CA Intermediate · Advanced Accounting

AS 12 Accounting for Government Grants: formula sheet

Full chapter guide

Key formulas

Definition of government grant: Government grant = assistance by government, in cash or kind, to an enterprise, in return for past or future compliance with certain conditions; Government includes government agencies and similar bodies: local, national or international.
Recognition condition 1: Reasonable assurance that the enterprise will comply with the conditions attached to the grant; Test this even if cash is already received.
Recognition condition 2: Reasonable assurance that the grant will be received; Both conditions must be satisfied together before recognition.
Grant vs assistance: Government grant ⊂ Government assistance; Assistance that cannot be reasonably valued, or cannot be distinguished from normal trading transactions, is not a grant for AS 12 accounting.
Exclusions from scope: Excluded: (i) the effects of changing prices on grants; (ii) government participation in the ownership of the enterprise; (iii) government assistance in the form of income tax benefits (tax holidays, investment allowances, reduced tax rates, benefits in determining taxable income or tax liability); AS 12 excludes these three separate items, so it does not apply to any of them. A grant in the nature of promoters' contribution (given with reference to total investment, no repayment ordinarily expected) is different: it is within AS 12 and is credited to capital reserve as part of shareholders' funds. The two recognition conditions still apply to it.
Grant on depreciable asset: deduction method: Net cost of asset = Gross cost − Grant; Depreciation = on Net cost; Use when the question says the grant is deducted from the asset. Depreciation is charged on the reduced amount, so the grant flows to profit or loss automatically.
Grant on depreciable asset: deferred income method: Annual credit to P&L = Grant × (Depreciation of the year ÷ Total depreciation over the life); With straight-line depreciation and no residual value this is Grant ÷ useful life. Depreciation is charged on the full cost.
Grant for non-depreciable asset, no obligation: Credit Capital Reserve with the full grant; Not taken to profit or loss.
Grant for non-depreciable asset with obligation: Credit to income each year = Grant × (Cost of obligation met in the year ÷ Total cost of obligation); If the obligation is, for example, to build a factory on the land, spread the grant over the building's life in proportion to its cost charge.
Revenue grant: Recognise in P&L in the period of the related expense; Show as other income, or deduct from the related expense. If it compensates for expenses or losses already incurred, or gives immediate support, recognise it in the period it becomes receivable.
Promoters' contribution: Credit Capital Reserve; treat as shareholders' funds; Applies to grants given with reference to total investment or total capital outlay, with no repayment ordinarily expected.
Non-monetary grant recognition: Asset given free of cost: asset and grant recorded at fair value OR at nominal value. Asset acquired at a concessional rate: recorded at acquisition cost; For free assets, choose one policy and apply it consistently. Disclose the basis used.
Grant for past expenses or immediate support: Recognise in profit and loss of the period in which it becomes receivable; Disclose the amount. Show it as an extraordinary item only if the circumstances justify it.
Forgivable loan: Loan until waiver reasonably assured; then treat as grant; The test is reasonable assurance that the conditions for waiver will be met.
Refund of revenue grant: Set off against unamortised deferred credit first; any excess charged to profit and loss immediately; Treat the refund as an extraordinary item as required by AS 12.
Refund of grant related to a fixed asset (grant shown as deferred income): Reduce deferred income by the refund; excess over deferred income charged to profit and loss immediately; The refund is an extraordinary item. Cash paid equals the full refund.
Refund of grant related to a fixed asset (grant deducted from asset): Increase the asset's book value by the refund; depreciate the revised book value over the remaining useful life; The cumulative additional depreciation that would have been charged to date, had the grant not been deducted, is charged to profit and loss immediately, with the credit going to accumulated depreciation.
Refund of grant in the nature of promoter's contribution: Recorded by reducing the capital reserve (the grant was not credited to profit and loss); It is not an income or expense item and is not an extraordinary item.
Grant related to a depreciable asset: deduction method: Book value of asset = Cost − Grant; Depreciation = (Cost − Grant) ÷ Life (straight line, nil residual value); Profit and loss gets the benefit through lower depreciation. Do not also credit the grant to income.
Grant related to a depreciable asset: deferred income method: Yearly credit to P&L = Grant × (Depreciation of the year ÷ Total depreciable amount over life); The asset stays at full cost. The unamortised grant is shown as deferred income in the balance sheet.
Grant related to a non-depreciable asset: Credit to Capital Reserve (if no conditions requiring other obligations); If a condition requires a charge or obligation, credit to income over the periods that bear the cost of that obligation.
Revenue grant: Credit to P&L as separate income or deduct from the related expense; Match the grant to the costs it is meant to compensate.
Disclosures required: (i) Accounting policy and presentation methods; (ii) nature and extent of grants recognised, including non-monetary grants; (iii) unfulfilled conditions and other contingencies; Learn these three as a list. They are asked directly.

