Chapter 25 — Government Grants

CHAPTER 25
GOVERNMENT GRANTS
Chapter Overview and Objectives

After this chapter, readers are expected to comprehend:

The difference between government grants and government assistance.
The initial measurement of government grants.
eh ae ee

The subsequent measurement of government grants.

The presentation of government grants.
The disclosure of government assistance.

INTRODUCTION - ENTITY AND THE GOVERMENT

Governments may have actions that affect the affairs of an entity for a variety of
reasons. For this chapter, the discussion focuses on how an entity benefits from the
government's involvement in its operations.
Depending on its policies, the government may give financial or non-monetary
assistance to an entity to promote or boost the industry in which that entity belongs
to. A government may also give financial help to entities during an economic crisis
or after a major catastrophe. All of these will be the subject of the discussion in this
chapter.
In recent years, the topic of government grants and assistance came to the spotlight
due to government interventions in reviving economies after the recent
coronavirus pandemic.

FORMS OF GOVERNMENT BENEFITS TO AN ENTITY

PAS 20, Accounting for Government Grants and Disclosure of Government Assistance
classifies two major categories of government involvement in the operations of an
entity, namely government grants and other government assistance, which are
differentiated as follows:
Government Grants Other Government Assistance
Assistance by the government in the | Action by the government designed to
form of transfers of resources to an | provide an economic benefit specific to
entity in return for past or future | an entity or range of entities qualifying
compliance with certain conditions | under certain criteria
relating to the operating activities of the
entity.

The readers should take note that the main factor differentiating government
grants from government assistance is that in government grants there is an
existence of a reasonably measurable transfer of resources to an entity.

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 Chapter 25 — Government Grants

GOVERNMENT GRANTS
Primary examples of government grants include government's financial assistance,
provision of non-monetary assets, government's loan at below the market rates, and
government's loan that may be waived depending on the conditions (i.e. forgivable
loans). These will be the topic of the next section in this chapter.
Government grants exclude the following:
a. forms of government assistance which cannot have a value reasonably placed
upon them; and
b. transactions with the government which cannot be distinguished from the
normal trading transactions of the entity.

Examples of exclusions to government grant include but are not limited to:
a. employee training benefits;
b. provision of technical knowledge; and
c. sales to the government.

Most of the time, if an action of a government does not qualify as a government grant,
it will be instead classified as other government assistance. Government assistance
will be discussed later in the chapter.

CLASSIFICATIONS OF GOVERNMENT GRANTS

For accounting purposes, government grants can be classified into grants related
to assets and grants related to income, which can be differentiated as follows:

Grants Related to Assets g Grants Related to Income

Government grants whose primary | Government grants other than those
condition is that an entity qualifying for | related to assets
them should purchase, construct, or
otherwise acquire long-term assets

These classifications will matter later on when recording and presenting the
government grants in the financial statements.

RECOGNITION OF GOVERNMENT GRANTS

Government grants, including non-monetary grants at fair value, shall not be
recognized until there is reasonable assurance that:
a. the entity will comply with the conditions attaching to them; and
b. the grants will be received. [PAS 20.7].

Receipt of a grant does not provide conclusive evidence that the conditions attaching
to the grant have been or will be fulfilled. [PAS 20.7].

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 Chapter 25 — Government Grants

INITIAL MEASUREMENT OF GOVERNMENT GRANTS

Government grants are measured depending on how they were received (or to be
received) from the government:

Mode of Receipt Measurement

Financial or monetary grant} Amount received or receivable
Fair value of the non-cash asset. However, the entity
Non-monetary grant may choose to record the asset and the government
grant at nil amounts.
Forgivable loan Proceeds from the loan.
The difference between the proceeds received and
Belowsmarket interest loan the fair value of the loan, as required by PFRS 9.

Forgivable loans are loans which the lender undertakes to waive repayment of
under certain prescribed conditions. [PAS 20,3]. A forgivable loan from government
is treated as a government grant when there is reasonable assurance that the entity
will meet the terms for forgiveness of the loan. [PAS 20.10]. This, in substance, is
similar to a financial or monetary grant.

SUBSEQUENT ACCOUNTING FOR GOVERNMENT GRANTS

Subsequent accounting for government grants will depend on whether there is/are
condition/s that an entity is required to meet in relation to the grant:

Conditionality | Accounting © ;
These grants are usually given:
a. as compensation for expenses or losses already incurred; or
Non- b. for the purpose of giving immediate financial support to the
conditional entity with no future related costs.
grants
These grants shall be recognized in profit or loss in the period
during which they become receivable.
Initially, these grants are not immediately recognized in profit or
loss. Subsequently, these shall be recognized in profit or loss ona
systematic basis over the periods in which the entity recognizes as
expenses the related costs for which the grants are intended to
compensate. Guidelines on specific circumstances are as follows:
Conditional a. Grants related to assets - usually based on the proportion
of
mae depreciation
expense recognized by the entity. Consequently, the
amounts recognized in profit or loss will depend on the
depreciation method applied as discussed in Chapter 23.
b. Grants related to income - based on the proportion of specific
expenses expected to be incurred.

These rules are provided since recognition of government grants in profit or loss
on a receipts basis is not in accordance with the accrual accounting assumption.

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 Chapter 25 — Government Grants

RECORDING AND PRESENTATION OF GOVERNMENT GRANTS

Presentation of conditional government grants will depend on their classification
into either grants related to asset or grants related to income, as previously
discussed:

Classification | Presentation Alternatives

The government grant can be presented using either of the
following:
1, Recorded as a separate liability (gross) - In this alternative:
a. An entity will report a higher total assets and total liabilities
but has no effect in total equity.
b. Depreciation expense is based on the gross depreciable
amount of the related asset.
c. Income from government grant shall be recognized
Grants related separately.
to assets 2. Recorded as a deduction from the cost of the related asset
(net) - In this alternative:
a. An entity will report a lower total assets and total liabilities
but has no effect in total equity.
b. Depreciation expense is based on the depreciable amount of
the related asset less the amount of the grant (i.e., net of the
related income from government grant).

The readers should take note that the net amount of profit or loss
from the grant is the same under both alternatives.
These grants are always recorded as separate liabilities since
there is no related asset from which they can be deducted. Instead,
the presentation alternatives are the following:
1. Presented as separate income (gross) - In this alternative:
a. Expenses incurred are reported at their gross amounts.
Grants related b. Income from government grant is separately presented.
to income 2. Presented as direct deduction from related expenses (net)
- In this alternative, expenses incurred are reported net of
related supposed income from government grant.

The readers should take note that the net amount of profit or loss
form the grant is the same under both alternatives.

ILLUSTRATIONS - ACCOUNTING FOR GOVERNMENT GRANTS

After understanding the concepts, it is now the right time to apply these concepts
in accounting for government grants through illustrations.
Illustration 1 - Monetary Grant; Unconditional Grant. Due to recent coronavirus
pandemic, FLYAWAY Airline Company received a financial aid amounting to
P5,000,000 from the government of its home country to be used in covering its
losses during the year. No other conditions are attached in the financial aid.
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 Chapter 25 —- Government Grants

In this case, the government grant shall be initially measured at P5,000,000.

