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FAR OCAMPO/CABARLES/SOLIMAN/OCAMPO
FAR.2913-Government grants OCTOBER 2020

DISCUSSION PROBLEMS
1. Which statement is incorrect regarding government 6. Based on the provisions of PAS 20, how much should
grants in accordance with PAS 20? be recognized as income from government grant at the
a. Government grants are assistance by government end of year 1?
in the form of transfers of resources to an entity in a. P60 million c. P12 million
return for past or future compliance with certain b. P 4 million d. P 2 million
conditions relating to the operating activities of the
entity. 7. These are government grants whose primary condition
b. All government grants are government assistance. is that an entity qualifying for them should purchase,
c. All government assistance are government grants. construct or otherwise acquire long-term assets.
d. All the statements are correct. a. Grants related to assets
b. Grants related to income
2. Government grants include c. Grants related to liabilities
a. Government assistance, which cannot reasonably d. Grants related to expenses
have a value placed upon them.
b. Transactions with government, which cannot be 8. The grant received by Bren Inc. is a grant related to
distinguished from the normal trading transactions a. Assets c. Both a and b.
of the entity. b. Income d. Neither a nor b.
c. Both a and b.
d. Neither a nor b. 9. In the case of grants related to income, which of these
accounting treatments is prescribed by PAS 20?
3. Government grants include a. Credit the grant to “general reserve” under
a. Free technical or marketing advice. shareholders’ equity.
b. Provision of guarantees. b. Present the grant in the statement of
c. Government procurement policy that is responsible comprehensive income as “other income” or as a
for a portion of an entity’s sales. separate line item, or deduct it from the related
d. None of the above. expense.
c. Credit the grant to “retained earnings” on the
4. A government grant is recognized only when there is balance sheet.
reasonable assurance that: d. Credit the grant to sales or other revenue from
a. The entity will comply with any conditions attached operations in the statement of comprehensive
to the grant. income.
b. The grant will be received.
c. Both a and b. Use the following information for the next four questions.
d. Neither a nor b.
Nadine Company received a P1,800,000 subsidy from the
government to purchase manufacturing equipment on
5. Government grants shall be recognized in profit or loss
January 2, 2020. The equipment has a cost of P3,000,000,
on a systematic basis over the periods in which the
a useful life a six years, and no salvage value. Nadine
entity recognizes as expenses the related costs for
depreciates the equipment on a straight-line basis.
which the grants are intended to compensate. Which
of the following is an inappropriate application of this 10. If Nadine chooses to account for the grant as deferred
principle? income, the grant income to be recognized in 2020 is
a. Grants in recognition of specific expenses are a. Nil c. P 500,000
recognized in profit or loss in the same period as b. P300,000 d. P1,800,000
the relevant expenses.
b. Grants related to depreciable assets are usually 11. In the case of grants related to an asset, which of
recognized in profit or loss over the periods and in these accounting treatments (balance sheet
the proportions in which depreciation expense on presentation) is prescribed by PAS 20?
those assets is recognized. a. Record the grant at a nominal value in the first
c. Grants related to non-depreciable assets may also year and write it off in the subsequent year.
require the fulfillment of certain obligations and b. Either set up the grant as deferred income or
would then be recognized in profit or loss over the deduct in arriving at the carrying amount of the
periods that bear the cost of meeting the asset.
obligations. c. Record the grant at fair value in the first year and
d. Grants received as part of a package of financial or take it to income in the subsequent year.
fiscal aids to which a number of conditions are d. Take it to the statement of comprehensive income
attached are not recognized. and disclose it as an extraordinary gain.

Use the following information for the next four questions. 12. If Nadine chooses to account for the grant as an
adjustment to the asset, the carrying amount of the
Bren Inc. received a grant of P60 million to compensate it
asset on the December 31, 2020 statement of financial
for costs it incurred in planting trees over a period of five
position is
years. Bren Inc. will incur costs in this manner: Year 1 –
a. P1,200,000 c. P2,200,000
P2 million; Year 2 – P4 million; Year 3 – P6 million; Year 4
b. P1,000,000 d. P2,500,000
– P8 million; Year 5 – P10 million.

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EXCEL PROFESSIONAL SERVICES, INC.
13. Which of the following is true regarding the alternative
ways to apply the income approach to accounting of
resources acquired through government grants?
a. Expenses will be higher and net income lower if the
grant is recorded as deferred income.
b. Expenses will be higher and net income lower if the
grant is accounted for as an adjustment to the
asset.
c. Depreciation expense will be higher if the grant is
recorded as an adjustment to the asset, but net
income will be the same under the two
alternatives.
d. Depreciation expense will be higher if the grant is
recorded as deferred income, but net income will
be the same under the two alternatives.
Use the following information for the next three questions.
