Farming: Single Payment Scheme: Income Recognition (2005 to 2007 inclusive)
Following consultation with HMRC the Institute of Chartered Accountants of Scotland and the Institute of Chartered Accountants in England and Wales published guidance for their members on accounting issues arising from the SPS. It explains the accounting principles that needed to be applied to the recognition of SP in farmer’s accounts and, with their permission, extracts of which have been reproduced below.
- In the UK, accounting for government grants is governed by SSAP 4 ‘Accounting for Government Grants’. Paragraph 23 requires that, if a grant is made to finance the general activities of an enterprise over a specific period (as the SP is), it should be recognised in the Profit and Loss Account of the period in respect of which it is paid. However, paragraph 24 requires that SPs should not be recognised in the Profit and Loss Account until the conditions attached to the grant have been complied with and there is reasonable assurance the grant will be received.
- SSAP 4 requires that recognition does not take place until there is both compliance with the relevant conditions for receipt of the SP and reasonable assurance as to receipt.
- The conditions are set out in paragraph 10 above. Condition (a) is necessarily satisfied first. Condition (b) is satisfied at the end of the chosen ten month basis period. Condition (c), in theory, could be regarded as not satisfied until the end of the year of claim, or the end of the basis period if later. Therefore, under a strict application of SSAP 4, the conditions might only be said to have been satisfied at the later of:
- midnight on 31 December in the year of claim; and
- the end of the chosen ten month basis period
- However, it is difficult to ascertain when compliance by a farmer with the Cross- Compliance conditions could be said to be reasonably certain. It has been suggested that most of the Cross-Compliance conditions are manageable and achievable for the majority of farms and, indeed, these will normally be complied with as a matter of course. Moreover, it is understood that less than 10% of farms will be subject to inspection in any one year of claim. Therefore, for the vast majority of farms not subject to inspection in the year of claim, admission of non-compliance will essentially be voluntary:
- in the main, farmers will be unaware of unintentional non-compliance (by definition), unless this is identified by them, their advisers, accountants or auditors, or other third parties during the course of the year. If the farmer reports such non-compliance, then the appropriate penalty will be suffered (3 to 5% of the SP for that year, possibly rising to 15% for repeated unintentional non-compliance);
- in cases of intentional non-compliance, it would seem unlikely that farmers would wish to report this to the authorities or to their accountants or auditors and, in the absence of an inspection or the discovery of non-compliance by the accountants or auditors or other third parties, this would be likely to remain undiscovered.
- Furthermore, other than in cases of major intentional non-compliance, subsequent inspections are unlikely to result in penalties being applied retrospectively. Even after the end of the calendar year of claim or the ten month basis period, if later, it is possible that unintentional non-compliance which had existed during the year of claim may subsequently be discovered. For a diligent and honest farmer, however, the penalties for any such non-compliance subsequently discovered are unlikely to be applied retrospectively.
- For practical purposes, it would therefore be the case that, once the ten month basis period had been completed, the Cross-Compliance conditions could be assumed to be satisfied for a year of claim unless:
- an inspection has taken place during the ten month basis period (or any part of the calendar year of claim prior to that ten month period) and discovered non-compliance; or an inspection has taken place (or is to take place) before the end of the calendar year of claim if this is later than the end of the ten month basis period; or
- there is other evidence of non-compliance.
- Given the likely achievability of the Cross-Compliance conditions and the limitations of the inspection and penalty regimes, condition (c) does not seem to be significant to the timing of the recognition of the SP or for determining the amount recognised.
- Accordingly, it is recommended that the trigger for recognition of the SP should be the end of the ten month basis period for the year of claim.
Recognition of SP
- SSAP 4 requires the SP to be recognised in the Profit and Loss Account of the calendar year in respect of which it is paid. Unless some other basis seems more appropriate, this would be recognised evenly on a time basis. [Example 1 in Appendix B illustrates a simple case - where, by the end of both the financial year and the calendar year, the conditions for receipt of the grant have been met and there is reasonable assurance that the grant will be received.]
- However complications arise where the conditions are not met until after the end of the financial year. The question then arises as to whether the SP should be recognised in the accounting period during which the ten month basis period ends or whether it should be recognised in the calendar year to which it relates.
- Paragraph 24 of SSAP 4 is quite clear in stating that “…a government grant should not be recognised in the profit and loss account until the conditions for its receipt have been complied with…”. Under FRS21 “Events after the Balance Sheet Date”, events that provide evidence of matters that existed at the balance sheet date are adjusting events and the entity should adjust the amounts recognised in its financial statements or recognise items that were not previously recognised. The relevant condition for receipt of the SP is to hold the land for the whole of the chosen basis period, and the situation at the balance sheet date was that this condition for receipt had not yet been complied with. The end of the ten month period is therefore not an adjusting post balance sheet event. [See Example 2 in Appendix B.]
- If a farmer retains the same basis period and accounting period each year, each set of annual financial statements will include 12 months of SP.
- However, an anomaly can arise when the farmer changes the ten month basis period, with two years of SP being recognised in the same financial statements. [See Example 3 in Appendix B.] This situation gives rise to questions as to the consistency of accounting treatment and whether the financial statements for the years affected actually give a true and fair view. Paragraph 15 of FRS 18 ‘Accounting Policies’ states that ‘…if in exceptional circumstances compliance with the requirements of an accounting standard…is inconsistent with the requirement to give a true and fair view, the requirements of the accounting standard…should be departed from to the extent necessary to give a true and fair view…’. The general understanding is that the true and fair override should only be used to override an accounting standard in the special circumstances of an individual entity that has a different situation from most other entities. Paragraph 16 of FRS 18 states that ‘an entity will not depart from the requirements of an accounting standard…where a true and fair view can be achieved by additional disclosure’. Therefore, other than in exceptional circumstances, the matter should be dealt with by complying with SSAP 4 and making appropriate disclosures in the notes to the accounts.
Provision for Non-Compliance with the Cross-Compliance conditions
- Once recognition has been triggered, 100% of the SP for the year of claim should be recognised as receivable. Given the nature of the Cross-Compliance conditions and the limitations of the inspection and penalties regimes, it would normally be acceptable for 100% of the SP to be recognised as receivable at the end of the ten month period, even if this occurs before the end of the calendar year of claim.
- Recognition should only be deferred where there are reasons for believing that the farmer will not be able to comply with the conditions attached to the grant.
- Any provision to repay the grant (in whole or in part) should only be established to the extent that repayment is probable.
Early Receipt of SP
- Paragraphs 6 and 27 of SSAP 4 address the circumstances where the SP has been received by the farmer prior to the accounting year end. If the accounting year end is prior to the end of the ten month basis period, then the SP received would need to be carried forward in the balance sheet as deferred income/creditor until the end of the ten month period. If the accounting year end is after the end of the ten month basis period, the SP received would be recognised in the Profit and Loss Account (on a time basis) and any provision to repay the grant (in whole or in part) should only be established to the extent that repayment is probable.
Following the relaxation to allow farmers to have more than one 10 month period the income recognition point becomes the ending of the later of the two periods.
For entities applying one of EU endorsed IFRS, FRS 101 or FRS 102 it is expected that comparable considerations and principles will apply