Additionally, the grant shall be recognized immediately as income in profit or loss
when the grant becomes receivable since the related expenses (losses) were
already recognized and there were no further conditions:
Receivable - government grant 5,000,000
Income from government grant 5,000,000

Illustration 2 - Monetary Grant; Conditional Grant. At the beginning of 2023,

ESTROGEN Company received P2,400,000 from the government. The Company is
required to utilize the funds to purchase a machinery that shall be used in its tuba-
making operations. On the same date, it was able to acquire the required machinery
for P6,000,000, with an estimated useful life of six years. Straight-line method shall
be used in depreciating this machinery.
In this case, the following analyses are relevant:
a. The government grant shall be measured at P2,400,000 or equal to the amount
received.
b. Since there are requirements to acquire an asset, the grant shall be classified as
grant related to asset.
c. The grant shall be reported in profit or loss at annual amounts of P400,000
(P2,400,000/6 years useful life of the machinery).
d. Recording of the grant can be either of the following alternatives:
Liability Method Deduction Method
On January 1, 2023, the acquisition of On January 1, 2023, the acquisition of
the machinery and the receipt of the the machinery and the receipt of the
grant shall be recorded as follows: grant shall be recorded as follows:

Machinery 6,000,000 Machinery 6,000,000

Cash 6,000,000 Cash 6,000,000

Cash 2,400,000 Cash 2,400,000

Liab. from gov't grant 2,400,000 Machinery 2,400,000
Since the machinery has an initial cost Since the machinery has an initial cost
of P6,000,000, annual depreciation of of P3,600,000 (P6M - P2.4M), annual
-P1,000,000 (P6M/6 yrs.) shall be depreciation of P600,000 (P3.6M/6
recognized as follows: yrs.) shall be recognized as follows:
Depreciation expense 1,000,000 Depreciation expense 600,000
Accum. depreciation 1,000,000 Accum. depreciation 600,000
Annual recognition of income from No corresponding journal entry since
government grant is recorded as: the depreciation expense is already net
of the supposed income from
Liab. from gov't grant 400,000 government grant,
Income from gov't grant 400,000
Note: The effect to profit or loss under liability method is net decrease of P600,000 (P1M - P400k).
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 Chapter 25 — Government Grants

Under the liability method, the liability from government grant will have the
following balances at the end of each year:
Income Balance of
Date recognized __ the liability
Jan. 1, 2023 P2,400,000
Dec. 31, 2023 P400,000 2,000,000
Dec. 31, 2024 400,000 1,600,000
Dec. 31, 2025 400,000 1,200,000
Dec. 31, 2026 400,000 800,000
Dec. 31, 2027 400,000 400,000
Dec. 31, 2028 400,000 -

Illustration 3 - Non-Monetary Grant; Conditional Grant. On January 1, 2022,

GARMENTS Company received a land with a fair value of P7,000,000 from the
government but with a book value of P8,000,000 in the government’s records. The
Company is required to construct a factory for the production of public-school
children’s uniforms over the estimated useful life of the factory building. These
uniforms will be exclusively procured by the government, at their fair values, in
equal annual quantities. On January 1, 2023, the Company constructed a factory
with useful life of 10 years at a total cost of P9,000,000.
In this case, the following analyses are relevant:
a. The government grant shall be measured at P7,000,000 or equal to the fair
value of the land received. The government procurement of school uniforms is
neither a government grant nor a government assistance.
b. Since there are requirements to acquire an asset, the grant shall be classified as
grant related to asset.
c. The grant shall be reported in profit or loss at annual amounts of P700,000
(P7,000,000/10 years useful life of the factory).
d. Recording of the grant can be either of the following alternatives:

Liability Method Deduction Method

On January 1, 2022, the receipt of the On January 1, 2022, the receipt of the
grant shall be recorded as follows: grant shall be recorded as follows:
Land 7,000,000 Land 7,000,000
Liab. from gov't grant 7,000,000 Liab. from gov't grant 7,000,000

The completion of the factory on Note: Since the related factory is still
January 1, 2023 shall be recorded as under construction, the credit is
follows: temporarily made in a liability account.
Factory 9,000,000 The completion of the factory on
Construction in progress 9,000,000 January 1, 2023 shall be recorded as
follows: —

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 Chapter 25 — Government Grants

Factory 9,000,000
Construction in progress 9,000,000

Liab.from gov't grant 7,000,000

Building 7,000,000
Since the factory has an initial cost of Since the factory has an initial cost of
P9,000,000, annual depreciation of P2,000,000 (P9M - P7M), annual
P900,000 (P9M/10 yrs.) shall be depreciation of P200,000 (P2M/10 yrs.)
recognized as follows: shall be recognized as follows:

Depreciation expense 900,000 Depreciation expense 200,000

Accum. depreciation 900,000 Accum. depreciation 200,000
Annual recognition of income from No corresponding journal entry since
government grant is recorded as: the depreciation expense is already net
of the supposed income _ from
Liab. from gov't grant 700,000 government grant.
Income from gov'tgrant 700,000
Note: The effect to profit or loss under liability method is net decrease of P200,000 (P900K - P400K).

Illustration 4. On January 1, 2023, TOLEPAN Company received P9,000,000 cash

from the government that shall be used in its reforestation activities for the next
three years. There is a reasonable assurance that the Company will meet this
condition and projects the following costs of compliance:

2023 2024 2025

P5,000,000 P7,000,000 P4,000,000

In this case, the following analyses are relevant:

a. The government grant shall be measured at P9,000,000 or equal to the cash
received.
b. Since there are NO requirements to acquire or construct an asset, the grant shall
be classified as grant related to income.
c. The grant shall be reported in profit or loss in accordance with the following
schedule:
[A] x P9M
Amounts to be
Compliance [A] recognized in
costs Proportion profitorloss
2023 P5,000,000 5/16 P2,812,500
2024 7,000,000 7/16 3,937,500
2025 4,000,000 4/16 2,250,000
P16,000,000 16/16 P9,000,000

d. Recording of the grant can be either of the following alternatives (assuming the
expected compliance costs are equal to the actual compliance costs):

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 Chapter 25 - Government Grants

Gross Method Net Method se]

On January 1, 2023, the receipt of the On January 1, 2023, the receipt of the
grant shall be recorded as follows: grant shall be recorded as follows:
Cash 9,000,000 Cash 9,000,000
Liab. from gov't grant 9,000,000 Liab. from gov’tgrant 9,000,000
To recognize the expenses incurred To recognize the expenses incurred
during 2023 and the related income during 2023, netted with the supposed
from government grant: income from government grant:
Expenses 5,000,000 Expenses 5,000,000
Cash 5,000,000 Cash 5,000,000

Liab. from gov'tgrant 2,812,500 Liab. from gov't grant 2,812,500

Income from gov't grant 2,812,500 Expenses 2,812,500
To recognize the expenses incurred To recognize the expenses incurred
during 2024 and the related income during 2024, netted with the supposed
from government grant: income from government grant:
Expenses 7,000,000 Expenses 7,000,000
Cash 7,000,000 Cash 7,000,000
Liab. from gov’tgrant 3,937,500 Liab. from gov't grant 3,937,500
Income from gov’tgrant 3,937,500 Expenses 3,937,500
To recognize the expenses incurred To recognize the expenses incurred
during 2025 and the related income during 2025, netted with the supposed
from government grant: income from government grant:

