1.5 Query: Accounting treatment of unspecified capital grant.
1. A public sector company was formed in March, 1977, under section 25 of the Companies Act, 1956, with the main objective of promoting trade through organising/participating in fairs/exhibitions, both in India and abroad. The subscribed and paid-up capital of the company is Rs.50.00 lakhs and Rs.25.00 lakhs, respectively. The company gets grant from the Government of India on the basis of a pattern of financial assistance which is reviewed from time to time. The company receives grant of three types from the Government, i.e., (i) revenue grant for meeting revenue expenditure, (ii) specified capital grant for specific capital projects, and (iii) unspecified capital grant. As per the querist, the government has clarified that the unspecified capital grant is in the nature of a capital reserve to be utilised for creation of infrastructural facilities in the exhibition ground of the company, in a phased manner, to bring it at par with internationally accepted standards.
2. The querist has stated that the grant received from the Government is accordingly being treated/adjusted in the books of account of the said company as follows:
(a) Revenue grant is treated as income and credited to the Income and Expenditure Account.
(b) Specified capital grant is adjusted towards the capital cost of the specified project(s).
(c) The unspecified capital grant is disclosed in the balance sheet as ‘Capital Grant from the Government of India’ under the head ‘Reserves and Surplus’.
3. The querist has also stated that earlier on a reference made by the company to the Expert Advisory Committee of the Institute of Chartered Accountants of India, it was opined that unspecified capital grant is of the nature or promoters’ contribution and as such it is proper to treat the unspecified grant as ‘Capital Reserve’. The Committee had also opined* that the utilised and unutilised portions of the grant can be shown separately, as is done in the case of investment allowance reserve, where the amount of reserve utilised for specified purpose is transferred from Investment Allowance Reserve Account to Investment Allowance (Utilised) Reserve Account.
4.The querist has stated that while auditing the accounts of the company for the year 1992-93, the government auditors have made certain observation. The querist has reproduced the said observations and replies of the management thereto as follows:
Audit Observation
“Liabilities: Reserve and Surplus (Schedule-2) Capital grants from Government of India – Rs.43,58,48,939.00.
The above amount represents unspecified capital grant-in-aid given by the Government of India, for creation of infrastructural facilities of international standards necessary for fairs and exhibitions in ‘Pragati Maidan’. Being in the nature of promoter’s contribution and required to be treated as Capital Reserve as per direction of the Government of India (November, 1989) to the Company, the grant should have been classified as such under the head ‘Reserve & Surplus’, indicating utilised and unutilised portions distinctly.”
Management’s Reply
“Capital Grant from Government of India is being reflected as such, under ‘Reserve and Surplus’. In the accounts for the year 1993-94, this shall be merged with ‘Capital Reserve’ under ‘Reserve & Surplus’. Government of India, MOC, in their letter dated 15.11.89 have clarified that this capital grant is in the nature of a capital reserve for phased utilisation, in order to create infrastructural facilities in Pragati Maidan, comparable with international standards. There is, however, no direction from the Government to indicate the utilised and unutilised portions of capital grant distinctly.”
Income and Expenditure Accounts
“Dividend from U.T.I. (including tax deducted at source Rs.6,29,77,950/-).
A reference is invited to Comptroller and Auditor General’s Comments on the accounts of the Company for the year ended 31st March, 1987 and 31st March, 1988 regarding crediting of interest earned on unspent balance of the Capital grant, to the income of the company.”
Management’s Reply
“Comptroller & Auditor General’s comments on the accounts of the company for the year ended 31st March, 1987 and 31st March, 1988 relating to crediting of interest earned on unutilised capital grant, to the income of the company, instead of to capital grant, was due to the understanding that such interest was returnable to the Government. However, on receipt of a clarification from the Ministry of Commerce that the company was fully empowered to utilise this capital grant which was in the nature of a Capital Reserve, in a phased manner, for creation of infrastructural facilities in Pragati Maidan, comparable with international standards, it was concluded that neither the unutilised capital grant, nor interest earned thereon, was returnable to the Government. Thereafter, the issue was not raised by the Comptroller & Auditor General and the case was considered as settled, by the company.”
Audit Observation “The company continued to treat income earned (amount not quantifiable) on unutilised capital grant as its income, instead of crediting it to Capital Reserve, as income derived from investment of such grant should also be utilised for the purpose for which the grant was given. This has resulted in understatement of Reserves and Surplus – (Capital Reserve).”
Management’s Reply
“It may be stated that accounting of interest in the books of the company, as income is in accordance with the requirements of Schedule VI of the Companies Act. Further, capitalisation of interest in such cases, is not permissible under the Income-tax Act. The stand of the company to include interest in the Income and Expenditure Account, is considered correct and has not resulted in understatement of Reserves & Surplus (Capital Reserve). However, to settle the issue finally, necessary reference shall be made to the Institute of Chartered Accountants of India, for their expert advice.”
