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CHAPTER 26
Government Grant
Definition Subsidy of the government to an entity by means of transferring resources due to part or future compliance, meeting a specific conditions relating to the operating activities of the entity. Under Section 24 of PAS 20, it is an entity-specific transfer of resources. Hence, resources that are available to the various entities such as the public roads and other infrastructures do not constitute a government grant. Examples Receipts of cash or noncash assets subject to compliance upon certain conditions Forgivable loan from government Classification of Government Grant Grant related to asset A government grant given, whose primary condition requires the qualifying entity to purchase, construct and acquire long-term assets. Grant related to income Government grants other than those related to assets. Recognition of Government Grant Government grant, including nonmonetary grant at fair value shall be recognized when: There is reasonable assurance that the entity will comply with the given conditions attached to the grant There is reasonable assurance that the grant will be received. Characteristic of Recognized Government Grant
1. D irect benefits to qualifying entity 2. E conomic benefits from the government 3. W ith measurable value 4. R eceived or receivable in return for past/future compliance
- R easonable assurance of entity’s compliance to attached conditions 6. R easonable assurance of grant to be received
Accounting Treatment for Government Grant PAS 20 requires the government grant shall be recognized as “ income ” in the profit or loss on systematic basis over periods in which related costs of entity is incurred. It simply applies the matching principle that income is not yet recognized if the related expenses are not yet recognized. Accrual basis of accounting is violated when the government grant is recognized upon using receipt or cash basis, therefore it is prohibited. It is acceptable only if there is no allocation basis other than the grant received. Illustration 1 Grant related to depreciable asset On Jan 1. 2019, Bell Company received 5 000 000 grant from the government for the acquisition of an equipment with a cost of 9 000 000 and useful life of 4 years. The equipment is depreciated using the straight line method. Notes: Income shall be recognized in proportion with depreciation expense over the period if the grant is related to depreciable asset. (PAS 20) Since the equipment is depreciated using straight line method, the income is also computed using the same method. Entries for 2019 Cash 5 000 000 Deferred Income 5 000 000 To record the government grant received Equipment 9 000 000 Cash 9 000 000 To record the equipment related to grant Depreciation (9 000 000/4) 2 250 000 Accumulated Depreciation 2 250 000 To record the depreciation of equipment
Other recognition: Grant related to recognition of specific expenses – shall be recognized as income over the period and allocated in proportion to costs incurred. Grant that becomes receivable – shall be recognized as income of the period in which it become receivable. Presentation of Government Grant Related to asset o Deferred income o Deduction of grant to arrive at carrying amount Related to income o Other income o Grant deducted from related expense Repayment of Grant Noncompliance with the given conditions related to the given grant shall be accounted as change in accounting estimate. Repayment that is; Related to income - is applied first to the unamortized deferred income and immediately, the remaining shall be recognized as expense. Related to asset – shall be recognized by increasing the amount of the asset or reduction of the deferred income by the repayable amount. Illustration 3 On January 1, 2019, LTD Company received government grant of P10 000 000 related to a factory building that is acquired on the same date carrying a cost of P20 000 000. The factory building has a useful life of 10 years with no residual value. On January 1, 2021, the entire amount of the government grant became repayable by the reason of noncompliance with the attached conditions to the grant. Deferred Income Approach 2019 Jan. 1 Factory Building 20 000 000 Cash 20 000 000 1 Cash 10 000 000 Deferred Income 10 000 000
- Dec. 31 Depreciation (20M/10) - Accumulated Depreciation - 31 Deferred Grant Income - Grant Income (10M/10)
- Dec. 31 Depreciation (20M/10) - Accumulated Depreciation
- 31 Deferred Grant Income - Grant Income (10M/10)
- Jan.1 Deferred Grant Income - Loss on Repayment of grant - Grant Income
- Dec. 31 Depreciation (20M/10) - Accumulated Depreciation
- Factory Building
- Carrying Amount – Dec. 31, Accumulated Depreciation (2M×3) (6 000 000)
