ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 42  October 2021 CPA Licensure Exam  Weeks 4 - 5

FINANCIAL ACCOUNTING & REPORTING C. Uberita  G. Macariola  J. Binaluyo

FAR-4206: GOVERNMENT GRANT & AGRICULTURE

Government Grants – are assistance by the government in the form of transfer of resources to an entity in
return for past or future compliance with certain conditions relating to the operating activities of the entity.
They include outright cash support, subsidies, compensation, financial assistance for construction of assets.

Recognition criteria for Grants:

PAS 20 requires that government grants, including non-monetary grants, shall not be recognized until there is
reasonable assurance that;
a) The entity will comply with the conditions attaching to them, and
b) The grants will be received

The accounting standard requires that “government grants shall be recognized as income over the period
necessary to match with the related costs which they are intended to compensate, on a systematic basis. They
shall not be credited directly to shareholders’ interests”

Types of grants:
a) Grants related to income – normally have their related costs and expenses. These grants are taken to
profit or loss in the same period as the relevant costs or expenses are incurred.

But a government grant which is in the form of immediate financial support and has no further related
costs to be incurred shall be recognized in profit or loss in the period when the entity qualifies to receive
it.

A forgivable loan from the government is treated as a government grant when there is reasonable
assurance that the entity will meet the terms of forgiveness of the loan.

If an entity receives a government loan at a below market rate of interest, the loan is a financial liability
that shall be recognized and measured in accordance with PAS 39. The benefit of the loan at a below
market rate of interest is treated as a government grant. This benefit is measured as the difference
between the initial carrying amount of the loan (measured at fair value) and the proceeds.

Some government grants take the form of a non-monetary assets, such as land or other resources, for
the use of the entity. The non-monetary asset and the grant should be measured both at fair value. An
alternative course is to measure both the non-monetary asset and the grant at nominal value.

b) Grants related to Assets - these are 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.

A government grant that relates to a depreciable long-term asset shall be similarly be allocated
systematically to profit or loss over the period to match it with the related depreciation cost of the asset.
Such government grants, including non-monetary grant at fair value, shall be presented in the statement
of financial position either;
➢ By setting up the grant as deferred income, or
➢ By deducting the grant in arriving at the carrying amount of the asset

Grants in the form of Rights to Access Natural Resources – some government assistance takes the form of
rights to access natural resources, such as water rights, timber rights, airport landing rights, etc. PAS 38
Intangible assets “in some cases, intangible asset may be acquired free of charge, or nominal consideration,
by way of government grant. This may happen when a government transfers or allocates to an entity intangible
assets such as airport landing rights, licenses to operate radio or television stations, import licenses or quotas
or rights to access other restricted resources. In accordance with PAS 20, an entity may choose to recognize
both the intangible asset and the grant initially at fair value. If the entity chooses not to recognize the asset
initially at fair value, the entity recognizes the asset at nominal value plus any expenditure that is directly
attributable to preparing the asset for its intended use

Grants that Become Repayable – a government grant received by an entity may become repayable to the
Government, and this is normally due to the entity failing to meet the specified conditions of the grant. In
such cases, the grant repayable shall be accounted for as a change in accounting estimate. Repayment of
grant related to income shall be applied first against any unamortized deferred credit set up in respect of the
grant, and any remaining balance of the repayment shall be charged to profit or loss. The procedure to
recognize a repayment of grant related to asset depends on how the grant had previously been presented; as
follows:
a) If the grant had been netted off against the carrying amount of the related asset, then the repayment
shall be recorded by increasing the carrying amount of the asset; and
b) If the grant had been credited to deferred income, then the repayment shall be first be set off against the
unamortized deferred income

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4206
Weeks 4-5: GOVERNMENT GRANT & AGRICULTURE

