CHAPTER 16: ACCOUNTING FOR GOVERNMENT GRANTS MIDTERMS REVIEWER

IAS 20- Objective And Scope

1. Government grant - a form of government assistance; a transfer
of resources from the government to an organization, requiring
the organization to meet specific conditions in its operations.
2. Government assistance - government action to create economic
benefits for entities that meet specific qualifications.
 Excludes benefits related to adjusting taxable profit or loss, such
as investment tax credits, income tax holidays, accelerated tax
depreciation, or lower income tax rates.
Presentation of grants related to assets:
• Companies have a choice - recognized as
a) deferred income
b) as a reduction in carrying amount of the related asset
Example: Company A receives a $25 grant toward the purchase of new
equipment that cost $100; equipment has a five-year life and is
depreciated on a straight-line basis

Recognition and Measurement Entry when grant received:

• Recognition - a government grant when there is reasonable (a)
assurance that Dr. Cash 25
Cr. Deferred government grant 25
1. The grant will be received;
or
2. The entity will comply with the conditions attached to the grant
(b)
Two (2) General Approach Dr. Cash 25
Cr. Equipment 25
1. Capital approach
2. Income approach (apply this one)
Grants from government are not equity financing, they are non- Entry as asset is used:
shareholder-related increases in net assets and therefore items of (a)
income. Dr. Depreciation expense 20
Cr. Accumulated depreciation 20
1. Income approach recognize government grants in profit or loss in Dr. Deferred government grant 5
the same periods that the related expenses are recognized Cr. Depreciation expense/ grant income 5
✓ If for acquisition assets- on the same basis as the depreciation or
on the assets (b)
✓ If related directly to incurring specific expenditures- on the Dr. Depreciation expense 15
same basis as the expenditures Cr. Accumulated depreciation 15
Depreciation: ($100-$25) / 5= 15

NESHL ANGELISSE BALACANTA BSA 1B

CHAPTER 16: ACCOUNTING FOR GOVERNMENT GRANTS MIDTERMS REVIEWER

Repayment Of Grants: Disclosure

If grant becomes repayable: treat as a change in estimate Three (3) Types

Accounting policy for grants and their

1) presentation

If related to income: any necessary adjustments are

made to current year profit or loss
Nature and extent of grants recognized, and
2) information about other forms of assistance that
have been beneficial
If related to an asset: cumulative amount of additional
depreciation that would have been recognized to date is
recognized in profit/loss
Information about contingencies or conditions not
3) yet met related to assistance recognized

2. Government Assistance
• Grants don't include assistance that can't be valued or transactions
between the government and the entity that are part of regular
business operations.
• Other forms of assistance like loan guarantees and major sales
could be important for financial statement readers if the benefits
are substantial and recurring.
Looking Ahead
IAS 20 - part of short-term convergence project with FASB, IAS 20
shortcomings:
1. The option to treat grants as deferred credits does not align with
the conceptual framework because deferred credits don't fit the
definition of a liability.

2. Allowing entities to deduct grants from acquired assets leads to

understated assets and reduces the comparability of financial
statements across entities.

NESHL ANGELISSE BALACANTA BSA 1B

CHAPTER 16: ACCOUNTING FOR GOVERNMENT GRANTS MIDTERMS REVIEWER
Exercises:
Problem 47-2 (IFRS)
Government Grant
At the beginning of current year, Besao Company received a
Problem 47-1 (IFRS) grant of ₱10,000,000 from the Australian government for the
At the beginning of current year, Sagada Company Received a grant construction of a laboratory and research facility with an estimated
of ₱25,000,000 from the American government in order to defray safety cost of ₱15,000,000 and useful life of 5 years.
and environmental costs within the area where the entity is located. The laboratory and research facility was completed and ready
for the intended use at the end of the current year.
The safety and environmental costs are expected to be incurred over
four years, respectively, ₱2,000,000, ₱4,000,000, ₱6,000,000 and 2. What amount of grant income should be included in the income
₱8,000,000. statement for the current year?
1. What amount should be recognized as grant income for the a. 10,000,000
current year? b. 2,000,000
a. 25,000,000 c. 1,500,000
d. 0
b. 2,000,000
c. 2,500,000 Answer: B
d. 6,250,000

Answer: C

PAS 20, paragraph 17, provides that grants related to depreciable

assets are usually recognized as income over the periods and in
proportion to the depreciation of the related assets

PAS 20, paragraph 12, provides that government grants are

recognized as income over the periods necessary to match them with
the related costs which they are intended to compensate on a
systematic basis

NESHL ANGELISSE BALACANTA BSA 1B