Audit and Technical Partner Leavitt Walmsley Associates Ltd
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Accounting aspects of government assistance

Steve Collings examines the accounting treatment of grants received in respect of the Coronavirus Job Retention Scheme (CJRS) and the Coronavirus Statutory Sick Pay Rebate Scheme together with the disclosure requirements under UK GAAP.

11th May 2020
Audit and Technical Partner Leavitt Walmsley Associates Ltd
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As businesses continue to deal with the significant level of disruption, HMRC has now started to send payments out to employers in respect of the CJRS for employees that have been furloughed.

For self-employed individuals, it is expected that the self-employed income support scheme will be up and running during the middle of this month (May 2020).

Grants received from HMRC for furloughed employees

Employers who have furloughed employees will have been claiming the 80% grant available from HMRC. Many businesses have now received these grants and in terms of the accounting treatment, there are a couple of points that need to be considered where the financial statements are concerned.

FRS 102, the Financial Reporting Standard applicable in the UK and Republic of Ireland, deals with government grants in section 24 Government Grants. FRS 102, paragraph 24.3A states that government grants cannot be recognised in the financial statements until there is reasonable assurance that:

  1. the entity will comply with the conditions attaching to them; and
  2. the grants will be received.
Once the recognition criteria has been met, FRS 102, paragraph 24.5E states:
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.
The relevant accounting policy in respect of the grant will then be applied. Under FRS 102, Section 24 this will either be the ‘performance model’ (FRS 102, paragraph 24.5B) or the ‘accrual model’ (FRS 102, paragraphs 24.5C to 24.5G). Where the CJRS is concerned, recognition of the grant in the financial statements is likely to be the same under both models (i.e. it will be recognised immediately in profit and loss).

The grant in respect of furloughed employees must be presented as income within profit or loss. This can be done either separately as ‘Grant income’ or ‘Government grant’ or within the heading ‘Sundry income’.

The grant cannot be offset against the payroll expense (or any other expense) in profit or loss because this is prohibited in company law. Schedule 1 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410), para 8 states:

Amounts in respect of items representing assets or income may not be offset against amounts in respect of items representing liabilities or expenditure (as the case may be), or vice versa.
The above restriction is also the same for small companies in The Small Companies and Groups (Accounts and Directors’ Reports) Regulations 2008 (SI 2008/409) at paragraph 8.

Disclosure requirements

Non-small entities

FRS 102, paragraph 24.6 requires an entity to disclose the following:

  1. the accounting policy adopted for grants in accordance with paragraph 24.4 (ie the performance model or the accrual model);
  2. the nature and amounts of grants recognised in the financial statements;
  3. unfulfilled conditions and other contingencies attaching to grants that have been recognised in income; and
  4. an indication of other forms of government assistance from which the entity has directly benefited.

Small entities 

A small entity choosing to report under FRS 102, Section 1A is not required to apply the above disclosure requirements and there are no specific disclosure requirements in Section 1A for small companies where government grants are concerned.

However, there is still a requirement for the directors to ensure the financial statements give a true and fair view, so potentially there may be some disclosures made in respect of the grants received if the directors’ view this is necessary to enable a true and fair view to be presented.

Micro-entities

For micro-entities choosing to report under FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime, there are no specific disclosure requirements.

Coronavirus Statutory Sick Pay Rebate Scheme

For payments received by an entity from HMRC in respect of the Coronavirus Statutory Sick Pay Rebate Scheme, the same accounting treatment as above will apply.

Replies (6)

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By Hugh Jackson
13th May 2020 09:27

Very useful, although for certain companies and their internal management accounts, I expect that the grant will be shown as an expense offset, with an adjustment made in the statutory accounts to transfer the grant to income.

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By Donald MacKenzie
13th May 2020 09:39

I think treating the grant as an expense offset is more meaningful. If the scheme did not exist the employers would have laid off staff and would not be paying wages. The grant monies are NOT real income but just Treasury paying the wages.

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By johnacarpenter
13th May 2020 18:03

HMRC have stated that under the furlough scheme they are income for tax purposes, and as such are taxable.
Are they also subject to VAT, do they include VAT?

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Replying to johnacarpenter:
All Paul Accountants in Leeds
By paulinleeds
13th May 2020 22:09

They are not subject to, or include, VAT. It is not a taxable supply by the company to the government. It is outside the scope of VAT. Furthermore, there is no consideration receive for the grant. It is just that 'a government grant'

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By optimist
14th May 2020 09:39

What about the CBIL loans? With the set up charge and the first 12 months interest paid by the government, should this be brought in as Dr Expense Cr Grant Income?

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By poveyt
09th Jun 2020 14:25

To be honest, I would have thought showing this as income internally is better. You want to know the level of expense you are currently holding as a business and how much is coming from the government to understand what decisions to take next. But that is just my opinion...

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