Govt grant in aid Capital and accounting Standard

Recognize the grant as a liabiity if it's conditional and refundable. 

As per AS 12 (Acounting for Govt. Grants), if the grant relates to a specific fixed asset, reduce the carrying amount of the asset or treat it as deferred income. 

Generally, you don't reduce capital by the grant amount. Grants are typically treated as income or deducted from the asset's cost. 

AS 12 is applicable for accounting for govt. grants 

Many thanks Sir.

Grant in aid seems a part of seed capital and breach of conditions will permit Central Govt to rake back grant. 

Option to treat as Capital Reserve is possibly not permissible. 

If we reduce from Assets, any impact on depreciation as per IT Act, tax audit? Proper reflection of asset value will be distorted

Regards,

Even if you reduce govt grant from Value of asset, there is no impact on depreciation as per income tax act. As per sec 28 of Income tax act, Grant or assistance received from central or state govt will be treated as Business income & accordingly it will be taxable. However, it will impact Profit & Loss a/c through deffered taxes. Yes you should report under clause 13 ICDS with respect to govt grant.

Classify the grant first; that decides the accounting and tax:

• AS 12 (non-Ind AS company): grants in the nature of promoters' contribution (given with reference to total investment or as seed capital, with no repayment expected) are credited to Capital Reserve and not routed through P&L. Grants related to specific depreciable assets are either deducted from the asset's cost or treated as deferred income and recognised over the asset's life.

• Under CEFPPC/APC food-processing schemes, the grant is typically linked to plant and machinery and civil works. So it is related to specific assets, unless the sanction letter frames it as promoters' contribution.

• Conditions and refund risk: recognise the grant only when there is reasonable assurance of compliance and receipt. A refundable-on-breach clause doesn't by itself make it a liability, but disclose the contingency.

• Tax: Explanation 10 to Sec 43(1) reduces the actual cost of assets by the grant relating to them (lower depreciation). Sec 2(24)(xviii) taxes grants not so reduced, unless they are capital-reserve grants not linked to assets. Even "capital" grants are now income under 2(24)(xviii) except where reduced from cost.

• MAT (if applicable): grants credited to capital reserve aren't in book profit. Those through P&L are.