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UNIT 2 :
INDIAN ACCOUNTING STANDARD 20: ACCOUNTING
FOR GOVERNMENT GRANTS AND DISCLOSURE
OF GOVERNMENT ASSISTANCE

LEARNING OUTCOMES

After studying this unit, you will be able to:

 Interpret the principles for recognition of government grant including non-

monetary grants
 Recommend presentation requirements of grants related to assets and
income
 Account for repayment of government grants

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UNIT OVERVIEW

Ind AS 20

Government Grants Government Assistance Disclosure

Recognition of
Presentation of Repayment of
Government Grants
Government Grants Government Grants

Reasonable
assurance for
receipt and Related to asset Related to income
compliance

Credited to Statement
of profit and loss, either
Presented in balance separately or under
Non-monetary sheet by setting up grant 'other income'
government grants as deferred income

Alternatively,
deducted in reporting
Alternatively, deduct the grant in arriving related expense
at the carrying amount of the asset

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2.1 INTRODUCTION
The government gives grants to entities for various purposes including for industrial, geographic
and social development, to facilitate the flow of foreign investments, to promote entrepreneurship,
as subsidies to reduce the prices of goods and services offered by these entities.
The grant could be in different forms, e.g., monetary or non-monetary government grants.
Government grants may be significant for an entity and require appropriate treatment in the books
of accounts and disclosures in the financial statements to facilitate comparison with other entities
and with prior periods. Ind AS 20, Accounting for Government Grants and Disclosure of
Government Assistance, provides guidance on this.

2.2 SCOPE
2.2.1 Applicability
Ind AS 20 should be applied for:
(a) accounting and disclosure of government grants; and
(b) disclosure of other forms of government assistance.
2.2.2 Non-applicability
Ind AS 20 does not deal with:
(a) the special problems arising in accounting for government grants in financial statements
reflecting the effects of changing prices or in supplementary information of a similar nature;
(b) government assistance that is provided for an entity in the form of benefits that are available
in determining taxable profit or tax loss, or are determined or limited on the basis of income
tax liability;
Examples of such benefits are income tax holidays, investment tax credits, accelerated
depreciation.
(c) government participation in the ownership of the entity;
(d) government grants that will be covered by Ind AS 41, Agriculture.

2.3 DEFINITIONS
The following definitions are relevant for the purpose of understanding of Ind AS 20:
1. Government refers to government, government agencies and similar bodies whether local,
national or international.

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2. Government assistance is action by government designed to provide an economic benefit

specific to an entity or range of entities qualifying under certain criteria.
Government assistance for the purpose of Ind AS 20 does not include benefits provided only
indirectly through action affecting general trading conditions, such as the provision of
infrastructure in development areas or the imposition of trading constraints on competitors.
Government assistance does not include the provision of infrastructure by improvement to
the general transport and communication network and the supply of improved facilities such
as irrigation or water reticulation which is available on an ongoing indeterminate basis for the
benefit of an entire local community.
Government assistance takes many forms varying both in the nature of the assistance given
and in the conditions which are usually attached to it. The purpose of the assistance may be
to encourage an entity to embark on a course of action which it would not normally have
taken if the assistance was not provided.
The receipt of government assistance by an entity may be significant for the preparation of
the financial statements for two reasons:
 Firstly, if resources have been transferred, an appropriate method of accounting for the
transfer must be found.
 Secondly, it is desirable to give an indication of the extent to which the entity has benefited
from such assistance during the reporting period. This facilitates comparison of an entity’s
financial statements with those of prior periods and with those of other entities.
Examples 1-4 : Government assistance
1. Free technical assistance or marketing advice and the provision of guarantees are forms
of government assistance to which no value could reasonably be assigned.
2. An example of transactions with government which cannot be distinguished from the
normal trading transactions of the entity is a government procurement policy that is
responsible for a portion of the entity’s sales. The existence of the benefit might be
unquestioned but any attempt to segregate the trading activities from government
assistance could well be arbitrary.
3. Assistance in the form of priority bidding status: The government specifies that
entities below a certain size are to be given priority in bidding for a particular type of
government contract by mandating a minimum number of such entities to obtain bidding
status. Although the entities will benefit from the quota, the value cannot be identified,
and the effects of the assistance cannot be segregated from the trading activities of the
entities.

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4. Assistance in the form of credit facilities at market rates: Three governments that
amongst themselves own over 50% of the shares in an airline, participate in granting it
a revolving credit facility at a market rate of interest. This is not a government grant as
a loan is provided at market rate of interest which any private market participant might
have accepted. However, it is government assistance as the benefit cannot be
distinguished from normal trading activities of the airline.
The significance of the benefit in the above examples may be such that disclosure of the
nature, extent and duration of the assistance is necessary in order that the financial
statements may not be misleading.
3. Government grants are assistance by the 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.
Government grants are sometimes called by other names such as subsidies, subventions, or
premiums.
4. 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.
5. Grants related to income are government grants other than those related to assets.

6. Forgivable loans are loans which the lender undertakes to waive repayment of under certain
prescribed conditions.
7. Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date (Ind AS 113,
Fair Value Measurement).

