BALIUAG UNIVERSITY

Integrated Accounting Course II

Summer 2017
LUISITO V. CORREA JR., CPA, CAT, MBA

MODULE 2: Government Grants & Government Assistance

 RELATED STANDARD: IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance

 Definition of Terms
Government – refers to government, government agencies and similar bodies whether local, national or international.
Government assistance – is action by government designed to provide an economic benefit specific to an entity or
range of entities qualifying under certain criteria.
Government grants – are assistance by government 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.
Grants related to assets – are government grants whose primary condition is that an entity qualifying for them should
purchase, construct or otherwise acquire long-term assets.
Grants related to income – are government grants other than those related to assets.
Forgivable loans – are loans which the lender undertakes to waive repayment of under certain prescribed conditions.
Fair value – is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. (See IFRS 13 Fair Value Measurement.)

 Scope
 IAS 20 applies to all government grants and other forms of government assistance.
 It does not cover government assistance that is provided in the form of benefits in determining taxable
income.
 It does not cover government grants covered by IAS 41 Agriculture.
 The benefit of a government loan at a below-market rate of interest is treated as a government grant.

 Classification of Government Grants

1. Grants related to assets
2. Grants related to income

 Recognition
 A government grant is recognized only when there is reasonable assurance that
a. The entity will comply with any conditions attached to the grant; and
b. The grant will be received

 Receipt of a grant does not of itself provide conclusive evidence that the conditions attaching to the grant
have been or will be fulfilled.

 The grant is recognized as income over the period necessary to match them with the related costs, for
which they are intended to compensate, on a systematic basis.
 Thus grants in recognition of specific expenses are recognized in profit or loss in the same period
as the relevant expenses.
 Grants related to depreciable assets are usually recognized in profit or loss over the periods and in
the proportions in which depreciation expense on those assets is recognized.
 Grants related to non-depreciable assets may also require the fulfilment of certain obligations and
would then be recognized in profit or loss over the periods that bear the cost of meeting the
obligations.
 A grant receivable as compensation for costs already incurred or for immediate financial support,
with no future related costs, should be recognized as income in the period in which it is receivable.
 Grants are sometimes received as part of a package of financial or fiscal aids to which a number of
conditions are attached. It may be appropriate to allocate part of a grant on one basis and part on
another.

 Measurement
 All government grants shall be measured at fair value of the grants received or receivable.
 A government grant may take the form of a transfer of a non-monetary asset. In these circumstances it is
usual to assess the fair value of the non-monetary asset and to account for both grant and asset at that fair
value. An alternative course that is sometimes followed is to record both asset and grant at a nominal
amount.
 Presentation
 A grant relating to assets may be presented in one of two ways
1. Deferred income
Module 2: Government Grants & Government Assistance Page 1 of 4
Government Grants & Government Assistance L. V. CORREA

2. Deduction from the asset's carrying amount

 A grant relating to income may be reported separately as

1. Other income
2. Deduction from the related expense.

 Repayment of Government Grants

 If a grant becomes repayable, it should be treated as a change in estimate.
 Where the original grant related to income:
 The repayment should be applied first against any related unamortized deferred credit, and
 Any excess should be dealt with as an expense.
 Where the original grant related to an asset
 The repayment should be treated as increasing the carrying amount of the asset or reducing the
deferred income balance.
 The cumulative depreciation which would have been charged had the grant not been received should
be charged as an expense.

 Disclosure of Government Grants

1. Accounting policy adopted for grants, including method of balance sheet presentation.
2. Nature and extent of grants recognized in the financial statements.
3. Unfulfilled conditions and contingencies attaching to recognized grants.

