Skip to content

CMA Intermediate · Financial Accounting · Accounting for Government Grants (AS 12)

Ganga Engineering Ltd received a ₹12 lakh government grant in cash during 2026-27, and the grant is meant to be matched with related costs incurred over 4 years. The finance head proposes to credit the entire ₹12 lakh to profit in the year of receipt. Which statement is correct under AS 12?

The proposal is incorrect. AS 12 requires grants to be recognised in the profit and loss statement on a systematic and rational basis over the periods needed to match them with related costs. Recognising income when cash is received contradicts the accrual assumption.

  1. ACorrect, because cash receipt is the best evidence of income
  2. BIncorrect, because the income approach requires recognition on a systematic and rational basis over the periods needed to match the related costs; receipts-basis recognition conflicts with accrual accountingCorrect
  3. CCorrect, provided the amount is shown as an extraordinary item
  4. DIncorrect, because grants can never be taken to the profit and loss statement

Explanation

Under the income approach, grants are recognised in the profit and loss statement on a systematic and rational basis over the periods needed to match them with related costs. Recognition on a receipts basis is not in accordance with the accrual assumption. Option 4 is wrong because the income approach does take grants to profit and loss.

Did you get it right without looking?

One question tells you little. A timed set on Accounting for Government Grants (AS 12) shows your real accuracy, how long you take and where you lose marks.

Practise Accounting for Government Grants (AS 12)Free diagnostic mock

More Accounting for Government Grants (AS 12) questions