Intermediate

Accounting 2
Government
Grants(PAS/IAS 20)
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 PAS 20 defines Government grant as 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.
 Recognition and measurement
 Government grant, including nonmonetary grant at fair value, 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.
 Accounting for government grants:
 Government grant shall be recognized as income on a systematic basis over the
periods in which an entity recognizes the related costs for which the grant is
intended to compensate.
 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 three years.
 The safety and environmental expenses will be incurred by the entity as follows:
 First year 2,000,000
 Second year 3,000,000
 Third year 5,000,000
 10,000,000
 First year:
 Cash 15,000,000
 Deferred grant income 15,000,000
 Deferred grant income 3,000,000
 Grant income (2/10 x 15,000,000) 3,000,000
 Environmental expenses 2,000,000
 Cash 2,000,000
 Illustration 2:
 An entity received a grant of P50,000,000 from the Australian government for the acquisition of a chemical facility
with an estimated cost of P80,000,000 and useful life of 5 years.
 Note: Grant related to depreciable asset shall be recognized as income over the periods and in proportion to the
depreciation of the related asset. Accordingly, the grant of P50,000,000 is allocated as income over 5 years
depending on the method of depreciation. The straight line method is used.
 Journal entries for first year:
 1. Cash 50,000,000
 Deferred grant income 50,000,000
 2. Building 80,000,000
 Cash 80,000,000
 3. Depreciation 16,000,000
 Accumulated depreciation (80,000,000 / 5) 16,000,000
 4. Deferred grant income 10,000,000
 Grant income (50,000,000 / 5) 10,000,000
 Illustration 3:
 An entity is granted a large track 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.
 Note: Grant related to non-depreciable asset requiring fulfillment of certain conditions shall be recognized as income over
the periods which bear the cost of meeting the conditions.
 Accordingly, the grant of P60,000,000 is allocated over 20 years.
 Journal entries in the first year:
 1. Land (at fair value) 60,000,000
 Deferred grant income 60,000,000
 2. Refinery 100,000,000
 Cash 100,000,000
 3. Depreciation 5,000,000
 Accumulated depreciation (100,000,000 / 20) 5,000,000
 4. Deferred grant income 3,000,000
 Grant income (60,000,000 / 20) 3,000,000
 Illustration 4:
 An entity received a grant of P50,000,000 from the USA government to compensate for massive losses
incurred because of a recent earthquake.
 Note: A 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.
 Accordingly, the grant of P50,000,000 is recognized as income immediately as follows:
 Cash 50,000,000
 Grant income 50,000,000
 Presentation of government grant
 1. Government grant related to asset, including non-monetary grant at fair value, shall be presented in
the statement of financial position in either of two ways:
 a. By setting the grant as deferred income
 b. By deducting the grant in arriving at the carrying amount of the asset
 2. Government grant related to income is presented as follows:
 a. The grant is presented in the income statement, either separately or under the general heading “other
income”.
 b. Alternatively, the grant is deducted from the related expense.
 Illustration:
 At the beginning of the current year, 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 500,000
 3. To record annual depreciation:
 Depreciation 960,000
 Accumulated depreciation (5,000,000 – 200,000 / 5) 960,000
 4. To record the income from government grant for the current year:
 Deferred grant income 100,000
 Grant income (500,000 / 5 years) 100,000
 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 a deduction from the cost of the asset:
 Cash 500,000
 Equipment 500,000
 3. To record the annual depreciation:
 Depreciation 860,000
 Accumulated depreciation (4,300,000 / 5 years) 860,000
 (5,000,000 – 500,000 = 4,500,000 – 200,000)
 Repayment of government grant
 A government grant that becomes repayable because of noncompliance with conditions shall be accounted for as a change in
accounting estimate. Repayment of grant related to income shall be applied first against any unamortized deferred income and any
expense shall be recognized immediately as an expense. Repayment of a grant related to an asset shall be recorded by increasing the
carrying amount of the asset.
 Illustration – Grant related to income
 On January 1, 2020, 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, 2021, the entire amount of government grant became
repayable because the entity has never planted trees in 2020 which is a clear noncompliance of the conditions attached to the grant.
