AS - 12

REVISION TEST PAPERS ( RTP )

MAY 18
Q. D Ltd. acquired a machine on 01-04-2012 for ` 20,00,000. The useful life is 5
years. The company had applied on 01-04-2012, for a subsidy to the tune of 80% of
the cost. The sanction letter for subsidy was received in November 2015. The
Company’s Fixed Assets Account for the financial year 2015-16 shows a credit
balance as under:

Particulars `
Machine (Original Cost) 20,00,000
Less: Accumulated Depreciation (from 2012-13- to
2014-15 on
Straight Line Method) 12,00,000
8,00,000
Less: Grant received (16,00,000
)
Balance (8,00,000)
You are required to explain how should the company deal with this
asset in its accounts for 2015-16?
A. From the above account, it is inferred that the Company follows
Reduction Method for accounting of Government Grants. Accordingly, out of
the ` 16,00,000 that has been received, ` 8,00,000 (being the balance in
Machinery A/c) should be credited to the machinery A/c.

The balance ` 8,00,000 may be credited to P&L A/c, since already the cost of
the asset to the tune of ` 12,00,000 had been debited to P&L A/c in the earlier years
by way of depreciation charge, and ` 8,00,000 transferred to P&L A/c now would be
partial recovery of that cost.
There is no need to provide depreciation for 2015-16 or 2016-17 as the
depreciable amount is now Nil.

NOV 18
Q. A specific government grant of ` 15 lakhs was received by USB
Ltd. for acquiring the Hi-Tech Diary plant of ` 95 lakhs during the year 2014-
15. Plant has useful life of 10 years. The grant received was credited to
deferred income in the balance sheet. During 2017-18, due to non-
compliance of conditions laid down for the grant, the company had to
refund the whole grant to the Government. Balance in the deferred income
on that date was ` 10.50 lakhs and written down value of plant was ` 66.50
lakhs.
(i) What should be the treatment of the refund of the grant and the effect on cost
of plant and the amount of depreciation to be charged during the year 2017 -18
in profit and loss account?
What should be the treatment of the refund, if grant was deducted from the
(ii)
cost of the plant during 2014-15 assuming plant account showed the balance
of ` 56 lakhs as on 1.4.2017?
You are required to explain in the line with provisions of AS 12

A. As per para 21 of AS 12, ‘Accounting for Government Grants’, “the

amount refundable in respect of a grant related to specific fixed asset should
be recorded by reducing the deferred income balance. 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 ` 15 lakhs and balance in deferred income is
10.50 lakhs, ` 4.50 lakhs shall be charged to the profit and loss account for the
year 2017-18. There will be no effect on the cost of the fixed asset and
depreciation charged will be on the same basis as charged in the earlier years.
(ii) If the grant was deducted from the cost of the plant in the year 2014-15 then,
para 21 of AS 12 states that the amount refundable in respect of grant which
relates 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 book value of the plant shall be increased by ` 15 lakhs. The increased cost
of ` 15 lakhs of the plant should be amortized over 7 years (residual life).
Depreciation charged during the year 2017-18 shall be (56+15)/7 years =10.14
lakhs presuming the depreciation is charged on SLM.

MAY 19

Q. Viva Ltd. received a specific grant of ` 30 lakhs for acquiring the plant
of ` 150 lakhs during 2014- 15 having useful life of 10 years. The grant
received was credited to deferred income in the balance sheet and was not
deducted from the cost of plant. During 2017-18, due to non-compliance of
conditions laid down for the grant, the company had to refund the whole
grant to the Government. Balance in the deferred income on that date was `
21 lakhs and written down value of plant was ` 105 lakhs. 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 2017-18
in profit and loss account? AS 13 Accounting for Investments.

A. As per AS-12, ‘Accounting for Government Grants’, “the amount refundable in

respect of a grant related to specific fixed asset should be recorded by reducing the
deferred income balance. To the extent the amount refundable exceeds any such
deferred credit, the amount should be charged to profit and loss statement.
In this case the grant refunded is ` 30 lakhs and balance in deferred income is
` 21 lakhs, ` 9 lakhs shall be charged to the profit and loss account for the year 2017-
18. There will be no effect on the cost of the fixed asset and depreciation charged will
be on the same basis as charged in the earlier years.

NOV 19

Q. Samrat Limited has set up its business in a designated backward area which
entitles the company for subsidy of 25% of the total investment from Government of
India. The company has invested ` 80 crores in the eligible investments. The
company is eligible for the subsidy and has received ` 20 crores from the government
in February 2019. The company wants to recognize the said subsidy as its income to
improve the bottom line of the company.
Do you approve the action of the company in accordance with the Accounting
Standard?

