Financial Reporting Standard (FRS) 102 now applies to all companies, other than micro entities that elect to adopt FRS 105. These new Accounting Standards are not restricted to limited companies alone – they will, to some extent at least, apply to unincorporated businesses as well.
Under FRS 102, government grants are recognised (and taxed) in the Financial Accounts only when there is reasonable assurance that the conditions attached to the grant will be met and that the grant will ultimately be received.
To qualify for the Basic Payment Scheme (BPS), the land must be held as at 15 May and the performance criteria (e.g. greening conditions) must be satisfied throughout the year to 31 December. Under FRS 102 therefore, the BPS should not be recognised as income until at least 31 December when the conditions attached to the grant are met.
Under the previous accounting legislation, farmers may have accounted for BPS income on an accruals basis, essentially meaning that income was being recognised before the subsidy year end. Businesses with year ends falling between May and December who are applying for FRS 102 for the first time may therefore be required to recognise significantly less subsidy income – which could reduce overall profit for that year.
Deferring recognition of BPS would also defer the payment of tax due on that income until the following year, which would have a positive impact on cash flow, however, the reduction in profit may also adversely affect a business’s ability to obtain finance and could have a detrimental impact on financial covenants attached to existing borrowings.
If you think you may be affected by the above changes and would like further information, please do not hesitate to contact a member of our agricultural team.
