Accounting for government grants during coronavirus including the Job Retention Scheme

The government and local authorities announced several grants in March (and updated those announcements over the course of the pandemic to support business and employment)  including the various Job Retention Scheme iterations (JRS), the small business grant fund (SBGF) and the retail, hospitality and leisure grant fund (RHLG).

In late October and early November 2020 the Chancellor extended the JRS and deferred both the Job Support Schemes (JSS) for open and closed premises, and the Coronavirus Job Retention Bonus (JRB) scheme, and as such these are only covered at a high level in this article.

Whilst the corporation tax position of the JRS has now been clarified by the government announcement (the grant is taxable and any costs it reimburses are allowable), the accounting questions remain, and this article therefore covers the recognition, measurement and presentation of both the grants and the related costs in FRS 102.

Please refer to coronavirus and FRS 102 articles accounting for tax and provisions, onerous contracts and insurance recoveries, the latter explaining that provisions for future operating losses (eg for furloughed staff) are generally not recognised.

What does FRS 102 and the government say?

Accounting treatment of government grants

Government grants are recognised when there is reasonable assurance that the entity will comply with the conditions attaching to the grant and the grant will be received. (FRS102.24.3A)

Grants don’t need to have been applied for at the reporting date in order to be booked in the accounts – the entity only needs to have reasonable assurance that the grant claim will be successful and relate to the period in question. By the time the accounts are finalised, this should have been ascertained to provide evidence of the conditions that existed at the reporting date.

FRS 102 (section 24) requires the entity to make an accounting policy choice between the performance model and the accrual model when recognising government grant income. for most of the grant income available under the JRS, JSS, SBGF and RHLG, however there is potential difference between these models for any grants that provide incentives spanning an accounting period. This article therefore focuses on the specific accounting for these schemes, rather than the different models, before providing a high-level analysis of the JRB to show that potential difference. 

Presentation

Within the profit and loss account the grant income should be presented either separately or under a general heading such as other operating income but should not be turnover. Under company law the grant income cannot be netted against the costs that they might relate to.

Disclosure

FRS 102 (Section 24.6-7) states that an entity shall disclose the following:

1. the accounting policy adopted for grants in accordance with paragraph 24.4;
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.

*government assistance is action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under specified criteria eg free technical or marketing advice and the provision of guarantees.

Where an entity has accessed a coronavirus Business Interruption Loan and/or other forms of government backed loans, this should be disclosed in accordance with 24.6d above, as further discussed in the CBIL article.

The types of government grants described in this article arise from statute rather than a contract between the government and the entity and so would be out of scope of financial instrument disclosures. This also means the terms can be changed at short notice by the government.

Practical impact and interpretation for preparers

Job Retention Scheme

Accounting for grant income

There have been various iterations of the JRS scheme, and it was further extended to 31 March 2021 on the 5 November 2020. Each iteration however has essentially the same accounting considerations. 

For the monthly JRS grant income, the income will be recognised in the period to which the underlying furloughed staff costs relate to. The payroll liability has been incurred by the entity, and it has therefore met the conditions to claim for that payroll accounting period.

Cut-off or allocation questions may arise though, as the worker may be furloughed for a period of time spanning the year end. Careful allocation is therefore needed, for example, when a worker has been furloughed for 1 week in March 2020 and 2 weeks in April 2020. The income should be allocated between the accounting periods systematically.

There may be some additional cut-off considerations for entities with a 31 March 2020 year-end, particularly for those entities that laid off staff and then re-hired them and are claiming from 1 March 2020. If those staff were re-hired and paid a March salary then this is clearly with the intention of obtaining the job retention scheme grant, and so income ought to be booked in March if conditions have been met.

Tax treatment

The government has clarified that “Payments received by a business under the JRS scheme are made to offset these deductible revenue costs. They must therefore be included as income in the business’s calculation of its taxable profits for Income Tax and Corporation Tax purposes, in accordance with normal principles”.

Businesses can deduct employment costs as normal when calculating taxable profits for Income Tax and Corporation Tax purposes.” The same principles ought to apply to other grant schemes and related costs, however, please refer to the taxation article for further details and if in doubt speak to a tax expert.

Job Retention Bonus – deferred as at 5 November 2020

Accounting for grant income

Whilst some entities may have been relying upon this as part of their cash flow forecasts, the government announced on 5 November that the JRB would be deferred and may not be in the current guise: 'The JRB will not be paid in February and we will redeploy a retention incentive at the appropriate time. The purpose of the JRB was to encourage employers to keep people in work until the end of January. However, as the JRS is being extended to the end of March, the policy intent of the JRB falls away.'

