ACCOUNTING TREATMENT FOR CAPITAL SUBSIDY RECEIVED

There are two methods while accounting Subsidy into the books of accounts.

1.Capital Approach
2.Income Approach
CAPITAL APPROACH

Those in favour of Capital Approach argue that government grants are in the nature of promoters’ contribution i.e., These are grants which are given as a proportion of total investment in a business and ordinarily Government does not expect any repayment from such grants.

Another argument is that the grants given by the government are not earned and therefore should not be recognised in Profit and Loss Statement. It is an incentive provided by government without any related cost.

Since amount received will be shown under Capital / Shareholder’s Fund, there will be no Tax Implication of such grant.

INCOME APPROACH

Arguments in support of Income Approach state that Government Grants are rarely gratuitous, and the organisations earns by complying to the terms and conditions imposed and fulfilling the required obligations. Therefore, to be considered as Income and matched with the associated costs against which the grant is intended to compensate.

The Income from Grant is usually considered as “Other Income”.

Since the amount received will be recognized in Profit and Loss Account, there will be tax implication on such grant.

General practice shows that Grants which have the characteristics similar to those of promoters’ contribution should be treated as part of shareholders’ funds. Income approach may be more appropriate in the case of other grants.