Name : ___________________ Score: ____

Section : ___________________
Subject : Intermediate Accounting 1
Class Schedule : ______________
Teacher : Joanne R. Diesca
Date : ______________

MODULE 18

Lesson / Topic : GOVERNMENT GRANTS

Learning Target(s) : Explain the recognition and measurement for government grants.
 Explain the presentation of government grants in the financial
statements
Reference(s) : Millan, Z.V. 2020. Intermediate Accounting. Bandolin Enterprise

Introduction
This topic is governed by PAS 20 Accounting for Government Grants and Disclosure
of Government Assistance. There are instances wherein companies receive subsidies,
subventions or assistance from the government. We will discuss how to treat and present this
in the financial statement.

Activity
Enumerate any assistance a company may receive from the government.

1. ____________________________________
2. ____________________________________
3. ____________________________________
4. ____________________________________
5. ____________________________________

Analysis
Government grants are 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. They exclude those forms of
government assistance which cannot reasonably have a value placed upon them
and transactions with government which cannot be distinguished from the normal
trading transactions of the entity.
• Other terms for government grants include subsidies, subventions, or
premiums.

• The following are not government grants:

a. Tax benefits,
b. Free technical or marketing advice,
c. Provision of guarantees,
d. Government procurement policy that is responsible for a portion of the
entity’s sales, and
e. Public improvements that benefit the entire community.
Recognition

• Government grants, including non-monetary grants at fair value, shall not be

recognized until there is reasonable assurance that:
a. the entity will comply with the conditions attaching to them; and
 b. the grants will be received

Classifications of government grants according to attached condition

a. Grants related to assets – grants whose primary condition is that an entity

qualifying for them should purchase, construct or otherwise acquire long-
term assets.
b. Grants related to income – grants other than those related to assets.

Initial measurement
• Monetary grants are measured at the
a. amount of cash received; or
b. the fair value of amount receivable; or
c. carrying amount of loan payable to government for which repayment is
forgiven; or
d. discount on loan payable to government at a below-market rate of
interest.

• Non-monetary grants (e.g., land and other resources) are measured at the
a. fair value of non-monetary asset received.
b. alternatively, at nominal amount or zero, plus direct costs incurred in
preparing the asset for its intended use.

Accounting for Gov’t. Grants

• The main concept in accounting for gov’t. grants is the MATCHING

CONCEPT.
• This means that the gov’t. grant is recognized as income as the entity
recognizes as expense the related cost for which the grant is intended to
compensate.

Presentation of Government grants related to assets

• Government grants related to assets are presented in the statement of
financial position either by:
a. Gross presentation –the grant is presented as deferred income
(liability); or
b. Net presentation – the grant is deducted when computing for the
carrying amount of the asset

Presentation of Government grants related to income

• Grants related to income are sometimes presented in the income statement

either by:
a. Gross presentation – the grant is presented separately or under a
general heading such as “Other income”, or
b. Net presentation – the grant is deducted in reporting the related
expense

Repayment of Gov’t. Grants

• A government grant that becomes repayable is accounted for as a change in

accounting estimate that is treated prospectively under PAS 8.

Abstraction
n

On January 1, 20x1 ABC Co. received P2,000,000 grant from the government to aid in the
construction of a new building. The construction of the building was finished on March 31,
20x2 for a total cost of P6,000,000. The building is estimated to have a useful life of 30 years
and a residual value of P1,000,000.

a. If ABC Co. uses the gross presentation, how much is the income from the
government grant in 20x1?
b. If ABC Co. uses the gross presentation, how much is the carrying amount of the
building on December 31, 20x2?
c. If ABC Co. uses the gross presentation, how much is the income form the
government grant in 20x2?
d. If ABC Co. uses the gross presentation, how much is the depreciation expense
in 20x2?
e. If ABC Co. uses the gross presentation, how much is the balance of the deferred
income from government grant tin December 31, 20x2?
f. If ABC Co. uses the net presentation, how much is the carrying amount of the
building on December 31, 20x2?
g. If ABC Co. uses the net presentation, hw much is the depreciation expense in
20x1?

Solution:
1. Answer: 0

2. Solution:
(6M – 1M) x 29.25/30 + 1M = 5,875,000

3. Solution:
(2M / 30 yrs.) x 9/12 = 50,000

4. Solution:
(6M – 1M) ÷ 30 x 9/12 = 125,000

5. Solution:
(2M x 29.25/30 = 1,950,000

6. Solution:
(6M – 2M – 1M) x 29.25/30 + 1M = 3,925,000

7. Solution:
(6M – 2M – 1M) ÷ 30 x 9/12 = 75,000

2. On January 1, 20x1, Police Power co received cash of P8,000,000 from a local government
to be used in constructing a building. The construction was completed on December 31, 2021
for a total of P20,000,000. The building will be depreciated using the straight line method
over 20 years.

Requirements
a. Provide the journal entries in 20x1 to 20x3 using (i) gross presentation andn
(ii) net presentation
b. Prepare a partial comparative statement of financial position and a partial
comparative statement of profit or loss for 20x3, 20x2 and 20x1 using (i)
gross presentation and (ii) net presentation.

Requirement (a):

Gross presentation
Jan. 1, Cash 8,000,000
20x1 Deferred income –
government grant 8,000,000
Dec. 31, Building 20,000,000
20x1 Cash 20,000,000
Dec. 31, Depreciation expense 1,000,000
20x2 (20M ÷ 20 years)
Accumulated depreciation 1,000,000
 Deferred income 400,000
(8M ÷ 20 years)
Income from government
Grant 400,000
Dec. 31, Depreciation expense 1,000,000
20x3 (20M ÷ 20 years)
Accumulated depreciation 1,000,000

Deferred income 400,000

(8M ÷ 20 years)
Income from government
Grant 400,000

Net presentation
Jan. 1, Cash 8,000,000
20x1 Deferred income – government
grant 8,000,000
Dec. Building 20,000,000
31, Cash 20,000,000
20x1
Deferred income – government grant
Building 8,000,000
8,000,000
Dec. Depreciation expense 600,000
31, (12M ÷ 20 years)
20x2 Accumulated depreciation 600,000
Dec. Depreciation expense 600,000
31, (12M ÷ 20 years)
20x2 Accumulated depreciation 600,000

Requirement (b):

GROSS PRESENTATION

20x3 20x2 20x1

Statement of financial position
ASSETS
Building 20,000,000 20,000,000 20,000,000
Accumulated depreciation (2,000,000) (1,000,000) -
Total 18,000,000 19,000,000 20,000,000

LIABILITIES
Deferred income from government grant 7,200,000 7,600,000 8,000,000

20x3 20x2 20x1

Statement of profit or loss
Income from government grant 400,000 400,000 -
Depreciation expense (1,000,000) (1,000,000) -
Profit (Loss) (600,000) (600,000) -

NET PRESENTATION

20x3 20x2 20x1

Statement of financial position
ASSETS
Building 12,000,000 12,000,000 12,000,000
Accumulated depreciation (1,200,000) (600,000) -
Total 10,800,000 11,400,000 12,000,000

20x3 20x2 20x1

Statement of profit or loss
Depreciation expense (600,000) (600,000) -
Profit (Loss) (600,000) (600,000) -
Application
n
1. Please answer Chapter 18, Problem 5 and 6 in your textbook. Show your
solution if there’s any.