure requirements.

1. ACCOUNTING STANDARD -12
By
Shankar Bose
Inspector of Income-tax
MSTU, Puri

2. ACCOUNTING STANDARD -12
ACCOUNTING FOR
GOVERNMENT GRANTS

3. RELEVANT DEFINITIONS
Government grants are assistance by government in cash or
kind to an enterprise for past or future compliance with certain
conditions but they exclude those forms of government
assistance which cannot be valued. They also exclude the
normal trading transactions of the enterprise with the
government.
Government refers to government, government agencies and
similar bodies whether local, national or international.

4. ACCOUNTING TREATMENT
Government grants can be accounted
either by using capital approach or by
using income approach.
Capital approach: The grant is treated as
part of shareholder’s funds.
Income approach: The grant is taken to
income over one or more periods to match
them with the related costs.

5. RECOGNITION
Government grants should not be
recognised until:
There is reasonable assurance that the
enterprise will comply with the conditions
attached to them.
The benefit has already been earned.
Ultimate collection of the grant is certain.

6. EXTRA ORDINARY GRANTS
In certain circumstances, the grant is recognised in the
income statement of the period in which it becomes
receivable and wherever appropriate, such grants may be
treated as an ‘extraordinary’ grant. Such circumstances
may arise when a government grant is –
Awarded for the purpose of giving immediate financial
support to an enterprise with no further related costs.
receivable by an enterprise as compensation for expenses
or losses incurred in a previous accounting period.

7. NON MONETARY
GOVERNMENT GRANTS
If the government grant is in the form of non-monetary
assets given at concessional rates, the asset is recorded at
the acquisition cost and the assets given free of cost are
recorded at a nominal value i.e. Rs. 1.

8. GRANTS RELATING TO SPECIFIC
FIXED ASSETS
It may be shown in the Balance Sheet as a deduction from the
gross value of the asset concerned, resulting in reduced
depreciation charge in the profit and loss account.
It may be treated as deferred income which is recognised in the
profit and loss statement on a systematic basis over the useful life
of the asset.
The grant related to non depreciable assets are credited to capital
reserve.
If such grant requires the fulfillment of certain obligations, it is
credited to income over the same period over which the cost of
meeting such obligations is charged to income.

9. GRANTS RELATED TO REVENUE
Government grants with reference to revenue should be
recognised 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 are shown either separately in the
profit and loss account under 'Other Income‘ or
alternatively, they may be deducted from the related
expense.

10. GRANTS OF THE NATURE OF
PROMOTERS CONTRIBUTION
Grants given by way of contribution towards its
total capital outlay are termed as government grants
in the nature of promoters' contribution. If
repayment is not expected, the grants are treated as
capital reserve which can neither be distributed as
dividend nor considered as deferred income.

11. REFUND OF GOVERNMENT
GRANTS
The amount refundable in respect of a grant related to
revenue should be applied first against any unamortized
deferred credit remaining in respect of the grant and the
excess over such deferred credit balance if any, should be
charged to profit and loss statement.
The amount refundable in respect of a grant related to
specific fixed asset should be recorded by increasing the
book value of the asset or by reducing the capital reserve or
the deferred income balance, as appropriate.
Amounts refundable in respect of a government grant in
the nature of promoters' contribution should be reduced
from the capital reserve.

12. DISCLOSURE REQUIREMENTS
The accounting policy adopted for government grants
should be disclosed along with the methods of
presentation in the financial statements.
Nature and extent of government grants recognised in
the financial statements including grants of non
monetary assets given at a concessional rate or free of
cost.
The deferred income is suitably disclosed in the balance
sheet.

13. THANKS