LEARNING OBJECTIVES:

1. Define the concept of Government Assistance and Government Grants

2. Identify the two classifications of government grants
3. State the measurement of government grants
4. Account for Government Grants
5. Gross and Net Method of presentation of Government Grants

LO1 Define the concept of Government Assistance and Government Grants

PAS20: Accounting for Government Grants and Disclosure of Government Assistance

Government assistance is action by government designed to provide an economic benefit that is specific
to an entity or range of entities qualifying under certain criteria.

The essence of government assistance is that no value can reasonably be placed upon it. Examples of
government assistance are: 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.

Government assistance does not include the following indirect benefits or benefits not specific to an
entity: a. Infrastructure in development areas such as improvement to the general transport and
communication network. b. Imposition of trading constraints on competitors. c. Improved facilities such
as irrigation for the benefit of an entire local community.

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

● Only government assistance that meet the asset recognition criteria are recognized as
government grant
 ● Excludes government assistance whose value cannot be reasonably measured or cannot be
distinguished from the entity’s normal trading transactions

● Other examples on government assistance that are not government grant

1. Tax Benefit
2. Government procurement policy that is responsible for a portion of the entity’s sale

● If the government assistance is significant, it should be disclosed but not recognized as

government grant

Recognition
Government grants, including non-monetary grants at fair value, shall not be recognized until there
is reasonable assurance that:
1. the entity will comply with the conditions attaching to them; and
2. the grants will be received

● Receipt of grant does not of itself provide conclusive evidence that the conditions attaching to
the grant have been or will be fulfilled.

Characteristics of a recognized government grant

1. An economic benefit received from the government
2. Direct benefit is specific to the recipient entity
3. With measurable value
4. Received or receivable in return for past or future compliance with attached condition
5. There is reasonable assurance that the recipient entity will comply to the attached condition
6. There is reasonable assurance that the grant will be received

What are examples of government grants?

1. Receipt of Cash from the government subject to compliance with certain condition
2. Grant related to Non-Cash Depreciable Asset from the government subject to compliance
with certain condition
3. Grant related to Non-Cash Non-Depreciable Asset (Land) from the government subject to
compliance with certain condition
4. Receipt of financial aid in case of loss or calamity
5. Benefit of a government loan with below interest rate of interest or interest free- loan

LO2: Identify the two classifications of government grants

Types of Grant According to condition
Grant related to asset- This is government grant 1. Receipt of Cash from the government
whose primary condition is that an entity subject to compliance with certain
qualifying for the grant should purchase, construct condition that it should be used to
or otherwise acquire long-term asset. acquire equipment
2. Grant related to Non-Cash
Depreciable Asset from the
government subject to compliance
with certain condition
3. Grant related to Non-Cash
Non-Depreciable Asset (Land) from the
government subject to compliance
with certain condition

Grant related to income- By residual definition, this 1. Receipt of financial aid in case of loss
is government grant other than grant related to or calamity
asset. 2. Receipt of Cash from the government
subject to compliance with certain
condition to clean on an
environmental project

LO3: State the measurement of government grants

Monetary Grant Non-Monetary Grant

● Cash – face value ● Fair value of non-monetary asset received
● Receivable – fair value or
● Forgivable loan – carrying amount of the ● nominal amount plus direct
Loan costs
● Loan with zero interest or interest below
market rate – discount on loans payable

Note: The benefit of a loan at below market rate of

interest or zero-interest is measured as the
difference between the initial carrying amount of
the loan and the proceeds received.

LO4. Accounting for Government Grants:

 Government Grants are recognized in profit or loss on a systematic basis over the periods I which the
entity recognizes the related cost for which the grants are intended to compensate.

Government grants are accounted for using the matching concept. If there is no recognition of related
expense, there is no recognition of income. NO EXPENSE, NO INCOME

What are the rules for the recognition of government grant as income?
1. Grant in recognition of specific expenses shall be recognized as income over the period of the related
expense.
2. Grant related to depreciable asset shall be recognized as income over the periods and in proportion to
the depreciation of the related asset.
3. Grant related to non-depreciable asset requiring fulfilment of certain conditions shall be recognized as
income over the periods which bear the cost of meeting the conditions.

