GOVERNMENT GRANTS

Government Grants – are assistance by government in the form of transfers to an enterprise in return for
part or future compliance with certain conditions relating to the operating activities of the enterprise.

Classification of Government Grants

a. Grants related to assets
b. Grants related to income

Accounting for Government Grants

a. Income approach (Acceptable approach)
b. Capital approach

Accounting for Government Grants

I. Grants in recognition of SPECIFIC EXPENSES should be recognized as income over the period of
the related expense.
II. Grants related to DEPRECIABLE ASSETS should be recognized as income over the periods in
proportion to the depreciation of the related assets.
III. Grants related to NONDEPRECIABLE ASSETS requiring fulfilment of certain conditions should be
recognized as income over the periods which bear the cost of meeting the conditions.
IV. Grants that become receivable as COMPENSATION for expenses or losses already incurred or for
the purpose of giving immediate financial support to the enterprise with no further related costs
should be recognized as income of the period in which it becomes receivable.

BORROWING COSTS
Borrowing costs – are interest and other costs that an entity incurs in connection with the borrowing of
funds.

Borrowing cost includes the following:

1. Interest expense calculated using the effective interest method as described on PFRS 9.
2. Finance charge with respect to financing lease.
3. Exchange difference arising from foreign currency borrowing to the extent that it is regarded as an
adjustment to interest cost.

Qualifying Asset
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale. Depending on the circumstances, any of the following may be qualifying asset:
(BIMPII)
1. Bearer plants
2. Inventories
3. Manufacturing plants
4. Power generation facilities
5. Intangible assets
6. Investment properties
Financial assets and inventories that are manufactured, or otherwise produced, over a short period of
time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired are
not qualifying asset.

Excluded from Capitalization:

a. A qualifying asset measured at fair value (e.g., biological asset, investment property)
b. Inventories that are manufactured or otherwise produced, in large quantities, repetitive basis such
as whisky even if they take a substantial period of time to get ready for sale.

Commencement, Suspension and Cessation of Capitalization

Commencement When the entity first meets ALL of the following conditions:
1. It incurs expenditures for the asset
2. It incurs borrowing cost
3. It undertakes activities that are necessary to prepare the asset for its
intended use or sale
Suspension An entity shall suspend capitalization of borrowing costs during extended periods
in which it suspends active development of a qualifying asset.
Cessation An entity shall cease capitalizing borrowing costs when substantially all the
activities necessary to prepare the qualifying asset for its intended use or sale
are complete.

Accounting for Borrowing Cost (PAS 23 REVISED)

1. REQUIRED treatment (according to the revised PAS 23) Borrowing costs that are directly attributable
to the acquisition, construction or production of a qualifying asset are included in the cost of that
asset.
2. Other borrowing costs are recognized as an expense.
a. Asset financed by specific borrowing: Capitalizable borrowing cost = Actual borrowing cost
incurred minus investment income.
b. Asset financed by general borrowing
Capitalizable borrowing cost: Actual borrowing cost or average borrowing cost whichever is lower.
Average Borrowing cost = Capitalization rate x weighted average expenditures
Capitalization rate = Total borrowing cost / Total general borrowings

LECTURE DRILLS
Problem 1
At the beginning of current year, an entity received a grant of ₱25,000,000 from the American
government in order 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, respectively,
₱2,000,000, ₱4,000,000, ₱6,000,000, and ₱8,000,000. What amount should be recognized as grant
income for the current year?

a. 5,000,000
b. 2,000,000
c. 2,500,000
d. 6,250,000
Problem 2
At the beginning of the current year, an entity received a consolidated grant of ₱12,000,000. Three-
fourths of the grant will be utilized to purchase a college building for students from underdeveloped
countries. The balance of the grant is for subsidizing the tuition costs of those students for four years
from date of grant. The building was purchased in early January and is to be depreciated using the
straight-line method over 10 years. The tuition costs paid amounted to ₱600,000 during the current year.
What amount of grant income should be recognized for the current year?
a. 1,200,000
b. 3,000,000
c. 1,650,000
d. 1,050,000

