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Accounting Standard (AS) 12 (issued 1991)

Accounting for Government Grants

Paragraphs
INTRODUCTION 1-3
Definitions 3
EXPLANATION 4-12
Accounting Treatment of Government Grants 5-11
Capital Approach versus Income Approach
Recognition of Government Grants 6
Non-monetary Government Grants 7
Presentation of Grants Related to Specific Fixed Assets 8
Presentation of Grants Related to Revenue 9
Presentation of Grants of the nature of Promoters’ contribution 10
Refund of Government Grants 11
Disclosure 12
ACCOUNTING STANDARD 13-23
Disclosure 23

(This Accounting Standard includes paragraphs 13-23 set in bold italic type and paragraphs 1-12 set in plain type, which have
equal authority. Paragraphs in bold italic type indicate the main principles. This Accounting Standard should be read in the context
of the Preface to the Statements of Accounting Standards1. )
The following is the text of the Accounting Standard (AS) 12 issued by the Council of the Institute of Chartered Accountants of India
on ‘Accounting for Government Grants’.
The Standard comes into effect in respect of accounting periods commencing on or after 1.4.1992 and will be recommendatory in
nature for an initial period of two years. Accordingly, the Guidance Note on ‘Accounting for Capital Based Grants’ issued by the
Institute in 1981 shall stand withdrawn from this date. This Standard will become mandatory in respect of accounts for periods
commencing on or after 1.4.1994. 2

Introduction

1. This Statement deals with accounting for government grants. Government grants are sometimes called by other names such as
subsidies, cash incentives, duty drawbacks, etc.
2. This Statement does not deal with:

i. the special problems arising in accounting for government grants in financial statements reflecting the effects of changing
prices or in supplementary information of a similar nature;

ii. government assistance other than in the form of government grants;

iii. government participation in the ownership of the enterprise.

1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which Accounting Standards are intended to apply only to items
which are material.

2 Reference may be made to the section titled ‘Announcements of the Council regarding status of various documents issued by the Institute of
Chartered Accountants of India’ appearing at the beginning of this Compendium for a detailed discussion on the implications of the mandatory
status of an accounting standard.

Definitions
3. The following terms are used in this Statement with the meanings specified:
3.1 Government refers to government, government agencies and similar bodies whether local, national or international.
3.2 Government grants are assistance by government in cash or kind to an enterprise for past or future compliance with certain
conditions. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and
transactions with government which cannot be distinguished from the normal trading transactions of the enterprise.

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Explanation
4. The receipt of government grants by an enterprise is significant for preparation of the financial statements for two reasons.
Firstly, if a government grant has been received, an appropriate method of accounting therefor is necessary. Secondly, it is
desirable to give an indication of the extent to which the enterprise has benefited from such grant during the reporting period.
This facilitates comparison of an enterprise’s financial statements with those of prior periods and with those of other enterprises.

Accounting Treatment of Government Grants

5. Capital Approach versus Income Approach
5.1 Two broad approaches may be followed for the accounting treatment of government grants: the ‘capital approach’, under which
a grant is treated as part of shareholders’ funds, and the ‘income approach’, under which a grant is taken to income over one or
more periods.
5.2 Those in support of the ‘capital approach’ argue as follows:

i. Many 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 the case of such grants. These should, therefore, be credited directly to shareholders’ funds.

ii. 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.
5.3 Arguments in support of the ‘income approach’ are as follows:

i. Government grants are rarely gratuitous. The enterprise earns them through compliance with their conditions and
meeting the envisaged obligations. They should therefore be taken to income and matched with the associated costs
which the grant is intended to compensate.

ii. As income tax and other taxes are charges against income, it is logical to deal also with government grants, which are an
extension of fiscal policies, in the profit and loss statement.