AGRICULTURE
Biological assets – living plants and animals
Agricultural produce – the harvested product of the entity’s biological assets.
Biological transformation – relates to the processes of growth, degeneration and production and procreation
that cause quantitative or qualitative changes in a biological asset.
(1) Asset changes through
a) Growth (increase in quantity or improvement in quality of an animal or plant)
b) Degeneration (a decrease in the quantity or deterioration in quality of an animal or plant) or
c) Procreation (creation of additional living animals or plants;
(2) Production of agricultural produce such as latex, tea leaf, wool, and milk.
Agricultural activity - is 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, such as the
following:
a. Raising livestock e. Floriculture
b. Annual of perennial cropping f. Cultivating
c. Cultivating orchards and plantation g. Forestry
d. Aquaculture (including fish farming)
A group of biological assets - is an aggregation of similar living animals or plants.
Harvest – is the detachment of produce from a biological asset or the cessation of a biological asset’s life
processes.
Examples of biological assets, agricultural produce, and products that are the result of processing after harvest:
Agricultural Products That Are The Result
Biological Assets Produce Of Processing After Harvest
Sheep Wool Yarn, carpet
Trees in a timber plantation Logs Logs, Lumber.
Dairy cattle Milk Cheese
Pigs Carcass Sausages, cured hams
Cotton plants Harvested cotton Thread, clothing
Sugar cane Harvested cane sugar
Tobacco plants Picked leaves Cured tobacco
Fruit trees Picked fruit Processed fruit
Tea bushes Picked leaves Tea
Grape vines Picked leaves Wine
Oil palms Picked fruit Palm oil
Rubber trees Harvested latex Rubber products
Some plants, for example, tea bushes, grape vines, oil palms, and rubber trees, usually meet the definition of
a bearer plant and are within the scope of IAS 16. However, the produce growing on bearer plants, for example,
tea leaves, grapes, oil palm fruit and latex, is within the scope of IAS 41.

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

Measurement
Biological asset - shall be measured on initial recognition and at each balance sheet date at its Fair Value less
estimated point of sale costs. If the fair value cannot be measured reliably, it shall be measured at cost less any
accumulated depreciation and any impairment losses. Once the fair value of the biological asset becomes reliably
measurable, the entity shall measure at its fair value less estimated point of sale costs.
Agricultural produce harvested from entity’s biological assets – shall be measured at its fair value less
estimated point of sale costs at the point of harvest
Gains and losses
Gain or loss arising on initial recognition of a biological asset at fair value less estimated point of sale costs and
from a change in fair value less estimated point of sale costs of a biological asset shall be included in profit or
loss for the period in which it arises.

A loss may arise on initial recognition of a biological asset, because costs to sell are deducted in determining fair
value less costs to sell of a biological asset. A gain may arise on initial recognition of a biological asset, such as
when a calf is born.
Gains and losses arising on initial recognition of agricultural produce at fair value less estimated point of sale
costs shall be included in profit or loss for the period in which it arises.
Point of sale costs include the following
a. commission to brokers and dealers
b. levies by regulatory agencies and commodity exchanges
c. transfer taxes and duties

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4206
Weeks 4-5: GOVERNMENT GRANT & AGRICULTURE

Bearer plants – the new requirements

Agriculture: Bearer Plants (Amendments to PAS 16 and PAS 41) changes the accounting requirements for
biological assets that meet the definition of bearer plants. Bearer plants will no longer be within the scope of PAS
41. Instead, PAS 16 will apply. PAS 41 will still apply to any agricultural produce growing on a bearer plant. PAS
20 will now apply to government grants related to bearer plants. The amendments are retrospectively effective
for annual periods beginning on or after 1 January 2016, with early adoption permitted.

The International Accounting Standards Board (IASB) issued Agriculture: Bearer Plants (Amendments to PAS 16
and PAS 41) on 30 June 2014, which changed the accounting requirements for biological assets that meet the
definition of bearer plants (e.g., fruit trees). Bearer plants will now be within the scope of PAS 16 Property, Plant
and Equipment and will be subject to all of the requirements therein. This includes the ability to choose between
the cost model and revaluation model for subsequent measurement. Agricultural produce growing on bearer
plants (e.g., fruit growing on a tree) will remain within the scope of PAS 41 Agriculture. Government grants
relating to bearer plants will now be accounted for in accordance with PAS 20 Accounting for Government Grants
and Disclosure of Government Assistance, instead of in accordance with PAS 41.
Plants that are cultivated for agricultural produce, such as timber crop cultivation, are not bearer plants. Similarly,
rubber trees cultivated for wood, rather than for latex production, are not bearer plants. These consumable
biological plants remain in PAS 41. Also, short-term bearer plants are not within the scope of the amendment of
PAS 16.

