CMA Intermediate · Financial Accounting

Accounting for Government Grants (AS 12): formula sheet

Full chapter guide

Key formulas

Definition of government grants: Government grants = assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions; Para 3.2. Quote the three parts: giver, form (cash or kind), condition.
Exclusions from the definition: Excluded = (assistance that cannot reasonably be valued) + (transactions not distinguishable from normal trading); Para 3.2. Use these two points whenever asked what is not a government grant.
Grants related to specific fixed assets: Primary condition = purchase, construct or otherwise acquire the asset; Para 8.1. Extra conditions on type, location or holding period may also exist.
Presentation of grants related to revenue: Credit in profit and loss (separately or under 'Other Income'), or deduct from the related expense; Para 9.1. A typical example is a grant that compensates for expenses or losses (para 6.5).
Non-monetary grants: Concessional rate: record at acquisition cost. Free of cost: record at nominal value; Para 7.1. Applies to land or other resources received.
Recognition test: Recognise only if (i) reasonable assurance of compliance with conditions AND (ii) reasonable assurance the grant will be received; Both limbs must be met. Receipt of cash alone is not conclusive evidence.
Income approach matching: Grant income for the period = portion of grant matching the related cost charged in that period; Recognise on a systematic and rational basis. Do not recognise on a receipts basis.
Grant for specific expenses: Grant for specific expenses → income in the same period as those expenses; Applies where the expense period is readily ascertainable.
Refundable grant (revenue nature): Grant becoming refundable → treated as an extraordinary item (per AS 12 as notified; read with AS 5); Shown as an extraordinary item, not adjusted against past income.
Refundable promoters' contribution: Amount repayable reduces the capital reserve; Applies where the grant was in the nature of promoters' contribution.
Method 1: book value of asset: Book value = Gross cost of asset − Grant; Depreciation is charged on this reduced amount. If the grant is the whole or virtually the whole cost, show the asset at a nominal value.
Method 2: yearly credit to profit and loss: Grant credited = Total grant × (Depreciation of the year ÷ Total depreciation over life); Under straight line depreciation with no residual value this is Grant ÷ useful life. It follows the proportions in which depreciation is charged.
Deferred income balance: Closing deferred income = Grant received − Total amounts credited to profit and loss so far; Disclose it separately in the balance sheet.
Non-depreciable asset grant: Credit to capital reserve (no obligations); credit to income over the obligation period (with obligations); Applies under the deferred income method.
Non-monetary grant at concessional rate: Asset recorded at acquisition cost (the concessional price actually paid); AS 12 para 17. Do not record at market value.
Non-monetary grant free of cost: Asset recorded at nominal value; AS 12 para 17. Credit the same nominal amount to the grant or capital reserve as the question directs.
Promoters' contribution grant: Credit to Capital Reserve (not distributable as dividend, not deferred income); Para 10.1. Applies when given for total investment or total capital outlay and no repayment is ordinarily expected.
Refund of promoters' contribution grant: Capital Reserve A/c Dr. ; To Government / Bank A/c; Para 11.4. The amount recoverable by government is reduced from capital reserve.
Grant for past expenses or losses: Recognise in income statement of the period it becomes receivable; Para 6.5. Extraordinary item if appropriate under AS 5.
Disclosures: (i) accounting policy including presentation method; (ii) nature and extent of grants recognised, including non-monetary grants at concessional rate or free; Para 12.1.

Quick revision

Government grants are assistance by government in cash or kind for past or future compliance with certain conditions.
Assistance that cannot reasonably be valued, and transactions indistinguishable from normal trading, are excluded.
The income approach: recognise the grant in profit or loss on a systematic and rational basis over the periods that match the related costs.
Recognising grants on a receipts basis goes against the accrual assumption.
Two methods of presenting grants related to specific fixed assets are acceptable alternatives (para 8.2). One of them treats the grant as deferred income.
Under the deferred income method, a grant for a depreciable asset is credited to profit or loss in the proportions in which depreciation is charged.
A grant for a non-depreciable asset goes to capital reserve, unless it carries obligations. Then it is credited to income over the period in which the cost of meeting those obligations is charged.
Grants for specific expenses are taken to income in the same period as those expenses.
A grant that compensates for past expenses or losses is recognised in the statement of profit and loss of the period in which it becomes receivable, as an extraordinary item if appropriate.
Non-monetary assets given free of cost are recorded at a nominal value. Those given at a concession are usually recorded at acquisition cost.
Disclose the accounting policy, including the presentation methods, and the nature and extent of grants recognised, including non-monetary grants.

Common mistakes

Treating a sale to a government department at normal prices as a government grant. Fix: Apply the exclusion: a transaction not distinguishable from normal trading is not a grant (para 3.2).
Writing that grants are only in cash. Fix: The definition says 'cash or kind'. Non-monetary grants such as land are covered (para 7.1).
Recognising a grant as income as soon as cash is received. Fix: Remember that mere receipt is not conclusive evidence of compliance. Apply the two-gate test first, and recognise on accrual and matching, not on a receipts basis.
Checking only compliance with conditions and ignoring assurance of receipt. Fix: Write both limbs every time: reasonable assurance of compliance and that the grant will be received.
Charging depreciation on full cost under Method 1 Fix: Under Method 1, always compute depreciation on cost less grant.
Reducing depreciation base under Method 2 Fix: Under Method 2, depreciate full cost and show the grant separately as deferred income.
Recording a free non-monetary asset at market value. Fix: AS 12 para 17 requires a nominal value for an asset given free of cost.
Recording a concessional-rate asset at its market value. Fix: Use the acquisition cost, that is, the price actually paid at the concessional rate.

Exam tips

Learn the para 3.2 definition word for word in your own phrasing. It is the most likely 2-mark or 4-mark question.
In MCQs, look for the trap words 'normal trading' and 'cannot be valued'. These signal exclusions.
For classification questions, always underline the condition in the question. Asset acquisition means related to assets; compensation for costs means related to revenue.
Mention paragraph numbers only when you are sure; the definition and classification points earn the marks, not the numbers.
If a question mixes scope with presentation, answer scope first in one line, then move to treatment.
Always open your answer with the two-limb test from paragraph 13. Examiners look for both limbs.
In case studies, spot the trap: cash received but conditions doubtful means no income.
For a 14-mark theory question, contrast the capital approach with the income approach, giving two or three arguments for each, then quote paragraph 5.5 on recognition on a systematic and rational basis matched with costs.