25th November 2020Accounting Implications of Covid-19 Support Under FRS102 [UPDATED]

With so many different loans and grants available to businesses during the Covid-19 pandemic there are many new challenges in how to account for the various support schemes available. Here we discuss some of the main forms of support available and being utilised by businesses and offer guidance as to how to account for these in your financial statements.

This note deals with accounting under FRS102, which is the most common financial reporting standard used by small and medium sized businesses in the UK. Some differences will apply where other accounting standards are followed. We cover:

If you have any questions or would like to discuss any of the matters below, please contact Helen James.

Coronavirus Job Retention Scheme(CJRS) grants,

Many businesses have now utilised the CJRS and have put some or all of their employees on furlough leave at some point during 2020 and will need to account for this in their next statutory accounts.

How do I account for furlough grants?

Under FRS 102 the furlough grants received should be accounted for as grant income under Section 24 Government Grants.

Under FRS102, a government grant is defined as:
Assistance by government in the form of a transfer of resources to an entity in return for past or future compliance with specified conditions relating to the operating activities of the entity.

Entities must recognise grants either based on the performance model or the accrual model. We recommend that furlough grants are accounted for under the accrual model. FRS102 states that:

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.

Therefore furlough grant income should be recognised in the period that the expense was incurred. I.e. if an employee is on furlough leave between 1 April and 30 April, and all conditions of the furlough scheme have been met, then the grant income is recognised for the same period. The P&L will therefore show a salary expense as normal and a grant income for the furlough grant received or receivable.

For statutory financial statements, grant income should be recognised within other operating income or, preferably, under a separate heading describing the nature of the grant, in the profit and loss account. Until the grant income is received in cash from HMRC, a debtor balance should be recognised.

What disclosures are required?

Entities will need to disclose:

  • 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 (which could incorporate several different schemes at the current time)


Coronavirus Business Interruption Loan Scheme (CBILS)

This scheme allows businesses to take government backed loans. The government will cover the first 12 months of interest payments and any lender-levied fees.

How do I account for the interest paid by the government?

Although opinion on the treatment of these government backed loans had been divided, there is now a consensus.

These loans should be considered with reference to the following 3 elements: a bank loan, a government backed guarantee, and a business interruption payment (i.e. the interest to be paid by the government during the first 12 months).

FRS102 requires debt instruments to be measured on initial recognition at the present value of future cash flows discounted at a market rate of interest of a similar debt instrument. Although the loans are provided by banks and arguably are therefore at a market rate to other similar government backed instruments, the fact that no interest is paid by the entity in the first 12 months means that overall the entity is not paying a market rate of interest.

Therefore, on initial recognition the CBILS loans will need to be recognised at the present value of the future cash flows discounted at a a market rate of interest. This will result in a day 1 credit of the present value of the interest to be paid by government, this should be shown as a financing amount but, if material, identified as an amount from government.

CBILS loans are subsequently measured at amortised cost using the effective interest method.

What disclosures are required?

Entities will need to disclose:

  • An accounting policy for grants detailing that the accrual model has been adopted

Information that enables users of its financial statements to evaluate the significance of financial instruments, this would normally include the terms and conditions of the debt instrument (such as interest rate, maturity, repayment schedule, and restrictions that the debt instrument imposes on the entity).


Other assistance you may have been granted

Business rates holidays

You may have been granted a holiday from paying business rates. If so, then there will be no payments of rates required for a certain period, and therefore no P&L charge and no accounting entries are required.

If the effect of the business rates holiday is material to the accounts, then disclosure should be made in the accounts in order to give a true and fair view.

Rent holidays or concessions

Many landlords have granted rent holidays or rent concessions whilst businesses are suffering the effects of the pandemic.

Under FRS102, unless the rent holiday or recent concession coincides with entering into a new lease or renewing a lease the rent concession or holiday will not be treated as a lease incentive.

FRS 102 has recently been amended to specifically require that “changes in operating lease payments that arise from Covid-19 related rent concessions” should be reflected “over the periods that this change in lease payments is intended to compensate”. That is: the concession would be reflected immediately and not spread over the remainder of the lease.

This applies for accounting periods commencing on or after 1 January 2020, but early adoption is permitted (and is expected to be widely used), this treatment is limited to rent concessions that do not extend beyond 30 June 2021.

Disclosure in the financial statements will be required if the rent concession or holiday given is material, and an accounting policy for lease modifications will need to disclose how the modification has been treated.

Changes to employee rights to carry forward holiday

Don’t forget that if employees are carrying forward additional holiday, it may result in a holiday pay accrual at the year-end becoming material to the financial statements.

VAT deferrals

Companies making use of the ability to defer VAT payments will need to remember that larger VAT liabilities will be recognised in their financial statements.

Other grants or loans

If grants are obtained from other sources (not the government) then there is no specific guidance in FRS102 as to how they should be treated. However, we would recommend following the same principles as would be applied to government grants under section 24 of FRS102.

Interest-free loans

Certain businesses may be able to access interest-free loans. In this instance companies need to ascertain whether they are borrowing at a non-market rate of interest.

In normal circumstances, where interest-free loans are taken (normally from related parties) an entity would be expected to discount the loan cash flows at a market rate, resulting in an imputed interest charge to P&L.

In the current situation it may be possible to argue that 0% is the market rate, given that rate may be offered to all entities that meet the lending criteria to take the loan. Entities will therefore need to consider carefully the source of the loan and who is eligible for the loan in order to assess whether it is at market rate, or whether it is a discounted rate which will need to be adjusted in the financial statements.

Insurance proceeds

Following the High Court’s ruling related to Business Interruption Insurance, there are many businesses which may be able to claim for Covid related losses, and therefore must consider when to account for the associated insurance proceeds.

Under FRS102 insurance proceeds should only be recognised when it is virtually certain that the entity will receive the funds. In practice this means that in order to recognise income for the insurance claim at the reporting date the entity will need to be sure that it holds an insurance contract under which a valid claim can be made and that the claim is not disputed by the insurer.

Given the multiple schemes available and challenges of accounting for these, businesses should ensure they are up to date on the latest reporting and disclosure requirements.

We are here to help. If you have any questions or would like to discuss any of the matters above, please contact Helen James.

These details are in accordance with Government guidelines on 12 May 2020 and subsequent updates on 25 November 2020.

The information contained in this guidance has been obtained from public sources and every attempt has been made to ensure its accuracy at the date of publication. In this ever changing environment, this information is subject to change and we will not accept liability for losses arising from changes in the law or the interpretation thereof.

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