Accounting for COVID-19 government stimulus by for-profit and not-for-profit entities – Job keeper payments

As part of its response to COVID-19, the Australian Government, in March 2020, announced various stimulus measures to ease the burden experienced by businesses as a result of the economic fallout from the coronavirus lockdown and social distancing measures. These include:

  • ‘Job keeper’ payments
  • The initial and additional cash flow boosts
  • Increase in the instant asset write-off
  • The ‘backing business investment incentive’
  • ATO providing low interest payment plans for existing and ongoing tax liabilities, and
  • The SME loan guarantee scheme.
This article highlights some of the issues to consider when accounting for job keeper payments. Our observations are based on the job keeper rules at time of writing, and on the assumption that employers are eligible for job keeper payments.

How do job keeper payments work?

Job keeper payments are essentially a wage subsidy plan whereby employers will receive a $1,500 per fortnight ‘job keeper’ payment for each employee they keep on their books over the next six months.

In summary, the scheme works as follows:

  • An eligible employer determines the annual global turnover (i.e. annual turnover of all entities that are connected or affiliated with the employer, whether they are Australian or foreign) of the group in order to assess whether annual global turnover it is greater or less than $1 billion.
  • If annual global turnover is less than $1 billion – the eligible employer will need to show that GST turnover for a particular entity in the group has reduced by 30% or more since 1 March 2020 over a minimum one-month period (i.e. some entities in a group may qualify for the ‘job keeper’ payments and others may not qualify if their GST turnover has not reduced by 30% or more).
  • If annual global turnover is greater than $1 billion – the eligible employer will need to show that GST turnover for a particular entity in the group has reduced by 50% or more since 1 March 2020 over a minimum one-month period.
  • The eligible employer must pay the eligible employees at least $1,500 per fortnight, even if their regular wage per fortnight is less than $1,500.
    Note - Employees are not automatically eligible for job keeper payments. For example, eligible employees:
    • Must be Australian permanent residents
    • Must not be receiving job keeper payments from another employer
    • If casual employees - they must have been employed on a regular basis for at least 12 months, and
    • If teenagers of 16 or 17 years of age – they must be independent and not undertaking full-time study.
  • A condition of receiving the ‘job keeper’ payments is that the employer has made the minimum $1,500 salary payment to the eligible staff member.
  • The $1,500 fortnightly payment is assessable to the employer, but deductible through the minimum $1,500 salary payment to the employee (regardless of whether the employee has been stood down due to COVID-19, or they continue to work).

Agent or principal?

One of the first issues to consider when accounting for job keeper payments is whether the employer is acting as principal (and recognise the payments on a gross basis), or as agent for the Government (i.e. simply acting as a conduit between the Government and the eligible employee).

While some may argue that employers are acting as AGENT for the Government because they are merely passing through money to employees (in particular where an employee has been stood down and is not working), in general, the conditions that employers must meet in order to receive job keeper payments indicate that employers act as PRINCIPAL, and therefore job keeper payments should be recognised on a gross basis. This is because:

  • The employer has discretion whether to register for job keeper payments (the scheme is not mandatory), which employees will be retained, and how much they will be paid (i.e. employers can pay more than $1,500 per fortnight or choose to pay less, in which case they are not eligible for job keeper payments)
  • Employees must provide permission to employers to claim the job keeper payment (this is to avoid double counting by multiple employers claiming job keeper for the same employee)
  • Eligibility of employees is not the only criteria to be met in order for employers to claim job keeper payments. Employers also need to establish and meet other eligibility criteria
  • Employees do not have control over whether employers claim job keepers payments or not AND employees also cannot force employers to keep them employed, pay them $1,500 per fortnight, and then claim job keeper on their behalf, i.e. employees have no rights, and
  • The employer must pay employees before they are eligible to receive the ‘job keeper’ payments, i.e. the employer is at risk for employee salaries earlier/previously PAID.

Accounting treatment for for-profit entities

Which Accounting Standard applies to for-profit entities?

Job keeper payments are considered ‘government grants’ and accounted for under IAS 20 Accounting for Government Grants and Disclosure of Government Assistance because they are being provided by the Government in return for compliance with conditions relating to the operating activities of the entity. That is, in return for the ‘job keeper’ payments, the eligible entity must pay the amounts on to employees that have temporarily been stood down as a result of COVID-19.

When are job keeper payments recognised by for-profit entities?

Government grant income is only recognised when there is reasonable assurance that the entity will comply with the conditions attaching to them, and the grant will be received (IAS 20, paragraph 7). Conditions for receiving the job keeper payments include:

  • The employer must be eligible, i.e. they must have applied the rules for eligibility correctly, and
  • The employer must have paid requisite salaries to employees (minimum of $1,500 per fortnight).

Government grants, including non-monetary grants at fair value, shall not be recognised until there is reasonable assurance that: 

(a) the entity will comply with the conditions attaching to them; and
(b) the grants will be received.

IAS 20, paragraph 7

If the employer is satisfied that they have ‘reasonable assurance’ (for example because Tax advisors have confirmed eligibility for the scheme and the relevant fortnight’s salaries have been paid), the government grant is accrued in the same period that salary payments are made. Employers therefore recognise a receivable for the grant as each payroll is processed by recognising the following journal entry:

  Dr
($)
Cr
($)
Receivable for ‘job keeper’ payments 1,500  
Government grant income   1,500

This treatment will result in a NIL net impact in profit or loss.

