 Now, I am glad to introduce Mr. Anand Banka, he is also a CA and he is having his own firm in Mumbai as Talati and Talati and it is about 25 firms are there all over India and 250 people are working under him. And I would also like to tell you that he has delivered more than 150 lectures on various topics include including IFRS, Indian Accounting Standards, USGAAP, etcetera for corporates and other institutes in India and abroad. And he is a faculty for ICA certificate course on IFRS, he is also a co-opted member of the ICAI WIRC committee for IFRS implementation in India and a member of Chamber of Tax Consultation for Allied Laws Committee. He is also a special invitee for Accounting Standard Board of ICAI. So, I would like to hand over to Mr. Anand Banka to take the lecture, ok. Second day and last session, the topic I will be taking is Accounting for Government Grants, ok. Now, before I start what do you understand by the term government grants or what exactly grants do we receive in educational institutes? What kind of? There can be monetary grants, there can be non-monetary grants. What are the kind of monetary grants we receive? What are the kind of non-monetary grants we receive? Grants for creation of capital assets, ok. Grants for salaries, there can be revenue grants, there can be capital grants, ok, ok. What about non-monetary grants? These are all monetary grants for capital creation, maintenance or salaries, land, building, so basically assets. See, basically there is Accounting Standard 12, Accounting for Government Grants which we are discussing. The purpose or basic function is of the government is to promote economic and industrial development. Now, how does it do such a job of economic and industrial development? It discharges its duty by undertaking activities, promotional activities. It might be promotion of a particular area or giving incentives, specific incentives, special incentives which might be in form of tax breaks, ok, like ATIA, ATIB, income tax sections these are, then there are other grants. So, it can be tax breaks or the grants which we have just discussed, ok. And why do you need this standard? Now, there are two main reasons, one is Appropriate Method of Accounting of Such Grants. And because or by way of appropriate accounting what can happen is, the readers of those financial statements can better understand the purpose of those grants and the effect of those grants, whether positive, negative, whatever is on your financial statements. So, how the reporting entity has benefited out of that grants and how to account those grants? These are the two main reasons or main topics which AS-12 talks about. It deals with capital and revenue grants only from government agencies. Now, we are here the audience is only government sponsored institutes. So, this is relevant only to us. Any institute receiving private grants then this standard does not cover any private grants accounting for private grants. That will be covered by your standard on revenues, ok, it will not be covered by AS-12. Now, grants can be in form of monetary, non-monetary as we were discussing. Monetary grants can be subsidies, cash incentives, duty drawbacks, non-monetary can be land or other assets or resources. Now, what this statement or the standard does not cover is accounting for government grants in financial statements reflecting the effect of changing prices. Now, this is not relevant in India per se. There are standards or there are countries basically standards made for those countries which are hyperinflationary. Hyperinflationary is what is hyperinflationary, where the inflation is hyper, hyperinflationary means the inflation rates are varying very widely, ok. For those there are different standards, ok. Not in Indian accounting standards, there are internationally there are standards for such countries. From Indian point of view it is not relevant and hence this standard excludes accounting in those kind of statements. It excludes government assistance other than in form of government grants. That means see we said grants includes tax holidays. But this standard or this statement will not cover those forms of grants which is in form of tax holidays like ATIA, ATIB, ATHC, there are various sections under which government gives tax holidays or grants assistance basically. Those kind of assistance will not be accounted for under this section or this standard. And it will not cover government participation in ownership of the enterprise. That means if government purchases any share capital or government is owner or part owner of that enterprise that ownership transaction is not covered by this standard. So these are the three specific instances where this standard will not touch upon, ok. Now let us come to the main standard. The definition of government grant, what is a government grant? Government grant can be assistance by government in cash or kind for past or future compliance of certain conditions. So there can be certain conditions which can be levied and only if you fulfill those conditions you will be eligible for those grants. It does not include grants which cannot be reasonably measured. That means a grant or assistance which cannot be measured will not be accounted for under this standard. Does not include transactions with government which cannot be distinguished from normal trading transactions of an enterprise. That means say suppose an enterprise say deals into steel and provides steel to that to a government company. So that is not a government grant or that is not transaction covered by this standard. So a normal business transaction is not covered by this standard. Now government when I say government, government includes union, state, any agency of government or similar bodies which can be at local, national or international level. These were the startup things, the main standard or the accounting procedure starts from here, ok. Now we discussed there can be two types of grant, capital grants or income grants, ok. Capital grants are grants that are treated as part of shareholders funds or the capital funds. Revenue or income grants or where you follow, when you are income approach, grant is taken to income over a period of time, one or more period which can be specified when they give grants. When you account for those grants it is dependent upon whether it is a capital grant or a revenue grant and if a revenue grant what is the period of that grant, ok. Let us come to capital approach first. Now capital approach says that now as I said you know there are two types of grants, capital and revenue. When do we call it as a capital grant? What is a capital grant or what do you understand by word capital? Any capital expenditure incurred is capital grant, ok or and any other examples? So that is what is a capital expenditure, purchase of fixed assets. Anything else? See