MODULE 10: Government Grants & Government Assistance

RELATED STANDARD: IAS 20 – Accounting for Government Grants and Disclo-

sure of Government Assistance

INTRODUCTION
This chapter addresses the significance of the receipt of government grants by
an enterprise for preparation of the financial statements for two reasons. Firstly, if a
government grant has been received, an appropriate method of accounting therefor
is necessary. Secondly, it is desirable to give an indication of the extent to which the
enterprise has benefited from such grant during the reporting period. This facilitates
comparison of an enterprise’s financial statements with those of prior periods and
with those of other enterprises.

Learning Objectives:
1. Explain the recognition and measurement for government grants.
2. Explain the presentation of government grants in the financial statements.

 Definition of Terms
 Government – refers to government, government agencies and similar bodies
whether local, national or international.
 Government assistance – is action by government designed to provide an
economic benefit specific to an entity or range of entities qualifying under
certain criteria.
 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.
 Grants related to assets – are government grants whose primary condition is
that an entity qualifying for them should purchase, construct or otherwise
acquire long-term assets.
 Grants related to income – are government grants other than those related to
assets.
 Forgivable loans – are loans which the lender undertakes to waive repayment
of under certain prescribed conditions.
 Fair value – is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date. (See IFRS 13 Fair Value Measurement.)

 Scope
 IAS 20 applies to all government grants and other forms of government assis-
tance.
 It does not cover government assistance that is provided in the form of
benefits in determining taxable income.
 It does not cover government grants covered by IAS 41 Agriculture.
 The benefit of a government loan at a below-market rate of interest is treated
as a government grant.

 Classification of Government Grants

1. Grants related to assets
2. Grants related to income

 Recognition
 A government grant is recognized only when there is reasonable assurance
that
a. The entity will comply with any conditions attached to the grant; and
b. The grant will be received

 Receipt of a grant does not of itself provide conclusive evidence that the
conditions attaching to the grant have been or will be fulfilled.
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 The grant is recognized as income over the period necessary to match them
with the related costs, for which they are intended to compensate, on a sys-
tematic basis.
 Thus grants in recognition of specific expenses are recognized in profit
or loss in the same period as the relevant expenses.
 Grants related to depreciable assets are usually recognized in profit or
loss over the periods and in the proportions in which depreciation
expense on those assets is recognized.
 Grants related to non-depreciable assets may also require the fulfilment
of certain obligations and would then be recognized in profit or loss
over the periods that bear the cost of meeting the obligations.
 A grant receivable as compensation for costs already incurred or for
immediate financial support, with no future related costs, should be
recognized as income in the period in which it is receivable.
 Grants are sometimes received as part of a package of financial or
fiscal aids to which a number of conditions are attached. It may be
appropriate to allocate part of a grant on one basis and part on another.

 Measurement
 All government grants shall be measured at fair value of the grants received or
receivable.
 A government grant may take the form of a transfer of a non-monetary asset.
In these circumstances it is usual to assess the fair value of the non-monetary
asset and to account for both grant and asset at that fair value. An alternative
course that is sometimes followed is to record both asset and grant at a
nominal amount.

 Presentation
 A grant relating to assets may be presented in one of two ways
1. Deferred income
2. Deduction from the asset's carrying amount

 A grant relating to income may be reported separately as

1. Other income
2. Deduction from the related expense.

 Repayment of Government Grants

 If a grant becomes repayable, it should be treated as a change in estimate.
 Where the original grant related to income:
 The repayment should be applied first against any related unamortized
deferred credit, and
 Any excess should be dealt with as an expense.
 Where the original grant related to an asset
 The repayment should be treated as increasing the carrying amount of the
asset or reducing the deferred income balance.
 The cumulative depreciation which would have been charged had the grant
not been received should be charged as an expense.

 Disclosure of Government Grants

1. Accounting policy adopted for grants, including
method of balance sheet presentation.
2. Nature and extent of grants recognized in the financial
statements.
3. Unfulfilled conditions and contingencies attaching to
recognized grants.

