INDIAN ACCOUNTING STANDARD 20 5.

3. Assistance in the form of priority bidding status: A government specifies that

entities below a certain size are to be given priority in bidding for a particular type of
government contract by mandating a minimum number of such entities to obtain
bidding status. Although the entities will benefit from the quota, the value cannot be
identified and the effects of the assistance cannot be segregated from the trading
activities of the entities.
4. Assistance in the form of credit facilities at market rates: Three governments that
amongst themselves own just over 50% of the shares in an airline, participate in
granting it a revolving credit facility at a market rate of interest. This is not a
government grant as loan is provided at market rate of interest which any private
market participant might have accepted. However, it is a government assistance as
the benefit cannot be distinguished from normal trading activities of the airline.
The significance of the benefit in the above examples may be such that disclosure of the
nature, extent and duration of the assistance is necessary in order that the financial
statements may not be misleading.
3. Government grants are assistance by government in the form of transfers of resources to
an entity in return for past or future compliance with certain conditions relating to the
operating activities of the entity.
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 entity.
Government grants are sometimes called by other names such as subsidies, subventions,
or premiums.
4. Grants related to assets are government grants whose primary condition is that an entity
qualifying for them should purchase, construct or otherwise acqui re long-term assets.
Subsidiary 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.
5. Grants related to income are government grants other than those related to assets.

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 5.14 FINANCIAL REPORTING

(b) (second method) deducted in reporting the related expense.

The first method lays it foundation on the base:
(a) that it is inappropriate to net income and expense items and
(b) that separation of the grant from the expense facilitates comparison with other expenses
not affected by a grant.
It is argued for the second method:
(a) that the expenses might well not have been incurred by the entity if the grant had not been
available; and
(b) thus, presentation of the expense without offsetting the grant may therefore be misleading.
Both methods are regarded as acceptable for the presentation of grants related to income.
Disclosure of the grant may be necessary for a proper understanding of the financial statements.
Disclosure of the effect of the grants on any item of income or expense which is required to be
separately disclosed is usually appropriate.

Either presented in balance

sheet by setting up grant as
deferred income
Related to assets

Or deducted from the cost of

the asset
Presentation of
government grant
Presented as part of profit or
loss, either separately or
under 'other income'
Related to income
Alternatively, deducted in
reporting related expense

Illustration 9
A Ltd. received a government grant of ` 10,00,000 to defray expenses for environmental
protection. Expected environmental costs to be incurred is ` 3,00,000 per annum for the next 5
years. How should A Ltd. present such grant related to income in its financial statements?
Solution
As per paragraph 29 of Ind AS 20, Grants related to income are presented as part of profit or
loss, either separately or under a general heading such as „Other income‟; alternatively, they are
deducted in reporting the related expense.

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 INDIAN ACCOUNTING STANDARD 20 5.15

In accordance with the above, presentation of grants related to income under both the methods
are as follows:
Method 1: Credit in the statement of profit and loss
The entity can recognise the grant as income on a straight line basis i.e., ` 2,00,000 per year in
the statement of profit and loss either separately or under the head “Other Income”.
The supporters of this method consider it inappropriate to present income and expense items on
a net basis and that „separation of the grant from the expense facilitates comparison with other
expenses not affected by a grant‟.
Method 2: As a deduction in reporting the related expense
Since the grant relates to environmental expenses incurred/to be incurred by the entity, it can
present the grant by reducing the grant amount every year from the related expense i.e.,
environmental expense of ` 1,00,000 (i.e., net expense ` 3,00,000 – ` 2,00,000).
The supporters of this method are of the view that „the expenses might well not have been
incurred by the entity if the grant had not been available and presentation of the expense
without offsetting the grant may therefore be misleading‟.
The Standard regards both the methods as acceptable for the presentation of grants related to
income. However, method 2 may be more appropriate when the company can relate the grant to
a specific expenditure.
The Standard also provides that disclosure of the grant may be necessary for a proper
understanding of the financial statements. Disclosure of the effect of the grants on any item of
income or expense which is required to be separately disclosed is usually appropriate.
*****

1.8. REPAYMENT OF GOVERNMENT GRANTS

An entity may have to repay the government grant including in cases where conditions related to
the grant are not fulfilled by it.
A government grant that becomes repayable should be accounted for as a change in accounting
estimate and be treated in accordance with Ind AS 8, Accounting Policies, Changes in
Accounting Estimates and Errors.
The following steps should be followed in repayment of a grant related to income:
(a) The repayment should be applied first against any unamortised deferred credit recognised
in respect of the grant.
(b) To the extent that the repayment exceeds any such deferred credit, or when no deferred
credit exists, the repayment should be recognised immediately in profit or loss.

