Accounting for New Zealand Government wage subsidies provided in relation to COVID-19

Where an entity reports under NZ IFRS or NZ IFRS RDR, the applicable standard when accounting for the New Zealand Government wage subsidy is NZ IAS 20 Accounting for Government Grants and Disclosure of Government Assistance (“NZ IAS 20”). 

Under NZ IAS 20, government grants must not be recognised until there is reasonable assurance that the entity will comply with the conditions attaching to them and the grants will be received.  When a government grant such as the New Zealand Government wage subsidy is recognised, it must be recognised in profit or loss on a systematic basis over the periods in which the costs that the grant is intended to compensate are expensed.  However, a government grant that becomes receivable as compensation for expenses already incurred 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, which 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).  This means that, 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.

Where an entity that reports under PBE Standard or PBE Standards RDR receives revenue, it must determine whether that revenue arises from an exchange or a non-exchange transaction. 

PBE IPSAS 9 Revenue from Exchange Transactions (“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”). 

Revenue that arises from exchange transactions is accounted for under the requirements of PBE IPSAS 9, while revenue that arises from non-exchange transactions is accounted for under the requirements of PBE IPSAS 23 Revenue from Non-Exchange Transactions (“PBE IPSAS 23”).

The New Zealand Government wage subsidy meets the definition of a non-exchange transaction and is consequently accounted for under the requirements of PBE IPSAS 23. 

Under PBE IPSAS 23, revenue received or receivable from a non-exchange transaction is recognised:

• As revenue if it does not have an associated condition (a condition is a requirement that the asset received must be consumed by the recipient as specified, or returned to the transferor)
• As a liability if it does have an associated condition (with the liability being extinguished and revenue recognised as the condition is met).

The New Zealand Government wage subsidy has an associated condition, as an entity can be required to repay part or all of it under specified circumstances.  This means that, 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.

The Tier 3 PBE Standard requires grants and donations that have an associated “use or return” condition (as the New Zealand Government wage subsidy does) to be initially recognised as a liability and for revenue to be recognised (and the liability extinguished) as the conditions are met.   This means that, 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 Tier 4 PBE Standard recognises transactions when cash is received or paid (i.e. it does not use accrual accounting).  This means that, when the New Zealand Government wage subsidy is received, it must be recognised as a receipt. 

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).  This means that, 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.

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 New Zealand Government wage subsidy be recognised as a liability when received and then recognised as revenue (with the liability being extinguished) as wages/salaries are paid.  This 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).