Accounting for New Zealand Government Wage Subsidies provided in relation to COVID-19

As part of its response to COVID-19, the New Zealand Government has provided wage subsidies to eligible businesses to allow those businesses to retain employees when they are closed or suffering reduced trading due to COVID-19.

The purpose of these wage subsidies is to assist employers to meet salary and wage costs over a specific calendar period. A business receives the subsidy as a lump sum shortly after applying for it, but can be required to repay part or all of that lump sum under specified circumstances (which essentially relate to no longer meeting the eligibility criteria for the subsidy).

This article examines how to account for these subsidies under the various accounting frameworks that apply in New Zealand.

Tier 1 and Tier 2 For-Profit Entities

Where an entity reports under New Zealand equivalents to International Financial Reporting Standards (“NZ IFRS”) or NZ IFRS Reduced Disclosure Regime (“NZ IFRS RDR”), the applicable standard is NZ IAS 20 Accounting for Government Grants and Disclosure of Government Assistance (“NZ IAS 20”).

NZ IAS 20 provides the following key definitions:

“Government assistance is action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria.”
“Government grants are 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. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the entity.”
“Grants related to assets are government grants whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire long-term assets.”
“Grants related to income are government grants other than those related to assets.”

Based on those definitions, the wage subsidy is a government grant related to income.

Under NZ IAS 20:

Government grants must 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
When the recognition criteria are met, government grants must be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate
When the recognition criteria are met, a government grant that becomes receivable as compensation for expenses or losses already incurred, or for the purpose of giving immediate financial support to the entity with no future related costs, must be recognised in profit or loss in the period in which it becomes receivable.

The purpose of the New Zealand Government wage subsidy is to assist a business to meet wage costs over a specific calendar period. This means that the grant should be recognised as the wage and salary costs that are being subsidised are recognised (with recognition not to occur prior to the entity receiving confirmation of the amount of wage subsidy that it will receive). Consequently, when the wage subsidy is received, it must be initially recognised as a liability and then recognised as income (with the liability being extinguished) as wages/salaries are paid.

Ties 1 and Tier 2 Public Benefit Entities

For entities reporting under Public Benefit Entity Standards (“PBE Standards”) and PBE Standards Reduced Disclosure Regime (“PBE Standards RDR”), PBE IPSAS 9 Revenue from Exchange Transactions (“PBE IPSAS 9”) identifies two different types of revenue – revenue that arises from exchange transactions (which is accounted for under the requirements of PBE IPSAS 9) and revenue that arises from non-exchange transactions (which is accounted for under the requirements of PBE IPSAS 23 Revenue from Non-Exchange Transactions (“PBE IPSAS 23”)).

PBE IPSAS 9 defines:

Exchange transactions as “transactions in which one entity receives assets or services, or has liabilities extinguished, and directly gives approximately equal value (primarily in the form of cash, goods, services, or use of assets) to another entity in exchange”.
Non-exchange transactions as “transactions that are not exchange transactions”; further to this it notes that, in a non-exchange transaction, “an entity either receives value from another entity without directly giving approximately equal value in exchange, or gives value to another entity without directly receiving approximately equal value in exchange”.

The wage subsidy meets the definition of a non-exchange transaction and should consequently be accounted for under the requirements of PBE IPSAS 23.

Under PBE IPSAS 23, income received or receivable from a non-exchange transaction with an associated condition should be initially recognised as a liability and revenue should be recognised (and the liability extinguished) as the condition is met (note that a condition is a requirement that the asset received must be consumed by the recipient as specified or returned to the transferor).

As the New Zealand Government wage subsidy has an associated condition (because an entity can be required to repay part or all of it under specified circumstances), when it is received it must be initially recognised as a liability and then recognised as non-exchange revenue (with the liability being extinguished) as wages/salaries are paid.

