## Monetary Grants Relating to Depreciable Fixed Assets (PPE)
When a cash grant is received for purchasing or constructing a depreciable fixed asset, AS 12 permits two alternative methods.
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### Method 1 — Reduce Grant from Cost of Asset
The grant is directly deducted from the gross cost of the asset. Depreciation is charged on the net (reduced) cost.
Journal Entries:
| Event | Entry |
|---|---|
| Purchase asset | PPE A/c Dr [full cost] → To Bank |
| Receive grant | Bank A/c Dr [grant] → To PPE A/c [grant] |
| Annual depreciation | Deprn A/c Dr → To PPE A/c (on net cost) |
| P&L | P&L A/c Dr → To Deprn A/c |
Net value of PPE = Gross Cost − Grant − Accumulated Depreciation on net cost
The grant benefit reaches P&L indirectly through reduced annual depreciation.
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### Method 2 — Deferred Government Grant (DGG)
The asset is recorded at full gross cost. The grant is credited to "Deferred Government Grant" (DGG) — a deferred income account. Each year, a proportionate share of DGG is released to P&L as Other Income, matching the period's depreciation.
Journal Entries:
| Event | Entry |
|---|---|
| Purchase asset | PPE A/c Dr [full cost] → To Bank |
| Receive grant | Bank A/c Dr [grant] → To DGG A/c |
| Annual depreciation | Deprn A/c Dr → To PPE A/c (on full cost) |
| DGG release | DGG A/c Dr [proportionate] → To P&L (Other Income) |
| P&L | P&L A/c Dr → To Deprn A/c |
DGG transfer (SLM): Grant ÷ Asset Life per year (equal installments)
DGG transfer (WDV): Remaining DGG × WDV rate % per year
The grant benefit appears explicitly in P&L as Other Income each year.
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### Comparing the Two Methods
| Aspect | Method 1 (Reduce from Cost) | Method 2 (DGG) |
|---|---|---|
| Asset in books | Net cost (cost − grant) | Full gross cost |
| Depreciation base | Net cost | Full gross cost |
| Grant in P&L | Indirectly (lower deprn) | Directly as Other Income |
| Balance sheet item | None | DGG (deferred income) |
| Net P&L impact | Identical | Identical |
Both methods produce the same net P&L impact — they differ only in presentation.
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### Effect on Depreciation Reported
This is critical in exams: Method 1 shows lower depreciation; Method 2 shows higher depreciation (but offset by Other Income). Same bottom line, different line items.