Authors: Kristiine Villemi, sworn auditor and Mart Nõmper, partner, head of audit services, sworn auditor
Because of the state of emergency declared due to Covid-19, many companies find themselves in a situation where their turnover has dropped suddenly and it is harder to provide work and pay salaries to their employees. To alleviate the situation, the government established a new labour market service – a temporary subsidy program that employers who meet certain conditions can use for three months from March to June 2020.
For the detailed conditions for the compensation, see this page.
The temporary wage subsidy is accounted for as a government grant
The Accounting Standards Board has ruled that subsidy paid by the Unemployment Insurance Fund – i.e., both gross salary and employer’s taxes to be paid by the Unemployment Insurance Fund – should be recognised as government grant as treated in Accounting Standards Board Guideline (ASBG) 12, “Government Grants“. Based on Article 9 of ASBG 12, temporary subsidies should be recorded as income if their receipt is practically certain and substantial conditions related to government grants have been met. It is important to bear in mind that it is not permitted to recognise government grants under the net method. That means that both personnel expenses and income from government grants should be recognised in the income statement.
Accountants will undoubtedly ask when would be the correct time to recognise the subsidy in income and as a receivable in the balance sheet: whether at the time of filing the application or only after a positive response has been received from the Unemployment Insurance Fund? This definitely depends on the situation but for now the Unemployment Insurance Fund has pledged to pay the subsidies to everyone who meets the conditions for receiving the support. Thus, if the company’s management estimates at the time of filing the application that the conditions for the temporary subsidy have been met, it would be correct to recognise the receivable on the balance sheet and income from government grants in the income statement. The fact that the actual amount received may be different from the amount applied for is not an argument for not recording the receivable and income. At the same time, if the company is not sure that all conditions have been met, the income from government grants must not be recorded.
Possible layoffs must be considered when accounting for subsidies
In addition, we draw attention to the fact that if the company has received the subsidy but it is uncertain whether it can continue to meet certain conditions for the support, the government grant must be recorded in the balance sheet as a liability. Such a situation arises if the company nevertheless lays off or plans to lay off part or all of its employees before the end of the redundancy prohibition period agreed upon receiving the support.
Accounting estimates must be changed if necessary
If the temporary wage subsidy has been accounted for on the basis of management estimation that is not 100% accurate, a situation arises in accounting once the subsidy is received where the received amount is larger or smaller than the receivable recorded in the balance sheet. Here it should be borne in mind that the changes in accounting estimates are recorded in the period of re-estimation, not retroactively. Thus, the accounting entry made previously may not be restated retrospectively. An estimate is adjusted if necessary whenever new information is received, and once the exact amount of subsidy is known, the adjustment is recorded as change in income from government grants. For example, if the estimated receivable from the Unemployment Insurance Fund recorded was too high, the receivable from the Unemployment Insurance Fund and income from government grants are decreased accordingly.
If a situation should arise where the company’s management was completely sure that the conditions for receiving the subsidy were met and they already recorded the subsidy as income, but the support ultimately must be repaid, the repayment of the subsidy is recorded in the period in which the need to repay the support became known.
How should the subsidy be accounted for in the annual report?
Those whose financial year ends 30 April 2020, 31 May 2020 or 30 June 2020 should also ask whether and how the receipt of the subsidy should be accounted for in the annual report. As this is a government grant, the information on the temporary subsidy should be disclosed in the notes to the financial statements under the heading Government Grants. The support received can be disclosed in a table broken down by recipients and types of support. It should not be forgotten that pursuant to Article 53 of ASBG 15, contingent liabilities related to government grants and amounts of government grants repaid or repayable during the accounting period must also be disclosed.
Financial statements should be reviewed by an auditor
One reason it is extremely important that government grants be recorded properly in accounting is also the fact that many companies are seeking changes in financing terms from banks, leasing companies and other creditors, and their financial information must be submitted as part of these refinancing procedures. All transactions must be correctly recorded in the interim reports filed in the period between annual reports.
The accuracy and credibility of the interim reports can be increased by first consulting an auditor on more complicated and new accounting issues or requesting that the interim report be audited or reviewed. Since by auditing or reviewing the interim financial statements, the auditor can do some of the work that would be done anyway when auditing or reviewing the annual financial statements, there is no reason to worry that this will end up costing double.