Quick revision

AS 12 covers government assistance in cash or kind for past or future compliance with conditions.
It excludes tax benefits like tax holidays and government participation in ownership.
Recognise a grant only if you are reasonably assured of meeting conditions and of receiving it.
A grant is not credited to profit directly; match it with the related costs.
Grants tied to depreciable assets are shown as deduction from the asset or as deferred income over the asset's life.
Grants for non-depreciable assets go to capital reserve, unless the grant carries conditions requiring the fulfilment of obligations. In that case it is credited to income over the periods that bear the cost of meeting those obligations.
A grant given as immediate financial support with no future costs is recognised as income in the period it becomes receivable.
A non-monetary asset given free may be recorded at fair value or at nominal value. For an asset given at a concessional rate, the acquisition cost is the price paid. Follow the method the question states.
A forgivable loan is treated as a grant when there is reasonable assurance it will be waived.
A grant in the nature of promoters' contribution goes to capital reserve and is not credited to profit and loss.
Refund of a revenue grant is first set off against unamortised deferred credit; the balance is charged as an extraordinary item.
Disclose the accounting policy, the method of presentation, and the nature and extent of grants recognised.

Common mistakes

Recognising a grant as income as soon as cash is received. Fix: Recognise only when there is reasonable assurance of both compliance and receipt. Until then, AS 12 does not allow the grant to be recognised. In practice, cash received is often held as a liability (advance) pending the conditions, but that is a commonly adopted practice, not a rule stated in AS 12. Base your answer on the non-recognition rule.
Treating tax holidays or reduced tax rates as government grants. Fix: AS 12 excludes assistance given as tax benefits. Remember that grants are transfers of resources, tax benefits are not.
Crediting the whole grant to profit or loss in the year of receipt. Fix: Receipt alone is not recognition. Credit the grant to profit or loss over the periods that bear the related cost, unless it compensates for costs already incurred or gives immediate support.
Charging depreciation on the full cost when the grant is deducted from the asset. Fix: Under deduction, compute depreciation only on cost less grant. Under deferred income, use full cost and show the grant credit separately.
Treating a grant for past losses as deferred income spread over future years. Fix: If no future cost is linked to the grant, recognise it fully in the period it becomes receivable.
Recording a free asset at zero and passing no entry. Fix: Record the asset at fair value or nominal value, with the matching grant entry, and disclose the policy.
Crediting a grant for a depreciable asset fully to income in the year received. Fix: Spread it over the asset life through lower depreciation or deferred income, unless it is immediate support.
Depreciating the asset at full cost when the deduction method is used. Fix: Depreciation base is cost less grant under the deduction method.

Exam tips

In theory questions, always write both recognition conditions: reasonable assurance of compliance and of receipt. Missing one loses marks.
Expect an MCQ asking which item is outside AS 12. Tax holidays, investment allowances and government equity participation are the usual answers.
Learn the exact line: grant is in cash or kind, in return for past or future compliance with conditions.
Use the provision, facts, conclusion format in case-based answers and end with a clear yes or no on recognition.
Link this topic with the capital and revenue approach and with non-monetary grants, since questions often combine recognition with treatment.
Always state the nature of the grant in your first line. Examiners award marks for correct classification before any calculation.
When the question does not specify a method for a depreciable asset, show both presentations if time permits, and point out that with straight-line depreciation and no residual value the net P&L charge is the same, because the grant is credited in proportion to depreciation.
Give journal entries for receipt of the grant, annual depreciation and the annual transfer of deferred income. Each entry is a separate step mark.