Intermediate Accounting 1 - MODULE 7

Content Standards:
▪ An in-depth discussion about the nature of government grant.
▪ Discussion about the recognition of a government grant and the proper accounting treatment of
government grant.

Declarative Knowledge:
▪ Definition of Government Grant
▪ Recognition and Measurement
▪ Classification of Government Grant
▪ Accounting for Government Grant
▪ Repayment of Government Grant
▪ Grant of Interest-Free Loan
▪ Government Assistance
▪ Disclodures related to Government Grant

Functional Knowledge:
▪ Discussing the nature, the recognition and the proper accounting treatment of government grant.
▪ Illustrating the proper accounting treatment and the repayment of government grant, and the proper
accounting treatment of borrowing costs.
▪ Defining government assistance in contradistinction with government grant.

Intended Learning Outcome:

▪ Explain the nature of government grant, its recognition and the proper accounting treatment.
▪ Understand the proper accounting treatment, and the repayment of government grant and the proper
accounting treatment of borrowing costs.
▪ Distinguish government assistance in contradistinction with government grant.

Suggested Teaching/ Learning Activities:

▪ Chapter assessment theory questions and problem solving.
Chapter 24: Government Grant
PAS 20, paragraph 3, defined Government Grant (subsidies, subventions or premiums) as “assistance by
government in the form of transfers of resources to an entity in return for a part or future compliance with
certain conditions relating to the operating activities of the entity.”
A forgivable loan from government is treated as a government grant when there is a reasonable assurance that
the entity will meet the terms for forgiveness of the loan.
IAS 20 applies to all government grants and other forms of government assistance. [IAS 20.1] However, it does
not cover government assistance that is provided in the form of benefits in determining taxable income. It does
not cover government grants covered by IAS 41 Agriculture, either. [IAS 20.2] The benefit of a government
loan at a below-market rate of interest is treated as a government grant. [IAS 20.10A]
Recognition and Measurement
A government grant is recognised only when there is reasonable assurance that
▪ The entity will comply with any conditions attached to the grant.
▪ The grant will be received.

Non-monetary grants, such as land or other resources, are usually accounted for at fair value, although
recording both the asset and the grant at a nominal amount is also permitted.
Government grants shall not be recognized on a cash basis as this is not consistent with generally accepted
accounting practice.
Classification of Government Grant
▪ Grants related to assets.
▪ Grants related to income.
Accounting for Government Grants
The grant is recognised as income over the period necessary to match them with the related costs, for which
they are intended to compensate, on a systematic basis.
Illustration 1
An entity received a grant of P15,000,000 from the national government for the purpose of defraying safety and
environmental expenses over the period of 3 years.
The safety and environmental expenses will be incurred by the entity as follows:
1st year 2,000,000
2nd year 3,000,000
3rd year 5,000,000
10,000,000
Accordingly, the grant of P15,000,000 is allocated as income over 3 years in proportion to the costs incurred.
1st Year
Cash 15,000,000
Deferred Income-Government Grant 15,000,000

Deferred Income-Government Grant 3,000,000

Income from Government Grant 3,000,000
 (2/10 x P15,000,000)

Environmental Expenses 2,000,000

Cash 2,000,000

2nd Year
Deferred Income-Government Grant 4,500,000
Income from Government Grant 4,500,000
(3/10 x P15,000,000)

Environmental Expenses 3,000,000

Cash 3,000,000

3rd Year
Deferred Income-Government Grant 7,500,000
Income from Government Grant 7,500,000
(5/10 x P15,000,000)

Environmental Expenses 5,000,000

Cash 5,000,000

Grants related to depreciable assets shall be recognized as income over the periods and in proportion to the
depreciation of the related assets.
Illustration 2
An entity received a grant of P50,000,000 from the Australian government for the acquisition of chemical
facility with an estimated cost of P80,000,000 and useful life of 5 years.

Accordingly, the grant pf P50,000,000 is allocated as income over 5 years depending on the method of
depreciation.
Cash 50,000,000
Deferred Income-Government Grant 50,000,000

Building 80,000,000
Cash 80,000,000

Depreciation 16,000,000
Accumulated Depreciation 16,000,000
(80,000,000/5)

Deferred Income-Government Grant 10,000,000

Income from Government Grant 10,000,000
(50,000,000/5)

Grants related to nondepreciable assets requiring fulfillment of certain conditions shall be recognized as
income over the periods which bear the cost of meeting the conditions.
Illustration 3
An entity is granted a large tract of land in Mindanao by the national government. The fair value of the land is
P60,000,000. The grant requires that the entity shall construct a refinery on the site. The cost of the refinery is
estimated to be P100,000,000 and the useful life is 20 years.
Accordingly, the grant of P60,000,000 is allocated Over 20 years.
Land 60,000,000
Deferred Income-Government Grant 60,000,000

Refinery 100,000,000
Cash 100,000,000

Depreciation 5,000,000
Accumulated Depreciation 5,000,000
(100,000,000/20)

Deferred Income-Government Grant 3,000,000

Income from Government Grant 3,000,000
(60,000,000/20)

Government 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.

Illustration 4
An entity received grant of P50,000,000 from the USA government to compensate for massive losses incurred
because of a recent earthquake.
Accordingly , the grant of P50,000,000 is recognized as income immediately as follows:
Cash 50,000,000
Income from Government Grant 50,000,000

Presentation of Government Grants

A grant relating to assets may be presented in one of two ways: [IAS 20.24]
▪ Deferred income
▪ By deducting the grant from the asset's carrying amount.

