Since the COVID-19 pandemic began in early 2020, organizations have been forced to persevere through many unexpected issues. For a large number of businesses and not-for-profits, government relief funds have been critical in addressing one of the most important issues faced during the pandemic; how to maintain operations and continue serving customers. As the Pandemic is now showing signs of subsiding, organizations are faced with a new challenge; how to properly record and report relief funds that have been provided by the government.
Back in January, we provided you with guidance on accounting for PPP loans. Today, we are going to discuss accounting for other government grants.
How For-profit Businesses Should Account for Government Grants
While not-for-profit organizations are more likely to have policies in place to account for grants, government grants may cause some confusion for a for-profit business recording grants for the first time. While finding specific guidance may be a little difficult, we believe that businesses can analogize and use International Accounting Standards (ISA) 20 to account for government grants.
Under this guidance, if the grant is related to paying business expenses, the business would recognize the grant as the business incurs the related expenses and as the requirements are complied with. If the related expenses have not yet been incurred, the grant proceeds should be recorded as deferred revenue until those expenses are incurred. For example, a grant used for subsidizing wages would be recognized as those wages are paid, not all at once when the grant funds are received. As recognized, these grant funds should be classified as other income and reported as “COVID-19 grants” on the income statement.
Important Reminders for PPP Funds
It is important to note that PPP funds cannot be used to pay for expenses that are covered by other types of government funds. In order to avoid this happening, organizations should adequately separate expenses paid with PPP funds and those paid with other government funding in the accounting system. Proper account coding can be the difference between being in compliance and possibly running into issues when it comes to forgiveness time.
Lastly, it is important for organizations to keep in mind the requirements for Single Audits. If an organization spends more than $750,000 in Federal funds in a year, not including PPP funds, then that organization is subject to a Single Audit. A Single Audit is a compliance audit of a specific Federal program or programs. With an increase in Federal awards as a result of the Pandemic, many organizations will be subject to a Single Audit for the first time this year.
While accounting reporting issues were likely not on the forefront of business owners’ and not-for-profit directors’ minds during the Pandemic, now many organizations may be trying to determine how to report Federal funding information to stakeholders. These Federal funds have come with additional compliance and reporting requirements and those in charge of accounting for both for-profit businesses and not-for-profits may be feeling overwhelmed. If you are curious about your organization’s accounting for COVID relief, or not clear on if you may be subject to a Single Audit, the professionals here at Anderson ZurMuehlen will be happy to help you navigate these requirements.
This article was written by Kolten LaMiaux, CPA located in our Bozeman office.