Accounting for Non-Repayable Promoter Contributions Under Ind AS

1. Question

Omega Manufacturers Limited hereinafter referred to as “the Company” is a medium-sized industrial enterprise engaged in the production of specialised engineering components. Due to prolonged financial difficulties, the company had accumulated significant bank borrowings and other obligations, including compensation payable to employees and various operational liabilities.

Considering the financial liabilities, the management decided to explore a sale of the business. These liabilities, however, discouraged potential buyers, and no acquisition offers were received. Subsequently,to facilitate the proposed sale of the company to a new investor group, the existing promoter i.e. “the Outgoing Promoter” remitted a substantial sum of money directly into the company. This financial support was made to square up the company’s outstanding bank borrowings, settle compensation obligations arising from employee retrenchment and to clear pending trade and statutory liabilities. Thus, with additional financial support, an investor group, “Radiant Limited” was able to proceed with and complete the acquisition of the company.

The aforesaid funds were infused without any stipulation of repayment, and was intended solely to ensure a smoother transition during the sale process. After completion of negotiations, the outgoing promoter formally issued a waiver letter to the Radiant Limited i.e. “the investor group”, stating that they shall not be required to repay or compensate for the above amount in any manner.

The investor group, upon acquiring control of the company, proposed to treat the amount received from the outgoing promoter as income and record it in the statement of profit and loss of the company. Thus, the investor group is of opinion that the inflow is in the nature of a “private grant”, without any repayment obligation, hence should be treated as income of the company.

The management of the company while finalising the accounts were in dilemma regarding the aforesaid transaction. The management wants to understand whether the proposed accounting treatment of recognising the waived promoter contribution as income in the profit and loss account is appropriate as per the relevant Ind AS.

2. Relevant Provision

Conceptual Framework for Financial Reporting under Indian Accounting Standard

Para 4.68

Income is increase in assets, or decrease in liabilities that result in increase in equity, other than those relating to contributions from holders of equity claims.

Para 4.70

Contributions from holder’s of equity claims are not income, and distributions to holders of equity claims are not expenses.

Ind AS 20 – Government Grants

Para 1 of Ind AS 20

This standard shall be applied in the accounting for, and in the disclosure of government grants and in the disclosures of other form of government assistance.

Para 7 of Ind AS 20

Government grants including non-monetary grants at fair value, shall not be recognised until there is a reasonable assurance that:

(a) the entity will comply to the conditionsattached to them, and

(b) the grants will be received

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