UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES
Chapter 13 – PAS 20: GOVERNMENT GRANT/ PAS 23: BORROWING COSTS EDMUND E. HILARIO, CPA, MBA
FINANCIAL ACCOUNTING
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I. PAS 20: Government Grant
A. Definition
PAS 20, paragraph 3 defines government grants as’
assistance by government in the form of transfers of
resources to an entity in return for part or future
compliance with retain conditions relating to the
operating activities of the entity. In other words,
technically, to qualify as a government grant (either
monetary or nonmonetary), it is a prerequisite that
the grant shall be provided compliance with
conditions relating to the operating activities of the
entity.
Government grants are sometimes called by other
names such as subsidies, subventions or premiums. A
forgivable loan from government is treated as a
government grant when is reasonable assurance that
the entity will meet the terms for forgiveness of the
loan. PAS 20 as amended provides that the benefit of
a government loan with a below-market rate of
interest is treated as a government grant. The benefit
is measured as the difference between the proceeds
received and the initial carrying value of the loan.
B. Recognition and measurement
Government grants, including non-monetary grants
at fair value, shall be recognized when there is
reasonable assurance that:
1. The entity will comply with the conditions
attaching to them.
2. The grants will be received.
Receipt thereof does not of itself provides
conclusive evidence that the conditions attaching
to the grant have been or will be fulfilled.
Government grants shall not be recognized on a
cash basis as this is not consistent with generally
accepted accounting practice.
C. Classification of government grants
1. Grants related to assets
These are government grants whose primary
condition is that an entity qualifying for grant
shall purchase, construct, or otherwise acquire
long-term assets. Subsidiary conditions may also
be attached restricting the type or location of the
assets or the periods during which they are to be
acquired or held.
2. Grants related to income
These are government grants other than those
related to assets.
D. 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. In other
words, the grant is taken to income over-one or
more periods in which the related costs is incurred.
E. 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 in arriving at the
carrying amount of the asset
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1St SEMESTER 2019 – 2020
2) Government grant related to income is presented
as follows:
a) The grant is presented in the income
statement, either separately or under the
general heading “other income”.
b) Alternatively, the grant is deducted from the
related expenses
F. Government assistance
Government assistance is action by government
designed to provide an economic benefit specific to
an entity or range of entities qualifying under certain
criteria. The essence of government assistance is
that no value can reasonably be placed upon it.
Examples of government assistance are as follows:
a. Free technical or marketing advice
b. Provision of guarantee
c. 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,
such as:
a. Infrastructure in development areas such as
improvement to the general transport and
communication network
b. Imposition of trading constraints on competitors
c. Improved facilities such as irrigation for the
benefit of an entire local community.
G. Disclosures about government grant
1. The accounting policy
adopted for government grant, including the
method of presentation adopted in the financial
statements
2. The nature and extent
of government grant recognized in the financial
statements and in indication of other forms of
government assistance from which the entity has
directly benefited
3. Unfulfilled conditions
and other contingencies attaching to government
assistance that has recognized
It is not required to disclose the name of the
government agency that gave the grant along with
the date of sanctions of the grant by such
government agency and the date when cash was
received in case of monetary grant.
II. PAS 23: Borrowing costs
A. Definition
Under PAS 23, paragraph 5, Borrowing costs are
defined as interest and other costs that an entity
incurs in connections with borrowing of funds. This
definition encompasses interest on all types of
borrowing, including finance leases and ancillary
costs incurred in connection with the arrangement of
borrowing.
PAS 23 as amended provides that borrowing costs
include:
 Interest expenses calculated using the effective
interest method as described in PAS 39
 Finance charge with respect to a finance lease
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 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES
Chapter 13 – PAS 20: GOVERNMENT GRANT/ PAS 23: BORROWING COSTS EDMUND E. HILARIO, CPA, MBA
FINANCIAL ACCOUNTING
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 Exchange differences arising from foreign
currency borrowing to the extent that it is
regarded as an adjustment to interest cost
B. 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: Examples include the following
 Manufacturing plant
 Power generation facility
 Intangible asset
 Investment property
C. Excluded from capitalization
PAS 23 does not require capitalization of borrowing
costs relating to the following:
1) Asset measured at fair value, such as biological
assets
2) Inventory that is manufactured in large quantity
on a repetitive basis, such as maturing whisky,
even if it takes a substantial period of time to get
ready for sale
3) Assets that is ready for the intended use or sale
when acquired.
D. Accounting for borrowing cost
The amended PAS 23, paragraph 8 has eliminated
the benchmark treatment of expensing all borrowing
costs. The new rules on borrowing cost mandates the
following cost:
 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 asset. In other
words, the capitalization of borrowing costs is
mandatory for a qualifying assets.
 All other borrowing costs shall be expenses as
incurred. In other words, if the borrowing is not
directly attributable to a qualifying asset, the
borrowing cost is expensed immediately.
E. 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 borrowing.
F. Asset finance by general borrowing
PAS 23, paragraph 14, provides that if the funds are
borrowed by generally and used for acquiring a
qualifying asset, the amount of capitalizable
borrowing cost is equal to the average carrying
amount of 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, the investment income from general
borrowing is not deducted from capitalizable
borrowing costs.
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1St SEMESTER 2019 – 2020
G. 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:
1) When the entity incurs expenditures for the asset
2) When the entity incurs borrowing costs
3) When the entity undertakes activities that are
necessary to prepare the asset for the intended
use or sale.
H. 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. These 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 does not qualify for
capitalization.
I. Suspension of capitalization
Capitalization of borrowing costs 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 works is
being carried out.
Capitalization of borrowing costs 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 are common during the construction period in
the geographical region involved.
J. 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.
K. Disclosures related to borrowing costs
1) The amount of borrowing costs capitalized during
the period
2) 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.
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 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES

Chapter 13 – PAS 20: GOVERNMENT GRANT/ PAS 23: BORROWING COSTS EDMUND E. HILARIO, CPA, MBA
FINANCIAL ACCOUNTING 1St SEMESTER 2019 – 2020
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