Definition of a bearer plant The amendment defines a bearer plant as “a living plant that:
o is used in the production or supply of agricultural produce;
o is expected to bear produce for more than one period; and
o has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.
All of the above criteria need to be met for a biological asset to be considered a bearer plant.
Bearer plants will be accounted for as property, plant and equipment, separate from any related agricultural
produce.
The definition captures plants that would intuitively be considered to be bearers, for instance, grape vines. In
addition, some plants that may appear to be consumable, such as the root systems of perennial plants (e.g.,
sugar cane or bamboo) are expected to meet the definition of a bearer plant. Annual crops and other plants that
are held solely to be harvested as agricultural produce (e.g., many traditional bearable crops such as maize,
wheat and soya, as well as trees grown for lumber), are not expected to meet the definition of a bearer plant. In
addition, plants that have a dual use, that is, both bearing produce and the plant itself being sold as either a
living plant or agricultural produce (beyond incidental scrap sales), will not meet the definition. This may be the
case when, for example, an entity holds rubber trees to sell both the rubber milk as agricultural produce and the
trees as lumber. Bearer animals, like bearer plants, may be held solely for the produce that they bear. However,
bearer animals have been explicitly excluded from the amendments and will continue to be accounted for under
PAS 41 on the basis that the measurement model would become more complex if applied to such assets.

Careful assessment will, therefore, be important. In addition, it is not clear whether an entity would need to
reassess whether a plant meets the definition of a bearer plant after initial recognition. For example, if a plant
meets the definition of a bearer plant and that changes subsequently, would PAS 41 then apply instead of PAS
16? The amendments do not address this question or specify how to transfer such assets between PAS 16 and
PAS 41 (or vice versa).

Separating bearer plants from their agricultural produce – impact on current and non-current classification.
Currently, bearer plants and their agricultural produce are considered to be one asset prior to harvest (i.e., a
single unit of account) and presented as either current or noncurrent (usually the latter) based on the asset’s
useful life. The amendments now split the plant and the produce into two assets (i.e., two units of account), with
different measurement models. Bearer plants will be presented as non-current assets. Agricultural produce will
usually be a current asset, unless it takes more than a year to mature.
Measurement requirements for bearer plants Under PAS 41, bearer plants are currently measured at fair value
less costs to sell both at initial recognition and subsequently (unless the measurement exception applies because
fair value cannot be reliably measured). As a result of the amendments, bearer plants will be subject to all of the
recognition and measurement requirements in PAS 16, including the following: Before maturity, bearer plants
will be measured at their accumulated cost, similar to the accounting treatment for a self-constructed item of
plant and equipment before it is ’available for use’. After the bearer plants mature, entities will have a policy
choice to measure the bearer plants using either the cost model or the revaluation model. If the revaluation model
is selected, revaluations will need to take place with sufficient regularity to ensure the carrying amount does not
differ materially from the asset’s fair value had it been measured at the end of the reporting period, which may
be as frequent as currently required by PAS 41.

If the presumption that fair value can be reliably measured is rebutted on initial recognition, paragraph 30 of PAS
41 permits an entity to measure a biological asset at its cost less any accumulated depreciation until fair value
becomes reliably measurable.
Entities will have the option to apply PAS 16’s cost model or revaluation model to subsequently measure bearer
plants.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4206
Weeks 4-5: GOVERNMENT GRANT & AGRICULTURE

Elements of Cost on Bearer Plants (PAS 16):

Are accounted for in the same way as self-constructed items of Property, plant and equipment before they are in
the location and condition necessary to be capable of operating in the manner intended by management. The
costs that are included in the cultivation of bearer plants (such as oil palms and rubber trees) would typically
include:
1. land preparation (including land improvements that are capitalized as land cost) such as field roads, irrigation
and drainage development, construction of contours, bunds and fences, etc
2. planting materials such as seedlings, cover crops, and other supplies
3. fertilizers, chemicals and other inputs
4. direct labor
5. supervision and other maintenance costs including sub-contractors’ costs
6. plantation overheads
7. borrowing costs to the extent that they are incurred and capitalized only during the immature period

