Accounting for Government grants: further considerations

Published: Friday 14 August 2020

The COVID-19 pandemic continues to impact the financial performance of many companies, and whilst many have adjusted to different ways of working and continue to adapt to operational risks they face, the requirement to prepare financial statements is something many will see as a burden. Given the current environment, this will be the case even with the Companies House extension granted to all companies.

The Government has issued a significant number of incentives which many businesses will have taken advantage of, but now that these begin to slow down and come to an end, companies will need to consider how these should be accounted for in their financial statements.

Coronavirus job retention scheme (CJRS)

CJRS allows claims to be made for employees’ wages plus any employer National Insurance and pension contributions, if the business has placed them on furlough leave due to coronavirus. This has been extended to the end of October 2020 when it is expected to be phased out.

Any monies received should be accounted for as grant income and presented separately as other operating income. Under company law the income cannot be netted against the costs that they might relate to, so the wages costs incurred will continue to be expensed in the profit and loss.

Practical considerations will need to be made where there is a cut off or allocation whereby a payment straddles a year-end. Finance teams should look to make an accrual for the proportion of the income to which it relates to ensure it is matched against the expense incurred. When preparing the financial statements, companies will need to ensure they include accounting policies for this grant income to demonstrate how it has been accounted for in its financial statements.

Coronavirus business interruption loan scheme (CBILS) 

CBILS is available to small and medium sized businesses whereby the Government has confirmed it will pay interest and any fees for the first 12 months, with the loan 80% guaranteed. The finance is typically in the form of overdraft and invoice finance facilities for up to three years and for loans and asset finance facilities up to six years, with interest charges set by the lender. 

Consideration will need to be given to how to account for the interest and fees paid by the Government; this will be largely driven by the detail in the loan agreement. If the finance agreement makes the company contractually liable for interest and charges in the first year, whilst the cash flow is paid by the Government, a company would gross up the charge in the profit and loss account to recognise both an interest cost and any fees incurred, and a corresponding grant income. If, however, the business is not contractually liable then it is recommended that the interest charge is spread across the loan period.

As with most financing agreements, it is recommended to spend time reviewing these and even sharing these with advisers as soon as they are available to ensure the accounting treatment can be agreed upon.

It is worth noting that the bounce back loan scheme (BBLS) will have similar considerations to make.

Business rates holiday

All retail, hospitality, and leisure businesses will be given a business rates holiday for the 2020/21 tax year as part of the package of coronavirus measures. No action needs to be taken by businesses eligible for the rates holiday as local authorities will automatically reissue bills for 2020/21.

Whilst there will be no grant receivable and business rates will be zero for the period in which it relates, businesses who are impacted should consider how this is disclosed in the financial statements in order to show a true and fair view. This is of importance for those businesses whereby in a normal year the charge would be of significance to the profit and loss account. 

We would expect companies to include this in the strategic report if applicable, or by way of a note to the financial statements so that it is clear that the company has benefitted from this holiday payment during the financial year in which it impacts the profit and loss.

In addition to the business rates holiday, further reliefs made available 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 the retail, hospitality and leisure businesses operating from smaller premises, with a rateable value between £15,000 and £51,000. These two cash grants are considered government grants and entities should use the accruals method to account for these, recognising income when performance conditions have been met and the company is eligible for the cash.

Small business grant fund and retail, hospitality and grant leisure fund

The small business grant is payable to businesses that, on 11 March 2020, had a property that was eligible for the small business rate relief (SBRR) scheme. This SBRR scheme is available to a business with a property that has a rateable value of less than £15,000. The grant is also be available to those businesses that had a property eligible for the rural rate relief scheme as of the same date.

All retail, hospitality, and leisure businesses with a property that have a rateable value between £15,000 and £51,000 are eligible for a £25,000 cash grant. The sub-categories of businesses qualifying for this grant are the same as those the ‘expanded retail discount scheme’.

As with other Government grants received, these should be accounted for as other income and recognised as a credit to the profit and loss account.

Practical considerations here will be when is it recognised, which may be different to the receipt of cash compared to company year ends. Companies with a March 2020 year end may need to accrue the income in their balance sheet if the grant was received at a later stage.

Disclosure requirements

Where companies have taken advantage of any of the previously mentioned Government grants, additional disclosure will be required to allow a user of the financial statements to understand how the company has benefitted and what grants they have taken advantage of. We expect financial statements to include the following disclosures:

  • 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 .

Summary

There is plenty to consider for those preparing financial statements in the next 12 months; whether it be the timing and recognition of Government grants or the adoption of applicable accounting policies in its financial statements, businesses will need to plan for how they account for these incentives and how it might impact their profit and loss or balance sheet. We continue to work closely with our clients to offer advice and assistance on these matters and how they might impact financial statements for this year.