Ind AS 20 | Accounting Treatment of Incentives Received Through the Structured Package of Assistance

1. Question

A Company entered into a Structured Package of Assistance (SPA) arrangement with the Government of Tamil Nadu for setting up a Hardwood Pulp Plant (Expansion Project II). Under this package, the Government agreed to provide an incentive described as a “capital subsidy in lieu of SGST reimbursement”, computed as 10% of the eligible fixed asset investment and disbursed in 15 equal annual instalments.

To qualify for the annual instalments, the Company must fulfil a detailed set of conditions, including:

• Making a minimum eligible investment of ₹1,100 crore within the prescribed investment period.
• Creating and maintaining 156 direct employment positions during each of the 15 incentive years.
• Ensuring that the plant remains fully operational during those years.
• Filing an annual claim for the incentive, with eligibility assessed separately for each year.
• Understanding that non-fulfilment of conditions in any year leads to forfeiture of that year’s instalment, without any carry-forward benefit.

The Company accounted for the incentive as a revenue grant, recognising it annually in the Statement of Profit and Loss once it met the yearly conditions. However, the CAG auditors observed that the incentive is described as a “capital subsidy” and calculated based on capital investment; hence, they argued it should be treated as a capital grant and recognised over the useful life of related assets.

State, whether the incentive received under the Structured Package of Assistance be treated as a capital grant or a revenue grant under Ind AS 20, Accounting for Government Grants and Disclosure of Government Assistanceconsidering the nature of conditions attached and the manner of disbursement?

2. Relevant Provisions

Ind AS 20 – Accounting for Government Grants and Disclosure of Government Assistance

Definition – Government grants are assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the entity.*

Grants related to assets are government grants whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire long-term assets. Subsidiary conditions may also be attached restricting the type or location of the assets or the periods during which they are to be acquired or held.

Grants related to income are government grants other than those related to assets.

Paragraph 7 – Government grants, including non-monetary grants at fair value, shall not be recognised until there is reasonable assurance that:

(a) the entity will comply with the conditions attaching to them; and

(b) the grants will be received

Paragraph 12 – Government grants shall be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate.

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