## Capital Grant Treatment in Cash Flow Statements
Capital grants received from government/agencies (related to acquisition of fixed assets) present a classification choice under AS 3.
### The Core Issue
Capital grants are amortised to P&L over the life of the asset (deferred income approach). This creates a mismatch:
- P&L shows amortisation income each year (small amount)
- Actual cash was received in one year (full amount)
### Two Acceptable Treatments
Option A – Operating Activity:
- Deduct amortisation amount from operating CF (removing non-cash income from PBT)
- Show actual cash received nowhere in operating section
- Actual receipt may appear in financing activities
Option B – Investing Activity (ICAI Preferred):
- Deduct amortisation from operating CF (removing non-cash income)
- Show actual capital grant cash received under investing activities (since it relates to a capital asset acquisition)
> Exam Note: ICAI official solutions (e.g., ICAI Study Module Q8 of Cash Flow chapter) classify capital grant receipt under investing activities. Use this unless the question or institute solution specifies otherwise.
### Journal Context
Capital grant amortised: `Deferred Capital Grant A/c Dr → P&L Cr` (income recognised)
Actual receipt (year of receipt): `Bank Dr → Deferred Capital Grant A/c Cr`
The amortisation is a non-cash P&L credit — it inflated PBT, so deduct it in operating adjustments.