Government Grant
over one or more periods in which the related
PAS 20, paragraph 3 defines government grant
as assistance by government in the form of
transfer of resources to an entity in return for
part or future compliance with certain
conditions relating to the operating activities of
the entity.
Sometimes called by other names such as
subsidy, subvention or premium.
Recognition and Measurement
Government grant, including nonmonetary
grant at fair value, shall be recognized when
there is a reasonable assurance that:
a. The entity will comply with the
conditions attaching to the grant.
b. The grant will be received.
Government grant shall not be recognized on a
cash basis as this is not consistent with generally
accepted accounting practice.
In other words, the government grant shall be
recognized on the accrual basis when received
or receivable.
Classifications of government grant
a. Grant related to asset
- The primary condition is that an entity
qualifying for the grant shall purchase,
construct, or otherwise acquire long-
term asset.
b. Grant related to income
- By residual definition, grant related to
income is government grant other than
grant related to asset.
Accounting for government grant
Government grant shall be 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.
Stated otherwise, the grant is taken to income
cost is incurred.
Grant in recognition of specific expenses shall be
recognized as income over the period of the
related expense.
Grant related to depreciable asset shall be
recognized as income over the periods and in
proportion to the depreciation of the related
asset.
Grant related to nondepreciable asset requiring
fulfillment of certain conditions shall be
recognized over the periods which bear the cost
of meeting the conditions.
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.
Presentation of government grant
1. Government grant related to asset shall
be presented in the statement of
financial position in either of two ways
a. By setting the grant as deferred
income.
b. By deducting the grant from the
cost of the asset.
2. Government grant related to income;
a. The grant is presented in the
income statement, either
separately or under the general
heading other income.
b. or deducted from the related
expense.
Repayment of grant
A government grant that becomes repayable
because of noncompliance with conditions shall
be accounted for as a change in accounting
estimate.
Repayment of a grant related to income shall be
applied first against any unamortized deferred
income and 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 grant shall be recognized
immediately as an expense.
Government assistance
Government assistance in action by government
designed to provide an economic benefit
specific to an entity or range of entities
qualifying under certain criteria.
c. Improved facilities such as irrigation for
the benefit of an entire local community
Disclosures about government grant
a. The accounting policy adopted for
government grant, including the
method of presentation adopted in the
financial statements.
b. The nature and extent of government
grant recognized in the financial
statements and an indication of other
forms of government assistance from
which the entity has directly benefited.
c. Unfulfilled conditions and other
contingencies attaching to government
assistance that has been recognized.
It is not required to disclose the name of the
government agency that gave the grant along
with the date of sanction of the grant by such
government agency and the date when cash
was received in of monetary grant.

The essence of government assistance is that

no value can reasonably be placed upon it.

Examples:

1. Free technical or marketing advice

2. Provision of guarantee
3. 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.
BORROWING COST
Under PAS 23, paragraph 5, borrowing costs are
defined as interest and other costs that an
entity incurs in connection with borrowing of
funds.
In other words, as the term suggests, borrowing
costs are interest costs incurred as a result of
borrowings from banks and other financial
institutions.
Borrowing costs specifically include:
a. Interest expense calculated using the
effective interest method.
b. Finance charge with respect to a finance
lease.
c. Exchange difference arising from foreign
currency borrowing to the extent that it
is regarded as an adjustment to interest
cost.
Borrowing can be classified as specific
borrowing and general borrowing.
A specific borrowing is intended specifically in
acquiring a qualifying asset.
A general borrowing is intended partly in
acquiring a qualifying asset and partly for
general or working capital purposes.
Qualifying Asset
A qualifying asset is an asset that necessarily
takes a substantial period of time to get ready
for the intended use or sale.
Examples:
a. Manufacturing plant
b. Power generation facility
c. Intangible asset
d. Investment property
PAS 23 requires borrowing costs incurred in
connection with acquisition of a qualifying asset
should be capitalized as cost of the qualifying
asset.
Excluded from capitalization
PAS 23 does not require capitalization of
borrowing costs relating to the following assets
not considered as qualifying asset:
a. Asset measured at fair value, such as
biological asset
b. Inventory that is manufactured in large
quantity on a repetitive basis, such as
maturing whisky, even if it takes a
period of time to get ready for sale
c. Asset that is ready for the intended
use or sale when acquired
Accounting for borrowing cost
PAS 23, paragraph 8, mandates the following
rules on borrowing cost:
1. If the borrowing is directly attributable
to the acquisition, construction or
production of a qualifying asset, the
borrowing cost is required to be
capitalized as cost of the asset.
In other words, the capitalization of borrowing
cost is mandatory for a qualifying asset.
2. All other borrowing costs shall be
expensed as incurred.
In other words, if the borrowing is not directly
attributable to a qualifying asset, the borrowing
cost is expensed immediately.
Asset financed by specific borrowing
PAS 23, paragraph 12, provides that if the funds
are borrowed specifically for the purpose of
acquiring a qualifying asset, the amount of
capitalizable borrowing cost is the actual
borrowing cost incurred during the period less
any investment income from the temporary
investment of those borrowings.
Asset financed by general borrowing
PAS 23, paragraph 14, provides that if the funds
are borrowed generally and used for acquiring a
qualifying asset, the amount of capitalizable
borrowing cost is equal to the average carrying
expenditures on the asset during the period
multiplied by a capitalization rate or average
interest rate.
However, the capitalizable borrowing cost shall
not exceed the actual interest incurred.
The capitalization rate or average interest rate is
equal to the total annual borrowing cost divided
by the total general borrowings outstanding
during the period.
No specific guidance is provided for general
borrowing with respect to investment income.
Accordingly, any investment income from
general borrowing is not deducted from
capitalizable borrowing cost.
Commencement of capitalization
The capitalization of borrowing costs as part
of .the cost of a qualifying asset shall commence
when the following three conditions are
present:
a. When the entity incurs expenditures for
the asset.
b. When the entity incurs borrowing costs.
c. When the entity undertakes activities
that are necessary to prepare the asset
for the intended use or sale.
Cessation of capitalization
Capitalization of borrowing costs shall cease
when substantially all the activities necessary to
prepare the qualifying asset for the intended
use or sale are complete.
An asset is normally ready for the intended use
or sale when the physical construction of the
asset is complete even though routine
administrative work might still continue.
Disclosures related to borrowing costs
a. The amount of borrowing costs capitalized
during the period
b. The capitalization rate used to determine the
amount of borrowing costs eligible for
capitalization.
Segregation of assets that are "qualifying
assets" from other assets in the statement of
financial position is not required to be
disclosed.
Activities necessary to prepare
The activities necessary to prepare the asset for
the intended use or sale encompass more than
the physical construction of the asset.
Such activities include technical and
administrative work prior to the
commencement of physical construction, such
as drawing up plans and obtaining permit for a
building.
However, merely holding assets for use or
development without any associated
development activity does not qualify for
capitalization.
For example, borrowing costs incurred while
land is under development are capitalized
during the period in which development
activities are being undertaken.
But borrowing costs incurred while land
acquired for building purposes is held without
any associated development activity do not
qualify for capitalization.
Suspension of capitalization
Capitalization of borrowing cost shall be
suspended during extended periods in which
active development is interrupted.
However, capitalization of borrowing cost is not
normally suspended during a period when
substantial technical and administrative work is
being carried out.
Capitalization of borrowing cost is not also
suspended when a temporary delay is a
necessary part of the process of getting an
asset ready for its intended use or sale.

For example, capitalization continues during the

extended period that high water levels delay the
construction of a bridge. if such high water
levels are common during the construction
period in the geographical region involved.