TMI BlogAccounting for Government GrantsX X X X Extracts X X X X X X X X Extracts X X X X ..... tandard with the meanings specified: 3.1 Government refers to Government, Government agencies and similar bodies whether local, national or international. 3.2 Government grants are assistance by Government in cash or kind to an enterprise for past or future compliance with certain conditions. They exclude those forms of Government assistance which cannot reasonably have a value placed upon them and transactions with Government which cannot be distinguished from the normal trading transactions of the enterprise. Explanation 4. The receipt of government grants by an enterprise is significant for preparation of the financial statements for two reasons. Firstly, if a government grant has been received, an appropriate method of accounting therefor is necessary. Secondly, it is desirable to give an indication of the extent to which the enterprise has benefited from such grant during the reporting period. This facilitates comparison of an enterprise s financial statements with those of prior periods and with those of other enterprises. Accounting Treatment of Government Grants 5. Capital Approach versus Income Approach 5.1 Two broad approaches may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... most cases, the periods over which an enterprise recognises the costs or expenses related to a government grant are readily ascertainable and thus grants in recognition of specific expenses are taken to income in the same period as the relevant expenses. 6. Recognition of Government Grants 6.1 Government grants available to the enterprise are considered for inclusion in accounts : ( i ) where there is reasonable assurance that the enterprise will comply with the conditions attached to them; and ( ii ) where such benefits have been earned by the enterprise and it is reasonably certain that the ultimate collection will be made. Mere receipt of a grant is not necessarily a conclusive evidence that conditions attaching to the grant have been or will be fulfilled. 6.2 An appropriate amount in respect of such earned benefits, estimated on a prudent basis, is credited to income for the year even though the actual amount of such benefits may be finally settled and received after the end of the relevant accounting period. 6.3 A contingency related to a government grant, arising after the grant has been recognised, is treated in accordance with Accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the balance sheet at a nominal value. 8.4 Under the other method, grants related to depreciable assets are treated as deferred income which is recognised in the profit and loss statement on a systematic and rational basis over the useful life of the asset. Such allocation to income is usually made over the periods and in the proportions in which depreciation on related assets is charged. Grants related to non-depreciable assets are edited to capital reserve under this method, as there is usually no charge to income in respect of such assets. However, if a grant related to a non-depreciable asset requires the fulfilment of certain obligations, the grant is credited to income over the same period over which the cost of meeting such obligations is charged to income. The deferred income is suitably disclosed in the balance sheet pending its apportionment to profit and loss account. For example, in the case of a company, it is shown after Reserves and Surplus but before Secured Loans , with a suitable description, e.g. , Deferred government grants . 8.5 The purchase of assets and the receipt of related grants can cause major movements in the cash flow of an enterprise. For t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et or by reducing the capital reserve or the deferred income balance, as appropriate, by the amount refundable. In the first alternative, i.e. , where the book value of the asset is increased, depreciation on the revised book value is provided prospectively over the residual useful life of the asset. 11.4 Where a grant which is in the nature of promoters contribution becomes refundable, in part or in full, to the Government on non-fulfilment of some specified conditions, the relevant amount recoverable by the Government is reduced from the capital reserve. 12. Disclosure 12.1 The following disclosures are appropriate: ( i ) the accounting policy adopted for government grants, including the methods of presentation in the financial statements; ( ii ) the nature and extent of government grants recognised in the financial statements, including grants of non-monetary assets given at a concessional rate or free of cost. Main Principles 13. Government grants should not be recognised until there is reasonable assurance that (i) the enterprise will comply with the conditions attached to them, and (ii) the grants will be received. 14. Govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tems and Changes in Accounting Policies). 19. A contingency related to a government grant, arising after the grant has been recognised, should be treated in accordance with Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date. 20. Government grants that become refundable should be accounted for as an extraordinary item [ see Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies]. 21. The amount refundable in respect of a grant related to revenue should be applied first against any unamortised deferred credit remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount should be charged to profit and loss statement. The amount refundable in respect of a grant related to a specific fixed asset should be recorded by increasing the book value of the asset or by reducing the capital reserve or the deferred income balance, as appropriate, by the amount refundable. In the first alternative, i.e. , where the book value of the asset is increased, depreciation on the rev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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