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13th May 2020Accounting Implications of Covid-19 Support Under FRS102

With so many different loans and grants available to businesses during the Covid-19 pandemic there are many new challenges in how to account for the various support schemes available. Here we discuss some of the main forms of support available and being utilised by businesses and offer guidance as to how to account for these in your financial statements.

There are currently differing views on how the accounting should work for some of the issues covered in this note (and at present few if any companies will yet have had to formally report on the transactions involved). Therefore, some of the conclusions in this note (as indicated) remain tentative pending the development of a clearer consensus.

This note deals with accounting under FRS102, which is the most common financial reporting standard used by small and medium sized businesses in the UK. Some differences will apply where other accounting standards are followed. We cover:

If you have any questions or would like to discuss any of the matters below, please contact Helen James.

Coronavirus Job Retention Scheme(CJRS) grants,

Many businesses have now utilised the CJRS and have put some or all of their employees on furlough leave. The furlough claims portal is now open on gov.uk for applications and HMRC have started to release the first furlough grants to businesses.

How do I account for furlough grants?

Under FRS 102 the furlough grants received should be accounted for as grant income under Section 24 Government Grants.

Under FRS102, a government grant is defined 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.

Entities must recognise grants either based on the performance model or the accrual model. We recommend that furlough grants are accounted for under the accrual model. FRS102 states that:

A grant that becomes receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the entity with no future related costs shall be recognised in income in the period in which it becomes receivable.

Therefore furlough grant income should be recognised in the period that the expense was incurred. I.e. if an employee is on furlough leave between 1 April and 30 April, and all conditions of the furlough scheme have been met, then the grant income is recognised for the same period. The P&L will therefore show a salary expense as normal and a grant income for the furlough grant received or receivable.

For statutory financial statements, grant income should be recognised within other operating income or, preferably, under a seprate heading describing the nature of the grant, in the profit and loss account. Until the grant income is received in cash from HMRC, a debtor balance should be recognised.

What disclosures are required?

Entities will need to disclose:

  • An accounting policy for grants detailing that the accrual model has been adopted
  • Nature and amounts of grants recognised
  • Any unfulfilled conditions and other contingencies attaching to grants recognised in income
  • An indication of other forms of government assistance from which the entity has directly benefited (which could incorporate several different schemes at the current time)

 

Coronavirus Business Interruption Loan Scheme (CBILS)

This scheme allows businesses to take government backed loans. The government will cover the first 12 months of interest payments and any lender-levied fees.

How do I account for the interest paid by the government?

Interest payable for the first 12 month period of the loan is paid by the government straight to the lender.

This leads to the question as to whether the interest is originally levied on the company, before being paid by a government grant; or whether the initial period is interest free and no interest is levied on the company in that period.

The appropriate treatment is likely to depend on the exact terms and conditions issued by the lender, however, although opinions on this may differ, our current view is that in most cases the Business Interruption Payment from the government to cover the first 12 months of interest payments and any lender-levied charges should be treated as a government grant.

Therefore, we would expect entities to account for all interest payments and fees on the loan as normal and then recognise a government grant receivable for the interest and fees paid by the government.

As per the CJRS the government grant should be recognised in the period that the expense was incurred and therefore will match against the interest charged in the period.

What disclosures are required?

Entities will need to disclose:

  • An accounting policy for grants detailing that the accrual model has been adopted
  • Nature and amounts of grants recognised
  • Any unfulfilled conditions and other contingencies attaching to grants recognised in income
  • An indication of other forms of government assistance from which the entity has directly benefited (which could incorporate several different schemes at the current time)

 

Other assistance you may have been granted

Business rates holidays

You may have been granted a holiday from paying business rates. If so, then there will be no payments of rates required for a certain period, and therefore no P&L charge and no accounting entries are required.

If the effect of the business rates holiday is material to the accounts, then disclosure should be made in the accounts in order to give a true and fair view.

Rent holidays or concessions

Many landlords have granted rent holidays or rent concessions whilst businesses are suffering the effects of the pandemic.

Under FRS102, unless the rent holiday or recent concession coincides with entering into a new lease or renewing a lease the rent concession or holiday will not be treated as a lease incentive. Therefore, the change in the lease terms to allow the rent concession or holiday needs to be accounted for as a lease modification.

Although lease modifications are not specifically dealt with under FRS102 it is generally thought that the reduction in rent should be spread over the remainder of the lease term, but this is an area where views could change.

Disclosure in the financial statements will be required if the rent concession or holiday given is material, and an accounting policy for lease modifications will need to disclose how the modification has been treated.

Changes to employee rights to carry forward holiday

Don’t forget that if employees are carrying forward additional holiday, it may result in a holiday pay accrual at the year-end becoming material to the financial statements.

VAT deferrals

Companies making use of the ability to defer VAT payments will need to remember that larger VAT liabilities will be recognised in their financial statements.

Other grants or loans

If grants are obtained from other sources (not the government) then there is no specific guidance in FRS102 as to how they should be treated. However, we would recommend following the same principles as would be applied to government grants under section 24 of FRS102.

Interest-free loans

Certain businesses may be able to access interest-free loans. In this instance companies need to ascertain whether they are borrowing at a non-market rate of interest.

In normal circumstances, where interest-free loans are taken (normally from related parties) an entity would be expected to discount the loan cash flows at a market rate, resulting in an imputed interest charge to P&L.

In the current situation it may be possible to argue that 0% is the market rate, given that rate may be offered to all entities that meet the lending criteria to take the loan. Entities will therefore need to consider carefully the source of the loan and who is eligible for the loan in order to assess whether it is at market rate, or whether it is a discounted rate which will need to be adjusted in the financial statements.

Given the multiple schemes available and challenges of accounting for these, businesses should ensure they are up to date on the latest reporting and disclosure requirements.

We are here to help. If you have any questions or would like to discuss any of the matters above, please contact Helen James.

12 May 2020

The information contained in this guidance has been obtained from public sources and every attempt has been made to ensure its accuracy at the date of publication. In this ever changing environment, this information is subject to change and we will not accept liability for losses arising from changes in the law or the interpretation thereof.

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Helen James
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