Overview Of Accounting Standards: Notes(Part- 3) | Accounting for CA Intermediate (Old Scheme) PDF Download

 Page 1


 
 
3.113 
 
OVERVIEW OF ACCOUNTING STANDARDS 
 
 2.6 AS 12: ACCOUNTING FOR GOVERNMENT  
  GRANTS  
Introduction 
AS 12 deals with accounting for government grants such as subsidies, cash 
incentives, duty drawbacks, etc. and specifies that the government grants should 
not be recognised until there is reasonable assurance that the enterprise will 
comply with the conditions attached to them, and the grant will be received. The 
standard also describes the treatment of non-monetary government grants; 
presentation of grants related to specific fixed assets and revenue and those in the 
nature of promoters’ contribution; treatment for refund of government grants etc. 
This Standard 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. 
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 therefore 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. 
Government Grants 
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. 
Accounting Treatment of Government Grants 
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’ 
Page 2


 
 
3.113 
 
OVERVIEW OF ACCOUNTING STANDARDS 
 
 2.6 AS 12: ACCOUNTING FOR GOVERNMENT  
  GRANTS  
Introduction 
AS 12 deals with accounting for government grants such as subsidies, cash 
incentives, duty drawbacks, etc. and specifies that the government grants should 
not be recognised until there is reasonable assurance that the enterprise will 
comply with the conditions attached to them, and the grant will be received. The 
standard also describes the treatment of non-monetary government grants; 
presentation of grants related to specific fixed assets and revenue and those in the 
nature of promoters’ contribution; treatment for refund of government grants etc. 
This Standard 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. 
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 therefore 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. 
Government Grants 
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. 
Accounting Treatment of Government Grants 
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’ 
 
 
3.114 
 
ACCOUNTING 
funds, and  
? the ‘income approach’, under which a grant is taken to income over one or 
more periods. 
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. 
Recognition of Government Grants 
A government grant is not recognised until there is reasonable assurance that: 
? the enterprise will comply with the conditions attaching to it; and  
? the grant will be received. 
Receipt of a grant is not of itself conclusive evidence that the conditions attaching 
to the grant have been or will be fulfilled. 
Non-monetary Government Grants 
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. 
Presentation of Grants Related to Specific Fixed Assets 
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. 
Two methods of presentation in financial statements of grants related to specific 
fixed assets are regarded as acceptable alternatives. 
Method I : 
? 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.  
Page 3


 
 
3.113 
 
OVERVIEW OF ACCOUNTING STANDARDS 
 
 2.6 AS 12: ACCOUNTING FOR GOVERNMENT  
  GRANTS  
Introduction 
AS 12 deals with accounting for government grants such as subsidies, cash 
incentives, duty drawbacks, etc. and specifies that the government grants should 
not be recognised until there is reasonable assurance that the enterprise will 
comply with the conditions attached to them, and the grant will be received. The 
standard also describes the treatment of non-monetary government grants; 
presentation of grants related to specific fixed assets and revenue and those in the 
nature of promoters’ contribution; treatment for refund of government grants etc. 
This Standard 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. 
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 therefore 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. 
Government Grants 
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. 
Accounting Treatment of Government Grants 
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’ 
 
 
3.114 
 
ACCOUNTING 
funds, and  
? the ‘income approach’, under which a grant is taken to income over one or 
more periods. 
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. 
Recognition of Government Grants 
A government grant is not recognised until there is reasonable assurance that: 
? the enterprise will comply with the conditions attaching to it; and  
? the grant will be received. 
Receipt of a grant is not of itself conclusive evidence that the conditions attaching 
to the grant have been or will be fulfilled. 
Non-monetary Government Grants 
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. 
Presentation of Grants Related to Specific Fixed Assets 
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. 
Two methods of presentation in financial statements of grants related to specific 
fixed assets are regarded as acceptable alternatives. 
Method I : 
? 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.  
 
 
3.115 
 
OVERVIEW OF ACCOUNTING STANDARDS 
 
? 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. 
Illustration 1 
Z Ltd. purchased a fixed asset for ` 50 lakhs, which has the estimated useful life of 5 
years with the salvage value of ` 5,00,000. On purchase of the assets government 
granted it a grant for ` 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.  
Solution 
Journal in the books of Z Ltd. 
Year Particulars ` (Dr.) ` (Cr.) 
1st Fixed Assets Account  Dr. 50,00,000   
   To Bank Account  50,00,000  
 (Being Fixed Assets purchased)   
 Bank Account  Dr. 10,00,000   
   To Fixed Assets Account  10,00,000  
 (Being grant received from the government)   
 Depreciation Account  Dr.  7,00,000   
   To Fixed Assets Account   7,00,000  
 (Being Depreciation charged on SLM)   
 Profit & Loss Account  Dr. 7,00,000  
   To Depreciation Account  7,00,000 
 (Being Depreciation transferred to P/L Account)   
2nd Depreciation Account  Dr. 7,00,000   
   To Fixed Assets Account  7,00,000  
 (Being Depreciation charged on SLM)   
 Profit & Loss Account  Dr. 7,00,000  
   To Depreciation Account  7,00,000 
 (Being Depreciation transferred to P/L Account)   
 
