MODULE 14: PAS 20 GOVERNMENT GRANT Disclosures:

GOVERNMENT GRANT – assistance by government in the form of
transfer of resources to an entity in return for or part of future
compliance with certain conditions relating to the operating activities
of the entity
Recognition and Measurement:
 The entity will comply with the conditions attaching to the
grant.
 The grant will be received.
[Note: 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. The 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
benefitted
c. Unfulfilled conditions and other contingencies attaching to
government assistance that has been recognized
[Note: It is not required to disclose the name of the government
agency that gave the grant along with the date of sanction of the
grant by such government agency and the date when cash was
received in case of monetary grant.]

1. Grant related to asset – primary condition is that an entity

qualifying for the grant shall purchase, construct, or
otherwise acquire long-term asset
2. Grant related to income – government grant other than
related to asset

Accounting: 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

Presentation:

1. Government grant related to asset shall be presented in

the statement of financial position in either of the two ways:
a. By setting the grant as deferred income
b. By deducting the grant in arriving at the carrying
amount of the asset
2. Government grant related to income is presented as
follows:
a. The grant is presented in the income statement, either
separately or under the general heading “other
income”
b. Alternatively, the 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 criteria although no value can be reasonably
placed upon it. Examples are:

 Free technical or marketing advice

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

However, this does not include the following indirect benefits or

benefits not specific to an entity:

 Infrastructure in development areas such as improvement

to the general transport and communication network
 Imposition of trading constraints on competitors
 Improved facilities such as irrigation for the benefit of an
entire local community
 PAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE
RATES
FUNCTIONAL CURRENCY - the currency of the primary economic
environment in which the entity operates. It is the own entity’s
currency and all other currencies are “foreign currencies”.
PRESENTATION CURRENCY - the currency in which the financial
statements are presented.
[Note: An entity can actually choose its presentation currency, but it
CANNOT choose its functional currency.]
HOW TO DETERMINE FUNCTIONAL CURRENCY:
The most important factor in determining the functional currency is
the entity’s primary economic environment in which it operates (but
this is not necessarily true) and normally the one in which the entity
primarily generates and expends the cash.
The following factors can also be considered:
 What currency does mainly influence sales prices for
goods and services?
 In what currency are the labor, material and other costs
denominated and settled?
 In what currency are funds from financing activities
generated (loans, issued equity instruments)?
Sometimes, sales prices, labor and material costs and other items
might be denominated in various currencies and therefore, the
functional currency is not obvious.
In this case, management must use its judgment to determine the
functional currency that most faithfully represents the economic
effects of the underlying transactions, events and conditions.
HOW TO REPORT TRANSACTIONS IN FUNCTIONAL
CURRENCY:
Initial recognition - all foreign currency transactions shall be
translated to functional currency by applying the spot exchange rate
between the functional currency and the foreign currency at the date
of the transaction.
 Date of transaction - the date when the conditions for the
initial recognition of an asset or liability are met in line with
IFRS.
Subsequent reporting - at the end of each reporting period, you
should translate:
1. All monetary items in foreign currency using the closing
rate;
2. All non-monetary items measured in terms of historical cost
using the exchange rate at the date of transaction
(historical rate);
3. All non-monetary items measured at fair value using the
exchange rate at the date when the fair value was
measured.
How to report foreign exchange differences:
All exchange rate differences shall be recognized in profit or loss,
with the following exceptions:
1. Exchange rate gains or losses on non-monetary items are
recognized consistently with the recognition of gains or
losses on an item itself.
2. Exchange rate gain or loss on a monetary item that forms a
part of a reporting entity’s net investment in a foreign
operation shall be recognized:
 In the separate entity’s or foreign operation’s financial
statements: in profit or loss;
 In the consolidated financial statements: initially in other
comprehensive income and subsequently, on disposal of
net investment in the foreign operation, they shall be
reclassified to profit or loss.
Change in functional currency
When there is a change in a functional currency, then the entity
applies the translation procedures related to the new functional
currency prospectively from the date of the change.
HOW TO TRANSLATE FINANCIAL STATEMENTS INTO A
PRESENTATION CURRENCY
Non-hyperinflationary economy
When an entity’s functional currency is NOT the currency of a
hyperinflationary economy, then an entity should translate:
 All assets and liabilities for each statement of financial
position presented (including comparatives) using the
closing rate at the date of that statement of financial
position.
Here, this rule applies for goodwill and fair value
adjustments, too.
 All income and expenses and other comprehensive income
items (including comparatives) using the exchange rates at
the date of transactions.
Standard IAS 21 permits using some period average rates
for the practical reasons, but if the exchange rates fluctuate
a lot during the reporting period, then the use of averages
is not appropriate.
All resulting exchange differences shall be recognized in other
comprehensive income as a separate component of equity.
However, when an entity disposes the foreign operation, then the
cumulative amount of exchange differences relating to that foreign
operation shall be reclassified from equity to profit or loss when the
gain or loss on disposal is recognized.
Hyperinflationary economy
The entity’s current year’s financial statements are restated first, as
required by IAS 29 Financial Reporting in Hyperinflationary
Economies. Comparative figures are used the same as current year’s
figures in the financial statements from previous reporting period.
Only then, the same procedures as described above are applied.
 MODULE 15: PAS 23 BORROWING COSTS
BORROWING COSTS – interest and other costs that an entity incurs
in connection with borrowing of the funds, including specifically:
 Interest expenses calculated using the effective interest
method
 Finance charge with respect to a finance lease
 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 include:
 Manufacturing plant
 Power generation facility
 Intangible asset
 Investment property
Excluded from capitalization:
 Asset measured at fair value, such as biological asset
 Inventory that is manufactured in large quantity on a
repetitive basis even if it takes a substantial period of time
to get ready for sale
 Asset that is ready for the intended use or sale when
acquired
Accounting:
1. Borrowing cost can be capitalized when the asset is a
qualifying asset and it is probable that the borrowing cost
will result to future economic benefit and the cost can be
measured reliably.
2. All other borrowing costs shall be expensed as incurred.
Asset financed by specific borrowing
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. This includes 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.
Suspension of capitalization: during extended periods in which active
development is interrupted
 However, capitalization of borrowing costs is not normally
suspended during a period when substantial technical and
administrative work is being carried out.
 Capitalization of borrowing costs is not also suspended
when a temporary delay is a 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
 An asset is normally ready for the intended use or sale
when the physical construction of the asset is complete
even though routine administrative work might still
continue.
Disclosures:
a. The amount of borrowing costs capitalized during the
period
b. The capitalization rate used to determine the amount of
borrowing costs eligible for capitalization

 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.
[Note: Segregation of assets that are “qualifying assets” from other
assets in the statement of financial position is not required to be
disclosed.]

Asset financed by general borrowing

 If the 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.
 However, the capitalizable value shall not exceed the
actual interest incurred.
 No specific guidance is provided for general borrowing with
respect to investment income.
 Any investment income from general borrowing is not
deducted from capitalizable borrowing cost.

Commencement of capitalization (when the following three conditions

are present)