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 5.16 FINANCIAL REPORTING

The repayment of a grant related to an asset should be recognised either by reducing the
deferred income balance by the amount repayable or by increasing the carrying amount of the
asset.

Repayment of government grant

Related to income Related to asset

First applied *Either recognised by increasing the

towards any carrying amount of the asset
unapplied *The cumulative additional
deferred credit depreciation that would have been Or by reducing the
and then recognised in profit or loss to date in deferred income balance
charged to profit the absence of the grant shall be by the amount payable
and loss recognised immediately in profit or
account loss.
immediately * Check the possible impairment of the
new carrying amount of the asset.

Illustration 10
A Ltd. has received a grant of ` 10,00,00,000 in the year 20X1-20X2 from local government in
the form of subsidy for selling goods at lower price to lower income group population in a
particular area for two years. A Ltd. had accounted for the grant as income in the year
20X1-20X2. While accounting for the grant in the year 20X1-20X2, A Ltd. was reasonably
assured that all the conditions attached to the grant will be complied with. However, in the year
20X5-20X6, it was found that A Ltd. has not complied with the above condition and therefore
notice of refund of grant has been served to it. A Ltd. has contested but lost in court in
20X5-20X6 and now grant is fully repayable. How should A Ltd. reflect repayable grant in its
financial statements ending 20X5-20X6?
Solution
Note: It is being assumed that the accounting done in previous years was not incorrect and was
not in error as per Ind AS 8.
Paragraph 32 of Ind AS 20, states that a Government grant that becomes repayable shall be
accounted for as a change in accounting estimate (see Ind AS 8, Accounting Policies, Changes
in Accounting Estimates and Errors).

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 INDIAN ACCOUNTING STANDARD 20 5.17

Repayment of a grant related to income shall be applied first against any unamortised deferred
credit recognised in respect of the grant. To the extent that the repayment exceeds any such
deferred credit, or when no deferred credit exists, the repayment shall be recognised
immediately in profit or loss.
Repayment of a grant related to an asset shall be recognised by increasing the carrying amount
of the asset or reducing the deferred income balance by the amount repayable. The cumulative
additional depreciation that would have been recognised in profit or loss to date in the absence
of the grant shall be recognised immediately in profit or loss.
The following journal entries should be passed:
S. Particulars Nature of Account Dr./Cr. Amount
No. (` in crores)
(i) Repayment of Government Grant Expense (P/L) Dr. 10
To Grant repayable Balance sheet (Liability) 10
(Being recognition of repayment
of grant in statement of profit or
loss)
(ii) Grant repayable Balance sheet (Liability) Dr. 10
To Bank Balance sheet (Asset) 10
(Being grant refunded)

Assuming that no deferred credit balance exists in the year 20 X5-20X6, therefore repayment
recognised in P&L.
It may also be noted that the standard also provides that circumstances giving rise to repayment
of a grant related to an asset may require consideration to be given to the possible impairment
of the new carrying amount of the asset.
*****

1.9. DISCLOSURE
The following should be disclosed:
(a) the accounting policy adopted for government grants;
(b) the methods of presentation adopted for government grants in the financial statements;
(c) the nature and extent of government grants recognised in the financial statements;
(d) an indication of other forms of government assistance from which the entity has directly
benefited. At times, the significance of the benefit of government assistance may be such

