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

Sagar Textiles Ltd received a government grant of Rs 40 lakh in April 2025 as a compensation for losses already incurred in the previous year due to a flood. No future obligations are attached to the grant. How should the grant be treated as per AS 12?

The grant is recognised as income in the period in which it becomes receivable, as an extraordinary item if appropriate. It compensates for losses already incurred with no future obligations, so AS 12 does not allow deferral over asset life or crediting capital reserve.

  1. ACredit it to capital reserve
  2. BRecognise it as income in the period in which it becomes receivable, as an extraordinary item if appropriateCorrect
  3. CDeduct it from the cost of plant and machinery
  4. DSpread it over the useful life of the fixed assets as deferred income

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 of the period in which it becomes receivable, and shown as an extraordinary item if appropriate. Capital reserve or deferral over asset life applies to grants related to assets or promoters' contribution, which is not the case here.

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