CHAPTER 18: GOVERNMENT GRANTS (PAS 20) a.

depreciable assets - recognized in profit or loss over the

- assistance received from the government in the form of periods and in the proportions in which depreciation
resources in exchange for compliance with certain expense on those assets is recognized
conditions b. non-depreciable assets - recognized in profit or loss
- exclude those whose value cannot be reasonably when the costs of fulfilling the attached condition are
measured or cannot be distinguished incurred.
c. Grants received as financial aid for expenses or losses
Government assistance but not government grants: already incurred - recognized immediately in profit or
a. Tax benefits loss when the grant becomes receivable (because the
b. Free technical or marketing advice related costs have already been expensed).
c. Provision of guarantees
d. Government procurement policy  receipts basis (e.g., cash basis) is prohibited as it
- if significant, disclosed but not recognized violates the accrual basis of accounting
Not government assistance: Illustration 1: Grant related to depreciable asset
a. public improvements - 1M cash from government for acquisition of equipment
b. trading constraints on competitors - Jan 1, 20x1 acquired equipment 3M, useful life 5 yrs
Recognition (straight-line method)
reasonable assurance that: Depreciation Income from GG
a. attached condition will be complied Dec 31, 20x1 600,00 200,000
b. grants will be received Dec 31, 20x2 600,00 200,000
Solution:
Types according to attached condition
3M/ 5 = 600K 1M/5 = 200K
1. Grants related to assets – acquire or construct long-term
asset (equipment or building) Illustration 2: Grant related to non-depreciable asset
2. Grants related to income – other than those related to - Jan 1, 20x1 received land from government with
assets condition that a building should be constructed
- fair value of land was P500k
Measurement
- Jan 1, 20x3 cost of building 1M, useful life 10 yrs,
Monetary grants – measured at
straight line method
a. amount of cash received;
b. fair value of amount received Depreciation Income from GG
Dec 31, 20x3 100,00 50,000
Non-monetary grants – measured at
Solution:
a. fair value of asset received
1M/ 10 = 100K 500k/10 = 200K
b. alternatively, nominal amount
Illustration 3: Grant received as compensation for loss
Form of loan
- typhoon caused damaged of 40M
a. Forgivable loan – government waives repayment,
- government gave 10M as financial aid
measured at carrying amount
b. Loan at below-market rate of interest or zero-interest – Accounting:
measured as the difference between initial carrying 10M grant recognized immediately in profit or loss because
amount of the loan and the proceeds received. loss already incurred
Approaches to the accounting for government grants Notice that income from government grant is recognized in
Capital approach – recognized outside profit or loss or in P/L simultaneously and in the same manner with dep. exp.
equity
Income approach – recognized in profit or loss over one or Presentation
more periods Grants related to assets
Statement of financial position
 PAS 20 uses the income approach. Gross presentation Net presentation
- deferred income - deducted from the
Accounting for government grants
(liability) carrying amount of
- recognized in profit or loss on a systematic basis over the the related asset
periods in which the entity recognized as expenses the
related costs for which the grants are intended to
compensate Statement of comprehensive income (profit or loss section)
- ‘matching’ concept (if expenses are not recognized, Gross presentation Net presentation
income is also not yet organized) - reported separately or - deducted from the
- Accordingly: included in ‘Other depreciation charge
 income’ - not suspended if substantial technical and
Grants related to income administrative work is being performed or temporary
Statement of comprehensive income (profit or loss section) delay is a necessary part of development process
Gross presentation Net presentation - not suspended if temporarily stopped due to a typhoon
- reported separately or - deducted from the
included in ‘Other related expense Cessation of capitalization
income’ - ceases when qualifying asset is substantially complete
- if by part, capitalization ceases for each part that is
 whether presented in gross or net, net effect on equity or completed
profit or loss is the same
 income from government grant is recognized in Determining borrowing costs eligible for capitalization
proportion to the expenses actually incurred over the Specific borrowing
total estimated cost - funds borrowed specifically for the purpose of obtaining a
 grant is recognized as reduction to the related expenses qualifying asset
for which it was intended to compensate
Capitalizable BC = Actual borrowing costs – Investment income
Repayment of Grants
- failure to satisfy attached condition Illustration 1: Specific borrowing
- treated as change in accounting estimate and accounted - borrowed 5M, 8% interest
for prospectively - investment income 150k
a. Grant related to income – deducted from related Solution:
deferred income balance, any difference is recognized 5M X 8% = 400K – 150K = 250K (capitalizable BC)
immediately in profit or loss
b. Grant related to asset – treated as reduction in the General borrowing
deferred income balance (under gross presentation) or an - obtained for more than one purpose
increase in the carrying amount of the asset (under net
BC on Gen. Borrowings = Ave. Expenditure x Capitalization Rate
presentation)
- cumulative additional depreciation that would have been
Capitalization rate =
recognized in the absence of the grant is recognized
immediately in profit or loss Total interest expense on generl borrowings
See book page 280Total general
for sample borrowings
illustration.
CHAPTER 19 – BORROWING COSTS (PAS 23)
Borrowing costs – capitalized if directly attributable to the  Capitalizable BC is the lower of:
acquisition, construction or production of a qualifying asset a. the amount computed
- cost incurred in relation to the borrowing of funds b. actual borrowing cost incurred (total interest
a. interest expense (effective interest method) expense)
b. exchange differences on foreign borrowings
 do not include actual or imputed cost of equity or capital  when expenditures are incurred evenly, simple divide the
total by two
 Qualifying asset – asset the takes a substantial period of
time to get ready for its intended use or sale (long Specific and General borrowings
period) 1. Average accumulated expenditure method (Traditional
method) – simple a combination of the two formulas but
Capitalization of BC
with one modification
- capitalized if they are avoidable (would have not been
 compute first for specific borrowing
incurred if expenditure had not been made)
 then, compute for general borrowing by first
Start of capitalization (all are met) subtracting the amount of specific borrowing from
a. expenditure for the asset are being incurred average expenditure (page 283)
b. borrowing costs are being incurred  add specific and general borrowing
c. activities necessary to prepare the asset for its intended 2. Avoidable interest method – suggested by international
use or sale are being undertaken audit firms PrincewaterhouseCoopers (PwC) and
i. technical and administrative work prior to the GrantThorton UK (GT), places greater emphasis on
start of physical construction (obtaining permits) avoidable costs
ii. actual physical construction - expenditure are allocated first to the specific borrowings
and excess on general borrowings
Suspension of capitalization - only the expenditures allocated to the general borrowings
are averaged
- suspended during extended periods in which active
 sample computation with the specific borrowing cost
development is interrupted
- borrowing cost are expensed
  for general borrowing, used the averaged c. has a remote likelihood of being sold as agricultural
expenditure (subtract first specific borrowing then produce except for incidental scrap sales
average only expenditure financed by general
borrowing) computed (page 285)