 Government Assistance
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 Excluded from the definition of government grants are certain 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.
 Examples of assistance:
a. Free technical or marketing advice
b. Provision of guarantees.
c. Government procurement policy that is responsible for a portion of the
entity’s sales.
 The significance of the benefit in the above examples may be such that
disclosure of the nature, extent and duration of the assistance is necessary in
order that the financial statements may not be misleading.
 Government assistance for the purpose of this Standard does not include
benefits provided only indirectly through action affecting general trading
conditions, such as:
a. Provision of infrastructure by improvement to the general transport and
communication network
b. Supply of improved facilities such as irrigation or water reticulation which is
available on an ongoing indeterminate basis for the benefit of an entire
local community.
c. Imposition of trading constraints on competitors

 Difference between IFRS for SMEs and Full IFRS

Full IFRS IFRS for SMEs
Accounting model depends on A different model is applied for the
whether it relates to expenses and accounting of government grants
assets. based on future performance
Grants related to asset may be No provision that grants may be
deducted from the carrying amount deducted from the carrying amount of
of the asset. the asset.
Accounting policy must be disclosed Accounting policy disclosure is not
required

 Government Grants and Government Assistance

o Subsidies received from the national government to be used exclusively
for the construction of flood control facility.
o Technical feasibility advice provided by DOST as support to the IT
companies built in Visayan region.
o Guarantee provided by BSP to rural banks engaged in international
financing activities.
o Road improvements made by DPWH that results in the increase of the
fair values of the companies real properties.
o Licensing agreement gratuitously provided by the national government
for mining companies for the exclusive rights to conduct operation in
Benguet for 10 years.
o Immediate financial assistance provided to private hospitals by LGUs as
aid for the aftermath of a calamity.

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Illustrative Problems

1. Defined by IAS 20 as actions by government designed to provide an economic

benefit specific to an entity or range of entities qualifying under certain criteria.
A. Government grants C. Government subsidy
B. Government assistance D. Government subventions

2. Defined by IAS 20 as 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.

A. Government grants C. Government subsidy

B. Government assistance D. Government subventions

3. Government grants whose primary condition is that an entity qualifying for

them should purchase, construct or otherwise acquire long-term assets.
A. Government grants C. Grants related to income
B. Government assistance D. Grants related to assets

4. Government grant shall be recognized when there is reasonable assurance

that
A. The entity will comply with the conditions attaching to the grant and that the
grant was constructively received.
B. The entity will comply with the conditions attaching to the grant and that the
grant will be received.
C. The entity will comply with the conditions attaching to the grant.
D. The grant was constructively received.

5. Government grant is recognized as income over the period necessary to

match them with the related costs, for which they are intended to compensate,
on a systematic basis. Government grants may be recognized as follows,
except
A. The grants in recognition of specific expenses are recognized in profit or
loss in the same period as the relevant expenses.
B. A grant receivable as compensation for costs already incurred or for
immediate financial support, with no future related costs, should be recog-
nized as prior period adjustment in the retained earnings.
C. Grants related to non-depreciable assets may also require the fulfilment of
certain obligations and would then be recognized in profit or loss over the
periods that bear the cost of meeting the obligations.
D. Grants related to depreciable assets are usually recognized in profit or loss
over the periods and in the proportions in which depreciation expense on
those assets is recognized.

6. Grant related to asset may be classified in the financial statement as follows,

except
A. Setting the grant as deferred income
B. Deducting the grant in arriving at the carrying amount of the asset.
C. Deducting the grant from the related expense.
D. None of the foregoing.

7. Repayment of grant related to income shall be

A. Expensed immediately in the period the grant becomes repayable.
B. Treated as increasing the carrying amount of the asset.
C. Applied first against any related unamortized deferred income and any
excess shall be recognized as an expense.
D. Any of the foregoing.

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8. Government assistance does not include

A. Free technical or marketing advice
B. Provision of infrastructure by improvement to the general transport and
communication network
C. Provision of guarantees
D. Government procurement policy that is responsible for a portion of the
entity’s sales

9. Disclosure requirements for government grants do not include

A. The name of the government agency that gave the grant and the date
when the grant was received.
B. Unfulfilled conditions and contingencies attached to the recognized grant.
C. Accounting policy adopted for grants, including method of balance sheet
presentation.
D. Nature and extent of grants recognized in the financial statements.