For our commentary on the scheme please refer to our analysis of the Job Retention Bonus here.

There may be differences between the accounting under the performance model compared to the accrual model for the bonus scheme that has criteria spanning several months. This is because all the conditions must be satisfied under the performance model, whereas under the accruals model grant income must be recognised on a systematic basis over the periods in which the entity recognises the related costs for which the grant is intended to compensate. (FRS 102.24.5D).

If the scheme is introduced in 2021 an entity should consider whether any subsequent receipt of the JRB after the reporting date is a disclosable (non-adjusting) event.

Job Support Scheme (Open and Closed)

Accounting for grant income

Similarly to the Job Retention Bonus scheme, the implementation of the JSS has been deferred.

Please refer to our analysis of the scheme rules here which are particularly complex and subject to change as with all the government support schemes.

Despite the myriad of complexities in the scheme, the accounting and tax for the Job Support Schemes (both Open and Closed) are likely to be the same as the monthly grant income under the JRS above ie it is payment to support employment and is treated as grant income in the period the costs relate to under both the performance and accrual method. 

The Small Business Grant Fund and Retail, Hospitality and Leisure Grant Fund

Details of the terms for these grant funds are still being released, however, based on the currently available information, these local authority grants do not have any performance conditions attached, as they are designed to provide immediate financial support. They are therefore to be recognised immediately in income once the entity is satisfied they have the entitlement.

Entities became eligible for the grants based on their rateable value as at 11 March 2020 and therefore if it is confirmed that they are eligible, and they intend to participate in the scheme, the income should be recognised on 11 March 2020 irrespective of when the amount is received.

Other grant income

For other grant income, the terms of the grant, and the entity’s accounting policy choice between the performance model and the accruals model, will determine how and when the grant income is recognised. In summary:

Under the performance model grants are recognised as follows:

1. 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.
2. A grant that imposes specified future performance-related conditions on the recipient is recognised in income only when the performance-related conditions are met.
3. Grants received before the revenue recognition criteria are satisfied are recognised as a liability.
   (FRS 102.24.5B)

Under the accruals model: 

Revenue grants are recognised on a systematic basis over the periods in which the entity recognises the related costs for which the grant is intended to compensate. (FRS 102.24.5D)

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. (FRS 102.24.5E)

Accounting treatment of related costs under all schemes

Costs which are supported by grants are expensed as incurred (ie no different than before). Any costs which would have been capitalised as part of a construction project must cease when construction is suspended.

The presentation and classification of staff costs should remain consistent within the profit and loss account unless another presentation or classification would be more appropriate following a significant change in the nature of the entity’s operations (FRS 102.3.11(a)). Any such change should be considered against Section 10 Accounting Policies, Estimates and Errors. ie the change provides more useful information to users of the accounts.

Disclosure of the change would be required under FRS 102.3.13 as it would not be appropriate to reclassify comparatives. Depending on when the entity first started to be affected, it is conceivable it could report a gross loss, given the grant income will be shown in other operating income and a large amount of direct labour could continue to be included within gross profit.

Our advice

• Entities should prepare a schedule of the government assistance that they are or will be receiving to ensure all are accurately reflected in the accounts. This should include relevant backup to support any claim under the job retention scheme.
• Entities must review the terms of any grants or assistance to determine the amount that was due to them at the year end, and when to recognise that income as well as any consequential impacts (eg being discouraged from paying dividends). This is particularly important as scheme rules changes are often issued with little notice on evenings and weekends.
• Entities must select an accounting policy for coronavirus related grant income, by choosing what constitutes a class of grant income, and then whether they will use the performance or accrual model for each class, noting there may be a difference in timing of income for any grants that have performance conditions spanning the year-end.
• As grants are generally taxable and generate a tax outflow, entities should carefully consider any accounting policy choice. There is a clear opportunity under the accruals model to ensure grant income is booked in the same accounting period as the related costs, rather than ahead of the costs (although there should be minimal difference in income recognition for the two main schemes).
• Entities should consider whether other forms of additional government assistance will affect the recording of income or expense. For example, the enhanced business rates relief scheme will mean that eligible businesses will no longer pay business rates in the 2020/21 tax year.
• Entities should consider if grants received after the reporting date are disclosable (non-adjusting) events.