Expert Advisory Committee
ICAI-Expert Advisory Committee
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1.9  Query:    

   Disclosure of unspent capital based grants.

 

1. A company has received capital grants from Government of India for purchase and installation of fixed assets. Terms and conditions of the grants-in-aid stipulate that the items purchased by the company out of these funds will be the property of the Department of Ocean Development and should not be disposed of or utilised for purpose other than for which funds are provided, without prior sanction of the said Department. However, no time limit for utilisation of the grant is stipulated. The company is following the under-mentioned accounting policy in respect of such grants-

 

“Cost of fixed assets met out of grants form part of block and disclosed separately. No depreciation is charged on such amount of assets”.

           

2. As per the querist, such a grant could not be utilised during the year ended as on 31.3.93  Therefore, the unspent amount of grant has been considered as a current liability in the balance sheet as on 31.3.93. The underlying thought in so disclosing the unspent amount of grant, as per the querist, is that even when no time limit is pecified, the grant is to be utilised at the earliest possible for the stipulated purpose.

           

3. The querist has stated that Guidance Note on Accounting for Capital Based Grants, issued by the Institute of Chartered Accountants of India, advises in respect of the treatment of such grants when they are utilised for the specified purpose. The said guidance note, as per the querist, however, does not deal with the disclosure and accounting treatment of the unspent capital based grants.

 

4.The querist has sought the opinion of the Expert Advisory Committee as to whether it is correct to treat the unspent amount of the capital grant as current liability and disclose the same accordingly?

 

 

                                                                                        Opinion                November 25, 1994

 

1.The Committee notes that Guidance Note on Accounting for Capital Based Grants, issued by the Institute of Chartered Accountants of India in 1981, as mentioned by the querist in para 3 of the query, had been withdrawn with effect from April 1, 1992, consequent to issuance of Accounting Standard (AS) 12 on ‘Accounting for Government Grants’.

 

2.The Committee notes from the other supplementary information supplied by the querist that although the legal ownership of the assets acquired out of the amount of the grant vests in the Department of Ocean Development, as per the terms and conditions of the grant, in substance, the company is the owner of such assets for all practical purposes, since all significant risks and rewards of ownership in respect of such assets, are with the company only. The Committee also notes that the grant in question was in respect of specific fixed assets.

 

3.The Committee notes paras 13 and 14 of Accounting Standard (AS) 12, 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 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.The Committee notes that Guidance Note on Terms Used in Financial Statements, issued by the Institute of Chartered Accountants of India defines the term ‘liability’ as “The financial obligation of an enterprise other than owners’ funds.” The Committee also notes that the term ‘Reserve’ has been defined, in the abovesaid Guidance Note, as “The Portion of earnings, receipts or other surplus of an enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation of diminution in the value of assets or for a known liability. The reserves are primarily of two types: capital reserves and revenue reserves.”

 

5. The Committee notes that a donor’s restriction focuses that fiduciary responsibility on a stipulated use for specified contributed assets but does not change the basic nature of the organisation’s fiduciary responsibility to use its assets. A donor’s gift of cash to be spent for a stipulated purpose or of another asset to be used for a stipulated purpose imposes a responsibility to spend the cash or use the asset in accordance with the donor’s instructions. In its effect on the liabilities of the organisation, a donor’s restriction is essentially the same as management’s designating a specified use for certain assets. That is, the responsibility imposed by earmarking assets for specified uses is fundamentally different, both economically and legally, from the responsibility imposed by incurring a liability, which involves a creditor’s claim. Consequently, most donor-imposed restrictions on an organisation’s use of contributed assets do not create obligations that qualify as liabilities of the organisation.*

 

6. The Committee is accordingly of the view that the government grants received by the company, as stated in the query, for acquisition of specific items of fixed assets should be accounted for as per para 13 and 14 of Accounting Standard (AS) 12, as reproduced in para 3 above. The amount of the grant attributable to the specific fixed asset which remains unspent at the end of the reporting period, should be disclosed separately under the head ‘Reserves’, except where company is not reasonably assured that it will comply with the conditions attached to the grant. In such cases, the amount of unspent grant should be shown as a current liability of the company.

 

7.On the basis of the above, subject to para 2, the Committee is of the opinion that the accounting policy of the company with regard to government grants, as stated at para 1 of the query, is not correct. The company should account for the government grants received for purchase and installation of specific fixed assets as per the paras 13 and 14 of Accounting Standard (AS) 12, issued by the Institute of Chartered Accountants of India. Further, the amount of such grants remaining unspent at the end of the year should be disclosed separately under the head ‘Reserves’, except where the company is not reasonably assured that it will comply with the conditions attached to the grant, in which case it should be shown as a current liability of the company.

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  * Extracts of para 58 of Elements of Financial Statements, FASB Statement of Concepts No.6.