CHAPTER 15

GOVERNMENT GRANT

- PAS 20, paragraph 3, an assistance by government in the form of transfer or resources to an

entity in return for part or future compliance with certain conditions relating to the operating
activities of the entity

RECOGNITION AND MEASUREMENT

Government grant shall be recognized when there is reasonable assurance that:

a. The entity will comply with the conditions attaching to the grant
b. The grant will be received

Government grant shall not be recognized on a cash basis as this is not consistent with generally
accepted accounting practice

Classifications of government grant

a. Grant related to asset

- Primary condition is that an entity qualifying for the grant shall purchase, construct or otherwise
acquire long-term asset
b. Grant related to income
- Grant other than grant related to asset

ACCOUNTING FOR GOVERNMENT GRANT

- Government grant shall be recognized as income on a systematic basis over the periods in which
an entity recognizes as expenses the related costs for which the grant is intended to
compensate
- Grant is taken to income over one or more periods in which the related cost incurred

Grant related to depreciable asset shall be recognized as income over the periods and in proportion to
the depreciation of the related asset

Grant related to nondepreciable asset requiring fulfillment of certain conditions shall be recognized as
income over the periods which bear the cost of meeting the conditions

Grant that becomes receivable as compensation for expenses or losses already incurred or for the
purpose of giving immediate financial support to the entity with no further related costs shall be
recognized as income of the period in which it becomes receivable

PRESENTATION OF GOVERNMENT GRANT

1. Related to asset:
a. By setting the grant as deferred income
b. By deducting the grant in arriving at the carrying amount of the asset
2. Related to income
a. Grant presented in income statement, either separately or under the genral heading “other
income”
 b. Alternatively, grant is deducted from the related expense

GOVERNMENT ASSISTANCE

- Action by government designed to provide an economic benefit specific to an entity or range of

entities qualifying under certain area

Examples:

a. Free technical or marketing advice

b. Provision of guarantee
c. Government procurement policy that is responsible for a portion of the entity’s sales

Government assistance does not include the following indirect benefits:

a. Infrastructure in development areas such as improvement to the general transport and

communication network
b. Imposition of trading constraints on competitors
c. Improved facilities such as irrigation for the benefit of an entire local community

Disclosures about government grant

a. Accounting policy adopted for government grant, including the method of presentation adopted
in the financial statements
b. The nature and extent of government grant recognized in the financial statements and an
indication of other forms of government assistance from which the entity has directly benefited
c. Unfulfilled conditions and other contingencies attaching to government assistance that has been
recognized
- It is not required to disclose the name of the government agency that gave the grant
 CHAPTER 16

BORROWING COSTS

- PAS 23, paragraph 5, borrowing costs are interests and other costs that an entity incurs in
connection with borrowing funds

Paragraph 6, borrowing costs specifically include:

a. Interest expense calculated using the effective interest method

b. Finance charge with respect to finance lease
c. Exchange difference arising from foreign currency borrowing to the extent that it is regarded as
an adjustment to interest cost

QUALIFYING ASSET

- Asset that necessarily takes a substantial period of time to get ready for the intended use or sale

Examples:

a. Manufacturing plant
b. Power generation facility
c. Intangible asset
d. Investment property

Excluded from capitalization

PAS 23, does not require capital or borrowing costs relating to the following:

a. Asset measured at fair value, such as biological asset

b. Inventory that is manufactured in large quantity on a repetitive basis
c. Asset that is ready for the intended use or sale when acquired

ACCOUNTING FOR BORROWING COST

PAS 23, paragraph 8, mandates the following rules on borrowing cost:

1. Borrowing cost is directly attributable to the acquisition, construction or production of a

qualifying asset, the borrowing cost is required to capitalized as cost of the asset.

Capitalization of borrowing costs is mandatory for a qualifying asset

2. All other borrowing costs shall be expensed as incurred

- If borrowing is not directly attributable to a qualifying asset, the borrowing cost is expensed
immediately

ASSET FINANCED BY SPECIFIC

PAS 23, paragraph 12, provides that if the funds are borrowed specifically for the purpose of acquiring a
qualifying asset, the amount of capitalizable borrowing cost is the actual borrowing cost incurred
during the period less any investment income from the temporary investment of those borrowings
ASSETS FINANCED BY GENERAL BORROWING

- PAS 23, paragraph 14, if funds are borrowed generally and used for acquiring a qualifying asset,
the amount of capitalizable borrowing cost is equal to the average carrying amount of the asset
during the period multiplied by a capitalization rate or average interest rate
- Borrowing cost shall not exceed the actual interest incurred
- Capitalization rate or average interest rate is equal to the total annual borrowing cost divided
by the total general borrowings
- Any investment income from general borrowing is not deducted from capitalizable borrowing
cost

COMMENCEMENT OF CAPITALIZATION

Capitalization of borrowing costs as part of the cost of a qualifying asset shall commence when the
following three conditions are present:

a. When the entity incurs expenditures for the asset

b. When the entity incurs borrowing costs
c. When the entity undertakes activities that are necessary to prepare the asset for the intended
use or sale

Activities necessary to prepare

- Encompass more than the physical construction of the asset

- Include technical and administrative work prior to the commencement of physical construction
- However, merely holding assets for use or development without any associated development
activity does not qualify for capitalization
- Borrowing costs incurred while land acquired for building purposes is held without any
associated development activity do not qualify for capitalization

SUSPENSION OF CAPITALIZATION

- It shall be suspended during extended periods in which active development is interrupted.

- It is not suspended when a temporary delay is necessary part of the process of getting an asset
ready for its intended use or sale

CESSATION OF CAPITALIZATION

- When substantially all the activities necessary to prepare the qualifying asset for the intended
use or sale are complete. (when the physical construction of the asset is complete)

DISCLOSURES RELATED TO BORROWING COSTS

a. The amount of borrowing costs capitalized during the period

b. The capitalization rate used to determine the amount or borrowing costs eligible for
capitalization