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Revenue Recognition for Coronavirus Relief Funds (CRF)

One program under the Coronavirus Aid, Relief, and Economic Security Act (CARES ACT) is the Coronavirus Relief Fund (CRF).  CRF monies are to be used by state and local governments for necessary expenditures in response to the Coronavirus Disease 2019 (COVID-19) pandemic.
Background:
While the majority of CRF monies were paid to states to distribute to local governments, five local governments in Georgia (Cobb, DeKalb, Fulton, and Gwinnett Counties as well as the City of Atlanta) received direct payments from the U.S. Treasury.  All other counties and cities outside of the aforementioned counties are eligible for funding through the State of Georgia.  On June 29, 2020, the Office of the Governor sent a letter to eligible units of local government detailing the allocations of CRF monies. This letter indicated the State of Georgia would be launching a portal for local governments to apply for the CRF funding.  The letter instructed the designee in each local government to establish logon credentials and apply for the funding.  Thirty percent of each eligible local government’s allocation would be immediately available once the application and certifications were complete.  The remaining seventy percent would be available for drawdown on a reimbursement basis based on submission of eligible expenditures.  It is important to note the State’s portal was not launched and available to local governments until July 24, 2020.  As such, the application and certification process was not available for local governments until that date.

In addition to the letter from the Governor, the Coronavirus Relief Funds Terms and Conditions states the following in the “Performance Period” section:

 

“Funding has been authorized for eligible expenditures incurred between March 1, 2020 and December 30, 2020.  The performance period for this Grant is from acceptance of this Grant Agreement to the liquidation date or December 30, 2020, whichever is earlier. All expenditures must be incurred and all services must be received within the performance period.”

Question:

 

Many clients with a June 30th fiscal year-end have reached out to us regarding the proper accounting treatment for these CRF monies.  Specifically, should local governments record a receivable and related revenue for expenditures incurred prior to June 30, 2020?
Guidance:

GASB Technical Bulletin No. 2020-1, states the following:

 

“The U.S. Treasury has determined that CRF resources are not grants and instead has identified the resources as ‘other financial assistance’ under 2 CFR 200.40.  However, the provisions in paragraph 8 of Statement 33 require that, for accounting and financial reporting purposes, the focus of the analysis be on the substance of a transaction.  The CARES Act, as clarified through the FAQs, stipulates certain conditions that are required to be met, such as the incurrence of eligible expenditures. Those conditions are identified, for accounting and financial reporting purposes, as eligibility requirements. In addition, the recipient government has the ability not to accept the resources.  Therefore, the CRF Funds are identified as voluntary nonexchange transactions, subject to eligibility requirements rather than purpose restrictions.“
GASB Implementation Guide No. 2019-1 (Question and Answer 4.7), also provides guidance:

Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions

4.7. Q – A city government with a June 30 fiscal year-end incurred costs for debris clearing and increased public safety protection as a result of a natural disaster that occurred on May 30, 20X8. The president of the United States declared a natural disaster and approved funding for the region affected. The city applied for federal funding, and it received a notice of award on June 29, 20X8. The city executed the grant agreement on July 5, 20X8. Can the city recognize voluntary nonexchange revenue as of June 30, 20X8, for the reimbursement of costs incurred related to the natural disaster that occurred that fiscal year?

A – No. Paragraph 15 of Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, identifies expenditure-driven grant provisions to be a form of stipulation that “is considered an eligibility requirement…and affects the timing of recognition. That is, there is no award -… the recipient has no asset (receivable) – until the recipient has met the provider’s requirements by incurring costs in accordance with the provider’s program.” In other words, in the absence of an executed grant agreement before the end of the reporting period, the city cannot establish that it has incurred allowable costs and, therefore, cannot establish the existence of an asset (a receivable) at June 30, 20X8; that is the case even when the city has incurred costs that could be reimbursable once the grant agreement is executed. Assets and revenue should be recognized for allowable costs only after the grant agreement is executed.

Conclusion:

 

As noted in the implementation guide from GASB, “in the absence of an executed grant agreement before the end of the reporting period, the city cannot establish that is has incurred allowable costs and, therefore, cannot establish the existence of an asset (a receivable) at June 30, 20X8; that is the case even when the city has incurred costs that could be reimbursable once the grant agreement is executed.  Assets and revenue should be recognized for allowable costs only after the grant agreement is executed.”
The situation in this implementation guide question is nearly identical to the situation for local governments in Georgia.  Although the letter from the Governor includes costs incurred prior to and as of June 30, 2020 will be reimbursable, the grant agreement (Coronavirus Relief Fund Terms and Conditions) was not executed by local government officials until at least late July 2020 and therefore, assets and revenue cannot be recognized by those local governments until late July 2020 at the earliest.

 

Therefore, specific to a local government’s June 30, 2020 financial statements, the local government will not record any revenue or accounts receivable related to eligible expenditures incurred and reimbursed by the CRF funds passed through from the State of Georgia.  Furthermore, as the local government did not receive the funding until FY2021, the costs incurred also do not become federally funded until FY2021 and thus the local government will not include any amounts related to this federal program on its June 30, 2020 SEFA.  All eligible expenditures reimbursed by the CRF program will be included on local government’s June 30, 2021 SEFA and will be subject to Single Audit consideration accordingly.

 

Please note that officials in cities within the counties receiving direct funding from the U.S. Treasury and entities with fiscal year ends other than June 30th would need to consider the details of the specific situation as it applies to their specific entity and apply relevant guidance.
Questions?  Please reach out to any of our governmental team members.   We are happy to help!