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2.4 RECOGNITION OF GOVERNMENT GRANTS

Recognition of government grant

Only when there is a reasonable

assurance that

Entity will comply with the conditions

Grant will be received
attached to the grant

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.
A government grant is not recognised until there is reasonable assurance that the entity will
comply with the conditions attaching to it, and that the grant will be received. Receipt of a grant
does not of itself provide conclusive evidence that the conditions attaching to the grant have been
or will be fulfilled.
Illustration 1
Government gives a grant of 10,00,000 for past research of H1N1 vaccine to
A Pharmaceuticals Limited. There is no condition attached to the grant.
Examine how this government grant be recognised in the books of A Pharmaceuticals Limited.
Solution
The entire grant should be recognised immediately in the statement of profit and loss.
*****
Illustration 2
Government gives a grant of 10,00,000 for research and development of H1N1 vaccine to
A Pharmaceuticals Limited even though similar vaccines are available in the market but are
expensive. The entity has to ensure by developing a manufacturing process over a period of

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2 years that the costs come down by at least 40%.
Examine how this government grant be recognised assuming that A Pharmaceuticals Limited has
reasonable assurance that the conditions attached to the grant will be complied with.
Solution
The entire grant should be recognised immediately as deferred income and charged to profit or
loss over a period of two years.
*****
Illustration 3
A village of artisans in a district got devastated because of an earthquake. A Limited was
operating in that district and was providing employment to the artisans. The government gave a
grant of 10,00,000 to A Limited so that 100 artisans are rehabilitated over a period of 3 years.
Government releases 2,00,000.
Examine how this government grant be recognised.
Solution
A Limited will recognise 10,00,000 as government grant and set it up as a deferred income and
will recognise it in its profit or loss over the period of three years as per the principles enunciated
in Ind AS 20.
Once a government grant is recognised, any related contingent liability or contingent asset is
treated in accordance with Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets.
The manner in which a grant is received does not affect the accounting method to be adopted in
regard to the grant. Thus a grant is accounted for in the same manner whether it is received in
cash or as a reduction of a liability to the government or in the form of a non-monetary asset.
*****
2.4.1 Forgivable loan
A forgivable loan from government is treated as a government grant when there is reasonable
assurance that the entity will meet the terms for forgiveness of the loan.
2.4.2 Loans at less than market rate of interest
The benefit of a government loan at a below-market rate of interest is treated as a government
grant. The loan should be recognised and measured in accordance with Ind AS 109, Financial
Instruments. The benefit of the below-market rate of interest should be measured as the
difference between the initial carrying value of the loan determined in accordance with

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Ind AS 109 and the proceeds received. The benefit is accounted for in accordance with
Ind AS 20. The entity should consider the conditions and obligations that have been, or must be,
met when identifying the costs for which the benefit of the loan is intended to compensate.
Illustration 4
A Limited received from the government a loan of 50,00,000 @ 5% payable after 5 years in a
bullet payment. The prevailing market rate of interest is 12%. Interest is payable regularly at the
end of each year.
Calculate the amount of government grant and pass necessary journal entry. Also examine how
the Government grant be recognised.
Solution
The fair value of the loan is calculated at 37,38,328 (refer Working Note).

Year Opening Balance Interest Interest paid @ 5% Closing Balance

calculated @ 12% on 50,00,000 +
principal paid

(a) (b) (c) = (b) x 12% (d) (e) =(b) + (c) – (d)

1 37,38,328 4,48,600 2,50,000 39,36,928

2 39,36,928 4,72,431 2,50,000 41,59,359
3 41,59,359 4,99,123 2,50,000 44,08,482
4 44,08,482 5,29,018 2,50,000 46,87,500
5 46,87,500 5,62,500 52,50,000 Nil

A Limited will recognise 12,61,672 ( 50,00,000 – 37,38,328) as the government grant and
will make the following entry on receipt of loan:
Bank Account Dr. 50,00,000
To Deferred Income 12,61,672
To Loan Account 37,38,328
12,61,672 is to be recognised in profit or loss on a systematic basis over the periods in which A
Limited recognise as expenses the related costs for which the grant is intended to compensate.
(see Illustration 5 in this regard).

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Working Note:
Particulars Amount Discounting Present value
( ) factor taking 12% as
the discount
rate
( )
Interest @ 5% for Year 1 on loan amount of 50 lakhs 2,50,000 0.893 2,23,214
Interest @ 5% for Year 2 on loan amount of 50 lakhs 2,50,000 0.797 1,99,298
Interest @ 5% for Year 3 on loan amount of 50 lakhs 2,50,000 0.712 1,77,945
Interest @ 5% for Year 4 on loan amount of 50 lakhs 2,50,000 0.636 1,58,880
Interest @ 5% for Year 5 on loan amount of 50 lakhs 2,50,000 0.567 1,41,857
Loan 50,00,000 0.567 28,37,134
Present value of loan at the beginning of Year 1 37,38,328

The above present value above has been computed on full scale basis.
*****

2.5 ACCOUNTING OF GOVERNMENT GRANT

There are two approaches to the accounting of government grant: ‘capital approach’ or ‘income
approach’. Under capital approach, a grant is recognised outside profit or loss, i.e., grant is
credited directly to equity whereas under the income approach grant is recognised in profit or loss
over one or more periods.
The Standard rejects the capital approach and prescribes only the income approach despite the
following arguments in favour of capital approach:
(a) government grants are a financing device and should be dealt with as such in the balance sheet
rather than be recognised in profit or loss to offset the items of expense that they finance. Since
no repayment is expected, such grants should be recognised outside profit or loss.
(b) it is inappropriate to recognise government grants in profit or loss, because they are not
earned but represent an incentive provided by government without related costs.
The income approach has been prescribed because of the following arguments in its favour:
(a) because government grants are receipts from a source other than shareholders, they should
not be recognised directly in equity but should be recognised in profit or loss in appropriate
periods.
(b) government grants are rarely gratuitous. The entity earns them through compliance with their
conditions and meeting the envisaged obligations. They should therefore be recognised in