investment of capital as I said you know when I invest capital that means I purchase shares or so that is not a grant, that is investment. So investment has to be differentiated from a grant, ok. What if I give you a grant without specifying the purpose, which type of grant it is? Ok, plan non-plan fine but under the standards there are only two types, ok which is capital and revenue. Now whether it is plan or non-plan I have to define it whether it is a capital or revenue. A planned expenditure or a non-plan expenditure both can be capital or revenue, right. So we will talk in terms of capital and revenue not in terms of plan and non-plan, ok. So what if I give you a grant without defining the purpose? Why revenue? No, I am accounting for it when I am receiving the grant and not when I am spending the grant. So I do not know today where will I where I will be spending that grant, ok. So I cannot define a grant based upon my future spendings. I will define the grant based upon why the grantor or the government has given to me, the purpose for which the government has given to me and not the purpose for which I am utilizing it. Yes. See. I do not think there is a single example so far that government has released and not mentioned anything what you have to do and we have to abide by those guidelines. Ok, let me put it this way, ok what if it is for a project wherein it includes both capital and revenue? In project also everything is mentioned very clearly what you have to do. If you are projecting sanctions for 4 crores of high-poils whatsoever, equipment, recurring, non-necran, everything is mentioned they are overhead these things. Right. How will you categorize that grant into capital or revenue is my question. Absolutely accepted the point that I will have a plan for that expense that amount to be spend it. That means whether I will be spending that amount on how much portion of the amount will be spent on pultures of assets, how much portion of the amount will be spent on maintenance, how much portion will be spent on revenue expenditure, I agree to that. My question is when a grant is given for a project a total amount or the outlay is given to you, ok and the spending is clear fine or the budget is approved by the government and then the grant is given but how will you classify such kind of grant that is my question. Actually that depends upon nature of expenditure of that project so. See the problem here is accounting, ok see I am speaking from accounting point of view accounting terms and the terms which are used by you is the government terms, ok. The government might be defining that these are the capital expenditure you have to incur these are the revenue expenditure you have to incur, right. Now the classification which you will be doing is from accounting point of view and not from the the the as you said you know the classification for budget or the spending point of view. Now from the sanction later itself it is very clear which expenditure is capital and which will be revenue, right. Like equipment always capital expenditure, if there is a provision of keeping two fellows for two years that will be revenue expenditure either some consumable required that will be revenue expenditure like that everything is mentioned and depending upon the nature of expenditure we decide whether it is capital or. So let me give you an example, suppose there are four kind of expenditure which you have to incur which is for a project which might be say two expenditure is for capital which is purchase of some assets. Those two assets will cost you say 60,000 rupees another 40,000 is for revenue expenditures ok which you have already defined and it is approved, ok. So the 60,000 is for capital and 40,000 is for revenue now how will you account for that total 1 lakh which you have received from government. What head will you use for 60? Then where will you show that liability side under what head capital funds ok and 40 how will you show under revenue. Ok and when will you show that under income side income side when is my question there are three things right there is timing there is measurement and there is recognition ok recognition is income ok measurement is 40,000 what is the timing. Will you map it to the expenditure that means 40,000 is for expenditure 40,000 is for expenditure that means you have specific expenditure to be incurred right will you map it with expenditure say suppose I have incurred 5 out of 6 expenditure in the current year and one expenditure has we could not incur and it will be incurred in the next year. Then the amount will be created to the fund again for it will be deferred revenue grant something like that. How will you account for it? Yes 40 rupees you are saying it is a revenue grant ok if it is over a period of 4 years then 30 rupees I will take in. I am not saying over the period of 4 years I am saying it has been given for. Income and expenditure account. Immediately. Grants utilized for revenue expenditure about the 40 percent or 40 rupees for expenditure year mark for expenditure will be reflected in the income and expenditure account. When is my question? When you have utilized it to the extent utilized. And what happens to that portion which has not been utilized? That will be. That will be a surplus sir. When we receive the 1 lakh rupees for government India first we pass the voucher and create the liability grant in it this first we create the liability. Right. And suppose we incurred the expenditure 60 lakh rupees for equipment and 40 lakh rupees for continuous expenditure all 1 lakh rupees used. So, we pass the general voucher that liability should be reduced and that should be taken into income and from income 40,000 rupees revenue expenditure and 60,000 rupees the capital expenditure then we submit the utility and certificate to government India for total 1 lakh rupees. This is the procedure we are following MNAT Bhopal. Right. My question is what if you are not able to utilize that 40,000 which is meant for revenue in the current year and suppose 1 expenditure you will incur in the next year. Sir for that year we show the unutilized grant that is the liability for us. So, when we utilize then only we transfer into income otherwise that is the liability for the institute. Right. So, what is the unutilized amount that it is mandatory to refund the government of India. So, that time it is a liability. Okay. So, I will just summarize whatever we have discussed and correct me if I am wrong in this 1 lakh is the total which you have received out of which 60,000 will be used for fixed assets 40,000 will be used for revenue. Okay. Now, out of this 40,000 say suppose now this 40,000 will go to entirely liability when you receive it. Right. So, cash account debit to liability when you receive it. Right. Now, when you start spending it every time you spend something. Okay. You transfer the similar amount to income. So, your entry at that time is liability debit to income. Whatever remains unutilized in the current year will remain in the liability over here. Right. Okay. So, this is the fixed assets part 60,000 which you have received for fixed assets you will reflect in. So, this 60,000 will entirely go to capital fund you are saying. Yeah. And what happens after you utilize it? First entry is cash account debit to capital fund. And the next entry is fixed asset account debit to bank. So, equal and the balance sheet on the capital fund side 60 rupees will appear on the asset side 60 rupees will appear. So, the balance sheet will tell you. So, you are saying that if I have a balance sheet FA will be 60. And capital fund will be 60. 