Ind AS 20: EPCG exemption for import duty on capital goods is a Government Grant

Query

A company, say A Ltd. has received exemption of paying custom duty on imported capital goods subject to condition that it has to export the manufactured goods under Export Promotion Capital Goods (EPCG) scheme.

Whether such exemption by the government can be treated as government grant under Ind AS 20, Government Grants and Disclosure of Government Assistance? If yes, then which type of grant it is and how it will be accounted for?

Response

Government grants are defined in para 3 of Ind AS 20 as assistance by government to an entity in the form of transfers of resources subject to past or future compliance with certain conditions which are related with the operating activities of the entity. Therefore, in the present case, the exemption by government to pay custom duty on import of capital goods is a government grant under Ind AS 20.

The classification of government grant as the grant related to asset or grant related to income requires exercise of judgment and careful examination of terms and conditions of the grant. So, if a grant is classified as the grant related to asset then, as per paras 24 & 26 of Ind AS 20, the amount of the grant (fair value in case of non-monetary grant) should be recognised as deferred income and same is transferred to profit or loss over the useful life of the asset.

If the grant is classified as the grant related to income then, as per para 29 of Ind AS 20, the grant should be recognised as income on a systematic basis over the periods in which the entity recognises associated costs as expenses. In the present case, if the grant received is to compensate import cost of capital goods subject to condition of exporting then the grant should be recognised as income on a systematic basis that should be related to the fulfillment of export obligations.

However, if the grant is to compensate import cost of capital goods and condition to export the manufactured goods is secondary in nature then the grant should be recognised as income over the useful life of underlying capital good.