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Financial Accounting


Accounting Standard-XII

Accounting for Government Grants

Presented By:
What Accounting
Standard is?

Introduction to AS-XII :



Need for AS-XII

Methods of Accounting
Accounting Standards
ICAI premier accounting body took upon the leadership role by constituting the
accounting standard board on 21st april,1977.

ASB is to formulate accounting standards which have to be complied by the
business entities so that the financial statements are prepared in accordance
with generally accepted accounting principles

ACCOUNTING standards standardize diverse accounting policies with a view to:

 Eliminate the non-comparability of financial statements and improve the
reliability of financial statements

 Provide a set of standard accounting policies, valuation norms and disclosure

 Differences in the institutions ,traditions and legal systems from one country to
another give rise to differences in accounting standars adopted in different
What is Accounting Standard-12 ?

AS 12 is issued by the council of the Institute of Chartered
accountants of India on “Accounting for Government Grants”

This standard comes into effect in respect of accounting
periods commencing on or after 1-4-1992

This standard becomes mandatory in respect of accounts for
periods commencing on or after 1-4-1994
AS 12 deals with accounting for government grants – called
by other names such as subsidies,cash incentives,duty
drawbacks etc…

Does not deal with problems arising in financial statements
reflecting effects of changing prices

Government assistance other than in the form of government

Government participation in the ownership of the enterprise
Important Terms

Government Grants :
are assistance by government in cash or kind to an enterprise for
past or future compliance with certain conditions

Government refers to state or central government and its agencies
and similar bodies whether local, national or international

Duty drawbacks :

Cash incentives :

Why this AS12?
This is significant for two reasons:

If grant has been received appropriate method of accounting
is necessary

Indication of the extent to which the enterprise has benefitted

Facilitates comparison of financial statements with those of
prior periods and with other enterprises
Accounting treatment

This standard delineates two approaches:

CAPITAL APPROACH: grant treated as part of shareholders

INCOME APPROACH : grant taken to income over one or
more periods
Capital Vs Income Approach
Arguments in favour of capital approach:
Grants in nature of promoters contribution: no repayment
and directly credited to shareholders funds
Inappropriate to recognise in profit and loss statement, since
they are not earned
Arguments in support of income approach:
Government grants are rarely gratuitous
Grants are an extension of fiscal policies
Grants to be recognised in profit and loss statement on a
systematic and rational basis
Two conditions are to be fulfilled before a grant is recognized
in the accounts

First, the enterprise will comply with the conditions

Second, collection will be made in cases where the benefits
in respect of the grant or assistance is already “earned” by
Grant in nature of compensation for expenses or losses of
previous period , recognition would be governed by AS 5 as
extraordinary item

If any contingency aruse recognition would be governed by
AS 29

If grant is non-monetary in nature, recognition would be:

Actual cost basis where no concessions are involved

At nominal value,where it is a free of cost
Method of Accounting
In this standard method of accounting should be based
on the nature of the relevant grants. grants generally fall
into three category.
1.fixed assets related

2.Related revenue

3. Capital Related

Accounting treatment for these and related areas is
explained below.
Fixed assets

First alternative
Second alternative


Promoters contribution

Grants- rendered refundable
Fixed Assets
First Alternative :-Grants related to fixed assets presented in the
balance sheet by showing the grant as a deduction from the gross
value of the assets concerned in arriving at their book value.

If grant related to a specific fixed assets equal the whole, of the
cost of the asset, it shows in the balance sheet at a nominal value.

Second Alternative:-grant related to depreciable fixed assets can
be treated as as deferred income, such grant should be allocated in
which depreciation on those assets is charged.

If grant is related to nondepreciable assets like land the amount
should be created to capital reserve. the balance of defferd
income should be disclosed separately in the financial statement.
Government grants related to revenue should be
recognized on a systematic basis in the profit and loss
statement .such recognition should be spreads over the
periods necessary to match them with the related cost
,which the grant is in tented to compensate.

Such grant should be shown separately either under the
head ‘other income' or as an item of item of deduction
from the related to expense.
Promoters contributions

Govt grants can be in the nature of promoters
contribution examples included a capital subsidy for a
project ,such grant should be created to capital reserve
and treated as part of share holder funds, in as much as
no repayment is ordinarily expected in respect of such
Grants- related refundable
The amount refundable and relating to a specific fixed assets
should be accounted for by increasing the book value of the assets
,or by reducing the capital reserve ,or the deferred income
balance, as appropriate.

Where the book value of the assets is increased,depreaciation on
the revised book value is provided prospectively ,over the residual
useful ,life of the assets.

Where a grant ,which is in the nature of promoters' contribution
,becomes refundable ,in the part or in full, the relevant amount is
reduced from the capital reserve.

The accounting policy adopted for government grants,
including the methods of presentation in the financial

The nature and extent of government grants recognized in
the financial statement including grants of non monetary
assets given at a concessional rate or free of cost.