PHILIPPINE INTERPRETATIONS COMMITTEE (PIC)

QUESTIONS AND ANSWERS (Q&As)

Q&A No. 2008–02

PAS 20.43 – Accounting for government loans with low interest rates under the
amendments to PAS 20

Issue

Does an entity that adopted one of the accounting treatments for government loans with low
interest rates under Q&A 2007-02 change its policy as result of the amendments to PAS 20?

Background

In 2007, PIC Q&A 2007-02, Accounting for government loans with low interest rates, was issued
to provide guidance on the accounting for government loans with low interest rate that are
sometimes provided to certain banks, the proceeds of which are to be invested by the recipient
bank in government securities at prevailing interest rates.

Because of the conflict in accounting guidance at that time on loans with low interest provided in
PAS 20, Accounting for Government Grants and Disclosure of Government Assistance and PAS
39, Financial Instruments: Recognition and Measurement, the three following accounting
alternatives were considered acceptable:

1. The government loan is recognized initially at the nominal amount of the loan and is not
subsequently measured at fair value in accordance with PAS 20. No fair value gain or loss is
recognized.

2. The government loan is measured initially at fair value (i.e., the present value of all future
cash payments discounted using a market rate of interest) in accordance with PAS 39. The
difference between the fair value at initial recognition and the loan proceeds received is
recognized immediately in income.

3. The government loan is measured initially at fair value (i.e., the present value of all future
cash payments discounted using a market rate of interest) under PAS 39. The difference
between the fair value of the loan and the proceeds of the loan are considered a form of
government grant under PAS 20, and is recognized as income on a systematic basis over the
period of the loan.

In August 2008, the Financial Reporting Standards Council (FRSC) approved the adoption of the
Improvements to PFRSs. Among these improvements is an amendment to PAS 20 which
resolved the inconsistency of guidance in PAS 20 and PAS 39 with respect to loans at low
interest rates.

Paragraph 10A of amended PAS 20 now provides that “the benefit of a government loan at a
below-market rate of interest is treated as a government grant. The loan shall be recognized and
measured in accordance with PAS 39. The benefit of the below-market rate of interest shall be
measured as the difference between the initial carrying value of the loan determined in
accordance with PAS 39 and the proceeds received. The benefit is accounted for in accordance
with amended PAS 20. The entity shall consider the conditions and obligations that have been, or
must be, met when identifying the costs for which the benefit of the loan is intended to
compensate.”

1
The amendments to PAS 20 also deleted paragraph 37, which states that “loans at nil or low
interest rates are a form of government assistance, but the benefit is not quantified by the
imputation of interest.”

Consensus

An entity that adopted one of the accounting treatments adopted under Q&A 2007-02 does not
change the accounting for loans prior to the effective date of the amendments to PAS 20.

Paragraph 43 of amended PAS 20 provides that the amendments shall be applied prospectively
to government loans received in periods beginning on or after January 1, 2009, with earlier
application permitted. Accordingly:

• Government loans received prior to January 1, 2009 will continue to be accounted under the
accounting treatment chosen under Q&A 2007-02.

• Government loans received on or after January 1, 2009 will be accounted for under the
amended provisions of PAS 20.

• If an entity opts to early adopt the amendments to PAS 20, the amendments shall apply
prospectively on government loans received on or after the date of early adoption. For
example, if an entity chooses to adopt the amendments on January 1, 2008, the amendments
shall be applied prospectively to government loans received in periods beginning on or after
January 1, 2008.

Effective Date

The consensus in this Q&A is effective from the date of approval by the FRSC.

*****

Date approved by PIC: November 26, 2008

PIC Members

David L. Balangue, Chairman

Wilfredo A. Baltazar Ramon G. Opulencia

Rosario S. Bernaldo Ruby R. Seballe

Ma. Elenita B. Cabrera Editha O. Tuason

Dalisay B. Duque Jose T. Valencia

Ma. Concepcion Y. Lupisan Ma. Gracia Casals-Diaz

Normita L. Villaruz

Date approved by FRSC: January 16, 2009