Background For sustained agricultural growth and to promote balanced nutrient application, it is imperative that fertilisers are made available to farmers at affordable prices. With this objective, urea being the only controlled fertiliser, is sold at statutory notified uniform sale price, and decontrolled Phosphatic and Potassic fertilisers are sold at indicative maximum retail prices (MRPs). The problems faced by the manufacturers in earning a reasonable return on their investment with reference to controlled prices, are mitigated by providing support under the New Pricing Scheme for Urea units and the concession Scheme for decontrolled Phosphatic and Potassic fertilisers. The statutorily notified sale price and indicative MRP is generally less than the cost of production of the irrespective manufacturing unit. The difference between the cost of production and the selling price/MRP is paid as subsidy/concession to manufacturers.
Query
Whether subsidy received by the manufacturers should be presented as ‘other income’ or as ‘revenue’?
Response
Theoretically, there could be two views.
View 1
Paragraph 29 of Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance states “Grants related to income are presented as part of profit or loss, either separately or under a general heading such as ‘Other income’; alternatively, they are deducted in reporting the related expense.” Since the subsidies are paid to the manufacturer, the same cannot be reflected as revenue of the manufacturer. It should be presented as ‘other income’. Further, since the subsidy is not related to providing relief on specific expenditure, the same cannot be deducted from expenses.
View 2
The benefit of the subsidy is meant for the farmers not for the manufacturer of fertilisers. This is a government grant to the farmers, not to the manufacturers. As far as the manufacturer company is concerned, it is receiving revenue at fair value from the farmers and the government. In other words, the government is paying the subsidy (part of sale proceeds) to the manufacturer on behalf of the farmer. Therefore, the government should be seen more as a customer, rather than as a provider of grant to the manufacturer.
Consider the following definitions under Ind AS 20:
Government assistance is action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria. Government assistance for the purpose of this Standard does not include benefits provided only indirectly through action affecting general trading conditions, such as the provision of infrastructure in development areas or the imposition of trading constraints on competitors.
Government grants are assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the entity.
Both the above definitions entail compliance with past and future onerous conditions by the manufacturer to become eligible for the subsidy. For example, this is clearly seen in the Capital Investment Subsidy Scheme, which requires the manufacturer to make investments in plant and machinery of a specified value in backward regions and also imposes other conditions, such as, with respect to setting up social infrastructure and employment generation.
In the fertiliser subsidy, the manufacturers do not have to comply with such onerous conditions, and hence it is not a government grant from the manufacturer perspective.
Conclusion
The author believes View 2 is more appropriate for reasons already mentioned above. A simple analogy is the subsidy on cooking gas cylinders. In the past, the subsidy was paid to the manufacturer on behalf of the consumers (who paid a subsidised price for the cylinder). Now the consumers have to pay full fair price to the manufacturers, and the Government directly credits the subsidy to the consumers. Similarly, with respect to fertilisers, it can be argued that the subsidy is to the farmer, and not to the fertiliser manufacturer.
