Government support often plays a key role in helping businesses grow, modernize, and stay competitive. Whether it’s a subsidy for setting up a new unit, funding for research, or reimbursement of certain costs, such assistance can significantly ease a company’s financial load. But how these grants are shown in the books of accounts can affect how a company’s performance looks to investors, lenders, and regulators.
To keep things consistent and transparent, the Institute of Chartered Accountants of India (ICAI) has issued Accounting Standard 12 (AS 12) — Accounting for Government Grants. This standard provides clear rules on how grants should be recognized, measured, and presented so that financial statements reflect the true picture of a company’s performance and position.
Meaning and Scope of AS 12
AS 12 deals with accounting treatment of government grants, which include financial assistance given by central or state governments or by agencies acting on their behalf. These grants may come in different forms — cash subsidies, tax refunds, or funds given for purchasing assets or meeting certain business expenses.
However, AS 12 does not apply to:
- Government participation in a company’s ownership (like equity investments), or
- Benefits that cannot be reasonably measured in monetary terms (for example, free advice or guarantees).
Simply put, AS 12 applies to financial assistance that can be quantified and directly impacts an enterprise’s income or assets.
Objectives of AS 12
The primary goal of AS 12 is to ensure that government grants are recorded fairly and consistently. It prevents companies from using grants to inflate profits or hide losses. The main objectives include:
- Defining when a grant should be recognized as income or capital.
- Ensuring that grants are matched with the costs they are meant to cover.
- Bringing uniformity in the accounting treatment across different entities.
- Promoting transparency and disclosure in financial reporting.
This way, AS 12 maintains a balance between showing the benefit of a government grant and not overstating financial performance.
Types of Government Grants
Government grants generally fall into two broad categories under AS 12:
1. Grants related to specific fixed assets
These are grants given for purchasing or constructing certain fixed assets, such as plant and machinery or infrastructure.
Example: A government may provide a ₹10 lakh subsidy to a manufacturing company for setting up a solar power unit.
2. Grants related to income
These grants are not tied to the purchase of assets but are meant to offset day-to-day business expenses or losses.
Example: A company receiving ₹5 lakh from the government to cover employee training or R&D costs.
The classification is important because it determines how and where the grant will appear in the financial statements.
Recognition of Government Grants
AS 12 clearly states that a government grant should be recognized only when there is reasonable assurance that:
- The enterprise will meet all the conditions attached to the grant, and
- The grant will actually be received.
Recognition before these assurances exist can lead to misleading financial results.
Presentation Methods under AS 12
AS 12 allows two accepted methods for presenting government grants in the financial statements — the Capital Approach and the Income Approach.
1. Capital Approach
This approach is followed when the grant is related to a capital asset. The grant is treated as part of shareholders’ funds rather than as income. There are two common ways to present it:
- The grant amount is deducted from the cost of the asset, or
- The grant is shown as a capital reserve under equity.
Example: If a company buys machinery worth ₹50 lakh and receives a subsidy of ₹10 lakh, the asset can be recorded at ₹40 lakh. Depreciation is then charged on the reduced amount.
This ensures the benefit of the grant is spread across the asset’s useful life through lower depreciation charges.
2. Income Approach
When the grant relates to income, it is shown in the profit and loss account — either immediately or over several periods, depending on the associated costs.
Example: If a firm receives a grant of ₹5 lakh to cover training costs, the amount can be credited to “Other Income” in the year the training expenses are incurred.
This method helps in matching income with the expenses that the grant is meant to offset, following the matching principle of accounting.
Refund of Government Grants
Sometimes, a company may have to refund a grant if it fails to meet the required conditions. AS 12 specifies how this should be handled:
- If the original grant was credited to income, the refund is treated as an expense in the period of repayment.
- If the grant was linked to a fixed asset, the refund is added back to the cost of the asset or reduced from the capital reserve.
This ensures that the financial statements remain accurate even after the reversal of earlier benefits.
Disclosure Requirements
Transparency is a key part of AS 12. Every entity that has received government assistance must disclose:
- The nature and amount of the grant.
- The accounting policy used for its recognition and presentation.
- The effect of the grant on financial results.
These disclosures help stakeholders understand how much government assistance contributed to the entity’s performance and ensure that comparisons between companies remain fair.
Relevance of AS 12 in Today’s Context
India’s business environment today offers multiple forms of financial support through schemes like Make in India, Startup India, and Production Linked Incentive (PLI). These initiatives often involve direct or indirect grants from the government.
By following AS 12, companies can ensure that such benefits are recorded fairly, transparently, and consistently. It helps prevent manipulation of earnings and builds confidence among investors, auditors, and other stakeholders.
AS 12 also aligns Indian practices with international standards such as IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance, helping Indian entities present globally comparable financial reports.
Conclusion
AS 12 – Accounting for Government Grants is a cornerstone of fair financial reporting in India. It ensures that government assistance is recognized responsibly and transparently, without distorting an enterprise’s profitability or financial health.
By following the principles of AS 12, businesses can strike the right balance between showing the real benefit of a grant and maintaining prudence in financial statements. For SMEs and large corporations alike, proper compliance with AS 12 not only supports accuracy but also builds trust, a foundation every business needs to grow with integrity and confidence.
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