Problem 3
An entity received a government grant of ₱5,000,000 related to a factory building that it bought in
January 2022. The entity’s policy is to treat the grant as deferred income. The entity acquired the
building from an industrialist identified by the government. If the entity did not purchase the building,
which was located in the slums of the city, it would have been repossessed by the government agency.
The entity purchased the building for ₱12,000,000. The useful life of the building is the 10 years with no
residual value. On January 01, 2024, the entire amount of the government grant became repayable by
reason of noncompliance with conditions attached to the grant.
1. What is the deferred grant income on December 31, 2023?
a. 5,000,000
b. 1,200,000
c. 1,000,000
d. 4,000,000
2. What amount should be recognized loss from the repayment of grant in 2024?
a. 4,000,000
b. 1,000,000
c. 3,000,000
d. 0

Problem 4
An entity purchased a machine for ₱8,500,000 on January 01, 2022 and received a government grant of
P1,000,000 toward the capital cost. The policy is to treat the grant as a reduction in the cost of the asset.
The machine is to be depreciated on a straight-line basis over 5 years with residual value of ₱500,000.
On January 01,2024, the grant became fully payable because of noncompliance with conditions. What is
the depreciation for 2024?
a. 1,800,000
b. 1,600,000
c. 2,000,000
d. 1,400,000
Problem 5
On January 01, 2022, an entity took out a loan of P24,000,000 in order to finance specifically the
renovation of a building. The renovation work started on the same date. The loan carried annual interest
at 10%. Work on the building was substantially complete on October 31,2022. The loan was repaid on
December 31,2022 and P200,000 investment income was earned in the period to October 31 on the
proceeds of the loan not yet used for renovation. What amount of capitalizable borrowing cost should
be included in the cost of the building?
a. 2,400,000
b. 2,200,000
c. 2,000,000
d. 1,800,000

Problem 6
During 2022, an entity constructed a new building at a cost of ₱30,000,000. The expenditures for the
building, which was finished late in 2022, were incurred evenly during the year. The entity had the
following loans outstanding on December 31, 2022:
 10% note to finance specifically construction of the building, dated January 1, 2022, ₱10,000,000
and unpaid on December 31, 2022. Investments were made on the proceeds from the loan and
income of ₱100,000 was realized in 2022.
 12% 20-year bonds payable issued at face amount on April 30, 2020, ₱30,000,000.
 8% 5-year note payable, dated March 1, 2021, ₱10,000,000.
What amount of interest should be capitalized at cost of the new building?
a. 1,550,000
b. 1,450,000
c. 1,400,000
d. 1,500,000

Problem 7
An entity commenced construction of a new plant on February 1, 2022. The cost of ₱24,000,000 was
paid in full to the contractor on February 1, 2022 and was funded from existing general borrowings. The
construction was completed on September 30, 2022. The borrowings during 2022 comprised First Bank
6% ₱8,000,000, Second Bank 6.6% ₱10,000,000 and Third Bank 7% ₱30,000,000. What amount of
borrowing cost should be capitalized in relation to the plant?
a. 1,620,000
b. 1,080,000
c. 3,240,000
d. 2,160,000

Problem 8
During 2022 and 2023, an entity had outstanding 12% specific construction loan ₱5,000,000 and 10%
general construction loan ₱20,000,000. The entity began construction of a new building on January 1,
2022 and the building was completed on June 30, 2023. The expenditures made were January 1, 2022
₱4,000,000, April 1, 2022 ₱5,000,000, December 1, 2022 ₱3,000,000, and March 1, 2023 ₱6,000,000.
1. What is the cost of the new building on December 31, 2022?
a. 12,000,000
b. 12,900,000
c. 12,300,000
d. 12,600,000

2. What is the cost of the new building on June 30, 2023?

a. 18,000,000
b. 19,795,000
c. 18,900,000
d. 20,690,000

3. What is the interest expense for 2023?

a. 1,705,000
b. 2,300,000
c. 1,405,000
d. 2,000,000