The federal government’s swift response to COVID-19 provided financial relief to the health care industry through the Public Health and Social Services Emergency Fund, also known as the Provider Relief Fund (PRF). Now that the Department of Health and Human Services has distributed funds, the resulting fiduciary requirements for recipients have come to light and health care providers are obligated to ensure proper accounting processes are in place.
Accounting for funding received in accordance with the proper standards has posed some challenges for certain recipients. Nongovernmental recipient entities may be required to utilize different accounting approaches depending on whether they are a not-for-profit or commercial entity, and certain commercial entities may have various accounting alternatives from which to select.
Not-for-profit (NFP) entities should follow ASC 958-605 when determining how to account for the funds received from a governmental entity. This includes evaluating whether the funding meets the definition of an exchange transaction or a contribution. ASC 958 describes a contribution as a transaction in which there is an unconditional transfer of cash or assets in a voluntary nonreciprocal transfer, which is a voluntary transfer of assets from one party to another without any expectation or requirement for payment by the transferee or other value to be returned to the transferor. PRF funds were distributed to relieve the health care provider (the transferee), not benefit HHS (the transferor). Therefore, this is a voluntary nonreciprocal transfer and for the NFP entities the receipt of these funds would be considered a contribution under ASC 958-605.
Per ASC 958, the NFP entity must further determine whether the contribution is conditional or unconditional, and revenue can only be recognized to the extent that conditions, if any, have been satisfied. Since HHS has required that the funds be spent on specific items and noncompliance with these requirements would allow HHS the opportunity to recoup the funds, these contributions would be considered conditional and revenue would only be recognized by the NFP when the conditions are satisfied. For funds that have been received in which the conditions will be met in a future period, the NFP entity should record a liability and defer revenue recognition until such conditions have been met.
Lastly, for financial reporting purposes the NFP entity should evaluate whether there are donor-imposed restrictions on the funds received. A restriction would be identified if the required use of resources is more narrow than the recipient’s mission or use of the resources is limited to a specified time. Due to the governmental restrictions in the terms and conditions accepted by recipients, these PRF funds would generally be considered donor restricted. An NFP would therefore apply the guidance in ASC 958 for accounting for donor-restricted contributions, which requires that once the conditions have been satisfied (for example, when qualified expenses have been incurred) the contribution revenue is recognized as an increase in donor-restricted net assets in the NFP’s statement of operations or statement of changes in net assets. In this case, since the conditions and restrictions are satisfied in the same period (when the qualified expenditures have been incurred), the increase in donor-restricted net assets would be recognized, along with a reclassification to net assets without donor restrictions. An entity may make an accounting policy election to report the contribution directly in net assets without donor restrictions for any donor-restricted contributions that were received and restrictions met in the same reporting period.
Commercial entities that receive government assistance are explicitly scoped out of ASC 958-605 and there is no U.S Generally Accepted Accounting Principles (GAAP) that addresses this type of funding specifically for commercial entities. As such, business entities must look at similar types of transactions or events in which a U.S. GAAP analogy can be utilized. The Association of International Certified Professional Accountants (AICPA) has determined that International Accounting Standard (IAS) 20 Accounting for Government Grants and Disclosure of Government Assistance, FASB ASC 958-605 or FASB ASC 450-30 Contingencies – Gain Contingencies may be applied as an analogy.
ASC 958-605 and IAS 20 differ on a few key points when determining when and how to recognize revenue. Under ASC 958-605 revenue is recognized when the conditions have been substantially met, while under IAS 20 recognition is when the entity has reasonable assurance that it will comply with the conditions and the grant will be received. “Reasonable assurance” is not specifically defined, but is generally interpreted as “probable”. Therefore, with this consideration of the element of probability of compliance with conditions, as opposed to actual compliance with conditions required in ASC 958-605, in some circumstances the grant revenue may be recognized sooner under IAS 20 than under ASC 958-605. Any funds that have been received but have not met the threshold of reasonable assurance and therefore recognition, should be recorded as a liability, similar to the deferral of revenue recognition under ASC 958-605. In terms of presentation in an entity’s financial statements, under ASC 958-605 grant income would be presented gross while under IAS 20, grant income can be presented gross as income or can be deducted from the related expenses and presented net.
If an entity applies FASB ASC 450-30, Contingencies, the income from the conditional grant is analogized to a gain contingency. The entity would recognize income at the point that all uncertainties related to the conditional aspects of the grant are solved and the grant income is realized or realizable. Similar to ASC 958-605 and IAS 20, the entity would defer recognition and record a liability for any funds received until all conditional elements are satisfied.
Regardless of the methodology utilized, organizations should make clear disclosures in the footnotes to their financial statements on how the funds were accounted for.
Weaver is working directly with HHS and other agencies and will provide more information as more detailed audit and reporting requirements become available. For information, contact us.