1.20 Query: Accounting treatment of capital grants.
1. A company has been promoted by the Government of Tamilnadu in association with the Government of India, with the main objective of ‘Empowerment of Women in Tamilnadu’. The company acts as an interface organisation, networking the reputed non-governmental organisations, financial institutions, various governmental departments etc., for the advancement of women in the state.
2. While carrying out the developmental activities for women, the company receives grants from various funding agencies and under various programmes of both Government of India and Government of Tamilnadu, through Government of Tamilnadu. These grants include capital grants also. The capital items acquired out of these grants are the office equipments such as xerox machine, duplicator, furniture, computer systems and vehicles for the project implementation units. The said capital items, as per the querist, are utilised for the implementation of the projects as per the sanction order of the Government. The company has planned and decided to utilise these items in its project areas for the implementation of various schemes only. The querist has further clarified that there is only overall limitation on the total amount of grant sanctioned in a project. The overall limit is usually split into components for administrative convenience and control whereas there is a flexibility for marginal deviation (excess or shortfall) while incurring actual expenditure on implementation. Such assets are not at all meant for disposal even after the completion of particular project activity.
3. As per the querist, the company credits the concerned scheme fund account in its books on receipt of funds of the grants. On utilisation of the same, the grant utilised to meet the revenue expenditure is transferred to the credit of the profit and loss account and the grant utilised for the purchase of capital items is transferred to capital reserve account.
4. As per the querist, depreciation is provided on the cost of the assets acquired out of the funds of grants in accordance with the provisions of the Companies Act, 1956. No part of the capital reserve representing depreciation for the year on these assets acquired out of grants is transferred to the profit and loss account. This accounting treatment, as per the querist, has also been disclosed in the notes to accounts.
5.The querist has stated that the government auditors while auditing the accounts of the company for the year 1992-93 raised an objection that the company should transfer proportionate amount of capital reserve created on acquisition of capital assets out of grants, to the extent of depreciation provided on these capital items acquired out of grants, to the profit and loss account. The querist has submitted a copy of auditor’s objections for perusal of the Committee. However, the company as well as its statutory auditors are of the view that the treatment being followed by the company is correct and can be permitted.
6. The querist has also stated that the company has also informed the Accountant General that the Expert Advisory Committee of the Institute of Chartered Accountants of India while deciding on a similar issue in the case of a dairy development company had opined that the company need* not transfer the proportionate amount equivalent to depreciation provided on the capital items acquired out of the grants from the capital reserve account to profit and loss account.
7. The querist has sought the opinion of the Expert Advisory Committee as to whether the accounting treatment of capital grants received by the company, being followed by the company, is correct? Opinion March 7, 1995
1. The Committee notes that although the querist has referred to accounting issues related to both capital as well as revenue grants received by the company, he has sought the opinion of the Committee only on the issue whether the accounting treatment of capital grants received by it for the project implementation units is proper or not. The opinion of the Committee given herein is accordingly restricted to this issue only. 2.The Committee wishes to point out that the exact accounting treatment would depend on the specific terms and conditions of the various grants. Each case has, therefore, to be seen in the light of its particular facts. The Committee notes that, in the present case, the individual assets to be purchased out of the grants have been specified in the terms and conditions of the relevant grant. Therefore, each grant can be directly related to specific items of fixed assets.
3. In this context, the Committee notes paras 13 and 14 of Accounting Standard (AS) 12 on ‘Accounting for Government Grants’ issued by the Institute of Chartered Accountants of India, which read as follows:
“13.Government grants should not be recognised until there is reasonable assurance that (i) the enterprise will comply with the conditions attached to them, and (ii) the grants will be received.
14. Government grants related to specific fixed assets should be presented in the balance sheet by showing the grant as a deduction from the gross value of the assets concerned in arriving at their book value. Where the grant related to a specific fixed asset equals the whole, or virtually the whole, of the cost of the asset, the asset should be shown in the balance sheet at a nominal value. Alternatively, government grants related to depreciable fixed assets may be treated as deferred income which should be recognised in the profit and loss statement on a systematic and rational basis over the useful life of the asset, i.e., such grants should be allocated to income over the periods and in the proportions in which depreciation on those assets is charged. Grants related to non-depreciable assets should be credited to capital reserve under this method. However, if a grant related to a non-depreciable asset requires the fulfillment of certain obligations, the grant should be credited to income over the same period over which the cost of meeting such obligations is charged to income. The deferred income balance should be separately disclosed in the financial statements.”
4. On the basis of the above, the Committee is of the opinion that the company should recognise the amount of grants in the book of account when the criteria stated in para 13 of Accounting Standard (AS) 12, as reproduced at para 3 above, are met. The Committee is further of the opinion that the accounting treatment of capital grants in the case of the company should be as per para 14 of AS 12, reproduced at para 3 above. ______________________________ *Vide Query No. 1.44, Compendium of Opinions, Volume XI, published by the Institute of Chartered Accountants of India.
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