Government Grant

Definition
PAS 20, paragraph 3, 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.
Government grant is sometimes called by
other names such as subsidy, subvention
or premium.
 Recognition and
Measurement
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.
 Classifications of Government
Grant
A. Grant related to asset – this is
government grant whose primary condition
is that an entity qualifying for the grant
shall purchase, construct or otherwise
acquire long term asset.

B. Grant related to income – this is

government grant other than grant related
to asset.
 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.
 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 P15,000,000) 3,000,000

 Environmental expenses 2,000,000

 Cash 2,000,000

 First year (2/10 x P15,000,000) 3,000,000

 Second year (3/10 x 15,000,000) 4,500,000
 Third year (5/10 x 15,000,000) 7,500,000
 15,000,000
 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.

 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 tract 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.
 Journal entries in the first year:
 1. Land 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
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.
 Illustration 4
An entity received grant of P50,000,000
from the USA government to compensate
for massive losses incurred because of
a recent earthquake.

Journal entry:
Cash
50,000,000
 Grant income
50,000,000
 Presentation of
Government Grant
1. Government grant related to asset,
including nonmonetary grant at fair value,
shall be presented in the statement of
financial position in either 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 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 grant income 500,000

 3. To record annual depreciation.

 Depreciation 960,000
 Accumulated depreciation (5,000,000 – 200,000/ 5 years)
960,000

 4. To recognize 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 860,000

 Acquisition cost 5,000,000

 Government grant (500,000)
 Net cost 4,500,000
 Residual value (200,000)
 Depreciable amount 4,300,000

 Annual depreciation (4,300,000/ 5 years) 860,000

 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 a grant related to income shall be
applied first against any unamortized deferred
income and any excess 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.

The cumulative additional depreciation that

would have been recognized to date in the absence
of the grant shall be recognized immediately as an
expense.
 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 the

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.
 2020
 Jan. 1 Cash 6,000,000
 Deferred grant income 6,000,000

 Dec. 31 Deferred grant income 2,000,000

 Grant income (6,000,000/ 3 years)
2,000,000

 2021
 Jan. 1 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
building 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
 2020
 Jan. 1 Building 25,000,000
 Cash
25,000,000

 1 Cash 5,000,000
 Deferred grant income 5,000,000

 Dec. 31 Depreciation 2,500,000

 Accumulated depreciation (25,000,000/ 10)
2,500,000

 31 Deferred grant income 500,000

 Grant income (5,000,000/10)
500,000
 2021
 Dec. 31 Depreciation 2,500,000
 Accumulated depreciation
2,500,000

 31 Deferred grant income 500,000

 Grant income
500,000
 2022
 Jan. 1 Deferred grant income 4,000,000
 Loss on Repayment of Grant 1,000,000
 Cash 5,000,000

 Dec. 31 Depreciation 2,500,000

 Accumulated depreciation 2,500,000

 Building 25,000,000
 Accumulated depreciation (2,500,000 x 3) (7,500,000)
 Carrying amount – December 31, 2022
17,500,000
 Deduction From Asset
Approach
 2020
 Jan. 1 Building 25,000,000
 Cash
25,000,000

 1 Cash 5,000,000
 Building
5,000,000

 Dec. 31 Depreciation (20,000,000/10) 2,000,000

 Accumulated depreciation
2,000,000
 2021
 Dec. 31 Depreciation 2,000,000
 Accumulated depreciation
2,000,000

 2022
 Jan. 1 Building 5,000,000
 Cash
5,000,000

 Dec. 31 Depreciation 3,500,000

 Accumulated depreciation
3,500,000
 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

 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, paragraph 10, provides that the benefit

of a government loan with NIL or below
market rate of interest is treated as a
government grant.

Paragraph 10A 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 three years evidenced by a promissory note.

 The market rate of interest for similar loan is 5%. The

present value of 1 at 5% for three 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
three years.
 Computation
 Date Amortization Discount on
Present Value
 Note
Payable
 1/1/2020 681,000
4,319,000
 12/31/2020 215,950 465,050
4,534,950
 12/31/2021 226,748 238,302
4,761,698
 12/31/2022 238,302 -
5,000,000
 Journal Entries
 2020
 Jan. 1 Cash 5,000,000
 Discount on Note Payable 681,000
 Note Payable
5,000,000
 Deferred grant income
681,000

 Dec. 31 Interest expense 215,950

 Discount on Note Payable
215,950

 Deferred grant income 215,950

 Grant income
215,950
 2021
 Dec. 31 Interest expense 226,748
 Discount on Note Payable 226,748

 Deferred grant income 226,748

 Grant income 226,748

 2022
 Dec. 31 Interest expense 238,202
 Discount on Note Payable 238,202

 Deferred grant income 238,202

 Grant income 238,202

 Note payable 5,000,000

 Cash
5,000,000
 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.
Examples:
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.
 Disclosures About Government
Grant
A. The accounting policy adopted by for
government grant, including the method of
presentation adopted in the financial
statements.
B. 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 already
benefited.
C. Unfulfilled conditions and other
contingencies attaching to government
assistance that has been recognized.
 End of
Presentation