## Refund of Government Grants
A grant becomes refundable when conditions attached to it are not fulfilled. The accounting treatment of refund mirrors how the original grant was recorded.
> AS 5: Refund of a government grant is classified as an Extraordinary Item in the P&L.
---
### Case 1: Grant Was Originally Reduced from Asset Cost (Method 1)
Refund is added back to the asset's carrying amount.
```
PPE A/c Dr [refund amount]
To Bank [refund amount]
```
Consequence on Depreciation:
- Asset's book value increases by the refund amount
- Future depreciation increases prospectively (revised carrying amount ÷ remaining life)
- NO retrospective adjustment — prior years' depreciation is not revised
> New Annual Deprn = (New Carrying Amount − Salvage Value) ÷ Remaining Useful Life
---
### Case 2: Grant Was Originally Credited to DGG (Method 2)
Refund is absorbed first from DGG balance. Excess (if any) is charged to P&L.
DGG balance at refund date = Original grant − Amounts already transferred to P&L
```
DGG A/c Dr [remaining balance in DGG]
P&L A/c Dr [Blf] [excess refund over DGG balance, if any]
To Bank [total refund amount]
```
Asset's carrying amount and depreciation do not change (asset was never adjusted for the grant).
---
### Case 3: Grant Was Originally Credited to Capital Reserve
Refund is charged against Capital Reserve. Shortfall (if any) goes to P&L.
```
Capital Reserve A/c Dr [balance available]
P&L A/c Dr [Blf] [shortfall, if any]
To Bank [total refund]
```
---
### Summary Table
| Original Treatment | Refund Treatment | Effect on Depreciation |
|---|
| Reduced from asset cost | Added back to asset cost | Increases prospectively |
| DGG (deferred income) | DGG balance first, excess → P&L | No change |
| Capital Reserve | Cap Reserve first, shortfall → P&L | No change |
### Example 1
Case 1 — Asset cost method with refund: PPE ₹20L, Grant ₹8L (Method 1, reduced from cost), Life 4 years, Salvage ₹4L.
Year 1:
- Net cost = 20 − 8 = ₹12L
- Deprn = (12 − 4) / 4 = ₹2L
- CA end Yr 1 = ₹10L
1st day of Year 2 — Refund ₹5L:
```
PPE A/c Dr 5L
To Bank 5L
```
New CA = 10 + 5 = ₹15L, Remaining life = 3 years
New Deprn = (15 − 4) / 3 = 11/3 = ₹3.67L (prospective change only)
### Example 2
Case 1 — WDV example: Asset cost ₹40L, Salvage ₹8L, Life 4 years (SLM), Grant ₹16L (Method 1).
Net cost = ₹24L; Deprn = (24−8)/4 = ₹4L/year
- CA end Yr 1 = ₹20L
- CA end Yr 2 = ₹16L
Refund ₹16L on 1st day of Year 3:
```
PPE A/c Dr 16L
To Bank 16L
```
New CA = 16 + 16 = ₹32L; Remaining life = 2 years
New Deprn = (32 − 8) / 2 = ₹12L/year (for Years 3 and 4)
JE for Year 3 Refund: PPE A/c Dr 16L → To Bank 16L
### Example 3
Case 2 — DGG method with refund: Same ₹40L asset, Grant ₹16L (Method 2 — DGG).
Asset at full ₹40L; DGG = ₹16L; Deprn on full cost = (40−8)/4 = ₹8L/year
- DGG transferred to P&L: Yr 1 = ₹4L, Yr 2 = ₹4L → DGG balance = ₹8L at end Yr 2
Refund ₹16L at start of Year 3:
```
DGG A/c Dr 8L [balance remaining]
P&L A/c Dr [Blf] 8L [excess over DGG balance]
To Bank 16L
```
Asset CA unchanged (₹24L at end Yr 2). Deprn for Yr 3 unchanged at ₹8L.
### Example 4
DGG with partial refund (Ques 11 type): DGG = ₹90L (to be transferred over 5 years, ₹18L/year).
After Years 1, 2, 3: Transferred = 3 × 18 = ₹54L → DGG balance = ₹36L
Start of Year 4 — Refund ₹90L required:
```
DGG A/c Dr 36L [balance]
P&L A/c Dr [Blf] 54L [excess]
To Bank 90L
```
### Example 5
Ques 9 — Depreciation in Year 2 after refund (Case iii): Cost ₹60L, Grant ₹20L (Method 1), Salvage ₹10L, Life 10 years. Refund happens at the END of Year 2 (31.03.2023).
Net cost = ₹40L; Deprn = (40−10)/10 = ₹3L/year
- Year 1 Deprn = ₹3L; Year 2 Deprn = ₹3L ← refund at END of Yr 2 does not affect Yr 2 deprn
- Changes will take effect from Year 3 onwards (prospective)
Answer: Deprn for Year 2 = ₹3,00,000