Accounting for coronavirus government support schemes under FRS 102

Introduction

This helpsheet has been issued by ICAEW’s Technical Advisory Service (in collaboration with the Financial Reporting Faculty) to help ICAEW and Financial Reporting Faculty members preparing accounts under FRS 102 to account for some of the various support schemes available for businesses from the government in light of the coronavirus pandemic. The following subsections take each support scheme in turn and outline the potential accounting treatment.

While this helpsheet seeks to apply the existing standards to these schemes and offers potential accounting approaches, it does not necessarily address every potential approach and, as most of these schemes are new, this is an emerging area of UK GAAP. When accounts are prepared in accordance with a relevant SORP, its requirements should also be considered.

Members may also wish to refer to the following helpsheets and guidance:

• Checklist: implications of COVID 19 on the preparation of accounts under FRS 102
• The financial reporting implications of coronavirus

Coronavirus Job Retention Scheme (CJRS)

The Coronavirus Job Retention Scheme (CJRS) results in cash payments from government to compensate employers for part of the wages, associated national insurance contributions (NICs) and employer pension contributions of employees who have been placed on furlough (i.e. placed on a temporary leave of absence from working for the employer). This is a government grant which should be accounted for in accordance with Section 24 of FRS 102.

Paragraph 24.4 of FRS 102 permits an entity to recognise grants based on either the performance model or the accrual model. This is an accounting policy choice which must be applied on a class-by-class basis. Practically, this choice does not make a difference to the accounting treatment of a CJRS grant, however the accounting policy used should be disclosed in the notes to the financial statements.

Regardless of which model is applied, where the entity has its own PAYE payroll scheme, the grant income will be shown within other income and there may be a debtor balance recognised depending upon when the cash was received from HMRC. It is not appropriate to net the grant income off against wages and salaries costs (FRS 102 paragraph 2.52).

Performance model

Under the performance model, entitlement to the grant only passes to the employer over the period of time that the relevant employee is on furlough. Practically, this means that the income from the grant will normally be recognised on a straight line basis over the furlough period for each relevant employee.

Accrual model

Under the accrual model, FRS 102 paragraph 24.5D states that a grant 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. Practically, this means that the income from the grant will normally still be recognised on a straight line basis over the furlough period for each relevant employee.

Example 1

A business with a year end of 31 March 2020 furloughed an eligible member of staff with effect from 1 March 2020. The business has calculated that the total amount which can be claimed under the CJRS for this period for this employee is £2,100 (this is an illustrative figure for the purpose of this example – to work out how much can be claimed for a particular employee, please refer to HMRC’s guidance). At the year end, the claim portal hadn’t yet opened, although the business had reasonable assurance that it had complied with the relevant conditions to be able to claim once the portal was opened, and that the grant would be received. This business made the claim on 20 April 2020 and received the funds 6 working days later.

In the accounts for the year ended 31 March 2020, the business should recognise £2,100 as other income and a debtor balance of £2,100.

Example 2

A business with a year end of 30 April 2020 furloughed an eligible member of staff with effect from 30 March 2020. The business has calculated that the total amount which can be claimed under the CJRS for this period for this employee is £2,100 (this is an illustrative figure for the purpose of this example – to work out how much can be claimed for a particular employee, please refer to HMRC’s guidance). This business made the claim on 28 April 2020 but had not received the funds by the year end. At the year end, the business has reasonable assurance that the grant would be received and that it has complied with the relevant conditions to make the claim.

In the accounts for the year ended 30 April 2020, the business should recognise £2,100 as other income and a debtor balance of £2,100.

Small Business Grant Fund (SBGF), Retail, Hospitality and Leisure Grant Fund (RHLGF) and discretionary fund

The Small Business Grant Fund (SBGF), the Retail, Hospitality and Leisure Grant Fund (RHLGF) and the discretionary fund represent cash payments from local authorities to eligible businesses. These 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.

Paragraph 24.4 of FRS 102 permits an entity to recognise grants based on either the performance model or the accrual model. This is an accounting policy choice which must be applied on a class-by-class basis. Practically this choice doesn’t make a difference to the accounting treatment of these particular grants, however, the accounting policy used should be disclosed in the notes to the financial statements.