Entities following either model will need to determine the useful life of the bearer plant in order to depreciate it.
The useful life will need to be re-evaluated each year. Unlike biological assets, property, plant and equipment is
not scoped out of PAS 36 Impairment of Assets. Entities will, therefore, need to assess whether there are
indicators that a bearer plant is impaired at the end of each reporting period. If such indicators exist, an
impairment loss will be recognized if the carrying value is lower than the bearer asset’s recoverable amount (being
the higher of the asset’s fair value less costs of disposal and its value in use). While the amendments will reduce
the volatility in profit or loss when accounting for bearer plants, entities will still need to recognize any changes
in the fair value of agricultural produce growing on the bearer plant, as discussed below.
Requirements for government grants. Since bearer plants will be excluded from the scope of PAS 41, any related
government grants will be in the scope of PAS 20 instead. Under PAS 20, government grants related to bearer
assets will either be:
1. Recognized as deferred income and then recognized in profit or loss on a systematic basis over the useful life
of the asset, or
2. Deducted in calculating the carrying amount of the asset and then recognized in profit or loss over the life of
a depreciable asset as a reduced depreciation expense Currently, PAS 41 does not permit the second approach
for government grants related to biological assets measured at fair value less costs to sell.

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1. On January 2, 2020, the local government of Manila promised Circus Company P500,000 as subsidy if it
clears up the pollution in the river near its factory in the next two years. Circus Company incurred P300,000
during 2020 and expects to incur the same cost in 2021. By what amount should the profit or loss in 2020
of Circus Company be affected by above transaction?
a. Not affected c. P250,000 increase
b. P50,000 decrease d. P300,000 decrease

2. On January 2, 2020 the government granted and transferred a land to Jaguar Company for a nominal
consideration of P10,000. The market value of the land on this date was P10,000,000. The condition attached
to the grant was Jaguar Company shall clean up the water pollution in the river for 10 years.

Question 1: If Jaguar Company elects to measure the land at the nominal value, what amount of deferred
income that should be recognized on January 2, 2020?
a. none c. P 9,990,000
b. P10,000 d. P10,000,000

Question 2: If Jaguar Company elects to measure the land at its fair value, what amount of deferred
income should Jaguar Company recognize on January 2, 2020?
a. None c. P 9,990,000
b. P10,000 d. P10,000,000

3. On January 1, 2021, Palatino company received a P1,800,000 cash from the government with the condition
that the entity should purchase a building that will be used as a school for its employee’s children. The entity
immediately acquired the building costing P5,000,000 from a certain real estate corporation specifically
identified by the government. The estimated useful life of the building is 20 years using the straight-line
method.

Q1: Assuming the grant is treated as a deferred income, how much is the deferred income from government
grant on December 31, 2021?
a. 1,800,000 c. 90,000
b. 1,710,000 d. 0

Q2: Assuming the grant is treated as a deduction from the gross carrying amount of the asset, how much is the
deferred income from government grant on December 31, 2021?
a. 1,800,000 c. 90,000
b. 1,710,000 d. 0

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4206
Weeks 4-5: GOVERNMENT GRANT & AGRICULTURE

4. On January 2, 2020, Tripod Company receives a government loan of P2,000,000 paying a coupon interest of
2% per year. The loan is repayable at the end of year 5. Tripod Company’s borrowing cost is 8% per annum.
The below-market interest is provided by the government to enable Tripod Company to bear cost of 2% per
annum on the nominal value of the loan. What amount of deferred income should Tripod Company recognized
on December 31, 2020?
a. P81,670 c. P 95,260
b. P88,203 d. P102,881

5. Sulfur Company has the following information pertaining to its biological assets:

A herd of 100, 2-year-old animals was held at January 1, 2021. Ten animals aged 2.5 years were purchased
on July 1, 2021 for P5,400, and ten animals were born on July 1, 2021. No animals were sold or disposed of
during the period. Per unit estimated fair values less cost to sell were as follows:

2.0-year old animal at January 1, 2021 P5,000

Newborn animal at July 1, 2021 3,500
2.5-year old animal at July 1, 2021 5,400
Newborn animal at December 31, 2021 3,600
0.5-year old animal at December 31, 2021 4,000
2.0-year old animal at December 31, 2021 5,250
2.5-year old animal at December 31, 2021 5,550
3.0-year old animal at December 31, 2021 6,000