60. Yeah. Okay. Then you keep depreciating this fix. Now, if I provide depreciation then depreciation account debit to fixed asset. And then again the depreciation will be charged to the capital fund. And so, for that one entry will be capital fund account debit to income expenditure account. So, one entry will be depreciation to fixed assets. Yes. Say 6 rupees. Yes. There will be another entry capital fund account debit to income expenditure. Capital fund. Debit to income expenditure. So, in the balance sheet depreciation amount will be deducted from the fixed asset as well as from the capital fund. So, basically if I draw a P and L I will see a depreciation over here 6 and income over here as 6. 6. Is that so? Yes. Yes, it is. Okay. Because depreciation against any capital fund is a charge against capital fund not against I in expenditure. Okay. So, in the balance sheet against depreciation will be deducted from the fixed asset as well as from the capital fund. So, the net fixed asset and capital fund balance will tell you. Okay. This is the practice everywhere in all the institutes. Okay. Okay. Now, this is not what AS-12 says. Total 100 is credited to income and expenditure account. Total revenue grant is credited to income expenditure and the shortfall is going to capital. The effect is same but to that extent the capital is reduced. Okay. Let me tell you what AS-12 says. Okay. Then we will discuss how to move towards AS-12 from the current approach. Okay. Now AS-12 says capital grants or capital approach. It says as capital approach and revenue approach. There are two approaches which you can follow. Okay. Capital approach says whatever you have received as a for a specific project which includes both capital and revenue. One of the options is you consider it as promoter's contribution. That means everything goes to capital funds. Okay. If you have received for a specific fixed asset, then again what you do is you take fixed assets to capital fund. This is called as what you just mentioned. This is called as capital approach. Okay. You book fixed assets and you take to capital funds. Okay. However, when you follow this approach, you do not reverse this depreciation of six which you pass capital to income. Capital fund to income. This entry which you have passed, this second entry. This entry, this is reversal. Okay. This reversal does not happen if you follow capital approach. Okay. So what it says is if you have received any grant for fixed assets. Okay. You do these two things. Option one and option two. Option one says I recognize fixed asset at rupee one. Okay. I do not recognize full value of fixed assets and full value of grant. Okay. If FAA is recognized at rupee one, I will not depreciate it. I will not book any income or grant or anything. My balance sheet is anyways tallied. Okay. Because I have received 100% of the grant from government. The other option it says is FAA recognized at 60 and liability not capital fund. Liability I recognize at 60. Then I depreciate this FAA. This entry is normal which we anyways pass. The second entry from liability will go to depreciation. It will not go to income. That means my entry will be liability. That means I will not have a depreciation expense in P and L in this case. See what happens in the case where I book depreciation and income is, I am having both expenditure and income. There is a depreciation and there is an income. It says that you set off that depreciation with income. How does it relate to that? Because it is a normal life. It is a normal life. When I am debiting income expenditure account, income expenditure account is unnecessarily burdened on account because it is a charge against capital fund. That's why I am passing an adjustment entry debiting the capital fund and getting the I and it is a non-fund item. I think it doesn't make any difference. See in the options which I have also mentioned, there is no charge to your income and expenditure account in both the options. But at the same time... In both the options... But at the same time it is not also logical when you are charging something to depreciation, it will not be shown in the income expenditure account. I am reversing the depreciation. I am taking out some portion of liability and creating the depreciation. You are in the depreciation, in the depreciation, you are reversing but you are not showing to the PNL. I... Because the PNL... I will show net depreciation account, net amount of depreciation. So I will not have any expenditure because of depreciation, because this fixed asset which I have received is a grant from the government. It is not incurred any expenditure. So there should be no depreciation. Whatever depreciation you are charging, you are nullifying by passing an adjustment entry. Right, right, right. So the problem here is the difference you see, although the net profit will remain same in all the three options. Net profit will remain same. Net profit will remain same. But in the option which you are following, you are inflating both income and expenditure. I am utilizing from the grant of 60. So my grant, so after this entry, my closing balance sheet will look like this, FA54 and grant, which is my liability, which is this, will also be 54. This is my closing balance sheet. I was saying that for accounting of the capital grant to the extent utilized for expenditure, it is transferred to the capital fund. Not the entire grant. If say out of 60,000, 10,000 is spent on procurement of assets. To that extent only, the grant is transferred to the capital fund and the remaining portion remains in the liability. Then it is utilized, of course. So this is how it is. And the depreciation charged on assets is taken to the income and expenditure account, that the depreciation charged on the asset is taken to the income and expenditure account and the net surplus or deficit, whatever is taken to the capital fund. This is how it is. Your question is basically, if I have not utilized the grant meant for fixed asset, you are saying. Yes, the capital, I was saying that the treatment of capital grant