Performance model

Under the performance model, FRS 102 paragraph 24.5B(a) states a grant that does not impose specified future performance-related conditions on the recipient is recognised in income when the grant proceeds are received or receivable (this is likely to be when the scheme eligibility criteria were first published, or if there was uncertainty around eligibility, when confirmation of entitlement was received from the local authority). Practically, this will be shown within other income, with a corresponding debtor until the cash has been received from the local authority.

Accrual model

Under the accrual model, FRS 102 paragraph 24.5E states that a grant that becomes receivable for the purpose of giving immediate financial support to the entity with no future related costs shall be recognised as income in the period in which it becomes receivable (again, this is likely to be when the scheme eligibility criteria were first published, or if there was uncertainty around eligibility, when confirmation of entitlement was received from the local authority). Practically, this will be shown within other income, with a corresponding debtor until the cash is received from the local authority.

Business rates holiday

Eligible nurseries and businesses in the retail, hospitality and leisure sectors will not have to pay business rates for the 2020-21 tax year. Under FRS 102, this simply represents a reduction in the rates expense.

If the financial year of the business is aligned to the tax year, the business would simply have a zero rates expense for the year. In most cases, the financial year will not be aligned to the tax year, so time apportionment will be necessary.

Example

An eligible business has a year end of 30 June 2020. In the 2019-20 tax year its total rates bill was £30,000. In the 2020-21 tax year, due to the business rates holiday, its total rates bill is zero.

The rates expense to be reflected in the accounts for the year ended 30 June 2020 is as follows:

Time period	Calculation	Expense
1 July 2019 to 5 April 2020	(280 days / 366 days) x £30,000	£22,951
6 April 2020 to 30 June 2020	(86 days / 365 days) x £0	£0
Ttotal		£22,951

Statutory sick pay (SSP) rebate scheme

The statutory sick pay (SSP) rebate scheme results in cash payments from government to compensate employers for the SSP they pay to employees because they either a) have coronavirus, b) cannot work because they are self-isolating at home, or c) are shielding in line with public health guidance. This is a government grant which should be accounted for in accordance with Section 24 of FRS 102.

Paragraph 24.4 of FRS 102 permits an entity to recognise grants based on either the performance model or the accrual model. This is an accounting policy choice which must be applied on a class-by-class basis. Practically this choice doesn’t make a difference to the accounting treatment of these particular grants, however the accounting policy used should be disclosed in the notes to the financial statements.

Regardless of which model is applied, where the entity has its own PAYE payroll scheme, the grant income will be shown within other income and there would be either a debtor or a deferred income balance recognised depending upon when the cash was received from HMRC. It is not appropriate to net the grant income off against wages and salaries costs (FRS 102 paragraph 2.52).

Performance model

Under the performance model, entitlement to the grant only passes to the employer as time passes while the relevant employee is absent (for a period of up to two weeks). Practically, this means that the income from the grant will be recognised on a straight line basis over the period a relevant employee is absent.

Accrual model

Under the accrual model, FRS 102 paragraph 24.5D states that grants relating to revenue shall be recognised in income on a systematic basis over the periods in which the entity recognises the related costs for which the grant is intended to compensate. Practically, this means that the income from the grant will be recognised on a straight line basis over the period a relevant employee is absent.

VAT deferral and time to pay

When an entity is making use of the Deferral of VAT payments due to coronavirus or HMRC’s time to pay scheme, this is simply a deferral of the tax due; it does not result in a reduction in the amount of tax due. As tax liabilities do not meet the definition of a financial instrument, there is no need to adjust the carrying amount of the liability.

Note that under the time to pay scheme, interest usually still accrues and should therefore be accounted for in accordance with the agreement reached with HMRC. It is the position as at the balance sheet date which should be reflected in the financial statements (subsequent negotiations after the balance sheet date would be a non-adjusting event after the reporting period in line with paragraph 32.2 of FRS 102).

