AS-12 – Accounting for Government Grants

Government grants are assistance by Government in cash or kind to an enterprise for past or future compliances with certain conditions. Such grants are sometimes called by other names such as subsidies, cash incentives, duty drawback etc. There are two approaches to the treatment of Government grants. The first one is ‘capital approach’ under which a grant is treated as part of the shareholders’ funds and the second is the ‘income approach’ under which a grant is taken to income over one or more periods. Government grants related to specific fixed assets should be presented in the balance sheet by showing the grant as deduction from the gross value of the assets. Where the grant covers the total cost of the assets, the assets should be shown in the balance sheet at a nominal value. Alternatively, the grant may be treated as deferred income and allocated in the profit and loss account over the useful life of the assets. Grants related to non-depreciable asset should be credited to capital reserve.

Government grants related to revenue should be recognised on a systematic basis in the profit and loss account over the periods necessary to match them with related costs which they are intended to compensate. Government  grants of the nature of promoters’ contribution should be credited to capital reserve and treated as a part of shareholders’ funds. The standard recommends the following disclosures in the financial statements: (i) the accounting policy adopted for government grants, including the methods of presentation of financial statements; (ii) the nature and extent of government grants recognised in the financial statements, including grants of nonmonetary assets given at a concessional rate or free of cost.