to the extent utilized for procurement of assets is transferred from the grant availability account to the capital fund. To the extent utilized for procurement of assets. To the capital fund. Yes. And then what do you do with that fund? You will depreciate fixed asset? That, of course, will be done. And then will there be a reversal of that capital fund to income and expenditure? To the extent of depreciation? Depreciation is taken to the income and expenditure account on the expenditure side. Right. And the net result of the income and expenditure account is taken to the capital fund. The net deficit of surplus. For that asset? Yes. No. The net result of the income and expenditure account which is surplus or deficit is taken to capital fund. But then in that case your surplus or deficit is higher because depreciation you have charged. But you have not taken out that 6 rupees from capital fund and credited to income. So your income and expenditure will show a lower surplus or higher deficit by 6 rupees. I don't understand. I am not following you. Okay. You are saying that suppose I have received 60,000 rupees for spending on fixed assets. Yes. So that will be shown as liability. Yes. Right. Now I have bought a fixed asset for 40,000 rupees. Yes. Right? Yes. So what you will do is you will remove 40 from here and you will show capital fund of 40,000. Yes. And the liability will remain 20,000. Yes. Right Tilya? Okay. Then you are saying I will pass a depreciation entry on that 40,000 of say 4. Okay. Right? Yes. Yes. Okay. And then what do you do? Depreciation 4 rupees is taken to income and expenditure account. Right. So suppose income and expenditure I have a income of 100 throughout the year. Yes. And I have a depreciation of 4. Yes. So my net surplus is 96. Okay. You are saying I take this to capital fund and make it 4096. Yes. That's right. Okay. So that's what I am saying that this is not allowed as per accounting standard 12. This is wrong method of accounting because this 4 rupees, see this entire 40,000 grant from government. You have not incurred this expenditure. Okay. Because you have not incurred this expenditure, you have got it for free. You cannot have a charge to your income and expenditure account for something which you have got for free. What do you mean by saying free? Free in the sense government sponsored. Yes. Because it is government sponsored, there is no expenditure which has been incurred by you. It is government giving you that expenditure. See. See. Please. See. Hello. Hello. This is only for government grant whether received by corporates or whether received by government. Sir. Sir. This is only for government grant whether received by corporates or whether received by government. This standard is applicable to all the companies whether private or government but only with respect to grant received from government. Sir. Hence it's called government grants. Government grants and not private grants or grants. Sir. This is the treatment that I have just mentioned. This is... See. Because of this you know your profits are reducing to by 96 and because profits are reducing to 96 you will pay a lower tax on 96. According to the format of annual accounts which was introduced in 2005-06 or 4-5 on a critical basis this was the practice which was suggested or rather approved by the even the sort of of accountants and the CAG all approved this practice and they suggested in the format of accounts and this is accordingly applied and used. One point of course one point of course remains there. Initially you mentioned the grants for projects. There's a bit of confusion over maybe confusion over the terminology projects. We use sponsored projects. Sponsored project is a different term and the grants which we normally take are non-plan grants which is simple the recording type generally and the sponsored projects are altogether different type of thing. It is not a grant it is not a grant to the institution. The amount received for sponsored project is not a grant to the institution. So that is a different issue and the grants to the institution are only non-plan grants or plan grants or maybe sometimes I will tell you what you are referring to see when I spoke over here capital approach or income or this approach income or revenue approach one of the contribution can be promoter's contribution which you are referring to. If it is see he is saying that in one of the years his institute referred received a grant for a project which was not a plan or non-plan expenditure it was completely for a project and that entire grant was treated as promoter's contribution when you receive a grant for promoter's contribution or as promoter's contribution that grant is taken directly to capital fund and whatever expenditure you incur whether on fixed assets or PNL then you do not credit or you do not take out anything from that capital fund. See you are never allowed to take out anything from the capital fund. Once anything goes to capital fund it remains over there. You cannot take out depreciation or anything out of capital fund you can take it out of liability till the time it is there in the liability or as a deferred revenue you know any form of liability you can take out things and you can take it to PNL or income and expenditure account promoter's contribution goes directly to capital fund the other approach is where I said where it is for a specific fixed asset. Now any monetary grant received for a specific fixed asset there are only two options available under AS12 those two options are either you take entire fixed asset at 1 rupee you do not value it you do not take it at the cost value you take it at 1 rupee which is the nominal value or you book 60 rupees the cost of asset on the asset side and the grant which is received against it on the liability side then you depreciate that fixed asset take it to depreciation which is the expenditure and then you take out similar amount from the liability and credit your depreciation so depreciation becomes 0 for that particular asset and there is no charge in income and expenditure account for that particular asset these are the two things which is which falls under capital approach depreciation has to be routed through income and expenditure account absolutely so we have to debit the expenditure side of depreciation and equal amount we have to show that deferred income in the income and expenditure that's what the government audit has observed you have to net it off so when you present it in your income and expenditure account you will net off the income with the depreciation and depreciation will be lower by that amount so you will charge depreciation on 60 you will take it to depreciation account and then you will charge similar 6 rupees to your liability and credit your depreciation account sir I have some two three fundamental clarification