iii. In case grants are credited to shareholders’ funds, no correlation is done between the accounting treatment of the grant
and the accounting treatment of the expenditure to which the grant relates.
5.4 It is generally considered appropriate that accounting for government grant should be based on the nature of the relevant
grant. Grants which have the characteristics similar to those of promoters’ contribution should be treated as part of
shareholders’ funds. Income approach may be more appropriate in the case of other grants.
5.5 It is fundamental to the ‘income approach’ that government grants be recognised 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 receipts basis is not in accordance with the accrual accounting assumption (see Accounting Standard
(AS) 1, Disclosure of Accounting Policies).
5.6 In most cases, the periods over which an enterprise recognises the costs or expenses related to a government grant are readily
ascertainable and thus grants in recognition of specific expenses are taken to income in the same period as the relevant
expenses.
6. Recognition of Government Grants
6.1 Government grants available to the enterprise are considered for inclusion in accounts:

i. where there is reasonable assurance that the enterprise will comply with the conditions attached to them; and

ii. where such benefits have been earned by the enterprise and it is reasonably certain that the ultimate collection will be
made.

Mere receipt of a grant is not necessarily a conclusive evidence that conditions attaching to the grant have been or will be
fulfilled.
6.2 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.
6.3 A contingency related to a government grant, arising after the grant has been recognised, is treated in accordance with
Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date. 3
6.4 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. Such grants may be confined to an individual enterprise and may
not be available to a whole class of enterprises. These circumstances may warrant taking the grant to income in the period in
which the enterprise qualifies to receive it, as an extraordinary item if appropriate (see Accounting Standard (AS) 5, Prior Period
and Extraordinary Items and Changes in Accounting Policies 4 ).
3 Pursuant to AS 29, Provisions, Contingent Liabilities and Contingent Assets, becoming mandatory in respect of accounting periods commencing
on or after 1-4- 2004, all paragraphs of AS 4 that deal with contingencies stand withdrawn except to the extent they deal with impairment of
assets not covered by other Indian Accounting Standards. Reference may be made to Announcement XX under the section titled
'Announcements of the Council regarding status of various documents issued by the Institute of Chartered Accountants of India' appearing at the
beginning of this Compendium.

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6.5 Government grants may become receivable by an enterprise as compensation for expenses or losses incurred in a previous
accounting period. Such a grant is recognised in the income statement of the period in which it becomes receivable, as an
extraordinary item if appropriate (see Accounting Standard (AS) 5, Prior Period and Extraordinary Items and Changes in
Accounting Policies 4 ).
4 AS 5 has been revised in February 1997. The title of revised AS 5 is ‘Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies’.

7. Non-monetary Government Grants

7.1 Government grants may take the form of non-monetary assets, such as land or other resources, given at concessional rates. In
these circumstances, it is usual to account for such assets at their acquisition cost. Non-monetary assets given free of cost are
recorded at a nominal value.
8. Presentation of Grants Related to Specific Fixed Assets
8.1 Grants related to specific fixed assets are government grants whose primary condition is that an enterprise qualifying for them
should purchase, construct or otherwise acquire such assets. Other conditions may also be attached restricting the type or
location of the assets or the periods during which they are to be acquired or held.
8.2 Two methods of presentation in financial statements of grants (or the appropriate portions of grants) related to specific fixed
assets are regarded as acceptable alternatives.
8.3 Under one 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. 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.
8.4 Under the other 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. Such allocation to income is usually made
over the periods and in the proportions in which depreciation on related assets is charged. Grants related to non-depreciable
assets are credited to capital reserve under this method, as there is usually no charge to income in respect of such assets.
However, if a grant related to a non-depreciable asset requires the fulfillment of certain obligations, 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
suitably disclosed in the balance sheet pending its apportionment to profit and loss account. For example, in the case of a
company, it is shown after ‘Reserves and Surplus’ but before ‘Secured Loans’ with a suitable description, e.g., ‘Deferred
government grants’.
8.5 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.
9. Presentation of Grants Related to Revenue
9.1 Grants related to revenue are sometimes presented as a credit in the profit and loss statement, either separately or under a
general heading such as ‘Other Income’. Alternatively, they are deducted in reporting the related expense.
9.2 Supporters of the first method claim that it is inappropriate to net income and expense items and that separation of the grant
from the expense facilitates comparison with other expenses not affected by a grant. For the second method, it is argued that
the expense might well not have been incurred by the enterprise if the grant had not been available and presentation of the
expense without offsetting the grant may therefore be misleading.
10. Presentation of Grants of the nature of Promoters’ contribution
10.1 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.
11. Refund of Government Grants
11.1 Government grants sometimes become refundable because certain conditions are not fulfilled. A government grant that
becomes refundable is treated as an extraordinary item (see Accounting Standard (AS) 5, Prior Period and Extraordinary Items
and Changes in Accounting Policies 5 ).
11.2 The amount refundable in respect of a government grant related to revenue is applied first against any unamortised deferred
credit remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit, or where
no deferred credit exists, the amount is charged immediately to profit and loss statement.
11.3 The amount refundable in respect of a government grant related to a specific fixed asset is recorded by increasing the book
value of the asset or by reducing the capital reserve or the deferred income balance, as appropriate, by the amount
refundable. In the first alternative, i.e., where the book value of the asset is increased, depreciation on the revised book value
is provided prospectively over the residual useful life of the asset.
11.4 Where a grant which is 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 recoverable by the government is reduced from the capital
reserve.
5 See footnote 4.