Specific borrowing used for general purposes Agricultural produce

- only the interest pertaining to the expenditures made on - harvested produce of the entity’s biological asset
the qualifying, net of any investment income, asset can be - on natural state and not yet processed
capitalized - those subjected to processing are treated as inventories
- specific borrowing is treated as general borrowing Harvest – detachment of produce from a biological asset or
cessation of a biological asset’s life processes
BC = (Ave. Expenditure – Investment income) x Capitalization Rate
Agricultural Products that
Limitation on expenditures Bearer
produce at are the
Biological asset plants
- include only those that have resulted in (PAS 41) (PAS 16
point of results of
a. payment of cash harvest (PAS processing
PPE)
41) after harvest
b. transfer of other assets
Sheep Wool Yarn, carpet
c. assumption of interest-bearing liabilities Trees in a timber Felled trees Logs, lumber
- expenditures are reduced by any progress payments (net plantation
of tax) and grants received in connection with the asset Diary cattle Milk Cheese
Pigs Carcass Sausages,
CHAPTER 20 – AGRICULTURE (PAS 41) cured hams
Agriculture – farming or process of producing crops and Cotton plants Harvested Thread,
cotton clothing
raising livestock Sugarcane Harvested Sugar
PAS 41 applies to: cane
Tobacco plants TGFOR Picked leaves Cured
a. Biological assets, except bearer plants
tobacco
b. Agricultural produce at the point of harvest Tea Picked leaves tea
c. Unconditional government grants related to a bushes
biological asset measured at its fair value less cost Grape Picked grapes Wine
to sell vines
Fruit trees Picked fruit Processed
Biological asset fruit
- living animal or plant Oil palms Picked fruit Palm oil
- bio means life, dead animals cannot qualify Rubber Harvested Rubber
tree latex products
a. Consumable biological assets – are to be harvested as
agricultural produce or sold as biological assets Agricultural activity
Examples: - management by an entity of the biological
i. livestock intended for production of meet transformation and harvest of biological assets for sale
ii. livestock held for sale or for conversion into agricultural produce or into
iii. fish in farm additional biological assets
iv. crops such as maize and wheat - raising livestock, forestry, annual cropping, cultivating
v. produce on a bearer plant - common features: (CMM)
vi. trees being grown for lumber a. Capability to change – capable of biological
b. Bearer biological assets – held to bear produce, only transformation
produce harvested while bearer asset remains b. Management of change – enhancing, or at least
Examples: stabilizing, conditions necessary for the process to
i. livestock from which milk is produced take place
ii. fruit trees from which fruit is harvested c. Measurement of change – change in quality or
quantity brought about by biological transformation
 living animals whether consumable or bearer are or harvest is measured and monitored as a routine
classified as biological asses management function
 living plants are classified as biological assets only if
Biological Transformation – comprises the ff that cause
they are consumable, bearer plants are classified as
qualitative and quantitative changes in a biological asset:
PPE
I. Asset changes through:
Bearer plant a. Growth – an increase in quantity or improvement in
a. used in production or supply of agricultural produce quality of an animal or plant
b. expected to bear produce for more than one period b. Procreation – creation of additional living animals
or plants
 c. Degeneration – decrease in the quantity or disclosure encouraged but not required:
deterioration in quality of an animal or plant 1. Disclosure of consumable and bearer biological assets
II. Production of agricultural produce 2. Disclosure of mature and immature biological assets
 Mature biological assets – those that have attained
Measurement harvestable specification or are able to sustain regular
Biological asset – initially and subsequently measured at harvests
fair value less costs to sell, gain or loss is recognized in 3. Disclosure of breakdown of total “Gain (loss) from
