Government aid not only in connection with the Covid-19 pandemic, or are you entering them in the accounting correctly?
- Petra Čechová
- Renata Dudášová
The term government (state) support, subsidy, contribution, etc. is widely known and many of us, who deal with accounting issues, have had to decide many times what is actually hidden under this term, in order to be correctly accounted for and therefore also reported in the financial statements of the accounting entity.
The aim of this article is to describe the issue from a “perspective”, that is from the definition of aid, through the possibilities of obtaining it, to the method of accounting for received aid in double-entry bookkeeping and the main principles related to it.
What is a subsidy, support ...?
The definition of the above terms can generally be applied to any directly or indirectly provided gratuitous advantage that is financed from state or other funds. These benefits are provided on the basis of specific legislation and can only be used for a predefined purpose. Support can be drawn not only from the domestic state budget, but also, for example, from funds of the European Union.
From the accounting perspective, the aid may take the form of compensation for costs incurred or a waiver of obligations/payments. The description of the term “subsidy” in Czech accounting regulations is provided in article 47 paragraph 6 of Decree No. 500/2002 Coll., implementing certain provisions of Act No. 563/1991 Coll., on Accounting (“Decree”).
The issue of subsidies and their accounting is treated in the Czech Accounting Standard for Entrepreneurs No. 017 in point 3.7. National Accounting Standards Board Interpretation No. I-14, Recognition of Entitlement to Receive or Return a Subsidy, also discusses the method of recognizing an entitlement and its eventual repayment. Subsidies are also treated in National Accounting Council Interpretation No. I-22 – Foreign currency subsidies, I-27 – Subsequent acquisition of a non-current asset subsidy and I-28 – Subsequent repayment of a non-current asset subsidy.
Types of subsidies
As mentioned in the introduction, in practice we may encounter several types of subsidies. A subsidy may be obtained for the acquisition of non-current assets (Accounting Class 0 - Non-current Assets), for the reimbursement of operating/financial costs incurred (Accounting Class 5 - Costs), or it may be a waiver of payments such as insurance premiums (Accounting Class 5 - Costs).
Currently and in recent times, we are seeing many types of government support provided to minimize the impact of the pandemic. These were the “A, B, C type Antivirus” programmes, with the aim of minimising the impact of the pandemic on employment; the “Covid - Rent” programme, with the aim of supporting tenants; the “Uncovered Costs” programme; and others.
There is currently talk of other support options, as unfortunately the pandemic is still here.
However, subsidies have been and hopefully will be provided for reasons other than the COVID pandemic. Subsidies are generally granted depending on the size of the enterprise, the object of its business (e.g. agriculture, R&D, IT, etc.), as well as on areas requiring increased investment (machinery and technology, environment, employment, etc.).
Each subsidy is announced, managed and controlled by a designated state body and therefore the conditions for obtaining it cannot be generalised. It is always necessary to follow the rules set out in the guidelines within the framework of the possibility of obtaining a given subsidy.
Subsidies in the accounting
Above we have listed the main accounting rules that deal with the issue of accounting for subsidies. At the same time, accounting principles need to be taken into account, including, but not limited to, the true and fair image of the accounting records, accrual of costs and revenues, and the prudence principle.
Sometimes there can be a “conflict” between following several principles simultaneously – in particular the prudence principle, i.e. assessing whether or not an unquestionable entitlement to subsidy has arisen vs. the accrual of costs and revenues, which requires that the related costs and revenues correspond, i.e. that revenues are not recognised in a different accounting/taxable period than the related costs.
Another important aspect is to separate the moment of recognition of entitlement to receive/repay the subsidy and the moment of receipt/repayment of the funds. These moments are usually not identical and many accounting entities very often fail to recognise that a subsidy is not accounted for on the basis of movement of funds, as the receipt/repayment of the subsidy (money) is always preceded by something – a motion from the company or from the provider of the subsidy.
In general, the course of the subsidy programme can be divided into the following stages (please note that this division is only in general terms, it is not a standardised process):
- Announcement of a subsidy programme by the provider, setting out the individual conditions for obtaining support
- Preparation of documents by the applicant and their subsequent submission to the provider in the prescribed form and within the deadline
- Evaluation of the application received by the provider
- Sending a request for payment by the applicant to the provider, if it is necessary to submit such a request
- Transfer of funds by the provider to the bank account of the applicant
- Preparation of the overall statement of accounts by the applicant
- Final evaluation of the billing by the provider
As can be seen, this is not a simple administrative or not time-consuming matter, and both parties have to meet predetermined criteria and deadlines under the current subsidy policy.