on this accounting grant one is in the exclusion class you have told participation as owner is excluded exposure draft of in the exclusion class three exclusions you have told participation as owner we have to understand what is the relationship between the autonomous bodies and the government whether is it a owner entity relationship or something if it is owner entity it is not applicable right and next one the very term says that government grant indirectly implying it is applicable to non-government organization it is anything which is given as ownership is not a government grant all the universities IIT we service the government relationship it is something like owner then this grant this accounting standard may not be applicable no no no it is not so amount given as ownership okay if I give any amount to the trust as ownership if I give any amount to the institution as ownership okay that means the grant what we are receiving is something similar to ownership entity relationship only because we are putting in the capital not as liability what you are saying grant we are not showing it as liability we are showing it as capital all the grant so in that case it is indirectly implying that there is a ownership relationship which grant you are talking about revenue or capital what is the grant utilized for capital grant capital for purchase of fixed assets no the grant we are getting sir for an entire planned period we are getting some 300 crores maybe if 200 crores is for the acquisition of land fixed assets we are showing it as capital so indirectly meaning that government is the owner of the IIT or central universities so when this grant exclusion class says that participation as owner in that case this grant this accounting standard is not applicable see when I say exclusion I am not saying the accounting standard is not applicable there are two things I am saying these transactions this transaction accounting standard is not applicable the transaction where the amount has come in as purchase of shares or as purchase of ownership rights in the institution now does that amount give ownership right to the government or is the amount given as grant to be utilized by the institution in a specified way conditions that yes you have to utilize for this purpose yes you have to utilize for this purpose yes it comes like that only so then it is not a ownership grant it will not fall in this third point because it is given to be utilized for specific points it is not given as generally only it is given for acquisition of fixed assets land like that university or IITs are established based on that grant we will discuss your case separately because your case is different from all other cases and we will not yes and one more point I have sir this very term government grant we are using means is it applicable to only to non-government organizations see government grants means grants given by government given to anyone grants given by government given to anyone then you have to follow this standard given the person who gives is government the person who receives it is not mentioning anything that means anyone who receives a grant from the government has to follow this standard so RLs can we assume that the relationship is something like that of a promoter to a company see we will discuss your point separately we will not mix with everyone otherwise we will waste time yes what you are explaining that capital approach when we receive the grants for capital capital assets fixed assets creation we show it in the fixed assets side as fixed assets grant and on the liability side as a liability now we have utilized that grant fixed assets are created and utilization is there the amount can be transferred from liability to the capital fund first question one minute no no no the approach which you explained that fixed assets have been created now the grants stand fully utilized and depreciation question comes at that point of time because fixed assets are to be shown as rupee one and the grants also are to be shown almost utilized nothing is to be refunded in that situation the depreciation charge will not be there at all will not be there at all but none of the organization is following this kind of practice so it will need more clarity more clarity on this aspect because it is a big departure from what we have been following see standard gives you two options you can follow any of the options and both options are right options the first option which I said is you recorded at dominal value which is rupee one that is one option second option is you recorded at full value you can create a liability of full value right so you can both the options are correct there is no incorrect option amongst these two now if you are following the second option of recording the full value of fixed assets and recording the full value of liability you are still correct so I am not asking you to change from option to option one if we keep full value and then depreciation is charged then suppose 60 rupee grant which was shown and 6 rupee depreciation is charged then assets will appear 54 right this side also the liability side also it will appear 54 right right now you are explaining that in the molotovs it was explained that 54 is like a deferred income right and here again 6 rupee right absolutely absolutely 48 will come and then it will both sides 48 absolutely every year absolutely yes so that is the option to which I am saying which is also correct the only thing which I was referring to is depreciation and the income both should knock off in that situation there will be no entry in income and expenditure account absolutely entry basically both the entries will go to income and expenditure and knock off the net effect is nil net effect is nil right right see what you all are doing is you all are inflating income and expenditure both I am saying you both become 0 right sir one question suppose I have created the asset not from the grants for example I have created the asset from the internal resources now the entry is fixed asset account debit to bank right right now whether that fixed asset forms promoter's contribution can I debit income and expenditure and create the capital fund for the equal amount no because there are some university and institution who does not get government grant right because they does not require also right because their capital reserve has crossed more than right few thousand crore right so in this case they are generating fixed assets from their internal resources right so suppose I have bought a furniture amounting to 100 rupees right whether that 100 rupees will form promoter's contribution no is the promoter giving you contribution you are utilizing your own surplus yeah you cannot utilize your own surplus and create promoter's contribution promoter is not giving you contribution promoter's contribution