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Financial Accounting · Accounting for Government Grants (AS 12)

AS 12 Presentation of Grants Related to Assets

Updated 10 October 2026 · Fact-checked

AS 12 allows two methods for grants related to specific fixed assets. Either deduct the grant from the asset's gross value to get its book value, or treat it as deferred income and credit it to profit and loss over the useful life in the proportion of depreciation. Non-depreciable asset grants go to capital reserve.

Understand Presentation of Grants Related to Assets

A government may give you money to buy a specific fixed asset, such as a machine. AS 12 says two methods of presentation are acceptable alternatives. You pick one and apply it consistently.

Method 1: deduct from the asset. The grant is shown as a deduction from the gross value of the asset to arrive at its book value. Depreciation is then charged on the reduced amount. So the grant reaches profit and loss through a lower depreciation charge over the useful life. If the grant equals the whole, or virtually the whole, of the cost, the asset is shown at a nominal value.

Method 2: deferred income. The asset stays at full cost and is depreciated on full cost. The grant is carried as deferred income and credited to the statement of profit and loss on a systematic and rational basis over the useful life. This is usually in the same periods and proportions in which depreciation is charged. The unamortised balance is disclosed separately in the balance sheet. For a non-company entity, it is shown after 'equity' but before 'liability', described for example as 'Deferred government grants'.

Non-depreciable assets. Under the deferred income method, a grant for a non-depreciable asset such as land is credited to capital reserve, since there is usually no charge to income for such assets. But if the grant requires you to fulfil certain obligations, it is credited to income over the same period in which the cost of meeting those obligations is charged to income.

Why the two differ in look but not in profit. In both methods, the total profit effect over the asset's life is the same: depreciation net of the grant. Only the presentation changes. Method 1 shows lower depreciation. Method 2 shows full depreciation plus a separate grant income.

Key rules to remember

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.

How to solve Presentation of Grants Related to Assets questions

Use this order for any numerical question on asset-related grants.

  1. 1Identify the grant, the asset it relates to, the asset cost, useful life, residual value and depreciation method.
  2. 2Check whether the asset is depreciable. If not, use capital reserve, unless obligations are attached.
  3. 3Note which method the question asks for. If it asks for both, work them separately.
  4. 4Method 1: compute book value as cost less grant. Compute yearly depreciation on this amount.
  5. 5Method 2: compute depreciation on full cost. Compute the yearly grant credit in proportion to depreciation.
  6. 6Pass journal entries for receipt, purchase, depreciation and the transfer of deferred income.
  7. 7Show the balance sheet extract: asset at book value (Method 1) or asset at full cost less depreciation, plus deferred income balance (Method 2).
  8. 8Check that the net profit effect is the same under both methods.

Quickest way: Net charge check

When to use it: Use when the question asks only for the profit and loss effect or the book value at a year end.

  1. Method 1: net yearly charge = (Cost − Grant − Residual value) ÷ life for straight line.
  2. Method 2: depreciation on full cost, less grant ÷ life, gives the same net charge.
  3. Book value at year end under Method 1 = Cost − Grant − accumulated depreciation.
  4. Under Method 2, show asset at Cost − accumulated depreciation and deferred income as Grant − credits so far.
  5. Cross-check: Method 2 asset value less deferred income equals Method 1 book value.

Common mistakes in Presentation of Grants Related to Assets

  • Charging depreciation on full cost under Method 1

    You forget the grant has already reduced the asset's book value.

    Fix: Under Method 1, always compute depreciation on cost less grant.

  • Reducing depreciation base under Method 2

    You mix the two methods.

    Fix: Under Method 2, depreciate full cost and show the grant separately as deferred income.

  • Crediting the whole grant to profit and loss in the year of receipt

    You treat it like ordinary income.

    Fix: A grant for a depreciable asset is spread over the useful life in the proportion of depreciation.

  • Treating a land grant as deferred income amortised yearly

    You apply the depreciable asset rule to all assets.

    Fix: Land is non-depreciable. Credit the grant to capital reserve, unless obligations are attached, then credit income over the period the obligation costs are charged.