Expenses 4,000,000 Expenses 4,000,000

Cash 4,000,000 Cash 4,000,000
Liab. from gov’tgrant 2,250,000 Liab. from gov'tgrant 2,250,000
Income from gov't grant 2,250,000 Expenses 2,250,000

These can be summarized as follows:

Gross Method Net Method
Expenses, 2023 P5,000,000 P2,187,500
Less: Income, 2023 2,812,500 -
Net expenses, 2023 P2,187,500 2,187,500
Expenses, 2024 P7,000,000 P3,062,500
Less: Income, 2024 3,937,500 -
Net expenses, 2024 P3,062,500 P3,062,500

Expenses, 2025 P4,000,000 =P 1,750,000

Less: Income, 2025 2,250,000 -
Net expenses, 2025 P1,750,000 __P 1,750,000

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 Chapter 25 — Government Grants

e. Lastly, the liability balances at the end of each year, under both methods are
the following:
Income Balance of
Date recognized the liability
Jan. 1, 2023 P9,000,000
Dec. 31,2023 2,812,500 6,187,500
Dec. 31,2024 3,937,500 2,250,000
Dec. 31,2025 2,250,000

Illustration 5 - Below-Market Interest Loan. On January 1, 2023, ALBINO

Company received a P7,000,000, noninterest-bearing loan from the government,
provided that it will use it for the purchase of a specialized equipment. The term of
the loan is equal to the useful life of the equipment. Market rate as of that date was
9%. Total cost of the equipment was P9,000,000 and estimated to be used for four
years.
In this case, the following accounting procedures are relevant:
a. The government grant shall be measured at P2,041,025, which is determined
as follows:
Present
PV Factor of PV Factor Cash Flow value
Single payment for 4 periods at9% 0.708425 7,000,000 P4,958,975
Initial carrying amount of the loan P4,958,975
Less: Proceeds received 7,000,000
Initial amount of government grant P2,041,025

This initial amount of government grant is also equal to the initial amount of
discount on loans payable.

b. Since there is a requirement to construct an asset, the grant shall be classified as

grant related to asset.

c. Inthe academe, the amount of income from government grant is equal to the
amount of amortization of discount during the same period. The related
amortization table of the loan is as follows:
Discount
Interest Amorti- Carrying on Loans
Date Payments Expense zation Amount Payable
Jan. 1, 2023 4,958,975 2,041,025
Dec. 31, 2023 - 446,308 446,308 5,405,283 1,594,717
Dec. 31, 2024 - 486,475 486,475 5,891,758 1,108,242
Dec. 31, 2025 530,258 530,258 6,422,016 577,984
Dec. 31,2026 7,000,000 577,984 6,422,016

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 Chapter 25 — Government Grants

d. For simplicity’s sake, only the liability method is presented for the journal
entries. To record the receipt of the loan and the acquisition of the related
equipment on January 1, 2023:

Cash 7,000,000
Discount on loans payable 2,041,025
Liability from government grant 2,041,025
Loans payable 7,000,000

Equipment , 9,000,000
Cash 9,000,000

As of December 31, 2023, the entries to record the recognition of interest

expense, income from government grant, and depreciation expense,
respectively, were:

Interest expense 446,308

Discount on loans payable 446,308
Liability from government grant 446,308
Income from government grant 446,308
Depreciation expense (P9M/4 yrs.) 2,250,000
Accumulated depreciation 2,250,000

As of December 31, 2024, the entries to record the recognition of interest

expense, income from government grant, and depreciation expense,
respectively, were:
Interest expense 486,475
Discount on loans payable 486,475
Liability from government grant 486,475
Income from government grant 486,475

Depreciation expense (P9M/4 yrs.) 2,250,000

Accumulated depreciation 2,250,000
e. Based on the entries above, it can be deduced that the carrying amount of the
liability from government grant is equal to the corresponding balance of
discount on loans payable in the amortization table.
Consequently, the government grant portion of the below-market interest loan
will have no net effect in the recipient entity’s profit or loss.
The approach applied in practice, which is the more correct approach, is discussed
in the Appendix at the end of the chapter,

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 Chapter 25 — Government Grants

REPAYMENT OF GOVERNMENT GRANTS

A government grant that becomes repayable shall be accounted for as a change in
accounting estimate (i.e., accounted prospectively). [PAS 20.32]. Specific accounting
procedures will depend on the classification of the grant and the method of
recording:
Classification | Accounting for repayment
Grant Repayment shall be applied first against any balance of liability from
relatedto | government grant recognized in respect of the grant. Any excess of
income repayment shall be recognized in profit or loss.
1. The entity applied the liability method
Repayment shall be appliedfirst against any balance of liability
from government grant with respect to the repaid grant. Any
excess of repayment shall be recognized in profit or loss.
Grant
related asset | 2. The entity applied the deduction method
The carrying amount of the related asset shall be increased by the
amount of the government grant repayment. The amount of
additional depreciation that was not recognized because of the
grant shall be immediately recognized in profit or loss.

Illustration 6 - Grant Related to Income. On January 1, 2023, SUNSET Company

received P3,000,000 from the government to be used for cleaning efforts after a
major oil spill damaged some of its beaches. The amounts and timing of clean-up
costs are as follows:
2023 | 2024 2025
Clean-up costs P3,500,000 P3,000,000 P1,500,000

Based on these expected costs, the pattern of recognizing the grant as income is as
follows:
[A] x P3M
Amount to be
Compliance [A] recognized in
costs Proportion profit or loss
2023 P3,500,000 3.5/8 P1,312,500
2024 3,000,000 3/8 1,125,000
2025 1,500,000 1.5/8 562,500
P8,000,000 8/8 P3,000,000

Assuming that the expected costs of compliance become equal with the actual costs
of compliance, the balances of liability from government grant at the end of each
year are as follows:

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 Chapter 25 — Government Grants

Income Balance of
Date recognized the liability
Jan. 1, 2023 P3,000,000:
Dec. 31,2023 P1,312,500 1,687,500
Dec. 31, 2024 1,125,000 562,500
Dec. 31, 2025 562,500 -

Assuming that on March 1, 2025, when the balance of the liability is P562,500, the
Company failed to execute some of the conditions of the grant. As a result, the
Company became obligated to repay the whole P3,000,000 of grant that it had
received initially. The following entry shall be made to record this repayment:
Liability from government grant 562,500
Loss on gov't grant repayment 2,437,500
Cash 3,000,000

The readers should take note that the amount of loss recognized is equal to
cumulative amounts previously recognized as addition to profit or loss. In this
illustration, the loss of P2,437,500 is equal to the sum of P1,312,500 income
recognized in 2023 and P1,125,000 income recognized in 2024.

