Think about a government giving ₹20 lakhs to a textile company to buy machinery for backward-area development. Or a subsidy to cover interest costs on a loan. These are government grants — and AS 12 tells you exactly how to record them in the books.
A government grant is financial assistance from the government (central, state, or international bodies like SIDBI/NABARD schemes) given to an enterprise in return for past or future compliance with certain conditions. The critical recognition rule: recognize a grant only when (a) there is reasonable assurance the enterprise will comply with the conditions, and (b) the grant will be received. Don't book it the moment it's announced — wait for reasonable certainty.
Grants fall into two buckets. Revenue grants relate to expenses (e.g., a wage subsidy, export incentive) — these are matched against the related expense in the P&L. If the grant covers a future expense, park it as deferred income until that expense hits. Capital grants relate to fixed assets, and here AS 12 allows two methods: (1) Deduction from asset cost — reduce the gross block; depreciation is then charged on the lower amount. (2) Deferred income method — treat the grant as deferred income on the liabilities side, and transfer it to P&L proportionately over the asset's useful life. Both methods are acceptable under AS 12 — this is a favourite exam trap. For non-monetary grants (e.g., land given free), record at nominal value (i.e., ₹1) or at fair value — both permitted.
If a grant is later repaid (because conditions were not met), it's an accounting estimate revision. For a capital grant: increase the asset's book value or reduce the deferred income balance, then recalculate depreciation prospectively. For a revenue grant: charge the repayment to P&L immediately. This is asked frequently as a 4–5 mark question in Paper 1 — especially the repayment scenario.