profit or loss changes in FVLCS” during the period attributable to
- gain may arise on initial recognition when for example a price change and physical change
calf was born
- loss may arise because costs to sell are deducted from  Due to price change – difference between prices at the
fair value beginning and end of the period without considering
- if fair value cannot be readily determined, initially changes in price due to physical growth of biological
measure at cost and subsequently measured at cost less asset. Age of biological asset at the end of the period is
accumulated depreciation and accumulated ignored.
impairment losses Formula:
- continued to be measured at fair value less cost to sell (FVLCS, end. Age as of beg.) – (FVLCS, beg. Age as of beg.) x Qty.
until it is disposed of
 Due to physical change – difference between prices at
Agricultural produce – initially measured at fair value less
the end of the period considering changes in price due
costs to sell at the point of harvest
to physical growth. FVLCS at the beginning of the
Costs to sell include the following: period is ignored.
a. Commissions to brokers Formula:
b. Levies by regulatory agencies and commodity (FVLCS, end. Age as of end.) – (FVLCS, end. Age as of beg.) x Qty.
exchanges +
c. Transfer taxes and duties FVLCS of newborn at date of birth
- do not include transport costs, advertising costs,
income taxes, and interest expense Reconciliation:
- if location is a characteristic, price in principal market Change in FVLCS due to price change
shall be adjusted for the transport costs Change in FVLCS due to physical change
+
- in the absence of principal market, price in the most Total gain (loss) on change in FVLCS
advantageous market which is the market that
maximizes the amount that would be received to sell Financial statement presentation
the asset (higher) Biological assets – noncurrent assets, breakdown disclosed
 Active market – market in which transactions for the in the notes
asset or liability take place with sufficient frequency and - after point of harvest, agricultural produce are presented
volume to provide pricing information on an ongoing as Inventories – current assets
basis
CHAPTER 21 – INVESTMENT PROPERTY (PAS 40)
Biological assets attached to land
Investment Property – land or building held to earn rentals
- fair value of raw land and land improvements may be
or for capital appreciation or both
deducted from the fair value of the combined assets to
- generates its own cash flows independently from the
arrive at the fair value of the biological assets
other assets of an entity and is not:
Government grants a. Owner-occupied property (PPE)
- only related to biological assets measured fair value b. Held for sale in the ordinary course of business
less costs to sell are accounted for under PAS 41 (inventory)
- Under PAS 41, if the government grant is: c. Classified as “held for sale” under PFRS 5 Non-
a. Unconditional – recognized in profit or loss when current assets Held for Sale and Discontinued
it becomes receivable Operations
b. Conditional – recognized in profit or loss when the Examples:
attached conditions are met a. long-term capital appreciation
c. Conditional but the terms of the grant allow part b. undetermined future use
of it to be retained according to the time that has c. leased out under one or more operating leases
elapsed – portion is recognized in profit or loss as d. developed for future use as investment property
time passes
Partly investment property and partly owner-occupied
Encouraged disclosures
- if portion could not be sold separately, property is - using cost model under PAS 16 (PPE)
classified as investment property if owner-occupied
portion is insignificant Fair value model
- if owner-occupied portion is significant, classified as - subsequently measured at its fair value at the end of
PPE each reporting period
Ancillary services to occupants - gain or loss in changes are recognized in profit or loss
- investment property if services are insignificant - not depreciated
- if services are significant, entire property is PPE - uses PFRS 13 Fair Value Measurement

