Case:
A company ABC SRL benefits from a grant for working capital (Measure 2) according to the URGENT ORDINANCE 130/2020. It wants to distribute the profit obtained in 2021.
In the case of a micro-enterprise, is the income from grants included in the profit distribution?
Solution:
According to the URGENT ORDINANCE 130/2022, the forms of support from non-reimbursable external funds refer to:
- micro-grants granted from non-reimbursable external funds in the form of a lump sum;
- grants for working capital granted as a lump sum and as a percentage of turnover.
Please note that according to article 11 paragraph (3) of the EMERGENCY ORDINANCE no.130/2020 the amount of working capital grants does not include the co-financing of the beneficiaries of state aid for the establishment of working capital, in a percentage of at least 15% of the amount of the grant requested.
Please note that the nature of the expenses that can be financed from the working capital grants is the one provided for in Article 14 paragraph (1) of the EMERGENCY ORDINANCE no.130/2020, as follows:
“(1) Beneficiaries may use grants for working capital, in the form of a lump sum, allocated from non-reimbursable external funds, co-financed from the state budget, on the basis of a contract for the granting of state aid concluded in electronic format, to support expenditure of the following type:
(a) expenditure on stocks of raw materials, materials, goods and other categories of stock necessary for the beneficiaries’ current/operational activities;
- b) current and outstanding debts to current suppliers, including utility suppliers, under the contracts concluded;
- c) expenditure on rent under the contract;
(d) expenditure on the purchase of services necessary for day-to-day operations, with the exception of consultancy services, studies and other categories of indirect services;
- e) expenditure on medical protective equipment, including disinfection materials to protect against the spread of SARS-CoV-2;
- f) expenditure on the purchase of inventory items, including inventory items of a fixed asset nature necessary for the resumption of current activities;
- g) expenditure on the purchase of equipment, machinery, installations, technologies, independent equipment necessary for the resumption of activities;
- h) expenses related to the payment of debts to the state budget.”
According to OMFP 1802/2014 for the approval of Accounting Regulations, paragraph 396(1), government grants, including non-monetary grants at fair value, should not be recognized until there is sufficient assurance that:
- the entity will comply with the conditions attached to their award; and
- the grants will be received.
Receipt of a grant alone does not provide conclusive evidence that all conditions attached to the grant have been or will be met.
The recognition of income from grants is carried out in accordance with the terms on which they were granted.
According to point 397, paragraph 1, the accounts of projects financed from grants shall be kept separately for each project, source of financing, according to the contracts concluded, without separate annual financial statements being drawn up for each such project.
To ensure that grant-funded expenditure is matched with the related income, the following procedure is followed:
a) from the point of view of the profit and loss account:
– during each month expenditure shall be recorded according to its nature;
– at the end of the month, the subsidies corresponding to the expenditure incurred shall be entered under revenue;
b) from the point of view of the balance sheet:
– the receivable from subsidies shall be recognised on the basis of the subsidy income, if the expenditure incurred from these subsidies has been incurred, or on the basis of deferred income, if this expenditure has not yet been incurred;
– periodically, together with the request for reimbursement of the equivalent of the expenditure incurred or on the basis of other documents establishing and approving the amounts due, the amounts recorded as receivable from grants shall be regularised.
According to OMFP 1802, subsidies are recognised, on a systematic basis, as revenue of the periods corresponding to the related expenditure that these subsidies are intended to compensate.
If subsidies are received in a period for expenditure that has not yet been incurred, the subsidies received are not income of the current period.
It should be noted that in the case of micro-enterprises, operating income represents the share of subsidies received to finance investments or operating subsidies and is not included in the taxable income tax base, i.e. income from subsidies is deducted from the income of micro-enterprises obtained from any source according to Article 53 paragraph (1) of the Tax Code.
Thus, theoretically, the company cannot obtain profit from subsidies. The final result includes both expenses incurred from subsidies and income from subsidies.
From an accounting point of view, according to the provisions of point 420 and following of the regulations approved by OMFP no. 1802/2014, as amended, the final result of the financial year is established at its closing and represents the final balance of the profit and loss account (account 121).
From this profit the legal reserves are first recorded, according to the provisions of Law 31/1990, the amounts constituted from the profit of the current financial year, being recorded by accounting article 129 Profit distribution = 1061 Legal reserves (recording made on 31.12.2021)
The accounting profit remaining after this distribution is taken at the beginning of the financial year following the one for which the annual financial statements are drawn up to account 117 Retained earnings, from where it is to be distributed to the other uses decided by the general meeting of the associates, in compliance with the legal provisions.
It should be noted that in the case of micro-enterprises, operating income represents the share of subsidies received to finance investments or operating subsidies and is not included in the taxable income tax base, i.e. income from subsidies is deducted from the income of micro-enterprises obtained from any source according to Article 53 paragraph (1) of the Tax Code.
Thus, theoretically, the company cannot obtain profit from subsidies. The final result includes both expenses incurred from subsidies and income from subsidies.
Therefore, in view of the above, the distribution of dividends will be made on the basis of the approval of the General Meeting of Shareholders , according to the final balance of the profit and loss account (121), which includes in the total debit balance the amounts representing expenses incurred from grants, and in the total credit balance the amounts representing income for the periods corresponding to the related expenses.
Legal basis:
– OMFP1802 / 2014 for the approval of the Accounting Regulations regarding the individual annual financial statements and the consolidated annual financial statements;
– EMERGENCY ORDINANCE 130/2020 on some measures for granting financial support from non-reimbursable external funds, related to the Competitiveness Operational Program 2014-2020, in the context of the crisis caused by COVID-19, as well as other measures in the field of European funds;
– Fiscal Code (approved by Law no. 227/2015, published in the Official Gazette no. 688 of 10.09.2015), with subsequent amendments and completions.