Use AS 12 only after confirming the entity's reporting framework. An entity following the notified Accounting Standards applies AS 12. An entity following Indian Accounting Standards applies Ind AS 20. The recognition idea is similar, but some presentation and repayment rules differ, so an old AS 12 worksheet should not be reused for an Ind AS company without review.
The current requirements below are taken from ICAI's AS 12 text on Accounting for Government Grants. If the entity follows Ind AS, use the related Ind AS 20 government-grant guide instead.
Start with the framework and the grant terms
| Question | Why it matters | Evidence to retain |
|---|---|---|
| Does the entity apply AS or Ind AS? | This decides whether AS 12 or Ind AS 20 governs the accounting. | Applicable financial-reporting framework and prior-year policy. |
| What does the scheme compensate? | The substance decides whether the grant relates to revenue, a specific fixed asset or total capital investment. | Scheme, sanction letter, approval and claim documents. |
| Are the conditions likely to be met? | Recognition requires reasonable assurance of compliance and receipt. | Eligibility calculation, compliance evidence and correspondence. |
| Can the grant be clawed back? | A repayment clause affects monitoring and later accounting. | Milestones, utilisation certificates and repayment terms. |
Recognition needs reasonable assurance
Cash receipt alone is not enough. AS 12 requires reasonable assurance that the enterprise will comply with the attached conditions and that the grant will be received. Conversely, an earned benefit may be recognised on a prudent estimate even when final settlement and collection occur after the reporting date.
For example, a sanction letter may say that a factory must operate in a specified area for five years. Before recognising the grant, the file should explain why compliance is reasonably assured. A bank credit does not replace that assessment.
Classify the grant by what it is meant to support
| Nature of grant | AS 12 treatment | Typical example |
|---|---|---|
| Revenue-related | Recognise systematically in profit and loss over the periods of the related costs. Present separately, such as other income, or deduct from the related expense. | Reimbursement of eligible staff-training costs. |
| Specific depreciable fixed asset | Deduct the grant from the asset's gross value, or recognise it as deferred income over the asset's useful life. | Subsidy for a specified machine. |
| Specific non-depreciable asset | Under the deferred-income approach, normally credit capital reserve. If obligations create costs, recognise income over the same period as those costs. | Land granted subject to building specified facilities. |
| Promoters' contribution | Credit capital reserve when the grant relates to total investment or total capital outlay and repayment is not ordinarily expected. | Qualifying central investment subsidy. |
| Non-monetary asset | Record an asset received at a concessional rate at acquisition cost; record a free asset at nominal value. | Land transferred at a concessional price. |
The label used in the ledger does not decide the treatment. A large subsidy is not automatically a promoters' contribution. Read the scheme conditions and identify what the government is actually supporting.
Revenue grants should follow the related costs
A grant compensating revenue expenditure is recognised on a systematic and rational basis over the periods in which the related costs are recognised. If a ₹12 lakh grant compensates twelve months of eligible operating cost and all conditions are satisfied, recognising the whole ₹12 lakh merely because cash arrived in one month would not reflect the matching principle.
A grant that compensates expenses or losses from a previous period, or provides immediate financial support without future related costs, is recognised when it becomes receivable. The presentation should follow the current financial-statement framework and the wording of AS 12 and AS 5 applicable to the entity.
Specific fixed-asset grant: compare both methods
Assume a machine costs ₹50 lakh. A ₹10 lakh grant relates specifically to the machine. Its useful life is five years, residual value is nil and straight-line depreciation applies.
| Item | Deduction from asset | Deferred-income method |
|---|---|---|
| Initial asset amount | ₹50 lakh − ₹10 lakh = ₹40 lakh | Asset remains ₹50 lakh; grant is deferred income. |
| Annual depreciation | ₹40 lakh ÷ 5 = ₹8 lakh | ₹50 lakh ÷ 5 = ₹10 lakh |
| Annual grant income | Nil as a separate line | ₹10 lakh ÷ 5 = ₹2 lakh |
| Simplified annual net expense | ₹8 lakh | ₹10 lakh − ₹2 lakh = ₹8 lakh |
The simplified profit-and-loss effect is the same under these assumptions, but the balance-sheet presentation differs. Document the selected accounting policy and apply it consistently. The related depreciation-method guide explains how the depreciation pattern itself should be selected.
Refunds require a fresh calculation
A grant may become refundable when a condition is not fulfilled. Do not reverse the original entry mechanically. The adjustment depends on the original classification and presentation.
| Original grant | Refund accounting under AS 12 |
|---|---|
| Revenue-related grant | Use any unamortised deferred credit first. Charge the excess, or the full refund when no deferred credit remains, to profit and loss. |
| Specific fixed-asset grant | Increase the asset's book value or reduce the relevant capital reserve or deferred-income balance. If book value increases, depreciate the revised amount prospectively over the remaining useful life. |
| Promoters' contribution | Reduce the refundable amount from capital reserve. |
Revenue-grant example: a company must refund ₹8 lakh. The related unamortised deferred credit is ₹5 lakh. Adjust ₹5 lakh against that balance and charge the remaining ₹3 lakh to profit and loss.
Fixed-asset example: under the deduction method, the ₹50 lakh machine above was recorded at ₹40 lakh and depreciated by ₹8 lakh each year. After two years its simplified carrying amount is ₹24 lakh. If the ₹10 lakh grant then becomes fully refundable, increase the carrying amount to ₹34 lakh. With three years remaining, prospective annual depreciation becomes about ₹11.33 lakh, subject to the normal estimates and impairment considerations.
Close the file with disclosures and continuing monitoring
Disclose the accounting policy for government grants, including the presentation methods used. Also disclose the nature and extent of grants recognised, including non-monetary assets received free or at a concessional rate.
- Reconcile every material grant to its scheme, sanction and ledger entries.
- Record the reporting framework and the classification conclusion.
- Support reasonable assurance with evidence, not only management expectation.
- Match income recognition with the related costs or asset life.
- Recalculate deferred income, asset balances and capital reserve.
- Track continuing conditions and possible repayment until the exposure ends.
- Check that policy, nature and extent disclosures agree with the accounting.
The working paper should let a reviewer move from the scheme conditions to recognition, classification, calculation, presentation and disclosure without guessing why the grant was accounted for in that way.
