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COVID-19 SPECIAL

GUIDING THE PROFESSION THROUGH CHALLENGING TIMES

LIM JU MAY AND FELICIA TAY

ACCOUNTING GUIDANCE ON PROPERTY TAX REBATE AND JSS

In his Budget speech in February 2020, Deputy Prime Minister Heng Swee Keat referred to 2020 as one that is marked by tectonic shifts in Singapore’s operating environment, and major uncertainties. At that time, Covid-19 was just starting to spread globally but the impact on Singapore’s economy was already felt. Fast forward to April 2020, the pandemic has swept through the world and wreaked havoc socially and economically.

To steer Singapore through these challenging times, the Singapore government has launched the Unity, Resilience and Solidarity Budgets totalling a staggering S$160 billion, which is 32% of Singapore’s gross domestic product. Of this sum, S$60 billion is set aside to fund a slew of Covid-19 support packages including the Jobs Support Scheme (JSS), Enhanced Wage Credit Scheme and Property Tax Rebate for 2020. These support packages are geared towards combating Covid-19 through protecting livelihoods, stabilising businesses, supporting households and building resilience.

For businesses, two of the key support packages are the JSS and the Property Tax Rebate for 2020 (that is, the property tax rebate that is granted by the government on qualifying non-residential properties for the period from 1 January to 31 December 2020).

ISCA, with the support of its Financial Reporting Committee (FRC), has issued Financial Reporting Bulletin 5 (FRB 5) and some Technical FAQs to address the questions which entities may have in the accounting for the property tax rebate granted by the government. Key questions addressed include:

  • How should landlords and tenants account for the property tax rebate given by the government to landlords, which must be fully passed on to their tenants under the Unity Budget and Resilience Budget announced by the government on 18 February 2020 and 26 March 2020 respectively?
  • Why is the property tax rebate given by the government to the landlord that is passed on to their tenants not accounted for in accordance with SFRS(I) 16 Leases?

On the JSS, ISCA has received feedback that there is uncertainty on the accounting of JSS payouts by entities, in particular by entities with a financial reporting period ended 31 March 2020. ISCA’s FRC and FRC Core Sub-Committee have deliberated on this issue and their views are shared in the FRB 6 that was issued on 7 May 2020.

In this article, we will be highlighting key salient points from the aforementioned technical guidance that were issued to steer the profession through these challenging times.

ACCOUNTING OF PROPERTY TAX REBATE GRANTED BY THE GOVERNMENT

The government has given remission of property tax (“property tax rebate”) to qualifying non-residential properties for the period from 1 January 2020 to 31 December 2020 in response to the Covid-19 pandemic.

For the portion of a non-residential property leased out to a lessee (“tenant”), the owner of the property (“landlord”) must transfer the benefit from the property tax rebate to the tenant without any changes to any term or condition of the lease agreement.

FRB 5 provides accounting guidance and key considerations on how to account for the property tax rebate granted by the government to the landlord (from the landlord’s perspective) and how to account for the related rental rebate granted by the landlord to the tenant (“related rental rebate”)(from the tenant’s perspective).

FRB 5 also makes it clear that the property tax rebate is given independent of the commercial terms of the individual lease agreements and is clearly not intended to modify the existing terms of the leases. Under the law, the landlord must pass the benefit to the tenant without attaching any condition. Accordingly, the property tax rebate to the landlord and in turn the related rental rebate to the tenant are both in substance government grants and should be accounted for in accordance with SFRS(I) 1-20 Accounting for Government Grants and Disclosures of Government Assistance rather than SFRS(I) 16 Leases.

…property tax rebate is given independent of the commercial terms of the individual lease agreements and is clearly not intended to modify the existing terms of the leases… Accordingly, the property tax rebate…and the related rental rebate… are both in substance government grants and should be accounted for in accordance with SFRS(I) 1-20 rather than SFRS(I) 16.