Illustration 7 - Grant Related to Asset. On January 1, 2023. CULTIVATION

Company received a P2,500,000 grant from the government. The grant should be
used as a supplement in acquiring a high-tech farming equipment as part of the
government's initiative on promoting industrialization of the agricultural sector.
The Company acquired the required farming equipment on the same date for
P7,000,000. Estimated useful life is five years and straight-line method is to be used.
On January 2, 2025, the Company breached the conditions of the grant and thus
obligated to repay the P2,500,000 grant.
Required: Record the repayment of the grant assuming:
1. The government grant is recorded as a separate liability.
2. The government grant is recorded as a deduction from equipment.

Scenario 1 - Grant is Recorded as a Separate Liability

The annual recognition of income from government grant is P500,000
(P2,500,000/5-year useful life of the related equipment). After two years, as of
December 31, 2024, the liability from government grant will have a P1,500,000
balance [P2,500,000 - (P500,000 x 2 years from 2023 to 2024)].
On January 2, 2025, the repayment shall be recorded as follows:
Liability from government grant 1,500,000
Loss on gov't grant repayment 1,000,000
Cash 2,500,000

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 Chapter 25 - Government Grants

The loss of P1,000,000 is equal to the sum of previously recognized income from
government grant: P500,000 recognized in 2023 and P500,000 recognized in 2024.
In addition, the repayment did not affect the Equipment account.
Scenario 2 - Grant is Recorded as a Deduction from Equipment
In this case, the equipment’s initial measurement is P4,500,000 (P7M - P2.5M) and
the related annual depreciation is P900,000 (P4.5M/5 years). The related lapsing
schedule is as follows:
[B] [A] - [B]
Annual [A] Accumulated Carrying
Date Depreciation Cost Depreciation Amount
Dec. 31, 2023 P900,000 P4,500,000 P900,000 P3,600,000
Dec. 31, 2024 900,000 4,500,000 1,800,000 2,700,000
Dec. 31, 2025 900,000 4,500,000 2,700,000 1,800,000
Dec. 31, 2026 900,000 4,500,000 3,600,000 900,000
Dec. 31, 2027 900,000 4,500,000 4,500,000 ~

In recording the repayment on January 2, 2025, the following guidelines may be

followed:
1. First, increase the equipment account by the amount of repayment:
Equipment 2,500,000
Cash 2,500,000

After this entry, the carrying amount equipment will be:

Equipment, carrying amount before repayment P2,700,000

Add: Amount of repayment 2,500,000
Equipment, carrying amount after repayment P5,200,000

2. Next, determine the supposed carrying amount of the equipment assuming that
there was no government grant received. In the absence of the government grant,
the equipment is subject to P1,400,000 annual depreciation (P7,000,000/5-year
useful life). As of January 2, 2025 the equipment’s carrying amount shall be:
Cost as if no gov't grant P7,000,000
Less: Accumulated depreciation (P1.4Mx2yrs.) _ (2,800,000)
Carrying amount asJf no gov't grant, 1/2/25 P4,200,000

3. Compare, the carrying amount of the equipment after repayment of P5,200,000

against its carrying amount of P4,200,000 as if no there. was no government
grant, both as of January 2, 2025:
Equipment, carrying amount after repayment P5,200,000
Less: Carrying amount as if no gov't grant (4,200,000)
Additional depreciation expense in 2025 P1,000,000

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 Chapter 25 — Government Grants

The additional depreciation expense shall be recorded for 2025 as follows:

Depreciation expense 1,000,000
Accumulated depreciation 1,000,000

The amount of additional depreciation is the same amount as the loss on

repayment of government grant in Scenario 1. After the recording of this
additional depreciation, the equipment’s carrying amount will now become
P4,200,000.

Moving forward, the equipment is now subject to P1,400,000 annual

depreciation. For the year 2025, however due to the repayment, total
depreciation expense is P2,400,000 (P1,400,000 + P1,000,000).

USING DIFFERENT DEPRECIATION METHODS FOR GRANTS RELATED TO ASSET

Since the recognition in profit or loss of almost every grant related to asset is based
on the amount of depreciation, the method of depreciation will have a profound
effect in the amounts of government grant that will be recognized in profit or loss.
In this case, the portion of government grant to be recognized in profit or loss is
based on the proportion of the depreciation expense relative to the total depreciable
cost of the asset.
Illustration 8. On October 1, 2022, an entity received a P3,000,000 government
which shall be used in constructing a specialized machinery. The construction was
finished on January 1, 2023 for a total cost of P5,000,000. Estimated useful life is
five years while residual value is estimated to be P500,000. Required: Under each
of the following independent scenarios, determine the amount of government grant
that shall be recognized in profit or loss each year:
1. Straight-line method is to be used in depreciating the machinery.
2. SYD method is to be used in depreciating the machinery.
3. Double-declining balance method is to be used in depreciating the machinery.

Scenario 1 - Straight-line method

Annual amount of government grant to be recognized in profit or loss is P600,000
(P3,000,000/5-year useful life).
&
Scenario 2 - SYD method
In this scenario, the amount of government grant to be recognized in profit or loss
is based on the fractions to be used in computing the depreciation of the machinery:

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 Chapter 25 - Government Grants

([A] x P3M) Amt.

Remaining [A] to be recognized
Year Year/s Fraction in profit or loss
2023 5 5/15 P1,000,000
2024 4 4/15 800,000
2025 3 3/15 600,000
2026 2 2/15 400,000
2027 1 1/15 200,000
15 15/15 P3,000,000

Scenario 3 - Double-declining balance method

In this scenario, the relevant double-declining rate is 40% [(1/5 years)
x 200%]. The
related lapsing schedule of the equipment is as follows:

[A] [B]=[A] x 40% [Cc] [A] - [C]

Beg.Carrying Depreciation Accumulated End. Carrying
Date Amount Expense __ Depreciation Amount
Dec. 31, 2023 P5,000,000 P2,000,000 P2,000,000 P3,000,000
Dec. 31, 2024 3,000,000 1,200,000 3,200,000 1,800,000
Dec. 31, 2025 1,800,000 720,000 3,920,000 1,080,000
Dec. 31, 2026 1,080,000 432,000 4,352,000 648,000
Dec. 31, 2027 648,000 *148,000 4,500,000 500,000
*P148,000 = P648,000 - P500,000. The reason for this is that the minimum carrying
amount of the PPE should be equal to its residual value.
Next, state the depreciation expense per year as a percentage of the total depreciable
cost. This percentage is multiplied to the P3,000,000 amount of government grant
to determine the amount to be recognized in the profit or loss for each year:
[A] ([A] x P3M) Amt. to
Depreciation Percentage be recognized in
Year Expense (%) profit or loss
2023 P2,000,000 44.44% P1,333,333
2024 1,200,000 26.67% 800,000
2025 720,000 16.00% 480,000
2026 432,000 9.60% 288,000
2027 148,000 3.29% 98,667
P4,500,000 100% P3,000,000

The readers should take note that for the year 2023, 44.44% = P2M/P4.5M; for the
year 2024, 26.67% = P1.2M/P4,5M; and so on.

