BALIUAG UNIVERSITY

APC 5: Auditing & Assurance: Specialized Industries

Module 1: Special Topics – Assets LVC

I. Accounting for Government Grants and Disclosure of Government Assistance (PAS 20)

 Definition of Terms
Terminology Definition
Government An action by government designed to provide an economic benefit specific to an entity or
assistance range of entities qualifying under certain criteria
Government grants 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 Government grants whose primary condition is that an entity qualifying for them should
assets purchase, construct or otherwise acquire long-term assets.
Grants related to Government grants other than those related to assets.
income
Forgivable loans Loans which the lender undertakes to waive repayment of under certain prescribed conditions.

 Classification of Government Grants

Classification Presentation
Grant relating to assets a) Deferred income
b) Deduction from the asset's carrying amount

Grant relating to income a) Other income

b) Deduction from the related expense.

 Recognition
Particular Accounting
Recognition of grant 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 grant
Matching of grant income
to expense
Receipt of a grant does not of itself provide conclusive evidence that the conditions
attaching to the grant have been or will be fulfilled.
 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.
 Grants in recognition of specific expenses are recognized in profit or loss in the
same period as the relevant expenses.

Grant related to asset
 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.

Grant as immediate  A grant receivable as compensation for costs already incurred or for immediate
income financial support, with no future related costs, should be recognized as income in
the period in which it is receivable.

Allocation of grant  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

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Module 1: Special Topics – Assets LVC
 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.

 Repayment of Government Grants

Classification of Original Grant Accounting
Original grant related to income 1) The repayment should be applied first against any related unamortized
deferred credit, and
2) Any excess should be dealt with as an expense.

Original grant related to an asset 1) The repayment should be treated as increasing the carrying amount of
the asset or reducing the deferred income balance.
2) 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
Particular Accounting
Excluded from Grants that are accounted as forms of government assistance:
definition of a. Cannot reasonably have a value placed upon them; and
government grants b. Transactions with government which cannot be distinguished from the normal trading
transactions of the entity.

Examples included in a. Free technical or marketing advice

government b. Provision of guarantees.
assistance c. Government procurement policy that is responsible for a portion of the entity’s sales.

Examples excluded Benefits provided only indirectly through action affecting general trading conditions:
from government a. Provision of infrastructure by improvement to the general transport and communication
assistance 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 IFRS for SMEs
Accounting model depends on whether it relates to A different model is applied for the accounting of
expenses and assets. government grants based on future performance

Grants related to asset may be deducted from the No provision that grants may be deducted from the
carrying amount of the asset. carrying amount of the asset.

Accounting policy must be disclosed Accounting policy disclosure is not required

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 Module 1: Special Topics – Assets LVC
 Illustration: Classify the following as Government Grants, Government Assistance or N/A
a. Subsidies received from the national government to be used exclusively for the construction of flood control
facility.
b. Technical feasibility advice provided by DOST as support to the IT companies built in Visayas region.
c. Financial guarantee provided by BSP to rural banks engaged in international financing activities.
d. Road improvements made by DPWH that results in the increase of the fair values of the entity’s real properties.
e. Licensing agreement gratuitously provided by the national government for mining companies for the exclusive
rights to conduct operation in Benguet for 10 years.
f. Immediate financial assistance provided to private hospitals by LGUs as aid for the aftermath of a calamity.
g. Implementation of a new legislation that restricts the operation of direct competitors which resulted in expanded
revenue generation of the entity.
h. Public bidding organized by the Philippine government procurement offices that requires acquisition of specialized
goods and services that is exclusively marketed by a few entities.

II. Borrowing Costs (PAS 23)

 Definition of Terms
Terminology Definition
Borrowing costs Interest and other costs that an entity incurs in connection with the borrowing of funds.
Capitalization Recognizing a cost as part of the cost of an asset.
Qualifying asset An asset that necessarily takes a substantial period of time to get ready for its intended use or
sale.

 Scope
Particular Inclusion & Exclusion
Borrowing  Borrowing cost may include:
a. Interest expense calculated by the effective interest method under PFRS 9
b. Finance charges in respect of finance leases recognized in accordance with PFRS 16
Leases; and
c. Exchange differences arising from foreign currency borrowings to the extent that they
are regarded as an adjustment to interest costs.

