1.30   Query:  

Accounting for government grants.

1. A consultancy and engineering company is engaged in design, procurement, project management and provision of technical and consultancy services for petroleum projects, refineries, oil fields, gas pipelines, off-shore engineering, petrochemical complexes etc. The company had made a proposal to the Ministry of Petroleum for establishing a research centre. The capital cost of the research centre was estimated at Rs.18.63 crores, which was further revised to Rs.24.15 crores. The proposed cost of the research centre was to be met by a loan of Rs. 6 crores and the grant of Rs.2 crores by Oil Industry Development Board (OIDB) and the balance amount from internal resources of the company. Subsequently, OIDB had given a loan of Rs. 6 crores repayable in 8 years, and a capital grant of Rs.2 crores for the construction of the research centre in the year 1984-85. As per the querist, the grant of Rs.2 crores was not for the purchase of any specific assets. (The querist has supplied the break-up of the assets at the research centre for the perusal of the Committee).

2. The querist has stated that Guidance Note on Accounting for Capital Based Grants, issued by the Institute of Chartered Accountants of India, provides that the Government gives such grant (i) by reference to the total investment made in an undertaking, or (ii) by reference to the capital expenditure incurred by an undertaking on fixed assets.  As per the querist, this grant was given by OIDB with reference to the total investment made by the company for setting up the research centre, consisting of a large number of facilities. The grant given by OIDB was in the nature of contribution towards capital outlay of the research centre and this contribution has the characteristics similar to those of promoters’ contribution and therefore has been treated as capital receipt and shown as capital reserve, which shall not be regarded distributable as dividend. This treatment, as per the querist, is in conformity with para 3.1 of the said guidance note.

3. During the course of the audit of accounts of the company for the year 1992-93, the office of the Principle Director Commercial Audit and Ex-officio Member, Audit Board, New Delhi, has expressed certain reservations with regard to the treatment of the capital grant, adopted by the company in the accounts and suggested an alternative course of action for future compliance. The querist has reproduced the comments of the government auditors as follows:

“The above amount represents capital grants received by the company from OIDB for its R & D project. The capital based grants should be presented in the balance sheet either by showing the grants as deduction from the gross value of the assets concerned or alternatively it should be allocated to income over the periods and in the proportion in which depreciation on assets is charged. The company has not followed the above system of accounting of capital grants, resulting in under statement of profit to the extent of depreciation charged on the concerned assets.”

(i)       Whether the treatment adopted by the company with regard to the government grants as explained above, is correct? If yes, whether any further disclosure is called for.

(ii)        If the treatment adopted is not appropriate, what should be the treatment in the aforesaid circumstances?

                                                          Opinion                                         February 3, 1994

1. The Committee notes from the facts of the query that the grant of Rs.2.00 crores given by the Oil Industry Development Board (OIDB), was for the purposes of promotion of research and development activities in the petroleum sector through establishment of a research and development centre by the company. Although, the amount of the grant had been computed with reference to the fixed capital cost of the research centre, in the view of the Committee, however, it is only a method of quantification of the grant. It can not be construed to render the grant being given for the purpose of meeting the cost of specific fixed asset(s) or portion thereof. Therefore, in the view of the Committee, the grant received by the company for meeting a part of the cost of construction of the research centre, is in the nature of promoters’ contribution.

2. The Committee notes para 16 of Accounting Standard (AS) 12 on ‘Accounting for Government Grants’*, issued by the Institute of Chartered Accountants of India, which reads as follows:

“16.      Government grants of the nature of promoters’ contribution should be created to capital reserve and treated as a part of share holders’ funds.”

3. On the basis of the above, the Committee is of the following opinion in respect of the issues raised at para 4 of the query:

(a)        The treatment adopted by the company with regard to the government grants, as stated in para 2 of the query, is correct. The company should disclose the accounting policy adopted for government grants, including the methods of presentation in the financial statements.

(b)        In view of (a) above, this question does not arise.

* It may be noted that upon issuance of Accounting Standard (AS) 12 by the Institute of Chartered Accountants of India, the Guidance Note on Accounting for Capital Based Grants, issued in 1981 by the Institute, as mentioned at para 2 of the query, has been withdrawn with effect from April 1, 1992.

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