ICAI Notes- Unit 1: Other Accounting Standards | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
1.1 
 
a
    
 
CHAPTER 
9 
 
 
LEARNING OUTCOMES 
 
OTHER ACCOUNTING 
STANDARDS 
 
 
UNIT 1: ACCOUNTING STANDARD 12 ACCOUNTING 
FOR GOVERNMENT GRANTS 
 
  
After studying this unit, you will be able to comprehend the – 
? Accounting Treatment of Government Grants   
? Capital Approach versus Income Approach  
? Recognition of Government Grants  
? Non-monetary Government Grants  
? Presentation of Grants: 
? Related to Specific Fixed Assets  
? Related to Revenue  
? In the nature of Promoters’ contribution  
? Refund of Government Grants  
? Disclosures. 
  
© The Institute of Chartered Accountants of India
Page 2


 
1.1 
 
a
    
 
CHAPTER 
9 
 
 
LEARNING OUTCOMES 
 
OTHER ACCOUNTING 
STANDARDS 
 
 
UNIT 1: ACCOUNTING STANDARD 12 ACCOUNTING 
FOR GOVERNMENT GRANTS 
 
  
After studying this unit, you will be able to comprehend the – 
? Accounting Treatment of Government Grants   
? Capital Approach versus Income Approach  
? Recognition of Government Grants  
? Non-monetary Government Grants  
? Presentation of Grants: 
? Related to Specific Fixed Assets  
? Related to Revenue  
? In the nature of Promoters’ contribution  
? Refund of Government Grants  
? Disclosures. 
  
© The Institute of Chartered Accountants of India
a
 
 
 
 
ADVANCED ACCOUNTING 
 
9.2 
 
 1.1. 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. 
 1.2 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. 
© The Institute of Chartered Accountants of India
Page 3


 
1.1 
 
a
    
 
CHAPTER 
9 
 
 
LEARNING OUTCOMES 
 
OTHER ACCOUNTING 
STANDARDS 
 
 
UNIT 1: ACCOUNTING STANDARD 12 ACCOUNTING 
FOR GOVERNMENT GRANTS 
 
  
After studying this unit, you will be able to comprehend the – 
? Accounting Treatment of Government Grants   
? Capital Approach versus Income Approach  
? Recognition of Government Grants  
? Non-monetary Government Grants  
? Presentation of Grants: 
? Related to Specific Fixed Assets  
? Related to Revenue  
? In the nature of Promoters’ contribution  
? Refund of Government Grants  
? Disclosures. 
  
© The Institute of Chartered Accountants of India
a
 
 
 
 
ADVANCED ACCOUNTING 
 
9.2 
 
 1.1. 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. 
 1.2 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. 
© The Institute of Chartered Accountants of India
 
 
OTHER ACCOUNTING STANDARDS 
a
   
 
9.3 
 
 1.3 ACCOUNTING TREATMENT OF GOVERN-
MENT 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’ 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. 
 1.4  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. 
Example: 
X Ltd applies for a grant from the local authority towards a social cause. X Ltd. is 
required to meet certain conditions to be eligible for the receipt of grant. There is 
a reasonable assurance that X Ltd will receive the grant in time. However, after 
having applied for the grant, there is a likelihood that X Ltd may not be able to 
meet all the conditions attached to the grant. 
In such case, X Ltd should not recognise the grant in its books until there is a 
reasonable assurance that it would be able to meet all conditions attached to the 
grant.  
© The Institute of Chartered Accountants of India
Page 4


 
1.1 
 
a
    
 
CHAPTER 
9 
 
 
LEARNING OUTCOMES 
 
OTHER ACCOUNTING 
STANDARDS 
 
 
UNIT 1: ACCOUNTING STANDARD 12 ACCOUNTING 
FOR GOVERNMENT GRANTS 
 
  
After studying this unit, you will be able to comprehend the – 
? Accounting Treatment of Government Grants   
? Capital Approach versus Income Approach  
? Recognition of Government Grants  
? Non-monetary Government Grants  
? Presentation of Grants: 
? Related to Specific Fixed Assets  
? Related to Revenue  
? In the nature of Promoters’ contribution  
? Refund of Government Grants  
? Disclosures. 
  