- What accounting standard is related to government grants? A. PAS 28 B. PAS 16 C. PAS 23 D. PAS 20 PROBLEMS Problem 26- At the beginning of the year, Chameleon Company received a grant of 14 000 000 from the American government for construction of research facility with an estimated cost of 21 000 000 and a useful life of 7 years. The facility was already completed and ready for intended use at the current of the year. What is the amount of income from government grant should be recognized in the income statement at the end of the year? A. 2 000 000 B. 3 000 000 C. 14 000 000 D. 0 Problem 26- On Jan. 1, 2020, Sky Company purchased a machinery costing 9 100 000 and received a government grant of 600 000 towards the asset cost. The company uses straight line method to depreciate the machine having 10 years useful life and residual value of 300 000. On January 1, 2022, the grant became fully repayable due to noncompliance with the conditions. What is the depreciation for 2020? A. 600 000 B. 880 000 C. 820 000 D. 940 000
Problem 26- In the preceding problem, what is the depreciation for 2022. (Refer to the given in problem 26-2) A. 880 000 B. 940 000 C. 960 000 D. 1 000 000 Problem 26- At the start of the current year, Sharp Company received a government grant of P15 600 000 related to a building purchased for P45 000 000 on the same date. The building has an estimated useful life of 12 years with no residual value. Straight line method is used by the Company. What is the journal entry and the amount of grant income that shall be recognized in the current year? A. Deferred Grant Income 1 350 000 Cash 1 350 000 B. Deferred Grant Income 1 300 000 Grant Income 1 300 000 C. Deferred Grant Income 3 750 000 Grant Income 3 750 000 D. Grant Income 3 750 000 Deferred Grant Income 3 750 000 Problem 26- At the beginning of the current year, Wizard Company is granted a large tract of land in Nueva Ecija by the Philippine Government. The land has a fair value of 50 700 000. The grant requires the Company to construct a research and development facility employing only the personnel residing in Nueva Ecija. The cost of the facility is estimated to be P55 000 000and useful life of 25 years. What amount should be recognized as government grant income at the end of the year? A. 0 B. 2 028 000 C. 2 200 000 D. 4 300 000
Problem 26- At the beginning of the current year, Aspire Company received P75 000 000 government grant from Australian government for the purpose of defraying safety and environmental expense over the period of 4 years. The costs incurred are 8 000 000, 12 000 000, 15 000 000, 25 000 000 respectively. What should be recognized as grant income for the first year? A. 18 750 000 B. 10 000 000 C. 15 000 000 D. 75 000 000 Problem 26- In the preceding problem, what is the grant income to be recognized in the third year? A. 25 000 000 B. 15 000 000 C. 18 750 000 D. 10 000 000
ANSWER KEY (CHAPTER 26)
Theories- True or False Indicate Government if the statement is correct and Grant if not correct.
- Grant The following are not examples of government grants since it is provided among different entities.
- Grant Grants that are related to depreciable asset should be recognized as income as the asset is depreciated.
- Government The statement is correct.
- Grant Indeed, the matching principle is applied but the income is not yet recognized if the related expenses are not yet recognized.
- Grant Indirect benefits given to entity such as improvement to public transport and facilities are not included in the government assistance since it will benefit the entire community. Multiple Choice Theories
- Government grant that becomes repayable shall be accounted as E. Change in accounting period F. Change in accounting estimate G. Change in accounting approach H. Change in accounting method Answer B
- What are the approaches in recognizing the grant income? E. Income and asset approach F. Deferred and asset approach G. Deferred and deduction from asset approach H. Deferred and Income approach Answer C
Problem 26- Solution: Answer D Original Depreciation 820 000 Add: Additional Depreciation (600 000/10×3) 180 000 Depreciation for 2022: 1 000 000 Problem 26- Solution: Answer B Deferred Grant Income 1 300 000 Grant Income 1 300 000 (15 600 000/12 years) Since the Sharp Company used straight line basis in depreciating the asset, the same method is also used to depreciate the grant income. Problem 26- Solution: Answer B Government grant income: (50 700 000/25 years) 2 028 000 Problem 26- Solution: Answer C Total grant received 2 500 000 Income recognized in 2016 and 2017 (2 500 000/8×2) (625 000) Deferred Income – December 31, 2017 1 875 000 Problem 26- Solution: Answer A Deferred Income: (6 200 000 × 20%) 1 240 000
Problem 26- Solution: Answer D Deferred Income: [(6 200 000-200 000) × 20%] 1 200 000 Problem 26- Solution: Answer C Year Costs Allocation Income First 8 000 000 8/60 10 000 000 Second 12 000 000 12/60 15 000 000 Third 15 000 000 15/60 18 750 000 Fourth 25 000 000 25/60 31 250 000 60 000 000 75 000 000 Problem 26- Solution: Answer C Income for third year: (15 000 000/60 000 000) × 75 000 000 18 750 000
