CHAPTER 15: GOVERNMENT GRANTS Nature of Government Grants 2. Recognition Principles for Governmént Grants 3. Accounting for Government Grants 4. Classification of Government Grants 5. Repayment of Government Grants 6. Grant of Interest-Free Loan 7. Government Assistance 8._Disclosures on Government Grants Nature of Government Grants » Government grants are assistance by the 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. ition Principles for Gc iment Grant >. Government grants, including non-monetary grants at fair value, shall not be recognized until there is reasonable assurance that: The entity will comply with the conditions attached to them; and Y The grants will be received. > Government grants shall be recognized-on an accrual basis when received or receivable. Nn Nofe: IAS 20 disallows-the recognition of government grants.on.a.cash basis as this is.|._ ‘accordance with generally accepted accounting principles. for rant z > Government grants shall be recognized in profit or loss on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate. > Rules: ° ir nition of specifi S ‘© Recognized in profit or loss in the same period as the related expenses. able Grants 1 ‘9 Recognized in profit or loss over the periods and in the proportions in which depreciation expense on those assets is recognized: Scanned with CamScannerobligations (or conditions), © Recognized in profit or loss over the periods that bear the cost of meeting the obligations (or conditions). Note: A government grant that becomesireceivable as compensation for expenses or losses already incurred or for the purpose of giving Immediate financial support to the entity with no future felated costs shall be)fecognized in profit or loss of the period in which it becomes receivable, Tlustration 4: (Grant in recognition of specific expenses)... Atthe SOS reson Wain Conreny received'a grant of P45,000,000 from the U.S. government to defray safety and environmental costs within the area where the entity is located. ‘The safety and environmental costs are expected to be incurred over four years as follows: Year Amount ‘ ; 2023. 3,600,000 —~ i 2 2024 7,200,000 4 he ide 2025 10,800,000 : # ? 2026 14,400,000 sei Ngee © Q; Determine the grant income to be recognized for the years angs-edeugh 2026. Ht Riss eA “ay Safety and Fraction Grant income environmental costs 2023 3,600,000 -3.6/36 ' 4,500,000 2024 7,200,000, 7.2/36 9,000,000 2025 10,800,000’ 10.8/36 13,500,000 2026 14,400,000’ | 14.4/36 __" 18,000,000 Total 36,000,000" 45,000,000 ntries Cash 45,000,000 fred grant income 45,000,000 Deferred grant income * ~ 4,500,000 Grant income 4,500,000 Safety and environmental expense, 3,600,000 x Cash ‘ 3,600,000 2OL-Z Comment: > Grant in recognition of specific expenses shall be recognized as income in the same period as the related expense. © AS a result, the granbof P45,000,000 Is distributed as income over four years in proportion to the éxpenses incurred. 748 Scanned with CamScannerGhappten 15: Government Grants Tilustration 2: (Grants related to day preciable assets) At the beginning of the current year, XYZ Company received a grant of P5,000,000 from |. the African government for the acquisition of ility_ wit i P7,500,000 and useful life ofS years, eee @Q; Prepare the journal entries during the current year. eA: Cash 5,000,000 Deferred grant income i 5,000,000 Building 7,500,000 Cash a 7,500,000 Depreci we coprinn (P7.5M/5) 1,500,000 AceGmulated depreciation 1,500,000 ferred grant income 1,000,000 Grant income (P5M/5) 1,000,000 Comment: Grants related to depreciable assets shall be recognized in profit or loss over the periods and in the proportions in which depreciation expense on those assets is recognized. Illustration 3: (Grants related to non-depreciable assets requiring fulfillment of certain conditions) At the beginning of the current year, Kram Company is granted a large tract of land in the Tlocos region by the Philippine government. The fair value of the land is P48,000,000. The entity is required by the grant to construct a research facility and employ only Personnel residing in the Tlocos region. The estimated cost of the facility is P54,000,000 which has a useful life of 10 years. The research facility was completed and ready for the intended use at the end of the current year. @Q: Prepare the journal entries during the current year. & PAV ee 48,000,000 Land 000, Deferred grant income 48,000,000 + 8 54,000,000 ‘Cah 54,000,000 4,800,000 PRY Deferred grant income asboaen ie Grant income (48M/10) Comment: Grants related to non-depreciable assets requiring fulfillment of certain conditions shell be recognized in profit or oss over the periods that bear the cost of Meeting the conditions. ls Pay i onl j Gs Her, Dees Ea Je a 749 Woow Scanned with CamScannerComprehensive Aecountiag Restewer Sores Volume ti Financial Acaanting end Reporteg Tllustration 4: (Grant as immediate financial support) Atthe beginning of the current yet, Sam Company received a grant of P7,000,000 from the British government to compensate for massive losses incurred because of a'recent tsunami. The grant was made for the purpose of giving immediate financial support to the entity. It will take the entity two years to reconstruct the assets destroyed by the ‘tsunami. 4 @Q: Prepare the journal entries during the current year. GA: Cash 7,000,000 Grant income 7,000,000 y Comment: A government grant that becbmes 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 recoghized in profit or loss of the period in which it becomes receivable. Classification of Government Grants 1. Grants related to assets 2. Grants related to income =| Grants related to assets > Grants whose primary condition is that an entity qualifying for the grant shall purchase, construct, or acquire fixed assets. (2) Setting up the grant as deferred income, or (b) Deducting the grant in ariving at the carrying amount of the asset. Note: oye > If the grant is recognized as deferred income, it will be recognized in profit or loss on @ systematic basis over the useful life of the asset. If the grant is deducted in arriving at the carrying amount of the asset, the grant is recognized in profit or loss over the life of a depreciable asset as a reduced depreciation expense. > Journal entries: (a) Cash x Deferred grant income x (b) Cash x Property, plant, and equipment xx Grants related to income > Grants other than those related to assets. 