AE 15 — Financial Accounting and Reporting, Topic 3 (IA1 Integrated)

Government Grant
Borrowing Cost
Accounting treatment to government grant and borrowing costs

Miles N.M. Santos, CPA

Assistant Professor I
Faculty — College of Business, Management and Accountancy
Colegio de la Purisima Concepcion

1
Government grant

Government grant is defined 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.
Government grant is sometimes called by other names such as subsidy, subvention or
premium.
Recognition and measurement of government grant

Government grant, including non monetary 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.
Government grant shall be recognized on the accrual basis when received or
receivable.
Accounting for government grant

Government grant shall be 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.
In other words, the grant is taken to income over one or more periods in which the
related cost is incurred.
Accounting for government grant

Classification of Approach used in When grant income is Amount of grant income

government grant accounting recognized recognized

Either deferred
On a systematic basis similar to
Grant related to income approach or Government grant divided by the
the depreciation of the related
depreciable asset deduction from asset useful life of the related asset
asset
approach

Grant related to non- Deferred income On the date when the condition The entire government on the date
depreciable asset approach required in grant is fulfilled of fulfillment of condition

Government grant multiplied the

resulting amount of dividing the
Grant related to Deferred income On a proportional basis of
actual expenses incurred over the
income approach expenses incurred
total estimated expenses to be
incurred

Grant related to
compensation of Outright income Recognized immediately as The entire government grant on the
already incurred approach income date of recognition of grant
expenses
Deferred income approach

To record recognition of government grant:

Cash/Receivable from government xx

Deferred income xx

To record realization of government grant:

Deferred income xx
Grant income xx
Deduction from asset approach

To record recognition of government grant:

Cash/Receivable from government xx

Equipment xx
In deduction from asset approach, the amount of government grant decreases the cost of the related asset.

To record realization of government grant:

Depreciation expense xx
Accumulated depreciation xx
Instead of recognizing grant income, the portion of the government grant as determined by the useful life of the asset serves as
the deduction of the depreciation expense.
Repayment of government grant

When the entity failed to comply with the conditions antecedent to a government grant, the following are
apparent:

1. The entire government shall be returned to the government immediately.

2. The grant income previously recognized shall be charged as loss on repayment of grant.

Deduction from asset approach:

Deferred income approach: Equipment
Deferred income xx
xx Cash
Loss on repayment of grant xx
xx
Cash Depreciation expense*
xxitems, depreciation of the asset had there been
xxof repayment, depreciation consists of two
*On the year
Accumulated
no government grant and depreciation of government depreciation
grant for a number of period before it becomes
repayable. xx
Government assistance

Government assistance is 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
sale
Borrowing costs

Borrowing costs are interest and other costs that an entity incurs in connection with
borrowing of funds.

It includes:

a. Interest expense calculated using the effective interest method

b. FInance charges with respect to a 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. The borrowing costs that are directly attributable to the acquisition, construction
or production of a qualifying asset are borrowing costs that would have been
avoided if the expenditure on the qualifying asset had not been made. The
borrowing costs incurred which are directly attributable to a qualifying asset
shall be capitalized.

2. All other borrowing costs that are not directly attributable to a qualifying asset
shall be expensed as incurred.
Amount of borrowing costs to be capitalized to the qualifying asset
Assets financed by specific
borrowing
Assets financed by general
borrowings
Assets financed by both specific
and general borrowings
Actual borrowing costs incurred during
the period less any investment income
from the temporary invest of those
borrowings
The lower amount of average carrying
amount of the asset during the period
multiplied by a capitalization rate or
average interest rate, and
Borrowing costs on the general
borrowing
The combination of both, provided that
average carrying amount of assets are
deducted by the amount of specific
borrowings
(Specfic borrowings x interest rate) -
Temporary investment income
(Average expenditures X
Capitalization rate);
(General borrowings x interest rate)
whichever is lower
Here the average expenditures is
further deducted by specific
borrowings
Average expenditures and capitalization rate

Average expenditures is the weighted average of expenditures incurred to a qualifying asset. In case the
expenditures are incurred evenly, the average expenditures is determined by dividing the total expenditures by
the number of periods they were incurred.

Capitalization rate is equals to the total borrowing costs of general borrowings divided by
the amount of general borrowings.

Sum of borrowing costs on general borrowings

Capitalization rate =
Amount of total general borrowings

In case there is only one general borrowing, the interest rate, thereon, is the capitalization
rate.