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profit or loss over the periods in which the entity recognises as expenses the related costs
for which the grant is intended to compensate.
(c) since income and other taxes are expenses, it is logical to deal also with government grants,
which are an extension of fiscal policies, in profit or loss.
Principle:
Thus, government grants should 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 grant is intended
to compensate.
In most cases the periods over which an entity recognises the costs or expenses related to a
government grant are readily ascertainable. Thus grants in recognition of specific expenses are
recognised in profit or loss in the same period as the relevant expenses. Similarly, grants
related to depreciable assets are usually recognised in profit or loss over the periods and in the
proportions in which depreciation expense on those assets is recognised.
Illustration 5
Continuing with the facts given in the Illustration 4, state how the grant will be recognized in the
statement of profit or loss assuming:
(a) the loan is an immediate relief measure to rescue the enterprise
(b) the loan is a subsidy for staff training expenses, incurred equally, for a period of 4 years
(c) the loan is to finance a depreciable asset.
Solution
12,61,672 is to be recognised in profit or loss on a systematic basis over the periods in which
A Limited recognised as expenses the related costs for which the grant is intended to compensate.
Assuming (a), the loan is an immediate relief measure to rescue the enterprise - 12,61,672 will
be recognised in profit or loss immediately.
Assuming (b), the loan is a subsidy for staff training expenses, incurred equally, for a period of
4 years, 12,61,672 will be recognised in profit or loss over a period of 4 years.
Assuming (c), the loan is to finance a depreciable asset - 12,61,672 will be recognised in profit
or loss on the same basis as depreciation.
*****
2.5.1 Whether receipts basis permissible
Recognition of government grants in profit or loss on a receipts basis is not in accordance with
the accrual accounting assumption (Ind AS 1, Presentation of Financial Statements) and would
be acceptable only if no basis existed for allocating a grant to periods other than the one in which
it was received.

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2.5.2 Grants related to non-depreciable assets
Grants related to non-depreciable assets may also require the fulfilment of certain obligations and
would then be recognised in profit or loss over the periods that bear the cost of meeting the obligations.
Example 5
A grant of land may be conditional upon the erection of a building on the site and it may be
appropriate to recognise the grant in profit or loss over the life of the building.

2.5.3 Conditional Grants received as part of a package of financial or

fiscal aids
In such cases, care is needed in identifying the conditions giving rise to costs and expenses which
determine the periods over which the grant will be earned. It may be appropriate to allocate part
of a grant on one basis and part on another.
2.5.4 Grant for expenses or losses already incurred and grant as an
immediate financial support
A government grant that becomes receivable as compensation for expenses or losses already
incurred or for the purpose of giving immediate financial support to the entity with no future related
costs should be recognised in profit or loss of the period in which it becomes receivable.
In some circumstances, a government grant may be awarded for the purpose of giving immediate
financial support to an entity rather than as an incentive to undertake specific expenditures. Such
grants may be confined to a particular entity and may not be available to a whole class of
beneficiaries. These circumstances may warrant recognising a grant in profit or loss of the period
in which the entity qualifies to receive it, with appropriate disclosures to ensure that its effect is
clearly understood.
A government grant may become receivable by an entity as compensation for expenses or losses
incurred in a previous period. Such a grant is recognised in profit or loss of the period in which it
becomes receivable, with disclosure to ensure that its effect is clearly understood.
2.5.5 Non-monetary government grants
A government grant may take the form of a transfer of a non-monetary asset, such as land or
other resources, for the use of the entity. In these circumstances the fair value of the non-
monetary asset is assessed and both grant and asset are accounted for at that fair value.
Alternatively, an entity may measure both asset and grant at nominal value.

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Non-monetary government grants

Either Or

Assess the fair value of the non-monetary asset and Record both asset and grant at a
account for both grant and asset at that fair value nominal amount

Illustration 6
A Limited wants to establish a manufacturing unit in a backward area and requires 5 acres of land.
The government provides the land on a leasehold basis at a nominal value of 10,000 per acre.
The fair value of the land is 100,000 per acre.
Calculate the amount of the government grant to be recognized by an entity.
Solution
A limited will recognise the land at fair value of 5,00,000 and 450,000 [( 100,000 –
10,000) x 5)] as government grant. This government grant should be presented in the balance
sheet by setting up the grant as deferred income.
Alternatively, the land may be recognised by A Ltd. at nominal value of 50,000 ( 10,000 x 5).
*****
2.5.6 Government Assistance – No Specific relation to Operating
Activities
In some countries government assistance to entities may be aimed at encouragement or long-term
support of business activities either in certain regions or industry sectors. Conditions to receive such
assistance may not be specifically related to the operating activities of the entity.
Examples of such assistance are transfers of resources by governments to entities which:
(a) operate in a particular industry;
(b) continue operating in recently privatised industries; or
(c) start or continue to run their business in underdeveloped areas.
The issue is whether such government assistance is a ‘government grant’ within the scope of
Ind AS 20 and, therefore, should be accounted for in accordance with Ind AS 20.
In this regard, Appendix A to Ind AS 20 provides that government assistance to entities meets the
definition of government grants in Ind AS 20, even if there are no conditions specifically relating
to the operating activities of the entity other than the requirement to operate in certain regions or

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industry sectors. Such grants should therefore not be credited directly to shareholders’ interests
and should be recognised in profit or loss on a systematic basis.

