Audit and Technical Partner Leavitt Walmsley Associates Ltd
Share this content

Covid-19 accounting: CBILS loan

Steve Collings examines the accounting treatment for a loan received under the Coronavirus Business Interruption Loan Scheme (CBILS) and shows how Excel can help.

16th Jun 2020
Audit and Technical Partner Leavitt Walmsley Associates Ltd
Share this content
Closed business
istock_clarkandcompany_aw

Accountants up and down the country are in the midst of assisting their clients through the Covid-19 pandemic. The level of disruption caused by the virus cannot be underestimated and the government has put in place a range of financial measures to help businesses and their employees through this turbulent period.

Businesses can now get access to grants including the Coronavirus Job Retention Scheme, Self-Employed Income Support Scheme, SSP Rebate and the Small Business Grant Fund, Retail, Hospitality and Leisure Grant Fund and Discretionary Fund.

There are a couple of loan products that have been made available to businesses as well which aim to help them survive the pandemic. Notably, the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme.

This article examines the accounting treatment for a loan received under the CBILS. It should be emphasised that loans such as these are brand new and the method shown in this article is potentially one way that a loan could be accounted for under the provisions of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.  The terms attached to the loan will need careful scrutiny and as we progress through the second-half of this year, other treatments may begin to emerge.

At the outset it is worth mentioning that there are three elements to a CBILS loan:

  • Element 1: The bank loan itself
  • Element 2: The government-backed guarantee
  • Element 3: The business interruption payment

The business interruption payment (BIP) is the payment made by the government to the lender in respect of the first year’s interest and any lender-levied fees.  There are no lender-levied fees on a Bounce Back loan and some banks may not charge any arrangement fees for a CBILS loan (although some are taking a small fee where they may take a debenture for the first time but this is not across the board for all banks).

Some banks are also proving far more efficient than others at processing applications for CBILS or Bounce Back loans.

Example – CBILS loan

Emery Ltd takes out a £150,000 CBILS loan over a five-year period at 5% interest. The bank does not charge an arrangement fee but does charge a £200 document fee for taking a debenture for the first time which is paid by the scheme. Ordinarily repayments would be £34,645 per annum but in the first year the government pay the interest so the first year’s payments are £7,500 (£150,000 x 5%) less than they are in year 2 onwards. This example assumes interest is paid in arrears.

The Goal Seek function in Microsoft Excel can be used to deal with the accounting side.  To do this you profile the loan in an Excel spreadsheet as follows:

Excel

The formulas used in the above spreadsheet are shown below:

Excel

To use the Goal Seek function go to the Data tab at the top of the Excel spreadsheet and click ‘What-if Analysis’ and select ‘Goal Seek’ and enter the following:

Excel

Once you click ‘OK’ the following will appear:

Excel

You can see that the interest in year 1 is nil because the company is not paying the interest – the government are meeting this cost but there will have to be a government grant recorded to reflect this arrangement (see later). The cash flows in year 1 are also £7,500 lower than in years 2 to 5 because of this arrangement with the government. In year 2, the payments revert to normal.

It is important, however, to scrutinise the terms and conditions of the loan because not every CBILS loan will be the same in terms of payment dates and interest.  It is only Bounce Back Loans where the interest is capped from year 2 onwards at 2.5%.

Year 1 entries

In year 1, Emery Ltd records the loan as follows:

   

£

Dr Bank

 

150,000

Cr Loan payable

150,000

Being CBILS loan received

 
   

£

Dr Loan payable

27,145

Cr Bank

 

27,145

Being payments to bank in year 1

The government will make a business interruption payment (BIP) to the lender for the interest and any lender-levied fees. In this example the loan interest in year 1 is £7,500 (£150,000 x 5%) plus the debenture fee of £200 hence the BIP is £7,700.  This is recorded in the profit and loss account as follows:

   

£

Dr Finance costs

7,700

Cr Government grant

7,700

Being business interruption payment

The business interruption payment is effectively a government grant and although there is a neutral effect on profit and loss this would be recorded in the financial statements to reflect what has actually happened. Had the company taken out a normal loan (ie not a CBILS loan), then it would have had to pay the year 1 interest and the lender-levied fee. In this particular case, however, the government met that cost.

The above accounting treatment would also be necessary because as is the case with all types of Covid-19-related grants (such as the CJRS grant), they must not be offset against expenditure in profit or loss (FRS 102, para 2.52 and FRS 105, para 2.37) – they are shown within income in profit or loss.

At the end of year 1, the loan is shown in the balance sheet as a current liability of £28,505 (£122,855 less £94,350) and a non-current liability of £94,350 to comply with the statutory formats of the balance sheet.

Year 2 entries

In year 2, payments increase to £34,645 per the loan terms and conditions and the profit and loss account takes the interest charge of £6,140.  The journals to record these transactions are as follows:

   

£

Dr Finance costs (P&L)

6,140

Cr Loan payable

6,140

Being year 2 interest

 
   

£

Dr Loan payable

34,645

Cr Bank

 

34,645

Being payments to bank in year 2

In year 2 the loan balance of £94,350 is presented as a current liability (£29,929) and a non-current liability (£64,421).

Conclusion

This article has examined how a CBILS loan may be accounted for within the financial statements bringing in the government grant aspect and other considerations. As noted earlier in the article, it is important that loan terms are scrutinised because these will inevitably differ among clients and as we progress through the second-half of this turbulent year, there may be other nuances that need to be considered in terms of their accounting treatments.

Replies (4)

Please login or register to join the discussion.

avatar
By Ian McTernan CTA
17th Jun 2020 11:48

I'm pretty sure a lot of people won't even think of making entries in their accounts for a payment made directly from the Govt to the lender in year one...especially as none of the money actually goes through the company so the company does not incur the finance charge nor receive the Govt grant- the bank does.
Can you confirm that the payment is actually made (or will the banks and Govt come up with some other way of accounting for it between themselves?).
It's not a normal loan and there is no actual payment due by the company, so comparing to a normal loan and saying 'if it had been' doesn't sound like a proper approach.
I'm sure accounting purists will throw up their arms and get technical, but in practical terms there is no way for the company to know the payment was made and also it never received the money so to credit a grant when none was received by the company seems wrong to my non-audit eyes.

Thanks (3)
Replying to Ian McTernan CTA:
avatar
By sphonner
18th Jun 2020 12:06

The borrower benefited from the grant. The grant was part of the conditions, so the bank will not charge the interest, even if the government fails to pay the bank!

Thanks (0)
avatar
By sphonner
18th Jun 2020 12:11

A timely reminder and helpful article. Government grants are rare!

I wonder how the lender will view the interest for year 1 (covered by the grant) under interest and debt servicing covenants.

Thanks (0)
avatar
By mikebeadle
21st Jun 2020 20:53

This cannot possibly be right. The borrower has entered into one contract with the bank and nothing else. There is no contract with the government at all, not cash receipts. CBILS just provides a way for the government to help the bank, some of which is passed on to the borrower.

The terms of the loan contract provide that no interest payments etc are due in the first year. So just do the obvious thing: no interest accrues in year 1 and then it accrues and is (hopefully!) paid thereafter. That's it. There are many loans with variable interest rates - this loan happens to have rate of 0% for the first year.

You could assume that interest accrues evenly throughout the loan life but that it is paid slightly in arrears (due to no payment in year one). But I don't think that's right either: if there were a default in year 1 then the borrower would not owe the 'accrued' interest.

Thanks (0)