INTERMEDIATE ACCOUNTING 2

LESSON 2
GOVERNMENT GRANT

GOVERNMENT GRANT
An 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.
Also known as:
SUBSIDY SUBVENTION OR PREMIUM

RECOGNITION - when there is reasonable assurance that: CLASSIFICATIONS

1. the entity will comply with the conditions attaching to a. Grant related to asset – condition is: the qualified
the grant. entity to receive the grant shall purchase, construct or
2. the grant will be received. otherwise acquire long-term asset.
Recognized on the accrual basis when received or b. Grant related to income – government grant other
receivable than grant related to asset.

Accounting for government grant

 Recognized as income on a systematic basis over the periods in which an entity recognizes as expenses
the related costs for which the grant is intended to compensate.
(the grant is taken to income over one or more periods in which the related cost is incurred.)

Example 1- Grant in recognition of specific expenses shall be recognized as income over the period of the
related expense.
Grant received by an entity from the government for the purpose of
defraying safety and environmental expenses over the period of three years. P15,000,000

Expenses that will be incurred for:

1st year, P2,000,000 2nd year, P3,000,000 3rd year, P5,000,000 Total P10,000,000

Accordingly, the grant of P15,000,000 is allocated as income over 3 years in proportion to the costs
incurred.

Entries: (for first year)

Cash 15,000,000
Deferred grant income 15,000,000
Receipt of government grant.

Deferred grant income 3,000,000 1 yr – 2K 2/10 x 15 = 3M

Grant income (2/10 x P15M) 3,000,000 2 yr – 3K 3/10 x 15 = 4.5M
Recognition of grant income. 3 yr -=5K 5/10 x 15 = 7.5M

Environmental expenses 2,000,000

Cash 2,000,000
Environmental expense incurred.

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Example 2- Grant related to depreciable asset shall be recognized as income over the periods and in
proportion to the depreciation of the related asset.
An entity received a grant of P50,000,000 from the Australian government for the acquisition of a
chemical facility with an estimated cost of P80,000,000 and useful life of 5 years.

Accordingly, the grant of P50,000,000 is allocated as income over 5 years depending on the method of
depreciation of the related asset.

Cash 50,000,000
Deferred grant income 50,000,000
Receipt of government grant.

Building 80,000,000
Cash 80,000,000
Acquisition of chemical facility.

Depreciation (80,000,000/5) 16,000,000

Accumulated depreciation 16,000,000
Depreciation for the year.

Deferred grant income 10,000,000

Grant income (50,000,000/5) 10,000,000
Recognition of grant income.

Example 3- Grant related to nondepreciable asset requiring fulfillment of certain conditions shall be
recognized as income over the periods which bear the cost of meeting the conditions.
An entity received a grant of a large tract of land in Mindanao by the national government. The fair
value of the land is P60,000.

The grant required the entity to construct a refinery on the site. The cost of the refinery is estimated to
be P100,000,000 and the useful life is 20 years.

Accordingly, the grant of P60,000,000 is allocated over 20 years.

Land 60,000,000
Deferred grant income 60,000,000
Receipt of government grant.

Refinery 100,000,000
Cash 100,000,000
Acquisition of refinery.

Depreciation (100,000,000/20) 5,000,000

Accumulated depreciation 5,000,000
Depreciation for the year.

Deferred grant income 3,000,000

Grant income (60,000,000/20) 3,000,000
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 Recognition of grant income.
Example 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.
An entity received grant of P50,000 from the USA government to compensate for massive losses
incurred because of a recent earthquake.

Accordingly, the grant of P50,000,000 is recognized as income immediately.

Cash 50,000,000
Grant income 50,000,000
Receipt of government grant.

PRESENTATION OF GOVERNMENT GRANT

GOVERNMENT GRANT RELATED TO ASSET GOVERNMENT GRANT RELATED

TO INCOME
Presented in the SFP in either of two ways: Presented in the Income
Statement as:
1. Either separately or
By setting the grant as deferred By deducting the grant from the under the general
income(Deferred Income cost of the asset (Deduction from heading “other income”,
Approach) Asset Approach)
OR
2. Deducted from the
Illustration: At the beginning of the year, an entity purchased an equipment related expense.
for P5,000,000 and received a government grant of P500,000 with respect to
this asset. The equipment is to be depreciated on a straight line basis over
five (5) years with estimated residual value of P200,000.
Transactions Deferred Income Approach Deduction from Asset Approach
Acquisition of equipment. Equipment 5,000,000 Equipment 5,000,000
Cash 5,000,000 Cash 5,000,000
Government grant as: a. Cash 500,000
deferred income Deferred grant inc. 500,000
Cash 500,000
b. deduction from asset Equipment 500,000
Annual depreciation Depreciation 960,000
(5M-200K /5 yrs.) Accum. depn. 960,000

(5M-500K-200K / 5 yrs.) Depreciation 860,000

Accum. depn. 860,000

REPAYMENT OF GOVERNMENT GRANT

Rules:
 Government grant that becomes repayable because of non-compliance with conditions shall be
accounted for as a change in accounting estimate.
 Repayment of grant related to income shall be applied
o First, against any unamortized deferred income; and
o any excess shall be recognized immediately as an expense.
 Repayment of a grant related to an asset shall be recorded by increasing the carrying amount of the
asset.
 The cumulative additional depreciation that would have been recognized to date in the absence of the 3
grant shall be recognized immediately as an expense.
Illustration: Repayment of government grant (grant related to income)

On January 1, 2021, An entity received P6,000,000 as government grant to compensate for cost to be incurred in
planting 100 trees every year in a reforestation area over a period of 3 years.

On January 1, 2022, the entire amount of the government grant became repayable because the entity has never
planted trees in 20212 which is a clear noncompliance of the conditions attached to the grant.

