presentation on accounting standard – 12 presented by: ca verendra kalra organised by on aug 05,...

PRESENTATION ON

ACCOUNTING STANDARD – 12

Presented by:CA Verendra Kalra

ORGANISED BY

ONAUG 05, 2008

ATONGC

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ACCOUNTING STANDARD – 12OVERVIEW


ILLUSTRATIONS

DISCLOSURES

REFUND

RECOGNITION ACCOUNTING

DEFINITIONS

SIGNIFICANCE

EXCLUSIONS

INTRODUCTION

AS 12

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ACCOUNTING STANDARD – 12INTRODUCTION

• AS-12 came into effect in respect of accounting periods commencing on or after 1.4.1992, but has become mandatory for accounting period commencing on or after 1.4.1994.

• The statement deals with the accounting for government grants.


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ACCOUNTING STANDARD – 12EXCLUSIONS FROM THE AS

The Accounting Standard does not deal with:

• Government assistance other than in the form of government grants. i.e. tax holiday in backward area, tax exemption in notified area

• Government participation in the ownership of the enterprise. i.e. investment by the Government as equity


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ACCOUNTING STANDARD – 12MEANING OF ‘GOVERNMENT GRANTS’

• Government Grants are assistance by the Govt. in the form of cash or kind to an enterprise in return for past or future compliance with certain conditions

• Government assistance, which cannot be valued reasonably, is excluded from Government Grants

• Those transactions with Government, which cannot be distinguished from the normal trading transactions of the enterprise, are not considered as Government Grants.These are sometimes called as subsidies, cash incentives, duty drawbacks etc.


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ACCOUNTING STANDARD – 12MEANING OF ‘GOVERNMENT GRANTS’

• Government refers to government, government agencies and similar bodies whether local, national or international.


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ACCOUNTING STANDARD – 12SIGNIFICANCE OF THE AS

The receipt of government grants by an enterprise is significant for preparation of the financial statements because:

• If a government grant has been received, an appropriate method of accounting is necessary

• It is desirable to give an indication of the extent to which the enterprise has benefited from such grant during the reporting period


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ACCOUNTING STANDARD – 12TYPES OF GOVERNMENT GRANTS


Monetary Grants Non Monetary Grants

• Eg: Grants related to depreciable fixed assets

• Eg:Grants in the form of assets such as land, plant & machinery etc.

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ACCOUNTING STANDARD – 12APPROACHES TOWARDS TREATMENT

OF GOVERNMENT GRANTS


Capital Approach Income Approach

• The grant is treated as a part of the shareholder’s funds

• The grant is taken as income for one or more periods

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ACCOUNTING STANDARD – 12ARGUMENTS IN SUPPORT OF CAPITAL

APPROACHThere are many arguments as to which approach is the correct accounting treatment of the government grants. Following are the arguments in support of capital approach -

• Many government grants are given with reference to the total investment in an undertaking or by way of contribution towards its total capital outlay and no repayment is ordinarily expected. Therefore, these should be credited directly to shareholders’ funds.


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ACCOUNTING STANDARD – 12ARGUMENTS IN SUPPORT OF CAPITAL

APPROACH• It is inappropriate to recognize government grants in the

profit and loss statement, since they are not earned but represent an incentive provided by government without related costs.

• Government grants are rarely gratuitous. The enterprise earns them through compliance with their conditions and meeting the envisaged obligations. Therefore, they should be taken to income and matched with the associated costs which the grant is expected to compensate.


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ACCOUNTING STANDARD – 12ARGUMENTS IN SUPPORT OF

INCOME APPROACH• As income tax and other taxes are charges against income,

government grants should also be dealt in the profit and loss statement, as they are an extension of fiscal policies.

• In case grants are credited to shareholder’s funds, no correlation is done between the accounting treatment of the grant and the accounting treatment of the expenditure to which the grant relates.


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ACCOUNTING STANDARD – 12ACCOUNTING TREATMENT OF

GOVERNMENT GRANTS• Accounting for government grant should be based on the

nature of the relevant grant. Grants which have the characteristics similar to those of promoter’s contribution should be treated as part of shareholder’s funds. Income approach may be more appropriate in the case of other grants.


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ACCOUNTING STANDARD – 12ACCOUNTING TREATMENT OF

GOVERNMENT GRANTS• In case of Income approach, Government grants should be

recognized in the profit and loss statement on a systematic and rational basis over the periods necessary to match them with the related costs. Income recognition of government grants on a receipt basis is not in accordance with the accrual accounting assumption.


