INTERMEDIATE ACCOUNTING Cash 2M

PAS 20: Government Grant

 Assistance by government in the form of transfer of
Note: In using Grant to acquire asset, the recognition of Grant
resources to an entity in return for part or future compliance Income will be in proportion to the depreciation of the Related
with certain conditions relating to the operating activities of Asset.
the entity.
 Aka Subsidy, Subvention or Premium Illustration 2:
Entity received a GG of 50M to acquire a Chemical Facility for
Recognition of Government Grant: 80M with UL of 5yrs.
Gov Grant, including nonmonetary grant at Fair Value shall be
recognized when there is reasonable assurance that: Prepare Journal entries for Year 1:
a. The entity will comply with the conditions attaching to the grant. Cash 50M To record receipt of Gov Grant
b. The Grant will be received. Def Grant Income 50M
Building 80M To record Acquisition of
NOTE: The grant will not be recognized on a Cash Basis as this is Cash 80M Chemical Facility
Dep’n Expense 16M To record Depreciation of the
not consistent with GAAP.
Acc Depn 16M Chemical Facility
Def Grant Inc 10M To recognize Grant Income based
Classifications of Government Grant Grant Income 10M on the method of Depreciation
Grant related to Asset Grant related to Income
= Govt grant whose primary = Residual definition or grant Note: Grant related to Nondepreciable Asset (Land) which
condition is that an entity shall other than those related to requires the fulfillment of a condition shall be recognized as
purchase, construct, or Asset Income based on the Cost over the period of such Condition.
otherwise acquire Long Term
Asset.

Illustration 3:
Entity received Land with FV of 60M; Condition: the entity should
construct a refinery on the site which is estimated to cost for 100M with
NOTE: Govt grant shall be deferred and recognized as Grant UL of 20 years.
Income on the basis of the related expenses incurred.
Prepare Journal Entries for Year 1:
Illustration 1: Land 60M To record receipt of Land as Gov
Def Grant Income 60M Grant
Refinery 100M To record Cost of Constructing
An entity received a grant of 15M from the nat’l govt for the Cash 100M the Refinery
purpose of defraying safety and environmental expenses over the Dep’n Expense 5M To record Depreciation Expense
period of three years. Acc Depn 5M of the Refinery
The safety and environmental expenses will be incurred by the Def Grant Inc 3M To recognize Grant Income based
entity as follows: Grant Income 3M on the method of Depreciation
In connection to Illustration 3, Supposed the Condition of the Grant is
Year 1 2M estimated to cost at 50M, where the expenses will be spent this way; Year
Year 2 3M 1 and 2 = 10M each and Year 3 = 30M. How much should be recognized
as Grant Income for Year 1.
Year 3 5M
10M
Recognition of Grant Income:
Expenses Grant (FV of Land)
Prepare Journal entries for year 1:
Yr 1 10M 12M
Yr 2 10M 12M
Recognition of Grant Income on the basis of Related Expenses:
Yr 3 30M 36M
50M 60M
Expenses Grant Income
Yr 1 2M 3M
Note; Govt Grant that becomes receivable as compensation for
Yr 2 3M 4.5M
expenses/losses already incurred or for the purpose of giving immediate
Yr 3 5M 7.5M financial support to the entity shall be recognized immediately as Income.
10M 15M
Illustration 4:
Entity received grant of 50M to compensate for massive losses incurred
because of a recent Earthquake.

