Accounting for government COVID-19 support measures
The number and nature of COVID-19 support measures are significant and, many of the schemes constitute ‘government grants‘ – an area of accounting practice that many accountants have had little cause to turn to previously. In these extraordinary times, accounting for government grants or governmental assistance by other means has come sharply into focus as the Government has made unprecedented levels of assistance available.
Section 24 of FRS 102 defines a government grant as 'assistance by government in the form of a transfer of resources to an entity in return for past or future compliance with specified conditions relating to the operating activities of the entity’ (Government refers to government, government agencies and similar bodies whether local, national or international). FRS 102 requires that government grants shall not be recognised until there is reasonable assurance that:
(a) The entity will comply with the conditions attaching to them
(b) The grants will be received
The standard requires entities to recognise grants based on either the performance model or the accrual model. The performance model requires that grants are recognised as income at the date when any related performance conditions are met. The accrual model requires that entities classify grants either as a grant relating to revenue or a grant relating to assets; it follows that grants relating to revenue shall be recognised as income on a systematic basis over the periods in which the entity recognises the related costs for which the grant is intended to compensate.
Disclosures for all government grants
An entity shall disclose the following:
(a) The accounting policy adopted for grants in accordance with paragraph 24.4
(b) The nature and amounts of grants recognised in the financial statements
(c) Unfulfilled conditions and other contingencies attaching to grants that have been recognised as income
(d) An indication of other forms of government assistance from which the entity has directly benefited
Disclosures for small companies
For small companies following Section 1A of FRS 102, the recognition and measurement criteria noted above all apply and they will also need to disclose an accounting policy for the grants received.
Careful consideration should be given about whether disclosures are required to meet the requirements of (b) to (d) above, as while Section 1A does not refer to these requirements directly, the small entity financial statements should be prepared to show a true and fair view – so additional disclosure of these points may be necessary to present that view.
Coronavirus Job Retention Scheme (CJRS)
The CJRS scheme falls under the FRS 102 definition of a government grant.
Given that the CJRS payments are made for the employment of staff and are being received now, they should be recognised in the month they are received.
The accrual model is likely to be most appropriate for the CJRS scheme as the 'grant' in this case is designed to compensate for staff wages.
The amounts paid to staff would be recognised as staff wages as usual but the receipt from the Government recognised as grant income when the entity is entitled to the cash, i.e. the wage expense and receipt from the government are ’grossed up‘ and not netted off.
Coronavirus Business Interruption Loan Scheme (CBILS)
The British Business Bank (BBB) together with 40+ lending providers are providing a range of financial options enabling a SME (turnover of less than £45m) to borrow up to £5m, with the first 12 months being interest-free and the loan being 80% backed by a government guarantee under the CBILS.
CBILS guarantees facilities up to a maximum of £5 million, available on repayment terms up to six years (for term loans and asset finance) and up to three years (for overdrafts and invoice finance facilities). There is no guarantee fee for SMEs to access the scheme. The Government will make a Business Interruption payment to cover the first 12 months of interest payments and any lender-levied fees.
The payments by the government to cover interest in the first year and all other loan fees are government grants under FRS 102 and so the accounting for these will be similar to the CJRS scheme described above. Each month, as an interest expense is recognised, an equal amount of grant income will also be recognised in the P&L.
There is a school of thought that there is a second type of government grant in the form of the lower interest rate than would likely have been payable under market interest rates in the absence of the government guarantee. Where this is the case under FRS 102 the entity would measure the loan at the present value of the future payments discounted at a market rate of interest for a similar debt instrument. The government grant in each case is then measured as the difference between this initial carrying amount and the proceeds received. This government grant would be recognised in the income statement as grant income.
Ordinarily where loans are received for interest rates different to those prevailing in the market (say from related parties or fellow subsidiaries) this measurement requirement of FRS 102 presents a significant challenge in determining what is a prevailing market interest rate for such a loan. It might be extremely difficult to make a reliable estimate.
In this case, the question arises as to what are market rates currently? As these forms of assistance are so widely available, there is a compelling argument that the rates agreed with an entity are ‘new’ market rates and entities would recognise interest at the interest rate agreed with the lender.
Disclosure of the accounting policy and terms of the loan, including the government assistance in the form of the guarantee and payment of the year one interest are likely to provide sufficient detail to enable a user of the financial statements to understand the facility.
Coronavirus Large Business Interruption Loan Scheme (CLBILS)
The loan scheme available to larger businesses, CLBILS, has been extended to all larger viable businesses. All firms with a turnover exceeding £45 million will be able to apply for up to £25 million of finance, increasing to £50 million of finance for firms with a turnover of more than £250 million.
The finance will be lent at a commercial rate of interest, so the consideration of what is a market rate does not apply. Unlike the CBILS scheme, while the Government will extend a guarantee to cover payments of loan principal, interest and fees, the CLBILS scheme will not involve the Government paying the interest and fees in the first 12 months. There is no government grant to recognise for the CBILS scheme.
Bounce Bank Loan (BBL) scheme
The Bounce Bank Loan (BBL) scheme launched on 4 May. Under this scheme small businesses can apply for quick and easy-to-access loans of up to £50k (and no more than 25% of turnover).
Loans under this scheme have set interest rates of 2.5% per annum and no fees and are available over a six-year term. The government has pledged to cover the interest payable to the lender for the first 12 months.
Accounting for the BBL scheme is similar to the CBILS scheme:
- The Government paying the year one interest is the 'grant'
- The set 2.5% can reasonably be assumed to be the market rate of interest available to lenders at the current time given the availability of these loans and their planned accessibility to all small entities
Business Rates reliefs
There are a few reliefs available in respect of business rates, including a business rates retail holiday for all retail, hospitality and leisure businesses (shops, pubs, theatres, music venues, restaurants etc), irrespective of rateable value, in England for the 2020 to 2021 tax year. Where an entity is entitled to total relief from business rates, the rates holiday has no specific accounting implications for the tax year 2020/21 and is not a government grant - the charge will not be levied so there is simply no expense to recognise. As there is no transfer of resources, so the will not be a government grant, but it will represent a form of government assistance that is likely to require disclosure for the purpose of preparing “true & fair” accounts. Further reliefs include a £10,000 cash grant for businesses currently eligible for the small business rates relief or rural rate relief and a £25,000 cash grant that will be provided to retail, hospitality and leisure businesses operating from smaller premises, with a rateable value between £15,000 and £51,000.
The final two cash grants are government grants like the CJRS scheme and entities should use the accruals or performance model to account for these, recognising the grant income when performance conditions are met and the entity is eligible for the cash.
The disclosure requirements above will apply.
If you wish to discuss these accounting support measures and/or any other COVID-19 related initiatives, please contact your usual haysmacintyre contact or email CV19@haysmacintyre.com.