CMA Intermediate · Financial Accounting

Accounting for Government Grants (AS 12) for CMA Inter

AS 12 covers government assistance in cash or kind given for compliance with conditions. You recognise a grant in profit or loss on a systematic and rational basis, matched to the related costs, never simply when cash is received. Asset grants are shown either as a deduction from the asset's cost or as deferred income.

What this chapter covers

AS 12 deals with assistance given by government to an enterprise, in cash or in kind, for past or future compliance with certain conditions. The chapter answers four questions. What counts as a government grant? When do you recognise it? How do you present a grant linked to a fixed asset? What happens with non-monetary grants and disclosure?

The core idea is the income approach. A grant is not a gain to book on the day the money arrives. You spread it over the periods in which the related costs are charged. The standard says that recognising grants on a receipts basis is not in accordance with the accrual assumption.

This chapter links to the rest of Financial Accounting through depreciation, fixed assets, accrual accounting and the preparation of final accounts. If you are comfortable with depreciation and the balance sheet, AS 12 is a short chapter. Most questions are small journal-entry and presentation problems.

AS 12 is a compact chapter with a clear set of rules, so it rewards a student who learns it properly. It can appear as a 2-mark MCQ on definitions and presentation, or as a short written or numerical question where you show the journal entries, the deferred income balance and the effect on depreciation. Marks are lost mainly through mixing up the two presentation methods or treating depreciable and non-depreciable asset grants alike. You can fix both with a few hours of practice.

Accounting for Government Grants (AS 12): topics in the order to study them

1AS 12 Scope and Definitions of Government GrantsStart here, because every later rule depends on knowing what a government grant is and what it excludes.
2Recognition of Government GrantsNext, learn the income approach and when a grant reaches profit or loss, since presentation builds on it.
3Presentation of Grants Related to AssetsThis is the most numerical part, so study it once recognition is clear and practise the two methods side by side.
4Non-Monetary Grants, Refund and DisclosureFinish with the special cases and disclosure points, which are short and easy to revise last.

How to prepare Accounting for Government Grants (AS 12)

You can prepare this chapter in a few short sessions. Focus on understanding the matching idea, then practise the entries until they are automatic.

Read the definition: government grants are assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions. Note the exclusions: assistance that cannot reasonably have a value placed on it, and dealings with government that cannot be distinguished from normal trading transactions.
Learn the recognition logic. Take a grant to profit or loss on a systematic and rational basis, matched to the related costs. Do not recognise it simply when cash is received, because a receipts basis is not in accordance with the accrual assumption.
Sort grants into types: grants for specific depreciable assets, grants for non-depreciable assets, and grants related to revenue. Write the treatment of each in one line.
Practise the two presentation methods on one example. Say a machine costs ₹50,00,000 with a ₹10,00,000 grant and a 5-year life, written off on a straight-line basis. Under Method 1 (deduct the grant from the asset), the asset is shown at ₹40,00,000 and depreciation is ₹8,00,000 a year. There is no deferred income credit under this method. Under Method 2 (deferred income), the asset is shown at ₹50,00,000 and depreciation is ₹10,00,000 a year. Only under this method is deferred income of ₹2,00,000 a year (₹10,00,000 ÷ 5) credited to profit or loss. The net charge is ₹10,00,000 − ₹2,00,000 = ₹8,00,000 under Method 2, which equals the ₹8,00,000 depreciation under Method 1. The net charge is ₹8,00,000 in both cases.
Learn the treatment of non-monetary grants: given free of cost, they are recorded at a nominal value, and given at a concessional rate, they are usually accounted for at their acquisition cost. Then memorise the two disclosure items.
In written answers, give the journal entries first, then the balance sheet and profit or loss presentation, then one line naming the method and the standard's principle. This earns step marks even if a figure is wrong.
Finish with 15 MCQs on definitions, methods and non-monetary grants. Review each wrong option and note why it fails.

Common mistakes in Accounting for Government Grants (AS 12)

Crediting the whole grant to profit or loss when it is received.
Fix: Remember the income approach. Match the grant to the related costs. For a depreciable asset, spread it in line with depreciation.
Charging depreciation on the full cost under the deduction method.
Fix: Under the deduction method, depreciate the reduced figure (cost less grant). Under the deferred income method, depreciate the full cost and credit deferred income to profit or loss.
Treating every grant for an asset the same way.
Fix: Depreciable asset: deferred income over its life. Non-depreciable asset: capital reserve, unless the grant has obligations attached, in which case credit income over the period the obligation cost is charged.
Recording non-monetary grants at fair value in every case.
Fix: Use the supplied rule: concessional assets are usually accounted for at acquisition cost, and assets given free of cost are recorded at a nominal value.
Spreading a grant that compensates for past expenses or losses over future years.
Fix: A grant receivable as compensation for expenses or losses of a previous period is recognised in the period in which it becomes receivable, as an extraordinary item if appropriate.
Writing only numbers in written answers, with no disclosure or policy point.
Fix: Add a line on the accounting policy and the presentation method used. Also state the nature and extent of the grants, as the standard requires.

Last-day revision: Accounting for Government Grants (AS 12)

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.

Accounting for Government Grants (AS 12) practice questions

Accounting for Government Grants (AS 12) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Accounting for Government Grants (AS 12): frequently asked questions

What are the two methods of showing a grant for a fixed asset in AS 12?

AS 12 regards two methods of presenting grants related to specific fixed assets as acceptable alternatives. Under the deferred income method, a grant for a depreciable asset is treated as deferred income. It is recognised in profit or loss on a systematic and rational basis over the asset's useful life, usually in proportion to depreciation. Learn the other method, which deducts the grant from the asset, from the ICAI study material.

Can a government grant be taken to income when it is received?

Not simply because it is received. AS 12 says that recognising income from grants on a receipts basis is not in accordance with the accrual assumption. You match the grant with the related costs over the periods needed.

How are non-monetary grants such as land recorded?

Non-monetary assets given at concessional rates are usually accounted for at their acquisition cost. Assets given free of cost are recorded at a nominal value. You must also disclose the nature and extent of such grants.

Does a grant for a non-depreciable asset always go to capital reserve?

Under the deferred income method, it usually does, because there is no depreciation charge to match. If the grant requires certain obligations to be fulfilled, you credit it to income over the same period in which the cost of meeting those obligations is charged.

How should I answer an AS 12 question in the exam?

Start with the journal entries and the yearly figures in a neat table-like list. Then state how the item appears in the balance sheet and in profit or loss. Close with a line naming the method used and the principle behind it, as this earns step marks.