1.8       Query

Accounting treatment of capital based grants.

1.A Tourism Development Corporation, registered as a company, is owned by a State Government. The corporation is having hotels and restaurants in the State, apart from information offices throughout the country. Against the establishment of hotels, the corporation used to get subsidies under the Central Subsidy Scheme. The subsidy is granted by the Director of Industries of the State Government against the application submitted by the corporation. Further, 25% subsidy is allowed on investments towards land, buildings, electric installation etc. The grant of subsidy is being allowed in totality. However, only certain fixed assets such as buildings, equipments are eligible for subsidy on which 25% of investment is granted as subsidy under the Central Subsidy Scheme.

2. The corporation is of the opinion that the accounting treatment of the capital subsidy received under the Central Subsidy Scheme should be as recommended in para 4 of the Guidance Note on Accounting for Capital Based Grants, published by the Research Committee of the Institute of Chartered Accountants of India. The said para reads as follows:

“Where the grant or subsidy is with reference to the total investment on an undertaking or by way of contribution towards the capital outlay of the characteristics similar to those of promoters’ contribution, it may be treated as a capital receipt. In such cases, the method suggested in para 3 (i) may be followed. It follows from this that the amount will not be available for distribution as dividend.”

3.The querist has mentioned that it is more relevant to note that the State in question being a backward state, as far as industrial development is concerned, subsidy is treated at par with promotors’ capital for the purpose of granting loans etc., and as such, this Central Subsidy may be treated, in the view of the querist, as promotors’ contribution and accordingly the subsidy should be treated as capital reserve considering the nature of subsidy should be treated as capital reserve considering the nature of subsidy.

4.The querist has drawn the attention of the Expert Advisory Committee to the opinion published in the Compendium of Opinions, Vol. III, Query No. 1.10, para 4 of which reads as follows:

“The Committee also noted 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 promotors’ contribution.”

5. The querist has sought the opinion of the Expert Advisory Committee as to whether, in the circumstances of the query, the subsidy received by the corporation should be treated as a capital reserve.

                                                                Opinion                                                   May 22, 1989

The Committee notes from the facts of the Central Investment Subsidy Scheme that the scheme is aimed at encouraging industries as a whole by providing incentives to establish industries in backward areas. The Committee is of the view that even though the amount of the subsidy is determined with reference to fixed capital cost, it cannot be construed to render the subsidy being given for the specific purpose of meeting cost of fixed assets or portion thereof. The basis adopted for computation of the amount of subsidy is only a method of quantification. The Committee is, therefore, of the opinion that the amount received under the said Scheme may be treated as a capital reserve which should be regarded as not distributable as dividend [Paras 3(i) and 4 of the Guidance Note on Accounting for Capital Based Grants, issued by the Research Committee of the Institute of Chartered Accountants of India].

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