XYZ Group of companies is engaged in the business of providing construction services. Within a group an entity X Ltd. is involved in the business of providing engineering services. During the previous year 20×7- 20×8, X Ltd. has provided engineering services to one of its foreign client, on the basis of which the company gets entitled to a government grant called ‘Duty Credit entitlement Certificates’ under ‘Served From India Scheme’ (SFIS). As per this scheme, the company gets a duty credit entitlement which can be utilized in payment of import duty on import of capital goods or consumables.
In F.Y. 20×7- 20×8, X Ltd. had a requirement for Earth Moving Equipment and hence utilized such duty credit entitlement scrip for payment of import duty on such construction equipment. Now, the company is of view that since it utilized such duty credit entitlement scrip on payment of import duty of capital asset, it should be treated as grant related to specific fixed asset as per AS 12. The earlier opinions on similar matter opined that duty credit entitlement should be treated as grant in nature of income as per AS 12.
The company believes that since duty credit can be utilized upon fulfillment of certain conditions and utilization can be done for capital assets or consumables, therefore it should be treated as grant in nature of specific fixed assets.
Whether the treatment adopted by the company with respect duty credit entitlement certificate is correct?
No, the credit granted under SFIS scheme should be accounted as grant in the nature of revenue in accordance with AS 12.
As per AS 12 Accounting for Government Grant, a grant should be recognized as grant related to specific fixed asset or revenue on the basis of the nature of relevant grant. Further, as per para 8.1 of AS 12, one of the primary conditions for recognizing a grant as grant related to specific fixed asset is that an enterprise qualifying for it should purchase, construct or otherwise acquire such assets.
According to general features of SFIS scheme, this duty credit entitlement scrip entitles an enterprise which has export earnings in service sector and the grant can be utilized by an ‘enterprise’ having export earnings or ‘Group companies’ operating in service sector. Therefore, grant is dependent on two criteria:
a) qualifying criteria in which an entity earns credit under SFIS upon export of services and
b) utilization criteria which must be utilized in payment of import duty on import of capital asset or consumables to be used in service sector by exporting entity or Group companies.
The accounting treatment of SFIS grant is dependent on its nature rather than its utilization. This can be explained as per AS 12, which states that the eligibility for availing the grant related to specific fixed assets is that the entity should purchase, construct or otherwise acquire such capital assets. Whereas for availing SFIS grant the eligibility condition is exports not to acquire such capital assets. Thus, an entity would not be entitled such duty credit unless the condition of export is met.
The primary condition for granting a credit under SFIS Scheme is not that an enterprise should purchase, construct or otherwise acquire such capital assets instead, it is export of services which makes an entity entitled to this scheme. Thus, it is determined that this grant (scrip) is in nature of grant related to revenue no matter how the scrip is actually utilized i.e. import of capital goods. The actual utilization does not change the nature of grant. Hence, the company is not correct in its accounting treatment related to duty credit entitlement certificates. This should be recognized as grant in the nature of revenue.
– EAC opinion Query 26, Volume 36
– Opinion finalized on 3 February 2017
– AS 12
Para 5.4 of AS 12
It is generally considered appropriate that accounting for government grant should be based on the nature of the relevant grant. Grants which have the characteristics similar to those of promoters’ contribution should be treated as part of shareholders’ funds. Income approach may be more appropriate in the case of other grants.
Para 8.1 of AS 12
Grants related to specific fixed assets are government grants whose primary condition is that an enterprise qualifying for them should purchase, construct or otherwise acquire such assets. Other conditions may also be attached restricting the type or location of the assets or the periods during which they are to be acquired or held.
Source : Financial Express