AS 12:Accounting for Government Grants CA Final Course Paper 1 Financial reporting Chapter 1 Unit 12 CA. K. Shanmuganathan, FCA,ACMA
Learning Objectives The conditions for recognition of government grants Accounting treatment for government grants Disclosure requirements pertaining to government grants Accounting entries in the books of Business enterprise receiving the grant 2
Scope of the standard As12 describe the treatment for the following grants: Non- monetary grants ( grants in kind ) Grants related to specific fixed assets Grants related to revenue or promoter s contribution Treatment relating to refund of government grants 3
Important definitions of AS 12 Government Government grants 4
Government & Government grant Government refers to government, government agencies and similar bodies, whether local, national or international. Government grants are assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions. They exclude government assistance which cannot have value placed or normal trading transactions with the government by the business enterprise. 5
The standard does not deal with Accounting for grants in Financial statements reflecting the effect of changing prices Other indirect forms of assistance Government participation in the ownership of an enterprise 6
Prescribed accounting methods Capital approach The grant is treated as part of shareholders funds These are in the nature of promoters contribution That is by way of contribution towards its total capital outlay and No repayment is ordinarily expected in the case of such grants. Income approach The grant is taken to income over one or more periods. The enterprise earns grants 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. 7
Conditions for Recognition of Grants The recognition of government grant require reasonable assurance that: The enterprise will comply with conditions attached to them. Ultimate collection will be made in respect of grant already earned by an enterprise. 8
Non-monetary government grants Grants in the form of assets such as land, Plant and machinery, etc are covered under this category. Assets provided at concessional rate are accounted for at their cost of acquisition. When the assets are provided at free of cost ( as non-monetary grant), it will be recorded at nominal value. 9
Grants relating to Fixed assets Method of Accounting Alternative I Alternative II 10
Alternative I 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 asset Where the grant related to specific fixed asset equals the whole value of the asset the asset, the asset should be shown at nominal value in the balance sheet. 11
Alternative II Grants related to depreciable fixed assets can be treated as deferred income. The deferred income should be recongnised in the profit and loss statement on a systematic and rational basis over useful life of the asset. Such grants should be allocated to income over the periods and in proportion to the depreciation charged on those assets. 12
Alternative II (contd.) When the grants relate to non-depreciable assets like land, the amount should be credited to capital reserve. When the above grant is subject to fulfillment of certain obligations, the grant should be credited to income over the same period over which the cost of meeting such obligation is charged to income The balance of deferred income should be shown separately in the financial statements. 13
Example 1 Q. A Company purchased on April 1, 2010 special purpose machinery for Rs. 1 crore, and received Central Government subsidy for 25% of the price. Effective life of the machinery is 8 years. Explain the accounting treatment and quote the relevant AS. 14
Solution AS 12 Accounting for Government Grants permits two alternative treatments for grants related to specific fixed assets: Alternative I: The grant can be reduced from the gross value of the asset will be recognized at Rs.75 lakhs. The depreciation charge will automatically stand reduced to lower cost recognized. Alternative II: The grant can be treated as deferred income. Periodically, a part of this income is recognized in the profit and loss account, in the same proportion as the depreciation charged on the asset. 15
Solution Cont.. In this case, the asset of the company will be recognized at Rs.1 crore. The grant will be recognized as deferred income in the balance sheet at Rs. 25 lakhs. Periodically, the deferred amount will be transferred to the profit and loss account in the same proportion as the depreciation on the asset. The net effect is that depreciation charge will be reduced. 16
Revenue grants Government grant related to revenue should be recognised on a systematic basis in the profit and loss statement. Such recognition should be spread over the periods necessary to match them with the related costs, which the grant is intended to compensate. Such grants should be shown separately either under the head Other income or as an item of deduction from the related expense. 17
Promoter's contribution Government grants can be in the nature of promoters contribution. Examples include a capital subsidy for a project. Such grants should be credited to capital reserve and treated as part of shareholders funds. The reason being that no repayment is ordinarily expected in respect of such grants. 18
Refund of government grants A Government Grant that becomes refundable is treated as an extra ordinary item under AS 5 Amount refunded (or refundable) to the Government, should be accounted for by debit first to any unamortized 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 the P&L statement. The amount refundable and relating to a specific fixed asset should be accounted for by increasing the book value of the asset, or by reducing the capital reserve, or the deferred income balance, as appropriate. 19
Refund of government grants Cont.. 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. Where a grant which is in the nature of promoters contribution becomes refundable, in part or in full, the relevant amount is reduced from the capital reserve. 20