When developing FRB 5, ISCA received feedback that a landlord may provide an additional rental rebate (in excess of the quantum of the property tax rebate) to a tenant. Although the accounting of the additional rental rebate is not covered under FRB 5, the following considerations should be noted:

  • The additional rental rebate does not represent an assistance by the government. Hence, it does not meet the definition of a “government grant” under SFRS(I) 1-20. The additional rental rebate will be accounted for under SFRS(I) 16 by both the landlord and the tenant.
  • It is highly likely that the additional rental rebate will be deemed to be a “lease modification”1 under SFRS(I) 16. For the landlord (assuming that the lease is an operating lease), it is required to account for the additional rental rebate on a straight-line basis over the remaining lease term. For the tenant, it is required to account for the additional rental rebate by remeasuring the lease liability using a current discount rate and making a corresponding adjustment to the right-of-use asset.
  • The International Accounting Standards Board (IASB) has provided a practical expedient to exempt lessees from assessing Covid-19-related rent concessions as lease modifications under IFRS 162 (please see below for details).

IASB’s practical expedient for Covid-19-related rent concessions

IASB has received feedback that applying the requirements in IFRS 16 on lease modifications to a potentially large volume of Covid-19-related rent concessions could be complex, particularly in light of the many other challenges stakeholders are facing during the pandemic.

In response to the feedback, IASB issued an exposure draft, “Covid-19 Related Rent Concessions (Proposed amendment to IFRS 16)” on 24 April 2020. The proposed amendment provides lessees with an exemption from assessing whether a Covid-19-related rent concession is a lease modification (that is, a practical expedient). Entities applying the exemption would account for the changes as if they were not lease modifications.

ISCA has submitted a comment letter to IASB on the above exposure draft. Generally, ISCA agrees with the proposals and has put forth the following key recommendations for IASB’s consideration:

  • Extend the practical expedient to rent concessions that affect payments beyond 2020, as the Covid-19 impact on lessees’ financial statements is difficult to predict and may stretch beyond 2020;
  • Extend the practical expedient to lessors, as lessors also face significant operational challenges in accounting for Covid-19 rent concessions due to the large volume of contracts that needs to be assessed.

At its supplementary meeting on 15 May 2020, IASB deliberated on the recommendations received (including ISCA’s) and has agreed to extend the practical expedient to rent concessions up to 30 June 2021. However, IASB has maintained its stance of not extending the practical expedient to lessors on the basis that the lease modification accounting required by IFRS 16 is not expected to be complicated. IASB has issued the finalised amendments to IFRS 16 on 28 May 2020. Similar amendments to SFRS(I) 16 Leases and FRS 116 Leases have been issued by the Accounting Standards Council. The amendments are effective for annual reporting periods beginning on or after 1 June 2020; an entity may apply the amendments in financial statements not authorised for issue at 28 May 2020.

ACCOUNTING OF JSS PAYOUTS RECEIVABLE BY EMPLOYERS

The JSS was first announced at the Budget 2020 (“Unity Budget”) on 18 February 2020. The purpose of JSS is to provide wage support to employers to help them retain their local employees (Singapore Citizens and Permanent Residents) during this period of economic uncertainty. Employers who have made CPF contributions for their local employees will qualify for the payouts under JSS.

The JSS was enhanced3 subsequently in the two supplementary budgets (“Resilience Budget” and “Solidarity Budget”) and at the Multi-Ministry Taskforce on Covid-19 press conference announced on 26 March, 6 April and 21 April 2020 respectively. The government will co-fund the wages of local employees for nine months.

The summary of JSS and its subsequent enhancements are shown in Table 1.

The summary of the timing of JSS payouts is shown in Table 2.

As stated on IRAS’ webpage on JSS, “JSS payouts are intended to offset and protect local employees’ wages. Employers must act responsibly and fairly, taking reference from the tripartite advisory on salary and leave arrangements during the circuit breaker period. Where there is evidence of irresponsible and unfair treatment, employers may be denied employment support (including JSS) and have their work pass privileges curtailed. Please refer to MOM’s advisory on Salary and Leave Arrangements”. Entities should treat employees fairly and retain their local employees (Singapore Citizens and Permanent Residents) during this period of economic uncertainty.

The key issues arising from the accounting of JSS payouts include the appropriate accounting standard to be used, and when and how JSS payouts should be recognised in the entity’s financial statements. Below is a summary of the guidance provided in FRB 6 to these issues.

1) Do the payouts receivable under JSS meet the definition of government grants?