means capital funds I am saying in government organization there is no promoter exactly I understand but you cannot create capital funds out of your surplus but I am from I am Calcutta some of I am following this practice that is wrong practice see I am just serious what is the accounting which you will do we debit the income expenditure and create the capital fund for the equal amount we are debiting income expenditure account for equal amount and creating capital fund for depreciation amount no no no the original principal amount no I am not getting one second say suppose my fixed asset is 60 rupees okay so first of all you spend 60 rupees to bank or cash right 60 rupees yeah this is entry number one entry number two you are saying is income expenditure debit capital fund 60 rupees so basically you are creating a charge to income an expenditure account yeah is this correct you tell me so if any institute is doing this kind of accounting entry it is wrong fine okay it is to be segregated segregated and deferred income kind of thing right right absolutely so logically you are not allowed to recoup anything out of capital funds no adjustment is allowed to be made yes yes yes right right right right right right right right all of this money subsequent years future year also is to be made out of that right right right right right okay there are few examples which I have put in slides okay method one is the option one which I was talking about which none of you will follow but I will just discuss it specific fixed asset if you have received grant the amount of grant is deducted from the gross value of asset thus recognized in P&L by way of reduced depreciation charge reduced depreciation charge means out of 100 if I have received 60 so 60 rupees will be deducted from 140 rupees will be my fixed asset if I have received entire 100 rupees then my fixed asset will be at 1 rupee okay where the grant equals the whole of the cost of the asset the asset is shown as nominal value which is 1 rupee okay the rate limited purchase of fixed asset for 50 lakhs estimated useful life 5 years salvage value 5 lakhs government grant is 10 lakhs so basically what will I do I will record at 40 lakhs and I will depreciate 40 lakhs 40 minus 5 35 lakhs over 5 years 7 lakhs is my depreciation if I have received entire 50 lakhs then I would have recorded at 1 rupee and hence no depreciation in this case where in I received 10 lakhs as grant okay this is the method 2 which we were discussing right now option 2 which we all follow okay so let's discuss this in detail now there can be two types of assets it says it can be depreciable assets there can be non-depreciable assets non-depreciable assets means land which we cannot depreciate anything or whatever anything else okay now depreciable assets it is treated as deferred income as I was saying as a liability deferred income okay recognized in the profit and loss statement on a systematic and rational basis over the useful life of the asset in the proportion in which depreciation is charged fine if it is non-depreciable it cannot depreciate if you create a deferred revenue expenditure that deferred revenue expenditure will never go to PNL or your income and expenditure because there is no corresponding depreciation see if it is a depreciable asset okay how am I taking the deferred revenue expenditure to my income and not be able to take this deferred revenue expenditure to PNL so deferred revenue expenditure will always stay in deferred revenue expenditure which is not right hence if the asset is non- depreciable then you take it to capital reserve or capital fund if the asset is a land okay this 60,000 which we are speaking about if that is a land so what I will do is I will create land at 60,000 and I will create capital fund of 60,000 I will not create deferred revenue in that case only where it is a depreciable fixed asset I will create a asset of 60,000 and a deferred revenue expenditure of 60,000 that is what I explained why difference because if I create okay I have a land 60,000 okay suppose I create a deferred revenue expenditure like in any other case okay of 60,000 right what do I do about it in the next year if it was not land okay I would have depreciated it by say 60,000 right and I would have taken 60,000 to income an expenditure account or one day it would have become zero right for cases which is not land you are saying for depreciable asset cases that is what I am saying see anything which you take to capital fund anything which is capital okay capital is not meant to be taken back to PNL anything which you take to capital generally anything to PNL should not go to income and expenditure once it goes to capital it should remain in capital hence you do not take something to capital which is again going back to income now this I know is going back to income hence I should not treat it as capital fund I should treat it as deferred revenue expenditure which should be in my liability and not capital how this is let me come to the basics what is a fixed asset why do you depreciate a fixed asset okay can I give you a different theory to depreciation okay have you heard of something called as matching concept what is a matching concept current year income should match with expenditure okay when I say match it means that anything I have earned and anything which is gone for earning that income both should come together that is matching right now I have used these fixed assets to earn some income right when I have used these fixed assets to earn some income there should be some expense because I am using this fixed asset that okay this is matching concept I have used this asset to earn some income hence some part of this asset which I have used in the current year should go to my expenditure which I take it as a depreciation now you may call it as wear and tear of that asset or you may call it by any other name but it is basically a matching concept logically okay now I have received the amount for this fixed asset so there is another asset right so I have spent something for a fixed asset Rs. 60,000 and I have got that amount of Rs. 60,000 okay now I am saying that either I do not record both of them because I have received that Rs. 1 or 0 okay or if I want to record I record both of them okay now if I record this there will be charged to PNL there will be charged to PNL whereas there should be because I have not spent this I have received this amount hence I have to take a similar amount to PNL so that PNL is 0 for this depreciation how do I do that if I want to take 60,000 to PNL over say life is 5 years of this asset so I am using this asset for 5 years I have spent 60,000 for 5 years and I have received 60,000 so I have to because I have to record this income was 5 years it is my revenue and it is deferred for 5 years hence it is deferred revenue sir if it