10. Ali-Muong Inc. acquired a transferable 9-year taxi license by way of

government grant on January 1, Year 1, when the fair value of the license was
P180,000. The license was given free of charge on the basis of Ali-Muong
performance and there are no future performance condition attached to the
grant. How should the grant be accounted in Year 1?
A. Recognized P180,000 in the profit and loss
B. Recognized P20,000 as grant income in the profit or loss.
C. Recognized P180,000 gain from grants in other comprehensive income.
D. Recognized P20,000 as deferred grant income.

11. Refer to no. 10. Assume that Ali-Muong is required to operate at least 10 taxis
in the deprived neighborhood of the city during the 9-year period. Failure to do
so will result in the revocation of the license. How should the grant be
accounted in Year 1?
A. Recognized P180,000 in the profit and loss
B. Recognized P20,000 as grant income in the profit or loss.
C. Recognized P180,000 gain from grants in other comprehensive income.
D. Recognized P20,000 as deferred grant income.

12. Culany Company received a government grant of P1,800,000 on May 1, Year

1 in return for the reforestation of Mt. Arayat until April 30, Year 4. The project
would be implemented every year. A grant relating to income is reported sepa-
rately by Culany as 'other income'. How much would be the grant income to be
recognized in the profit and loss for year ended December 31, Year 1?
C. 450,000 C. 600,000
D. 300,000 D. 400,000

13. Areenolah Company received a government grant of P1,800,000 on January

1, Year 1 in return for the reforestation of Mt. Arayat for 4 years. Annual
reforestation expenses to be incurred for the 4-year reforestation project would
be P4 million, P3 million, P2 million and P1 million respectively. A grant
relating to income is deducted from the related expense of Areenolah. How
much would be the reforestation expense to be recognized in the profit and
loss for year ended December 31, Year 2?
A. 2,460,000 C. 720,000
B. 3,280,000 D. 540,000

14. Kileekeeli Enterprise purchased a machine for P6.4 million on January 1, Year
1. The entity received a government grant of P540,000 in respect to the
machinery. Useful life of the machinery is 4 years and residual value is
P400,000. The grant is presented as deferred income. How much would be

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the carrying amount of the machinery and deferred grant income on

December 31, Year 1?
Carrying Amount Deferred Income Carrying Amount Deferred Income
A. 4,900,000 405,000 C. 4,500,000 -0-
B. 4,095,000 405,000 D. 4,495,000 -0-

15. Refer to no. 14. Assume that Kileekeeli presented the grant as deduction from
the asset's carrying amount. How much would be the carrying amount of the
machinery and deferred grant income on December 31, Year 2?
Carrying Amount Deferred Income Carrying Amount Deferred Income
A. 3,000,000 270,000 C. 3,130,000 -0-
B. 2,730,000 270,000 D. 3,400,000 -0-

16. On January 1, Year 1, Anne-Anne Corp. received P5 million as government

grant related to a building that was purchased on the same date for P25
million. The useful life is 10 years with no residual value. The grant is
presented as deferred income. On January 1, Year 3, the grant became
repayable in full. How much would be the loss on government grant and the
depreciation expense to be recognized in the profit and loss for year ended
December 31, Year 3?
Loss on grant Depreciation Loss on grant Depreciation
A. -0- 2,500,000 C. 1,000,000 2,500,000
B. -0- 3,500,000 D. 5,000,000 2,500,000

17. On January 1, Year 1, Anne-Anne Corp. received P5 million as government

grant related to a building that was purchased on the same date for P25
million. The useful life is 10 years with no residual value. The grant is
presented as deduction from the asset's carrying amount. On January 1, Year
3, the grant became repayable in full. How much would be the loss on
government grant and the depreciation expense to be recognized in the profit
and loss for year ended December 31, Year 3?
Loss on grant Depreciation Loss on grant Depreciation
A. -0- 2,500,000 C. 1,000,000 2,500,000
B. -0- 3,500,000 D. 5,000,000 2,500,000

- End of discussion

“Education is what survives when what has been learned has been forgotten.” - B. F.
Skinner

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ANSWER KEY:
1. B
2. A
3. D
4. B
5. B
6. C
7. C
8. B
9. A
10. A
11. B
12. D
13. A
14. A
15. C
16. C
17. B

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