Given that JSS is a cash grant from the government, it qualifies as a government grant because there is a transfer of resources from the government to entities in return for meeting the stipulated conditions related to the operating activities of the entity and there is no service or goods provided back to the government by the entities. Therefore, SFRS(I) 1-20 should be applied in accounting for the JSS payouts.

2) How does the employer account for the JSS payouts receivable under JSS in its financial statements?

An entity shall not recognise government grants until there is reasonable assurance that it will comply with the conditions attached to them and the grants will be received (SFRS(I) 1-20, paragraph 7).

The conditions for the JSS payout are that the entity is required to pay salaries to local employees for the period mentioned in the announcements, and that the related CPF contributions on those salaries have been paid. This scheme is administered automatically without the need for application by the entity.

Accordingly, there is reasonable assurance that the grant conditions are satisfied when salaries and related CPF contributions are incurred by the employer, and a grant receivable is recognised. The timing and manner in which the grant will be received should not affect the accounting for the grant.

The JSS grant is recognised in profit or loss on a systematic basis over the periods in which the entity recognises the related costs for which the grant is intended to compensate (SFRS(I) 1-20, paragraph 12).

3) What are the “related costs” for which the JSS grant is intended to compensate?

While the payouts are calculated with reference to wages paid in certain months, they are meant to support businesses during the period in which the payouts are received.

In ISCA’s view, the “related costs” for which the JSS grant is intended to compensate are the salary costs incurred by the entity during the nine-month period of economic uncertainty in 2020. Judgement is involved in determining the appropriate period. For most companies, the nine-month period of economic uncertainty is likely to commence in April 2020. However, for some companies in the more affected sectors, the period of economic uncertainty may commence earlier.

In ISCA’s view, the “related costs” for which the JSS grant is intended to compensate are the salary costs incurred by the entity during the nine-month period of economic uncertainty in 2020.

4) How should the JSS grant income be recognised by an entity?

Recognition of grant income:

The JSS grant income should be recognised in the profit or loss on a systematic basis over the nine-month period of economic uncertainty in which the entity recognises the related salary costs in the calendar year 2020 (but not earlier than the date of the Unity Budget which was announced on 18 February 2020).

The determination of when the period of economic uncertainty commences and how the systematic basis is applied by the entity will be an accounting estimate. If the grant amount is material, disclosures on the assumptions made and on the effects of the grant will be required in the entity’s financial statements (SFRS(I) 1-1 Presentation of Financial Statements, paragraph 125 and SFRS(I) 1-20, paragraph 31).

Presentation and disclosures:

According to SFRS(I) 1-20 paragraph 29, the grant income can be presented either (1) separately as grant income or under “other income”, or (2) deducted against the salary costs.

Greater transparency will be achieved if the JSS grant income is presented as “grant income” or under “other income” in the financial statements, instead of as a deduction against the salary costs. Disclosure requirements of SFRS(I) 1-20 should also be considered.

5) How should the JSS grant income be recognised by an entity with a financial reporting period ended 31 March 2020?

To aid in the understanding of the principles being applied, an example illustrating the recognition of JSS grant income by an entity with a financial reporting period ended 31 March 2020 is included in FRB 6.

CLOSING REMARKS

For the entire suite of ISCA Covid-19 technical resources, please refer to ISCA Covid-19 Technical Resources.

We encourage and welcome members to share technical issues relating to Covid-19 developments as well as any other implementation/application issues through ISCA Technical Helpdesk. In the meantime, we will continue to issue technical guidance to support the accountancy profession through these challenging times.


Lim Ju May is Deputy Director, and Felicia Tay is Manager, Technical, Institute of Singapore Chartered Accountants.


1 “Lease modification” is defined as “a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease (for example, adding or terminating the right to use one or more underlying assets, or extending or shortening the contractual lease term)” (Appendix A of SFRS(I) 16)

2 IFRS 16 Leases is identical to SFRS(I) 16 Leases

3 Please note that FRB 6 (issued in May 2020) does not take into account the JSS enhancement announced at the Fortitude Budget on 26 May 2020. FRB 6 may be updated in future to reflect the latest enhancements to JSS in the Fortitude Budget.