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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 year the grant was sanctioned, as immediate financial support to meet losses already incurred in the previous year. No future related costs are expected and no conditions remain. How should the grant be treated under AS 12?

The grant is recognised as income in the statement of profit and loss of the period in which it becomes receivable. It compensates for losses already incurred and has no future related costs, so there is nothing to match it against and deferral or capital reserve treatment is not appropriate.

  1. ACredited to capital reserve
  2. BDeducted from the cost of plant and machinery
  3. CRecognised as income in the statement of profit and loss of the year it becomes receivableCorrect
  4. DShown as deferred income and spread over 10 years

Explanation

A grant receivable as compensation for expenses or losses already incurred, or as immediate financial support with no future related costs, is recognised as income in the period in which it becomes receivable. It is shown as an extraordinary item if the circumstances warrant it. Spreading it as deferred income is wrong because there are no future related costs to match against.

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