Getting the accounts right is critical

Covid-19: How to manage the payments from HM government

With the year now of Covid-19 and a need for getting those books in on time, it would be appropriate to sort out the books before the accountant keeps chasing! There has been many offers and opportunities from local government grants to national furlough schemes, you need ot get all the accounting stuff sorted!
Many companies will have taken advantange of the packages available and you will need to start to understand what should happen to these.

If you are unsure what you could have claimed for, please speak to one of us in Cranleys.

The Coronavirus Job Retention Scheme provide payments or credits back to the amount you would normally have paid HMRC, so the taxes and national insurance payments when they are on furlough.

We will explore how these payments should be claimed in your business’s financial statements.

Payments received under the Coronavirus Job Retention Scheme or (CJRS) are considered not loans but grants and should be accounted for against the payment to which they are providing, or you can mark these as additional income if you want to do things properly in accordance with FRS 102 and FRS 105.

So in bookkeeping terms, this will mean you will show this all as other income, with a corresponding amount being shown as your bank receipt, unless you have not yet received it, then it is a debtor. As the grant is intended to cover costs, it should be recognised in income in the same period in which the related expense is incurred.

It is not appropriate to net the grant income off against wages and salaries costs so please avoid this.

What about sick pay refunds from staff not being able to work due to COVID-19? How should these cash rebates be shown in our accounts?

Exactly the same as above, as other income. The benefit of this is we can see what your normal run rate of the income is, the normal costs and the additional amount you have received.

Please do not net these amounts off with each other.

What about the receipt of local government funding?

The Small Business Grant Fund is a grant with liabilities attached, so the money cannot get repaid even if our business fails. Again the same FRS 102 and FRS105 will be applicable.

This means the payment will be recognised when it is received. This may mean you account when you were able to qualify or it may mean when you actually received this will be fine. We may need to see when you were able to qualify to ensure it is correctly accounted for.

The grant canbe then seen within “other income”, with a matching debtor until the cash is received from the local authority.

The retail business we trade on no longer has to pay rates for the financial year 2020/21. Does this need to be shown in our financial statements?

Under the FRS 102 and FRS 105 accounting rules, this simply means you have a lower Council tax  / rates cost showing in the accounts.

If the financial year of the business is aligned to the tax year, the business would simply have a zero rates expense for the year.

Grants or loans, disclosure will differ

Our business has successful applied for a loan under the Coronavirus Business Interruption Loan Scheme (CBILS). Should this be shown in our annual accounts in the same way as other bank borrowing?

The Coronavirus Business Interruption Loan Scheme is actually three parts:

  • A bank loan;
  • A government-backed guarantee; and
  • A business interruption payment (i.e. the government pays any fees and interest payments for the first 12 months).

If your business prepares its financial statements under accounting standard FRS 102, this requires financing transactions to be initially measured at the present value of future payments and discounted at a current market rate of interest, adjusted for transaction costs. Subsequent measurement will then be at amortised cost using the effective interest method.

If your business is a micro-entity and preparing financial statements under accounting standard FRS 105, no present value of future payments is required, instead the financial liability must initially be recognised at cost (i.e. the amount borrowed).

To be a micro-entity the business must meet certain criteria including, at least two of the following being met:

  • Annual turnover not more than £632,000
  • Balance sheet total not more than £316,000
  • Average employees not more than 10. 

My business has a bounce back loan scheme. Does this need to be shown in our accounts in the same way as other borrowing?

Bounce Back Loan Schemes should be accounted for in the same way as Coronavirus Business Interruption Loan Scheme (above).

If your business prepares its financial statements under accounting standard FRS 102, this requires financing transactions to be initially measured at the present value of future payments and discounted at a current market rate of interest, adjusted for transaction costs. Subsequent measurement will then be at amortised cost using the effective interest method.

If your business is a micro-entity and preparing financial statements under accounting standard FRS 105, no present value of future payments is required, instead the financial liability must initially be recognised at cost (i.e. the amount borrowed).

To be a micro-entity the business must meet certain criteria including, at least two of the following being met:

  • Annual turnover not more than £632,000
  • Balance sheet total not more than £316,000
  • Average employees not more than 10.

For more tax advice and assistance with accounts and to speak to Colin Davison, Managing Partner at Cranleys. 01256 830000