Refund of government grants Book value to be increased by refund Refund of grant ( treated as extra-ordinary item under AS 5 ) Reduction from value of asset If initially credited in capital reserve, it should be adjusted in capital reserve Treated as deferred credit Adjust unamortised portion of deferred credit. Adjust the remaining amount by debit to P & L 21
Depreciation After Adjustment of Refund Depreciation on the increased value of asset should be adjusted prospectively, during the remaining useful life of the asset. 22
Example 2 Final November 2011 Examination Financial reporting Question No. 1a) ( 5 marks ) 23
Problem Statement Primus Hospitals Ltd. had acquired 40 units of Doppler Scan machines from Holiver USA at a cost of US$ 165,100 per unit in the beginning of financial year 2008-09. The prevailing rate of exchange was Rs 50 to 1 US $. The acquisition was partly funded out of a government grant of Rs. 5 crores. The grant relating to such machines was given with a rider that in the event of a change in management, the entity is bound to return the grant. In April 2011, 51% control in the company was taken over by an overseas investor. The expected productive period of such an asset is normally reckoned as 5 years. The depreciation rate adopted was 20% p.a. on S.L.M. basis. 24
Problem Statement Cont.. The company had incurred expenditure of US $ 4000 towards bank charges and Rs 7500 per unit as sea freight. You are also informed that neither capital reserve nor deferred income account has been maintained by the company. You are required to suggest the accounting treatment as a result of the return of the grant, in the light of the relevant AS. 25
SOLUTION 26
Calculation of Revised Book value as on 1st April, 2010 Particulars Rs Acquisition of 40 Doppler Scan machines [40 machines X US $ 165,100 X Rs 50 = 33,02,00,000 Add: Bank charges paid ($ 4000 x Rs 50) 2,00,000 Add: Sea Freight on the above machines (40machines X Rs 7,500 per unit ) 3,00,000 Total landed cost as on 1st April, 2008 33,07,00,000 Less: Government grant 5,00,00,000 Value of 40 Doppler scan machines 28,07,00,000 Less: Depreciation @ 20% for 3 years on SLM basis (Rs 28,07,00,000 x 20% x 3 years) 16,84,20,000 27
Solution contd. WDV at the beginning of the year 2011-12 11,22,80,000 Add: Refund of Government grant 5,00,00,000 Revised Book value on 1st April, 2011 16,22,80,000 As per para 16 of AS 6 Depreciation Accounting, where the historical cost of a depreciable asset has undergone a change due to 28
Solution contd. - increase or decrease in long term liability on account of exchange fluctuations, - price adjustments, - changes in duties or similar factors, the depreciation on the revised unamortized depreciable amount should be provided prospectively over the residual useful life of the asset. 29
Solution contd. In this case, on 1st April, 2011, the remaining useful life is only two years i.e. 2011-12 & 2012-13. Hence the WDV of Rs 16,22,80,000 is to be written off under SLM @ 50% each year. i.e. Rs 8,11,40,000 per year. The Government grant of ` 5 crores that becomes refundable should be accounted for as an extraordinary item as per AS 12 Government Grants., The related disclosure of the increased depreciation of Rs 2.5 crores (i.e. Rs 8,11,40,000 Rs 5,61,40,000) consequent to the return of such grant should also be made. (old depreciation = 28,07,00,000 X 20/100=5,61,40,000) 30
Journal entry S.NO. PARTICULARS DEBIT RS. CREDIT RS. 1 Receipt of government grant for non-depreciable FA Bank A/c Dr. To Fixed Asset / Capital Reserve xxx Xxx Note: If there is no obligation attached which requires expenditure to be incurred, then the above entry can be passed. 31
Journal entry S.NO. PARTICULARS DEBIT RS. CREDIT RS. 1 Receipt of government grant for non-depreciable FA Bank A/c Dr. To Deferred government grant A/c xxx Xxx Note: If there is an obligation to incur expenditure for a particular period, then the above entry can be passed. ( Example for years ) 32
Government grant for depreciable fixed assets S.NO. PARTICULARS DEBIT RS. 1 Credit the grant to Fixed assets (Alternative I) Bank A/c Dr. To Fixed assets A/c xxx CREDIT RS. Xxx 2 Credit the grant to deferred grant ( Alternative II ) Bank A/c Dr. To Deferred grant A/c 3 Amortisation of grant during useful life (Alternative II) Deferred grant A/c Dr. To Profit & loss A/c xxx xxx xxx Xxx 33
Refund of Government grant for depreciable fixed assets S.NO. PARTICULARS DEBIT RS. CREDIT RS. 1 When grant credited to Fixed assets at the time of receipt (Alternative I) Fixed assets A/c To Bank A/c Dr. xxx xxx 2 When grant credited to deferred grant at the time of receipt (Alternative II) Deferred grant A/c Profit & loss A/c To Bank A/c Dr. xxx xxx 34
Example 2 A limited company has set up its business in a designated backward area and is entitled to a capital subsidy of 15% under a scheme in force. Accordingly, it received a subsidy of Rs 30 lakhs on an investment of Rs 200 lakhs in the unit. The accountant would like to treat it as income and reduce the losses made in the first year of its operations ending with 31 st March 2009. You are asked to advise the accountant, whether his view is in conformity with AS12. 35
Solution: According to AS 12, 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, 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. Therefore, in the given case the subsidy is given with reference to the total investment in the unit located in the backward area by way of promoter s contribution, the amount should be treated as capital reserve and not income. 36
Disclosure Requirements The accounting policy adopted for government grants, including the methods of presentation in financial statements The nature and extent of government grants recognised in the financial statements The grants of nonmonetary assets given at a concessional rate or free of cost. 37
Thank You 38