CHAPTER 24 – GOVERNMENT GRANT Grant income 3,000,000

Accounting for government grant

PAS 20, paragraph 3, defines government Environmental expenses 2,000,000
grant as assistance by government in the Government grant shall be recognized as
Cash 2,000,000
form of transfer of resources to an entity in income on a systematic basis over the
return for part or future compliance with periods in which an entity recognizes as
For the second entry:
certain conditions relating to the operating expenses the related costs for which the
activities of the entity. grant is intended to compensate.
1st 2,000,000 2/10 x 15M = 3,000,000
- Sometimes called as subsidy, - The grant is taken to income over
2nd 3,000,000 3/10 x 15M = 4,500,000
subvention or premium. one or more periods in which the
3rd 5,000,000 5/10 x 15M = 7,500,000
related cost is incurred.
10,000,000 15,000,000
Recognition and Measurement
Illustration 1:
Illustration 2:
Government grant, including nonmonetary
grand at fair value, shall be recognized Government grant for safety and
Grant for acquisition of chemical facility
when there is reasonable assurance that: environmental expenses = 15,000,000
= 50,000,000
a. The entity will comply with the Estimated cost of chemical facility
conditions attaching to the grant. Expenses to be incurred:
= 80,000,000 with useful life of 5 years
b. The grant will be received. First year – 2,000,000
Second year – 3,000,000
(Grant related to depreciable asset shall be
*Government grant shall not be recognized Third year – 5,000,000
recognized as income over the periods and
at cash basis as this is not consistent with Total of 10,000,000
in proportion to the depreciation of the
GAAP. In other words, it shall be recognized related asset.)
on the accrual basis when received or (Grant in recognition of specific expenses
receivable. shall be recognized as income over the
The grant of 50,000,000 is allocated as
period of the related expense.)
income over 5 years depending on the
Classifications of government grant
depreciation method. Straight line method
Allocate the grant of 15,000,000 in
a. Grant related to asset – whose is used. First year journal entries:
proportion to the costs incurred over the
primary condition is that an entity three years. The entries for the first year
qualifying for the grant shall Cash 50,000,000
are:
purchase, construct, or otherwise Deferred grant income 50,000,000
acquire long-term asset. Cash 15,000,000
b. Grant related to income – by Building 80,000,000
Deferred grant income 15,000,000
residual definition, this is gov. grant Cash 80,000,000
(a liability)
other than grant related to asset.
Depreciation (80M/5) 16,000,000
Deferred grant income 3,000,000
 Accumulated dep. 16,000,000 Grant received to compensate for massive with respect to this asset. Equipment is to
losses incurred due to recent earthquake be depreciated on a straight-line basis over
Deferred grant income 10,000,000 = 50,000,000 5 years. Estimated residual value of the
Grant income (50M/5) 10,000,000 equipment is 200,000.
(Grant received as compensation for losses
Illustration 3: or expenses already incurred or for financial Deferred income approach
support to the entity with no further related
Government grant of a large tract of land cots shall be recognized as income of the To record acquisition of equipment:
with a fair value of 60,000,000 period in which it becomes receivable.)
Condition: construct a refinery on the site. Equipment 5,000,000
Cost of refinery = 100,000,000 with a useful Accordingly, the grant is recognized as Cash 5,000,000
life of 20 years. income immediately.
To record the government grant as deferred
(Grant related to non-depreciable asset Cash 50,000,000 income:
requiring fulfillment of certain conditions Grant Income 50,000,000
shall be recognized as income over the Cash 500,000
periods which bear the cost of meeting Presentation of Government grant Deferred grant income 500,000
conditions.)
1. Grant related to asset shall be To record annual depreciation:
Accordingly, the grant of 60,000,000 is presented in the statement of
allocated over 20 years. financial position in either of the two Depreciation 960,000
ways: Accumulated dep. 960,000
Land 60,000,000 - By setting the grant as deferred
Deferred grant income 60,000,000 income. Acquisition cost 5,000,000
- By deducting the grant from the cost Less: Residual value 200,000
Refinery 100,000,000 of the asset. Depreciable amount 4,800,000
Cash 100,000,000
2. Grant related to income is presented Annual depreciation 960,000
Depreciation (100M/20) 5,000,000 in the income statement, either (4,800,000/5)
Accumulated Dep. 5,000,000 separately or under the general
heading “other income” or deducted To recognize income from government
Deferred grant income 3,000,000 from the related expense. grant:
Grant income (60M/20) 3,000,000
Illustration: Deferred grant income 100,000
Illustration 4: Grant related to asset: Grant income (500K/5) 100,000
Entity purchased an equipment for
5,000,000 and received a grant of 500,000
 Repayment of grant related to income shall
be applied first against any unamortized
Deduction from asset approach deferred income and any excess shall be 2022
recognized immediately as an expense.
To record acquisition of equipment: Jan. 1 Deferred grant inc. 4,000,000
Repayment of grant related to an asset shall Loss on repayment 2,000,000
Equipment 5,000,000 be recorded by increasing the carrying Of grant
Cash 5,000,000 amount of the asset. Cash 6,000,000

