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

Sundaram Textiles Ltd received a grant of Rs 12,00,000 from the State Government in April 2025 as immediate financial support to meet operating losses already incurred in the previous year, with no future conditions attached. How should the grant be treated under AS 12?

The grant is recognised as income in the period it becomes receivable, shown as an extraordinary item if appropriate, because it compensates losses already incurred with no future conditions. Capital reserve, asset deduction or deferral over years is not appropriate for such a grant.

  1. ACredited to capital reserve directly
  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, as an extraordinary item if materialCorrect
  4. DShown as deferred income and released over 5 years

Explanation

AS 12 treats a grant receivable as compensation for losses already incurred, or for immediate financial support with no future related costs, as income of the period in which it is receivable. It is shown as an extraordinary item if the circumstances warrant. Capital reserve or deferral applies to grants related to assets, not to this one.

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