1.57 Query
(a) Accounting Treatment of Receipt of a Subsidy.
A company purchased an ambulance van for Rs. 30,200 against which it received a subsidy of Rs. 27,280 out of Cess Fund from Salt Department. Such grants are admissible for expenditure incurred on labour welfare projects. The company has to incur expenditure before claiming the subsidy from the Cess Fund. It is likely that the grant may not be received in the same year. The Committee’s advice is solicited as to whether the cost of ambulance should be exhibited in financial books at its original cost and depreciation provided thereon or at the actual cost to the company and depreciation provided thereon.
Opinion December 4, 1979
Paragraph 8.18 of the “Statement on Auditing Practices” (3rd edition) published by the Institute of Chartered Accountants of India reads as under: - “Grants, contributions and subsidies received for meeting capital expenditure can be shown by way of deduction from the cost of the relevant assets. Alternatively the same can be shown as a separate item in the balance sheet after “Reserves and Surplus” but before “Secured Loans”. If they are repayable in certain contingencies they should be appropriately described. In such a case the amount can be amortised over the life time of the assets in respect of which they have been received”.
Having regard to the above views, either of the procedures indicated by the querist would be in order i.e. depreciation could be provided on the net cost (subsidy is deducted from the cost of the asset) or on the original cost.
The accounting treatment of subsidy received is normally decided on the basis of the objective of the subsidy. If the objective of the subsidy is to contribute to the cost of the fixed asset, the same is credited to the account of the concerned asset. If the objective of the subsidy is to provide the entrepreneur with the capital outlay so that he could, to some extent, compensate various deficiencies, the same is credited to capital reserve account, although subsidy is calculated with reference to investment in fixed assets.
A subsidy, normally is accounted for on cash basis and would be credited to the fixed asset in the year in which the subsidy is received with consequential amendment to the depreciation provision retrospectively or credited to reserve depending upon the alternative adopted. However, if definite right to receive subsidy is created the same may be recorded in accounts, even though the amount is not actually received in the same year.
In case the asset is capitalised at the original cost and the subsidy received is credited to capital reserve, the capital reserve would gradually become a revenue reserve to the extent of the difference between the accumulated depreciation on the original cost and that on the net cost and could be transferred to Profit and Loss Account or to a revenue reserve as is desired.
Query b) Accounting Treatment of Receipt of Grants. A company has incurred an expenditure of Rs. 2,44,500/- on Deodani Kyars (a capital work of Kachha nature) against which they have received grants amounting to Rs. 2 lakhs from Government of India/ a State Government. Kindly advice whether the grant should be credited to capital reserve or the credit for the same should be taken in profit and loss account. As per the provisions of Income-tax Act, the expenditure incurred on ‘Kachha Works’ can be written off by way of depreciation is full in the year in which such expenditure is incurred.
Opinion December 4, 1979
The answer to query (a) above will apply mutatis mutandis to this also. When the asset could be depreciated at 100% two methods of accounting are available. One method is that the asset is capitalized and shown at its original cost in the ‘gross block’ of Fixed Assets schedule and the 100% depreciation under the column ‘depreciation written off to date’ and Nil value under ‘net block’ column. In the second method the entire asset is written off to the profit and loss account. Under both the methods subsidy received becomes a revenue since 100% depreciation is provided in the very first year and could be dealt with in whatever manner the management consistently follows. The amount of subsidy received may be exhibited as a deduction from the expenditure of Rs. 2,44,500/- in the Profit & Loss Account or may be credited to Profit and Loss Account.
Query (c) Provision of Auditor’s Expenses in Accounts. The audit of a company’s account is generally completed after the close of the financial year of the company. Kindly advise whether auditor’s TA/DA expenditure actually incurred after the close of the financial year should be taken as expenditure for the year in which it is actually incurred or whether provision/liability for the same should be made in the year for which the audit is conducted.
Opinion December 4, 1979
According to the explanation contained in sub-section (8) of Section 224 of the Companies Act, 1956, the auditor’s expenses shall be deemed to be part of auditor’s remuneration. Hence in actual practice the expenses reimbursible to the auditors are normally provided by the companies on an estimated basis in the year for which the audit is conducted. But in certain companies, only the audit fee is provided in the year to which the fees relate and the auditor’s expenses are accounted for as and when the auditors submit the bills for such expenses, because the exact amount of expenditure is not known at the time of closing of the accounts and also such expenses accrue in the next year. The Committee prefers the first method in view of the explanation in sub-section (8) of Section 224 of the Companies Act. However, so far as the expenses do not materially affect the accounts, either of the above method may be followed provided the method is consistently followed. Query
(d) Writing Back of unclaimed Credit Balance. A company wants to write back some unclaimed balance relating to creditors. Whether the credit in respect thereof should go to the profit and loss account or to the capital reserve being a capital receipt?
Opinion December 4, 1979
The question can be analysed in two parts depending upon the nature of expenditure for which the liability was created. If the unclaimed credit balance which is being written back has originated on a revenue account, such as purchase of materials, stocks and stores or expenses for services, the same should be credited to the profit and loss account. If the unclaimed credit balance which is being written back, originated on a capital account, i.e. for supply of capital assets, the same may be credited to the account of the concerned assets and depreciation may be adjusted on net value of the assets or the same may be credited to capital reserve account and depreciation is provided on the original cost of the asset. The amount credited to capital reserve may be gradually amortised and transferred to revenue reserve in proportion to depreciation provided in such account. Where the amount of unclaimed credit balance being written back is not very significant or material, it may not be worth while to dig up past records and ascertain the source of credit balance. In such a case, the unclaimed credit balance may be written back to the Profit and Loss Account, even though it might have originated on capital account. Query
e) Accounting Treatment for Royalty Rights A company has allotted shares free of cost of the value of Rs. 40 lakhs in lieu of the royalty rights which are being shown in the balance sheet as royalty rights at cost. So far the company has written off Rs. 2 lakhs out of the royalty rights out of its profits. Kindly advise whether the balance of Rs. 38 lakhs should be shown under fixed Assets or under Miscellaneous Expenditure (to the extent not written off or adjusted) or under some other head as per the requirements of Schedule VI to the Companies Act, 1956.
Opinion December 4, 1979
It should be examined first that whether the amount of Rs. 40 lakhs has been paid for use of royalty rights or for acquisition of royalty rights having useful life for several years. If the amount is paid for use of royalty rights and recurring payments are made the expenditure is generally of revenue nature. However, in this case it appears that a lump sum payment of Rs. 40 lakhs has been made for acquisition of royalty rights and the same will be useful for a number of years. Hence the expenditure of Rs. 40 lakhs appears to be in the nature of capital expenditure.
Schedule VI to the Companies Act, 1956, allows the cost of any patents, trade marks or design to be capitalised and shown under fixed assets. According to accounting conventions any outlay could be regarded as a fixed asset if the outlay itself is not the subject matter of trading or does not go into the product content physically in the process of manufacture, but serves only as means or a tool for trading/manufacturing activity. What are shown under “miscellaneous expenditure” are items of deferred revenue expenditure.
If the royalty rights referred to by the querist are of the nature or akin to patent or trade mark rights, these can be capitalised and included under “fixed assets” and depreciated over their useful life. If the usefulness of these rights is more in the initial years and likely to taper off in later years the method of depreciation could be suitably adjusted accordingly. ___________________________ |