Case Study on Treatment of Grant Received from Govt. to Set Up a Company

Para 5 of AS 12, Accounting for Government Grants, states that two broad approaches may be followed for the accounting treatment of government grants: the ‘capital approach’, under which a grant is treated as part of shareholders’ funds, and the ‘income approach’, under which a grant is taken to income over one or more periods. Further para 5.4 states that accounting for government grant should be considered appropriate when based on the nature of the relevant grant.

When a company is based on the self-sustaining model, however, in the initial years, the company requires a Government grant to meet the initial cost of setting up the company (including working capital), employee benefits, operational expenses, administrative expenses and expenditure on creation of fixed assets. The central government has provided budgetary support of Rs. 200 crore to the company. The intention behind this budgetary support is to become 100% owner of the Company in exchange for equity contribution.

Following para 5.5, the company has followed the ‘income approach’ where government grants are to be recognised in the profit and loss statement on a systematic and rational basis over the periods necessary to match them with the related costs.

This case study discusses the correct accounting treatment of the government grant as per AS 12, Accounting for Government Grants, where the grant is in nature of working capital provided as an equity contribution of the government.

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