First Year: Cash 50M

Cash 15M Grant Income 50M
Deferred Grant Income 15M

Deferred Grant Income 3M Deferred Income Vs. Deduction from Asset Approach
Grant Income 3M
Illustration 5:
Environmental Exp 2M On Jan 1, entity purchased Equipt for 5M and received a Govt
 Grant of 500T with respect to this asset. UL of Asset = 5 years *To recognize the Income from GG
(5M / 10 years)
with an estimated Residual Value of 200T. Def Grant Inc 500T Acq Cost 25M
Deferred Income Deduction from Asset Grant Income 500T Govt Grant (5M)
*Record the Acquisition of Equipt *Record the Acquisition of Equipt Net Cost 20M
Equipt 5M Equipt 5M Residual Value (0)
Cash 5M Cash 5M Depreciable Amt 20M
Annual Dep’n 2M
*To record the GG as Deferred Income *To record the GG as a deduction from
the Cost of the Asset 2020 2020
Cash 500T Dep’n Expense 2.5M Dep’n Expense 2M
Cash 500T Equipment 500T Acc Dep’n 2.5M Acc Dep’n 2M
Def Grant Inc 500T
*To record annual Dep’n Expense *To record annual Dep’n Expense
Def Grant Inc 500T
(5M – 200T) / 5yrs Dep’n Expense 860T
Grant Income 500T
Dep’n Expense 960T Acc Dep’n 860T
Acc Dep’n 960T 2021 2021
*To record Repayment of Grant *To add back the Cost of Bldg
*To recognize the Income from GG
Acq Cost 5M Def Grant Income 4M Bldg 5M
(500T / 5 years)
Govt Grant (500T) Loss on Repayment Cash 5M
Def Grant Inc 100T
Net Cost 4.5M Of Grant 1M
Grant Income 100T
Residual Value (200T) Cash 5M
Depreciable Amt 4.3M Dep’n Exp 3.5M
Annual Dep’n 860T Acc Dep’n 3.5M
Dep’n Expense 2.5M
Acc Dep’n 2.5M
Depn with no Grant (3yrs) 7.5M
Repayment of Government Grant Depn with Grant (2 yrs) (4M)
 Due to noncompliance with Conditions Dep’n for Current Year 3.5M
 Accounted for as Change In Accounting Estimate
*Subsequent Dep’n – No Grant
(25M / 10 yrs) 2.5M
Illustration 6:
On Jan 1, 19, entity received 6M as GG to compensate for costs to
be incurred in planting 100 trees every year for a period of 3 yrs.
On Jan 1, 20, the GG became repayable because the entity has Grant of Interest-free Loan
never planted trees in 2019, which is a clear noncompliance of the  Forgivable Loan from the Government = treated as a Govt
conditions attached to the grant. Grant when there is reasonable assurance that the entity
will meet the terms for forgiveness of the loan.
2019:  The Benefit of a Govt Loan with a NIL or Below market
Jan 1 Cash 6M rate of Interest = is treated as a Government Grant
Def Grant Inc 6M
Face amount of Loan xx
Dec 31 Def Grant Inc 2M (6M/3yrs) PV of Loan (xx)
Grant Income 2M Benefit xx

1. Repayment of Grant related to Income shall be applied first

against any unamortized deferred income and any excess shall be
recognized immediately as an Expense.
2020:
Jan 1 Def Grant Inc 4M
Loss on Repayment
of Grant 2M
Cash 6M

Illustration 7:
On Jan 1, 19, entity received 5M as GG to a bldg. that is
purchased on the same date at a cost of 25M. UL = 10 yrs
On Jan 1, 20, GG became repayable due to lack of compliance
with the conditions attached to the government grant.

2. Repayment of a Grant related to an Asset shall be recorded by

increasing the CA of the Asset.
The cumulative add’l dep’n that would have been recognized to
date in the absence of the GG shall be recognized immediately as
an Expense.
Deferred Income Approach Deduction from Asset Approach
2019 2019
*Record the Acquisition of Equipt *Record the Acquisition of Equipt
Bldg 25M Bldg 25M
Cash 25M Cash 25M
*To record the GG as Deferred Income *To record the GG as a deduction from
the Cost of the Asset
Cash 5M
Cash 5M Bldg 5M
Def Grant Inc 5M
*To record annual Dep’n Expense *To record annual Dep’n Expense
(25M / 10yrs) Dep’n Expense 2M
Dep’n Expense 2.5M Acc Dep’n 2M
Acc Dep’n 2.5M