Accounting for Saving in Custom Duty on Import of Machinery

Facts of the Case:
The Company has imported machinery without payment of import or custom duty under Export Promotion Council Guarantee scheme. The company is obliged to make exports of certain amount, say Rs.1000 within next 7 years, otherwise the benefit of import duty availed will have to be repaid back. The company has given guarantee to EPC to this effect. Probably, the company is confident that it will make exports of the amount stipulated in the agreement with EPC.

Say, import duty saved is Rs.100 and export obligations are Rs.1000 to be fulfilled in 7 years.

Issue/Query:
1. Whether the benefit availed in form of import duty would be treated as government grant to be recognised under Ind AS-20?

2.What would be the journal entries at initial recognition? Whether import duty saved is added to the cost of machinery and corresponding deferred income to be shown as liability?

3. What would be Journal Entries at the end of 1st year in which the company has achieved export turnover of Rs.200?

Response
On recognition, the company shall debit Machinery and credit Deferred Government Grant for Rs.100

At end of reporting period, the company shall debit Deferred Government Grant and credit Export Incentive for Rs.20.

Basis for Response:
Paragraph 3 of Ind AS 20, Accounting for Government Grants and Disclosure of Government Assistance, defines “Grants related to assets” as under:
“Grants related to assets are government grants whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire long-term assets. Subsidiary 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.”

Paragraph 3 of Ind AS 20, Accounting for Government Grants and Disclosure of Government Assistance, defines “Grants related to income” as under:
“Grants related to income are government grants other than those related to assets.”

In the given case, the company is required to import and also export the goods manufactured from use of that imported machine. Thus, there are two primary conditions. The grant in the form of saving of import duty becomes repayable if the export obligation is not fulfilled. Therefore, the grant is not related to assets. Accordingly, the grant is related to income.

The company shall present the saving in import duty as deferred government grant. The company shall recognise export incentive as and when the company satisfies the export obligation. The outstanding amount reflects the amount of import duty that is refundable at any point in time. As the company has fulfilled exports of the value of Rs.200 out of total value of Rs.1000, the company shall recognise export incentive as other income for Rs.20 out of total import duty saved of Rs.100. To make the financial statements understandable, the company shall disclose in notes the relation between satisfaction of export obligation and the movement of deferred government grant.