2.6 PRESENTATION OF GRANTS RELATED TO ASSETS

2.6.1 Presentation in the Balance Sheet
Government grants related to assets should be presented in the balance sheet by setting up the
grant as deferred income. The non-monetary grants at fair value should be presented in a similar
manner.
Alternatively, it can be presented in the balance sheet by deducting the grant in arriving at the
carrying amount of the asset.
The grant set up as deferred income is recognised in profit or loss on a systematic basis over the
useful life of the asset.
The other method deducts the grant in calculating the carrying amount of the asset. The grant is
recognised in profit or loss over the life of a depreciable asset as a reduced depreciation expense.
Illustration 7
A Limited establishes solar panels to supply solar electricity to its manufacturing plant. The cost
of solar panels is 1,00,00,000 with a useful life of 10 years. The depreciation is provided on
straight line method basis. The government gives 50,00,000 as a subsidy.
Examine how the Government grant be realized.
Solution
A Limited will set up 50,00,000 as deferred income and will credit 5,00,000 equally to its
statement of profit and loss over next 10 years.
Alternatively, A Ltd. may deduct 50,00,000 from the cost of solar panel of 1,00,00,000.
*****
2.6.2 Disclosure in the statement of cash flows
The purchase of assets and the receipt of related grants can cause major movements in the cash
flow of an entity. For this reason and in order to show the gross investment in assets, such
movements are disclosed as separate items in the statement of cash flows. This presentation is
done irrespective of the fact that the grant is deducted or not from the related asset, for the
purpose of presentation in the balance sheet.

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Illustration 8
Continuing with the facts given in Illustration 7 above, state how the same will be disclosed in the
Statement of cash flows.
Solution
A Limited will show 1,00,00,000 being acquisition of solar panels as outflow in investing
activities. The receipt of 50,00,000 from government will be shown as inflow under investing
activities.
*****

2.7 PRESENTATION OF GRANTS RELATED TO INCOME

Two methods are prescribed for presentation of grants related to income. The grant could be
(a) (first method) presented as a credit in the statement of profit and loss, either separately or
under a general heading such as ‘Other income’; or
(b) (second method) deducted in reporting the related expense.
The first method lays it foundation on the base:
(a) that it is inappropriate to net income and expense items and
(b) that separation of the grant from the expense facilitates comparison with other expenses not
affected by a grant.
It is argued for the second method:
(a) that the expenses might well not have been incurred by the entity if the grant had not been
available; and
(b) thus, presentation of the expense without offsetting the grant may therefore be misleading.
Both methods are regarded as acceptable for the presentation of grants related to income.
Disclosure of the grant may be necessary for a proper understanding of the financial statements.
Disclosure of the effect of the grants on any item of income or expense which is required to be
separately disclosed is usually appropriate.

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Either presented in balance
sheet by setting up grant as
deferred income
Related to assets
Or deducted from the cost of
the asset
Presentation of
government grant
Presented as part of profit or
loss, either separately or
under 'other income'
Related to income
Alternatively, deducted in
reporting related expense

Illustration 9
A Ltd. received a government grant of 10,00,000 to defray expenses for environmental
protection. Expected environmental costs to be incurred is 3,00,000 per annum for the next 5
years.
Determine the presentation of such grant related to income in the financial statements of A Ltd.?
Solution
As per paragraph 29 of Ind AS 20, grants related to income are presented as part of profit or loss,
either separately or under a general heading such as ‘Other income’; alternatively, they are
deducted in reporting the related expense.
In accordance with the above, presentation of grants related to income under both the methods
are as follows:
Method 1: Credit in the statement of profit and loss
The entity can recognise the grant as income on a straight line basis i.e., 2,00,000 per year in
the statement of profit and loss either separately or under the head “Other Income”.
The supporters of this method consider it inappropriate to present income and expense items on
a net basis and that ‘separation of the grant from the expense facilitates comparison with other
expenses not affected by a grant’.
Method 2: As a deduction in reporting the related expense
Since the grant relates to environmental expenses incurred/to be incurred by the entity, it can
present the grant by reducing the grant amount every year from the related expense i.e.,
environmental expense of 1,00,000 (i.e., net expense 3,00,000 – 2,00,000).
The supporters of this method are of the view that ‘the expenses might well not have been incurred
by the entity if the grant had not been available and presentation of the expense without offsetting

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the grant may therefore be misleading’.

The Standard regards both the methods as acceptable for the presentation of grants related to
income. However, method 2 may be more appropriate when the company can relate the grant to
a specific expenditure.
The Standard also provides that disclosure of the grant may be necessary for a proper
understanding of the financial statements. Disclosure of the effect of the grants on any item of
income or expense which is required to be separately disclosed is usually appropriate.
*****

2.8 REPAYMENT OF GOVERNMENT GRANTS

An entity may have to repay the government grant including in cases where conditions related to
the grant are not fulfilled by it.
A government grant that becomes repayable should be accounted for as a change in accounting
estimate and be treated in accordance with Ind AS 8, Accounting Policies, Changes in Accounting
Estimates and Errors.
Repayment of a grant related to income
The following steps should be followed in repayment of a grant related to income:
(a) The repayment should be applied first against any unamortised deferred credit recognised in
respect of the grant.
(b) To the extent that the repayment exceeds any such deferred credit, or when no deferred
credit exists, the repayment should be recognised immediately in profit or loss.
The repayment of a grant related to an asset should be recognised either by reducing the deferred
income balance by the amount repayable or by increasing the carrying amount of the asset.

