Although it may seem that the COVID-19 pandemic is on the decline, businesses affected by the epidemic and by governmental anti-pandemic measures can still apply for allowances and support in order to decrease the impact of the current crisis. This article summarises the approaches to the accounting treatment of support and compensations and their reflection in the 2020 financial statements in line with Czech accounting legislation, including new titles that have been approved by the Government only in 2021.
We have already addressed the COVID-19-related grants in our dReport (refer to Accounting for Grants from June 2020 and the Impacts of the COVID-19 Epidemic on Lease Relationships from September 2020). This time we will have a closer look at the accounting treatment of the Antivirus programme, other compensation programmes and the latest programme for the support of self-testing for COVID-19.
Businesses – regardless of their size – have mostly been using the Antivirus Programme, the main objective of which is to minimise the impacts of the crisis on the employment rate. It is a contribution for full or partial salary compensations attributable to employees due to an obstacle on the part of the employee (quarantine order) or on the part of the employer (obstacle – closing of business premises due to the government order to close the business) if there is a proof that the obstacle to work was a result of COVID-19 infection.
On 22 February 2021 the Government issued Decree No. 186 approving the extension of the period for expense eligibility in the Antivirus programme (Mode A, Mode B and Mode A Plus) until 30 April 2021.
The individual modes differ in the support amount, i.e. in the percentage of eligible expenses, including the salary compensation paid to the employee and the corresponding amount of statutory contributions depending on the type of obstacle.
How to account for Antivirus programme allowance?
Pursuant to Section 47 (6) of Regulation No. 500/2002 Coll., providing implementation guidance on certain provisions of the Accounting Act, as amended (hereinafter the “Regulation”), the nature of allowances from the Antivirus programme is that of a grant.
General Information on Grants
A grant is a free-of-charge supply provided directly or indirectly from state or European budgets or funds under special legal regulations for a pre-defined purpose. Pursuant to the Regulation, a grant includes a waiver of a portion of fees if a legal regulation allows doing so and a relevant body defines the waived portion of fees as a grant.
When accounting for grants, the accrual principle, i.e. matching the relevant expenses and income, must be considered in order to prevent recording the grant income in a different period than the period in which the expenses related to the grant are incurred. At the same time, it is necessary to consider the prudence principle, i.e. to assess whether the provision of a grant is unquestionable (unquestionable title) and to answer the question whether the entity has met all its obligations pertaining to the grant application and whether it is certain rather than probable that the grant will be provided to the entity. An assessment regarding whether the grant is provided without other restrictions, e.g. by the total volume of the public budget funds for the relevant type of grant (after the funds have been used, no other applicants will receive the grant, or the grant payments are reduced, etc.) is also well grounded. This assessment is of key importance, particularly at the turn of the reporting period, if the entity did not have any documents justifying the unquestionable title at its disposal by the end of the reporting period. The accounting treatment is stipulated by Czech Accounting Standard No. 017 – Accounting Relations, Article 3.7.
Unquestionable legal title to a grant:
- Debit Sundry receivables 37*
- Credit Grant accounting 34*
Using a grant to settle expenses:
- Debit Grant accounting 34*
- Credit Sundry operating (financial) income 64*
Grant receipt on an account:
- Debit Bank account 22*
- Credit Sundry receivables 37*
In practice, dilemmas arise regarding which principle should prevail. For example, if the reporting entity applies for a grant to cover the expenses of 2020 in 2021 (or if the application receipt itself is activated only in 2021, but relates to 2020 expenses). The timing of the financial statements and the related certainty/uncertainty until the date of preparation of the 2020 financial statements will also play a role when practicing the expert judgement of accounting professionals regarding how to capture the grant or other form of support. Refer to the FAQ below.
In 2020, the Ministry of Labour and Social Affairs also granted support within the Antivirus C programme, waiving a portion of social security contributions paid by employers on behalf of their employees for the period from June until August 2020. This form of support has been declared as insurance payment waiver and the and the entitlement to this waiver was presented in the form of a reduced assessment base submitted to the relevant District Social Security Administration. Strictly speaking, this form of support does not comply with the definition of a grant pursuant to Section 47 (6) of the Regulation, it can therefore be recorded as a discount – directly through the reduction of expenses (A) or through two entries (B):
- A) Assessment of a reduced social security payable:
- Debit Staff costs 52* (usually 524)
- Credit Settlement with institutions 33* (usually 336)
- B) Assessment of the full amount of the social security payable and accounting for a discount through a reverse entry:
- Debit Staff costs 52* (usually 524)
- Credit Settlement with institutions 33* (usually 336)
- Debit Settlement with institutions 33* (usually 336)
- Credit Staff costs 52* (usually 524)
Let us add that we have also come across such views that in order to ensure the comparability of financial statements, the full amount of insurance payments should be recorded and the waiver of a portion thereof should be presented as a grant within other operating income. This means that the insurance payment reduction would be recorded as a second step following solution A) described above and not offset through an entry in Debit Staff costs 52* and Credit Other operating (financial) income 64*.
