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

Vindhya Auto Ltd received Rs 25,00,000 from the Government as compensation for losses already incurred due to a natural calamity, with no future related costs. How should the grant be treated under AS 12?

The grant is recognised as income in the period it becomes receivable, disclosed as an extraordinary item if appropriate. AS 12 treats grants compensating for losses already incurred, with no future related costs, as income immediately rather than capital reserve or deferred income.

  1. ACredited to capital reserve
  2. BRecognised as income in the period it becomes receivable, as an extraordinary item if materialCorrect
  3. CDeducted from the cost of fixed assets
  4. DShown as deferred income and amortised over 5 years

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 the circumstances warrant. It is not capital in nature and has no related asset to deduct from.

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