 Government Assistance
 Excluded from the definition of government grants are certain forms of government assistance which:
 Cannot reasonably have a value placed upon them; and
 Transactions with government which cannot be distinguished from the normal trading transactions of
the entity.
 Examples of assistance:
a. Free technical or marketing advice
b. Provision of guarantees.
c. Government procurement policy that is responsible for a portion of the entity’s sales.
 The significance of the benefit in the above examples may be such that disclosure of the nature, extent and
duration of the assistance is necessary in order that the financial statements may not be misleading.
 Government assistance for the purpose of this Standard does not include benefits provided only indirectly
through action affecting general trading conditions, such as:
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. Imposition of trading constraints on competitors

 Difference between IFRS for SMEs and Full IFRS

Full IFRS
Accounting model depends on whether it relates
to expenses and assets.
Grants related to asset may be deducted from the
carrying amount of the asset.
Accounting policy must be disclosed
IFRS for SMEs
A different model is applied for the accounting of
government grants based on future performance
No provision that grants may be deducted from
the carrying amount of the asset.
Accounting policy disclosure is not required

 Government Grants and Government Assistance

o Subsidies received from the national government to be used exclusively for the construction of flood
control facility.
o Technical feasibility advice provided by DOST as support to the IT companies built in Visayan region.
o Guarantee provided by BSP to rural banks engaged in international financing activities.
o Road improvements made by DPWH that results in the increase of the fair values of the companies
real properties.
o Licensing agreement gratuitously provided by the national government for mining companies for the
exclusive rights to conduct operation in Benguet for 10 years.
o Immediate financial assistance provided to private hospitals by LGUs as aid for the aftermath of a
calamity.
Illustrative Problems

1. Defined by IAS 20 as actions by government designed to provide an economic benefit specific to an entity
or range of entities qualifying under certain criteria.
Module 2: Government Grants & Government Assistance Page 2 of 4
Government Grants & Government Assistance L. V. CORREA

A. Government grants C. Government subsidy

B. Government assistance D. Government subventions
2. Defined by IAS 20 as assistance by government 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.
A. Government grants C. Government subsidy
B. Government assistance D. Government subventions
3. Government grants whose primary condition is that an entity qualifying for them should purchase,
construct or otherwise acquire long-term assets.
A. Government grants C. Grants related to income
B. Government assistance D. Grants related to assets
4. Government grant shall be recognized when there is reasonable assurance that
A. The entity will comply with the conditions attaching to the grant and that the grant was constructively
received.
B. The entity will comply with the conditions attaching to the grant and that the grant will be received.
C. The entity will comply with the conditions attaching to the grant.
D. The grant was constructively received.
5. Government grant is recognized as income over the period necessary to match them with the related costs,
for which they are intended to compensate, on a systematic basis. Government grants may be recognized
as follows, except
A. The grants in recognition of specific expenses are recognized in profit or loss in the same period as the
relevant expenses.
B. A grant receivable as compensation for costs already incurred or for immediate financial support, with
no future related costs, should be recognized as prior period adjustment in the retained earnings.
C. Grants related to non-depreciable assets may also require the fulfilment of certain obligations and
would then be recognized in profit or loss over the periods that bear the cost of meeting the
obligations.
D. Grants related to depreciable assets are usually recognized in profit or loss over the periods and in the
proportions in which depreciation expense on those assets is recognized.
6. Grant related to asset may be classified in the financial statement as follows, except
A. Setting the grant as deferred income
B. Deducting the grant in arriving at the carrying amount of the asset.
C. Deducting the grant from the related expense.
D. None of the foregoing.
7. Repayment of grant related to income shall be
A. Expensed immediately in the period the grant becomes repayable.
B. Treated as increasing the carrying amount of the asset.
C. Applied first against any related unamortized deferred income and any excess shall be recognized as an
expense.
D. Any of the foregoing.
8. Government assistance does not include
A. Free technical or marketing advice
B. Provision of infrastructure by improvement to the general transport and communication network
C. Provision of guarantees
D. Government procurement policy that is responsible for a portion of the entity’s sales
9. Disclosure requirements for government grants do not include
A. The name of the government agency that gave the grant and the date when the grant was received.
B. Unfulfilled conditions and contingencies attached to the recognized grant.
C. Accounting policy adopted for grants, including method of balance sheet presentation.
D. Nature and extent of grants recognized in the financial statements.
10. Ali-Muong Inc. acquired a transferable 9-year taxi license by way of government grant on January 1, Year 1,
when the fair value of the license was P180,000. The license was given free of charge on the basis of Ali-
Muong performance and there are no future performance condition attached to the grant. How should the
grant be accounted in Year 1?
A. Recognized P180,000 in the profit and loss
B. Recognized P20,000 as grant income in the profit or loss.
C. Recognized P180,000 gain from grants in other comprehensive income.
D. Recognized P20,000 as deferred grant income.
11. Refer to no. 10. Assume that Ali-Muong is required to operate at least 10 taxis in the deprived
neighborhood of the city during the 9-year period. Failure to do so will result in the revocation of the
license. How should the grant be accounted in Year 1?
A. Recognized P180,000 in the profit and loss
B. Recognized P20,000 as grant income in the profit or loss.
C. Recognized P180,000 gain from grants in other comprehensive income.
Module 2: Government Grants & Government Assistance Page 3 of 4
Government Grants & Government Assistance L. V. CORREA

