1.14 Query
Accounting treatment of a capital based grant.
1. A Company entered into an agreement with certain foreign authorities according to which it would receive $2,50,000 for training officials, purchase of equipment like computers and certain other assets. Out of this sum, the company received $1,25,000 (Rs. 11,00,000) in the year 1981-82, which was disclosed in the balance sheet under the head ‘Current Liabilities’. In the year 1982-83, the company purchased some fixed assets out of this amount.
2. In this context, the following issues have been raised for the opinion of the Expert Advisory Committee:
(i) whether the fixed assets acquired out of the grant should be valued at
a) the nominal value of Re. 1, or
b) the market price at which these were purchased or as per the actuary’s valuation by making a corresponding credit to the Capital Reserve Account with a note to the accounts of the accounting treatment followed, or
c) at any other value
As the company is exempt from payment of income-tax and surtax, which method would be more suitable keeping in view the profitability of the company,
(ii) If fixed assets are to be shown at the nominal value of Re. 1, to which account head should the corresponding credit be made?
(iii) (a) What should be the manner of providing for depreciation if the fixed assets are valued at market price by crediting the Capital Reserve Account? (b) In this case, should any note to the profit and loss account be given?
(iv) What should be the manner of disclosure in the Statement of Accounting Policies regarding the valuation of fixed assets and provision for depreciation in respect of such assets?
(v) Any other disclosure requirement under Schedule VI to the Companies Act, 1956.
Opinion August 8, 1983
1. The Committee is of the view that since the amount received from the foreign authorities has been used for the acquisition of the fixed assets, the assistance is of the nature of a foreign based grant. In this context, the Committee also presumes that the fixed assets so acquired belong to the company.
2. The Committee notes that the principal methods of accounting for agents are discussed in the Guidance Note on ‘Accounting for capital Based Grants’ (1981) issued by the Institute of Chartered Accountants of India.
3. The Committee is of the view that in the circumstances described in the query, the following treatments suggested in Paras 3 (iii) and (iv) of the aforesaid Guidance Note would be appropriate:
“3 (iii)----- The amount may be credited to the specific fixed assets for which the grant or subsidy was made available; or
(iv)----- 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 life of the fixed asset for which the subsidy made available;”
4.The Committee also notes that the above two methods are further discussed in 6 & 7 of the Guidance Note, which are reproduced below:
5. Regarding the valuation of an asset at nominal value of Re. 1, Para 11 of the aforesaid Note states as below: “Sometimes, the grant or subsidy is in the form of a fixed asset (e.g. land) given at a concessional or at a nominal rate. Since the financial accounts are drawn on the historical cost basis, the fixed assets may not be revalued. In case of fixed asset acquired by way of an outright gift, a nominal value may however, be assigned thereto, the basic concept being to treat the fixed asset on historical cost basis. Alternatively, the fixed asset may be revalued with the help of an authorised valuer and the difference in the cost and the value may be credited to the Capital Reserve Account.”
“6. If the subsidy or grant is given for the acquisition of a specific fixed asset, the same may be reduced from the cost of the fixed asset as stated in para 3 (iii) above. This is a simple way of apportioning the amount of the grant or subsidy to revenue over the life of the asset though 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.”
“7.The method at para 3 (iv) is an alternative to the method suggested in para 3 (iii). 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.” 6. On the basis of the above, the point-wise opinion of the Expert Advisory Committee on the issues raised by the querist is as below: i) The fixed acquired out of the grant may be shown in the balance sheet in either of the followings ways:
(a) The fixed assets may be valued at their acquisition cost and the amount of grant utilised in their acquisition may be credited to such assets. The balance sheet may show the acquisition cost of the fixed assets and the amount of the grant utilised as a deduction therefrom.
(b) Alternatively, the fixed assets may be valued at their acquisition cost with a corresponding credit to a special reserve account out of which a proportionate part should be transferred annually to the profit and loss account with reference to the life of the concerned assets. This special reserve may be shown as a separate item in the balance sheet after ‘Reserves and Surplus’ but before ‘Secured Loans’ (Para 13 of the Guidance Note referred to above).
In the opinion of the Committee, though the net profits figure as per the profit and loss account would be the same in both the methods, yet the method described in (b) above would indicate a true profitability position of the company since this method presents the capital figure more correctly.
b) Where, however, the fixed assets have been valued at their acquisition cost with a corresponding credit to a special reserve account, the depreciation thereon should be provided for in the normal manner over the life of the assets. As suggested above, the amount equivalent to the depreciation provided for during the year should be transferred out of the special reserve to the credit of the profit and loss account. Where the statement of Accounting Policies includes a statement as suggested below, a note in this respect to the profit and loss account may not be given.
(iv) According to Para 14 of the above referred Guidance Note “A disclosure should also be made in the financial statements regarding the accounting policy adopted for the treatment of grant.”
Thus, the statement on Accounting Policies may include the following:
(a) Where the fixed assets are shown at acquisition cost less the amount of grant:
“The fixed assets (specify the nature thereof) have been financed entirely from a specific grant and therefore have been shown at their acquisition cost less the amount of the grant.”
(b) Where the fixed assets are shown at the acquisition cost with a corresponding credit to a special reserve:
“The fixed assets (specify the nature thereof) have been financed entirely from a specific grant and have been valued at the acquisition cost with a corresponding credit to ------(specify the name of the special reserve account e.g., it may be Capital Grant Reserve Account). The depreciation for the year on these assets amounting to Rs.----- has been arrived at on the basis of------- (specify the method adopted). The amount equivalent to the depreciation provision for the year is transferred out of the -------(special reserve account) to the profit and loss account every year.”
(v) In the opinion of the Committee, there is no other special disclosure requirement in Schedule VI to the Companies Act, 1956 in respect of the issues raised by the querist.
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