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AS – 12 Government Grant

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Government means central, state, local government or government bodies or national/ international organizations. Grant means assistance in cash or kind whose value can be placed and are subject to certain conditions.

Recognition of government grant
A government grant should be recognized in the financial statements if the following conditions are satisfied.

  1. If a government grant is expected to realize or its collection is reasonably specific.
  2. A condition related to government grants has complied.

Accounting treatment of government grants
An entity may adopt any two of the accounting approaches to undertake the accounting treatment of government grants. These include:

  1. Capital approach
  2. Income approach

It shall be noted that the accounting treatment of government grants must be based on the nature of government grants. In contrast, other sets of grants must be treated as income in the financial statement. Accordingly, government grants are managed as income must be recognized in the profit and loss statement. Such income must be matched with the related cost in a reporting period.

In addition, government grants received on the receipt basis may not be recognized as income in the profit and loss statement. It is because such a government grant is not an income as per the accrual accounting assumption. The costs and expenses related to grant that needs to be recognized over the number of periods are typically determined with ease. Therefore, government grants related to specific expenses are treated as income in the same period in which such expenses should be recognized.

Types of grant

Type Grant Treatment
Income grant Reward for performance Transfer to profit and loss account
Bailout grant To meet for accumulated losses Transfer to profit and loss account
Expenses grant To meet specific expenses Transfer such grant to grant validity once expenses have been incurred; it should be transferred to profit and loss account.
Grant for non-depreciable assets For purchasing non-depreciable assets Such grant is credited to capital reserve
Grant for backwards reason or promoter contribution grant Government support for backward areas Such grant is credited to capital reserve
Grant for depreciable assets To acquire depreciable assets Such grant should be treated as per gross method and net method

Refund of grant
Whenever a grant is refunded, it should be debited where it was earlier credited. If the grant was credited to fixed assets, it should be debited to fixed assets, and depreciation will be charged from next year.

Disclosure requirement
An enterprise that is receiving the government grants need to disclose the following in the books of accounts:

  • Accounting policy adopted by an entity for government grants includes the methods of presentation in the entity’s financial statements.
  • Nature and extent of grants admitted in the financial statements.
  • Government grant policy should be disclosed
  • Reason for refund, if any, should be disclosed

A government grant is a highly competitive process. The paperwork is complex, and applicants must relate how the awarded funds will benefit the local community or the public. Receiving a government grant is an esteemed event, a sign an individual or nonprofit organization has a compelling, positive impact on a community or in a field of study or industrial sector. Often, it puts a project on the donor map, attracting other funding providers, both nonprofit and profit. It also might lend the grantee some influence with, or attention from, the sponsoring agency.

At AJSH, we assist our clients in bookkeeping, payroll, auditing, taxation, secretarial compliance’s and preparation of financial statements ensuring compliance’s with accounting standards. If you have any questions or wish to know more about AS-12, kindly contact us.


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