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

Sundaram Textiles Ltd received a government grant of ₹6,00,000 in cash as immediate financial support to meet past operating losses, with no future related costs and no conditions attached. As per AS 12, how should the grant be treated in the books?

The grant should be recognised as income in the statement of profit and loss of the period in which it becomes receivable, because it compensates for losses already incurred or gives immediate support with no future related costs, so nothing needs to be deferred.

  1. ACredit to capital reserve
  2. BDeduct from the cost of plant and machinery
  3. CRecognise as income in the statement of profit and loss of the period in which it becomes receivableCorrect
  4. DRecognise as deferred income and spread 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 of the period in which it becomes receivable. Spreading it as deferred income is wrong because there is no future cost to match against.

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