LECTURE NOTES ON GOVERNMENT GRANTS

Definition

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.

Government grants exclude:

(a) those forms of government assistance which cannot reasonably have a value placed upon them; and
(b) transactions with government which cannot be distinguished from the normal trading transactions of the entity.

Types of government grants

Grants related to assets

Government grants whose primary condition is that an entity qualifying for them should purchase, construct or
otherwise acquire long-term assets. Subsidiary conditions may also be attached restricting the type or location of
the assets or the periods during which they are to be acquired or held.

Grants related to income

Government grants other than those related to assets.

Recognition of government grants

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.

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, and should not to be credited directly to equity.

Even if there are no conditions attached to the assistance specifically relating to the operating activities of the entity
(other than the requirement to operate in certain regions or industry sectors), such grants should not be credited to
equity.

Grants in recognition of specific expenses

Recognized in profit or loss in the same period as the relevant expenses.

Grants in related to depreciable assets

Usually recognized in profit or loss over the periods and in the proportions in which depreciation expense on those
assets is recognized. In other words, use the same method of depreciation and use the same depreciation period.

Grants in related to non-depreciable assets

Recognized in profit or loss over the periods that bear the cost of meeting the obligations. As an example, a grant
of land may be conditional upon the erection of a building on the site and it may be appropriate to recognize the
grant in profit or loss over the life of the building.

Consolidated grant
Grants are sometimes received as part of a package of financial or fiscal aids to which a number of conditions are
attached. In such cases, care is needed in identifying the conditions giving rise to costs and expenses which
determine the periods over which the grant will be earned. It may be appropriate to allocate part of a grant on one
basis and part on another.

Grant recognized in profit or loss of the period in which it becomes receivable

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 future related costs shall be recognized in profit
or loss of the period in which it becomes receivable.

Forgivable 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.

Government loan at a below-market rate of interest

• 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 or PFRS 9.
• 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 or PFRS 9 and the proceeds received.
• The benefit is accounted for in accordance with 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.

Measurement of government grants

Non-monetary grants, such as land or other resources, are usually accounted for at fair value, although recording
both the asset and the grant at a nominal amount is also permitted.

Presentation of government grants

A grant relating to assets may be presented in one of two ways:
1. as deferred income, or
2. by deducting the grant from the asset's carrying amount.

A grant relating to income may be reported:

1. separately (income from government grant):
2. under the heading ‘other income'; or
3. deducted from the related expense.
Grant that becomes repayable

• 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.

Government grants related to biological assets

PAS 20 is applied only to a government grant related to a biological asset measured at its cost less any accumulated
depreciation and any accumulated impairment losses. PAS 41 requires a different treatment from PAS 20, if a
government grant relates to a biological asset measured at its fair value less costs to sell or a government grant
requires an entity not to engage in specified agricultural activity.

Unconditional government grant

An unconditional government grant related to a biological asset measured at its fair value less costs to sell shall be
recognized in profit or loss when, and only when, the government grant becomes receivable.

Conditional government grant

If a government grant related to a biological asset measured at its fair value less costs to sell is conditional, including
when a government grant requires an entity not to engage in specified agricultural activity, an entity shall recognize
the government grant in profit or loss when, and only when, the conditions attaching to the government grant are
met.

Terms and conditions of government grants vary. For example, a grant may require an entity to farm in a particular
location for five years and require the entity to return all of the grant if it farms for a period shorter than five years.
In this case, the grant is not recognized in profit or loss until the five years have passed. However, if the terms of
the grant allow part of it to be retained according to the time that has elapsed, the entity recognizes that part in
profit or loss as time passes

PROBLEMS

1. Bren Inc. received a grant of P60 million to compensate it for costs it incurred in planting trees over a period of
five years. Bren Inc. will incur costs in this manner: Year 1 – P2 million; Year 2 – P4 million; Year 3 – P6 million;
Year 4 – P8 million; Year 5 – P10 million. Based on the provisions of PAS 20, how much should be recognized
as income from government grant at the end of year 1?

Use the following information for the next two questions.

Nadine Company received a P1,800,000 subsidy from the government to purchase manufacturing equipment on
January, 2, 2015. The equipment has a cost of P3,000,000, a useful life a six years, and no salvage value. Nadine
depreciates the equipment on a straight-line basis.
2. If Nadine chooses to account for the grant as deferred income, the grant income to be recognized in 2015 is

3. If Nadine chooses to account for the grant as an adjustent to the asset, the carrying amount of the asset on the
December 31, 2015 statement of financial position is

Use the following information for the next two questions.

On January 1, 2014, Citimart Inc. was granted land in a village, located near the slums outside the city limits, by a
local government authority. The condition attached to this grant was that the company should clean up this land
and lay roads by employing laborers from the village in which the land is located. The government has fixed the
minimum wage payable to the workers. The entire operation will take three years and is initially estimated to cost
P160 million. The fair value of this land on the date of grant was P240 million and is expected to increase by at least
20% annually because of the improvements to be done by the company. In relation to the attached condition, the
company incurred costs of P80 million in 2014 and P70 million in 2015. On December 31, 2015, the company
estimated that it will incur additional cost of P30 million in 2016.

4. How much should be recognized as income from government grant for the year ended December 31, 2014?
5. How much should be recognized as income from government grant for the year ended December 31, 2015?

6. Lively Inc. received a consolidated grant of P120 million. Three-fourths of the grant is to be utilized to purchase
a college building for students from underdeveloped or developing countries. The balance of the grant is for
subsidizing the tuition costs of those students for four years from the date of grant. The college building, which
costs P100 million, will be depreciated using the straight-line method over 10 years. Assuming that the tuition
subsidy will be offered evenly over the period of 4 years, the amount that should be recognized as income at
the end of year 1 is

7. Puff Company is engaged in the operation of public highways and skyways in the Philippines. On November 2,
2014, a catastrophe devastated some of the company's operated highways and skyways. The company suffered
P5.6 billion loss due to catastrophe. On January 1, 2015, the Philippine government decided to compensate the
company for the incurred loss. The government loaned P5 billion at 5% per annum with maturity period of 5
years. The present value of cash flows at January 1, 2015 using the current market rate for similar type of loan
after considering credit risks attached was P4.2 billion. The conditions stipulated on the loan agreement provide
that the proceeds will be used for reconstruction of the skyways and highways.On January 1, 2015, how much
should the company recognize as government grant?

8. A public limited company, Eks Dairy Products, produces milk on its farms. The company has had problems
during 2015. Contaminated milk was sold to customers. As a result, milk consumption has gone down. The
government decided to compensate farmers for potential loss in revenue from sale of milk. This fact was
published in the national press on December 1, 2015. Eks received an official letter on December 15, 2015,
stating that P1 million would be paid to it on April 3, 2016.The entity should recognize income from government
grant of