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

In March 2027, Bharat Engineering Ltd becomes entitled to a government grant of ₹6 lakh as compensation for losses it incurred in the previous accounting year. Which treatment follows AS 12?

The ₹6 lakh is recognised in the profit and loss statement of the period in which it becomes receivable, as an extraordinary item if appropriate. AS 12 does not allow restating the earlier year or deferring a grant compensating past losses.

  1. ARecognise it in the profit and loss statement of the period in which it becomes receivable, as an extraordinary item if appropriateCorrect
  2. BRestate the previous year's profit and loss by adding ₹6 lakh
  3. CCredit it to capital reserve permanently
  4. DDefer it and recognise it equally over the next five years

Explanation

For grants receivable as compensation for expenses or losses of a previous period, AS 12 requires recognition in the income statement of the period in which it becomes receivable, as an extraordinary item if appropriate. The prior year is not reopened, and spreading it over later years has no basis because the related costs are already past.

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