5.As per the querist, the management’s replies, as stated above are based on the following: -
(i) No separate fund has been created by the company in respect of specified and unspecified capital grant received.
(ii) Further, while it may be practicable to create a separate fund in respect of specified capital grant and keep account of income earned/expenditure incurred thereon/therefrom, it may perhaps not be advisable to create a separate fund for unspecified capital grant in view of the following:
(a) The company is treating unspecified capital grant as capital reserve of the nature of the promoters’ contribution, as opined by the Expert Advisory Committee of the Institute of Chartered Accountants of India, for which no separate fund is created, as in the case of share capital which could be utilised for capital expenditure, revenue expenditure, investments or working capital.
(b) In case of Investment Allowance Reserve, the amount utilised for specified purposes is transferred from Investment Allowance Reserve Account to Investment Allowance (Utilised) Reserve Account. However, no specific purpose is specified by the Government of India in respect of unspecified capital grant which could be utilised both for capital and revenue expenditure or even deferred revenue expenditure for creation of infrastructural facilities in the exhibition ground of the company, to bring it at par with internationally accepted standards in this regard.
6.The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(i) Should the unspecified capital grant be reflected distinctly under the head ‘Reserves and Surplus’ as ‘Capital grant from Government of India’ or it should be merged with ‘Capital Reserves’?
(ii) If the unspecified grant from Government of India is to be shown separately and not merged with capital reserves is it necessary to bifurcate it into utilised and unutilised portions?
(iii) If it is considered appropriate to bifurcate the unspecified grant into utilised and unutilised portions, the methodology there of may kindly be indicated, keeping in view the fact that the unspecified capital grant is to be used for creation of infrastructural facilities in the exhibition ground of the company, which may be of the nature of capital expenditure, revenue expenditure or both or even for this matter deferred revenue expenditure.
(iv) Whether it is advisable to capitalise and transfer the income on unutilised capital grant (specified and/or unspecified) to Capital Reserve/Capital Grant from Government of India (specified/unspecified) Account, instead of transferring to Income and Expenditure Account. (At present income on unutilised capital grant is being transferred to the Income and Expenditure Account.)
Opinion June 14, 1994
1. The Committee notes paras 16 and 23 of Accounting Standard (AS) 12 on ‘Accounting for Government Grants’, issued by the Institute of Chartered Accountants of India, which read as follows:
“16. Government grants of the nature of promoters’ contribution should be credited to capital reserve and treated as a part of shareholders’ funds.”
“23. The following should be disclosed:
(i) the accounting policy adopted for government grants, including the methods of presentation in the financial statement;
(ii) the nature and extent of government grants recognised in the financial statements, including grants of non-monetary assets given at a concessional rate or free of cost.”
2.The Committee notes that grant, termed as ‘unspecified’, received by the company is for the purposes of creation of infrastructural facilities at the exhibition ground of the company, to bring it at par with the international standards, and not for the acquisition of any specified fixed assets. The Committee is accordingly of the view that the said unspecified grant is of the nature of the promoters’ contribution. It should, therefore, be accounted for and disclosed as recommended in paras 16 and 23 of AS 12 as reproduced above.
3.The Committee notes that clause 3(xi) of Part II of Schedule VI to the Companies Act, 1956, inter alia, requires that the profit and loss account of companies shall disclose the amount of income by way of interest, specifying the nature of income.
4.The Committee is of the view that the accounting of interest on unutilised amount of the unspecified grant will depend on the terms and conditions of such grant. For example, where the use of the unutilised grant money is not restricted, i.e., it can be utilised for the business purposes in the period falling between the receipt of the grant and its actual utilisation for the specified purposes, the income earned from unutilised part of the grant money by way of interest etc., would be the income of the company. However, where the use of the unutilised grant money is restricted to the purposes of the grant, or is to be refunded to the Government, the interest etc., so earned, would form part of the grant, or as the case may be, would be the liability of the company.
5.On the basis of the above, the Committee is of the following opinion in respect of the issues raised at para 6 of the query:
(i), and (ii)The amount of unspecified capital grants received for the purposes (iii) creation of infrastructural facilities at the exhibition ground of the company should be disclosed under the broad head ‘Capital Reserves’, specifying the nature and extent of the grant. Further, the company can disclose the amount of utilised and unutilised portions of the grant separately in the balance sheet, or as the case may be in the schedule of ‘Reserves and Surplus’. Alternatively, the amount of grant remaining unutilised can be shown as a note to accounts.
(iv) Refer to para 4 above. _________________________ * Vide query 1.45 on page XI-140 of Compendium of Opinions, Volume XI, published by the Institute of Chartered Accountants of India. |