Miriam Hanley – Technical Specialist
DD: +44 (0)1784 497116
The emergence and spread of Covid-19, and the corresponding social distancing measures have negatively impacted many businesses. As a result the government has introduced a number of schemes to support companies through this difficult time. This blog will explain the accounting treatment for these schemes under UK GAAP.
Covid-19 has resulted in many landlords providing rent holidays to their tenants. While this is not a government grant, it is still important to consider the accounting treatment.
A rent holiday as a result of Covid-19 is not a lease incentive, unless the landlord also renews the lease. It could be argued that it is a lease modification and so should be spread like a lease incentive. However, the rent holiday is to help the company through the financial difficulties from Covid-19, and therefore it would seem appropriate to recognise the reduction in rent in the period in which the rent holiday is given.
Business Rates Holiday
All retail, hospitality and leisure businesses in England are receiving a 100% discount on business rates for the 2020 to 2021 tax year.
This scheme is not classified as a grant and so the accounting treatment is straight forward. In the period when the business rate holiday is received nothing is recognised in profit or loss, because there is no expense. Furthermore, disclosure of the business rate relief is not explicitly required by FRS 102, but may be needed for a true and fair view.
Job Retention Scheme
The Government will provide funds to pay 80% of the wage, up to a maximum of £2,500 per month for furloughed workers. It is a grant to employers and does not have to be repaid.
Section 24 of FRS 102 outlines the accounting treatment for government grants. Per Section 24 an entity should recognise grants either based on the performance model or accruals model. However, the method selected does not change the accounting treatment for the job retention scheme. Under both methods the entity should recognise the salary expense as paid, and amounts received from the government should be recognised in profit or loss over the same period as the costs to which they relate. The amount received from the government should be shown separately in the profit or loss.
There are a number of disclosure requirements under section 24 including the accounting policy adopted for the grant and the nature and amounts recognised in the financial statements. For small companies they are only required to include an accounting policy for government grants, but an entity will need to consider whether additional disclosure is needed to present a true and fair view.
Statutory sick pay
Statutory sick pay is normally paid at the employer’s cost. However, the government has announced that it will meet the cost of providing statutory sick pay for up to 14 days for workers in companies with up to 250 employees.
The accounting treatment matches the job retention scheme, in that amounts received should be recognised in the profit or loss in accordance with when the cost is recognised.
Coronavirus Business Interruption Loan Scheme
For businesses that meet certain criteria they are able to apply for the Coronavirus Business Interruption Loan Scheme. Under this scheme the government will pay for the first 12 months of interest and will also provide the bank with an 80% guarantee.
Amounts received from the government in relation to interest payments should be accounted for in a similar way to the job retention scheme and statutory sick pay. The entity should account for the interest cost and then an equal and opposite income item.
The interest rate will be lower due to the government guarantee, and therefore there is a question over whether it is a market rate of interest and if discounting is required. This would require the loan to be measured at the present value of the future payments discounted at a market rate of interest. The difference between the carrying amount and the proceeds received is the government grant, and would be recognised in profit or loss over the life of the loan. However, it would be extremely challenging to determine the market rate of interest. Furthermore, the interest expense and the grant credit would net off against each other. Therefore, it is sufficient to disclose that the government guarantee exists, and not perform the discounting calculation.
COVID-19 Corporate Finance Facility
The Covid Corporate Financing Facility will provide short term bridging finance to businesses by purchasing a type of debt called commercial paper. This will only be available to businesses that were financially sound prior to the crisis.
The commercial paper should be accounted for as a financial liability. If it meets the definition of a basic financial instrument it will be accounted for at amortised cost. As it will only be provided to entities that were previously financially sound it is likely that the interest will be at market rate and therefore there is no government grant element.
The Future Fund will provide matched loans with automatic conversion into equity at the next equity round or on maturity repayment subject to a redemption premium or conversion into equity. The interest rates is minimum 8% pa paid on maturity, and higher where private investors agree higher rates for the matched funding. The loans will automatically convert into equity at the next equity funding round which is in aggregate equal to the total loan (Government and private investor monies). The accrued interest can be repaid separately. The price on conversion is a minimum 20% discount to the price set in the funding round, or greater if agreed with matched investors. On maturity the loans can either be repaid with a redemption premium (100% of the principal amount) or converted into equity at a 20% discount to the most recent funding round.
The interest rate and conversion discount prices indicate that this loan is on an arm’s length basis. This means the transaction price is the fair value and there is no government grant to recognise. The loans will meet the definition of a non-basis financial instrument, and so will need to be recognised at fair value at each year end, with gains and losses going to the profit or loss.
Relaxation on rolling over annual leave
The government have announced changes to employee annual leave entitlement following on from the Covid-19 pandemic we’re currently facing. The update means that employees who have not been able to take all their statutory leave due to Covid-19 will be able to roll these holidays over the next two leave years.
Per FRS 102, an entity needs to accrue for the cost of any unused annual leave entitlement at the year end. This new relief will mean that more employees will be carrying forward annual leave, which will increase the holiday pay accrual for some entities.
VAT payments deferral
UK VAT registered business that have a VAT payment due between 20 March 2020 and 30 June 2020 can defer VAT payments until 31 March 2021.
The VAT liability is not a financial instrument, and therefore the deferral will not impact the carrying value. However, depending on when the year end is, consideration will be needed to determine whether the liability needs to be split between current and non-current.
For more information on any of the above items covered in this document, contact Menzies Technical Manager Miriam Hanley.