( Recognize deferred income upon the receipt, only recognize income ( amortized the deferred income)
when the related expenses is recognized. NO EXPENSE. NO INCOME.

4. 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. ( EXEMPTION)

Note: Recognizing government grants in profit or loss on a cash basis is prohibited as it violates accrual
basis of accounting. Cash basis is only applicable if there is no allocation basis other than the one in
which grant was received.

PAS 20 uses income approach where grant is recognize in profit or loss over one or more periods.

How do we account for the following independent cases?

a. P1, 000,000 cash conditioned on the acquisition of equipment. Equipment was acquired for P1,
200,000 on March 1, 20x1. The equipment was assessed to have a 5-year useful life and a 10%
residual value. Entity Z uses the SYD method of depreciation.

Receipt of Grant Fulfillment of the condition Amortization of the grant

Cash 1,000,000 March 1, 20x1 Dec 31, 20x1
Deferred Income -GG 1,000,000 Equipment 1,200,000 Deferred Income 277,778
Cash 1,200,000 Income from GG 277,778

Dec 31,20x1 1,000,000

Depreciation Expense 300,000 X 5/15
Accumulated Dep 300,000 333 333.33
X10/12
Initial Cost 1,200,000 277,778
x 90%
Depreciable Amount 1,080,000 1,000,000*27.78% =277,778
X 5/15
= 360,000 x 10/12 = 300,000

300,000/1,080,000 =27.78%
 Note: Income from the grant of ₱1M will be recognized in profit or loss as depreciation is recognized
on the equipment

b. Land with fair value of P800, 000 conditioned on the construction of a building on the land.
Construction of a building on the land was started. Total construction costs incurred during the
period amounted to P2, 000,000. 10 years useful life. Without residual value

Receipt of Grant Fulfillment of the condition Amortization of the grant

Land 800,000 Building 2,000,000 Deferred Income 80,000
Deferred Income 800,000 Cash 2,000,000 Income 80,000

Depreciation expense 200,000 800,000

Accumulated Dep 200,000 X 10%
80,000
2,000,000 / 10 YRS = 200,000
200,000/ 2,000,000 = 10%

Note: Income from the grant of land will be recognized in profit or loss as depreciation is recognized
on the constructed building

c. P600, 000 cash as aid on a planned environmental project – a cleanup dive on coastal areas
within the community. The clean-up drive has an estimated total cost of P720,000. In The first
phase of the clean-up drive , Company X incurred 100,000.

Receipt of Grant Fulfillment of the condition Amortization of the grant

Cash 600,000 Clean-up drive expense 100,000 Deferred Income 83,333.33
Deferred Income 600,000 Cash 100,000 Income 83,333.33

100,000/720,000 = 13.89

Note: Income from the ₱600,000 grant will be recognized in profit or loss as expenditures are made on
the clean-up drive

d. P200,000 cash as aid on losses incurred from a recent typhoon. ( Exemption to the rule)

Receipt of Grant Fulfillment of the condition Amortization of the grant

Cash 200,000
Income 200,000

Note: Income from the ₱200,000 grant is recognized immediately.

 e. On January 1, 2001, because of exemplary accomplishment that brought international
recognition to the community, the government waived the repayment of BTS Co.’s loan with a
carrying amount of 200,000.

Receipt of Grant Fulfillment of the condition Amortization of the grant

Loans Payable 200,000

Income 200,000

Note: Income from the ₱200,000 grant is recognized immediately. A forgivable loan from government
is treated as government grant when there is assurance that the entity will meet the terms for
forgiveness of the loan.

f. On January 1, 2001 the government granted BTS Co. a zero interest P1,000,000 loan maturing
on December 31, 2003. The prevailing rate for this type of loan is 10%.

