Recognition of Government Grant in Books of Accounts

Recognition of Government Grant in Books of Accounts.

                For the development of business and expanding economic base of the country government assets business in various ways and one of the waysfor assisting business is provision of Government grants. In India government provides many grants to businesses which fulfils various conditions attached to it for upliftment of the economy for example Government subsidy for small business for cold chain.

After receiving such grant its recognition and presentation in accounting system must be properly dealt with considering all accounting principles. Effect of government grant in accounting system is governed by IAS 20 and IND AS 20 and lets quickly dive into some of its major points.

As per the definition of Government grant'Government assistance is action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria' so we can easily understand that any economic benefit given by any government or any of its department or agency will be qualified as government grant subject to fulfilling conditions attached to it, which can be both immediate conditions or future conditions. Grants also can be both Capital in Nature that is for capital expenditure like purchase of long-term assets or Revenue in nature that is for expenditure other than capital expenditure.

Whatever be its nature and amount, government grants have to be recognised in books of Accounts as per accounting standards. As already mentioned In India IND AS 20 deals with it and its international version is IAS 20. Both accounting standards require that before recognising government grants there shall be reasonable assurance that conditions attached to it must be complied and grant will be received.

As per IAS 20 and IND AS 20 accounting effect of RevenueGrants andCapital Grants are given below

Accounting effect of Revenue Grant: -

Method 1	Method 2
Recognition: -Credit P&L a/c with the amount of grant in other income head	Recognition: -Deduct amount of grant from Relevant Expense.
General View: -This method facilitates recognition of Full amount of Government grants and expenditure incurred against it will be separately shown which gives the user of financial statements better understanding.	General View: - This method ensures expense recognition only if grant is received. That is this expense not incurred if no grant is received
Entry: - Cash Account Dr To Other Income (Govt. Grant)	Entry: - Bank Account Dr To Expenditure (Deduct from relevant exp.)

 

 

Accounting effect of Capital Grant: -

 

Method 1	Method 2
Recognition: -Deduct Grant Amount from cost of acquisition of capital assets and charge depreciation on reduced cost.	Recognition: - Recognise assets at full cost vis a vis charge depreciation on full costand create a Deferred Government grant account on liability side of balance sheet and reduce this account deferred account over the useful life of assets.
Entry: - Bank Account Dr To Fixed Assets (For which Grant Received)	Entry: - Bank Account Dr To DeferredGovernment Grant account.

 

 

Difference between IAS 20 and IND as 20: -

Sr No	Basis of Difference	IAS20	IND AS 20
1	Non-Monetary Grants	Can be shown at Fair value or Nominal Value	Shall be shown at fair Value.

 

Example: - X LTD has taken loan of 10,00,000 at the interest rate of 10%, the government is giving 5% interest subsidy and calculation of the same is given below.

 

 

Year	Interest (5%)	Amount to be paid at year end	PV of Amount to be paid
1	50,000	50,000	45,454.54
2	50,000	50,000	41,322.31
3	50,000	50,000	37,565.74
4	50,000	50,000	34,150.67
5	50,000	50,000	31,046.06
5	0	10,00,000(Principal)	620,921.32
	250,000	12,50,000	810,460.66

 

 

So here X LTD will recognize 189,539.3/- as government grant and will make following entry and 189,539.3/- is to be recognised in profit or loss on a systematic basis over the periods in which X Limited recognise as expenses the related costs for which the grant is intended to compensate and X Limited will pass following entry: -

 

Bank Account Dr  10,00,000

To Deferred Income                         810460.7

To Loan Account                              189539.3