Accounting and Audit News

published on 31 October 2022

ACCOUNTING TREATMENT OF INCENTIVES / GOVERNMENT GRANTS

The Government of India has announced INR 1.45 trillion in 2020 for manufacturing companies to boost the production in India over the years 2020-25. The companies are encouraged to start and grow in multiple sectors through various polices like state Industrial policy, IT policy, ESDM scheme, etc.

Generally, below mentioned are the major prerequisite criteria for availing the incentives from the Government:-

Prior application for approval
Minimum amount of capital investment
Minimum no. of new employment
Investment in eligible area

Broadly, the grants / incentives received by the companies from the Government are in three categories:-

First one is revenue in nature which will be granted against the sales / any cost incurred.
Second one is capital in nature as it will be based on the capital investment made.
Lastly, there are lumpsum amount of grants provided to encourage/promote the business irrespective of the investment made which will be similar to the promotor's contribution.

The accounting of incentives is the one of the critical areas where accountants are mostly confused due to the different nature of incentives and its impact in the financial statements.

Revenue Incentives

The incentive received against the sales/exports made by the company, or the expenses incurred by the company will be treated as income in the books of accounts. Accordingly, the same will be shown under "Other operating income" in profit and loss account or the same can be deducted from the relevant expense against which the incentive is received. As the industry practice, most of the companies present as income instead of deducting from the expense for better picture of profit & loss statement. The company shall not wait until incentive amount received in bank account for accounting in the books of account. It shall be recognized on the date of meeting the eligibility conditions and application submitted which is actual on accrual basis. This will be fair presentation by allocating the revenue into the year in which it is earned by the company.

Capital Incentives

The capital incentives are generally reduced from gross block of the asset if incentives are specific to asset and not repetitive. In other way, the organizations can treat this as deferred revenue in the books and the same shall be recognized in the profit and loss account in the proportion of useful life of the assets. This treatment is specified in Compendium of Opinions given by the ICAI as well. The accounting entries will be as follows:-

Entry for accrual of incentive amount on meeting the eligibility conditions

Govt. incentive – Receivable A/c (Dr) XXX

Govt. incentive – Deferred A/c (Cr) XXX

Option1 - Entry for reducing the incentive amount from asset value

Govt. incentive – Deferred A/c (Dr) XXX

Fixed assets A/c (Cr) XXX

Option2 - Entry for recognizing the proportion of incentive amount in P&L Statement

Govt. incentive – Deferred A/c (Dr) XX

Operating Income A/c (Cr) XX

On the receipt of the Incentive

Bank A/c (Dr) XXX

Govt. incentive – Receivable A/c (Cr) XXX

The above entries will be used over the years if the incentives are received in multiple years.

Lumpsum Incentives

The incentives received for the non-depreciable assets shall be directly credited to capital reserves without impacting the profit and loss account. Similarly, the incentives having same nature of promoter's contribution shall be treated as shareholder's funds and credited to capital reserves without impacting the profit and loss account:-

Entry for Lumpsum incentive amount on meeting the eligibility conditions

Govt. incentive – Receivable A/c (Dr) XXX

Capital reserve A/c (Cr) XXX

The non-monetary incentives shall be accounted at the nominal value and in case of non- monetary and non-measurable incentives received the disclosure is compulsory in notes to the financial statements.