Investment property in consolidated financial statements Transfer

- property being leased by a member to another member made only if there is change in use, evidenced by:
does not qualify as investment property in the a. Commencement of owner-occupation, for transfer
consolidated financial statements, because from group from investment property to PPE
perspective property is owner-occupied. b. End of owner-occupation, for a transfer from PPE
- property is investment property in lessor/owner’s to investment property
individual financial statements c. Commencement of an operating lease to another
party, for transfer from inventories to IP
Initial measurement d. Commencement of development with a view to
- initially measured at cost, depends on the mode of sale, for transfer from IP to inventories
acquisition
Accounting for transfers
Acquisition by Purchase Transfers under the Cost model
- cost comprises purchase price and any directly Transfers - transfers made at carrying
attributable costs between amount
- if payment is deferred, cost is the cash price equivalent investment - impairment loss is recognized
- cost of self-constructed investment property is the cost property, PPE, in profit or loss
when the construction or development is completed and inventory
- Cost excludes: Transfers under the Fair value model
a. cost of day-to-day servicing (repair) IP to PPE or - transfers made at fair value
inventory - gain or loss recognized in
b. start-up costs unless necessary
profit or loss
c. operating losses incurred before
PPE to IP - update first carrying amount
d. abnormal amounts of wasted materials
1. any increase
Exchanges of assets
a. With Commercial Substance – entity’s subsequent
cash flows are expected to change as a result of the
exchange
1. Fair value of asset Given up (plus cash paid or
minus cash received)
2. Fair value of the asset Received
3. Carrying amount of the asset Given up (plus cash
paid or minus cash received)
b. Lacks Commercial Substance – measured at Carrying
amount of the asset Given up (plus cash paid or minus
cash received)
 no gain or loss if measured at carrying amount

Subsequent measurement
- either cost model or fair value model and apply to all
investment property
 PAS 40 requires an entity to determined the fair value 2. any decrease is impairment loss
of investment property regardless of accounting policy except if there is revaluation
surplus, excess is charged in
used.
profit or loss
 Entity may change from cost model to fair value model
Inventory to IP - increase or decrease recognized
using PAS 8. profit or loss

Cost model Derecognition

- when disposed of or no future economic benefits are
expected from it
- difference between net disposal proceeds and carrying
amount is recognized as gain or loss in profit or loss
Subsequent expenditures a. purchase price, including import duties and non-
Replacement of parts: refundable purchase taxes, after deducting trade
a. Cost model – cost of new part is capitalized, discounts and rebates and
carrying amount of old part is derecognized and b. any directly attributable cost of preparing the asset
charged as loss regardless whether it had been for its intended use
depreciated separately, if old part cannot be a. cost of employee benefits
determined use the cost of new part on b. professional fees
derecognition c. costs of testing
Entry to derecognized:
Dr Accumulated Depreciation Not part of cost:
Cr Investment property (old part) a. cost of introducing a new product or service
Entry for replacement: b. cost of conducting a business in a new location
Dr Investment property (new part) c. administration and other general overhead costs
Cr Cash - if deferred, cost is the cash price equivalent
b. Fair value model – cost of replacement is
capitalized, then fair value is reassessed and any Acquisition as part of a business combination
difference is recognized in profit or loss - cost is the fair value at acquisition date
Entry for replacement:
Dr Investment property (new part) Acquisition by way of a government grant
Cr Cash - initially measured either:
Entry for loss: a. at fair value; or
Dr Unrealized loss b. at nominal amount plus direct costs incurred in
Cr Investment property preparing the asset for its intended use

