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

Rajhans Textiles Ltd received a government grant of ₹6,00,000 in cash for the purpose of giving immediate financial support to meet losses already incurred in the previous year, with no future related costs expected. How should the grant be treated under AS 12?

The grant is recognised as income in the statement of profit and loss in the period it becomes receivable, with extraordinary item disclosure if appropriate. AS 12 requires this for grants compensating past losses or giving immediate support with no future related costs, so deferral or capital reserve treatment is not applicable.

  1. ACredited to capital reserve
  2. BDeducted from the cost of plant purchased in the current year
  3. CRecognised as income in the statement of profit and loss of the period in which it becomes receivable, shown as an extraordinary item if appropriateCorrect
  4. DCredited to deferred income and amortised over 5 years

Explanation

AS 12 states that 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. It may be shown as an extraordinary item if the circumstances warrant. Capital reserve or deferral applies to grants linked to assets or future costs, so those options are wrong.

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