 This standard does not deal with the actual or imputed cost of equity, including any
preferred capital not classified as a liability pursuant to PAS 32.
Qualifying asset  A qualifying asset could be
a. PPE and investment property during the construction period
b. Intangible assets during the development period
c. "Made-to-order" inventories.

 Assets that would otherwise be qualifying assets are excluded from the scope of PAS 23:
a. Qualifying assets measured at fair value, e.g. biological assets under PAS 41 Agriculture.
b. Inventories that are manufactured in large quantities on a repetitive basis and that take
a substantial period to get ready for sale (for example, maturing whisky)
c. Assets that are ready for their intended use or sale when acquired.

 Recognition and Presentation

Accounting Description

Capitalized Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset.

Expense Other borrowing costs that are not directly attributable to qualifying asset.

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 Measurement
Particular Accounting
Specific borrowing  Funds are borrowed specifically for the acquisition, construction or production of a
qualifying asset.
 Capitalized borrowing cost = actual borrowing costs incurred less any income earned
on the temporary investment of such borrowings.

General borrowing  Funds are part of a general pool (partly for qualifying asset)
 Borrowing cost capitalized = capitalization rate x average expenditure
 The capitalization rate will be the weighted average of the borrowing costs applica-
ble to the general pool.
 The amount of borrowing costs that an entity capitalizes during a period shall not
exceed the amount of borrowing costs it incurred during that period.
 Income earned on the temporary investment of such borrowings is not deducted
from borrowing cost.

 Capitalization
Particular Accounting
Commencement Capitalization should commence when expenditures are being incurred, borrowing costs are
being incurred and activities that are necessary to prepare the asset for its intended use or sale
are in progress

Suspension Capitalization should be suspended during periods in which active development is interrupted.
Cessation  Capitalization should cease when substantially all of the activities necessary to prepare the
asset for its intended use or sale are complete.
 If only minor modifications are outstanding, this indicates that substantially all of the activi-
ties are complete.
 Where construction is completed in stages, which can be used while construction of the
other parts continues, capitalization of attributable borrowing costs should cease when sub-
stantially all of the activities necessary to prepare that part for its intended use or sale are
complete.

 Disclosure
 Amount of borrowing cost capitalized during the period
 Capitalization rate used to determine the amount of borrowing cost eligible for capitalization

III. Agriculture (PAS 41)

 Definition of terms
Terminology Definition
Agricultural activity The management by an entity of the biological transformation and harvest of biological
assets for sale or for conversion into agricultural produce or into additional biological assets.
Agricultural The harvested produce of the entity’s biological assets.
produce
Bearer plant A living plant that: (a) is used in the production or supply of agricultural produce; (b) is
expected to bear produce for more than one period; and (c) has a remote likelihood of being
sold as agricultural produce, except for incidental scrap sales.

Biological asset A living animal or plant.

Biological It comprises the processes of growth, degeneration, production, and procreation that cause
transformation qualitative or quantitative changes in a biological asset.

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Terminology Definition
Costs to sell Incremental costs directly attributable to the disposal of an asset, excluding finance costs
and income taxes.
Point of sale costs:
a. Include commissions to brokers and dealers, levies by regulatory agencies and
commodity exchanges, transfer taxes and duties.
b. Exclude transport and other costs necessary to bring the asset to a market.

Group of biological An aggregation of similar living animals or plants

assets
Harvest The detachment of produce from a biological asset or the cessation of a biological asset’s life
processes.

 Scope
 PAS 41 applies to biological assets with the exception of:
a. Bearer plants
b. Agricultural produce at the point of harvest (after harvest, PAS 2 applies)
c. Government grants related to these biological assets.
 PAS 41 does not apply to
a. Land related to agricultural activity
b. Intangible assets related to agricultural activity
c. Government grants related to bearer plants.
 However, it does apply to produce growing on bearer plants.

 Recognition
 An entity recognizes a biological asset or agriculture produce only when
a. The entity controls the asset as a result of past events
b. It is probable that future economic benefits will flow to the entity, and
c. The fair value or cost of the asset can be measured reliably.

