CHAPTER
BLUE NOTES
18 S
L
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.(PAS 20)
CLASSIFICATIONS OF GOVERNMENT GRANTS
Grants related to assets – these are government grants whose primary condition is that an entity qualifying for them
shall purchase, construct or otherwise acquire long-term assets.
Grants related to income – these are government grants other than those related to assets.
Recognition
Government grants, including nonmonetary grants at fair value, shall be recognized when there is reasonable
assurance that:
The entity will comply with the conditions attaching to them
The grants will be received
Accounting for Government Grants
Grants in recognition of specific expenses Recognized as income over the period of related
expense
Grants related to depreciable assets Recognized as income over the periods and in
proportion to the depreciation of the related assets
Grants related to nondepreciable assets requiring Recognized as income over the periods which bear the
fulfillment of certain conditions cost of meeting the conditions
Grants that become receivable as compensation for Recognized as income in the period in which it becomes
expenses or losses already incurred or for giving receivable.
immediate financial support
REPAYMENT OF GOVERNMENT GRANT
A government grant that becomes repayable, for example because conditions of receipt have not been met shall
be accounted for as a change in accounting estimate.
Repayment of a grant related to income shall be applied first against any unamortized deferred income and any
excess shall be recognized immediately as an expense.
Repayment of a grant related to an asset shall be recorded by increasing the carrying amount of the asset. The
cumulative additional depreciation that would have been recognized to date in the absence of the grant shall be
recognized immediately as an expense.
Theory of Accounts Practical Accounting 1
68 USL Blue Notes Chapter 18 – Government Grants
Government Assistance
Government assistance is an action by government designed to provide an economic benefit specific to an
entity or range of entities qualifying under certain criteria.
Illustrative Problems
1. An entity receives a grant of 15, 000, 000 from the national government for the purpose of defraying safety and
environmental expenses over the period of three years. The safety and environmental expenses will be incurred by the
entity as follows:
First year 2, 000, 000
Second year 3, 000, 000
Third year 5, 000, 000
10, 000 ,000
First year
Cash 15, 000, 000
Deferred income – government grant 15, 000, 000
Deferred income – government grant 3, 000, 000
Income from government grant 3, 000, 000
(2/10 x 15, 000, 000)
Environmental expenses 2, 000, 000
Cash 2, 000, 000
Second year
Deferred income – government grant 4, 500, 000
Income from government grant 4, 500, 000
(3/10 x 15, 000, 000)
Environmental expenses 3, 000, 000
Cash 3, 000, 000
Third year
Deferred income – government grant 7, 500, 000
Income from government grant 7, 500, 000
(5/10 x 15, 000, 000)
Environmental expenses 5, 000, 000
Cash 5, 000, 000
2. An entity receives a grant of 50, 000, 000 from the Australian government for the acquisition of a chemical facility
with an estimated cost of 80, 000, 000 and useful life of 5 years.
Accordingly, the grant of 50, 000, 000 is allocated as income over 5 years.
Practical Accounting 1 Theory of Accounts
Chapter 18 – Government Grants USL Blue Notes 69
First year
Cash 50, 000, 000
Deferred income – government grant 50, 000, 000
Building 80, 000, 000
Cash 80, 000, 000
First year to Fifth year entries
Depreciation expense 16, 000, 000
Accumulated Depreciation – building 16, 000, 000
(80, 000, 000 / 5years)
Deferred income – government grant 10, 000, 000
Income from government grant 10, 000, 000
(50, 000, 000 / 5 years)
3. An entity is granted a large tract of land in Mindanao by the national government. The fair value of the land is 60,
000, 000. The grant requires that the entity shall construct a refinery on the site. The cost of the refinery is estimated
to be 100, 000, 000 and useful life is 20 years.
Accordingly, the 60, 000, 000 is allocated over 20 years.
First year
Land 60, 000, 000
Deferred income – government grant 60, 000, 000
Refinery 100, 000, 000
Cash 100, 000, 000
First year to 20th year
Depreciation expense 5, 000, 000
Accumulated depreciation – refinery 5, 000, 000
(100, 000, 000 / 20 years)
Deferred income – government grant 3, 000, 000
Income from government grant 3, 000, 000
(60, 000, 000 / 20 years)
4. An entity receives a grant of 50, 000, 000 from the USA government to compensate for massive losses because of a
recent earthquake.
Cash 50, 000, 000
Income from government grant 50, 000, 000
Theory of Accounts Practical Accounting 1
