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CA Intermediate · Advanced Accounting · AS 12 Accounting for Government Grants

Bharat Textiles Ltd received a government grant of ₹12,00,000 in the form of a non-refundable cash subsidy to compensate for revenue losses already incurred in the previous year because of a flood. No future conditions are attached to the grant. As per AS 12, how should the grant be treated?

The grant should be recognised as income in the period in which it becomes receivable, disclosed as an extraordinary item if appropriate. It compensates for losses already incurred and has no future conditions, so deferring it or crediting capital reserve would be wrong under AS 12.

  1. ACredit to capital reserve directly
  2. BRecognise as income in the period in which it becomes receivable, as an extraordinary item if appropriateCorrect
  3. CDeduct from the cost of plant and machinery
  4. DTreat as deferred income and spread over 5 years

Explanation

AS 12 provides that a grant receivable as compensation for expenses or losses already incurred, or for immediate financial support with no future related costs, is recognised as income of the period in which it becomes receivable, and shown as an extraordinary item if circumstances warrant. Deferral or capital reserve treatment applies to grants tied to assets or future costs, which is not the case here.

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