Receipt of Grant Fulfillment of the condition Amortization of the grant

Cash 1,000,000 Interest Expense 75,131 Deferred Income 75,131
Discount on loan Payable 248,685 Discount on Loan Payable Income
Loan Payable 1,000,000 75,131 75,131
Deferred Income 248,685
CA 751,315
X 10%
PV of 1, 10% 3 years = 0.7513 x ,1,000,000= 75,131
751,315 CA

EXERCISE
1.
2

4
5

7
8

10
LO5. GROSS vs NET METHOD

Grant Related to Asset

On January 1, 2001 BTS Co. Received cash of 4,000,000 from the LGU to be used in constructing
a building. The construction was completed on December 31, 20x1 for a total cost of
P10,000,000. The building will depreciate over 20 years.
GROSS NET
Jan1 . 2021 Cash 4,000,000 Cash 4,000,000
Deferred Income- gov grant 4,000,000 Deferred Income- gov grant 4,000,000
Dec 31, 2021 Building 10,000,000 Building 10,000,000
Cash 10,000,0000 Cash 10,000,0000
Deferred income 4,000,000
Building 4,000,000
Dec 31, 2022 Dep. Expense 500,000 Dep. Expense 300,000
Accu-Dep- Building 500,000 Accu dep 300,000
(10,000,000/20 yrs= 500,000)
500,000/10,000,000 = 5%

Deferred income 200,000

Income 200,000

4,000,000 x 5% = 200,000
Presentation ( Statement of Financial Position) Presentation ( Statement of Financial Position)
Asset Asset
Building 10,000,000 Building 6,000,000
Accu Dep 500,000 Accu Dep 300,000
BV , 2022 9,500,000 BV,2022 5,700,000

Liabilities Liabilities
Deferred Income 3,800,000 0

Net Effect in Equity 5,700 ,000 Net Effect in Equity 5,700 ,000

Statement of Comprehensive income Statement of Comprehensive income

Other income 200,000 Other income 0

Depreciation Expense (500,000) Depreciation Expense (300,000)

Net Effect (300,000) Net Effect (300,000)

Grant is recognized simultaneously as Dep expense is Gov. Grant is realized thru reduced depreciation
recognized charge

Grant Related to Income

On January 1, 2001 BTS Co. Received cash of 4,000,000 from the LGU to be used to defray safety
and hazard related cost over 5 years It was estimated that the cost will total P8,000,000. In 20x1
and 20x2 the actual cost or safety and hazard related cost amounted to 1,000,000 and 1,200,000
respectively

GROSS NET
Jan1 . 2021 Cash 4,000,000 Cash 4,000,000
Deferred Income- gov grant 4,000,000 Deferred Income- gov grant 4,000,000
Dec 31, 2021 Safety /Hazard Expenses 1,000,000 Safety /Hazard Expenses 1,000,000
Cash 1,000,0000 Cash 1,000,0000

Deferred Income 500,000 Deferred Income 500,000

Income 500,000 Safety and Hazard Expense 500,000

1,000,000/8,000,000 = 12.5% x 4,000,000 = 500,000

Dec 31, 2022 Safety /Hazard Expenses 1,200,000 Safety /Hazard Expenses 1,200,000
Cash 1,200,0000 Cash 1,200,0000

Deferred Income 600,000 Deferred Income 600,000

Income 600,000 Safety and Hazard Expense 600,000

1,200,000/8,000,000 = 15% x 4,000,000 = 600,000

Presentation ( Statement of Financial Position) Presentation ( Statement of Financial Position)
Asset=0 Asset=0

Liabilities Liabilities
Deferred Income 3,500,000 Deferred Income 3,500,000

Net Effect in Equity 3,500,000 Net Effect in Equity 3,500 ,000

Statement of Comprehensive income Statement of Comprehensive income

Other income 500,000 Other income 0
Safety Expense (1,000,000)
Safety Expense (500,000)
Net Effect (500,000)
Net Effect (500,000)
Grant is recognized in proportion to the expense actually Gov. Grant is realized thru reduced related charge
incurred over total estimated cost which it intend to compensate

Repayment of Grant:

A government grant that becomes repayable because of failure to satisfy a certain condition is
treated as change in accounting estimates and accounted for prospectively.