A. As per AS 12 “Accounting for Government Grants”, where the government

grants are in 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.
The subsidy received by Samrat Ltd. for setting up its business in a designated
backward area will be treated as grant by the government in the nature of promoter’s
contribution as the grant is given with reference to the total investment in an
undertaking i.e. subsidy is 25% of the eligible investment and also no repayment is
apparently expected in respect thereof.
Since the subsidy received is neither in relation to specific fixed assets nor in
relation to revenue. Thus, the company cannot recognize the said subsidy as income
in its financial statements in the given case. It should be recognized as capital
reserve which can be neither distributed as dividend nor considered as deferred
income.

MAY 20

Q. How would you treat the following in the accounts in accordance with AS 12
'Government Grants'?
(i) ` 35 Lakhs received from the Local Authority for providing Medical facilities to
the employees.
(ii) ` 100 Lakhs received as Subsidy from the Central Government for setting up a
unit in a notified backward area.
(iii) ` 10 Lakhs Grant received from the Central Government on installation of anti-
pollution equipment.

A. 35 lakhs received from the local authority for providing medical

facilities to the employees is a grant received in the nature of revenue grant.
Such grants are generally presented as a credit in the profit and loss
statement, either separately or under a general heading such as ‘Other
Income’. Alternatively, ` 35 lakhs may be deducted in reporting the related
expense i.e. employee benefit expenses.

As per AS 12 ‘Accounting for Government Grants’, where the

government grants are in 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 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 from the Central Government
for setting up a unit in notified backward area is neither in relation to specific
fixed asset nor in relation to revenue. Thus, amount of ` 100 lakhs should be
credited to capital reserve.
 10 lakhs grant received for installation anti-pollution equipment is a
grant related to specific fixed asset. Two methods of presentation in financial
statements of grants related to specific fixed assets are regarded as
acceptable alternatives. Under first method, 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 recognised in the profit and loss statement over the
useful life of a depreciable asset by way of a reduced depreciation charge.
Under the second method, grants related to depreciable assets are treated as
deferred income which is recognised in the profit and loss statement on a
systematic and rational basis over the useful life of the asset.

Thus, ` 10 lakhs may either be deducted from the cost of equipment or

treated as deferred income to be recognized on a systematic basis in profit &
Loss A/c over the useful life of equipment.

NOV 20

Q. How would you treat the following in the accounts in accordance

with AS 12 'Government Grants'?

(i) ` 35 Lakhs received from the Local Authority for providing Medical facilities to
the employees.
(ii) ` 100 Lakhs received as Subsidy from the Central Government for setting up a
unit in notified backward area.

A. (i) ` 35 lakhs received from the local authority for providing medical
facilities to the employees is a grant received in the nature of revenue grant.
Such grants are generally presented as a credit in the profit and loss
statement, either separately or under a general heading such as ‘Other
Income’. Alternatively, ` 35 lakhs may be deducted in reporting the related
expense i.e. employee benefit expenses.

(ii ) As per AS 12 ‘Accounting for Government Grants’, where the

government grants are in 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 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 from the Central Government for
setting up a unit in notified backward area is neither in relation to specific
fixed asset nor in relation to revenue. Thus, amount of ` 100 lakhs should be
credited to capital reserve.

PAST EXAM QUESTIONS

MAY 18

Q. On 01.04.2014, XYZ Ltd. received Government grant of ` 100 Lakhs

for an acquisition of new machinery costing ` 500 lakhs. The grant was
received and credited to the cost of the assets. The life span of the
machinery is 5 years. The machinery is depreciated at 20% on WDV
method.

The company had to refund the entire grant in 2nd April, 2017 due to non-
fulfilment of certain conditions which was imposed by the government at the
time of approval of grant.
How do you deal with the refund of grant to the Government in the books of
XYZ Ltd., as per AS 12?

A. According to AS 12 on Accounting for Government Grants, the

amount refundable in respect of a grant related to a specific fixed asset (if
the grant had been credited to the cost of fixed asset at the time of receipt
of grant) should be recorded by increasing the book value of the asset, 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.

(` in lakhs)
1st April, 2014 Acquisition cost of machinery (` 500 – ` 400.00
100)
31st March, Less: Depreciation @ 20% (80)
2015
1st April, 2015 Book value 320.00
 31st March, Less: Depreciation @ 20% (64)
2016
1st April, 2016 Book value 256.00
31st March, Less: Depreciation @ 20% (51.20)
2017
1st April, 2017 Book value 204.80
2nd April, Add: Refund of grant 100.00
2017
Revised book value 304.80
Depreciation @ 20% on the revised book value amounting ` 304.80
lakhs is to be provided prospectively over the residual useful life of the
asset.
MAY 19

Q State whether the following statements are 'True' or 'False'. Also

give reason for your answer.

As per the provisions of AS-12, government grants in the nature of

promoters' contribution which become refundable should be reduced
from the capital reserve.

A. True:

When grants in the nature of promoters’ contribution becomes

refundable, in part or in full to the government on non-fulfillment of
some specified conditions, the relevant amount refundable to the
government is reduced from the capital reserve.