A grant relating to income may be reported

▪ Separately as 'other income'
▪ Deducted from the related expense.

Illustration 5
On January 1, 2011, an entity purchased an equipment for P5,000,000 and received a government grant of
P500,000 with respect to this asset. The equipment is to be depreciated on a straight line basis over 5 years. The
estimated residual value of the equipment is P200,000.

Deferred Income Approach

1. To record the acquisition of the equipment
Equipment 5,000,000
Cash 5,000,000

2. To record the government grant as deferred income

Cash 500,000
Deferred Income-Government Grant 500,000
3. To record annual depreciation
Depreciation 960,000
Accumulated Depreciation 960,000
(5,000,000 – 200,000/5)

4. To recognize the income from government grant for 2011

Deferred Income-Government Grant 100,000
Income from Government Grant 100,000
(500,000/5)

Deduction from Asset Approach

1. To record the acquisition of the equipment
Equipment 5,000,000
Cash 5,000,000

2. To record the government grant as deduction from the cost of the asset
Cash 500,000
Equipment 500,000

3. To record annual depreciation

Depreciation 860,000
Accumulated Depreciation 860,000

Acquisition Cost 50,000,000

Government Grant (500,000)
Net Cost 4,500,000
Residual Value (200,000)
Depreciable Amount 4,300,000

Annual Depreciation 860,000

(4,300,000/5)

Repayment of Government Grants

If a grant becomes repayable, it should be treated as a change in estimate. Where the original grant related to
income, the repayment should be applied first against any related unamortised deferred credit, and any excess
should be dealt with as an expense. Where the original grant related to an asset, the repayment should be
treated as increasing the carrying amount of the asset or reducing the deferred income balance. The
cumulative depreciation which would have been charged had the grant not been received should be charged as
an expense.

Grant related to Income

Illustration 6

On January 1, 2011, an entity received P6,000,000 as government grant to compensate for costs to be incurred
in planting 100 trees every year in a reforestation area over a period of 3 years. On January 1, 2012. The entire
amount of the government grant became repayable because the entity has never planted trees in 2011 which is a
clear noncompliance of the conditions attached to the grant.
2011
Jan. 1 Cash 6,000,000
Deferred Income-Government Grant 6,000,000

Dec.31 Deferred Income-Government Grant 2,000,000

Income from Government Grant 2,000,000
(6,000,000/3)

2012
Jan. 1 Deferred Income-Government Grant 4,000,000
Loss on Government Grant 2,000,000
Cash 6,000,000

Grant related to Asset

Illustration 7

On January 1, 2011, an entity received P5,000,000 as government grant related to a building that is purchased
on same date at a cost of P25,000,000. The useful life of the building is 10 years with no residual value. On
January 1, 2013, the entire amount of the government grant became repayable due to lack of compliance with
the conditions attached to the government grant.

Deferred Income Approach

2011
Jan. 1 Building 25,000,000
Cash 25,000,000

Cash 5,000,000
Deferred Income-Government Grant 5,000,000

Dec.31 Depreciation 2,500,000

Accumulated Depreciation 2,500,000
(25,000,000/10)

Dec.31 Deferred Income-Government Grant 500,000

Income from Government Grant 500,000
(5,000,000/10)

2012
Dec.31 Depreciation 2,500,000
Accumulated Depreciation 2,500,000
(25,000,000/10)

Dec.31 Deferred Income-Government Grant 500,000

Income from Government Grant 500,000
(5,000,000/10)
2013
Jan. 1 Deferred Income-Government Grant 4,000,000
Loss on Government Grant 1,000,000
Cash 5,000,000

Dec.31 Depreciation 2,500,000

Accumulated Depreciation 2,500,000

Building 25,000,000
Accumulated Depreciation (7,500,000)
(2,500,000 x 3)
Carrying Amount – December 17,500,000
31, 2013

Deduction from Asset Approach

2011
Jan. 1 Building 25,000,000
Cash 25,000,000

Cash 5,000,000
Building 5,000,000

Dec.31 Depreciation 2,000,000

Accumulated Depreciation 2,000,000
(20,000,000/10)

2012
Dec.31 Depreciation 2,000,000
Accumulated Depreciation 2,000,000

2013
Jan. 1 Building 5,000,000
Cash 5,000,000

Dec.31 Depreciation 3,500,000

Accumulated Depreciation 3,500,000

Depreciation on original CA 2,000,000

Depreciation on increased CA 1,500,000
(5,000,000/10x3years)
Total Depreciation for 2013 3,500,000

Government Assistance
▪ 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 grants do not include government assistance whose value cannot be reasonably measured,
such as technical or marketing advice. [IAS 20.34] Disclosure of the benefits is required.
Disclosure of Government Grants
The following must be disclosed: [IAS 20.39]
▪ Accounting policy adopted for grants, including method of balance sheet presentation.
▪ Nature and extent of grants recognized in the financial statements unfulfilled.
▪ Conditions contingencies attaching to recognized grants.

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.

Prepared By: Ms. Charmaine Buan, CPA

References:
1. Financial Accounting Volume 1, 2011 ed. – Conrado T. Valix, Jose F. Peralta and Christian Aris M.
Valix
2. https://www.iasplus.com/en/standards/ias/ias40