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published on 14 October 2020 | reading time approx. 3 minutes
Covid-19 does not only endanger the health, but also has significant economic implications worldwide. In order to counteract the economic crisis triggered by the pandemic and to support the many companies affected, governments around the world have adopted various support measures. The financial support ranges from (concessionary) loans to immediate grants. For companies, the question arises as to how these individual measures are to be accounted for. German parent companies with their internationally operating subsidiaries must answer this question in the context of German accounting principles if they prepare HGB consolidated financial statements.
A popular support measure in Germany is the offering of guarantees by the state governments for troubled companies. The effects of such guarantees on accounting are limited, as the secured liabilities must continue to be recognized (unchanged) at their settlement amount.
More interesting is the question of how loans granted are reflected in the balance sheet. The granting of loans can be structured differently. In Germany, for example, low-interest loans are provided by the KfW special program. The “Paycheck Protection Program” in the USA even grants companies loans that can be partially or completely forgiven under certain conditions, such as the use of the proceeds from the loan for personnel costs and retaining personnel. The non-refundable portion of the loan must be repaid over the remaining term.
Moreover, immediate measures in the form of non-repayable grants should also be mentioned. As a rule, these are earmarked for specific costs (expense-related grants); in many cases, they are only granted, if certain conditions are met.
The treatment of loans received due to the Covid-19 pandemic is simple. The borrower recognizes a liability in its balance sheet in the amount of the settlement amount and then repays the loan over the agreed term. Interest rates that are not customary on the market are generally indisputable under commercial law and only result in lower interest expenses.
The accounting for loans that are only repayable to a limited extent is more complex. According to HGB, such loans are to be classified as liabilities with resolutory conditions. In particular, the question is when to derecognize (affecting net income) the obligation to pay back the received funds. This is defined as the point in time, at which all of the conditions for the loan waiver have been met and a corresponding application has been submitted or will be submitted in due time with almost absolute certainty. This does not in principle prevent the granting authority from carrying out a final examination.
Whether the reversal is to be recognized immediately in profit or loss depends on the specific terms of the agreement. If the liability or a part of it is waived to offset certain expenses, such as personal expenses, it is an expense-related grant that is recognized in the income statement on an accrual basis in line with the related expenses.
Non-repayable grants received may either be unconditional or subject to certain conditions. A receivable is only to be recognized on the balance sheet when the grant condition is met. The receivable may be recognized immediately in profit or loss or, in the case of, for example, expense-related grants made for multi-periodic compensation purposes, it may be recognized on an accrual basis. Payments made before the conditions are met are initially recognized as liabilities before being released to income (on an accrual basis) as the conditions are met.
If all legal requirements are met and the employer provides effective notification of the loss of working hours, employees in Germany are entitled to short-time work compensation from the Federal Employment Agency. Similarly structured assistance measures have been introduced in many other European countries. In such areas, the employer is basically only responsible as a trustee for handling payments. The company is obliged to make advance payments to their employees, but must subsequently apply to the Federal Employment Agency for reimbursement. From the company's point of view, the short-time work allowance is therefore a transitory item. In the profit and loss account under commercial law, neither an expense nor an income from the settlement of payments between employees and the Federal Employment Agency is to be recorded via the employer's balance sheet accounts. In accordance with the anticipated payments to employees, a refund claim against the Federal Employment Agency is to be capitalized if all conditions for entitlement are met and the application for refund has been filed by the time the balance sheet is prepared or will be filed with a probability bordering on certainty within three months. If, on the other hand, the employer has its own direct claim against the Federal Employment Agency, e.g. for reimbursement of the social security contributions to be borne by the employer, this is a non-refundable grant that must be recognized in profit or loss.
The different types of financial support being granted to reduce the economic consequences of the Covid-19 pandemic serve to compensate temporary liquidity shortages. Whether or not they can also have an immediate impact on the results depends on the specific characteristics. The multitude of worldwide support measures are designed differently in detail and can have different benefits for individual companies. The question of appropriate accounting must therefore always be assessed on a case-by-case basis.
Coronavirus: What you need to know
David Shirkhani
Senior Associate
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