1.45 Query: Accounting for capital grant received from Government.
1. A public sector company was formed in March, 1977, under section 25 of the Companies Act, 1956, with the objective of promoting trade through fairs, both in India and abroad. The subscribed capital of the company is Rs. 50 lakhs and paid up capital is Rs. 25 lakhs. The company is a grantee institution. Grant is released by the concerned ministry on the basis of a pattern of financial assistance, which is reviewed after 3/5 years. It is in receipt of two types of grants from the ministry –specified capital grant for specific projects and unspecified capital grant. The ministry has clarified that the latter grant is in the nature of a capital reserve to be utilised for creation of infrastructural facilities in Pragati Maidan, in a phased manner, to bring it on par with internationally accepted standards.
2. Accordingly, the specified capital grant has been adjusted by the company, reducing the grants spent on specified projects and has been accounted for in the financial books. Unspecified capital grant continues to be reflected in the balance sheet without adjustment.
3. To indicate the liquidity position of the company, a mention is made, in the Directors’ Report of capital grants by adding grants received and reducing therefrom the expenditure (without distinction being made in respect of specified or unspecified capital grant). As a result of the above practice, the figures of capital grant reflected in the balance sheet do not reconcile with the figures indicated in the Directors’ Report.
4. While auditing the accounts for the year 1989-90, the Principal Director of Commercial Audit & Ex-officio Member Audit Board have observed that:
“(i) [The company] has received Rs. 3,895.15 lakhs as capital grant since inception to March ’90. As per Directors’ Report Rs. 2,466.03 lakhs grant has been utilised, leaving a balance of Rs. 1,429.12 lakhs. The balance does not tally with the figures of capital grant shown against ‘Reserves and Surplus’ in the accounts. Hence, the balance sheet would require to be revised.
(ii) Out of Rs. 1,429.12 lakhs mentioned above, Rs. 949.04 lakhs has been paid to the Ministry of Urban Development in 1986-87, towards the cost of Pragati Maidan. Despite this transaction, [the company] continues to reflect this amount under loans and advances instead of adjusting it against the grant received, on the plea that the conveyance deed has not been finalised.”
5. The querist has further informed that the views of the statutory auditors are as below:
(i) Capital grant contributed by the ministry has the characteristics similar to those of a promoter’s contribution and it is to be utilised only towards the capital outlay of the company. The disclosure in the balance sheet for the financial year ended 31.3.1990, regarding the total capital grant form Government of India Rs. 3,895.15 lakhs is in accordance with paragraph nos. 3.1 and 4 of the Guidance Note on ‘Accounting for Capital Based Grants’ issued by the Institute of Chartered Accountants of India (No. 0 2 317 6) of 1984.
(ii) Pending the execution of a ‘Sale Deed’ by a registered instrument, the company does not acquire ownership rights of Pragati Maidan. The payment of Rs. 949.04 lakhs continues to be in the nature of a loan or advance and has been correctly reflected in the balance sheet. In the absence of legal title, the tax paid by the company is treated as a service charge and not property tax.
6. The querist’s views are as follows:
(i) Capital grant received by the company can be categorized into specified and unspecified. The specified capital grant has been adjusted by reducing the grant spent on specified projects and accounted for in the financial books. Unspecified capital grant continues to be correctly reflected in the balance sheet, as per the accounting practice.
(ii) The figures in the Directors’ Report indicate only the liquidity position of the company after adjusting expenditure against specified and unspecified grant. Therefore, figures in the balance sheet and Directors’ Report cannot be correlated.
(iii) Rs. 1,429.12 lakhs shown in the Directors’ Report does not include Rs. 949.04 lakhs paid as advance to Ministry of Urban Development/ CPWD towards the cost of Pragati Maidan Complex. The adjustment of an advance of Rs. 949.04 lakhs shall be carried out in the books after execution of the formal transfer deed. At present, the company is paying only those charges/taxes as are leviable on Government of India’s buildings.
7. The querist has informed that the matter was subsequently discussed with the Principal Director of Commercial Audit & Ex-officio Member Audit Board. While the interpretation of the company regarding the reflection of Rs. 949.04 lakhs under loans and advances as also the manner of reflection of capital grant in the Directors’ Report was agreed to, it was desired by them that the expert opinion of the Institute of Chartered Accountants of India should be obtained regarding the manner of treatment of non-specified capital grant in the balance sheet.
8. The querist has sought the opinion of the Expert Advisory Committee on whether the accounting treatment given to unspecified capital grants received from the Government of India and as reflected in the balance sheet of the company is in conformity with the standard accounting practice.
Opinion June 12, 1991
1. The Committee notes that although in the query the querist has referred to various accounting issues related to capital grants received by the company, he has sought the opinion of the Committee only on the issue whether the accounting treatment of the unspecified capital grant is proper. In view of this, the Committee refrains from expressing its views on the propriety or otherwise of accounting treatment in respect of the other matters. The opinion of the Committee given hereafter is, therefore, restricted to the question whether the accounting treatment of the unspecified grant received by the company is proper or not.
2. The Committee notes that the ministry concerned has given the grant, termed as ‘unspecified’, for the purpose of creation of infrastructural facilities in Pragati Maidan in a phased manner, to bring it at par with internationally accepted standards in this regard. The Committee further notes that the purpose of the grant was not for the acquisition or construction of a specific fixed asset at Pragati Maidan, but for the purpose of creation of infrastructural facilities thereat. The Committee is accordingly of the view that the grant is of the nature of the promoters’ contribution.
3. The Committee notes that the Research Committee of the Institute of Chartered Accountants of India has issued a Guidance Note on Accounting for Capital Based Grants. The relevant extracts of the Guidance Note are reproduced below:
“3. The following principal methods of accounting for grants or subsidies are available:
(i) the amount may be transferred to a capital reserve which should be regarded as not distributable as dividend: or
…………………..
4. Where the grant or subsidy is with reference to the total investment on an undertaking or by way of contribution towards the capital outlay of the undertaking and where such contribution has the characteristics similar to those of promoters’ contribution, it may be treated as a capital receipt. In such cases the method suggested in para 3(i) may be followed. It follows from this that the amount will not be available for distribution as dividend.”
4. On the basis of the above, the Committee is of the opinion that it is proper to treat the unspecified grant received from the ministry for the creation of infrastructural facilities in Pragati Maidan in a phased manner, as capital reserve. However, the utilised and unutilised portions of the grant can be shown separately as is done in the case of investment allowance reserve where amount of reserve utilised for specified purposes is transferred from Investment Allowance Reserve to Investment Allowance (Utilised) Reserve Account. _____________________________ |