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

Lotus Foods Ltd. received Rs 9,00,000 from the government as immediate financial support to meet past losses, with no future related costs. How should it be treated under AS 12?

The grant is recognised as income in the period it becomes receivable, as an extraordinary item if circumstances justify. Because it compensates for losses already incurred with no future costs, there is no asset or future period to match it against, so deferral is inappropriate.

  1. ARecognised as income of the period in which it becomes receivable, as an extraordinary item if circumstances warrantCorrect
  2. BCredited to capital reserve
  3. CDeferred and recognised over 5 years
  4. DDeducted from the cost of fixed assets

Explanation

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 in the period in which it becomes receivable, and shown as an extraordinary item if appropriate. It is not related to assets, so no capital reserve or deferral applies.

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