Query No. 32

Subject:

Accounting treatment of subsidy.1

A. Facts of the Case

1. A state government undertaking, registered under the Companies Act, 1956, is mainly engaged in the activity of distribution of food grains under public distribution system (PDS) and other government welfare schemes like Antyodaya Anna Yojana, etc. The company meets its requirements of food grains by purchases thereof from the Food Corporation of India. It also undertakes procurement of food grains under price support operation and distributes the same under PDS.

2. The company commenced the ‘Decentralised Wheat Procurement Scheme’ in the year 1999-2000. Under this scheme, the company procures wheat from farmers under price support operation and retains the wheat stocks till disposal under PDS and other schemes. Thus, the company meets its requirement under PDS out of procurement. Any shortfall therein is met out of purchases from the Food Corporation of India. Surplus procurement over its requirement is surrendered to the central pool maintained by the Food Corporation of India.

3. The company gets subsidy under a scheme from the Government of India. Subsidy is the differential amount between the provisional economic cost and the central issue price, both approved by the Government of India. The company realises the amount equal to central issue price from the consumers of the state by way of consumer price under the PDS and other schemes.

4. According to the querist, in the year of commencement (1999-2000) of ‘Decentralised Wheat Procurement Scheme’, a memorandum of understanding (MOU) was signed between the Government of India, the Government of Madhya Pradesh and the company. The Government of India approved the economic cost and stated in the MOU that the economic cost mentioned therein shall be final. The MOU was signed only for one year. No MOU is signed for subsequent years. The company, therefore, took up the issue relating to signing of MOU with the Government of India. On regular follow up, the Government of India issued a final draft of MOU. The Government of Madhya Pradesh accepted many of the clauses therein and suggested some amendments. The Government of India has yet to consider the suggestions given by the Government of Madhya Pradesh to finalise MOU.

5. As regards provision for payment of subsidy in MOU for subsequent years, the draft initially finalised by the Government of India, contains a provision that the state government shall be paid subsidy under the Decentralised Procurement Scheme at the rate of 95% and the balance 5% will be released based on the final audited accounts and determination of final economic cost (emphasis supplied by the querist). There are several precedents that even if audited accounts are submitted, the Government of India imposes arbitrary cuts and the economic cost finalised under other schemes, thereafter, is less than the actual expenses incurred by the company. Under the scheme of decentralised wheat procurement, the audited accounts for the years 1999-2000 and 2000-2001 have been submitted to the Government of India and are still pending even after 2 ½ years.

6. Present accounting treatment of subsidy: - The company gets the monthly subsidy (95%) from the Government of India. At the time of finalisation of accounts of the company, total subsidy (including 5% released on determination of final economic cost) receivable for the year is calculated and provided for in the accounts keeping in view, according to the querist, the basic concept of accrual. The company has followed this practice since 1999-2000. Accumulation of the amount of subsidy booked as income but to be received on the basis of final economic cost is to the tune of about Rs. 20.00 crore for the years from 1999-2000 to 2003-2004. Thus, the company has paid income tax on such subsidies, the amount of which may vary downwards, on finalisation by the Government of India (emphasis supplied by the querist).

7. In the view of the company, the practice of booking 100% subsidy for the year seems to be defective. When there is a provision in the MOU that 5% subsidy shall be released on the determination of economic cost, the subsidy to that extent should not be booked unless the final economic cost is determined by the Government of India. The 5% subsidy accrues only on determination of the final economic cost by the Government of India and, therefore, should be booked on issue of order to this effect by the Government.

B . Query

8. The querist has sought the opinion of the Expert Advisory Committee as to whether the company can defer 5% of the subsidy till final economic cost is decided by the Government of India on the ground that it does not accrue until the order for final economic cost is issued by the Government of India.

C. Points considered by the Committee

9. The Committee notes that the basic issue raised in the query relates to the timing of recognition of the balance 5% subsidy which becomes receivable by the company only after determination of final  economic cost by the Government of India on the basis of final audited accounts submitted by it to the Government of India. The Committee has, therefore, considered only this issue and has not dealt with any other issue arising from the facts of case. Further, the opinion of the Committee is purely from the accounting stand-point.

10. The Committee notes that the ‘Framework for the Preparation and Presentation of Financial Statements’, issued by the Institute of Chartered Accountants of India, while laying down the principles for ‘Recognition of Income’, inter alia, states as follows (paragraph 92):

"92. The procedures normally adopted in practice for recognising income, for example, the requirement that revenue should be earned, are applications of the recognition criteria in this Framework. Such procedures are generally directed at restricting the recognition as income to those items that can be measured reliably and have a sufficient degree of certainty."

The Committee notes from the above that even if an income has been earned, it should not be recognised unless there is a sufficient degree of certainty of its receipt and it can be measured reliably.

11. The Committee further notes paragraphs 3.2, 6.1 and 13 of Accounting Standard (AS) 12, ‘Accounting for Government Grants’, issued by the Institute of Chartered Accountants of India, which state as follows:

"3.2 Government grants are assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the enterprise."

"6.1 Government grants available to the enterprise are considered for inclusion in accounts:

(i) where there is reasonable assurance that the enterprise will comply with the conditions attached to them; and

 

(ii) where such benefits have been earned by the enterprise and it is reasonably certain that the ultimate collection will be made."

Mere receipt of a grant is not necessarily a conclusive evidence that conditions attaching to the grant have been or will be fulfilled."

 

"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."

12. The Committee notes from the facts of the case that the monthly subsidy received by the company, depends upon the provisional economic cost and that the final subsidy is determined on the basis of final economic cost determined by the Government of India. It is, thus, possible that the amount of final subsidy receivable by the company may be less than the amount of 95% subsidy received by the company. In such a case, the excess may have to be refunded to the Government. In other words, in the view of the Committee, the uncertainty relates not only to the amount which is yet to be received (i.e., 5%) but also to the amount already received (95%). If it is so, the subsidy should not be recognised to the extent of uncertainty involved which may be greater than 5%, even though the amount has been received. Therefore, the Committee is of the view that such subsidy should be recognised to the extent there is reasonable assurance of its receipt and it can be measured reliably; the balance being recognised when such assurance is achieved.

D. Opinion

13. On the basis of the above, the Committee is of the opinion that the company should defer recognition of the 5% of the subsidy receivable from the Government to the extent of uncertainty involved till final economic cost is decided by the Government of India.

1 Opinion finalised by the Committee on 28.1.2005