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Repayment of government grant

Related to income Related to asset

First applied *Either recognised by increasing the

towards any carrying amount of the asset
unapplied
deferred credit *The cumulative additional depreciation Or by reducing the
and then that would have been recognised in deferred income balance
charged to profit profit or loss to date in the absence of by the amount payable
and loss the grant shall be recognised
account immediately in profit or loss.
immediately * Check the possible impairment of the
new carrying amount of the asset.

Illustration 10
A Ltd. has received a grant of 10,00,00,000 in the year 20X1-20X2 from local government in the
form of subsidy for selling goods at lower price to lower income group population in a particular
area for two years. A Ltd. had accounted for the grant as income in the year
20X1-20X2. While accounting for the grant in the year 20X1-20X2, A Ltd. was reasonably assured
that all the conditions attached to the grant will be complied with. However, in the year 20X5-
20X6, it was found that A Ltd. has not complied with the above condition and therefore notice of
refund of grant has been served to it. A Ltd. has contested but lost in court in
20X5-20X6 and now grant is fully repayable. The accounting done in previous years was not
incorrect and was not an error as per Ind AS 8.
Analyse how should A Ltd. reflect repayable grant in its financial statements ending 20X5-20X6?
Solution
Paragraph 32 of Ind AS 20, states that a government grant that becomes repayable shall be
accounted for as a change in accounting estimate (see Ind AS 8, Accounting Policies, Changes
in Accounting Estimates and Errors).
Repayment of a grant related to income shall be applied first against any unamortised deferred
credit recognised in respect of the grant. To the extent that the repayment exceeds any such
deferred credit, or when no deferred credit exists, the repayment shall be recognised immediately
in profit or loss.

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The following journal entries should be passed:

S. Particulars Nature of Account Amount

No. ( in crores)
(i) Repayment of Government Grant Expense (P/L) Dr. 10
To Grant repayable Balance sheet (Liability) 10
(Being recognition of repayment
of grant in statement of profit or
loss)
(ii) Grant repayable Balance sheet (Liability) Dr. 10
To Bank Balance sheet (Asset) 10
(Being grant refunded)

Assuming that no deferred credit balance exists in the year 20X5-20X6, therefore repayment
recognised in P&L.
*****

2.9 DISCLOSURE
The following should be disclosed:
(a) the accounting policy adopted for government grants;
(b) the methods of presentation adopted for government grants in the financial statements;
(c) the nature and extent of government grants recognised in the financial statements;
(d) an indication of other forms of government assistance from which the entity has directly
benefited. At times, the significance of the benefit of government assistance may be such
that disclosure of the nature, extent and duration of the assistance is necessary in order that
the financial statements may not be misleading; and
(e) unfulfilled conditions and other contingencies attaching to government assistance that has
been recognised.
*****

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2.10 EXTRACTS OF FINANCIAL STATEMENTS OF LISTED

ENTITIES
Following is the extract from the financial statements of the listed entity ‘Hindustan Unilever
Limited’ for the financial year 2021-2022 with respect to ‘Government Grants’.

(Source: Annual Report 2021-2022 – Hindustan Unilever Limited)

2.11 SIGNIFICANT DIFFERENCES BETWEEN IND AS 20

AND AS 12
S. Particulars Ind AS 20 AS 12
No.
1. Monetary grants Taken to the statement of Credited as capital reserve
related to non- profit and loss assuming which is part of shareholder’s
depreciable assets that all grants have funds.
conditions attached to it. If such grant requires fulfilment
Specifically prohibits of certain obligations, credit the
recognition of grants grant amount to income over the
directly in the shareholders’ same period over which the cost
funds of meeting such obligations is
charged to income.
2. Non-monetary Accounted for at fair value  Accounted for on the basis

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government grant or at nominal value of their acquisition cost

given at a  Non-monetary assets given
concessional rate free of cost are recorded at
a nominal value
3. Grants in the nature of Ind AS 20 does not recognise To be credited to capital reserve
promoter’s government grants of the and to be treated as part of
contribution nature of promoters’ shareholders’ funds
contribution.
As stated at (1) above,
Ind AS 20 is based on the
principle that all government
grants would normally have
certain obligations attached
to them and it, accordingly,
requires all grants to be
recognised as income over
the periods which bear the
cost of meeting the
obligation.
4. Loan received from the Measured in accordance AS 12 does not deal with such
government at below- with Ind AS 109 (which cases
market rate of interest requires all loans to be
recognised at fair value,
thus requiring interest to be
imputed to loans with a
below-market rate of
interest)
5. Government Requires an indication of Does not deal with such
assistance not falling other forms of government government assistance
within the definition of assistance from which the
government grants entity has directly benefited
and should be disclosed in
the financial statements

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FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE

Questions
1. ABC Ltd. has received the following grants from the Government of Delhi for its newly started
pharmaceutical business:
● 20 lakhs received for immediate start-up of business without any further condition.
● 50 lakhs received for research and development of drugs required for the treatment
of cardiovascular diseases with following conditions:
 that drugs should be available to the public at 20% cheaper from current market
price; and
 the drugs should be in accordance with quality prescribed by the World Health
Organisation [WHO].
● Two acres of land (fair Value: 10 Lakhs) received for set up of plant.
● 2 lakhs received for purchase of machinery of 10 lakhs. Useful life of machinery is
5 years. Depreciation on this machinery is to be charged on straight-line basis.
Recommend how should ABC Ltd. recognise the government grants in its books of accounts.
2. A Limited received from the government a loan of 1,00,00,000 @ 5% payable after
5 years in a bulleted payment. The prevailing market rate of interest is 12%. Interest is
payable regularly at the end of each year.
Calculate the amount of government grant and pass necessary journal entry. Also examine
how the government grant be recognised. Also state how the grant will be recognized in the
statement of profit or loss assuming that the loan is to finance a depreciable asset.
3. MNC Ltd. has received grant in the nature of exemption of custom duty on capital goods with
certain conditions related to export of goods under Export Promotion Capital Goods (EPCG)
scheme of Government of India.