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 Chapter 25 — Government Grants

GOVERNMENT GRANTS RELATED TO BIOLOGICAL ASSETS

Aside from the usual monetary grants, governments may also transfer biological
assets to an entity. Accounting procedures will depend on the following factors:
a. whether there are attached conditions; and/or
b. whether the fair value less costs to sell (FVLCTS) of the biological asset is reliably
measurable.

The following are the accounting procedures if the FVLCTS of the biological asset
granted to the entity CAN be reliably measured:
Scenario Accounting Procedures under PAS 41, Agriculture
The grant is The government grant shall be measured at the FVLCTS of the
unconditional biological asset and shall be recognized in profit or loss when
(no conditions) _| the grant becomes receivable. _
The government grant shall be measured at the FVLCTS of the
biological asset and shall be recognized in profit or loss when
the conditions attached to the grant have been met.
The grant is t nt
conditional In other words, generally, no portion of the governmen gra
(with attached is periodically recognized in profit or loss until all the
conditions) conditions have been met.
However, if the terms of the grant allow part of it to be retained
according to the time that has elapsed, the entity recognizes
that part in profit or loss as time passes.

If the FVLCTS of the granted biological asset CANNOT be reliably measured,

the accounting procedures under PAS 20, as lengthily discussed earlier in the
chapter, shall be followed. The reason for this treatment is that in these cases, the
biological asset is measured at its cost less accumulated depreciation and any
accumulated impairment losses.
Illustration 9, On January 1, 2023, an entity received milking cows, with total
FVLCTS of P2,400,000, from the government. After the initial recognition, the
milking cows’ FVLCTS can be measured reliably.
Required: Under each of the following independent scenarios, determine the
relevant accounting procedures for the government grant:
1. The grant is unconditional.
2. The grant requires the entity to use the milking cows until December 31, 2025
in producing milk to be sold at a very cheap price. Failure to meet this
requirement will result to the government’s forfeiture of all the milking cows.
3. The grant requires the entity to use the milking cows until December 31, 2025
in producing milk to be sold at a very cheap price. Failure to meet this
requirement will result to the government's forfeiture of 60% of the milking
cows.

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 Chapter 25 - Government Grants

Scenario 1
In this scenario, the P2,400,000 government grant shall be recognized as increase
in profit or loss on January 1, 2023. Journal entry to record the receipt of the asset
on the same date is as follows:
Biological assets 2,400,000
Income from government grant 2,400,000

Scenario 2
In this scenario, the initial receipt of the biological asset on January 1, 2023 shall be
recorded with a corresponding increase in liability since there is a condition that
needs to be complied with. Related journal entry is as follows:
Biological assets 2,400,000
Liability from government grant 2,400,000

It is only on December 31, 2025 that the grant is recognized in profit loss since
the condition of using the milking cows in producing milk for three years (i.e.,
January 1, 2023 to December 31, 2025) has been met. Related journal entry on this
date is as follows:
Liability from government grant 2,400,000
Income from government grant 2,400,000

Scenario 3
Similar to Scenario 2, the receipt of the biological asset on January 1, 2023 shall be
credited to a P2,400,000 liability from government grant since there is a condition
that needs to be complied with.
However, since only 60% of the grant is required to be returned to the
government in case the condition has not been met, the 40% portion of the grant
will be retained by the Company, whether the condition has been met or not.

This P960,000 (P2.4M x 40%) portion shall be recognized in equal amounts of

P320,000 (P960,000/3 years) during each of the next three years, from 2023 to
2025. Journal entry to be made every December 31 of each year from 2023 to
2025 is as follows:
Liability from government grant 320,000
Income from government grant 320,000

Ultimately, on December 31, 2025, the remaining 60% portion or P1,440,000

(P2.4M x 60%) shall be recognized in profit or loss through the following entry:
Liability from government grant 1,440,000
Income from government grant 1,440,000

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 Chapter 25 — Government Grants

To summarize, under this scenario, the P2,400,000 liability from the government
grant is recognized in the Company’s profit or loss as follows:

2023 2024 2025 Total

P320,000 P320,000 *P1,760,000 P2,400,000
*Note: P1,760,000 = P320,000 + P1,440,000

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
following are excluded from the definition of government grants but considered as
forms of government assistance:
a. assistance which cannot have a value reasonably placed upon them (e.g., free
technical or marketing advice, and provision of guarantee)
b. transactions with the government procurement policy that is responsible for a
portion of the entity’s sales (e.g., government procurement policy)
Government assistance for the purpose of PAS 20 does not include benefits
provided only indirectly through action affecting general trading conditions, such
as the following:
a. the provision of infrastructure in development areas.
b. the imposition of trading constraints on competitors. [PAS 20.3].

APPENDIX - ACCOUNTING FOR BELOW-MARKET INTEREST LOAN IN PRACTICE

Regarding the below-market interest loan, the true compliance costs with the
grant is not the amount of interest expense but the depreciation of the related
depreciable asset. Interest expense is just an incidental cost in this case.
For ALBINO Company (Illustration 5), since the depreciation for the specialized
equipment is made on straight-line basis, the government grant shall be recognized
in profit or loss at annual amount of P510,256 (P2,041,025/4 years). This concept
is what is applied in actual practice. In addition, this approach accommodates the
recording alternatives:

Liability Method Deduction Method

On January 1, 2023, to record the On January 1, 2023, to record the
receipt of the government grant and receipt of the government grant and
the immediate acquisition of the the immediate acquisition of the
equipment: equipment:
Cash 7,000,000 Cash 7,000,000
Disconloan payable _— 2,041,025 Disconloan payable 2,041,025
Liab. from gov't grant 2,041,025 Equipment 2,041,025
Loans payable 7,000,000 Loans payable 7,000,000

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 Chapter 25 — Government Grants

Equipment 9,000,000 Equipment 9,000,000

Cash 9,000,000 Cash 9,000,000
Since the equipment has an initial cost Since the machinery has an initial cost
of P9,000,000, annual depreciation of of P6,958,975 (PIM - P2,041,025),
P900,000 (P9M/4 yrs.) shall be annual depreciation of P1,739,744
recognized as follows: (P6,958,975/4 yrs.) shall be recognized
as follows:
Depreciation expense 2,250,000
Accum. depreciation 2,250,000 Depreciation expense 1,739,744
Accum. depreciation 1,739,744
Annual recognition of income from No corresponding journal entry since
government grant is recorded as: the depreciation expense is already net
of the supposed income from
Liab. from gov't grant 510,256 government grant.
Income from gov't grant 510,256

Using the liability approach, the following amounts are now reported in the
statement of comprehensive income:
2023 2024 2025 2026
Interest expense (based on the
original amortization table) P446,308 P486,475 P530,258 P577,984
Add: Depreciation expense 2,250,000 2,250,000 2,250,000 2,250,000
Less: Income from gov't grant (510,256) (510,256) (510,256) (510,257
Net expense P2,186,052 P2,226,219 P2,270,002 2,317,727

On the other hand, the liability from government grant will have the following
balances:
Income Balance of
Date recognized the liability
Jan. 1, 2023 P2,041,025
Dec. 31, 2023 P510,256 1,530,769
Dec. 31, 2024 510,256 1,020,513
Dec. 31, 2025 510,256 510,257
Dec. 31, 2026 510,257 =

Using the deduction approach, the following amounts are now reported in the
statement of comprehensive income:
2023 2024 2025 2026
Interest expense (based on the
original amortization table) P446,308 P486,475 P530,258 P577,984
Add: Depreciation expense 1,739,744 1,739,744 _ 1,739,744 1,739,743
Net expense P2,186,052 2,226,219 2,270,002 P2,317,727

Needless to say, under the deduction approach, there is no balance in the liability
from government grant.
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 Chapter 25 — Government Grants

The readers should take note that unlike in the academe approach, when applying
the approach followed in practice, the loan bearing below-market interest rate will
result to a net increase or decrease in the entity's profit or loss (i.e., not zero effect).