The repayment of the grant related to income is deducted from the related deferred income
balance. Any difference is recognized immediately in profit or loss.

The repayment of the grant related to asset is deducted from the related deferred income
balance under gross presentation or an increase in the CA of the asset under net presentation.
The cumulative additional depreciation that would have been recognized in the absence of the
grant is recognized immediately in profit or loss.
T/F
1. TRUE
2. FALSE 0
3. TRUE
4. TRUE
5. FALSE 0
6. TRUE
7. TRUE
8. TRUE
9. TRUE
10. FALSE (2M x 9/10) = 1.8M

PROBLEM 2
1. C
2. C
3. B
4. B
5. Answer: 0
6. Solution:
(6M – 1M) x 29.25/30 + 1M = 5,875,000
7. Solution:
(2M / 30 yrs.) x 9/12 = 50,000
8. Solution:
(6M – 1M) ÷ 30 x 9/12 = 125,000
9. Solution:
(2M x 29.25/30 = 1,950,000
10. Solution:
(6M – 2M – 1M) x 29.25/30 + 1M = 3,925,000
11. Solution:
(6M – 2M – 1M) ÷ 30 x 9/12 = 75,000

DATE GROSS NET

JANUARY 1 Cash 2,000,000 Cash 2,000,000
Deferred Income 2,000,000 Deferred Income 2,000,000
MARCH 31, Building 6,000,000 Building 6,000,000
20x2 Cash 6,000,000 Cash 6,000,000

Deferred Income 2,000,000

Building 2,000,000

DEC 31, 20x2 Depreciation Exp 125,000 Depreciation Exp 75,000

Accu Dep 125,000 Accu Dep 75,000

Cost 6M 4M
RV (1M) (1M)
DA 5M 3M
Divide 30 yrs Divide 30 yrs
 Annual Dep 166,667 Annual Dep 100,000
X 9/12 = 125,000 X9/12 = 75,000

Deferred Income 50,000

Income from GG 50,000

2,000,000/30 x9/12 = 50,000

GROSS NET
Balance Sheet Income Statement Balance Sheet Income Statement
Building 6,000,000 Other Income 50,000 Building 4,00,000 Other income = 0
Accu Dep 125,000 Accu Dep 75,000
BV 5,875,000 BV 3,925,000
Expense: 125,000 Expense: 75,000
Deferred Income
1,950,000
Net effect on PL Net effect on PL
Net Effect on Equity = (75,000) (75,000)
3,925,000

12. Solution:
(1.8M x 4 mos. / 6 mos.*) = 1,200,000
*The income can be recognized on a straight-line basis because the related
costs were incurred evenly.
13. Solution:
(1.8M x 2/6) = 600,000
14. Solution:
(2.7M x 4/6) – (1.8M x 4/6) = 600,000

DATE GROSS NET

August 1, Cash 1,800,000 Cash 1,800,000
20x1 Deferred income 1,800,000 Deferred income 1,800,000
Dec 31, 20x1
Clean up drive exp 1,800,000 Clean up drive exp 1,800,000
Cash 1,800,000 Cash 1,800,000

2,700,000/6 = 450,000 monthly 2,700,000/6 = 450,000 monthly expenses

expenses
 Deferred Income-GG 1,200,000 Deferred Income – GG 1,200,000
Income from GG 1,200,000 Clean up drive exp 1,200,000

1,8000,000 x 4/6 = 1,200,000 1,8000,000 x 4/6 = 1,200,000

GROSS NET
Balance Sheet Income Statement Balance Sheet Income Statement
Asset: 0 Other Income 1,200,000 Asset: 0 Other income = 0