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 INDIAN ACCOUNTING STANDARD 20 7.51

State whether the same is a government grant under Ind AS 20, Government Grants and
Disclosure of Government Assistance? If yes, then how the same is to be accounted for if it is
(a) A grant related to asset; or
(b) A grant related to income.
4. ABC Ltd is a government company and is a first-time adopter of Ind AS. As per the previous
GAAP, the contributions received by ABC Ltd. from the government (which holds 100%
shareholding in ABC Ltd.) which is in the nature of promoters’ contribution have been
recognised in capital reserve and treated as part of shareholders’ funds in accordance with
the provisions of AS 12, Accounting for Government Grants.
State whether the accounting treatment of the grants in the nature of promoters’ contribution
as per AS 12 is also permitted under Ind AS 20 Accounting for Government Grants and
Disclosure of Government Assistance.
5. Rainbow Limited carries out various projects for which it has either received government
financial assistance or is in the process of receiving the same. The company has received
two grants of 1,00,000 each, relating to the following ongoing research and development
projects:
(i) The first grant relates to the “Clean river project” which involves research into the effect
of various chemicals waste from the industrial area in Madhya Pradesh. However, no
major steps have been completed by Rainbow limited to commence this research as at
31 st March, 20X2.
(ii) The second grant relates to the commercial development of a new equipment that can be
used to manufacture eco-friendly substitutes for existing plastic products.
Rainbow Limited is confident about the technical feasibility and financial viability of this
new technology which will be available for sale in the market by April 20X3.
In September 20X1, due to the floods near one of its factories, the entire production was lost
and Rainbow Limited had to shut down the factory for a period of 3 months. The State
Government announced a compensation package for all the manufacturing entities affected
due to the floods. As per the scheme, Rainbow Limited is entitled to a compensation based
on the average of previous three months’ sales figure prior to the floods, for which the
company is required to submit an application form on or before 30 th June, 20X2 with
necessary figures. The financial statements of Rainbow Limited for the year ended
31 st March 20X2 are to be adopted on 31 st May, 20X2, by which date the claim form would
not have been filed with the State Government.
Suggest the accounting treatment of, if any, for the two grants received and the flood-related
compensation in the books of accounts of Rainbow Limited as at 31 st March, 20X2.

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6. An entity opens a new factory and receives a government grant of 15,000 in respect of
capital equipment costing 1,00,000. It depreciates all plant and machinery at 20% per
annum on straight-line basis.
Show the statement of profit and loss and balance sheet extracts in respect of the grant for
first year under both the methods as per Ind AS 20.
7. A company receives a cash grant of 30,000 on 31 st March 20X1. The grant is towards the
cost of training young apprentices. Training programme is expected to last for
18 months starting from 1 st April 20X1. Actual costs of the training incurred in 20X1-20X2
was 50,000 and in 20X2-20X3 25,000.
State, how this grant should be accounted for.
8. Entity A is awarded a government grant of 60,000 receivable over three years ( 40,000 in
year 1 and 10,000 in each of years 2 and 3), contingent on creating 10 new jobs and
maintaining them for three years. The employees are recruited at a total cost of 30,000,
and the wage bill for the first year is 1,00,000, rising by 10,000 in each of the subsequent
years.
Calculate the grant income and deferred income to be accounted for in the books for the
years 1, 2 and 3 under the following two situations:
(a) There is reasonable assurance that the entity will comply with the conditions attaching
to them and the grant will be received
(b) There is no reasonable assurance that the grant will be received.
Answers
1. ABC Ltd. should recognise the grants in the following manner:
● 20 lakhs have been received for immediate start-up of business. This should be
recognised in Statement of Profit and Loss immediately as there are no further
conditions attached to the grant.
● 50 lakhs should be recognised in profit or loss on a systematic basis over the periods
which the entity recognises as expense the related costs for which the grants are
intended to compensate provided that there is reasonable assurance that
ABC Ltd. will comply with the conditions attached to the grant.
● Land should be recognised at fair value of 10 lakhs and government grant should be
presented in the balance sheet by setting up the grant as deferred income.
Alternatively, deduct the amount of grant from the cost of the asset. In the given case,
the land is granted at no cost. It will be presented in the books at nominal value.