CHAPTER SUMMARY
1. Government benefits to the entity can be classified into government grants and
other government assistance.
2. The main factor differentiating government grants from government assistance is
that in government grants there is an existence of a reasonably measurable transfer
of resources to an entity.
3. For accounting purposes, government grants are classified as either grants related
to assets and grants related to income.
4. Grants related to assets are those whose primary condition is that an entity
qualifying for them should purchase, construct or otherwise acquire long-term
assets. All other government grants are related to grants related to income.
5. Government grants, including non-monetary grants at fair value, shall not be
recognized until there is reasonable assurance that:
a. the entity will comply with the conditions attaching to them; and
b. the grants will be received.
6. The initial measurement of government grants will depend as follows:

Mode of Receipt Measurement

Financial or monetary grant | Amount received or receivable
Fair value of the non-cash asset. However, the
Non-monetary grant entity may choose to record the asset and the
government grant at nil amounts.
Forgivable loan Proceeds from the loan.
The difference between the proceeds received
Below-market interestloan | and the fair value of the loan, as required by
PFRS 9.
7. The recognition of government grant in profit or loss will depend on whether there
is/are attached conditions:

Scenario Accounting
Non-conditional | These grants shall be recognized in profit or loss in the period
grants during which they become receivable.
Generally, these grants are recognized initially as liability.
Subsequently, these shall be recognized in profit or loss on a
systematic basis over the periods in which the entity recognizes
as expenses the related costs for which the grants are intended to
Conditional
compensate.
grants
a. Grants related to assets - usually based on the proportion
of depreciation expense recognized by the entity.
b. Grants related to income - based on the proportion of
specific expenses expected to be incurred,
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 Chapter 25 — Government Grants

8. Alternative recording and presentation of the government grants are the following:

Classification Presentation Alternatives

The government grant can be presented usi ng either of the
Grants related following:
to assets 1. Separate liability
2. Deduction from the cost of the related asset
Grants related 1. Separate income (gross) |
to income 2. Direct deduction from related expenses (net)

9. Repayment of government grants are accounted for prospectively. Adjustments as

the result of the repayment are recognized in the current period’s profit or loss.
Previously reported amounts in the prior periods are not restated. _
10.The ratio of government grant to be reported in profit or loss will depend on the
depreciation method applied by the entity.
11.As an exception to PAS 20, government grants related to biological assets are
generally accounted for under PAS 41 at FVLCTS. Unconditional grant is recognized
in profit or loss when it becomes receivable. Conditional grant is recognized in profit
or loss during the period when all of the condition/s have been met.

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 Chapter 25 — Government Grants

CHAPTER 25: SELF-TEST EXERCISES

True or False
1. Government assistance involves the transfer of economic resource from the
government to an entity.
Z. Grants related to income means an entity is required to have a source of income
before becoming fully entitled to the economic resource.
Unconditional government grants are recognized in the profit or loss when they
become receivable.
Generally, conditional government grants are recognized in profit or loss at the time
when all of the conditions attached to the grant have been met.
Financial or monetary grant that have been received are measured equal to the
amount received or to be received.
Grants in the form of below-market interest loans are initially measured as the
difference between the fair value of the loan and the amount of the proceeds.
Grants related to assets shall be presented as a separate liability and can never be
deducted from the related asset in any case.
Grants related to income may be presented separately as income or as a deduction
from the related expenses.
Net income to be reported from grants related to income using the gross method is
higher than when the net method is used.
10. Repayment of government grant is accounted for prospectively.
11. Unconditional government grants related to biological assets are measured at
FVLCTS and recognized in profit or loss in the period during which they become
receivable.
12. Conditional government grants related to biological assets are proportionately
recognized in profit or loss over the period of compliance.

Multiple Choice - Theories

1. The following are the characteristics of government grants, except
a. The government transfers economic resources to the entity.
b. Government grants include transactions with the government involving the
entity’s normal selling operations.
c. Theresource can reasonably have a value placed upon them.
d. May be unconditional or subject to conditions.

All of the following are considered as government grants, except

a. Government loan that may be waived if pre-determined conditions have been
met.
b. Piece of land that was received from the government for no charge.
Ci A 5% interest-bearing loan from the government, even though the market rates
averaged 9%.
A trade receivable against the government coming from the entity's sales of
merchandise to the government.

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 Chapter 25 — Government Grants

3, Non-monetary grant received shall be measured at

a. its fair value
b. nominal amount
c. eitheraorb
d. neitheranorb

4. The initial amount of government grant arising from a below-market interest loan is
equal to
a. face amount of the loan
b. fair value of the loan
c. proceeds from the loan ;
d. difference between the proceeds received and the loan’s fair value
5. Which of the following is considered as grant related to asset?
a. A forgivable government loan, the proceeds of which are required to be used for
payroll of the entity’s indigenous manpower.
b. Cash received from the government to help the entity recover after a
widespread flooding in the area.
c. A below-market interest government loan that shall be used to finance the
acquisition of a building.
d. Cash received from the government to compensate the entity for its losses
during the coronavirus pandemic.
6. Government grants that do not contain conditions for the entity to be entitled to it
shall be recognized in profit or loss
a. during the time when they become receivable.
b. during the time when they were actually received.
c. over the estimated useful life of the related asset.
d. atthe end of the estimated useful life of the related asset .
7. The following are the correct accounting treatments for conditional government
grants regarding the amounts to be recognized in profit or loss, except
a. For grants related to depreciable assets, generally based on the proportion of
depreciation expense to be recognized for the asset.
b. For grants related to non-depreciable assets, generally based on the proportion
of the costs to comply with the conditions.
c. For grants related to income, based on the proportion of specific expenses
expected to be incurred in complying with the condition.
d. None of the above.
8. Inrecording a grant related to asset, an entity may separately recognize the grant as
a liability (gross method) or deduct it directly from the initial measurement of the
related asset. In connection with this, the following accounting consequences are
correct, except
a. Total assets and total liabilities are higher under the gross method compared to
the net method,
b. Total net income is higher under the gross method compared to the net method.
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 Chapter 25 — Government Grants