To record grant as deduction from the cost The cumulative additional depreciation that Illustration – Grant related to an asset
of asset would have been recognized to date in the
absence of the grant shall be recognized Jan. 1, 2021 – Received a grant of 5,000,000
Cash 500,000 immediately as an expense. related to a building purchased in same
Equipment 500,000 date at cost of 25,000,000. Useful life is 10
Illustration – Grant related to income years and no residual value.
To record annual depreciation:
Jan. 1, 2021 – Government grant of Jan. 1, 2023 – grant became repayable due
Depreciation 860,000 6,000,000 was received to compensate for to noncompliance with the conditions
Accumulated Dep. 860,000 costs to be incurred in planting 100 trees attached to the grant.
every year in a reforestation area over the
Acquisition cost 5,000,000 period of 3 years. Deferred income approach
Less: Government grant (500,000)
Net cost 4,500,000 Jan. 1, 2022 – grant became repayable 2021
Less: Residual Value (200,000) because the entity never planted trees in Jan. 1
Depreciable amount 4,300,000 2021 which is clear noncompliance of the Building 25,000,000
conditions attached to the grant. Cash 25,000,000
Annual depreciation 860,000
(4,300,000/5) 2021 Cash 5,000,000
Deferred Grant Income 5,000,000
Repayment of Government Grant Jan 1 Cash 6,000,000
Deferred grant income 6,000,000 Dec. 31
A government grant becomes repayable Depreciation 2,500,000
because of noncompliance with conditions Dec. 31 Deferred grant inc. 2,000,000 Accumulated dep. 2,500,000
shall be accounted for as a change in Grant income (6M/3) 2,000,000
accounting estimate. Deferred grant income 500,000
Grant income (5M/10) 500,000
 Dec. 31 Depreciation 2,000,000
(20M/10) Accu. Dep. 2,000,000
2022 - Dec. 31 2022 – Dec. 31
Depreciation 2,500,000 Depreciation 2,000,000 Grant of interest-free loan
Accumulated dep. 2,500,000 Accumulated Dep. 2,000,000
A forgivable loan from the government is
Deferred grant income 500,000 2023 treated as a government grant when there
Grant income (5M/10) 500,000 Jan. 1 is reasonable assurance that the entity will
Building 5,000,000 meet the terms for forgiveness of the loan.
2023 Cash 5,000,000
Jan. 1 PAS 20, paragraph 10, provides that the
Deferred grant income 4,000,000 Dec. 31 benefit of a government loan with a NIL or
Loss on repayment of 1,000,000 Depreciation 3,500,000 below-market rate of interest is treated as a
Of grant Accumulated Dep. 3,500,000 government grant.
Cash 5,000,000 - It further provides that the benefit is
Depreciation on original measured as the difference between
Dec. 31 carrying amount 2,000,000 face amount and the present value
Depreciation 2,500,000 Depreciation on increased of the loan.
Accumulated Dep. 2,500,000 carrying amount 1,500,000
(5M/10 x 3 years)
Building 25,000,000 Total dep. For 2023 3,500,000
Accumulated depreciation (7,500,000)
(2,500,000 x 3) Building 25,000,000
Accumulated depreciation (7,500,000)
Carrying amount 17,500,000 (2,000,000 + 2,000,000
As of Dec. 31, 2023 + 2,500,000)
Carrying amount 17,500,000
Deduction from asset approach As of Dec. 31, 2023

2021 - Jan. 1 *Observe that the carrying amount after

Building 25,000,000 repayment of grant must be the same
Cash 25,000,000 whether deferred income approach or
deduction from asset approach is used.
Cash 5,000,000
Building 5,000,000