ERC Grants, Accounting Considerations

  • Construction
  • 2/23/2022

By now many businesses have applied for and received Employee Retention Credit (ERC) grants. Now you likely have questions regarding accounting for and reporting of ...

By now many businesses have applied for and received Employee Retention Credit (ERC) grants. Now you likely have questions regarding accounting for and reporting of these transactions.

Accounting Considerations

Construction entities who receive ERC grants likely analogies to one of the following accounting alternatives:

  • IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, or
  • Subtopic 958-605, Not-For-Profit Entities—Revenue Recognition
StandardsInitial RecognitionDerecognition
ASC 958-605Refundable AdvanceContribution recognized once the conditions of release have been substantially met or explicitly waived.
IAS 20Deferred Income LiabilityGovernment assistance is recognized when there is “reasonable assurance” (similar to “probable” threshold in U.S. GAAP) that conditions will be met. Amount is recorded as either a credit (such as other income) or a reduction  of related expenses.
Under IAS 20, most contractors will report revenue for ERC grants as other income versus netting against expenses to not distort profit margins.

Disclosure requirements:

  1. Information about the nature of the transactions and the related accounting policy used to account for the transactions.
  2. The line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item.
  3. Significant terms and conditions of the transactions, including commitments and contingencies.

Areas of complexity

  1. Eligibility
    • Full or partial suspension due to governmental order
    • Substantial decline in gross receipts (20% for 2021)
  2. Cost Qualifications
    • Performance requirements must be met, and costs incurred are in compliance with the program.
    • Review costs for potential double reporting of expenditures for multiple programs. This would result in reduction in eligible costs and could require adjustment to earned grant revenue if this were to occur.
  3. Timing of Recording Grant Receivable
    • Grants from the government are recognized when all conditions of such grants are fulfilled or there is reasonable assurance that they will be fulfilled.

Consideration of these matters should be given proper attention. Eligibility and usage of funds in compliance with the program based on dollar thresholds and other factors are subject to review. These considerations can be subjective, and rules are not completely clear, so consider consulting with a professional if you need assistance. We are here to help.

This blog contains general information and does not constitute the rendering of legal, accounting, investment, tax, or other professional services. Consult with your advisors regarding the applicability of this content to your specific circumstances.

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