Depreciation expense is recognized in full under the gross method while it is

reduced under the net method.
Income from government grant is separately recognized under the gross
method while no such amounts are recognized under the net method.
9. Which of the following correctly describes the accounting consequences in applying
the reporting alternatives for grants related to income?
a. Total amount of liabilities under the gross method of presentation is higher than
when compared to using the net method.
b. Total amount of net income under both the gross and net methods are the same.
Cc Total amount of expenses under the net method is higher compared to when
using the gross method.
d. Other income under the net method is higher compared to when using the gross
method.
10.In accounting for repayment.of government grants, the following are the relevant
procedures, except
a. The repayment shall be accounted for prospectively.
b. Previously reported amounts shall be restated as if the government grant was
not received in the first place.
Cc. Any adjustments related to the repayment of the government grant shall be
recognized during the current period.
d. For grants related to income, any excess of the amount of repayment over the
carrying amount of the liability from the government shall be recognized in
profit or loss.
11.Biological assets received as government grant shall be accounted for as follows,
except
a. Unconditional grants shall be recognized in the entity’s profit or loss during the
time the grant becomes receivable.
b. Conditional grants are generally recognized in the entity’s profit or loss during
the period when all of the conditions have been met.
For conditional grants, the portion that the entity can retain whether it met the
conditions or not, if any, shall be’ recognized in profit or loss based on the
passage of time.
Conditional grants related to biological assets with FVLCTS that cannot be
measured reliably shall be recognized in profit or loss when all of the conditions
have been met.
12.An entity received a land from its government. To become fully entitled to the land,
the entity shall use the land in constructing a factory building in producing canned
goods over the factory’s useful life of 10 years, In this case, the government grant
shall be recognized in profit or loss
at the time the land was received.
poop

at the time the factory building has been constructed.

proportionately over the next 10 years,
after the 10-year useful life has elapsed.
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 Chapter 25 — Government Grants

Straight Problems
1. A few weeks ago, a strong earthquake devastated the province where MANHATTAN
Company’s operations are situated. Consequently, on May 1, 2023, the government
promised P4,000,000 to the Company to compensate its losses from the devastating
effects of the earthquake. This amount was actually received on June 30, 2023. This
grant is expected to help the Company recover over the next two years.

Required: Determine the journal entries for the year 2023.

2. On January 1, 2023, BROOKLYN Company received land and an old building from its
city government. The land has a fair value of P2,000,000 while the old building has
a fair value of P3,000,000. The grant has no conditions attached to it but the old
building has a remaining useful life of 20 years.
Required: Determine the journal entries for the year 2023 and 2024.
3. At the beginning of 2023, QUEENS Company received P5,700,000 from the national
government. This amount is required to be applied in constructing or purchasing a
building. On January 1, 2024, the Company has finished constructing the building for
a total cost of P9,000,000. This building has an estimated useful life of 15 years, and
the straight-line method will be used in determining the depreciation.
Required: Under each of the following independent scenarios, determine the (a)
journal entries from 2023 to 2025; and (b) carrying amounts of the building and the
liability from government grant, if any, as of December 31, 2025:
1. The Company uses the gross approach
2. The Company uses the deduction approach
4. On January 1, 2023, ALBANY Company received a ten-year, 4% interest-bearing
P9,000,000 government loan. The proceeds from the loan are required to be used in
acquiring equipment. As of the same date, an equipment costing P12,000,000 was
acquired. This equipment will be depreciated over its estimated useful life of 10
years using straight-line method. Market rates on January 1, 2023 averaged 7%.
Required: Under each of the following independent scenarios, determine the (a)
journal entries from 2023 to 2024; and (b) carrying amounts of the equipment and
the liability from government grant, if any, as of December 31, 2024:
1. The Company uses the gross approach under the academe approach
2. The Company uses the gross approach under the approach followed in practice
(see appendix)
3. The Company uses the net approach under the approach followed in practice
(see appendix)
5. On July 1, 2023, RHODES Company received a land with fair value of P4,500,000
from the government. The Company is required to construct a building as the
condition for the grant. After six months, on January 1, 2024, a building was
constructed for a total cost of P8,000,000. This building will be depreciated using the
straight-line method over its 20-year useful life.
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 Chapter 25 —- Government Grants

Required: Under each of the following independent scenarios, determine the (a)
journal entries from 2023 to 2025; and (b) carrying amounts of the building and the
liability from government grant, if any, as of December 31, 2025:
1. The Company uses the gross approach
2. The Company uses the deduction approach
6. At the beginning of 2023, SEASHELL Company received a P1,500,000 government
grant. The grant requires the Company to acquire an equipment. As of the same date,
an equipment was acquired for P6,500,000. This equipment will be depreciated over
its five-year useful life using a residual value of P500,000. The Company has a policy
of recording and presenting the government grant separately from the related asset.
Required: Under each of the following independent scenarios of depreciation
methods, determine the (a) amounts of income from government grant from 2023
to 2027; and (b) balance in the liability from government grant at the end of each
year from 2023 to 2027:
1. The Company uses straight-line method
2. The Company uses SYD method
3. The Company uses the double-declining balance method

7. OnJanuary 1, 2023, TROY Company received P3,120,000 from the government. This
amount is required to be spent in the Company’s tree-planting program as part of its
corporate social responsibility. This program will take place during the next four
years, and the estimated costs to be incurred each year are the following:
2023 2024 2025 2026
P2,340,000 P1,950,000 P2,496,000 P1,014,000

Required: Under each of the following independent scenarios, determine the (a)
journal entries to be made for each year; and (b) carrying amount of the liability
from government grant, if any, as of December 31 of each year:
1. The Company uses the gross presentation approach
2. The Company uses the net presentation approach
8. Way back last January 1, 2021, VIOLET Company received a P1,800,000 government
grant. The Company is required to utilize this amount in acquiring a machinery.
Immediately on the same date, the Company has acquired a machinery for a total
cost of P4,000,000. This machinery will be depreciated using the straight-line
method over its five-year useful life.
On January 1, 2023, the Company failed to meet some of the terms of the grant,
resulting to the forfeiture of all the amounts it previously received from the
government.
Required: Under each of the following independent scenarios, determine the journal
entries to record the repayment of the grant on January 1, 2023;
1. The Company used the gross approach in accounting for the grant.
2, The Company used the deduction approach in accounting for the grant.
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 Chapter 25 — Government Grants

9. On December 31, 2020, PURPLE Company received a P3,000,000 government grant

to be used in its corporate social responsibility involving the wellness of indigenous
tribes around the country. Estimated costs to be incurred under this program are
the following:

