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Nishant commented
about 5 years ago
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Two broad approaches may be followed for the accounting treatment
of government grants: the โcapital approachโ, under which a grant is treated
as part of shareholdersโ funds, and the โincome approachโ, under which a grant is taken to income over
one ormore periods.
2.Those in support of the โcapital approachโ argue as follows:
(i) Many government grants are in the nature of promotersโ
contribution, i.e., they are given with reference to the total
investment in an undertaking or by way of contribution towards
its total capital outlay and no repayment is ordinarily expected in
the case of such grants. These should, therefore, be credited directly
to shareholdersโ funds.
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1. Two broad approaches may be followed for the accounting treatment
of government grants: the โcapital approachโ, under which a grant is treated
as part of shareholdersโ funds, and the โincome approachโ, under which a grant is taken to income over
one ormore periods.
2.Those in support of the โcapital approachโ argue as follows:
(i) Many government grants are in the nature of promotersโ
contribution, i.e., they are given with reference to the total
investment in an undertaking or by way of contribution towards
its total capital outlay and no repayment is ordinarily expected in
the case of such grants. These should, therefore, be credited directly
to shareholdersโ funds.
(ii) It is inappropriate to recognise government grants in the profit
and loss statement, since they
are not earned but represent an
incentive provided by government without related
costs
An appropriate amount in respect of such earned benefits, estimated
on a prudent basis, is credited to income for the year even though the actual
amount of such benefits may be finally settled and received after the end of
the relevant accounting period.
A contingency related to a government grant, arising
after the grant has
been recognised, is treated
in accordance with Accounting Standard (AS) 4, Contingencies and Events Occ
urring After the Balance Sheet Date.