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 5.20 FINANCIAL REPORTING

Treatment of various types of grant

S. Type Treatment
No.
1. Grant received in cash or as Manner of accounting does not change
a reduction of a liability to the
government
2. Forgivable loan from Treated as a government grant when there is reasonable
government assurance that the entity will meet the terms for
forgiveness of the loan
3. Government loan at a below-  Benefit is treated as a government grant
market rate of interest  Recognised and measured in accordance with
Ind AS 109.
Benefit = Initial carrying value of the loan determined as
per Ind AS 109 - the proceeds received
4. Grants received as part of a  Identify the conditions giving rise to costs and
package of financial or fiscal expenses which determine the periods over which
aids with conditions attached. the grant will be earned.
 It may be appropriate to allocate part of a grant on
one basis and part on another.
5. Grant receivable as  Shall be recognised in profit or loss of the period in
compensation for expenses which it becomes receivable
or losses already incurred or  Provide disclosure to ensure that its effect is clearly
for immediate financial understood.
support with no future related
costs
6. Government Assistance –  Government assistance to entities meets the
No Specific relation to definition of government grants in Ind AS 20
Operating Activities  Such grants should not be credited directly to
shareholders‟ interests and be recognised in profit
or loss on a systematic basis.
7. Government assistance Excluded from the definition of government grants which
cannot reasonably have a value placed upon them and
transactions with government which cannot be
distinguished from the normal trading transactions of the
entity.

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State whether the accounting treatment of the grants in the nature of promoters‟ contribution
as per AS 12 is also permitted under Ind AS 20 Accounting for Government Grants and
Disclosure of Government Assistance.
5. Rainbow Limited is carrying out various projects for which the company has either received
government financial assistance or is in the process of receiving the same. The company
has received two grants of ` 1,00,000 each, relating to the following ongoing research and
development projects:
(i) The first grant relates to the “Clean river project” which involves research into the effect
of various chemicals waste from the industrial area in Madhya Pradesh. However, no
major steps have been completed by Rainbow limited to commence this research as at
31st march, 20X2.
(ii) The second grant relates to the commercial development of a new equipment that can
be used to manufacture eco-friendly substitutes for existing plastic products. Rainbow
Limited is confident about the technical feasibility and financial viability of this new
technology which will be available for sale in the market by April 20X3.
In September 20X1, due to the floods near one of its factories, the entire production was
lost and Rainbow Limited had to shut down the factory for a period of 3 months. The State
Government announced a compensation package for all the manuf acturing entities affected
due to the floods. As per the scheme, Rainbow Limited is entitled to a compensation
based on the average of previous three months‟ sales figure prior to the floods, for which
the company is required to submit an application form on or before 30 th June, 20X2 with
necessary figures. The financial statements of Rainbow Limited are to be adopted on 31 st
May, 20X2, by which date the claim form would not have been filed with the State
Government.
Suggest the accounting treatment of, if any, for the two grants received and the flood-
related compensation in the books of accounts of Rainbow Limited as on 31 st March, 20X2.
6. An entity opens a new factory and receives a government grant of ` 15,000 in respect of
capital equipment costing ` 1,00,000. It depreciates all plant and machinery at 20% per
annum on straight-line basis. Show the statement of profit and loss and balance sheet
extracts in respect of the grant for first year under both the methods as per Ind AS 20.
7. A company receives a cash grant of ` 30,000 on 31 March 20X1. The grant is towards the
cost of training young apprentices. Training programme is expected to last for 18 months
starting from 1 April 20X1. Actual costs of the training incurred in 20X1-20X2 was ` 50,000
and in 20X2-20X3 ` 25,000. State, how this grant should be accounted for?

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 INDIAN ACCOUNTING STANDARD 20 5.25

Accounting of such grant

It may be further noted that as per paragraph 12 of Ind AS 20, government grants shall be
recognised in profit or loss on a systematic basis over the periods in which the entity
recognises as expenses the related costs for which the grants are intended to compensate
Grants related to income are presented as part of profit or loss, over a period of six years,
either separately or under a general heading such as „Other income‟. Alternatively, they
are deducted in reporting the related expense.
4. Paragraph 2 of Ind AS 20, “Accounting for Government Grants and Disclosure of
Government Assistance” inter alia states that the Standard does not deal with government
participation in the ownership of the entity.
Since ABC Ltd. is a Government company, it implies that government has 100%
shareholding in the entity. Accordingly, as per Ind AS 20, the entity needs to determine
whether the payment is provided as a shareholder contribution or as a government. Equity
contributions will be recorded in equity while grants will be shown in the Statement of Profit
and Loss.
Where it is concluded that the contributions are in the nature of government grant, the
entity shall apply the principles of Ind AS 20 retrospectively as specified in Ind AS 101
„First Time Adoption of Ind AS‟. Ind AS 20 requires all grants to be recognised as income
on a systematic basis over the periods in which the entity recognises as expenses the
related costs for which the grants are intended to compensate. Unlike AS 12, Ind AS 20
requires the grant to be classified as either a capital or an income grant and does not
permit recognition of government grants in the nature of promoter‟s contribution directly to
shareholders‟ funds.
5. Accounting treatment for:
1. First Grant
The first grant for „Clear River Project‟ involving research into effects of various
chemicals waste from the industrial area in Madhya Pradesh, seems to be
unconditional as no details regarding its refund has been mentioned. Even though the
research has not been started nor any major steps have been completed by Rainbow
Limited to commence the research, yet the grant will be recognised immediately in
profit or loss for the year ended 31 st March, 20X2.
Alternatively, in case, the grant is conditional as to expenditure on research, the
grant will be recognised in the books of Rainbow Limited over the year the
expenditure is being incurred.