2021 2022 2023 2024

P1,500,000 2,250,000 P2,625,000 P1,125,000
On January 10, 2023, the Company has breached some of the terms of the grant,
which resulted to grant being repayable to the government.
Required: Under each of the following independent scenarios, determine the journal
entry to record the repayment: ,
1. The Company is required to repay the whole P3,000,000 grant.
2. The Company is required to repay only 80% of the P3,000,000 grant.
10.On January 1, 2023,,.NUMB Company received a government grant involving
biological assets with FVLCTS of P6,000,000 as of that date. These biological assets’
FVLCTS can be measured reliably on a continuing basis. Fair values of these
biological assets for the next four years are the following:
2023 2024 2025 2026
P6,600,000 P6,250,000 P6,300,000 P6,400,000
Required: Under each of the following independent scenarios, determine the
amount/s of government grant to be recognized in profit or loss from 2023 to 2026:
1. The grant is unconditional.
2. The grant is conditional in way that these biological assets shall be used only in
accordance with the terms of the grant for the next four years. Failure to meet
the conditions will result to forfeiture of the entire grant.
3. The grant is conditional such that these biological assets shall only be used in
accordance with the terms of the grant for the next four years. Failure to meet
the condition will result to forfeiture of the 70% of the grant.
Multiple Choice
1. On January 1, 2022, SCORPION Company received a P4,000,000 government grant
that shall be used in acquiring or constructing a research facility. A building was
constructed on January 1, 2023 for a total cost of P10,000,000. This building will be
depreciated using the straight-line method over its 10-year estimated useful life.
Assuming that the Company separately recorded the grant as a liability, the balance
in the liability from government grant as of December 31, 2025 shall be
a. P2,000,000 c. P2,400,000
b. P3,200,000 d. P2,800,000
Assuming that the Company deducted the grant from the initial cost of the facility,
the carrying amount of the facility as of December 31, 2026 shall be
a. P4,200,000 c, P3,000,000
b. P3,600,000 d, P3,800,000
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 Chapter 25 — Government Grants

2. At the beginning of 2023, CRAB Company acquired a machinery for a total cost of
P5,000,000. This acquisition was made to comply with the terms of the P2,000,000
grant that was received on the same date. The machinery has an estimated useful
life of four years after which it can be sold for an estimated amount of P500,000.
Assuming that the Company separately recorded the grant as a liability and that the
straight-line method of depreciation was applied to the machinery, the balance in the
liability from government grant as of December 31, 2024 shall be
a. P1,500,000 c. P600,000
b. P1,000,000 d. PO
Assuming that the Company deducted the grant from the initial cost and that the
straight-line method of depreciation was applied to the machinery, the carrying
amount of the machinery as of December 31, 2024 shall be
a. P1,750,000 c. P2;250,000
b. P1,500,000 d. P1,250,000
Assuming that the Company separately recorded the grant as a liability and that the
SYD method of depreciation was applied to the machinery, the balance in the liability
from government grant as of December 31, 2024 shall be
a. P1,200,000 c. P200,000
b. P600,000 d. P700,000
Assuming that the Company deducted the grant from the initial cost and that the SYD
method of depreciation was applied to the machinery, the carrying amount of the
machinery as of December 31, 2024 shall be
a. P1,750,000 c. P2,250,000
b. P1,500,000 d. P1,250,000

3. On January 1, 2023, PUDDING Company received a P2,500,000 government grant.

This amount shall be used in acquiring equipment to be used in the Company’s
operations. The related equipment was actually acquired on July 1, 2023 for
P6,500,000. This equipment has an estimated useful life of five years and will be
depreciated using the straight-line method.
Assuming that the Company separately recorded the grant as a liability, the balance
in the liability from government grant as of December 31, 2025 shall be
a. P1,000,000 c, P1,500,000
b. P1,250,000 d. P1,750,000
Assuming that the Company deducted the grant from the initial cost of the
equipment, the carrying amount of the equipment as of December 31, 2025 shall be
a. P2,800,000 c. P2,000,000
b. P2,400,000 d, P1,600,000
4. At the beginning of 2023, RAZOR Company received a noninterest-bearing
government loan with face amount of P6,000,000 and maturity date of December
31, 2030. Market rates that date averaged 6%. The loan proceeds shall be used in

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 Chapter 25 —- Government Grants

purchasing a machinery to be used during the whole duration of the loan. Actual cost
of the machinery amounted to P9,000,000. The Company presents the amount of the
government grant as a separate liability.
Using the approach in the academe, the amount of income from government grant
to be recognized for the year 2024 shall be
a. P279,441 c. P239,421
b. P225,868 d. P268,632

Using the approach in the academe, the carrying amount of the liability from the
government grant as of December 31, 2025 shall be.
c. P2,009,657 c. P2,235,526
d. P1,397,204 d. P1,516,451
5. To help compensate the RAISIN Company's cancer research for the next five years,
the government granted P4,000,000 to the Company on January 1, 2023. Cancer
research costs for the next five years are estimated as follows:

2023 2024 2025 2026 2027

P3,000,000 P2,000,000 1,500,000 P2,300,000 P1,200,000

The portion of the government grant to be recognized in the Company’s 2024 profit
or loss shall be
a. P800,000 c. P1,080,000
b. P920,000 d. P1,200,000

The carrying amount of the liability from the government grant as of December 31,
2025 shall be
a. P2,800,000 c. P1,400,000
b. P2,000,000 d. P480,000

6. On January 1, 2023, BUFFALO Company received biological assets from its national
government. These biological assets have total FVLCTS of P4,200,000 and shall be
used by the Company in its operations for the next three years (i.e., until December
31, 2025) as required in the terms and conditions of the grant. These biological
assets’ total FVLCTS as of December 31 of each year are the following:

2023 2024 2025

-P3,000,000 P2,000,000 P1,500,000
In case the Company failed to meet the terms and conditions of the grant, it is
required to return all of the biological assets to the government.
From the given information, the net amount to be recognized in the Company's 2024
profit or loss shall be
a. P400,000 net income c. P1,000,000 net income
b. P400,000 net loss d. P1,000,000 net loss

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 Chapter 25 — Government Grants

From the given information, the net amount to be recognized in the Company’s 2025
profit or loss shall be
a. P3,700,000 net income c. P900,000 net income
b. P3,700,000 net loss d. P900,000 net loss

7. On July 1, 2023, the national government transferred biological assets with total
FVLCTS of P7,000,000 to BALTIC Company. These biological assets are required to
be used for a specific purpose for the next four years. Failure to meet the conditions
of the grant will result to the forfeiture of 50% of the grant (the Company can retain
the other 50% whether it met the conditions or not). Total FVLCTS as of December
31 of each year are the following:
2023 2024 2025 2026 2027
P6,800,000 6,900,000 P7,080,000 7,160,000 P6,950,000
From the given information, the net amount to be recognized in the Company’s 2023
profit or loss shall be
a. P200,000 net income c. P675,000 net income
b. P200,000 net loss d. P675,000 net loss
The carrying amount of the liability from the government grant as of December 31,
2024 shall be
a. P1,750,000 c. P5,250,000
b. P3,500,000 d. P7,000,000

From the given information, the net amount to be recognized in the Company’s 2027
profit or loss shall be
a. P6,790,000 net income c. P4,165,000 net income
b. P6,790,000 net loss d. P4,165,000 net loss

8. On January 1, 2023, COOLIDGE Company received a P2,400,000 government grant,

which requires the acquisition of an equipment to be used in its operations. Shortly
after the receipt of the grant, an equipment was acquired for P6,000,000. This
equipment has an estimated useful life of six years and is to be depreciated using the
straight-line method.
After few years, on January 5, 2026, the Company repaid the grant since it failed to
comply with the grant’s terms and conditions. The government grant is deducted
from the initial cost of the equipment.
The total amount of depreciation for the year 2026 shall be
a. P600,000 c. P1,800,000
b. P1,200,000 d, P2,200,000

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