© The Institute of Chartered Accountants of India
a
 
 
 
 
ADVANCED ACCOUNTING 
 
9.2 
 
 1.1. 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. 
 1.2 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. 
© The Institute of Chartered Accountants of India
 
 
OTHER ACCOUNTING STANDARDS 
a
   
 
9.3 
 
 1.3 ACCOUNTING TREATMENT OF GOVERN-
MENT 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’ 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. 
 1.4  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. 
Example: 
X Ltd applies for a grant from the local authority towards a social cause. X Ltd. is 
required to meet certain conditions to be eligible for the receipt of grant. There is 
a reasonable assurance that X Ltd will receive the grant in time. However, after 
having applied for the grant, there is a likelihood that X Ltd may not be able to 
meet all the conditions attached to the grant. 
In such case, X Ltd should not recognise the grant in its books until there is a 
reasonable assurance that it would be able to meet all conditions attached to the 
grant.  
© The Institute of Chartered Accountants of India
a
 
 
 
 
ADVANCED ACCOUNTING 
 
9.4 
 
 1.5  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. 
Example 
X Convent wishes to open a school in locality A. It applies to the State authority 
for grant of land. The State authority grants the land for construction of the the 
purposes of the school construction. The market value of the land is `  20 crore 
whereas However, the authority provides the land at a nominal cost of `  50 lakhs 
including cost of registration. The State authority requires that free education 
must be provided to the poor children by way of reserving 20% of the seats in the 
school for such children. There is a reasonable assurance that X Convent has a 
reason to believe it can will meet that the above stated condition attached to the 
grant. 
Thus, X Convent needs to would recognise the cost of the land at its acquisition 
cost of ` 50 lakhs. 
 1.6  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. 
Example 
The Central Government is planning to generate large employment in rural and 
backward regions. Thus, it is planning to give grants for the same to entities who 
will meet the required conditions. F Ltd applied for a grant to the Central 
Government. The Government will give the grant on the condition that, F Ltd will 
be required to construct a factory where it would need to employ at least 500 
© The Institute of Chartered Accountants of India
Page 5


 
1.1 
 
a
    
 
CHAPTER 
9 
 
 
LEARNING OUTCOMES 
 
OTHER ACCOUNTING 
STANDARDS 
 
 
UNIT 1: ACCOUNTING STANDARD 12 ACCOUNTING 
FOR GOVERNMENT GRANTS 
 
  
After studying this unit, you will be able to comprehend the – 
? Accounting Treatment of Government Grants   
? Capital Approach versus Income Approach  
? Recognition of Government Grants  
? Non-monetary Government Grants  
? Presentation of Grants: 
? Related to Specific Fixed Assets  
? Related to Revenue  
? In the nature of Promoters’ contribution  
? Refund of Government Grants  
? Disclosures. 
  
© The Institute of Chartered Accountants of India
a
 
 
 
 
ADVANCED ACCOUNTING 
 
9.2 
 
 1.1. 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. 
 1.2 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. 
© The Institute of Chartered Accountants of India
 
 
OTHER ACCOUNTING STANDARDS 
a
   
 
9.3 
 
 1.3 ACCOUNTING TREATMENT OF GOVERN-
MENT 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’ 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. 
 1.4  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. 
Example: 
X Ltd applies for a grant from the local authority towards a social cause. X Ltd. is 
required to meet certain conditions to be eligible for the receipt of grant. There is 
a reasonable assurance that X Ltd will receive the grant in time. However, after 
having applied for the grant, there is a likelihood that X Ltd may not be able to 
meet all the conditions attached to the grant. 
In such case, X Ltd should not recognise the grant in its books until there is a 
reasonable assurance that it would be able to meet all conditions attached to the 
grant.  
© The Institute of Chartered Accountants of India
a
 
 
 
 
ADVANCED ACCOUNTING 
 
9.4 
 
 1.5  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. 
Example 
X Convent wishes to open a school in locality A. It applies to the State authority 
for grant of land. The State authority grants the land for construction of the the 
purposes of the school construction. The market value of the land is `  20 crore 
whereas However, the authority provides the land at a nominal cost of `  50 lakhs 
including cost of registration. The State authority requires that free education 
must be provided to the poor children by way of reserving 20% of the seats in the 
school for such children. There is a reasonable assurance that X Convent has a 
reason to believe it can will meet that the above stated condition attached to the 
grant. 
Thus, X Convent needs to would recognise the cost of the land at its acquisition 
cost of ` 50 lakhs. 
 1.6  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. 
Example 
The Central Government is planning to generate large employment in rural and 
backward regions. Thus, it is planning to give grants for the same to entities who 
will meet the required conditions. F Ltd applied for a grant to the Central 
Government. The Government will give the grant on the condition that, F Ltd will 
be required to construct a factory where it would need to employ at least 500 
© The Institute of Chartered Accountants of India
 
 
OTHER ACCOUNTING STANDARDS 
a
   
 
9.5 
 
workers for 5 years. Total cost of the construction is expected to be ` 50 crore. 
The amount of the grant is ` 30 crore. 
F Ltd will be able to recognise the grant only if there is reasonable assurance that 
it will meet  o the condition of employing 500 workers for next 5 years. 
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.  
? 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)   
© The Institute of Chartered Accountants of India