Following on from the accounting guidance ACCA issued in June, Steve Collings FCCA, a director at Leavitt Walmsley Associates and a member of the UK GAAP Technical Advisory Group at the Financial Reporting Council, has worked with ACCA to update the guidance on grants and loans, and to produce new guidance on the accounting treatments where share and other exchanges are involved.
FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland, deals with government grants in section 24. Paragraph 24.3A states that government grants cannot be recognised in the financial statements until there is reasonable assurance that:
- the entity will comply with the conditions attaching to them
- the grants will be received.
Once the recognition criteria have been met, paragraph 24.5E states: ‘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.’
The relevant accounting policy in respect of the grant will then be applied. This will either be the ‘performance model’ (paragraph 24.5B) or the ‘accrual model’ (paragraphs 24.5C to 24.5G). As far as the Coronavirus Job Retention Scheme (CJRS) grants are concerned, the recognition in the financial statements is likely to be the same under both models (ie it will be recognised immediately in profit and loss).
For more information, see the ACCA factsheets that examine the accounting treatments, together with the disclosure requirements.
IFRS Standards reviews
The Financial Reporting Council’s (FRC) reviews of the reporting of revenue and leases identify a number of critical areas where companies need to improve their reporting.
These reviews covered current reporting on IFRS 15, Revenue from Contracts with Customers, and IFRS 16, Leases. The reports indicate a number of areas where further improvement is expected.
The IFRS 15 review highlights that: ‘The FRC continues to identify disclosures by many companies that do not meet the FRC’s quality threshold. Companies should critically review their revenue-related disclosures to ensure they provide a clear understanding of how they have applied the requirements of the standard to their own particular circumstances.’
‘In particular, the FRC expects companies to:
- provide clear descriptions of performance obligations, the timing of revenue recognition and explanations of any significant judgements made by management
- identify, and explain significant movements in, contract balances
- ensure there is consistency between revenue-related information in the strategic report and information in the financial statements, including, for example, details about significant contracts and disclosures of disaggregated revenue
- specify the types of any variable consideration that exist within contracts and how they are both estimated and constrained.
The FRC’s report includes examples of both inadequate and better disclosures against which companies can benchmark their own draft disclosures. The FRC will challenge companies whose future disclosures do not meet its expectations.’
The IFRS 16 conclusion was a little better: ‘The FRC found that most companies provided a good explanation of the impact of adopting IFRS 16, which applies for the first time this year. However, the quality of their disclosures should improve in future reporting. The FRC expects companies to:
- tailor the descriptions of their leasing accounting policies to match their particular circumstances and to cover all material areas
- provide detailed information about the significant judgements affecting their accounting for leases
- include sufficient detail to enable a good understanding of the financial reporting effects of their leasing arrangements on their financial position, financial performance and cash flows.’