12. Disclosure
12.1 The following disclosures are appropriate:

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i. the accounting policy adopted for government grants, including the methods of presentation in the financial
statements;

ii. the 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.

Accounting Standard

13. Government grants should not be recognised until there is reasonable assurance that (i) the enterprise will comply
with the conditions attached to them, and (ii) the grants will be received.
14. Government grants related to specific fixed assets should be presented in the balance sheet by showing the grant
as a deduction from the gross value of the assets concerned in arriving at their book value. Where the grant
related to a specific fixed asset equals the whole, or virtually the whole, of the cost of the asset, the asset should
be shown in the balance sheet at a nominal value. Alternatively, government grants related to depreciable fixed
assets may be treated as deferred income which should be recognised in the profit and loss statement on a
systematic and rational basis over the useful life of the asset, i.e., such grants should be allocated to income over
the periods and in the proportions in which depreciation on those assets is charged. Grants related to non-
depreciable assets should be credited to capital reserve under this method. However, if a grant related to a non-
depreciable asset requires the fulfillment of certain obligations, the grant should be credited to income over the
same period over which the cost of meeting such obligations is charged to income. The deferred income balance
should be separately disclosed in the financial statements.
15. Government grants related 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 should either be shown separately under ‘other income’ or deducted in reporting the related expense.
16. Government grants of the nature of promoters’ contribution should be credited to capital reserve and treated as a
part of shareholders’ funds.
17. Government grants in the form of non-monetary assets, given at a concessional rate, should be accounted for on
the basis of their acquisition cost. In case a non-monetary asset is given free of cost, it should be recorded at a
nominal value.
18. Government grants that are receivable as compensation for expenses or losses incurred in a previous accounting
period or for the purpose of giving immediate financial support to the enterprise with no further related costs,
should be recognised and disclosed in the profit and loss statement of the period in which they are receivable, as
an extraordinary item if appropriate (see Accounting Standard (AS) 5, Prior Period and Extraordinary Items and
Changes in Accounting Policies 6 ).
19. A contingency related to a government grant, arising after the grant has been recognised, should be treated in
accordance with Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date . 7
20. Government grants that become refundable should be accounted for as an extraordinary item (see Accounting
Standard (AS) 5, Prior Period and Extraordinary Items and Changes in Accounting Policies 8 ).
21. The 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 that the amount refundable exceeds any such
deferred credit, or where no deferred credit exists, the amount should be charged to profit and loss statement. 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 the capital reserve or the deferred income balance, as appropriate, by the
amount refundable. In the first alternative, i.e., 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.
22. Government grants in the nature of promoters’ contribution that become refundable should be reduced from the
capital reserve.
6 See footnote 4.

7 See footnote 3.

8 See footnote 4.

Disclosure
23. The following should be disclosed:

i. the accounting policy adopted for government grants, including the methods of presentation in the financial
statements;

ii. the 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.

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