Accounting for government support schemes and incentives
This article is part of a series on financial reporting and auditing in the shadow of COVID-19.
As businesses continue to deal with the significant level of disruption caused by the Coronavirus pandemic, many entities in the UK will have received government aid in the form of small business grants, the Coronavirus Job Retention Scheme (CJRS), Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Bounce Back Loan Scheme (BBLS).
This article looks at the accounting treatment to be applied to these various support schemes, seeks to apply the existing accounting standards to these schemes and offers potential accounting approaches. The article is aimed at entities preparing accounts under FRS 102. The accounting approach under IFRS may be different. We will be discussing the accounting for business rates holidays and rent concessions in a separate article.
Small Business Grant Fund (SBGF) and Retail, Hospitality and Leisure Grant Fund (RHLGF)
SBGF should be recognised in the financial statements on a receivable basis.
Included in other income
These represent cash payments from local authorities to eligible businesses and are government grants for which there are no future performance-related conditions. They should be accounted for in accordance with Section 24 of FRS 102 (Government Grants).
Paragraph 24.4 of FRS 102 permits an entity to recognise grants based on either the performance model or the accrual model. This choice does not make a difference to the accounting treatment of these particular grants, however, the accounting policy applied should be disclosed in the notes to the accounts.
Where a grant does not impose specified future performance-related conditions on the recipient or is receivable for the purpose of giving immediate financial support to the entity with no future related costs then it should be recognised in income when the grant proceeds are receivable. This is likely to be when the scheme eligibility criteria was first published, or where there is uncertainty around eligibility, when confirmation of entitlement was received from the local authority. The grant will be shown within other income, with a corresponding debtor until the cash is received.
Coronavirus Job Retention Scheme (CJRS)
CJRS should be recognised in the financial statements on a receivable basis.
Included in other income
The CJRS results in cash payments from HM Revenue and Customs (HMRC) to compensate employers for part of the wage, national insurance and employer pension contributions costs (currently 80%) of employees who have been placed on furlough. This is a government grant and should be accounted for in accordance with Section 24 of FRS 102.
Again, regardless of which model is applied, the grant income will be shown within other income and there will be either a debtor or a deferred income liability recognised, depending on when the cash is received from HMRC. It is not acceptable to offset the grant income against the payroll expense in profit and loss.
Practically, entitlement to the grant only passes to the employer over the period of time that the relevant employee is on furlough which means that the income from the grant will normally be recognised on a straight line basis over the furlough period for each relevant employee.
Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Bounce Back Loan Scheme (BBLS)
Support under the CBILS or the BBLS is an arrangement which combines three elements as follows:
- A bank loan;
- A government-backed guarantee; and
- A business interruption payment (i.e. the government pays any lender-levied fees and interest payments for the first twelve months).
Under these schemes the government will make a business interruption payment (BIP) directly to the lender to cover the first twelve months of interest and so it follows that the entity will not be obliged to pay the full interest on the loan. This results in a non-market rate of interest overall on the loan. As the transaction fees are the responsibility of the government, there is unlikely to be a need to adjust for these.
FRS 102 paragraph 11.13 requires financing transactions at a below market rate of interest to be initially measured at the present value of future payments, discounted at a market rate of interest for a similar debt instrument, adjusted for transaction costs.
A similar debt instrument would be one where the same level of guarantee is provided (i.e. a loan for the same amount, over the same term and guaranteed by the government). Therefore, the stated rate of interest on a CBILS or BBLS loan is likely to be considered a market rate of interest as the entity has gone to the market and been offered the loan by its bank.
At initial recognition, the double entries for the loan would be as follows:
|Dr||Cash||Amount of cash received|
|Cr||Liability||Present value of payments discounted at market rate of interest|
|Cr||Finance income (P&L)||Balancing figure|
The balancing figure represents the present value of the interest being paid for by the government. Where this balance is immaterial, management would need to decide whether the amortised cost method of accounting is appropriate.
The accounting entries in future periods would be measured at amortised cost using the effective interest method. Subsequent entries would be as follows:
|Dr||Interest (P&L)||Calculated using amortised cost|
We can assist you in calculating the above figures that are relevant to your own loan circumstances.
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