1.10     Query

Accounting treatment of capital based grants.

1.A public sector company is a joint enterprise of Government of India and a foreign enterprise. The company received a gift of Rs.8.21 lakh from European Recovery Programme Fund for purchase of machines to be used in the company’s training centre. This amount was deposited with a foreign bank in a joint account which could be operated by the nominees of the company and a foreign enterprise. According to the terms of the gift, the order for the purchase of machines could only be finalised with the consultant of the donor.

2.At the time of the receipt of gift, the company credited the Capital Reserve Account with Rs.8.21 lakh. The Company debited the concerned fixed asset account on purchase of machines for the aforementioned purpose with Rs.8.17 lakhs, the balance of Rs.0.04 lakhs is still lying in the current account with the Austrian Bank.

3.The Company has now been advised that except for Rs.0.04 lakhs of unspent balance lying in the current account with the foreign bank, the rest of the amount should be shown as a deduction from the cost of fixed assets bought out of the aforesaid gift.

4.The opinion of the Expert Advisory Committee has been sought whether, as per the standard accounting practice, the amount of the gift used in the purchase of fixed assets should be shown as a deduction from the cost of such assets or the entire amount of the gift should be disclosed as capital reserve.

                                                Opinion                                                                       April 28, 1983

1.The Committee is of the view that the gift received by the company is of the nature of a capital based grant since it is made available to the company for the specific purpose of acquisition of a capital asset, viz., machines to be used in the training centre of the company.

2.The Committee notes that Para 6 of the “Guidance Note on Accounting For Capital Based Grants” issued by the Research Committee of the Institute of Chartered Accountants of India states as under:

“If the subsidy or grant is given for the acquisition of a specific fixed asset, the same may be reduced from the cost of that fixed asset… This is a simple way of apportioning the amount of the grant or subsidy to revenue over the life of the asset through a lower depreciation charge. This method is also in conformity with that provided under the Income-tax Act for computing the actual cost of such fixed asset.”

3.The alternative treatment suggested in the aforesaid Guidance Note is as under:

“The amount may be kept in a special reserve and a proportionate part transferred annually to the Profit and Loss Account with reference to the period specified in the scheme of grant or subsidy.” [Para 3 (iv)].

In this context, para 7 of the Guidance Note further sates:

“Under this method, the depreciation on the fixed asset will be charged with reference to its original total cost, as against which the amount of grant or subsidy kept as a special reserve will be apportioned over the life of the asset through transfer to the Profit and Loss Account.”

4.The Committee also notes that the amount of grant “may be transferred to a capital reserve which should be regarded as not distributable as dividend” [Para 3(i) of the aforesaid Guidance Note] only “where the grant or subsidy is with reference to the total investment on an undertaking and where such contribution has the characteristics similar to those of promoters’ contribution” [para 4 of the Guidance Note]. The Committee notes that such circumstances do not exist according to the facts of the present query.

5.On the basis of the above considerations, the Committee is of the opinion that the appropriate treatment would be that the amount of the gift may either be (i) deducted from the cost of the specific fixed assets for which the gift was made available, or (ii) kept in a special reserve and a proportionate amount transferred annually to the profit and loss account with reference to the life of the machines.