 Jan 1, 2020 Cash 6,000,000
 Deferred grant income 6,000,000
 Dec 31, 2020 Deferred grant income 2,000,000
 Grant income (6,000,000 / 3 years) 2,000,000
 January 1, 2021: Deferred grant income 4,000,000
 Loss on repayment of grant 2,000,000
 Cash 6,000,000
 Illustration – Grant related to asset
 On January 1, 2020, 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 asset is 10 years with no residual value. On January 1, 2022, 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
 Jan 1, 2020 Building 25,000,000
 Cash 25,000,000
 Cash 5,000,000
 Deferred grant income 5,000,000
 Dec 31, 2020 Depreciation 2,500,000
 Accumulated depreciation (25,000,000 / 10) 2,500,000
 Deferred grant income 500,000
 Grant income (5,000,000 / 10) 500,000
 Dec 31, 2021 Depreciation 2,500,000
 Accumulated depreciation 2,500,000
 Deferred grant income 500,000
 Grant income 500,000
 Jan 1, 2022 Deferred grant income 4,000,000
 Loss on repayment of grant 1,000,000
 Cash 5,000,000
 Dec 31, 2022 Depreciation 2,500,000
 Accumulated depreciation 2,500,000
 Note: Carrying amount of the building on December 31, 2022 is (25,000,000 – 7,500,000) 17,500,000.
 Deduction from asset approach
 Jan 1, 2020 Building 25,000,000
 Cash 25,000,000
 Cash 5,000,000
 Building 5,000,000
 Dec 31, 2020 Depreciation (20,000,000 / 10) 2,000,000
 Accumulated depreciation 2,000,000
 Dec 31, 2021 Depreciation 2,000,000
 Accumulated depreciation 2,000,000
 Jan 1, 2022 Building 5,000,000
 Cash 5,000,000
 Dec 31, 2022 Depreciation 3,500,000
 Accumulated depreciation 5,000,000
 Depreciation on original carrying amount 2,000,000
 Depreciation on increased carrying amount (5,000,000 /10 x 3) 1,500,000
 Total depreciation for 2022 3,500,000
 Note: Carrying amount of the building on December 31, 2022 is computed as follows:
 Building (20,000,000 + 5,000,000) 25,000,000
 Accumulated depreciation (2,000,000 + 2,000,000 + 3,500,000) (7,500,000)
 Carrying amount – December 31, 2022 17,500,000
 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 provides that the benefit of a government loan with a NIL or below-market rate of
interest is treated as a government grant. It further provides that the benefit is measured
as the difference between the face amount and the present value of the loan.
 Illustration
 On January 1, 2020, an entity received an interest-free loan from the national government
for P5,000,000 for a period of 3 years evidenced by a promissory note. The market rate of
interest for similar loan is 5%. The present value of 1 at 5% for 3 periods is 0.8638
 The government granted the interest-free loan provided the entity shall employ at least
40% of its work force from the area where the entity is located over the next 3 years.
 Required: What are the journal entries for 2020, 2021 and 2022?
 Table of amortization
 Date Amortization Discount on note payable Present value
 1/1/20 681,000 4,319,000
 12/31/20 215,950 465,050 4,534,950
 12/31/21 226,748 238,302 4,761,698
 12/31/22 238,302 - 5,000,000
 Journal entries
 1/1/20 Cash 5,000,000
 Discount on note payable 681,000
 Note payable 5,000,000
 Deferred gran income 681,000
 12/31/20 Interest expense 215,950
 Discount on notes payable 215,950
 Deferred grant income 215,000
 Grant income 215,000
 12/31/21 Interest expense 226,748
 Discount on notes payable 226,748
 Deferred grant income 226,748
 Grant income 226,748
 12/31/22 Interest expense 238,202
 Discount on notes payable 238,202
 Deferred grant income 238,202
 Grant income 238,202
 Note payable 5,000,000
 Cash 5,000,000
 Government assistance – is action by government designed to provide an economic benefit
specific to an entity or range of entities qualifying under certain criteria.
 Problem 24-11
 On January 1, 2020, the city government agreed to provide Probity Company
with a P5,000,000 3-year, zero-interest loan evidenced by promissory note.
The prevailing rate of interest for a loan of this type is 10% and the present
value of 1 at 10% for 3 years is 0.75.
 Required:
 1. What is the journal entry to record the loan and grant?
 2. What is the interest expense for 2020?
 3. What is the deferred grant income on December 31, 2020?
 4. What is the carrying amount of the note payable on December 31,
2021?
 Answers:
 1. Cash 5,000,000
 Discount on note payable 1,250,000
 Note payable 5,000,000
 Deferred grant income 1,250,000
 2. Interest expense (3,750,000 x 10%) 375,000
 3. Deferred grant income (1,250,000 – 375,000) 875,000
 4. Carrying amount of note payable on December 31, 2021:
 Present value – 1/1/2020 (5,000,000 x 0.75) 3,750,000
 Interest for 2020 (3,750,000 x 10%) 375,000
 Carrying amount – 12/31/2020 4,125,000
 Interest for 2021 (4,125,000 x 10%) 412,500
 Carrying amount – 12/31/2021 4,537,500