Deferred Income Deferred Income

600,000 Expense: 1,800,000 600,000 Expense: 600,000
( 1.8M -1.2=600k) ( 1.8M -1.2=600k)

Net Effect on Equity = Net effect on PL Net Effect on Net effect on PL

600,000 (600,000) Equity = 600,000 (600,000)

15. Answer: 200,000

1. Tian Ruiz

BORROWING COST
Related Standard: PAS23

Learning Object
1. Recall Past Topics
2. State the core principles under PAS23
3. Define Qualifying Assets
4. Identify Qualifying under the scope of PAS23
5. Capitalization of Borrowing Cost

LO1. Net and Gross Presentation of Government Grant

LO2. State the core principles under PAS23

Borrowing costs that are directly attributable to the acquisition, construction, or production of
a qualifying asset are capitalized as cost of asset. Other borrowing cost are expensed
immediately.

What is borrowing cost? (Interest or finance cost)

These are costs incurred in relation to the borrowing of funds.
● Interest expense on financial liabilities using Effective interest method
● Interest expense on lease liabilities using Effective interest method
 ● Exchange differences on foreign borrowings that are regarded as an adjustments to interest
cost

Note: Do not include actual or imputed cost of equity or capital

Borrowing cost under PAS 23 is in relation to the cost of borrowing of debt instruments.
Borrowing cost eligible for capitalization is avoidable. ( They would not have been incurred if
the expenditure on the QA had not been made.

Borrowing cost in general is treated as expense, however borrowing cost that meets the requirement
of PAS23 should be capitalized.

LO.3 Define Qualifying Assets

Is an asset that necessarily takes a substantial period of time to get ready for its intended use
or sale

Qualifying Assets Not Qualifying Asset

Inventories that take long period of time to
produce ( Custom-made inventories)
PPE – long period of time to construct or get
ready in its intended use
Investment property- measured at cost
model- takes long period of time to construct
Non- financial (takes a substantial period of
time to get ready for its intended use or sale)
Routinely produced over a short period of
time or mass produce in repetitive basis
Assets already for their intended use when
acquired
Assets ready for sale when acquired
Assets measured at Fair value
Financial Assets

LO.4 Capitalization

Commencement Suspension Cessation

All of the conditions are met:
1. Expenditure of the
asset are being
incurred
2. Borrowing cost are
being incurred
3. Activities necessary to
prepare the asset for
its intended use or sale
are being undertaken
(EBA)
Example:
1. Technical and
administrative work (
Suspended During extended QA is substantially
periods in which active completed.
development is interrupted.
( Treatment during Completed in parts, ceases
suspensive period- expense) for each part that is
completed and ready for its
intended use.
Not suspended- substantial
technical administrative work For uncompleted part-
is being performed or a Capitalization continues
temporary delay is necessary
part of the development
process.
 prior) start of ( Construction is temporary
construction ( Permit stopped due to typhoon)
to build)
2. Actual physical
construction

Note: Merely holding an asset

when no production or
development is being made
does not constitute necessary
activities.

Determining borrowing cost eligible for capitalization

1. Specific borrowing Refers to funds borrowed Actual borrowing cost

specifically for the purpose of less investment income
obtaining a QA.

2. General Borrowings Those obtained for more than Ave. Expenditures x

one purpose Capitalization rate = BC
( Acquisition/construction of on General borrowings
QA and some other puposes)
Vs.