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ACCOUNTING STANDARD – 12RECOGNITION OF GOVERNMENT

GRANTS• Government grants are considered for inclusion in

accounts:

o Where there is reasonable assurance that the

enterprise will comply with the conditions attached

to them, and

o Where such benefits have been earned by the

enterprise and it is reasonably certain that the

ultimate collection will be made


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GRANTS• Mere receipt of a grant is not necessarily a conclusive

evidence that conditions attaching to the grant have

been or will be fulfilled

• 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. This means that grants are recorded on accrual basis.


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GRANTS• A contingency arising after the grant has been recognized, is

treated in accordance with Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date.

• In certain circumstances, a government grant is awarded for the purpose of giving immediate financial support to an enterprise rather than as an incentive to undertake specific expenditure. In this case, the grant can be taken as income in the period in which the enterprise qualifies to receive it, as an extraordinary item


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GRANTS• Government grants may become receivable by an

enterprise as compensation for expenses or losses incurred in a previous accounting period. Such a grant is recognized in the income statement of the period in which it becomes receivable, as an extraordinary item

• If the government grants take the form of non-monetary assets, such as land, given at concessional rates, then such assets are accounted for at their acquisition cost.


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ACCOUNTING STANDARD – 12RECOGNITION OF NON-MONETARY

GOVERNMENT GRANTS

• Non-monetary assets given free of cost are recorded at a nominal value.


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ACCOUNTING STANDARD – 12ILLUSTRATION

Example 2

Suppose an asset with Rs.10 lakhs fair value is supplied by Government at -

• Concessional rate of Rs.3 lakhs, the accounting entry will be-

Fixed Asset Dr. 3,00,000

To Bank 3,00,000

(If it is depreciable fixed asset depreciation will be charged on Rs.3 lakhs).


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• Free of Cost, the accounting entry will be-

Fixed Asset Dr. 1.00(nominal value)

To Profit and loss account 1.00

(Asset will be shown at nominal value in the books till remains with the organization. When it is disposed it will be written off to profit and loss account).


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ACCOUNTING STANDARD – 12GRANTS RELATED TO SPECIFIC FIXED

ASSETS• Sometimes, government grants related to specific fixed

assets have conditions like an enterprise qualifying for them should purchase, construct or otherwise acquire such assets or they may restrict the type or location of the assets or the periods during which they are to be acquired or held. There are two methods for presentation of such grants related to specific fixed assets in financial statements.


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ACCOUNTING STANDARD – 12METHOD 1 FOR SPECIFIC FIXED

ASSETS GRANTS• The grant is shown as a deduction from the gross value of

the asset concerned in arriving at its book value. The grant is thus recognized in the profit and loss statement over the useful life of a depreciable asset by way of a reduced depreciation charge. Where the grant equals the whole, or virtually the whole, of the cost of the asset, the asset is shown in the balance sheet at a nominal value.


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ACCOUNTING STANDARD – 12METHOD 2 FOR SPECIFIC FIXED

ASSETS GRANTS• The grants related to depreciable assets are treated as deferred

income which is recognized in the profit and loss statement on a systematic and rational basis over the useful life of the asset, for example, in the proportions in which depreciation on related assets is charged. Grants related to non-depreciable assets are credited to capital reserve, as there is usually no charge to income in respect of such assets. However, if certain obligations are to be fulfilled, 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 to be disclosed in the balance sheet as Deferred Govt. Grants after Reserves but before Loans.


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ACCOUNTING STANDARD – 12GRANTS RELATED TO SPECIFIC FIXED

ASSETS• The purchase of assets and the receipt of related grants can

cause major movements in the cash flow of an enterprise. For this reason and in order to show the gross investment in assets, such movements are often disclosed as separate items in the statement of changes in financial position regardless of whether or not the grant is deducted from the related asset for the purpose of balance sheet presentation


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ACCOUNTING STANDARD – 12GRANTS RELATED TO REVENUE

• Government grants related to revenue should be recognized on a systematic basis in the profit and loss statement over the periods necessary to match them with the related costs which they are intended to compensate. Such grants should either be shown separately under 'other income' or deducted in reporting the related expense.


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ACCOUNTING STANDARD – 12GRANTS IN THE NATURE OF

PROMOTER’S CONTRIBUTION• Where the government grants are of the nature of

promoter’s contribution, they are treated as capital reserve which can be neither be distributed as dividend nor considered as deferred income


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Example 1

Suppose a fixed asset is purchased for Rs. 20 lakhs, and government grant received towards it is Rs. 8 lakhs. The asset is depreciable with Rs. 2 lakhs residual value and 4 years life, the accounting entries will be-

If it is a non-depreciable asset and no obligation are attached, then-

Bank Account Dr. 8,00,000

To Fixed assets/Capital Reserve 8,00,000


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Example 1

• If it is a non-depreciable asset and there is an obligation to incur expenses over 4 years, then-


To Deferred Government Grant 8,00,000

(The deferred grant will be written off to profit and loss account in 4 years i.e. Rs2 lakhs each year).


