What is the accounting treatment for partial cancellation of an ICO loan?

Many companies and freelancers, in the face of the COVID-19 crisis, applied for ICO loan subsidies to make their business viable. Since many people have been wondering about the correct accounting record of the subsidies received to partially cancel these loans, today, in TAS Consultancy, we tell you what is the accounting treatment of a subsidy to partially cancel an ICO loan.

What is an ICO loan?

First of all, what is ICO? It is the Official Credit Institute, which, since its creation 50 years ago, has been dedicated to promoting economic activities that contribute to the growth and development of the country.

Therefore, through its ICO lines, it has proposed to finance business activities and investment projects of the self-employed, companies and entrepreneurs, as well as their internationalization process. All with the purpose of covering each of the scenarios of business development.

ICO loans, in this sense, are a structured program with different national and international lines to finance different business activities, liquidity needs and expenses within Spain or its export activity.

In this regard, we will name the types of financing offered:

ICO loan for entrepreneurs, companies and SMEs

Within the first block, which is especially designed for SMEs, entrepreneurs and the self-employed, the ICO Empresas y Emprendedores loan line offers financing for investment projects, liquidity needs, expenses in Spanish territory and business activities.

With a maximum amount per client of 12.5 million euros, anyone who needs this ICO loan can apply for it through a bank that appears on the ICO list. 

What would the interest rate be? It would be variable or fixed. In addition, it will also depend on the margin established by the credit institution according to the amortization term.

ICO loans for business activity in Spain

Also, for activities within Spain, an ICO Commercial Credit line offers liquidity through the advance payment of invoices and pre-financing of the costs corresponding to the production of goods and services for their subsequent sale in Spain.

ICO lines of credit to support internationalization and exports

The ICO loan block, aimed at supporting internationalization and exports, includes three lines that cover liquidity needs and business activities outside Spanish territory.

The ICO Exportadores line is aimed at the self-employed, entrepreneurs and companies with registered offices in Spain that need liquidity through the advance payment of invoices from export activities and the pre-financing of production expenses for export.

We can also mention the ICO International line, which has two tranches:

• One for self-employed individuals, companies and public or private entities domiciled in Spain that need investment and liquidity to carry out activities outside the national territory.
• Another for companies that wish to export and need to request medium and long-term financing for the purchase of goods and services. In both cases the maximum contribution is 12.5 million euros and with a variable interest rate.

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What is the current question surrounding ICO loans?

Royal Decree-Law 5/2021, of March 12, on extraordinary measures to support business solvency, in response to the COVID-19 pandemic, staged the possibility for the Ministry of Economic Affairs and Digital Transformation to make transfers to companies and freelancers that comply with the requirements embodied in the Code of Good Practices.

This is for the sole purpose of reducing the outstanding principal of loans previously obtained through the ICO.

Many companies and self-employed people applied for the subsidies in order to make their business viable. However, it is important to take into account the ICO loan accounting; as well as the temporary imputation that must be made, always with a view to the correct taxation.

In view of this, many have wondered about the correct accounting record of the subsidies received to partially cancel these loans. 

For this reason, we will now tell you what is the answer offered by the Instituto de Contabilidad y Auditoría de Cuentas (ICAC) in its bulletin No. 129 this March 2022.

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So, what is the accounting treatment of a grant to partially cancel an ICO loan?

The question in question is whether the amount of the aid must be taken to income in the year in which it is received or whether it can be deferred during the years of duration of the ICO loan.

In this regard, the ICAC’s response is based on Accounting and Valuation Standard (NVR) 18 of the Chart of Accounts and the SME Chart of Accounts, which establishes that:

“Non-refundable grants, donations and bequests shall be initially recorded, as a general rule, as income directly charged to equity and shall be recognized in the profit and loss account as income on a systematic and rational basis in a manner correlated with the expenses arising from the grant, donation or bequest….”.

The ICAC, following the line of NRV, points out that in these cases a distinction must be made as to whether the grants are considered to be refundable or not, since the accounting treatment is, naturally, different.

Reimbursable subsidies or grants should be recorded as a liability until they become non-reimbursable. When it qualifies as nonrefundable, it shall be recorded directly in the organization’s equity.

What do the Accounting Recording and Valuation Standards indicate?

The charge to the profit and loss account will be made in accordance with the purpose for which it was granted and the criteria established in section 1.3 of the NRS will be applied, as indicated:

“Grants, donations and legacies of a non-refundable nature shall be taken to profit and loss on the basis of their purpose. For the purposes of their allocation in the profit and loss account, a distinction shall be made between the following types of grants, donations and legacies:

…

c) When they are granted to acquire assets or cancel liabilities, the following cases may be distinguished:

• Cancellation of debts: they will be imputed as income for the year in which such cancellation occurs, except when they are granted in connection with specific financing, in which case the imputation will be made on the basis of the financed item.”

Conclusion of the ICAC on the accounting treatment to cancel the ICO loan

The ICAC’s conclusion in this case is based on the aforementioned regulations and on the extent to which the grant was received to cancel debts, in this situation, related to the pandemic. 

This was not granted in relation to the financing of specific items, a circumstance that should be assessed taking into account the characteristics of the aid granted, since it will be recognized as income in the income statement for the year or years in which the debt is cancelled.

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If you found our article helpful, let us know in the comments, or if you have any other questions regarding taxation and accounting of your company in Spain. 

For a complete advice on the accounting treatment of a grant to pay an ICO loan, contact our managers and professionals of TAS Consulting through our email tasconsultoria@tas-sl.es, they will help you in all your fiscal and legal procedures of your company with pleasure.