GOVERNMENT

GRANT
GOVERNMENT GRANT
• PAS 20, paragraph 3,
• “assistance by government in the form of transfer of resources to
an entity in return for part or future compliance with certain
conditions relating to the operating activities of the entity”.
•  subsidy, subvention or premium
• To qualify as a government grant (either monetary or nonmonetary),
• a prerequisite that the grant shall be provided by the government
to an entity in return for past or future compliance with
conditions relating to the operating activities of the entity.
Recognition and Measurement
• Government grant, including nonmonetary grant at fair value
shall be recognized when there is reasonable assurance that:
1. The entity will comply with the conditions attaching to the
grant.
2. The grant will be received.

Government grant shall not be recognized on a cash basis as

this is not consistent with generally accepted accounting
practice.
Classifications of Government
Grant
• Grant related to asset
• primary condition is that an entity qualifying for the grant
shall purchase, construct or otherwise acquire long-term
asset.
• Grant related to income
• By residual definition, this is government grant other than
grant related to asset.
Accounting for government
grant
• 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.
• the grant is taken to income over one or more periods in
which the related cost in incurred.
 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
Accounting for Government Grant
YEAR I
• PAS 20 provides that grant in Cash 15,000,000
recognition of specific expenses shall Deferred Grant Income 15,000,000
be recognized as income over the To record government grant
period of the related expense. Deferred Grant Income 3,000,000
• An entity received a grant of P15,000,000 Grant Income 3,000,000
from the national government for the To record earned grant
purpose of defraying safety environmental
Environmental Expense 2,000,000
expenses over the period of three years.
Cash 2,000,000
• The safety environmental expenses will be To record payments related to grant
incurred by the entity as follows:
YEAR II
EXPENSES INCOME Allocated as Deferred Grant Income 4,500,000
income over
Year I 2,000,000 3,000,000 three years in Grant Income 4,500,000
Year II 3,000,000 To record earned grant
4,500,000 proportion to
Year III 5,000,000 the costs Environmental Expense 3,000,000
7,500,000 Cash 3,000,000
incurred
10,000,000 15,000,000 To record payments related to grant
 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
Accounting for Government Grant
Cash 50,000,000
• PAS 20 provides that grant related to
Deferred Grant Income 50,000,000
depreciable asset shall be recognized as
income over the periods and in proportion To record government grant
to the depreciation of the related asset.
Building 80,000,000
• An entity received a grant of Cash 80,000,000
P50,000,000 from the Australian To record acquisition
government for the acquisition of a Depreciation Expense 16,000,000
chemical facility with an estimated Accumulated Depreciation 16,000,000
cost of P80,000,000 and useful life
of 5 years. To record depreciation for the year
Deferred Grant Income 10,000,000
• The straight line method is used 10,000,000
Grant Income
80,000,000 / 5
Depreciation per year = P16,000,000 50,000,000
To record earned grant / 5
Allocated as income over five years
depending on the method of depreciation
 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
Accounting for Government Grant
Land 60,000,000
• PAS 20 provides that grant related to
nondepreciable asset requiring fulfillment of Deferred Grant Income 60,000,000
certain conditions shall be recognized as To record government grant
income over the periods which bear the cost of
meeting the conditions. Refinery 100,000,000
• An entity is granted a large tract of land Cash 100,000,000
in Mindanao by the national government. To record acquisition
The fair value of the land is P60,000,000.
Depreciation Expense 5,000,000
• The grant requires that the entity shall Accumulated Depreciation 5,000,000
construct a refinery on the site.
• The cost of the refinery is estimated to be To record depreciation for the year
P100,000,000 and the useful life is 20 Deferred Grant Income 3,000,000
years. Grant Income 3,000,000
100,000,000 / 20
To record earned grant
Depreciation per year = P5,000,000
60,000,000 / 20
Allocated as income over twenty years
Accounting for
government grant
• PAS 20 provides that a • An entity received grant of P50,000,000
government grant that becomes from the USA government to compensate
receivable as compensation for for massive losses of a recent earthquake.
expenses and losses already
incurred of for the purpose of Recognized as income IMMEDIATELY
giving immediate financial
support to the entity with no Cash 50,000,000
further related costs shall be Grant Income 50,000,000
recognized as income of the To record grant from USA gov’t
period in which it becomes
receivable.

