Spotlight on financial reporting
In response to the unprecedented impact of COVID-19 on Canadian business, in March 2020 the government quickly announced a number of support programs for small businesses.
The Temporary Wage Subsidy (TWS) came into effect on March 18, 2020 and allows eligible employers to reduce the amount of payroll deductions they would otherwise be required to remit to the Canada Revenue Agency (CRA). The amount of the subsidy is 10% of remuneration, to a maximum of $1,375 per employee and a maximum of $25,000 per employer and applies during the period of March 18, 2020 to June 19, 2020.
The Canada Emergency Wage Subsidy (CEWS) was announced on March 27, 2020. Under this program, qualifying businesses can receive up to 75% of their employees’ wages, with employers being encouraged to provide the remaining 25%. The maximum subsidy provided under this program is $847 per week per employee. Although the legislation was finalized on April 11, 2020, there are aspects of the rules that, at the date of writing this article, remain unclear and the government and CRA continue to provide further clarification.
Companies with a March 31, 2020 financial reporting date need to consider the appropriate accounting standard to apply to these support programs and consider how the subsidies should be reflected in an entity’s financial statements.
Determining the accounting standard to apply under International Financial Reporting Standards
IAS 12 Income Taxes (IAS 12)
For either of the subsidies to fall within the scope of IAS 12, they would have to be based on taxable profits, as described in IAS 12.2. While both these subsidies have been written into the Income Tax Act, they do not meet the requirements to be accounted for within IAS 12, as both subsidies are based on payroll costs rather than on taxable profits.
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance (IAS 20)
IAS 20 prescribes the accounting for government grants and other forms of government assistance that are not benefits available in determining taxable profit or loss. IAS 20.3 defines government grants as “assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity”.
To qualify for the TWS and CEWS, entities must meet certain conditions based on their operating activities. Specifically, they must have payroll from January 1, 2020 to March 15, 2020; continue to have payroll costs during the periods covering the subsidy; and in the case of the CEWS, have experienced a decrease in revenues during the grant period. As such, the TWS and CEWS are within the scope of IAS 20 and should be accounted for as government grants.
Accounting for government grants
IAS 20.7 states that government grants are recognized when there is reasonable assurance that the grant will be received and that the entity will comply with the conditions attached to them. For each of these programs, to establish “reasonable assurance,” entities must determine if there was enough information released by the federal government on March 31, 2020 to establish if they were eligible for the subsidy, whether the grant would be received and whether the entity would be able to comply with any conditions attached to the subsidy.
Temporary Wage Subsidy
Legislation for the TWS was passed on March 25, 2020. As a result, an entity would have had enough information available at March 31, 2020 to determine whether it was entitled to the subsidy and how much it was entitled to up to March 31, 2020. This means an entity can assess if it is reasonably assured that it will comply with any conditions and receive the subsidy. As a result, companies should be in a position to recognize TWS, and reduce their payroll taxes payable, as at the end of March 2020.
Canada Emergency Wage Subsidy
Although this program was initially announced in March 2020, it wasn’t until April 1, 2020 that details of the program and eligibility were released. Additional details, including guidance on determining whether revenue had decreased sufficiently to qualify, were released throughout April. While legislation was eventually passed on April 11, 2020, interpretation and guidance continues to emerge.
Given the status of this new government program as at March 31, 2020, and in particular the fact that details were not announced until at least April 1, 2020, companies would generally not be in a position to establish reasonable assurance that they will comply with the conditions attached to the grant and that it will be received.
Presentation in profit or loss—gross or net
Another issue that arises related to accounting for the TWS and CEWS subsidies is how the related recovery should be presented in profit or loss: on a gross basis or netted against employee costs. IAS 20.29 provides entities with a choice of recognizing the subsidy in profit or loss as either other income or as a reduction of the related expense. Both methods are considered acceptable, however an entity should make an accounting policy choice regarding which method it is using and apply that policy consistently. Disclosure of the impact of grants on income and expense is required.
Entities are also required to disclose their accounting policy choice for accounting for government grants in their financial statements, including the method of presentation (either gross or net) as outlined in their accounting policy, as well as the nature of government grants recognized (IAS 20.39).
Impact on tax provision
Both subsidies are taxable in the fiscal year they are received. As such, the receipt of TWS or CEWS subsidies is not expected to result in a temporary difference for tax provision purposes.
For information on the CEWS program, please see our latest article.
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