Page 4


 
 
3.113 
 
OVERVIEW OF ACCOUNTING STANDARDS 
 
 2.6 AS 12: ACCOUNTING FOR GOVERNMENT  
  GRANTS  
Introduction 
AS 12 deals with accounting for government grants such as subsidies, cash 
incentives, duty drawbacks, etc. and specifies that the government grants should 
not be recognised until there is reasonable assurance that the enterprise will 
comply with the conditions attached to them, and the grant will be received. The 
standard also describes the treatment of non-monetary government grants; 
presentation of grants related to specific fixed assets and revenue and those in the 
nature of promoters’ contribution; treatment for refund of government grants etc. 
This Standard 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. 
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 therefore 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. 
Government Grants 
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. 
Accounting Treatment of Government Grants 
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’ 
 
 
3.114 
 
ACCOUNTING 
funds, and  
? the ‘income approach’, under which a grant is taken to income over one or 
more periods. 
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. 
Recognition of Government Grants 
A government grant is not recognised until there is reasonable assurance that: 
? the enterprise will comply with the conditions attaching to it; and  
? the grant will be received. 
Receipt of a grant is not of itself conclusive evidence that the conditions attaching 
to the grant have been or will be fulfilled. 
Non-monetary Government Grants 
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. 
Presentation of Grants Related to Specific Fixed Assets 
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. 
Two methods of presentation in financial statements of grants related to specific 
fixed assets are regarded as acceptable alternatives. 
Method I : 
? 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.  
 
 
3.115 
 
OVERVIEW OF ACCOUNTING STANDARDS 
 
? 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. 
Illustration 1 
Z Ltd. purchased a fixed asset for ` 50 lakhs, which has the estimated useful life of 5 
years with the salvage value of ` 5,00,000. On purchase of the assets government 
granted it a grant for ` 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.  
Solution 
Journal in the books of Z Ltd. 
Year Particulars ` (Dr.) ` (Cr.) 
1st Fixed Assets Account  Dr. 50,00,000   
   To Bank Account  50,00,000  
 (Being Fixed Assets purchased)   
 Bank Account  Dr. 10,00,000   
   To Fixed Assets Account  10,00,000  
 (Being grant received from the government)   
 Depreciation Account  Dr.  7,00,000   
   To Fixed Assets Account   7,00,000  
 (Being Depreciation charged on SLM)   
 Profit & Loss Account  Dr. 7,00,000  
   To Depreciation Account  7,00,000 
 (Being Depreciation transferred to P/L Account)   
2nd Depreciation Account  Dr. 7,00,000   
   To Fixed Assets Account  7,00,000  
 (Being Depreciation charged on SLM)   
 Profit & Loss Account  Dr. 7,00,000  
   To Depreciation Account  7,00,000 
 (Being Depreciation transferred to P/L Account)   
 
 
 
3.116 
 
ACCOUNTING 
Method II: 
? 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.  
? 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.  
? If a grant related to a non-depreciable asset requires the fulfilment 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.  
Illustration 2 
Z Ltd. purchased a fixed asset for ` 50 lakhs, which has the estimated useful life of 5 
years with the salvage value of ` 5,00,000. On purchase of the assets government 
granted it a grant for ` 10 lakhs. Pass the necessary journal entries in the books of 
the company for first two years if the grant is treated as deferred income. 
Solution 
Journal in the books of Z Ltd. 
Year Particulars  ` (Dr.)   ` (Cr.)  
1st Fixed Assets Account   Dr. 50,00,000   
   To Bank Account  50,00,000  
 (Being fixed assets purchased)   
 Bank Account   Dr. 10,00,000   
   To Deferred Government Grant Account  10,00,000  
 (Being grant received from the government)   
 Depreciation Account   Dr.  9,00,000   
   To Fixed Assets Account   9,00,000  
 (Being depreciation charged on SLM)   
 Profit & Loss Account  Dr. 9,00,000  
   To Depreciation Account  9,00,000 
 (Being depreciation transferred to P/L Account)   
 Deferred Government Grants Account   Dr. 2,00,000  
Page 5


 
 
3.113 
 
OVERVIEW OF ACCOUNTING STANDARDS 
 
 2.6 AS 12: ACCOUNTING FOR GOVERNMENT  
  GRANTS  
Introduction 
AS 12 deals with accounting for government grants such as subsidies, cash 
incentives, duty drawbacks, etc. and specifies that the government grants should 
not be recognised until there is reasonable assurance that the enterprise will 
comply with the conditions attached to them, and the grant will be received. The 
standard also describes the treatment of non-monetary government grants; 
presentation of grants related to specific fixed assets and revenue and those in the 
nature of promoters’ contribution; treatment for refund of government grants etc. 
This Standard 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. 
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 therefore 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. 
Government Grants 
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. 
Accounting Treatment of Government Grants 
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’ 
 