  • Omitting the deferred income balance from the balance sheet

    You show only the P&L credit.

    Fix: Show the unamortised balance separately. For a non-company entity, place it after 'equity' but before 'liability'.

  • Writing an asset at cost when the grant is virtually the whole cost under Method 1

    You overlook the nominal value rule.

    Fix: If the grant equals the whole or virtually the whole cost, show the asset at a nominal value.

Worked examples

Example 1

On 1 April 2026, Kaveri Engineering Ltd bought a machine for ₹10,00,000 and received a government grant of ₹2,00,000 for it. Useful life is 5 years, no residual value, straight line depreciation. Show the treatment for 2026-27 under both methods.

Show the solution
  1. Method 1: book value = ₹10,00,000 − ₹2,00,000 = ₹8,00,000.
  2. Depreciation = ₹8,00,000 ÷ 5 = ₹1,60,000.
  3. Closing book value = ₹8,00,000 − ₹1,60,000 = ₹6,40,000.
  4. Method 2: depreciation on full cost = ₹10,00,000 ÷ 5 = ₹2,00,000.
  5. Grant credited to profit and loss = ₹2,00,000 ÷ 5 = ₹40,000.
  6. Deferred income balance = ₹2,00,000 − ₹40,000 = ₹1,60,000.
  7. Machine at year end = ₹10,00,000 − ₹2,00,000 = ₹8,00,000.
  8. Net charge: Method 2 is ₹2,00,000 − ₹40,000 = ₹1,60,000, same as Method 1.

Answer: Method 1: depreciation ₹1,60,000; machine ₹6,40,000. Method 2: depreciation ₹2,00,000, grant income ₹40,000, machine ₹8,00,000, deferred income ₹1,60,000. Net charge is ₹1,60,000 in both.

Example 2

Using the data of Kaveri Engineering Ltd, pass the journal entries for the deferred income method for 2026-27 (the grant is received in the bank on the date of purchase).

Show the solution
  1. Purchase: Machinery A/c Dr ₹10,00,000 to Bank A/c ₹10,00,000.
  2. Grant receipt: Bank A/c Dr ₹2,00,000 to Deferred Government Grant A/c ₹2,00,000.
  3. Depreciation: Depreciation A/c Dr ₹2,00,000 to Machinery A/c ₹2,00,000.
  4. Transfer of grant: Deferred Government Grant A/c Dr ₹40,000 to Profit and Loss A/c (grant income) ₹40,000.
  5. Closing deferred income = ₹2,00,000 − ₹40,000 = ₹1,60,000, shown separately in the balance sheet.

Answer: Entries as above. Profit and loss shows depreciation ₹2,00,000 and grant income ₹40,000. Deferred income of ₹1,60,000 remains in the balance sheet.

Exam tips

  • Read the question for the method asked. If it says 'either', show one clearly and mention the alternative.
  • Always show the balance sheet extract. Examiners give step marks for the deferred income line.
  • Write the check that net profit effect is equal under both methods.
  • For land or non-depreciable assets, state the capital reserve rule and check for attached obligations.
  • In MCQs, look for options that mix depreciation bases. Method 1 uses reduced value, Method 2 uses full cost.

Practice questions from Accounting for Government Grants (AS 12)

Presentation of Grants Related to Assets in other exams

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

Presentation of Grants Related to Assets: frequently asked questions

Which method is better under AS 12?

AS 12 treats both as acceptable alternatives. Neither is preferred. Choose one and apply it consistently. Your exam question will usually tell you which to use.

Does the method change total profit?

No. Over the asset's life, the net charge is the same. Only the presentation in the balance sheet and profit and loss differs.

Where is deferred income shown in the balance sheet?

It is disclosed separately. For a non-company entity, AS 12 gives the example of showing it after 'equity' but before 'liability', described as 'Deferred government grants'.

How is a grant for land treated?

Land is non-depreciable. Under the deferred income method the grant is credited to capital reserve. If it requires fulfilling obligations, it is credited to income over the period in which the cost of meeting those obligations is charged.