In response to the novel Coronavirus, many governments had to incur unplanned costs as they dealt with the impacts of the virus in their communities, took actions to slow the spread, and complied with state guidelines.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was signed into law by the Federal government in March 2020, designates various funds to provide resources in assisting with the impacts of the global pandemic.
The CARES Act, along with supplemental guidance released by the United States Department of Treasury (U.S. Treasury), establishes certain eligibility requirements, stating governments must use the funds provided to cover costs that are necessary expenditures incurred in response to the public health emergency.
Classifying Financial Assistance
The U.S. Treasury established that resources provided from the Coronavirus Relief Funds (CRF) are not considered grants. Rather they are classified as “other financial assistance,” although certain eligible expenses must be incurred to recognize the revenue. The incurrence of eligible expenses is identified as eligibility requirements for financial and reporting purposes.
A governmental entity may also choose to not accept the resources. As such, the CARES Act funds are identified as voluntary non-exchange transactions as defined by Statement No. 33 of the Governmental Accounting Standards Board (GASB), Accounting and Financial Reporting for Nonexchange Transactions.
According to the guidance released by the U.S. Treasury, necessary expenditures may include payroll charges for personnel dedicated to mitigating or responding to the public health emergency, resources provided to affected citizens, resources used to assist in preventing homelessness, and other similar expenses.
Treatment of Funds
The majority of the CARES Act funds are treated similarly to expenditure driven grants. Revenue should be recognized when the underlying, qualifying expenditures are incurred.
If qualifying expenditures are incurred prior to receipt of funds, the entity should accrue a receivable to recognize the revenue in the same period on the accrual basis of accounting. In financial statements prepared under the modified accrual basis of accounting, the receivable could also be subject to the entity’s revenue recognition policy for collection subsequent to year end (for example, 60 days).
In instances when funds are received in advance of incurring eligible expenditures, the government should record a liability (unearned revenue) for the unspent funds.
Reporting of Funds
Revenue from the CARES Act funds are reported as grant revenue in governmental funds, operating grants, and contributions in governmental activities on the Statement of Activities. In proprietary funds or entities using a Business-Type Activities reporting model, CARES Act funds should be reported as nonoperating revenue, even though the eligible costs that are reimbursed may be reported as operating expenses.
This guidance was recently clarified in GASB Technical Bulletin 2020-1, issued in June 2020.
For more information on the impact to your government entity, please contact our team.