Coronavirus Business Interruption Loan Scheme(CBILS) and Coronavirus Bounce Back Scheme Loan (BBLS)

Support under the Coronavirus Bounce Back Loan Scheme (BBLS) or the Coronavirus Business Interruption Loan Scheme (CBILS) is essentially an arrangement which combines three elements together:

• A bank loan;
• A government-backed guarantee; and
• A business interruption payment i.e. the government pays any fees and interest payments for the first 12 months (BIP).

The interest rate for BBLs is fixed at 2.5% by government whereas the interest rate on CBILS is set by the lender.

The examples below have been expanded to reflect (i) how UK GAAP has evolved in this area. (there are alternative views on accounting for the BIP); and (ii) a simplified approach when the entity does not consider the difference between the actual interest rate and the market rate for a similar debt instrument to be material.

Initial recognition

FRS 102 paragraph 11.13 requires financial liabilities to be measured initially at transaction price adjusted for transaction costs unless the arrangement constitutes a financing transaction (e.g. an arrangement that is at an off-market rate of interest). Financing transactions are required to be measured initially at the present value of future payments discounted at a market rate of interest for a similar debt instrument, adjusted for transaction costs.

Practically, as the fees are responsibility of government, there is unlikely to be a need to adjust for transaction costs.

A similar debt instrument would be one where the same level of guarantee is provided. In other words, looking at a loan for the same level of borrowing, over the same term, with the same government guarantee. On that basis, the stated rate of interest on a CBILS or BBLS loan is probably a market rate of interest as the entity has gone to the market (a bank) and has been offered this borrowing.

Under these schemes the government makes a (BIP) to the lender to cover the first 12 months of interest so 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, from the entity’s perspective. As always with financial instruments, it is imperative that each loan agreement is read carefully and in full to ensure the arrangement is as expected.

At initial recognition the double entries would be:

Dr Cash amount of cash received
Cr Liability present value of future payments discounted at a market rate of interest
Cr P&L (finance income) being the balance

The balancing figure represents the present value of the interest being paid for by the government (i.e. the BIP). Although there is no direct transfer of resources to the entity (as interest paid by government is paid directly to the bank), this is generally viewed as representing a government grant and will therefore be presented as such in profit or loss. An alternative view is that this could be presented as finance income.

If there is no material difference between the actual rate of interest on the loan and a market rate for a similar debt instrument then the loan will be recorded at the transaction price ie, the cash received (see BBL example below). Whether or not the difference is material from the perspective of the entity will depend on individual facts and circumstances.

Subsequent measurement

Subsequent measurement, as set out in FRS 102 paragraph 11.14, is amortised cost using the effective interest method.

Subsequent entries would be:

Dr P&L (interest)
Cr Liability
being interest calculated using the amortised cost method

Dr Liability Cr Cash being cash repayments made

Bounce Back Loan example

An entity has borrowed £100,000 under BBLS at 2.5% on the first day of its accounting period. The loan is repayable in full at the end of three years. Interest in the first year will be paid by the government. The entity does not consider the difference between the actual interest rate and the market rate for a similar debt instrument to be material.

The accounting entries would be:

The initial accounting entries are:

Dr Cash £100,000
Cr Liability £100,000

At the end of the first year:

Dr P&L (interest) @ 2.5% £2,500
Cr Other income (government grant) £2,500*
*alternatively, this could be presented as finance income.

At the end of the second year:

Dr P&L (interest) £2,500
Cr Cash £2,500

At the end of the third year:

Dr P&L (interest) £2,500
Dr Loan £100,000
Cr Cash £102,500

When a loan (or interest) is repaid in instalments over the three years the same principle will be applied. Interest will be calculated on the outstanding balance and the amount paid by government recognised as an interest expense and grant/finance income as in the first year above.

CBILS example

In this example we compare a loan arranged under CBILS to a similar debt instrument (as the entity considers the difference between the actual interest rate and the market rate for a similar debt instrument to be material) and how this might impact the accounting treatment under FRS 102.

An entity has borrowed £100,000 under CBILS on a 5 year term at 5% on the first day of its accounting period. Repayments are due on the anniversary of the drawdown of the loan. Without the business interruption payment from the government, the loan might ordinarily look like the following (assuming regular, equal repayments).