Impairment Exchanges of assets

- IP subsequently measured under cost model is tested for - the same with investment property
impairment using PAS 36
Internally generated intangible assets
CHAPTER 22 – INTANGIBLE ASSETS (PAS 38) a. Research phase
Intangible asset – identifiable non-monetary asset without Research – investigation to gain new scientific or technical
physical substance knowledge and understanding
- cost incurred are expensed
Essential element of an intangible asset Examples:
1. Identifiability a. Activities aimed at obtaining new knowledge;
a. separable b. The search for, evaluation and final selection of,
b. arises from contractual or other legal rights applications of research findings or other
knowledge;
 Goodwill does not have physical substance but is c. The search for alternatives for materials, devices,
outside the scope of PAS 38 because it is products, processes, systems or services; and
unidentifiable – not separable, cannot be sold d. The formulation, design, evaluation and final
separately, and does not arise from contractual or legal selection of possible alternatives for new or
rights. (PFRS 3, 10, PAS 36) improved materials, devices, products, processes,
systems or services.
2. Control – ability to benefit or prevent others from b. Development phase – application of research findings
benefiting, normally arises from legal rights to a plan or design
3. Future economic benefits – revenue from the sale, cost - cost are expensed
savings, and other benefits - capitalized if ALL of the ff are demonstrated:
(TIAPARm)
Assets with both intangible and tangible elements a. Technical feasibility of completing the intangible
- if intangible component is integral part, treat as PPE asset;
b. Intention to complete the intangible asset;
Initial measurement c. Ability to use or sell the intangible asset;
- initially measured at cost d. Probable future economic benefits;
e. Availability of adequate resources needed to
Separate acquisition complete the development; and
Cost comprises: f. Reliable measurement of the cost of the intangible
asset.
Example of activities include the word design
 if not clear whether research or development cost, treat - choice of method depends on management’s judgement
is as research cost which best reflect the expected pattern of consumption
 Research and development cost include only those costs of future economic benefit
incurred before commercial production is feasible. - three example: straight-line method, diminishing
 Terms commercial, existing product, customer, and method, and unit of production method
market/marketing is NOT an R&D expense.

Items of PPE used in R&D activities Residual Value

a. if PPE has an alternative use, can be used in various - assumed to be zero unless entity can demonstrate its
R&D activities and other purposes, cost of PPE is ability to sell the asset before end of life as evidence by:
capitalized (as PPE) and depreciated, amount of a. third party commitment to purchase the asset
depreciation included in R&D expense b. an active market where asset can be sold
b. if PPE has no alternative use, only for one specific - requires an annual review of amortization method
R&D project, cost is expensed immediately as R&D and assessments and estimates of useful life and residual
expense value at each year-end
- any change is accounted for prospectively as change in
Items not recognized as intangible assets accounting estimate
Internally generated brands, mastheads, publishing titles,
customer lists and similar items are NOT intangible assets Derecognition
- cost to develop these items are expensed - when disposed of or no future economic benefit
- capitalized as intangible asset only if purchased expected
- difference between net disposal proceeds and carrying
Subsequent measurement amount is recognized as gain or loss in profit or loss
a. cost model – cost less any accumulated amortization
and impairment losses Class – grouping of assets of a similar nature and use
b. revaluation model – fair value less any subsequent
accumulated depreciation and accumulated impairment Major categories of intangible assets
losses 1. Market-related – used in promoting and marketing
 intangible assets with no active market are measured products or services
under cost model a. Trademarks or trade names – word, phrase, or
symbol that distinguishes a company or product
Useful life - indefinite number of renewals for period of 10
a. Finite – entity can determined reliably the length, years each (has indefinite life, not amortized)
number of production, constitution useful life - trademark (products or brand)
- amortized - trade names (company)
b. Infinite – no limit or restriction and only for an
insignificant cost Accounting for trademarks
- not amortized but tested for impairment at least  Purchased – purchase price and any directly
annually attributable cost
 Internally generated – all directly attributable costs
Amortization  tested for impairment at least annually
- systematic allocation of depreciable amount of an  subsequent expenditures are expensed
intangible asset over its useful life
- similar to depreciation b. Mastheads – list found on editorial page of newspaper
- shorter of useful life and legal life  Purchased – purchase price and any directly
- starts when asset is available for use in the manner attributable cost
intended by the management  amortized over useful life
- stops when derecognized, classified as held for sale, or  Internally generated – expensed (not intangible
fully amortized asset)
- does not cease when asset is no longer used  subsequent expenditures are expensed
- recognized as expense (profit or loss) unless part of cost
of producing another asset (capitalized) c. Internet domain names – web sites
Web site development costs
Amortization Method
- PAS 38 ford not describe any specific method
d. Noncompetition agreement

2. Customer-related
3. Artistic-related
4. Contract-related
5. Technology related
6. Goodwill