Govtgrant rcvd directly by some other person

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RAGHAVENDRA HEGDE (Querist)
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28 December 2013 My client is a charitable Trust registered U/S12A of IT Act.The Trust Granted MLC Grant of Rs 10 lakh for Building costing Rs 40 lakh.The said work of construction was given to a cotractor.The Govt Dept paid Rs10 lakh Grant directly to the Contractor & the balance amount of the bill paid by the Trust.

Please suggest me in Accounting treatment of this Grant according to AS 12& for the purpose of 12A of the IT Act

CA Hardik Bunha

CA Hardik Bunha (Expert)
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28 December 2013 you have to create grant received a/c in your books of account.

pass following entry:

grant received a/c dr.
to fixed asset

contractor dr.
to grant reeived a/c

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RAGHAVENDRA HEGDE

RAGHAVENDRA HEGDE (Querist)
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30 December 2013 Thank you.
Is there any guidance notes or need to follow AS 12 by increasing bldg value & subsequently reducing bldg value,with some supporting s if any please.

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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26 July 2024 ### **Guidance on Government Grants and AS 12**

**AS 12 - Accounting for Government Grants** provides guidance on accounting for government grants and the disclosure of related information. Specifically, it addresses how to account for grants received from the government, including grants related to fixed assets like buildings.

Here’s a breakdown of how AS 12 applies, particularly in terms of increasing and subsequently reducing the value of buildings:

### **1. **Recognition and Measurement of Government Grants (AS 12)**

**Initial Recognition**:
- Government grants related to fixed assets, such as buildings, are initially recognized as a liability (deferred income) in the balance sheet.
- The grant should be recognized in the profit and loss account over the periods in which the related asset is depreciated.

**Journal Entry for Grant Receipt**:
When a grant is received for a fixed asset, such as a building, it is often credited to a deferred income account:
```plaintext
Bank Account (Dr) XX
Deferred Income (Cr) XX
```

**Subsequent Recognition**:
- The grant is then recognized in the profit and loss account systematically over the useful life of the asset. This can be done by either reducing the carrying amount of the asset or by crediting a separate account.

**Example**:
Assuming a grant of Rs. 5 lakhs is received for a building:
```plaintext
Deferred Income (Dr) 5,00,000
Building Account (Cr) 5,00,000
```
As the building is depreciated, the corresponding grant income is recognized:
```plaintext
Deferred Income (Dr) XX
Grant Income (Cr) XX
```
Where XX is the amount of the grant recognized in the profit and loss account for that period.

### **2. **Government Grants and Asset Valuation**

When a grant is received and credited to the asset account, the value of the asset is increased. This increased value is depreciated over the asset's useful life.

**Reduction of Building Value**:
- If a grant is returned or if the conditions of the grant are not met, the previously recognized grant amount may need to be adjusted.
- The adjustment involves reducing the asset's carrying amount or adjusting the deferred income account.

**Example**:
If you return Rs. 1 lakh of the grant after 3 years:
```plaintext
Deferred Income (Dr) 1,00,000
Bank Account (Cr) 1,00,000
```
And subsequently:
```plaintext
Building Account (Dr) 1,00,000
Deferred Income (Cr) 1,00,000
```
This adjustment would be done to align with the actual conditions and ensure accurate financial reporting.

### **3. **Supporting Guidance and Notes**

**a. **Accounting Standards (AS 12)**:
Refer to AS 12 for detailed guidance on the treatment of government grants. The standard emphasizes:
- Recognition of grants as income over the asset’s useful life.
- The option to either deduct the grant from the asset’s cost or recognize it as a separate income account.

**b. **Relevant Notes and Examples**:
- **AS 12 Guidance Notes**: Various professional accounting bodies and textbooks provide additional guidance and examples. These include explanations on how to handle different scenarios, such as adjustments for returned grants or changes in asset values.

**c. **International Standards**:
- **IAS 20 (International Accounting Standard 20)**: Provides similar guidance as AS 12 and can be used for comparative understanding. It discusses accounting for government grants and disclosure of government assistance.

### **4. **Conclusion**

- **Increase in Asset Value**: When the grant is initially received, it typically increases the value of the asset (building).
- **Subsequent Adjustments**: If there are changes, such as a return of part of the grant, adjustments are made to reflect the new reality, often by reducing the asset value or adjusting the deferred income.

**Supporting Documentation**:
- Refer to AS 12 in your local accounting standards.
- Consult accounting textbooks or guidance notes provided by professional accounting bodies for detailed examples and explanations.

If you have specific scenarios or need more detailed examples, please consult the full text of AS 12 or seek advice from a professional accountant familiar with your jurisdiction's regulations.