Actual borrowings which

ever is lower

3. Mixed borrowings Finance through both specific BC- Computed on both

and general borroiwngs specific and general
borrowings
  Specific Borrowing – refers to funds borrowed specifically for the purpose of obtaining a
qualifying assets

Formula:
Interest expense on specific borrowing ₱ xx
Less: Investment income earned on specific borrowing xx
Borrowing cost eligible for capitalization ₱ xx

SAMPLE PROBLEM:

On January 1, 20x1, BTS Co. borrowed 5,000,000 to finance the construction of a new building.
Interest is payable on the loan at 8%. Stage payments were due throughout the construction
period and therefore excess funds were invested during that period. By the end of the project
on December 31, 2001, investment income of 150,000 had been earned

Interest expense on specific borrowing ₱ 400,000

Less: Investment income earned on specific borrowing 150,000
Borrowing cost eligible for capitalization ₱ 250,000

 General Borrowing – is those obtained for more than one purpose other than construction or
acquisition of qualifying assets.

Formula:
Total interest expense on general borrowings ₱ xx
Divide by: Total general borrowings xx
Capitalization rate %

Average expenditure on the asset ₱ xx

Multiply by: Capitalization rate %
Borrowing cost that may be eligible for capitalization ₱ xx

Note: The amount computed in the formula above shall be compared with the actual
Borrowing costs incurred during the period. The amount to be capitalized is the lower amount.

Sample Problem:

On January 1, 20x1 BTS Co. had the following borrowings made for general purposes; a part of
the proceeds was used to finance the construction of a qualifying asset.
 Principal
12% short term note P10,000,000
14% bank loan (3 year) 18,000,000
16% note payable (5 year) 22,000,000

The construction of the qualifying asset was started immediately and expenditures incurred on
the qualifying asset were as follows

Jan1 P4,800,000
March 31 2,200,000
July 31 3,500,000
October 1 5,400,000
December 31 300,000

What is the capitalized borrowing cost?

Step 1: Compute for Capitalization Rate

Step 2: Compute for Average Expenditures
Step 3: Compute for the borrowing cost on general borrowings
Step 4: Compute the actual interest expense on General borrowings
Step 5: Compare 3 and 4, capitalize the lower amount

Step 1: Compute for Capitalization Rate

Principal Interest
Expense
12% short term note P10,000,000 1,200,000
14% bank loan (3 year) 18,000,000 2,520,000
16% note payable (5 year) 22,000,000 3,520,000
Total 50,000,000 7,240,000 Step 4

Formula:
Total interest expense on general borrowings P 7,240,000
Divide by: Total general borrowings 50,000,000
Capitalization rate 14.48%

Step 2: Compute for Average Expenditure

Actual Expenditures Months Outstanding Average Expenditures

Jan1 P4,800,000 12/12 4,800,000
March 31 2,200,000 9/12 1,650,000

July 31 3,500,000 5/12 1,458,333.33

October 1 5,400,000 3/12 1,350,000
December 31 300,000 0/12 0
TOTAL 9,258,333.33

Step 3: Compute for the borrowing cost on general borrowings

Average expenditure on the asset ₱ 9,258,333.33

Multiply by: Capitalization rate .1448
Borrowing cost that may be eligible for capitalization ₱ 1,340,606.67

Step 4: Compute the actual interest expense on General borrowings

Principal
12% short term note P10,000,000 1,200,000
14% bank loan (3 year) 18,000,000 2,520,000
16% note payable (5 year) 22,000,000 3,520,000
Total: Actual Interest Expense 50,000,000 7,240,000

Step 5: Compare 3 and 4, capitalize the lower amount

Actual interest Expense vs borrowing cost on general borrowings

7,240,000 vs 1,340,606.67
= 1,340,606.67 the lower amount ( BC eligible for capitalization)

Journal Entry:

December 31, 2021 Building 1,340,606.67

Interest Expense 1,340,606.67

FS statement presentation

QA are not segregated from other assets in the FS.

Presented as regular asset under normal classification under other standards.

QA item of PPE, BC is presented as part of PPE, not segregated and presented separately.

EXERCISE:
PROBLEM 1: TRUE OR FALSE
1. FALSE
2. FALSE
3. TRUE
4. FALSE
5. FALSE
PROBLEM 2: THEORY & COMPUTATIONAL
1. B
2. A
3. C
4. D
5. Answer: (12% x 1,000,000) – 18,000 = 102,000