Entries:
2021 Jan 1 Cash 6,000,000
Deferred grant income 6,000,000

Dec 31 Deferred grant income 2,000,000

Grant income (6,000,000/3 yrs) 2,000,000

2022 Jan 1 Deferred grant income 4,000,000

Loss on repayment of grant 2,000,000
Cash 6,000,000

Illustration: Repayment of government grant (grant related to asset)

On January 1, 2021, An entity received P5,000,000 as government grant related to a building purchased on same
date at a cost of P25,000,000. The useful life of the building is 10 years with no residual value.

On January 1, 2023, the entire amount of the government grant became repayable due tom lack of compliance
with the conditions attached to the government grant.

Deferred Income Approach:

2021 Jan 1 Building 25,000,000
Cash 25,000,000

Cash 5,000,000
Deferred grant income (6,000,000/3 yrs) 5,000,000

Dec 31 Depreciation 2,500,000

Accum. depreciation 2,500,000
(25,000,000/10)

Deferred grant income 500,000

Grant income (5,000,000/10) 500,000

2022 Dec 31 Depreciation 2,500,000

Accum. depreciation 2,500,000
(25,000,000/10)

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 Deferred grant income 500,000
Grant income (5,000,000/10) 500,000

2023 Jan 1 Deferred grant income 4,000,000

Loss on repayment of grant 1,000,000
Cash 5,000,000

Dec. 31 Depreciation 2,500,000

Accum. depreciation 2,500,000

Building 25,000,000
Accum. depreciation (2,500,000 x 3) 7,500,000
Carrying amount -12/31/2023 17,500,000

Deduction from Asset Approach:

2021 Jan 1 Building 25,000,000

Cash 25,000,000

Cash 5,000,000
Building 5,000,000

Dec 31 Depreciation (20,000,000/10) 2,000,000

Accum. depreciation 2,000,000

2022 Dec 31 Depreciation 2,000,000

Accum. depreciation 2,000,000

2023 Jan 1 Building 5,000,000

Cash 5,000,000

Dec. 31 Depreciation 3,500,000

Accum. depreciation 3,500,000

Depreciation on original carrying amount 2,000,000

Depreciation on increased carrying amount
(5,000,000 / 10 x 3 yrs.) 1,500,000
Total depreciation 3,500,000

The cumulative additional depreciation that would have been recognized to date in the
absence of the grant is recognized as depreciation for 2023.

Building 25,000,000
Accum. depreciation (2M + 2M + 3.5M) 7,500,000
Carrying amount -12/31/2023 17,500,000
Note:
 The carrying amount after repayment of the grant must be the same whether the entity follows the
deferred income approach or the deduction from asset approach.
 The subsequent annual depreciation starting 2024 is P2,500,000 (17,500,000/7).
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 GRANT OF INTEREST-FREE LOAN

 A forgivable loan from the government is treated as a government grant when:

o There is reasonable assurance that the entity will meet the terms of forgiveness of the loan.

 The benefit of a government loan with a NIL or below-market rate of interest is treated as a
government grant. (PAS 20, par 10)

 The benefit is measured as the difference between the face amount and the present value of the loan.

Illustration:
On January 1, 2021, an entity received an interest-free loan from the national government for P5,000,000 for a
period of three years evidenced by a promissory note.

The market rate of interest for similar loan is 5%. The PV of 1 at 5% or three periods is 0.8638.

The government granted the interest-free loan provided the entity shall employ at least 40% of its work force
from the area where the entity is located over the next three years.

The grant income each year is equal to the annual amortization of the discount on note payable.

Required: Journal entries.

2021
Jan. 1 Cash 5,000,000 Face amount - 5,000,000
Discount on note payable 681,000 PV (5,000,000 x .8638) 4,319,000
Note payable 5,000,000 Discount on NP 681,000
Deferred grant income 681,000

Dec. 31 Interest expense 215,950 PV 4,319,000

Discount on note payable 215,950 x market rate of int. 5%
Amortization of interest 215,950
Deferred grant income 215,950
Grant income 215,950

2022 Amort. of discount = PV x interest rate

Dec. 31 Interest expense 226,748
Discount on note payable 226,748 Date Amort. Disc NP PV
1/1/21 681,000 4,319,000
12/31/21 215,950 465,050 4,534,950
Deferred grant income 226,748
12/31/22 226,748 238,302 4,761,698
Grant income 226,748
12/31/23 238,302 - 5,000,000

2023
Dec. 31 Interest expense 238,202 *Interest expense and grant income are
Discount on note payable 238,202 adjusted at the same amount.
*Interest expense and grant income each
Deferred grant income 238,202 year may be offset against the other.
Grant income 238,202 *Interest expense and grant income would
be zero each year.
Note payable 5,000,000
Cash 5,000,000
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 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

EXAMPLES OF NOT GOVERNMENT ASSISTANCE

GOVERNMENT ASSISTANCE Indirect benefits or benefits not specific to an
 Free technical or marketing entity:
assistance  Infrastructure in development areas
 Provision of guarantee such as improvement to the general
 Government procurement policy transport and communication networks
that is responsible for a portion  Imposition of trading constraints on
of the entity’s sales. competitors
 Improved facilities such as irrigation for
the benefit of an entire local community

DISCLOSURES
 The accounting policy adopted for government grant, including the
method of presentation adopted in the financial statements.
 The nature and extent of government grant recognized in the FS and an
indication of other forms of government assistance from which the
entity has directly benefited.
 Unfulfilled conditions and other contingencies attaching to government
assistance that has been recognized.

Not required to be disclosed

 Name of government agency that gave the grant
 Date of sanction of the grant by such government agency
 Date when cash was received in case of monetary grant.