Tier 3 Public Benefit Entities

The accounting standard for Tier 3 public benefit entities (“PBEs”), PBE SFR-A (NFP) Tier 3: Public Benefit Entity Simple Format Reporting – Accrual (Not-for-profit), requires grants and donations that have an associated “use or return” condition to be initially recognised as a liability and for revenue to be recognised (and the liability extinguished) as the conditions are met.

As the New Zealand Government wage subsidy has a “use or return” condition, when it is received it must be initially recognised as a liability and then recognised as revenue (with the liability being extinguished) as wages/salaries are paid.

Tier 4 Public Benefit Entities

The accounting standard for Tier 4 PBEs, PBE SFR-C (NFP) Tier 4: Public Benefit Entity Simple Format Reporting – Cash (Not-for-profit), recognises transactions when cash is received or paid (i.e. it does not use accrual accounting). The Tier 4 PBE Standard require receipts (which comprise all money received during the financial year) to be recognised when received. This means that, when the New Zealand Government wage subsidy is received, it must be recognised as a receipt.

CAANZ Framework

Chartered Accountants Australia and New Zealand’s Special Purpose Financial Reporting Framework for use by For-Profit Entities (“the CAANZ Framework”) defines a government grant as “assistance by government in the form of a transfer of resources to an entity in return for past or future compliance with specified conditions relating to the operating activities of the entity”. The New Zealand Government wage subsidies meet the CAANZ Framework definition of a government grant.

Under the CAANZ Framework, where a government grant imposes specified future performance obligations on the recipient (as the New Zealand Government wage subsidy does), it is recognised as revenue only when the performance obligations are met (and, where the grant is received before the revenue recognition criteria are satisfied, it is recognised as a liability).

Consequently, when the New Zealand Government wage subsidy is received, it must be initially recognised as a liability and then recognised as revenue (with the liability being extinguished) as wages/salaries are paid.

The tax administration (financial statements) order 2014 and special purpose accounting policies

For those entities that report under the Tax Administration (Financial Statements) Order 2014, or that prepare special purpose financial statements (other than under the CAANZ Framework), a suitable accounting policy needs to be developed for wage subsidies.

All of the frameworks listed above that use accrual accounting (i.e. all of the frameworks except the Tier 4 PBE Standard) require that the wage subsidy be recognised as a liability when received and then recognised as revenue (with the liability being extinguished) as wages/salaries are paid. That would be a suitable policy for those entities reporting under the Tax Administration (Financial Statements) Order 2014 or preparing special purpose financial statements. However, other accounting policies might also be suitable (and the policy suggested should not be adopted if it conflicts with the entity’s existing accounting policies).

Summary of requirements

In summary, the requirements for each of the financial reporting frameworks used in New Zealand are:

Framework	Accounting for the wage subsidy
NZ IFRS and NZ IFRS RDR	When the wage subsidy is received, it must be initially recognised as a liability and then recognised as income (with the liability being extinguished) as wages/salaries are paid.
PBE Standards and PBE Standards RDR	When the wage subsidy is received, it must be initially recognised as a liability and then recognised as non-exchange revenue (with the liability being extinguished) as wages/salaries are paid.
Tier 3 PBE Standard	When the wage subsidy is received, it must be initially recognised as a liability and then recognised as revenue (with the liability being extinguished) as wages/salaries are paid.
Tier 4 PBE Standard	When the wage subsidy is received, it must be recognised as a receipt.
CAANZ Framework	When the wage subsidy is received, it must be initially recognised as a liability and then recognised as revenue (with the liability being extinguished) as wages/salaries are paid.

In addition to the financial reporting frameworks outlined in the table above, some entities report under the Tax Administration (Financial Statements) Order 2014, while others report under their own special purpose accounting policies. For such entities, unless their specific accounting policies require otherwise, it is appropriate that the wage subsidy is recognised as a liability when received and then recognised as revenue (with the liability being extinguished) as wages/salaries are paid.

For more on the above, please contact your local BDO Representative.