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● 2 lakhs should be recognised as deferred income and will be transferred to profit and
loss over the useful life of the asset. In this case, 40,000 [ 2 lakhs/5] should be
credited to profit and loss each year over a period of 5 years. Alternatively,
2,00,000 will be deducted from the cost of the asset and depreciation will be charged
at reduced amount of 8,00,000 ( 10,00,000 – 2,00,000) every year.
2. The fair value of the loan is calculated at 74,76,656 (refer Working Note).
Year Opening Balance Interest Interest paid @ 5% Closing Balance
calculated on 1,00,00,000 +
@ 12% principal paid
(a) (b) (c) = (b) x 12% (d) (e) =(b) + (c) – (d)
1 74,76,656 8,97,200 5,00,000 78,73,856
2 78,73,856 9,44,862 5,00,000 83,18,718
3 83,18,718 9,98,246 5,00,000 88,16,964
4 88,16,964 10,58,036 5,00,000 93,75,000
5 93,75,000 11,25,000 1,05,00,000 Nil

A Limited will recognise 25,23,344 ( 1,00,00,000 – 74,76,656) as the government grant

and will make the following entry on receipt of loan:
Bank Account Dr. 1,00,00,000
To Deferred Income 25,23,344
To Loan Account 74,76,656
25,23,344 is to be recognised in profit or loss on a systematic basis over the periods in
which A Limited recognised as expenses the related costs for which the grant is intended to
compensate.
If the loan is to finance a depreciable asset. 25,23,344 will be recognised in profit or loss
on the same basis as depreciation.
Working Note:
Discountin Present value
g factor@ taking 12% as
12% the discount
Particulars Rs. rate (Rs.)
Interest @ 5% for Year 1 on loan amount of 1 0.893
crore 5,00,000 4,46,429
Interest @ 5% for Year 2 on loan amount of 1 0.798
crore 5,00,000 3,98,597

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Interest @ 5% for Year 3 on loan amount of 1 0.712
crore 5,00,000 3,55,890
Interest @ 5% for Year 4 on loan amount of 1 0.636
crore 5,00,000 3,17,759
Interest @ 5% for Year 5 on loan amount of 1 0.567
crore 5,00,000 2,83,713
Loan 1,00,00,000 0.567 56,74,269
Present value of loan at the beginning of Year 1 74,76,656

The above present value above has been computed on full scale basis.
3. Paragraph 3 of Ind AS 20 states that 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.
In accordance with the above, in the given case exemption of custom duty under
EPCG scheme is a government grant and should be accounted for as per the provisions of
Ind AS 20.
Ind AS 20 defines grant related to assets and grants related to income as follows:
“Grants related to asset 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.”
Presentation
It is pertinent to note that the classification of the grant as related to asset or income will
require exercise of judgement and careful examination of the facts, objective and conditions
attached to the scheme of the government. Care is also required to ascertain the purpose
of the grant and the costs for which the grant is intended to compensate. Based on the
evaluation of facts, if it is ascertained that the grant is an asset related grant then the same
shall be presented as per paragraphs 24 and 26 of Ind AS 20 which has been stated below:
Presentation of grants related to assets
As per para 24, government grants related to assets, including non-monetary grants at fair
value, shall be presented in the balance sheet by setting up the grant as deferred income.
As per para 26, the grant set up as deferred income is recognised in profit or loss on a
systematic basis over the useful life of the asset.

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If it is determined that the grant is related to income then the same shall be presented as
follows:
Presentation of grants related to income
As per para 29, grants related to income are presented as part of profit or loss, either
separately or under a general heading such as ‘Other income’; alternatively, they are
deducted in reporting the related expense.
It may be further noted that as per paragraph 12 of Ind AS 20, government grants shall be
accounted as follows:
As per para 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.
In the given case, if based on the terms and conditions of the scheme, the grant received is
to compensate the import cost of assets subject to an export obligation as prescribed in the
EPCG Scheme; recognition of grant in the statement of profit and loss should be linked to
fulfilment of associated export obligations.
However, if the grant received is to compensate the import cost of the asset and based on
the examination of the terms and conditions of the grant, if it can be reasonably concluded
that conditions relating to export of goods are subsidiary conditions, then it is appropriate to
recognise such grant in profit or loss over the life of the underlying asset.
4. Paragraph 2 of Ind AS 20, “Accounting for Government Grants and Disclosure of Government
Assistance” inter alia states that the Standard does not deal with government participation in
the ownership of the entity.
Since ABC Ltd. is a government company, it implies that government has 100% shareholding
in the entity. Accordingly, as per Ind AS 20, the entity needs to determine whether the
payment is provided as a shareholder contribution or as a government. Equity contributions
will be recorded in equity while grants will be shown in the Statement of Profit and Loss.
Where it is concluded that the contributions are in the nature of government grant, the entity
shall apply the principles of Ind AS 20 retrospectively as specified in Ind AS 101 ‘First Time
Adoption of Ind AS’. Ind AS 20 requires all grants to be recognised as income 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. Unlike AS 12, Ind AS 20 requires the grant to be
classified as either a capital or an income grant and does not permit recognition of
government grants in the nature of promoter’s contribution directly to shareholders’ funds.

