Accounting treatment of a performance award received from

the Government for renovation and betterment of plant

1.A Government company has received a better performance award for 1983-84 from the Government of India for one of their thermal power stations. The conditions attached to the sanction of the award state that the award amount is to be spent for renovation and betterment of the said thermal power station, and the unspent portion, if any, has to be refunded to the Government. The award amount is expected to be utilized in 1984-85 and 1985-86.

2.The querist has informed that the renovation and betterment of the said thermal station would involve expenditure of a capital nature by way of acquisition of fixed assets to the extent of 60% to 70% of the amount of the award and the balance for revenue expenses.

3.The querist is of the view that in this situation the Guidance Note on ‘Accounting Treatment of Capital Based Grants’ issued by the Research Committee of the Institute of Chartered Accountants of India is not applicable straightaway. He has therefore sought the opinion of the Expert Advisory Committee on the following:

(i) Could the award receipt be treated as a revenue receipt despite its utilization for revenue or capital purposes?

(ii) Could it be treated as a reserve out of which the amount spent for revenue purposes is transferred to profit and loss account and the balance spent on acquisition of fixed assets is retained as reserve? In case the balance spent for acquisition of fixed assets is retained as reserve, is it necessary to transfer therefrom to profit and loss account the portion of depreciation charged for the year so that the original cost of the asset and the Depreciation Reserve are not disturbed and are exhibited at their gross amounts.

(iii) Is there any other better method of treating them in the books of account?

Opinion April 29,1985

1.The Committee is of the view that even though the performance award received by the company is not for the purchase of specific fixed assets, the following accounting treatments suggested in the Guidance Note on ‘Accounting For Capital Based Grants’ would be applicable in respect of that portion of the award which is utilised for the purchase of fixed assets:

“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 was made available”.

“6(vi) 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 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 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.

(vii) 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”.

2.In view of the above, the opinion of the Expert Advisory Committee on the issues raised by the querist in para 3 above is as below:

(i) The award amount should not be treated as a revenue receipt in the year in which it is received in view of the conditions attached to its utilisation and the failure of this treatment to match the revenue with the cost.

(ii) The Committee is of the opinion that the award amount on its receipt should be transferred to a Special Reserve Account. A transfer from the said account to the profit and loss account should be made to the extent the amount is spent on revenue expenses during the relevant period. Regarding the treatment of the remaining amount, the following alternatives are possible:

(a) The amount may be credited to the fixed asset(s) acquired out of the award.

(b) The amount may be kept in the Special Reserve Account and proportionate part transferred annually to the Profit and Loss Account with reference to the life of the fixed asset(s) acquired out of the award.

An appropriate disclosure should be made in the financial statements regarding the accounting policy adopted for the treatment of the award amount.

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