 
3.114 
 
ACCOUNTING 
funds, and  
? the ‘income approach’, under which a grant is taken to income over one or 
more periods. 
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. 
Recognition of Government Grants 
A government grant is not recognised until there is reasonable assurance that: 
? the enterprise will comply with the conditions attaching to it; and  
? the grant will be received. 
Receipt of a grant is not of itself conclusive evidence that the conditions attaching 
to the grant have been or will be fulfilled. 
Non-monetary Government Grants 
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. 
Presentation of Grants Related to Specific Fixed Assets 
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. 
Two methods of presentation in financial statements of grants related to specific 
fixed assets are regarded as acceptable alternatives. 
Method I : 
? 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.  
 
 
3.115 
 
OVERVIEW OF ACCOUNTING STANDARDS 
 
? 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. 
Illustration 1 
Z Ltd. purchased a fixed asset for ` 50 lakhs, which has the estimated useful life of 5 
years with the salvage value of ` 5,00,000. On purchase of the assets government 
granted it a grant for ` 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.  
Solution 
Journal in the books of Z Ltd. 
Year Particulars ` (Dr.) ` (Cr.) 
1st Fixed Assets Account  Dr. 50,00,000   
   To Bank Account  50,00,000  
 (Being Fixed Assets purchased)   
 Bank Account  Dr. 10,00,000   
   To Fixed Assets Account  10,00,000  
 (Being grant received from the government)   
 Depreciation Account  Dr.  7,00,000   
   To Fixed Assets Account   7,00,000  
 (Being Depreciation charged on SLM)   
 Profit & Loss Account  Dr. 7,00,000  
   To Depreciation Account  7,00,000 
 (Being Depreciation transferred to P/L Account)   
2nd Depreciation Account  Dr. 7,00,000   
   To Fixed Assets Account  7,00,000  
 (Being Depreciation charged on SLM)   
 Profit & Loss Account  Dr. 7,00,000  
   To Depreciation Account  7,00,000 
 (Being Depreciation transferred to P/L Account)   
 
 
 
3.116 
 
ACCOUNTING 
Method II: 
? 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.  
? 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.  
? If a grant related to a non-depreciable asset requires the fulfilment 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.  
Illustration 2 
Z Ltd. purchased a fixed asset for ` 50 lakhs, which has the estimated useful life of 5 
years with the salvage value of ` 5,00,000. On purchase of the assets government 
granted it a grant for ` 10 lakhs. Pass the necessary journal entries in the books of 
the company for first two years if the grant is treated as deferred income. 
Solution 
Journal in the books of Z Ltd. 
Year Particulars  ` (Dr.)   ` (Cr.)  
1st Fixed Assets Account   Dr. 50,00,000   
   To Bank Account  50,00,000  
 (Being fixed assets purchased)   
 Bank Account   Dr. 10,00,000   
   To Deferred Government Grant Account  10,00,000  
 (Being grant received from the government)   
 Depreciation Account   Dr.  9,00,000   
   To Fixed Assets Account   9,00,000  
 (Being depreciation charged on SLM)   
 Profit & Loss Account  Dr. 9,00,000  
   To Depreciation Account  9,00,000 
 (Being depreciation transferred to P/L Account)   
 Deferred Government Grants Account   Dr. 2,00,000  
 
 
3.117 
 
OVERVIEW OF ACCOUNTING STANDARDS 
 
   To Profit & Loss Account  2,00,000 
 (Being proportionate government grant taken to P/L 
Account) 
  
2nd Depreciation Account   Dr.  9,00,000   
   To Fixed Assets Account   9,00,000  
 (Being depreciation charged on SLM)   
 Profit & Loss Account   Dr. 9,00,000  
   To Depreciation Account  9,00,000 
 (Being depreciation transferred to P/L Account)   
 Deferred Government Grant Account   Dr. 2,00,000  
   To Profit & Loss Account  2,00,000 
 (Being proportionate government grant taken to P/L 
Account) 
  
Illustration 3 
Santosh Ltd. has received a grant of `8 crores from the Government for setting up a 
factory in a backward area. Out of this grant, the company distributed `2 crores as 
dividend. Also, Santosh Ltd. received land free of cost from the State Government but 
it has not recorded it at all in the books as no money has been spent. In the light of 
AS 12 examine, whether the treatment of both the grants is correct. 
Solution 
As per AS 12 ‘Accounting for Government Grants’, when government grant is 
received for a specific purpose, it should be utilised for the same. So the grant 
received for setting up a factory is not available for distribution of dividend.  
In the second case, even if the company has not spent money for the acquisition of 
land, land should be recorded in the books of accounts at a nominal value. The 
treatment of both the elements of the grant is incorrect as per AS 12.  
Presentation of Grants Related to Revenue 
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.