Financial Accounting · Accounting for Government Grants (AS 12)

AS 12 Scope and Definitions of Government Grants

Updated 10 October 2026 · Fact-checked

AS 12 deals with accounting for government grants: assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions. It excludes assistance that cannot reasonably be valued and transactions indistinguishable from normal trading. To answer, identify the giver, the condition attached, and whether the grant relates to a specific fixed asset or to revenue.

Understand AS 12 Scope and Definitions of Government Grants

A government grant is help given by government to a business. The help may be cash or something other than cash, such as land. In return, the business must comply with some conditions, either already complied with (past) or to be complied with (future). That is the heart of the definition in AS 12 (para 3.2).

Not every dealing with government is a grant. The standard's definition leaves out two things: forms of government assistance that cannot reasonably have a value placed on them, and transactions with government that cannot be distinguished from the normal trading transactions of the enterprise. For example, an ordinary sale of goods to a government department at normal prices is trading, not a grant.

Grants are then split by purpose. Grants related to specific fixed assets are those whose primary condition is that the enterprise should purchase, construct or otherwise acquire such assets (para 8.1). Other conditions may restrict the type or location of the assets, or the periods during which they are to be acquired or held. Grants related to revenue are dealt with separately in the standard (para 9). For example, a grant may become receivable as compensation for expenses or losses incurred in a previous period (para 6.5).

Grants may also be non-monetary, such as land or other resources given at concessional rates. It is usual to account for such assets at their acquisition cost. If given free of cost, they are recorded at a nominal value (para 7.1).

Key rules to remember

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.

How to solve AS 12 Scope and Definitions of Government Grants questions

Use this sequence for any question asking you to define, classify or test whether something falls under AS 12.

1Identify the giver. Is the assistance given by government?
2Check the form. Is it cash or kind (for example land given at concessional rates)?
3Look for a condition, past or future, that the enterprise must comply with. No condition and no real assistance means it may not be a grant.
4Test the exclusions: can a value reasonably be placed on the assistance, and is it distinguishable from normal trading? If not, it is outside the definition.
5Classify: if the primary condition is to purchase, construct or acquire a specific fixed asset, it is related to specific fixed assets. If it compensates for expenses or losses, treat it as related to revenue.
6For non-monetary grants, state the value: acquisition cost if concessional, nominal value if free.
7Write the conclusion in one line, quoting the definition words you used.

Quickest way: Three-question grant test

When to use it: For MCQs and short classification questions with little time.

Who gave it, and is it assistance rather than a normal trade deal? If it is a normal trade deal, stop: not a grant.
Is there a condition about compliance? If yes, it is a grant under the definition.
Is the main condition to acquire a specific fixed asset? Yes: related to specific fixed assets. If it compensates for expenses or losses: related to revenue.
If the grant is land or a similar resource: concessional means acquisition cost, free means nominal value.

Common mistakes in AS 12 Scope and Definitions of Government Grants

Treating a sale to a government department at normal prices as a government grant.
The word 'government' in the question makes students jump to the grant definition.
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.
Students remember grants as money received.
Fix: The definition says 'cash or kind'. Non-monetary grants such as land are covered (para 7.1).
Calling every grant received for an asset a grant related to specific fixed assets.
Students ignore the 'primary condition' wording.
Fix: The primary condition must be to purchase, construct or otherwise acquire the asset (para 8.1). A general grant for running costs is related to revenue.
Recording free land at its market value.
Students apply fair value logic from other topics.
Fix: Under para 7.1, land given free of cost is recorded at a nominal value; concessional assets are usually recorded at acquisition cost.
Forgetting the 'past or future compliance' part of the definition.
Students quote only 'assistance in cash or kind'.
Fix: Always include 'for past or future compliance with certain conditions' in a definition answer.

Worked examples

Example 1

Define 'government grants' as per AS 12 and state what the definition excludes. (4 marks)

Show the solution

Definition: government grants are assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions (para 3.2).
Exclusion 1: forms of government assistance which cannot reasonably have a value placed upon them.
Exclusion 2: transactions with government which cannot be distinguished from the normal trading transactions of the enterprise.

Answer: 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.

Example 2

Pragati Textiles Ltd receives the following: (a) ₹20,00,000 from a state government agency on the condition that it buys a specified machine; (b) ₹5,00,000 to compensate for expenses already incurred on a training programme; (c) land given free of cost by a state agency; (d) payment of ₹8,00,000 for cloth supplied at normal prices to a government department. Classify each.

Show the solution

(a) The primary condition is to acquire a specific fixed asset, so it is a grant related to specific fixed assets (para 8.1).
(b) The grant compensates for expenses already incurred and is not tied to acquiring an asset, so it is a grant related to revenue. Since it relates to expenses of a previous period, it is recognised in profit and loss in the period in which it becomes receivable (para 6.5).
(c) Land free of cost is a non-monetary grant. It is recorded at a nominal value (para 7.1).
(d) This is a normal trading transaction with government and cannot be distinguished from other sales, so it is not a government grant (para 3.2).

Answer: (a) grant related to specific fixed assets; (b) grant related to revenue; (c) non-monetary grant recorded at nominal value; (d) not a government grant, it is normal trading.

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.

Practice questions from Accounting for Government Grants (AS 12)

AS 12 Scope and Definitions of Government Grants in other exams

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

AS 12 Scope and Definitions of Government Grants: frequently asked questions

What is a government grant under AS 12?

It is assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions. Assistance that cannot reasonably be valued, and transactions not distinguishable from normal trading, are excluded.

How do grants related to assets differ from revenue grants?

A grant related to specific fixed assets has a primary condition that the enterprise purchases, constructs or otherwise acquires such assets. Grants related to revenue are dealt with separately in the standard, for example compensation for expenses or losses.

Are non-monetary grants covered by AS 12?

Yes. Land or other resources given at concessional rates are usually accounted for at acquisition cost. Assets given free of cost are recorded at a nominal value.

How is a grant for expenses already incurred recognised?

A grant that becomes receivable as compensation for expenses or losses of a previous accounting period is recognised in the income statement of the period in which it becomes receivable. It is shown as an extraordinary item if appropriate (para 6.5).