The Employee Retention Credit (ERC) program has allowed many employers to apply for and obtain credits in the form of cash as a benefit to retaining employees during the COVID-19 pandemic. As with the Paycheck Protection Program (PPP) and additional programs resulting from the CARES Act and other pandemic relief related legislation, U.S. generally accepted accounting principles (GAAP) do not provide specific guidance when accounting for these types of relief.

As an employer, you have two options to choose from when it comes to accounting for your ERC funds. In both instances, the funds are considered governmental grants. However, the timing of recognition depends on the model you use to recognize your ERC funds.

1. Model on Government Assistance in IAS 20, Accounting for Government Grants and Disclosure of Government Assistance

• Under this model, your business would not recognize government assistance until you are reasonably sure any conditions attached to the assistance will be met, and you will in fact receive the funds. U.S. GAAP does not define reasonable assurance; however, based on sound interpretations, it is analogous to “probable.”
• Once you are reasonably certain the conditions will be met, you would record the earnings impact of the grants over the periods in which your business recognizes the costs the grants are intended to pay for. These costs should be recognized as expenses.
• The funds can be recorded as other income or as an offset to related qualifying expenses.
• Note: This model is not available to not-for-profit entities.

2. Government Grant Model in ASC 958-605, Not-for-Profit Entities: Revenue Recognition

• Using this model, your business would be able to record the income when it incurs qualifying expenses, and you would reflect as other income with appropriate disclosures.
• It would likely not be deemed appropriate to apply ASC 958-605 government grant model to offset expenses, such as payroll, with ERC income.

If you previously received PPP funds and elected one of the two accounting models above, the model you elected for PPP should also be the one applied to ERC funds. Employers who accounted for PPP funds under the debt model can elect either model above for ERC funds, as this new policy would relate to governmental grants.

Depending on the model elected, you will need to consider certain items regarding the timing of income recognition. Though some or all qualifying expenses may have occurred in 2020, it may not be appropriate to record them as 2020 income under ASC 958-605, based on other barriers that may not have been overcome until 2021. Plan to discuss these considerations with your external audit team.  

As with any decision, be sure to take into account your financial statement users to adopt a model that is most appropriate and not misleading in any way. As a practical matter, it may be easiest to track ERC funds received in a separate general ledger account, regardless of the model you adopt. 

Contact Jessica Foster at jfoster@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.