AS 12: Non-Monetary Grants, Forgivable Loans and Refund of Grants

Understand Non-Monetary Grants, Forgivable Loans and Refund of Grants

Key rules to remember

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.

How to solve Non-Monetary Grants, Forgivable Loans and Refund of Grants questions

1. 1Identify the nature of the item: non-monetary asset, grant for past or immediate support, forgivable loan or refund.
2. 2For a non-monetary asset given free of cost, use fair value or nominal value, as the question states, and record the asset at that same amount. If the asset is acquired at a concessional rate, record it at its acquisition cost.
3. 3For a grant for past losses or immediate support, check when it became receivable and recognise it in profit and loss of that period. Show it as an extraordinary item only if the circumstances justify it.
4. 4For a forgivable loan, check whether reasonable assurance of waiver exists. If not, it stays a loan; if yes, treat it as a grant.
5. 5For a refund, find which method was used to show the original grant: deferred income or deduction from the asset.
6. 6Compute the unamortised balance at the date of refund. Apply it against the refund and charge the excess to profit and loss as an extraordinary item.
7. 7If the grant was deducted from the asset, add the refund back to the asset and compute the extra depreciation for the period up to the refund.
8. 8Write the journal entries and state the disclosure, using the extraordinary item label for the refund of a revenue or asset grant. For a promoter's contribution, reduce the capital reserve instead.

Quickest way: Refund of asset-related grant in four lines

Common mistakes in Non-Monetary Grants, Forgivable Loans and Refund of Grants

• Treating a grant for past losses as deferred income spread over future years.

  Students apply the asset-grant method to every grant.

  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.

  Students think no cash means no accounting.

  Fix: Record the asset at fair value or nominal value, with the matching grant entry, and disclose the policy.

• Calling a forgivable loan a grant from day one.

  The word 'forgivable' suggests the loan will be waived.

  Fix: Treat it as a grant only when there is reasonable assurance that the waiver conditions will be met.

• Treating the refund of a grant as a prior period item.

  Students link refund to an earlier year's grant.

  Fix: AS 12 treats the refund of a revenue or asset grant as an extraordinary item, not as a prior period item. Disclose its effect.

• Ignoring the unamortised deferred income when recording a refund.

  Students charge the full refund to profit and loss.

  Fix: Set the refund against the remaining deferred income first and charge only the excess.

• Forgetting catch-up depreciation when the grant was deducted from the asset.

  Students add back the refund but depreciate only from now.

  Fix: Compute the cumulative extra depreciation for the elapsed years that would have been charged had the grant not been deducted, and charge it at once.

Worked examples