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Example 1-choice1

If it is a depreciable asset, then there are two choices,

Credit the grant to fixed assets-


To Fixed Assets 8,00,000

(The book value is reduced to Rs.12 lakhs. The estimated scrap value is Rs.4 lakhs and life is 4 years, hence depreciation to be charged on the asset every year will be Rs.2 lakhs).


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[Depreciation = (12 - 4)/4 = 2]

Net approach distorts the value of the asset and shows a comparatively lower asset base and higher return, which may mislead investors.


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Example 1-choice 2

Credit the grant as deferred income-


To Deferred government grant 8,00,000

(The book value of asset is Rs.20 lakhs, residual value is Rs.4 lakhs and life is 4 years, hence depreciation to be charged on Rs.4 lakhs per annum for 4 years).

Deferred government grant Dr. 2,00,000

To Profit and Loss 2,00,000


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(The grant has to be recognized in profit and loss account over the life of asset in proportion to depreciation. Depreciation is Rs4 lakhs per annum for 4 years, hence grant to be written off will be Rs.2 lakhs per annum for a year).


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ACCOUNTING STANDARD – 12REFUND OF GOVERNMENT GRANTS

When certain conditions are not fulfilled, government grants becomes refundable. A government grant that becomes refundable is treated as an extraordinary item.

• Refund of grants related to revenue

o The amount refund should be adjusted against any unamortized ‘deferred government grants’, if any.

o The remaining balance amount of refund should be charged to Profit and Loss Account.


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• Refund of grants in nature of promoter’s contribution

o Where a grant which is in the nature of promoter’s contribution becomes refundable on non-fulfillment of some specified conditions, the relevant amount recoverable by the government is reduced from the capital reserve.


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• Refund of grant related to specific assets:

o The refundable amount should be recorded by increasing the book value of the asset. Here the depreciation on the revised book value is provided prospectively over the residual useful life of the asset, or

o The refundable amount should be recorded by reducing the capital reserve, or the refundable amount should be adjusted with unamortized deferred income, as may be appropriate.


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Example 3

A fixed asset purchased for Rs.20 lakhs, government grant is received Rs.8 lakhs (useful life is 4 years, residual value Rs.4 lakhs).Grant becomes refundable in the 3rd year to the extent of Rs.6 lakhs. The accounting treatment under different alternatives will be-

• Non-Depreciable fixed asset

o Fixed Asset/ Capital Reserve Dr. 6,00,000

To Bank 6,00,000


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Example 3

• Depreciable fixed asset

o Fixed Asset Dr. 6,00,000

To Bank 6,00,000

(The balance of fixed asset a/c after 2 years depreciation was Rs.8 lakhs and now it will become Rs.14 lakhs. Assuming same residual value and remaining life of 2 years, Rs.5 lakhs depreciation will be charged in remaining 2 years).


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o Deferred Government grant Dr.4,00,000

Profit and loss Account Dr.2,00,000

To Bank 6,00,000

(Deferred grant a/c will become nil. The fixed asset will continue to be depreciated at Rs.4 lakhs p.a.).


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ACCOUNTING STANDARD – 12DISCLOSURES

The following disclosures are to be made in the financial statements:

• The accounting policy adopted for government grants, including the methods of presentation in the financial statements, and

• The nature and extent of government grants recognized in the financial statements, including grants of non-monetary assets given at a concessional rate or free of cost.


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ACCOUNTING STANDARD – 12RELEVANCE

• As per point 3 of Schedule 27 of the previous year’s audited financial statements the following disclosure was made:

“Government grants for acquisition of fixed assets are initially treated as Capital Reserve and are subsequently recognized as income in the P & L on a systematic basis over the useful life of the assets in the proportion in which depreciation on those assets is charged.”

• As per Schedule 2 of Reserves & Surplus an amount of Rs. 25.97 million is being recognized as addition made to Government grants during the year.


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Thank You

presentation on accounting standard – 12 presented by: ca verendra kalra organised by on aug 05,...

Documents

form of government grants

receipt of government

overview accounting

equity accounting standard

government agencies

correct accounting treatment

respect of accounting

ongc slide