ABC Limited has received the following grants for its newly started venture of manufacturing defense equipment in the defense corridor: (i) 25 lakhs…

ABC Ltd. should recognise the grants in the following manner: (i) 25lakhs have been received as an incentive for setting up industry in the defence corridor. This should be recognised in Statement of Profit and Loss immediately as there are no further conditions attached to the grant. (ii) 50 lakhs should be recognised in profit or loss immediately assuming that no further conditions are attached to the grant. Alternatively, in case it is assumed that grant for carrying out research and development in the field of innovation of defense equipment has conditions attached to it, then 50 lakhs should be recognised in profit or loss on a systematic basis over the periods in which ABC Ltd. recognises as expense the Research and Development costs for which the grant is intended to compensate. (iii) Since there is reasonable assurance that the entity will comply with the conditions attaching to them and the grant will be received, the grant of 6,00,000 should be recognised at the beginning of the first year as receivable and will be compensated for the related costs over three years. Therefore, grant income to be recognised in the Statement of Profit and Loss for the years 1,2 and 3 would be - 2,32,000,1,76,000 and - 1,92,000 respectively. (Refer W.N 1 below) The amount of grant that has not yet been credited to the statement of profit and loss i.e. deferred income is to be shown on the balance sheet. Hence, deferred income balance as at end of year 1, 2 and 3 are - 3,68,000,1,92,000 and Nil respectively. (Refer W.N.1 below) Working Note: Calculation of grant income and deferred income: Year Labour Cost ₹ Grant Income ₹ Computation of Grant Income Deferred Income at the end of the year ₹ Computation of deferred income at the end of the year ₹ 1 11,60,000 2,32,000 6,00,000 x (1,160/3,000) 3,68,000 (6,00,000 - 2,32,000) 2 8,80,000 1,76,000 6,00,000 x (880/3,000) 1,92,000 (3,68,000 - 1,76,000) 3 9,60,000 1,92,000 6,00,000 x (960/3,000) Nil (1,92,000 - 1,92,000) 30,00,000 6,00,000