D. Recognized P20,000 as deferred grant income.

12. Culany Company received a government grant of P1,800,000 on May 1, Year 1 in return for the
reforestation of Mt. Arayat until April 30, Year 4. The project would be implemented every year. A grant
relating to income is reported separately by Culany as 'other income'. How much would be the grant
income to be recognized in the profit and loss for year ended December 31, Year 1?
C. 450,000 C. 600,000
D. 300,000 D. 400,000
13. Areenolah Company received a government grant of P1,800,000 on January 1, Year 1 in return for the
reforestation of Mt. Arayat for 4 years. Annual reforestation expenses to be incurred for the 4-year
reforestation project would be P4 million, P3 million, P2 million and P1 million respectively. A grant relating
to income is deducted from the related expense of Areenolah. How much would be the reforestation
expense to be recognized in the profit and loss for year ended December 31, Year 2?
A. 2,460,000 C. 720,000
B. 3,280,000 D. 540,000
14. Kileekeeli Enterprise purchased a machine for P6.4 million on January 1, Year 1. The entity received a
government grant of P540,000 in respect to the machinery. Useful life of the machinery is 4 years and
residual value is P400,000. The grant is presented as deferred income. How much would be the carrying
amount of the machinery and deferred grant income on December 31, Year 1?
Carrying Amount Deferred Income Carrying Amount Deferred Income
A. 4,900,000 405,000 C. 4,500,000 -0-
B. 4,095,000 405,000 D. 4,495,000 -0-
15. Refer to no. 14. Assume that Kileekeeli presented the grant as deduction from the asset's carrying amount.
How much would be the carrying amount of the machinery and deferred grant income on December 31,
Year 2?
Carrying Amount Deferred Income Carrying Amount Deferred Income
A. 3,000,000 270,000 C. 3,130,000 -0-
B. 2,730,000 270,000 D. 3,400,000 -0-
16. On January 1, Year 1, Anne-Anne Corp. received P5 million as government grant related to a building that
was purchased on the same date for P25 million. The useful life is 10 years with no residual value. The grant
is presented as deferred income. On January 1, Year 3, the grant became repayable in full. How much
would be the loss on government grant and the depreciation expense to be recognized in the profit and
loss for year ended December 31, Year 3?
Loss on grant Depreciation Loss on grant Depreciation
A. -0- 2,500,000 C. 1,000,000 2,500,000
B. -0- 3,500,000 D. 5,000,000 2,500,000
17. On January 1, Year 1, Anne-Anne Corp. received P5 million as government grant related to a building that
was purchased on the same date for P25 million. The useful life is 10 years with no residual value. The grant
is presented as deduction from the asset's carrying amount. On January 1, Year 3, the grant became
repayable in full. How much would be the loss on government grant and the depreciation expense to be
recognized in the profit and loss for year ended December 31, Year 3?
Loss on grant Depreciation Loss on grant Depreciation
A. -0- 2,500,000 C. 1,000,000 2,500,000
B. -0- 3,500,000 D. 5,000,000 2,500,000

- End of discussion

“Education is what survives when what has been learned has been forgotten.” - B. F. Skinner

Module 2: Government Grants & Government Assistance Page 4 of 4