 Measurement
Account Measurement
Biological assets a) Fair value less estimated costs to sell (Initial recognition and subsequent
measurement)
b) Cost less accumulated depreciation and any accumulated impairment if fair
value cannot be reliably measured,
Agricultural produce a) Fair value less estimated costs to sell at the point of harvest (PAS 41)
b) Lower of cost and net realizable value subsequent to harvest (PAS 2)
Gain or Loss on biological a) Gain/loss on initial recognition biological assets and changes in fair value less
asset and agricultural costs to sell during a period, are included in profit or loss.
produce b) Gain/loss on initial recognition of agricultural produce at fair value less costs to
sell are included in profit or loss for the period in which it arises.
c) The change in fair value of biological assets is part physical (growth) change and
part unit price change. Separate disclosure of the two components is encouraged
but not required.

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 Illustration: Identify whether each item listed is a biological asset, bearer plant, agricultural produce or product
after harvest
a. Carcass l. Picked fruit
b. Cheese m. Tea leaves
c. Cotton plants n. Sheep grown for their wool
d. Dairy cattle o. Sugar
e. Grape vines p. Wheat
f. Rubber trees grown for rubber production q. Trees (grown for lumbers)
g. Harvested cotton r. Wine
h. Yarn s. Wool
i. Palm oil t. Tea plants (tea leaves are harvested)
j. Coconut palms u. Swine
k. Rice plants v. Bamboo grass(bamboo poles are harvested)

 Financial statement presentation

 Biological assets shall be presented as a separate line item and classified as noncurrent assets.
 Agricultural produce is considered as inventories. PAS 41 applies until point of harvest and PAS 2 applies after
harvest.

 Other considerations
Particular
Agricultural land
Biological assets physically
attached to land
Accounting
Accounted for under PAS 16 - Property, Plant and Equipment
Measured as biological assets separate from the land.
Fair value less costs to sell of the biological asset can be based on the fair value of
the combined asset

Intangible assets relating to Accounted for under PAS 38 - Intangible Assets (e.g. milk quotas)
agricultural activity

Government grants received
(biological assets)
Unconditional government grants are recognized in profit or loss when the grant
becomes receivable.
Conditional grant (including where the grant requires an entity not to engage in
certain agricultural activity), the entity recognizes the grant in profit or loss only
when the conditions have been met.

Bearer plants Bearer plants are accounted using PAS 16 – PPE:

a) Cost model
b) Revaluation model
Examples are fruit-bearing trees and long-lived trees and plants that produce
products for harvest.

Annual crops Annual crops and other plants held solely for harvesting as agricultural produce
are not expected to meet the definition of bearer plants.

Plants that have dual use Plants both bearing produce and the plant itself being sold as either a living plant
or agricultural produce, are not bearer plants and accounted as biological asset.

Bearer animals Still accounted as biological assets under PAS 41

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IV. Other Investments
Particular Accounting
Funds set aside  Long-term funds classified as noncurrent assets include:
for noncurrent a. Sinking fund
purposes b. Preferred stock redemption fund
c. Plant expansion fund
d. Contingency fund
e. Insurance fund
 Long-term funds are measured at the amount of cash plus the cost of securities adjusted for
discount or premium amortization, and other assets in the fund.
Sinking fund  Sinking or redemption fund is a fund set aside for the liquidation of long term debt.
 Classification:
a. NCA = if related liability is maturing over a long-term period
b. Cash & cash equivalents = if related liability is currently maturing
 An entity’s policy may require appropriation of retained earnings
Annual contribution to fund (if managed by trustee) = Target future value ÷ FV factor (ordinary annuity or
annuity in advance).
Cash surrender  It is the amount which the insurance company will pay upon the surrender and cancellation of
value the life insurance policy.
 If the beneficiary of a life insurance is the entity itself, cash surrender value must be recognized
by the entity.
 Cash surrender value arises if
a. The insurance policy is life policy.
b. Premiums for 3 full years have been paid
c. Policy is surrendered at the end of the 3rd year or anytime thereafter.
 Cash surrender value legally accrued at the end of the third year.
 Computation of life insurance expense:
a. Dividends are not received by entity but applied to cash surrender value
Life insurance expense = Premium paid(expired) – increase in cash surrender value(current
period)
b. Dividends are received periodically by the entity
Life insurance expense = Premium paid(expired) – increase in cash surrender value(current
period) – dividends received
 Gain on life insurance = Face of policy – Cash surrender value – Unexpired premium paid

“You, Lord, give perfect peace to those who keep their purpose firm and put their trust in you.” Isaiah
26:3

“Believe in yourself and all that you are. Know that there is something inside you that is greater
than any obstacle.” Christian D. Larson.

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