is income sir then it should be it should be charged in the income and expenditure account no sir it will not be in the balance it see deferred revenue is the deferred part so at the end of the year it is something which is recorded earned in the current year so anything which is deferred will have to go to balance sheet right which will be pushed in the balance sheet which will be earned in the current year which will be recorded in the income suppose suppose if one assets depreciation is 1% then that means that 100 years it will be deferred income or deferred this will also be at 1% if this is 1% this is also 1% then sir it will go like 100 years yes like deferred if asset will go for 100 years is it a deferred expenditure definition that it will 100 years it will go as then what will be about fixed assets then what is then what is about fixed assets so I am asking you to show it as liability assets acquired assets are acquired out of grants as well as other sources grants not from government from other sources I understand understand out of grants or in the sources and they are put together they become property of the industry right and the treatment of depreciation etc is on overall all the assets so it is practically is it possible to differentiate between assets created out of grants and then take them separately and then rest of the assets portion of the assets so this is what I was trying to raise okay okay I will tell you I wanted to do that okay what if suppose after five years this asset is stolen or asset is sold or anything happens so I am saying see depreciation I am taking six years that means 6000 that means ten years right suppose after five years something happens to this asset say fire or stolen or sold where will it go see where will you take this so you have a balance of 30,000 after five years right when it gets stolen or fire or something happens your entry will be expenditure debit 30,000 to fix asset right now what if this was in a capital fund you will reverse capital fund yes to income that means you are tracking it by asset right will you or will you not reverse the capital fund by 30,000 you will right that means you are anyways tracking this asset by asset so where is the question of practically possible to track or not you have to track but sir one point I just want to mention that assets see why did I answer his question was possible to track each asset grant wise if it is not possible will you be able to reverse the capital fund which which you are the accounting which you are doing right now you are taking it to capital fund what if this situation arises in your institution will you reverse the capital fund by 30,000 if yes that means you are anyways tracking it asset by asset or anyways required to do that and you will saying it is credited to capital if it is non depreciable it is credited to capital reserve directly because now you are not going to depreciate the land and you are not going to take out anything out of that grant so it will go to capital fund okay let's go to revenue grants okay any other grant other than specific specific fixed assets or capital grant is revenue grant okay revenue grant is taken to other income you incur the expenditures so when you incur the expenditure you take you incur the cost so expenditure to cash at the same time you take that grant to income so your entry will be income liability debit to income I will just write the accounting entries for you so basically say suppose I have received grant of 40,000 right out of which I have incurred expenditure of say 15,000 so my normal entry is expenditure first when I receive the grant what is the entry I pass when I receive the grant bank or cash to grant right where do I show these grants this is liability when I receive the grants this is shown on liability side till the time I have not incurred the expenditure I have not utilized the money till the time I have not utilized the money this is my liability because in this portion I will have to return back right so when you in our university total expenditure is 100 rupees and our internal income generation is suppose 10 rupees government is sanctioning sanctioning 100 rupees grants less income generation 10 rupees 90 rupees the government is releasing grants right when do you receive the grant throughout the year throughout the year in different installments we are getting suppose 4 installments you take do you receive grants in advance or do you receive grants after incurring the expenditure throughout the year from where I will incur the expenditure I do not have money my total expenditure is 100 rupees so you receive grants in advance internal income is 10 rupees government 10 rupees internal income generation 90 rupees government is releasing throughout the year in 4 installments what will be the entry so you receive grant in advance right before incurring the expense you receive the grant what is the entry you pass when you receive the grant say you received out of 90 rupees you receive 30 rupees on the first day grant grants in aid grants in aid bank account debit to grants in aid right where will you show suppose I have to prepare a balance sheet on the first day itself where will you show that grants in aid income expenditure revenue grants in income expenditure so that that accounting is wrong accounting okay you should on the first day when you receive that 30 rupees the accounting should be whatever name you give to the aid or whatever deferred revenue you can give any name to that leisure okay the entry should be bank or cash account debit 30 rupees to liability so first you take that entire 30 rupees to the liability okay then then what you do when you incur the expenditure suppose out of 30 rupees I incur 20 rupees okay my entry right now when I incur this expenditure I transfer similar 20 rupees from grants to income so that time my entry will be grant account debit to income this is the entry I have to pass when I receive the amount I have to first take it to liability when I incur the expenditure I transfer that liability to income this is how I pass 20 rupees sir I have told that total expenditure is 100 rupees government has sanctioned grants 100 rupees less internal income generation 10 rupees then in net approach nothing will come in balance rate at the end of that means if I at the end of the year nothing will come in the balance rate at the end of the year my income is 100 rupees okay when I receive the amount okay I will have 90 rupees here then I spend 90 rupees total so balance 0 so in my balance sheet this amount will be 0 government has sanctioned 100 rupees grant not 90 rupees 100 rupees has given sanctioned letter then in net approach nothing will come in balance rate accounting will be basis what you have received and not what has been sanctioned okay even though according to AS9 when I will recognize