Accounting for COVID-19 government stimulus measures – COVID SME Guarantee Scheme

As part of the Australian Government’s second economic stimulus package in response to COVID-19, the Government announced that it would establish the ‘Coronavirus SME Guarantee Scheme’ (Scheme) to support SMEs to get access to working capital. In this regard, the Government will guarantee 50% of new loans issued by eligible lenders to SMEs to enhance the willingness and ability of banks to provide credit to SMEs.

The Scheme applies to SMEs with turnover of up to $50 million. There are two phases of this stimulus measure with different terms and conditions as outlined below:

Phase Loans made… Maximum size of loan Loan term Security
Initial phase Until 30 September 2020 $250,000 Up to 3 years, with an initial six-month payment holiday Unsecured
Second phase 1 October 2020 to 30 June 2021 $1 million Up to 5 years, with a six-month payment holiday at the discretion of the lender Secured or unsecured (excludes commercial or residential property)

Example

SME obtains a three-year loan from Bank X of $250,000 at an interest rate of 5%, of which 50% of the principal is guaranteed by the Government as part of the SME loan guarantee scheme.

The loan is repayable at the end of the three-year period but interest is payable annually in arrears.

Without the Government guarantee, SME would have incurred a 7% interest charge on the loan.

There are two possible ways that the above government loan guarantee can be accounted for and either would be acceptable.

Method one – Loan granted by government at a below-market interest rate

The benefits of loans granted (by government) at below market interest rates are accounted for as government grants under IAS 20 Accounting for Government Grants and Disclosure of Government Assistance (refer paragraph 10A).

The benefit of a government loan at a below-market rate of interest is treated as a government grant. The loan shall be recognised and measured in accordance with AASB 9 Financial Instruments. The benefit of the below-market rate of interest shall be measured as the difference between the initial carrying value of the loan determined in accordance with AASB 9 and the proceeds received. The benefit is accounted for in accordance with this Standard. The entity shall consider the conditions and obligations that have been, or must be, met when identifying the costs for which the benefit of the loan is intended to compensate.

IAS 20, paragraph 10A

Despite the Government, in this case, not actually loaning money to SMEs, the interest rate payable on the loans by SMEs (to the banks) is likely to be less than the interest rate otherwise payable without such Government guarantee. The requirements of paragraph 10A, with respect to below-market loans provided by Government, can therefore be applied by analogy to loan guarantees provided by government.

Initial recognition

On initial recognition, the SME would recognise the loan payable at fair value, using a market interest rate (without the Government guarantee, i.e. 7%). The difference between fair value and the initial proceeds is therefore deferred and recognised as government grant income by the borrower over the period of the loan.

Using the Example above, the fair value of the loan on initial recognition is $236,878 and SME recognises the following journal entry:

Dr         Cash                                                                 $250,000
Cr         Loan payable – Bank X                                                               $236,878
Cr         Deferred income – government grant                                          $13,122

Subsequent accounting

At the end of each financial year, interest is recognised as follows:

Year 1

Dr         Interest expense                                                $16,581
Cr         Cash                                                                                         $12,500
Cr         Loan – Bank X                                                                              $4,081

A proportion of the deferred government grant income is then recognised in profit or loss on a systematic basis in periods when the related interest expense is recognised:

Dr         Deferred income – government grant                  $4,081
Cr         Government grant income – P/L                                                 $4,081    

Year 2

Dr         Interest expense                                                $16,867
Cr         Cash                                                                                         $12,500
Cr         Loan – Bank X                                                                              $4,367

A proportion of the deferred government grant income is then recognised in profit or loss on a systematic basis in periods when the related interest expense is recognised:

Dr         Deferred income – government grant                  $4,367
Cr         Government grant income – P/L                                                 $4,367             

Year 3

Dr         Interest expense                                                $17,174
Cr         Cash                                                                                         $12,500
Cr         Loan – Bank X                                                                              $4,674

A proportion of the deferred government grant income is then recognised in profit or loss on a systematic basis in periods when the related interest expense is recognised:

Dr         Deferred income – government grant                  $4,674
Cr         Government grant income – P/L                                                 $4,674             

The above entries result in SME showing a 7% interest charge rather than 5% actually paid, which is offset by government grant income.

Method two – Government grant related to assets are deducted in arriving at the carrying amount of the assets, and income and expenses offset

Using this method, IAS 20, paragraphs 24 and 29 are applied by analogy, and the benefit of the SME guarantee is recognised as a government grant under IAS 20 in a similar way to Method one above, but the presentation in the financial statements is ‘net’, i.e.:

  • The deferred income balance of $13,122 on initial recognition is effectively added to the loan balance to arrive at a total carrying amount of $250,000, and
  • The annual interest expense is reduced for the effect of the benefit of the government grant income.

Government grants related to assets, including non-monetary grants at fair value, shall be presented in the statement of financial position either by setting up the grant as deferred income or by deducting the grant in arriving at the carrying amount of the asset.

IAS 20, paragraph 24

Grants related to income are presented as part of profit or loss, either separately or under a general heading such as ‘Other income’; alternatively, they are deducted in reporting the related expense.

IAS 20, paragraph 29

The effect is that interest expense is simply recognised at 5% per annum and reflected as a cash payment. The loan balance remains at $250,000 because the principal is only due for repayment at the end of the three-year period.

Initial recognition

Using the Example above, the fair value of the loan on initial recognition is $236,878 and SME recognises the following journal entry:

Dr         Cash                                                                 $250,000
Cr         Loan payable – Bank X                                                               $236,878^
Cr         Deferred income – government grant                                          $13,122^

^Shown on balance sheet as Loan owing to Bank X - $250,000

Subsequent accounting

At the end of each financial year, interest is recognised as follows:

Year 1

Dr         Interest expense                                                $16,581*
Cr         Government grant income – P/L                                                 $4,081*

*Shown on P/L as net interest expense of $12,500

Cr         Loan – Bank X                                                                              $4,081#
Dr         Deferred income – government grant                  $4,081#
Cr         Cash                                                                                         $12,500

#No movement on Loan owing to Bank X – still $250,000

Similar principles apply for Years 2 and 3.

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