Q1: How much is the increase in the fair value of the biological assets due to price change?
a. none c. 26,500
b. 25,000 d. 27,500

Q2: How much is the increase in the fair value of the biological assets due to physical change?
a. 75,000 c. 110,000
b. 79,500 d. 118,500

6. The following information are made available by Wind Farms of its biological assets at December 31, 2021:

Price of the assets in an active market P 4,500,000

Estimated dealer’s commission 50,000
Estimated finance cost and income tax 20,000
Transport and other costs expected to be incurred
to bring the assets to the market 60,000

At what amount should the biological assets be recognized on December 31, 2021?
a. P 4,500,000
b. P 4,450,000
c. P 4,390,000
d. P 4,370,000

7. Fortune Company purchased dairy cattle at for P300,000 on July 1, 2020. Cost of transporting the cattle back
to the company’s farm was P3,000 and the seller would have to incur cost similar transportation cost if it was
to sell the cattle in the auction/active market, in addition an auctioneer’s fee of 2% of sales price. On
December 31, 2020, after taking into account and location, the fair value of the biological assets had increased
to P500,000 (that is, the market price including the auctioneer’s fee of P10,000 and transportation cost of
P5,000).

Question 1: What amount of gain or loss should Fortune Company recognize as a result of change in fair
value on December 31, 2020 assuming the Dairy cattle were purchased at the auction area/active market on
July 1 2020?
a. P191,000 c. P196,000
b. P194,000 d. P200,000

Question 2: What amount of gain or loss should Fortune Company recognize as a result of change in fair
value on December 31, 2020 assuming the Dairy cattle were purchased at the seller's farm on July 1 2020?
a. P191,000 c. P196,000
b. P194,000 d. P200,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4206
Weeks 4-5: GOVERNMENT GRANT & AGRICULTURE

8. The following information pertains to the living plant and agricultural produce of Iron Company. On January 1,
2020, the cost of the living plant was P20,000,000 with an estimated useful life of 10 years. The company is
using the straight-line method of depreciation. As of December 31, 2020, Iron Company determines the
following:

Fair value of the fruits before the harvest on December 31, 2020 P5,000,000
Estimated cost to sell of the fruit 100,000
Estimated cost to sell of the living plant 500,000

With the assistance of valuation experts, Iron Company determines that the fair value of the living plant
including the fruit as of December 31, 2020 is P26,000,000.

Q1: How much is the carrying value of the living plant on December 31, 2020 under PAS 16?
a. 18,000,000
b. 20,000,000
c. 20,500,000
d. 25,400,000

Q2: How much is the carrying value of the living plant on December 31, 2020 under PAS 41?
a. 18,000,000
b. 20,000,000
c. 20,500,000
d. 25,400,000

9. The following information are based on the biological assets of Agri-farm Company. The following costs were
incurred from 1/1/17 being the time the biological assets were cultivated up to the time of initial commercial
harvest being on December 31, 2021:

Direct labor costs (50% incurred in 2017, 20% incurred in 2018 and
10% each incurred in 2019, 2020 and 2021) P 700,000
Costs of seedlings (incurred in 2017) 60,000
Costs of fertilizers and chemicals (incurred during the
first two years) 40,000
Depreciation of farm equipment & plantation overheads (incurred evenly) 400,000

As of December 31, 2022, the estimated fair value of the combined assets (living plants and the fruits) is
P3,000,000. The estimated fair value of the fruits bearing on the plants is P400,000. The estimated costs to
sell are P100,000 and P20,000 for the living plants and the fruits respectively. The estimated useful life of the
living plants is 10 years with a residual value of P20,000. The company is using the straight-line method of
depreciation.

Q1: Assuming the living plants are considered as bearer plants, how much is the depreciation expense for the
year 2022 in relation to the bearer plants?
a. 0
b. 80,000
c. 118,000
d. 150,000

Q2: Assuming the living plants are considered as bearer plants, what amount should be assigned to agricultural
produce on December 31, 2022?
a. 0
b. 380,000
c. 2,500,000
d. 2,880,000

Q3: Assuming the living plants did not meet the criteria to be qualified as bearer plants, what amount should be
recognized as an expense for the year 2021?
a. 0
b. 80,000
c. 118,000
d. 150,000

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