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Introduction

Accounting in government companies has long been a subject of intense debate in financial and regulatory circles. With India’s public sector enterprises playing a crucial role in infrastructure, energy, and banking, accurate accounting practices are vital for transparency and governance. The Ministry of Corporate Affairs (MCA) and Comptroller and Auditor General (CAG) have tightened compliance standards, making it essential to understand how principles and practices operate in real-world scenarios. This article unpacks the key accounting rules for government-owned companies, their applications, and the broader economic impact.

 

Background and Context

Government companies, as defined under Section 2(45) of the Companies Act, 2013, are entities where the central or state government holds at least 51% of the paid-up share capital. These companies bridge the gap between public welfare and commercial viability, operating in sectors like oil, gas, power, banking, and transport.

The accounting system in such entities is unique due to their dual mandate:

• Public Accountability: Ensuring transparency, disclosure, and statutory reporting.
• Commercial Performance: Delivering profitability and efficiency akin to private sector firms.

Historically, the accounting standards applicable to government companies were criticized for being less rigorous than those in the private sector. However, post-liberalization reforms and the adoption of Ind AS (Indian Accounting Standards) have pushed for international comparability and improved governance. The CAG audits most government companies, bringing another layer of oversight beyond statutory auditors.

This framework ensures alignment with the Companies Act, SEBI guidelines (for listed PSUs), and sector-specific regulators. With stricter disclosure norms and global investors increasingly watching Indian PSUs, the importance of robust accounting practices cannot be overstated.

 

Principles and Practices of Accounting in Government Companies

Core Accounting Principles

Government companies follow the same fundamental accounting principles as private enterprises, with added emphasis on public accountability:

• Accrual Basis: Revenues and expenses recorded when earned/incurred, not when cash changes hands.
• True & Fair View: Financial statements must present an accurate picture of the entity’s financial health.
• Prudence Principle: Conservative recognition of income and proactive provisioning of expenses.

Key Practices in Application

1. Adoption of Ind AS: Large PSUs now comply with Ind AS for improved comparability with global standards.
2. Segment Reporting: Many PSUs operate across multiple sectors (e.g., ONGC in exploration, refining, and distribution). Proper segment reporting ensures clarity.
3. Government Grants & Subsidies: Recognition and disclosure of grants, equity infusions, and subsidies are critical, as misreporting can distort financial performance.
4. Fixed Assets & Depreciation: Asset-heavy PSUs follow detailed schedules for depreciation, often mandated under Schedule II of the Companies Act.
5. CSR Accounting: Since CSR spending is mandatory, disclosures around utilization and unspent balances have become a crucial compliance area.

 

Practical Illustrations

Illustration 1: Recognition of Government Grants

A PSU receives a government subsidy of ₹100 crore for setting up renewable energy plants. Accounting treatment involves:

• Credit to Deferred Income: Spread over the useful life of the asset.
• Disclosure in Notes: Mention the purpose and conditions attached to the grant.

Illustration 2: Depreciation on Infrastructure Assets

A government-owned power transmission company acquires equipment worth ₹500 crore. Depreciation is calculated as per Schedule II rates, with additional disclosures on revaluation, if any.

Illustration 3: CSR Expenditure

If a PSU allocates ₹15 crore towards education projects but spends only ₹10 crore during the financial year, the unspent balance of ₹5 crore must be transferred to a separate account as per MCA guidelines.

 

Impact Analysis

On Businesses

• PSUs with transparent accounting attract more foreign investment, especially in sectors like oil & gas.
• Stronger disclosures improve credit ratings, lowering borrowing costs.

On Taxpayers

• Clear accounting ensures that subsidies and grants are used effectively, avoiding wastage of taxpayer money.
• Public access to audited statements builds trust in government expenditure.

On Auditors and CAs

• Increased reliance on forensic auditing, compliance with Ind AS, and monitoring CSR expenditures enhances the professional role of auditors.
• Dual oversight by statutory auditors and CAG means higher accountability and reduced scope for manipulation.

 

Common Misunderstandings

• Myth: Government companies don’t need to follow Ind AS.
  Reality: Large PSUs must comply with Ind AS.
• Myth: Grants and subsidies are always treated as income.
  Reality: They may be deferred and recognized over time.
• Myth: CSR expenditure is optional.
  Reality: It is mandatory under the Companies Act, 2013.
• Myth: CAG only audits Union Government accounts.
  Reality: CAG audits many state-owned enterprises and PSUs.

 

Expert Commentary

According to R. Krishnan, a senior partner at a Big 4 accounting firm:

“The convergence of Ind AS with IFRS in PSUs is a significant step. It not only enhances transparency but also ensures Indian government companies can raise funds globally with greater credibility. However, compliance costs remain a challenge for smaller entities.”

 

Conclusion and Action Steps

Accounting in government companies is at a turning point, balancing the traditional public service mandate with global investor expectations. Transparency, Ind AS adoption, CSR compliance, and clear reporting of grants are the cornerstones of this transformation.

Action Steps for Stakeholders:

• Businesses: Ensure segment-wise transparency and better disclosures.
• Auditors: Strengthen monitoring of subsidies, CSR, and related-party transactions.
• Policy Makers: Continue harmonization with global standards while reducing compliance burdens.

India’s government companies, if managed with robust accounting principles, can become benchmarks of accountability and efficiency for the private sector.

 

FAQs

1. What is the definition of a government company?
A government company is one where the central or state government holds at least 51% of the paid-up share capital.

2. Do government companies follow different accounting standards than private companies?
No. They follow the same Ind AS standards, though with additional compliance requirements such as CAG audits and CSR disclosures.

3. How are government grants accounted for in PSUs?
Grants are either recognized as deferred income or directly adjusted against related assets, depending on their nature.

4. Is CSR spending mandatory for government companies?
Yes. PSUs must spend at least 2% of average net profits on CSR activities under Section 135 of the Companies Act.

5. Who audits the accounts of government companies?
Both statutory auditors and the CAG audit government companies, ensuring dual oversight and enhanced transparency.

 

References

• Companies Act, 2013 – Ministry of Corporate Affairs
• Ind AS Framework – Institute of Chartered Accountants of India (ICAI)
• Comptroller and Auditor General of India (CAG) Guidelines
• SEBI Listing Obligations for PSUs