The accounting entity should deal with accounting for subsidies not only during the given accounting (taxable) period, but also at the balance sheet date, i.e. the date, when it compiles the financial statement. It is common for costs to be incurred and accounted for on an ongoing basis as incurred, but their compensation may be a matter of another accounting period. Accounting entities therefore deal with whether and how to account for accrual in their financial statements. We will discuss how to do it, further on.
Should I account for the subsidy in income or as a reduction in expenses?
In the text below, we do not deal with the issue of subsidies related to the acquisition of non-current assets, because in this context they are accounted for in conjunction with the relevant Class 0 – Non-current Assets account, so the subsidy does not directly affect the economic result.
During the accounting (taxable) period, but also when preparing the financial statements as of balance sheet date of 2020, many accounting entities dealt with whether to account for the subsidy received under the COVID programmes to reimburse costs incurred (e.g. wages, services, etc.) as a reduction of the related costs or whether to enter them as income. The answer can be found in Article 25 of the Decree, which states that “Entry ‘III.3 Other operating income’ includes in particular donations received, ......, subsidies to cover costs or to compensate for other economic harm, ...” The entity should account for the government support received as reimbursement of costs incurred as part of other operating income (account group 64x). This conclusion is also confirmed by the Chamber of Auditors of the Czech Republic.
Is it really important to know when to account for the subsidy?
We now know that we should charge the cost-recovery subsidy to income, but are we sure at what point to record the actual claim for the subsidy in the accounts? When the support is announced? When we send the request? When we receive consent or when we obtain the funds?
As noted above, an accounting entity should never account for entitlement to subsidy in relation to receipt of money (the cash flow itself) because that date is not the moment, at which the undisputed entitlement arises, but is merely the date on which the provider has transferred the agreed amount of the subsidy.
Accounting rules clearly declare that the creation of a subsidy claim is a matter of the balance sheet, accounted for by entry in MD (debit) 37 – Other receivables and Dal (credit) 34 – Settlement of taxes and subsidies. Subsequently, as described above, the related income is accounted for using the entries MD (debit) 34 – Settlement of taxes and subsidies and Dal (credit) 64 – Other operating income. When the entity receives a part/the entire subsidy, it is charged to MD (debit) 22 – Cash against Dal (credit) 37 – Other receivables.
A detailed description of the timing of the creation/extinction of an undisputed entitlement (i.e., balance sheet accounting for MD (debit) 37 vs. Dal (credit) 34) is provided in Interpretation No. I-14 issued by the National Accounting Standards Board.
Each subsidy must be assessed individually, also within each accounting unit. Several companies may apply for the same type of subsidy, but the moment of fulfilment of the conditions/approval of the subsidy etc. may be completely different and so the actual reporting in the accounts may not be of the same nature. It is therefore not advisable to take inspiration from how they have accounted for it in another accounting entity, because their point of entitlement/recovery of the subsidy may be different and applying this method of recording may lead to inaccuracies in your accounting.
Differences are also apparent in the preparation of the financial statements, because costs incurred in one year may be recognised in one year, but the related income is not recognised until the following year because, as of the date of compiling the financial statements, all the criteria for recognising an unquestioned entitlement in the same accounting period have not been met, even if related to that period on accrual basis. This is where the prudence principle should “prevail” because nothing should be recognised in the financial statements that does not meet the characteristics of undisputed entitlement as of the date of the financial statement.
However, if, in this case, there is a difference between costs and revenues and the reason is that the entity met the conditions for the subsidy in a different period but the application was made before the date of the financial statement and the information is material for users of the financial statements, this fact should be disclosed in the notes to the financial statements.
On the other hand, if the entity has fulfilled all the conditions, i.e. the receipt of the subsidy is undoubted as of the time of recognition of the receivable and only payment from the subsidy provider is being awaited, and all this is fulfilled at the time of compiling the financial statement, then one can recognise the receivable and the related income from the subsidy in the financial statements, i.e. the costs and revenues will be recorded in the same period and in this case the principle of material and temporal continuity will be fulfilled.
What to say to conclude...
Government support, subsidies, etc. are not only a “hot” topic recently, as there are many variations of subsidies and related conditions, and therefore their correct recognition in the company’s accounts. It is not appropriate to underestimate this issue, as incorrect reporting affects not only the profit for each year, but also the related value of profit shares paid/not paid to owners and, last but not least, the tax area (corporate income tax).
Are you currently dealing with the issue of correct accounting treatment of government or other support and are you not sure how to account for it? Do not hesitate to contact us, we will be happy to help you with this topic, not only in the context of consulting, but we also offer audit services in the form of subsidy verification.