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 5.26 FINANCIAL REPORTING

2. Second Grant
The second grant related to commercial development of a new equipment is a grant
related to depreciable asset. As per the information given in the question, the
equipment will be available for sale in the market from April, 20X3. Hence, by that
time, grant relates to the construction of an asset and should be initially recognised as
deferred income.
The deferred income should be recognised as income on a systematic and rational
basis over the asset‟s useful life.
The entity should recognise a liability on the balance sheet for the years ending
31st March, 20X2 and 31 st March, 20X3. Once the equipment starts being used in the
manufacturing process, the deferred grant income of ` 100,000 should be recognised
over the asset‟s useful life to compensate for depreciation costs.
Alternatively, as per Ind AS 20, Rainbow Limited would also be permitted to offset
the deferred income of ` 100,000 against the cost of the equipment as on 1 st April,
20X3.
3. For flood related compensation
Rainbow Limited will be able to submit an application form only after 31 st May, 20X2 ie
in the year 20X2-20X3. Although flood happened in September, 20X1 and loss was
incurred due to flood related to the year 20X1-20X2, the entity should recognise the
income from the government grant in the year when the application form related to it is
submitted and approved by the government for compensation.
Since, in the year 20X1-20X2, the application form could not be submitted due to
adoption of financials with respect to sales figure before flood occurred, Rainbow
Limited should not recognise the grant income as it has not become receivable as on
31st March,20X2.
6. (a) When grant is treated as deferred income
Statement of profit and loss – An extract
`
Depreciation (` 1,00,000 x 20%) (20,000)
Government grant credit (W.N.1) 3,000

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 INDIAN ACCOUNTING STANDARD 20 5.27

Balance Sheet - An extract

`
Non-current assets
Property, plant and equipment 1,00,000
Less: Accumulated depreciation (1,00,000 x 20%) (20,000) 80,000
????
Non-current liabilities
Government grant [12,000 – 3,000 (current liability)] 9,000
Current liabilities
Government grant (15,000 x 20%) 3,000
????
Working Note:
1. Government grant deferred income account
` `
To Profit or loss 3,000 By Grant cash received 15,000
(15,000 × 20%)
To Balance c/f 12,000
15,000 15,000

(b) When grant is deducted from cost of the asset

Statement of profit and loss – An extract
`
Depreciation [(` 1,00,000 – 15,000) x 20%] (17,000)
Balance Sheet - An extract
`
Non-current assets
Property, plant and equipment (1,00,000-15,000) 85,000
Less: Accumulated depreciation (17,000) 68,000
7. At 31st March 20X1 the grant would be recognised as a liability and presented in the
balance sheet as a split between current and non-current amounts.
` 20,000 [(12 months / 18 months) x 30,000] is current and would be recognised in profit
and loss for the year ended 31 st March, 20X1. The balance amount of ` 10,000 will be
shown as non-current.

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At the end of year 20X1-20X2, there would be a current balance of 10,000 (being the non-
current balance at the end of year 20X1-20X1 reclassified as current) in the balance sheet.
This would be recognised in profit in the year 20X2-20X3.
Extracts from the financial statements are as follows:
Balance Sheet (extracts)
31 March 31 March 31 March
20X1 20X2 20X3
Current liabilities
Deferred income 20,000 10,000 -
Non-current liabilities
Deferred income 10,000 - -
Statement of profit and loss (extracts)
31 March 20X2 31 March 20X3
Method 1
Other Income - Government grant received 20,000 10,000
Training costs (50,000) (25,000)
Method 2
Training costs (50,000 – 20,000) 30,000
Training costs (25,000 – 10,000) 15,000

© The Institute of Chartered Accountants of India