Accounting for capital subsidy

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

12 November 2014 Dear Experts,

An Depreciable asset was purchased by taking term Loan from Bank.Now Subsidy has been received by the bank for which it has opened FD in the name of the company.

How to account for the subsidy?

Regards,

RRV

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
Follow

13 November 2014 Please clarify whether subsidy received for purchase of fixed assets

Querist : Anonymous

Querist : Anonymous (Querist)

14 November 2014 Subsidy received for purchase of machinery

Upgrade to CAclubindia Pro. Subscribe Now!

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
Follow

14 July 2024 When a subsidy is received for a depreciable asset that was purchased using a term loan, the accounting treatment generally involves recognizing the subsidy as income over the useful life of the asset. Here’s how you can account for it:

1. **Initial Recognition of Subsidy:**
- Debit: Bank Account (or Cash Account) - to record the receipt of the subsidy amount.
- Credit: Subsidy Income Account - to recognize the subsidy as income.

2. **Treatment of Subsidy in Financial Statements:**
- The subsidy received should be recognized as income over the useful life of the related depreciable asset.
- Each accounting period, a portion of the subsidy amount should be transferred from the Subsidy Income Account to the Profit and Loss Account (or Income Statement) as income.

3. **Accounting Entries Over Time:**
- For each accounting period, you would typically adjust the Subsidy Income Account as follows:
- Debit: Subsidy Income Account (with a portion of the subsidy amount allocated for the period)
- Credit: Profit and Loss Account (or Income Statement) - to transfer the subsidy income to the regular operating income.

4. **Impact on Depreciable Asset:**
- The subsidy does not affect the carrying amount of the depreciable asset itself. It is treated separately as income.
- Depreciation continues to be charged on the depreciable asset based on its original cost, less any residual value.

5. **FD (Fixed Deposit) Opened by the Bank:**
- If the bank has opened an FD in the name of the company with the subsidy amount, it represents a separate financial asset of the company (FD asset).
- The FD should be recorded in the books of accounts:
- Debit: FD Account (Asset Account)
- Credit: Bank Account (or Cash Account) - if the subsidy amount was transferred directly to the FD.

6. **Disclosure:**
- Proper disclosure of the subsidy received and its accounting treatment should be made in the financial statements, including the notes to the financial statements.

**Example Journal Entries:**

Assume a subsidy of ₹100,000 is received for a depreciable asset purchased with a term loan, and it is expected to be recognized over 5 years (useful life of the asset):

- Initial receipt of subsidy:
- Debit: Bank Account ₹100,000
- Credit: Subsidy Income Account ₹100,000

- Annual recognition of subsidy income (assuming straight-line allocation):
- Year 1:
- Debit: Subsidy Income Account ₹20,000
- Credit: Profit and Loss Account ₹20,000

- Year 2, Year 3, Year 4, Year 5: Similar entries for each year until the entire subsidy amount is recognized.

These entries ensure that the subsidy income is recognized systematically over the useful life of the depreciable asset, reflecting its contribution to the company's income over time.