Year	b/f on first day of the year	Payment made on first day of the year	Balance immediately after payment	Interest (at 5%)	c/f on last day of year
1	100,000	-	100,000	5,000	105,000
2	105,000	(23,097)	81,903	4,095	85,998
3	85,998	(23,097)	62,900	3,145	66,045
4	66,045	(23,097)	42,984	2,147	45,095
5	45,095	(23,097)	21,998	1,100	23,097
6	23,097	(23,097	-	-	-
Total		(115,487)		15,487
Note: The figures in the above table have been rounded to the nearest pound for presentational purposes.

However, in this example, the loan agreement for this entity clearly states that it is not obliged to pay the interest over the first 12 months of the loan, the government is. So adjusting to reflect the BIP, i.e. the £5,000 interest in Year 1 not being the responsibility of the entity, the figures look like the following (again, assuming the entity is required to make regular, equal repayments).

Year	b/f on first day of the year	Payment made on first day of the year	Balance immediately after payment	Interest (at 5%)	c/f on last day of year
1	100,000	-	100,000	-	100,000
2	100,000	(21,998)	78,002	3,900	81,903
3	81,903	(21,998)	59,905	2,995	62,900
4	62,900	(21,998)	40,903	2,045	42,948
5	42,948	(21,998)	20,950	1,048	21,998
6	21,998	(21,998)	-	-	-
Total		(109,988)		9,988
Note: The figures in the above table have been rounded to the nearest pound for presentational purposes.

This demonstrates that there is a below market rate of interest as, while 5% interest is accruing in each of years 2 to 5, it is not accruing in Year 1.

The entity must therefore calculate the present value of the loan at initial recognition where payments are discounted back using a market rate of interest (in this example, 5%) to comply with the requirements of FRS 102.

Year	b/f on first day of the year	Payment made on first day of the year	Balance immediately after payment	Interest (at 5%)	c/f on last day of year
1	95,238	-	95,238	4,762	100,000
2	100,000	(21,998)	78,002	3,900	81,903
3	81,903	(21,998)	59,905	2,995	62,900
4	62,900	(21,998)	40,903	2,045	42,948
5	42,948	(21,998)	20,950	1,048	21,998
6	21,998	(21,998)	-	-	-
Total		(109,988)		14,750
Note: The figures in the above table have been rounded to the nearest pound for presentational purposes.

As such at initial recognition the present value of the liability is only £95,238.

The initial accounting entries are:

Dr Cash £100,000 (the cash received)
Cr Liability £95,238 (the PV of liability using market rate of interest)
Cr P&L £4,762 (the balance i.e. the present value of the BIP)

At the end of the first year, the accounting entries are:

Dr P&L (interest) £4,762
Cr Liability £4,762
being the interest using the amortised cost method

At the end of the second year, the accounting entries are:

Dr P&L (interest) £3,900
Cr Liability £3,900
being the interest using the amortised cost method

Dr Liability £21,998
Cr Cash £21,998
being the cash repayment

The double entries in subsequent years follow a similar pattern to those in the second year.

Under this example, where a loan is taken out towards the end of the financial year, the full present value adjustment to the loan will be credited to the P&L on initial recognition, but only the interest calculated under the amortised cost method for the period to the year end will be charge to the P&L.

However, if the entity considered that the difference between the actual interest expense and the ‘market rate’ to be immaterial, the accounting treatment would be as follows:

The initial accounting entries are:

Dr Cash £100,000
Cr Liability £100,000

At the end of the first year, the accounting entries are:

Dr P&L (interest) £5,000
Cr Other income (government grant) £5,000*
*alternatively, this could be presented as finance income.

At the end of the second year, the accounting entries are:

Dr P&L (interest) £3,900
Cr Liability £3,900.
being the interest using the amortised cost method

Dr Cash £21,998
Cr Liability £21,998
being the cash repayment

The double entries in subsequent years follow a similar pattern to those in the second year.

If in doubt seek advice

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.