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5. Accounting treatment for:
1. First Grant
The first grant for ‘Clear River Project’ involving research into effects of various
chemicals waste from the industrial area in Madhya Pradesh, seems to be unconditional
as no details regarding its refund has been mentioned. Even though the research has
not been started nor any major steps have been completed by Rainbow Limited to
commence the research, yet the grant will be recognised immediately in profit or loss
for the year ended 31 st March, 20X2.
Alternatively, in case, the grant is conditional as to expenditure on research, the grant
will be recognised in the books of Rainbow Limited over the year the expenditure is
being incurred.
2. Second Grant
The second grant related to commercial development of a new equipment is a grant
related to depreciable asset. As per the information given in the question, the
equipment will be available for sale in the market from April, 20X3. Hence, by that time,
grant relates to the construction of an asset and should be initially recognised as
deferred income.
The deferred income should be recognised as income on a systematic and rational basis
over the asset’s useful life.
The entity should recognise a liability in its balance sheets as at 31 st March, 20X2 and
31 st March, 20X3. Once the equipment starts getting used in the manufacturing
process, the deferred grant income of 100,000 should be recognised over the asset’s
useful life to compensate for depreciation costs.
Alternatively, as per Ind AS 20, Rainbow Limited would also be permitted to offset the
deferred income of 100,000 against the cost of the equipment as at 1 st April, 20X3.
3. For flood related compensation
Rainbow Limited will be able to submit an application form only after 31 st May, 20X2 ie
in the year 20X2-20X3. Although flood happened in September, 20X1 and loss was
incurred due to flood in the year 20X1-20X2, the entity should recognise the income
from the government grant in the year when the application form related to it is submitted
and approved by the government for compensation.
Since, in the year 20X1-20X2, the application form could not be submitted due to
adoption of financials with respect to sales figure before flood occurred,
Rainbow Limited should not recognise the grant income as it has not become receivable
as at 31 st March,20X2.

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6. (a) When grant is treated as deferred income

Statement of profit and loss – An extract

Depreciation ( 1,00,000 x 20%) (20,000)

Government grant credit (W.N.1) 3,000

Balance Sheet - An extract

Non-current assets
Property, plant and equipment 1,00,000
Less: Accumulated depreciation (1,00,000 x 20%) (20,000) 80,000
XXXX
Non-current liabilities
Government grant [12,000 – 3,000 (current liability)] 9,000
Current liabilities
Government grant (15,000 x 20%) 3,000
XXXX
Working Note:
1. Government grant deferred income account

To Profit or loss 3,000 By Grant cash received 15,000

(15,000 × 20%)
To Balance c/f 12,000
15,000 15,000
(b) When grant is deducted from cost of the asset
Statement of profit and loss – An extract

Depreciation [( 1,00,000 – 15,000) x 20%] (17,000)

Balance Sheet – An extract

Non-current assets
Property, plant and equipment (1,00,000-15,000) 85,000
Less: Accumulated depreciation (17,000) 68,000

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7. As at 31 st March 20X1 the grant would be recognised as a liability (deferred income) and
presented in the balance sheet as a split between current and non-current amounts.
20,000 [(12 months / 18 months) x 30,000] is current which would be recognised in the
statement of profit and loss for the year ended 31 st March, 20X2. The balance amount of
10,000 will be shown as non-current.
At the end of year 20X1-20X2, there would be a current balance of 10,000 (being the non-
current balance at the end of year 20X1-20X1 reclassified as current) in the balance sheet.
This would be recognised in profit in the year 20X2-20X3.
Extracts from the financial statements are as follows:
Balance Sheet (extracts)

31 March 20X1 31 March 20X2 31 March 20X3

Current liabilities
Deferred income 20,000 10,000 -
Non-current liabilities
Deferred income 10,000 - -

Statement of profit and loss (extracts)

31 March 20X2 31 March 20X3

Method 1
Other Income - Government grant received 20,000 10,000
Training costs (50,000) (25,000)
Method 2
Training costs (50,000 – 20,000) 30,000
Training costs (25,000 – 10,000) 15,000

8. (a) When there is reasonable assurance

The grant of 60,000 should be recognised at the beginning of the first year as
receivable and will be compensated for the related costs over three years.
The initial journal entry would be:

Grant Receivable Ac Dr. 60,000

To Deferred Income A/c 60,000

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Calculation of grant income and deferred income:

Year Labour Grant Computation of Deferred Computation of

Cost Income Grant Income Income at the deferred income at
end of the year the end of the year

1 1,30,000 21,667 60,000 x (130/360) 38,333 (60,000 – 21,667)

2 1,10,000 18,333 60,000 x (110/360) 20,000 (38,333 – 18,333)
3 1,20,000 20,000 60,000 x (120/360) - (20,000 – 20,000)
3,60,000 60,000

Therefore, grant income to be recognised in the Statement of Profit and Loss for the
years 1, 2 and 3 would be 21,667, 18,333 and 20,000 respectively.
The amount of grant that has not yet been credited to the statement of profit and loss
i.e. deferred income is to be shown in the balance sheet. Hence deferred income
balance as at end of year 1, 2 and 3 are 38,333, 20,000 and Nil respectively.
(b) When reasonable assurance is not there
The grant of 60,000 should be recognised over three years to compensate for the
related costs.
The journal entry on receipt of grant at year 1 would be:
Grant Receivable Ac Dr. 40,000
To Deferred Income A/c 40,000
Calculation of Grant Income and Deferred Income:
Year Labour Grant Computation of Deferred Computation of deferred
Cost Income Grant Income Income at income at the end of the
the end of year
the year

1 1,30,000 21,667 60,000 x (130/360) 18,333 (40,000 – 21,667)

2 1,10,000 18,333 60,000 x (110/360) 10,000 (50,000 – 21,667 – 18,333)
3 1,20,000 20,000 60,000 x (120/360) - (60,000 – 21,667 – 18,333 –
20,000)
3,60,000 60,000
Therefore, Grant income to be recognised in the statement of Profit and Loss for the
years 1, 2 and 3 would be 21,667, 18,333 and 20,000 respectively.
Amount of grant that has not yet been credited to the statement of profit and loss i.e;
deferred income is to be shown in the balance sheet. Hence, deferred income balance
as at the end of year 1, 2 and 3 are 18,333, 10,000 and Nil respectively.

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