Accounting for Covid-19 Relief
August 3, 2021 - Covid-19 relief has included a variety of programs, including the Paycheck Protection Program (PPP) loans, the Families First Coronavirus Relief Act (FFCRA), and the Employee Retention Credit (ERC).
If you’ve received some or all of this assistance, what do you do now from an accounting and reporting standpoint?
PPP Loan Accounting
For financial reporting purposes, companies were required to make an accounting policy election regarding the treatment of the loan proceeds and subsequent forgiveness. Generally, these loans were either treated as debt in accordance with ASC 470 or in substance government grants under IAS 20 by analogy. Fast forward to today, when many companies have either received confirmation from the SBA that their loan has been forgiven or are anxiously awaiting receipt of their notice, the question of what to do from an accounting and reporting standpoint is top of mind.
If previously accounted for as debt, the subsequent forgiveness, including principal and accrued interest, results in a gain (reported in other income) recognized in the period of extinguishment, in accordance with ASC 405-20, Liabilities: Extinguishments of Liabilities. A liability is considered to be extinguished when either of the following conditions have been met:
- The debtor pays the creditor and is relieved of its obligation for the liability.
- The debtor is legally released from primary obligation under the liability.
If previously treated as a government grant, the related forgiveness income would have already been recognized in the period in which the related expenses were incurred and therefore, requires no additional accounting upon receipt of formal forgiveness.
For those who received funding under the second round of PPP, the accounting treatment should remain consistent with the initial accounting policy election made to record the initial PPP loan.
The Employee Retention Credit (ERC) is a refundable payroll tax credit that was introduced as part of the CARES Act and subsequently extended and expanded with the passage of the Consolidated Appropriations Act (CAA). (You can read more about the CAA and its effect on the ERC by clicking here.) This credit has created opportunities for companies across a variety of industry sectors to recapture significant dollars on qualified payroll expenses during 2020 and into 2021. However, given the unprecedented program and lack of authoritative GAAP guidance, this creates unanswered questions when it comes to accounting and reporting.
Two standards have been commonly applied when accounting for ERC:
- ASC 958-605 - Not-for-Profit Entities: Revenue Recognition.
- IAS 20, Accounting for Government Grants and Disclosure of Government Assistance.
Both of these standards serve as acceptable guidance for how to report the credits earned under ERC and would result in income in the period that the qualifying expenses are incurred. IAS 20 provides flexibility to offset the qualifying expenses with the credits generated or record on a gross basis by reporting the credits as other income. Offsetting the expenses with the related income would generally not be allowable under ASC 958-605.
If ASC 958-605 is elected and the credit is treated as a conditional contribution, income is not recognized until the conditions to earn the credit have been substantially met. IAS 20 provides for income recognition once reasonable assurance has been obtained that the entity will receive the expected benefits of the credit.
The FFCRA required certain employers to provide paid sick leave and expanded family and medical leaves for COVID-19 related reasons. These credits were claimed on the employer’s 2020 2nd, 3rd, and 4th quarter Form 941. The credit was extended to September 30, 2021 and still applies through most of 2021. However, a difference from 2020 is that the Department of Labor no longer mandates that employers provide the leave, but still offers the credit if employers choose to follow the program.
Regardless of how the refunds are taken by the entity, it is important that the wages, employer Medicare tax, and qualified health expenses are separable from the expense classification given the expenses incurred to generate the credit are deductible. The income recognition and reporting guidance align with the Employee Retention Credit.
If your 2020 income tax returns have not been completed, consult with your trusted tax advisor if you have taken the FFCRA credit during 2020 and offset the related expenses with the credits generated. Furthermore, if you have not taken advantage of these programs and would like to learn more about their details you can click here to visit our Covid-19 resource center.