In cases where assessing eligibility of the employer for the job keeper payments is straight-forward, e.g. where there is a stand-alone company with no associated entities and GST turnover has clearly reduced by more than 30% (e.g. businesses forced to shut down completely because of social distancing, such as beauty parlours or gymnasiums, or sit-down restaurants reduced to take-away revenue only), there is likely to be reasonable assurance that the job keeper payments will be received, and can be recognised at the same time as the related salaries are paid. However, other cases may not be straight forward, e.g. where there is one company in the group that employs staff for all group entities, or for entities where annual global turnover may be close to the $1 billion threshold. Judgement is therefore required to assess whether the requirements of IAS 20, paragraph 7 have been met as to the timing of recognition of the job keeper payments, and if necessary, seek expert advice from BDO Tax or Business Services to make this assessment.

It should be noted that at 30 June 2020, it is not possible to accrue for the receipt of all remaining job keeper payments. Even though eligibility has been established for the six-month period, one of the conditions for recognition in paragraph 7(a) is that the entity has complied with all conditions, which includes each two-week payment of salaries after 30 June 2020.

Presentation in the financial statements of for-profit entities – Job keeper income

Employers need to consider their existing accounting policies for presentation of government grant income in the financial statements because the presentation of job keeper income should be consistent with that policy.

If the employer does not have an accounting policy because they have previously not received any grant income, IAS 20, paragraph 29 provides an accounting policy choice of presenting the receipt of the government grant income in the financial statements either on a ‘gross’ or ‘net’ basis.  Therefore, either of the following presentation formats are acceptable, although in our view, the ‘gross’ presentation format provides more useful and relevant information for users:

Gross basis 2020
Other income - Government grants 1,500
Salaries expense 1,500
Net profit -

OR

Net basis 2020
Salaries expense -
Net profit -

Accounting treatment for not-for-profit entities (NFPs)

The job keeper scheme is also available to NFPs. Generally, ACNC registered entities (excluding schools and universities) must show a reduction in turnover of 15% or more. However, there are special rules for calculating turnover of these entities, such as to exclude Australian government grants. Due to these complexities, we recommend you contact BDO Tax or Business Services for more information.

The following article also contains more information regarding a NFPs eligibility for job keeper payments:

Appropriate Accounting Standards for NFPs

IAS 20 does not apply to NFPs. Job keeper government grant income is therefore accounted for under the NFP Accounting Standard AASB 1058 Income of Not-for-Profit Entities. As the job keeper arrangement with Government does not contain sufficiently specific performance obligations, AASB 15 Revenue from Contracts with Customers does not apply, and income would be recognised in profit or loss (AASB 1058, paragraph 10). The continued employment of staff is an internal activity and does not represent the transfer or goods or services to a customer, i.e. no sufficiently specific performance obligation.

While IAS 20, paragraph 7 requires ‘reasonable assurance’ in order for the grant income to be recognised as a receivable, AASB 1058 does not specify when the receivable would be recognised. AASB 1058, paragraph 8 merely cross-references to various Accounting Standards to deal with the ‘asset’ side of the transaction, including timing of recognition.

Except as set out in paragraphs 18–22, an entity shall apply the requirements of other Australian Accounting Standards (as relevant) to an asset arising from a transaction within the scope of this Standard.  Examples include:

(a) AASB 9 Financial Instruments (eg cash received);
(b) AASB 16 Leases;
(c) AASB 116 Property, Plant and Equipment; and
(d) AASB 138 Intangible Assets.

AASB 1058, paragraph 8

Given that the ‘receivable’ is not dealt with by any specific Accounting Standard (i.e. statutory receivables are not financial instruments under IAS 32 Financial Instruments: Presentation, paragraph AG12), we would look to the ‘hierarchy’ in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, paragraph 11(a) and apply the requirements of Accounting Standards dealing with similar and related issues to determine the appropriate accounting. In this regard, NFP employers could apply the IAS 20, paragraph 7(a) ‘reasonable assurance’ test by analogy, in which case, timing of recognition of job keeper payments from Government would be when salaries are paid to employees, i.e. the journal entry for job keeper payments would be recognised as each payroll is processed:

  Dr
($)
Cr
($)
Receivable for ‘job keeper’ payments 1,500  
Government grant income   1,500

Similarly, NFPs could apply IFRS 9 by analogy, and recognise the right to receive a financial asset (cash) from the ATO when each fortnightly salary payment is made.

In making the judgement described in paragraph 10, management shall refer to, and consider the applicability of, the following sources in descending order: 

(a) the requirements in Australian Accounting Standards dealing with similar and related issues; and

(b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework.

IAS 8, paragraph 11

As noted for for-profit entities above, at 30 June 2020, it is not possible to accrue for the receipt of all remaining job keeper payments. Even though eligibility has been established for the six-month period, one of the conditions for recognition in IAS 20, paragraph 7(a) is that the entity has complied with all conditions, which includes each two-week payment of salaries after 30 June 2020.

Presentation in the financial statements of NFPs

AASB 1058 does not provide a choice to offset the government grant against the salary expense. Job keeper payments are therefore presented as Other Income.

Except as set out in paragraphs 15–17, an entity shall recognise income immediately in profit or loss for the excess of the initial carrying amount of an asset over the related amounts recognised in accordance with paragraph 9.

AASB 1058, paragraph 10

Need help?

While determining eligibility for job keeper payments may be reasonably straight forward for some entities, it can be fairly complex for others. Employers face the risk of bearing the cost of ongoing employee salaries during the COVID-19 period, while in fact being ineligible for job keeper payments. Further, the rules for determining turnover reduction for NFPs is also complicated. Please contact BDO Tax or Business Services for assistance on eligibility for job keeper payments and BDO’s IFRS Advisory Team for assistance with accounting issues.