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

Ganga Textiles Ltd receives Rs 6,00,000 from the State Government in March 2027 as compensation for losses on a flood-hit unit incurred in the year ended 31 March 2026, with no further conditions. Under AS 12, how should it be treated?

The Rs 6,00,000 is recognised in the profit and loss statement of the period in which it becomes receivable, as an extraordinary item if appropriate. AS 12 treats compensation for earlier-period losses this way, with no restatement of the prior year or deferral.

  1. ACredited to capital reserve directly
  2. BRecognised in the profit and loss statement of the period in which it becomes receivable, as an extraordinary item if appropriateCorrect
  3. CAdjusted against the prior year's profit by restating that year
  4. DSpread equally over the next five years

Explanation

A grant receivable as compensation for expenses or losses incurred in a previous period is recognised in the income statement of the period in which it becomes receivable, as an extraordinary item if appropriate. Restating the earlier year or deferring it is not what the standard says.

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