that revenue when sanction will come no yes according to AS9 revenue recognition see understand this AS9 says income is recognized when you are sure that you have earned that income and you have you will you will receive that income okay no sanctioned letter on 30th March and I received the grants in my bank in April I have to show my in my accounts that grants has been received grants account grants receivable account data to grants on 31st March on 31st March when you have not received you will show that I have received in bank no bank not bank grant receivable account data to grants sir recognition of revenue this is your grants receivable account data to grants that is recognition of grants remittance may take place and organizations are informed well in advance because of the likely closure of the financial year that this much money has been made remittance has been made it may be in transit you go on spending because the money may actually receive in the bank account of the recipient in the first week of April if we don't spend the money will lapse and then always likely expenditure which had to take place will not take a second story see AS9 says there are two conditions which you have to fulfill one is you have earned that grant which is the sanction letter that means you have earned it the second is you are sure you will receive it ok now the case which you are saying that on 30th March I have received the letter that the amount has been remitted but your bank will receive that amount in the bank account so both conditions of AS9 are fulfilled right now when you talk about a situation where government has sanctioned 100 rupees but I will receive only 90 rupees as and when I will keep on incurring the expenditure right will I receive 100 rupees cash from government 90 rupees right sanction is 100 but I will receive 100 right now in the scenario in which you are talking that sanction is 100 I will receive 90 I will record revenue or I will record that transaction only when I am sure of how much amount I am going to receive so suppose I am going to receive 30 first you know I am going to receive 10 rupees and when I incur I will keep on reducing the liability when the second cycle comes of 40 rupees that time I will record another 40 rupees and the last cycle will be of only 20 then so I need not record 100 rupees and then reverse 10 rupees if I am receiving 100 rupees and I have to refund 10 rupees then 10 rupees is already there in his custody in his bank account then 10 rupees will be recorded as liability what is the status of the 10 rupees because that is a government grant or non-government grant how it is to be taken in the books of accounts point is that see when 100 rupees is completely because the that is why the sanction is 100 rupees and 90 rupees remittance is coming so now right yes first of April we prepare the budget our total expenditure is 100 rupees right our IRG for example we are you can institute internal revenue we said 10 rupees our tuition fee so government pass the 90 rupees right so we pass the entry only for 90 rupees 10 rupees which show income from the student and suppose we make the 100 rupees the government is also allowed 100 rupees only 90 rupees right only 90 rupees IRG absolutely absolutely is it clear okay so there is capital approach and there is revenue approach capital approach we will talk only about fixed assets because that is relevant fixed assets can be by way of monetary grant it can be non-monetary grant when it is monetary grant it can show liability and asset both okay when it is non-monetary grant non-monetary grant is that means you are given an asset you are not given money so you are given a furniture or you are given a plant or you are given some asset at that time you have only one option which is to record it at rupee 1 okay so monetary grant you have to first take it to liability and then record as other income as and when you keep on incurring the expenditure okay there is no refund of government grants except when you have not utilized it so unutilized part so that's what so any amount which is refundable because you have not utilized that part will remain in your liability because I have booked the entire amount say suppose I have utilized 20 so 20 is already there in my liability side so simple when I refund it my entry will be liability to bank okay there is no PNL or the income and expenditure involved in that scenario okay disclosure requirements you have to give details of what method of approach you have followed whether capital approach we have got grant and this is capital approach these expenditure we have got grant and this is revenue approach okay method of accounting followed that means we discussed that you have followed option 2 that means you show asset and liability both so that you have to disclose okay nature and extent to which you have recognized as income or grant whatever grant for non-monetary grants any non-monetary grant if you have received you have to separately disclose in notes to accounts and description of grant refunded during the year so any grant if you have refunded you show it separately notes to accounts that this much amount unutilized have been refunded so this is basically the summary which we have discussed now these are questions which I want you all to answer okay what do you have to do for the sanction letter or a notification that you will receive a grant okay which amongst the options is right you will do nothing until the cash is received or you will record it on a cruel basis and you have to answer me what is a cruel basis if you select this option or you will open an account right so basically okay and what is a cruel basis amount receiver when will you say that income has been accrued when when the two conditions which I said is fulfilled that means one you have the sanction letter in hand and two your shore how much it is called it has been accrued but not received when the government grant is in form of land and at no cost that means land has been allotted to you for free okay for your institution land has been given to you for free then what will you do nominal P1 third one it will be recorded at nominal value at rupee one absolute amount first against capital profit or first against current profit or first against an amortized deferred credit so basically an amortized deferred credit is your liability side so whatever is refundable should be taken from that liability your income and expenditure account should not be affected okay this is not a normal case I know they sometimes they don't fulfill certain conditions of the government and they have to refund the grant because of that okay so what do they do you know when they have to refund the grant they don't increase or decrease the book value they give effect in general reserve or your capital reserve so thank you so much