PROBLEM 26-1
 Presentation of Government Grant
• Government grant related to asset, including nonmonetary
grant at fair value, shall be presented in the statement of
financial position in either of two ways:
• By setting the grant as deferred income
• By deducting the grant in arriving at the carrying amount of
the asset

• Government grant related to income is presented as follows:

• The grant is presented in the income statement , either
separately or under the general heading “other income”
• Alternatively, the grant is deducted from the related expense.
 DEFERRED INCOME APPROACH DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
YEAR 1
• At the beginning of the current Jan 1 Equipment 5,000,000
year, an entity purchased an Cash 5,000,000
To record acquisition
equipment for P5,000,000 and
received a government grant of 1 Cash 500,000
P500,000 with respect to the Deferred Grant Income 500,000
asset. To record government grant as
deferred income
• The equipment is to be
depreciated on a straight line Dec 31 Depreciation Expense 960,000
basis over 5 years. The Accumulated Depreciation 960,000
estimated residual value of the To record annual depreciation
equipment is P200,000.
31 Deferred Grant Income 100,000
(5,000,000 – 200,000) / 5 years
Grant Income 100,000
Depreciation per year = P960,000 To record earned grant
(500,000 / 5 years )
DEDUCTION FROM ASSET APPROACH DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
YEAR 1
• At the beginning of the current year, Jan 1 Equipment 5,000,000
an entity purchased an equipment for Cash 5,000,000
P5,000,000 and received a To record acquisition
government grant of P500,000 with
respect to the asset. 1 Cash 500,000
• The equipment is to be depreciated Deferred Grant Income 500,000
on a straight line basis over 5 years. To record government grant as a
deduction from the cost of asset
The estimated residual value of the
equipment is P200,000. Dec 31 Depreciation Expense 860,000
Acquisition Cost 5,000,000 Accumulated Depreciation 860,000
Government Grant 500,000 To record annual depreciation
Net Cost 4,500,000
Residual Value 200,000
Depreciable Amount 4,300,000
/ 5 years
Depreciation per year = P860,000
PROBLEM 26-4
Repayment of Government Grant
• A government grant that becomes repayable because of
noncompliance with conditions shall be accounted for a change in
accounting estimate.
• Repayment of a grant related to income shall be applied first against
any unamortized deferred income and any excess shall be recognized
immediately as expense.
GRANT RELATED TO INCOME DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
2019
• On January 1, 2019, an entity Jan 1 Cash 6,000,000
received P6,000,000 as Deferred Grant Income 6,000,000
government grant to compensate To record government grant as
deferred income
for costs to be incurred in
planting 100 trees every year in a Dec 31 Deferred Grant Income 2,000,000
reforestation area over a period Grant Income 2,000,000
of 3 years. To record earned grant
• On January 1, 2020, the entire (6,000,000 / 3 years )
amount of the government grant 2020
became repayable because the Jan 1 Deferred Grant Income 4,000,000
entity has never planted trees in Loss on repayment of grant 2,000,000
2019 which is a clear Cash 6,000,000
noncompliance of the conditions To record repayment of
government grant
attached to the grant.
Repayment of Government Grant
• Repayment of a grant related to an 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.
 GRANT RELATED TO ASSET
DEFERRED INCOME APPROACH
DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
2019
• On January 1, 2019, an entity Jan 1 Building 25,000,000
received P5,000,000 as Cash 25,000,000
To record acquisition
government grant related to a
building that is purchased on the 1 Cash 5,000,000
same date at a cost of Deferred Grant Income 5,000,000
P25,000,000. To record government grant as
deferred income
• The useful life of the building is
10 years with no residual value. Dec 31 Depreciation Expense 2,500,000
Accumulated Depreciation 2,500,000
To record annual depreciation
(25,000,000 / 10 years )
31 Deferred Grant Income 500,000
Grant Income 500,000
To record earned grant
(5,000,000 / 10 years )
 GRANT RELATED TO ASSET DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
DEFERRED INCOME APPROACH2020
Dec 31 Depreciation Expense 2,500,000
• On January 1, 2021, the entire Accumulated Depreciation 2,500,000
amount of the government grant To record annual depreciation
became repayable due to lack of 31 Deferred Grant Income 500,000
compliance with the conditions Grant Income 500,000
attached to the grant. To record earned grant
2021
Jan 1 Deferred Grant Income 4,000,000
Loss on repayment of grant 1,000,000
Cash 5,000,000
To record repayment of
government grant
Dec 31 Depreciation Expense 2,500,000
Accumulated Depreciation 2,500,000
To record annual depreciation
 GRANT RELATED TO ASSET DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
DEDUCTION FROM ASSET APPROACH 2019
• On January 1, 2019, an entity Jan 1 Building 25,000,000
received P5,000,000 as Cash 25,000,000
To record acquisition
government grant related to a
building that is purchased on the 1 Cash 5,000,000
same date at a cost of Building 5,000,000
P25,000,000. To record government grant as a
deduction from the cost of asset
• The useful life of the building is
10 years with no residual value. Dec 31 Depreciation Expense 2,000,000
Accumulated Depreciation 2,000,000
To record annual depreciation
(20,000,000 / 10 years )
2020
Dec 31 Depreciation Expense 2,000,000
Accumulated Depreciation 2,000,000
To record annual depreciation
 GRANT RELATED TO ASSET DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
DEDUCTION FROM ASSET APPROACH 2021
Jan 1 Building 5,000,000
• On January 1, 2021, the entire Cash 5,000,000
To record repayment of
amount of the government grant government grant
became repayable due to lack of
compliance with the conditions Dec 31 Depreciation Expense 3,500,000
attached to the grant. Accumulated Depreciation 3,500,000
To record annual depreciation
Building (20M + 5M) 25,000,000
Accumulated Depreciation Depreciation on original carrying amount 2,000,000
(4,000,000 + 3,500,000) 7,500,000 Depreciation on increased carrying amount
Carrying Amt – Dec 31, 2021 17,500,000 (5,000,000 / 10 * 3 years ) 1,500,000
TOTAL DEPRECIATION - 2021 3,500,000
Subsequent Annual Depreciation
starting 2022 is P2,500,000. The cumulative additional depreciation that would
have been recognized to date in the absence of
(17,500,000 / 7 years )
the grant is recognized as depreciation for 2021.
PROBLEM 26-8
GRANT of Interest-Free Loan
• A forgivable loan from government is treated as a government
grant when there is reasonable assurance that the entity will
meet the terms for forgiveness of the loan.
• PAS 20 paragraph 10 provides
• the benefit of a government loan with a NIL or below-market
rate of interest is treated as a government grant.
• The benefit is measured as the difference between the face
amount and the present value of the loan.
• On January 1, 2019, an entity received an ILLUSTRATION – forgivable loan
interest-free loan from the national
government for P5,000,000 for a period COMPUTATION:
of three years evidenced by a promissory FACE AMOUNT 5,000,000
note.
Multiply by PV FACTOR 0.8638
• The market rate of interest for similar
Present Value 4,319,000
loan is 5%. The present value of 1 at 5%
for three periods is 0.8638.
• The government granted the interest- Face Value of NOTE 5,000,000
free loan provided the entity shall Present Value of NOTE 4,319,000
employ at least 40% of its workforce
from the area where the entity is located Discount on NP 681,000
over the next three years.
• The difference between the face amount
YEAR Amortization Discount on NP Present Value
of the loan and the present value is
recognized as the discount on note Jan 1, 2019 5% 681,000 4,319,000
payable and grant income to be Dec 31, 2019 215,950 465,050 4,534,950
amortized over the term of the loan of Dec 31, 2020
1st amortization
226,748 = 4,319,000
238,302* 5% 4,761,698
three years using effective interest
Dec 31, 2021 238,302 0 5,000,000
method.
 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
2019
• ALTERNATIVELY, The interest Jan 1 Cash 5,000,000
Discount on Note Payable 681,000
expense and grant income each Note Payable 5,000,000
year maybe offset against the Deferred Grant Income 681,000
other. To record receipt from loan as
government grant
• In such case, the interest
expense and grant income Dec 31 Interest Expense 215,950
would be zero each year. Discount on Note Payable 215,950
To record amortization