Other Compensation Programmes
During the pandemic, other compensation programmes provided by the Ministry of Industry and Trade, Ministry of Regional Development and Ministry of Agriculture have been announced, such as COVID Rent, COVID Gastro – closed establishments, COVID Accommodation or AGRICOVID. In March, the previous sector programmes were replaced by a blanket programme COVID 2021, COVID – unsettled expenses and COVID Rent III and some other programmes. All these types of support are considered operating grants and fall under the same rules as the Antivirus A, Antivirus B or Antivirus Plus grants.
Expenses, mostly received services (e.g. rent) are recognised in full; the unquestionable grant title is recognised on an accrual basis in other receivables (or estimated receivables) and other operating (financial) income.
Programme for the Support of Self-Testing for COVID-19
Since 3 March 2021, the Ministry of Health has gradually imposed on employers the obligation to perform blanket testing of employees for SARS-Cov-2. In order to support self-testing for COVID-19 for employers and the self-employed, the Czech government adopted a resolution based on which self-testing should be supported from the prevention funds of health insurance companies in such cases. As part of this programme for the support of self-testing for COVID-19, it is possible to apply for an allowance for the purchase of self-testing kits in the amount of max. CZK 60 incl. VAT per test, or for the purchase of a maximum of 4 tests per calendar month (i.e. max. CZK 240 incl. VAT), starting from 1 April 2021. The self-testing allowance should be accounted for as follows:
- Debit Consumed purchases 50* (or Services 51*)
- Credit Payables 32* (or Cash on hand 21*)
Self-testing allowance entitlement – billing to the health insurance company:
- Debit Other receivables 31*
- Credit Other operating income 64*
Collecting the allowance from the health insurance company:
- Debit Bank account 22*
- Credit Other receivables 31*
Although the principles of accounting for government support and compensations provided in relation to the COVID-19 pandemic may seem relatively clear, several questions have arisen in practice, including the following:
Is it possible to account for a grant in relation to COVID-19 in the 2020 period before the completion of the financial statements, if the grant applies to 2020 expenses but the application is only submitted in the following period, or if the programme was only announced in 2021?
The COVID-19 situation is extraordinary due to its impact on the whole society. Every day, the media informs us about the forms of support that are being prepared or that are on the government’s agenda. This was also the case in late 2020 and early 2021. The current methodology included in the legislation most probably does not cover such unprecedented situation. An accounting professional has to carefully evaluate all facts and circumstances, as well as the subsequent events pursuant to Section 19 (5 and 6) of the Accounting Act. We believe that under certain circumstances, the grant for the settlement of 2020 expenses can be reported in 2020, if an unquestionable title to the grant arises and the grant is ideally received before the date of preparation of the financial statements. This does not affect the obligation to provide users of the financial statements with additional information on conditional factors, subsequent grant receipt, etc. in the notes to the financial statements.
If the reporting entity applies for a grant and has the conditions for its provision under control, and the grant provider on the other hand has no leeway for deciding (not) to grant the allowance (e.g. Antivirus), we can imagine the grant title being reported in 2020. However, if the reporting entity applies for a grant the provision of which is actually decided by the provider (e.g. in terms of the grant amount), we recommend waiting for the decision.
If the entity concludes that there are substantial uncertainties related to the grant (support) at the time of the preparation of the financial statements and does not recognise the grant in 2020, it shall describe the situation as a contingent asset in the notes to the financial statements.
However, the entity has to asses each grant application individually; it is not a general rule.
The company uses an allowance for the support of self-testing for COVID-19 from the health insurance companies’ prevention fund. Should we recognise the income even if the allowance is paid through a reduction in the payment of health insurance contributions?
Yes. The form as well as the moment of financial settlement of the allowance does not affect the method of its recognition and reporting in the profit and loss account.
Is the company obligated to disclose any information about the use of allowances and compensations in the notes to the financial statements?
Yes. Although the obligation to disclose information about grants received for investment and operating purposes is no longer explicitly stated in Section 39 of the Regulation after its 2016 amendment, we believe that major allowances and compensations can be considered items of extraordinary volume or origin pursuant to Section 39 (1) (g) of Regulation No. 500/2002 Coll. and therefore have to be described in the notes. This applies namely to cases when the balance sheet date is a date between the reporting of the (estimated) receivable arising from the entitlement to receive the grant and its actual financial settlement. If applicable, we recommend including the following information in a separate chapter:
a) Grant amount, purpose and provider, if relevant;
b) Identification of eligible expenses; and in particular
c) Additional information on the uncertainties related to submitted grant applications or to the reported grant titles, or information on subsequent events (subsequent grant decisions, received payments etc.).