On January 1, 2019, Citimart Inc. was granted land in a
village, located near the slums outside the city limits, by a
local government authority. The condition attached to this
grant was that the company should clean up this land and
lay roads by employing laborers from the village in which
the land is located. The government has fixed the
minimum wage payable to the workers. The entire
operation will take three years and is initially estimated to
cost P160 million. The fair value of this land on the date of
grant was P240 million and is expected to increase by at
least 20% annually because of the improvements to be
done by the company.
In relation to the attached condition, the company incurred
costs of P80 million in 2019 and P70 million in 2020. On
December 31, 2020, the company estimated that it will
incur additional cost of P30 million in 2021.
14. Non-monetary government grants are measured at
a. Fair value
b. Nominal amount
c. Either a or b
d. Neither a nor b
15. How much should be recognized as income from
government grant for the year ended December 31,
2019?
a. P160,000,000 c. P80,000,000
b. P120,000,000 d. P70,000,000
16. How much should be recognized as income from
government grant for the year ended December 31,
2020?
a. P120,000,000 c. P80,000,000
b. P150,000,000 d. P70,000,000
17. Lively Inc. received a consolidated grant of P120
million. Three-fourths of the grant is to be utilized to
purchase a college building for students from
underdeveloped or developing countries. The balance
of the grant is for subsidizing the tuition costs of those
students for four years from the date of grant.
The college building, which costs P100 million, will be
depreciated using the straight-line method over 10
years. Assuming that the tuition subsidy will be
offered evenly over the period of 4 years, the amount
that should be recognized as income at the end of year
1 is
a. P12.0 million c. P16.5 million
b. P10.0 million d. P17.5 million
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18. Which statement is incorrect regarding a government
loan at a below-market rate of interest?
a. The benefit of a government loan at a below-
market rate of interest is treated as a government
grant.
b. The benefit of the below-market rate of interest
shall be measured as the difference between the
initial carrying value of the loan determined in
accordance with PFRS 9 and the proceeds
received.
c. The entity shall consider the conditions and
obligations that have been, or must be, met when
identifying the costs for which the benefit of the
loan is intended to compensate.
d. The benefit is accounted for in accordance with
PFRS 9.
19. Puff Company is engaged in the operation of public
highways and skyways in the Philippines. On
November 8, 2019, a catastrophe devastated some of
the company's operated highways and skyways. The
company suffered P5.6 billion loss due to catastrophe.
On January 1, 2020, the Philippine government
decided to compensate the company for the incurred
loss. The government loaned P5 billion at 5% per
annum with maturity period of 5 years. The present
value of cash flows at January 1, 2020 using the
current market rate for similar type of loan after
considering credit risks attached was P4.2 billion. The
conditions stipulated on the loan agreement provide
that the proceeds will be used for reconstruction of the
skyways and highways.
On January 1, 2020, how much should the company
recognize as government grant?
a. Nil c. P4 billion
b. P5 billion d. P0.8 billion
20. A government grant that becomes receivable as
compensation for expenses or losses incurred in a
previous period
a. Shall be recognized in profit or loss of the period in
which it is received.
b. Shall be recognized in retained earnings in the
period in which it becomes receivable.
c. Shall be credited directly to equity in the period in
which it becomes receivable.
d. Shall be recognized in profit or loss of the period in
which it becomes receivable.
21. Which statement is incorrect regarding a grant that
becomes repayable?
a. Repayment of a grant related to an asset shall be
recognized by increasing the carrying amount of
the asset or reducing the deferred income balance
by the amount repayable.
b. The cumulative additional depreciation that would
have been recognized in profit or loss to date in
the absence of the grant shall be recognized
immediately in profit or loss.
c. Repayment of a grant related to income shall be
applied first against any unamortized deferred
credit recognized in respect of the grant.
d. To the extent that the repayment exceeds any
deferred credit, or when no deferred credit exists,
the repayment shall be recognized immediately in
retained earnings.
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EXCEL PROFESSIONAL SERVICES, INC.
22. PAS 20 requires the following disclosures
I. The accounting policy adopted for government
grants, including the methods of presentation
adopted in the financial statements.
II. The nature and extent of government grants
recognized in the financial statements and an
indication of other forms of government assistance
from which the entity has directly benefited.
III. Unfulfilled conditions and other contingencies
attaching to government assistance that has been
recognized.
a. I, II and III c. I and III only
b. I and II only d. II and III only
23. Which statement is incorrect regarding government
grants covered by PAS 41?
a. An unconditional government grant related to a
biological asset measured at its fair value less
costs to sell shall be recognized in profit or loss
when, and only when, the government grant
becomes receivable.
b. If a government grant related to a biological asset
measured at its fair value less costs to sell is
conditional, including when a government grant
requires an entity not to engage in specified
agricultural activity, an entity shall recognize the
government grant in profit or loss when, and only
when, the conditions attaching to the government
grant are met.
c. If a government grant relates to a biological asset
measured at its cost less any accumulated
depreciation and any accumulated impairment
losses, PAS 20 is applied.
d. None of the above.