31 Deferred Grant Income 215,950

Grant Income 215,950
To record earned grant
 DATE ACCOUNT TITLE & EXPLANATION DEBIT CREDIT
2020
• ALTERNATIVELY, The interest Dec 31 Interest Expense 226,748
Discount on Note Payable 226,748
expense and grant income each
To record amortization
year maybe offset against the
31 Deferred Grant Income 226,748
other.
Grant Income 226,748
• In such case, the interest To record earned grant
expense and grant income 2021
would be zero each year. Dec 31 Interest Expense 238,202
Discount on Note Payable 238,202
31 Deferred Grant Income 238,202
Grant Income 238,202

31 Note Payable 5,000,000

Cash 5,000,000
To record payment
PROBLEM 26-6
Government Assistance
• action by government designed to provide an economic benefit
specific to an entity or range of entities qualifying under certain
criteria.
• The essence of government assistance is that no value can reasonably
be placed upon it.
• Examples of government assistance are:
a. Free technical or marketing advice
b. Provision of guarantee
c. Government procurement policy that is responsible for a portion
of the entity’s sales.
Government Assistance
• Government assistance does not include the following indirect
benefits or benefits not specific to an entity:
a. Infrastructure in development areas as improvement to the
general transport and communication network.
b. Imposition of trading constraints on competitors.
c. Improved facilities such as irrigation for the benefit of an entire
local community.
Disclosures about government grant
1. The accounting policy adopted for government grant, including the
method of presentation adopted in the financial statements.
2. 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 benefited.
3. Unfulfilled conditions and other contingencies attaching to
government assistance that has been recognized.
• It is not required to disclose the name of the government agency that
gave 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.
END