UNIT VI – GOVERNMENT GRANTS AND BORROWING COSTS

Government Grants
 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.
acquire

Recognition and Measurement

 At Fair value – government grants including nonmonetary grants 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.

 Shall not be recognized on cash basis because it is not consistent with GAAP.

Classification of Government Grants

a. Grant related to Asset
o A government grant whose primary condition is that the entity qualifying for the grant shall
purchase, construct or acquire a long-term asset

b. Grant related to income

o Government grant other than related to asset.

Accounting for government grants

 The grant is recognized as income on a systematic basis over the period in which the related costs
or expenses is incurred.

Presentation of government grants

1. Government grants related to assets
 Shall be presented in the SFP in either two ways:
a. By setting the grant as deferred income
b. By deducting the grant in arriving the carrying amount of the asset.

2. Government grant related to income

a. Presented in the income statement either separate or under the general heading “other
income”.or
b. The grant is deducted from the related expense.

Repayment of Government Grant

 Accounted for as change in accounting estimates – for government grants that becomes repayable
because of noncompliance with conditions.

 Repayment of grants:
a. Related to income - shall be applied first against any unamortized deferred income and any
excess shall be recognized immediately as expense.
b. Related to asset – shall be recorded by increasing the carrying amount of the asset.

 The cumulative additional depreciation that would have been recognized to date in the absence of
the grant shall be recognized immediately as expense.
Borrowing Costs

 Interest and other costs that the entity incurs in connection with borrowing of funds.
 Specifically includes (PAS 23 par. 6)”
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.

Accounting for Borrowing Costs

1. If the borrowing costs is directly attributable to the acquisition, construction or production of a

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

2. All other borrowing costs shall be expensed as incurred.

Commencement of Capitalization

 Capitalization of borrowing costs as part 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.

Suspension of capitalization

 Shall be suspended during extended periods in which active development is interrupted.

Cessation of capitalization

 When substantially all the activities necessary to prepare the qualifying asset for the intended use
or sale is complete.
Activity1: Problems:
Problem 1: (source: Problem 24-4, Peach: Intermediate Accounting 1 by Valix)

At the beginning of the current year, Peach Company purchased a machine for P 7,000,000 and received a
government grant of P 1,000,000 toward the capital cost.

The machine is to be depreciated on a straight line basis over 5 years and estimated to have a residual value
of P 500,000 at the end of this period.

REQUIRED: Prepare the entries for the current year assuming the grant is accounted for as:
a) Deferred income
b) Deduction from the asset

Problem 2: (source: Problem 24-8, Preposterous: Intermediate Accounting 1 by Valix)

Preposterous Company received a government grant of P 2,000,000 related to a factory building that it
purchased in January 1, 2020 from an industrialist identified by the government.

If the entity did not purchase the building which was located in the slums of the city, it would have been
repossessed by the government agency.

The entity purchased the building for P 12,000,000. The useful life of the building is 5 years with no
residual value.

On January 1, 2021, the entire amount of the government grant become repayable by reason of
noncompliance with conditions attached to the grant.

REQUIRED: Prepare journal entries assuming the government grant is accounted for using:
1. Deferred income approach
2. Deduction from Asset approach

Problem 3: (source: Problem 25-1, Sulo Company : Intermediate Accounting 1 by Valix)

Sulo Company had the following borrowings during 2020. The borrowings were made for general purposes
but the proceeds were used to finance the construction of a new building.

Principal Interest
12% bank loan 3,000,000 360,000
14% long-term loan 5,000,000 700,000

The construction began on January 1, 2020 and was completed on December 31, 2020.
Expenditures on the building were P 2,000,000 on January 1, P 2,000,000 on June 30 and P 1,000,000 on
December 31.

Required: Compute the cost of the building.

Activity 2: Multiple Choice Problems
Problem 1: (source: Problem 24-9, Goddess: Intermediate Accounting 1 by Valix)

On January 1, 2020, Goddess Company purchased a plating machine for P 5,400,000. The entity received
a government grant of P 400,000 toward the asset cost.

The machine is to be depreciated on a 20% reducing balance basis over 10 years with residual value of
P 200,000.

The accounting policy is to treat the government grant as reduction in the cost of the asset.

What is the carrying amount of the machine on December 31, 2021?

a) P 4,000,000 b) P 4,040,000 c) 3,456,000 c) 3,200,000

Problem 2: (source: Problem 24-10, Patriotic: Intermediate Accounting 1 by Valix)

Patriotic Company purchased a machine for P 6,600,000 on January 1, 2020 and received a government
grant of P 600,000 toward the asset cost.

The accounting policy is to treat the government grant as reduction in the cost of the asset.

The machine is to be depreciated on a 20% reducing a straight line basis over 10 years with residual value
of P 500,000.

On January 1, 2022, the grant become fully repayable because of noncompliance with conditions.

Q1: What is the depreciation for 2020?

a) P 610,000 b) P 600,000 c) 660,000 d) 550,000

Q2: What is the depreciation for 2022?

a) 610,000 b) 600,000 c) 780,000 d) 730,000

Problem 3: (source: Problem 25-7, Marauder Company: Intermediate Accounting 1 by Valix)

Marauder Company borrowed P 15,000,000 at 12% to finance in part the construction of a new building on
January 1, 2020and in part for general purposes.
The loan is to repaid commencing the month following completion of the building.

Expenditures for the completed structure totaled P 10,000,000 during the year ended December 31, 2020.
These expenditures were incurred evenly throughout the year.

The entity earned interest of P 200,000 for the year on the unexpended portion of the loan.

Q1: what amount if interest is capitalized on December 31, 2020?

a) P 1,200,000 b) P 1,000,000 c) P 600,000 d) 400,000

Q2: What is the interest expense for 2020?

a) 1,800,000 b) 1,200,000 c) 1,600,000 d) 1,000,000

End