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24. A public limited company, Eks Dairy Products,
produces milk on its farms. The company has had
problems during 2020. Contaminated milk was sold to
customers. As a result, milk consumption has gone
down. The government decided to compensate
farmers for potential loss in revenue from sale of milk.
This fact was published in the national press on
December 1, 2020. Eks received an official letter on
December 15, 2020, stating that P1 million would be
paid to it on April 3, 2021.
The entity should recognize income from government
grant of
a. P1 million on December 1, 2020
b. P1 million on December 15, 2020
c. P1 million on April 3, 2021
d. Nil
25. A grant may require an entity to farm in a particular
location for five years and require the entity to return
all of the grant if it farms for a period shorter than five
years. In this case, PAS 41 requires that the grant
a. Is not recognized in profit or loss until the five
years have passed.
b. Is not recognized in equity until the five years have
passed.
c. Is recognized in profit or loss as time passes.
d. Is recognized in equity as time passes.
26. In accordance with PAS 41, an entity shall disclose the
following in relation to government grants related to
agricultural activity:
a. The nature and extent of government grants
recognized in the financial statements.
b. Unfulfilled conditions and other contingencies
attaching to government grants.
c. Significant decreases expected in the level of
government grants.
d. All of the above.
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EXCEL PROFESSIONAL SERVICES, INC.
DO-IT-YOURSELF (DIY) DRILL
1. PAS 20 applies to
a. Accounting for government grants.
b. Disclosure of government grants.
c. Disclosure of other forms of government
assistance.
d. All of the above.
2. PAS 20 applies to
a. The special problems arising in accounting for
government grants in financial statements
reflecting the effects of changing prices or in
supplementary information of a similar nature.
b. Government assistance that is provided for an
entity in the form of benefits that are available in
determining taxable profit or tax loss, or are
determined or limited on the basis of income tax
liability.
c. Government participation in the ownership of the
entity.
d. Biological asset measured at its cost less any
accumulated depreciation and any accumulated
impairment losses.
3. Which statement is incorrect regarding government
assistance for purposes of PAS 20?
a. Government assistance is action by government
designed to provide an economic benefit specific to
an entity or range of entities qualifying under
certain criteria.
b. Government assistance in the form of transfers of
resources to an entity in return for past or future
compliance with certain conditions relating to the
operating activities of the entity are called
government grants.
c. Not all government assistance are government
grants.
d. Government assistance include benefits provided
only indirectly through action affecting general
trading conditions, such as the provision of
infrastructure in development areas or the
imposition of trading constraints on competitors.
4. Government assistance include
a. Provision of infrastructure by improvement to the
general transport and communication network.
b. Supply of improved facilities such as irrigation or
water reticulation which is available on an ongoing
indeterminate basis for the benefit of an entire
local community.
c. Both a and b.
d. Neither a nor b.
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5. On January 1, 2020, Carmona Company received a
grant of P50 million from the British government in
order to defray safety and environmental costs within
the area where the enterprise is located. The safety
and environmental costs are expected to be incurred
over four years, respectively, P4 million, P8 million,
P12 million and P16 million. How much income from
the government grant should be recognized in 2020?
a. P50,000,000 c. P12,500,000
b. P 5,000,000 d. P 0
6. On July 1, 2019, Corregidor Company is granted a
large tract of land in the Cordillera region by the
Philippine government. The fair value of the land is
P10 million. Corregidor Company is required by the
grant to construct chemical research facility and
employ only personnel residing in the Cordillera region.
The estimated cost of the facility is P50 million with
useful life of 20 years. The facility was completed in
early 2020. Corregidor Company should recognize in
2020 an income from government grant at
a. P10,000,000 c. P2,500,000
b. P 500,000 d. P 0
7. On January 1, 2019, Amman Company received a
grant of P50 million from a foreign government for the
construction of a laboratory and research facility with
an estimated cost of P60 million and useful life of 25
years. The facility was completed in early 2020.
Company policy is to treat the grant as a reduction in
the cost of the asset. What should be the depreciation
expense in respect of this facility for the year ended 31
December 2020, assuming that depreciation is
calculated on a straight line basis?
a. Nil c. P2,000,000
b. P2,400,000 d. P 400,000
8. Bataan Inc. was granted a parcel of land by a local
government authority. The condition attached to this
grant was that Bataan Inc. should clean up this land
and lay roads by employing laborers from the village in
which the land is located. The entire operation will
take three years and is estimated to cost P100 million.
This amount will be spent in this way: P20 million each
in the first and second years and P60 million in the
third year. The fair value of this land is currently P120
million. How much should be recognized as income
from government grant at the end of the first year?
a. P20,000,000 c. P40,000,000
b. P24,000,000 d. P 0
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