750 = Scanned with CamScannerChapter 15: Govcrament Grants > Presentation: © Either by: (@) Using a separate income account or under other (or miscellaneous) income”, or (b). Deducting from the related expense. > Journal entries: (a) Cash xx Income (or other/miscellaneous income) XX (b) Cash Xx Expense mt ent of Govern > A government grant that becomes repayable due to non-compliance with conditions shall be accounted for as a change in accountin ° ant ((?) Repayment of a. grant related to an asset shall be recognized by increasing the carrying amount of the asset or reducing the deferred grant income balance by the amount repayable. oe i) The cumulative additional depreciation that would have been recognized in profit or loss to date in the absence of the grant shall be recognized immediately in profit or loss. + ts related to incor ¥ \ Repayment of a grant related to income shall be applied first against any unamortized deferred income in respect of the grant. © If the repayment exceeds any existing deferred grant income, or when no deferred grant income exists, ‘the repayment shall be recognized immediately in profit or loss. ¥ ) Journal entry: Deferred grant income xx Loss on repayment of grant XX Cash xx Tilustration 5: White Company purchased a machine for P5,250,000 on January 1, 2023, and received 2 government grant of P750,000 toward the capital cost. The machine is to be depreciated on a straight-line basis over 5 years and estimated to have a residual value of P375,000 at the end of its useful life. On January 1, 2025, the entity violated certain conditions attached to the grant and therefore had to repay fully such grant to the government. Case 1: The accounting policy is to treat the grant a deferred income, @Q-1: Prepare the journal entries for the year 2023, @Q-2: Prepare the journal entries for the year 2025, 751 Scanned with CamScannerComprehensive Accounting Reviewer Series Motu ts Flaancial Acounting aad Reporting en ee Case 2: The accounting policy is to treat the grant as a reduction in the cost of the asset. (@ Q-1: Prepare the journal entries for the year 2023. © Q-2: Prepare the journal entries for the year 2025. Case 1 Ont ‘ Machine 5,250,000 Cash 5,250,000 Cash 750,000 Deferred grant income 750,000 Depreciation expense [(5.25M - 375T)/5] 975,000 ‘Accumulated depreciation 975,000 Deferred grant income 150,000 Grant income (7507/5) ‘ 150,000 @A-2: \ Deferred grant income 450,000 Loss on repayment of grant 300,000 Cash 750,000 Deferred grant income, 1/1/2023 750,000 Less: Grant income, 2023 — 2024 (150,000 x 2) _(300,000) Deferred grant income, 12/31/2024 450,000, Depreciation expense 975,000 ‘Accumulated depreciation + 975,000 Case 2 Gat: s Machine 5,250,000 Cash 5,250,000 Cash 750,000 : Machine 750,000 Depreciation expense {(5,25M - 750T) ~375T/5) 825,000 Accumulated depreciation ee 825,000 @A-2: Machine 4 750,000 Cash 750,000 Depreciation expense 000 ‘Accumulated depreciation 1,275, 1,275,000 752 Scanned with CamScannerChapter 15: Government Grants ‘Original depreciation Add: Depreciation expense that would have aoe there been no grant [(750T/5}x 3 years ne erence had 450,000 Depreciation expense — 2025 1,275,000 int of Interest-Fres > _A forgivable loan from the government is treated as a government grant when there is reasonable assurance that ity wil fences the entity will meet the terms for the > The benefit of a government loan with no interest or below-1 it treated as a government grant. Ee ©The benefit is measured as the difference between the face amount and the present value of the loan. * The benefit is recognized as the discount on the:note payable to be amortized over the term of the loan using the éffective interest method. Note: The grant income per year is equal to the per year amortization of the discount on note payable. Government Assistance : > An action by the government designed to provide an’ economic benefit specific to an entity or range of entities qualifying under certain criteria, > No value can be placed upon government assistance, > £xampl : (7) Free technical or marketing advice, Provision of guarantees. Government procurement policy that is responsible for a portion of the entity's \U sales. > Does not include indirect benefits or those benefits not specific to an entity such ast ¥ Infrastructure in development areas such as improvements to the general transport and communication network. Imposition of trading constraints on competitors. Improved facilities such as irrigation for the benefit of an entire local community. res on Government Grat > ) The accounting policy adopted for government grants, including the method of presentation adopted In the financial statements. eM SUE irene c : > : he nature and extent of goverrimient:grants fecoghized in the financial statements ) 1d an indication of other forms of government assistance from which the entity has directly benefited. Oyo conditions and other contingencies attached to government assistance ~—Anat has been recognized. i a) : Scanned with CamScannerAeceanting Reotewer Seves Untume 1: Financial Hecounting and Reportiog Noter IAS 20 does not require the disclosure of the name of the government agenc that gave the grant along with the date ‘of sanction of the grant by such governmert agency and the date when cash was recelved In case of monetary grant. -000- 74 Scanned with CamScanner